MMP - 2015.3.31.10Q


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.: 1-16335
 _________________________________________
 Magellan Midstream Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
73-1599053
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

One Williams Center, P.O. Box 22186, Tulsa, Oklahoma 74121-2186
(Address of principal executive offices and zip code)
(918) 574-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large accelerated filer  x        Accelerated filer  £      Non-accelerated filer  £        Smaller reporting company  £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  £    No  x

As of May 4, 2015, there were 227,426,329 outstanding limited partner units of Magellan Midstream Partners, L.P. that trade on the New York Stock Exchange under the ticker symbol "MMP."
 
 
 
 
 


Table of Contents


TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
 
 
1.
 
 
2.
 
 
3.
 
 
4.
 
 
5.
 
 
6.
 
 
7.
 
 
8.
 
 
9.
 
 
10.
 
 
11.
 
 
12.
 
 
13.
 
 
14.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II
OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
 

1

Table of Contents


PART I
FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2014
 
2015
Transportation and terminals revenue
$
317,637

 
$
345,600

Product sales revenue
296,063

 
173,127

Affiliate management fee revenue
4,906

 
3,363

Total revenue
618,606

 
522,090

Costs and expenses:
 
 
 
Operating
73,497

 
98,495

Cost of product sales
198,040

 
136,179

Depreciation and amortization
37,511

 
41,697

General and administrative
34,935

 
35,498

Total costs and expenses
343,983

 
311,869

Earnings of non-controlled entities
466

 
9,590

Operating profit
275,089

 
219,811

Interest expense
36,416

 
36,607

Interest income
(391
)
 
(349
)
Interest capitalized
(5,310
)
 
(2,107
)
Debt placement fee amortization expense
599

 
587

Other expense

 
279

Income before provision for income taxes
243,775

 
184,794

Provision for income taxes
1,221

 
1,158

Net income
$
242,554

 
$
183,636

Basic and diluted net income per limited partner unit
$
1.07

 
$
0.81

Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation
227,141

 
227,525











See notes to consolidated financial statements.

2

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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2015
Net income
$
242,554

 
$
183,636

Other comprehensive income:
 
 

Derivative activity:
 
 
 
Net loss on cash flow hedges(1)
(3,613
)
 
(15,465
)
Reclassification of net loss (gain) on cash flow hedges to income(1)  
(26
)
 
200

Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
Amortization of prior service credit(2)
(895
)
 
(928
)
Amortization of actuarial loss(2)
824

 
1,572

Total other comprehensive loss
(3,710
)
 
(14,621
)
Comprehensive income
$
238,844

 
$
169,015

(1) See Note 8–Derivative Financial Instruments for details of the amount of gain/loss recognized in accumulated other comprehensive loss ("AOCL") on derivatives and the amount of gain/loss reclassified from AOCL into income.
(2) See Note 6–Employee Benefit Plans for details of the changes in employee benefit plan assets and benefit obligations recognized in AOCL.



























See notes to consolidated financial statements.

3

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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2014
 
March 31,
2015
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
17,063

 
$
52,813

Trade accounts receivable (less allowance for doubtful accounts of $0 and $20 at December 31, 2014 and March 31, 2015, respectively)
84,465

 
96,700

Other accounts receivable
15,711

 
15,744

Inventory
157,762

 
160,949

Energy commodity derivatives contracts, net
87,151

 
36,725

Energy commodity derivatives deposits
6,184

 
1,100

Other current assets
34,331

 
31,619

Total current assets
402,667

 
395,650

Property, plant and equipment
5,533,935

 
5,642,904

Less: Accumulated depreciation
1,204,601

 
1,243,310

Net property, plant and equipment
4,329,334

 
4,399,594

Investments in non-controlled entities
613,867

 
636,618

Long-term receivables
28,611

 
27,116

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $11,526 and $12,206 at December 31, 2014 and March 31, 2015, respectively)
4,573

 
3,893

Debt placement costs (less accumulated amortization of $8,952 and $9,539 at December 31, 2014 and March 31, 2015, respectively)
18,084

 
22,158

Tank bottoms and linefill
42,585

 
38,361

Other noncurrent assets
24,304

 
28,467

Total assets
$
5,517,285

 
$
5,605,117

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
97,131

 
$
91,022

Accrued payroll and benefits
48,298

 
31,719

Accrued interest payable
45,973

 
45,800

Accrued taxes other than income
47,888

 
42,087

Environmental liabilities
10,564

 
11,926

Deferred revenue
71,142

 
75,920

Accrued product purchases
44,355

 
37,953

Energy commodity derivatives contracts, net
5,413

 
814

Energy commodity derivatives deposits
84,463

 
31,512

Other current liabilities
80,928

 
50,134

Total current liabilities
536,155

 
418,887

Long-term debt
2,982,895

 
3,183,750

Long-term pension and benefits
75,155

 
80,741

Other noncurrent liabilities
29,069

 
23,427

Environmental liabilities
25,778

 
24,431

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (227,068 units and 227,426 units outstanding at December 31, 2014 and March 31, 2015, respectively)
1,949,773

 
1,970,042

Accumulated other comprehensive loss
(81,540
)
 
(96,161
)
Total partners’ capital
1,868,233

 
1,873,881

Total liabilities and partners' capital
$
5,517,285

 
$
5,605,117


See notes to consolidated financial statements.

4

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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three Months Ended
 
March 31,
 
2014
 
2015
Operating Activities:
 
 
 
Net income
$
242,554

 
$
183,636

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
37,511

 
41,697

Debt placement fee amortization expense
599

 
587

Loss on sale and retirement of assets
1,205

 
(3
)
Earnings of non-controlled entities
(466
)
 
(9,590
)
Distributions from investments in non-controlled entities
384

 
9,229

Equity-based incentive compensation expense
5,088

 
4,751

Amortization of prior service credit and actuarial loss
(71
)
 
644

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
15,022

 
(12,194
)
Inventory
(23,011
)
 
(3,187
)
Energy commodity derivatives contracts, net of derivatives deposits
(529
)
 
(5,804
)
Accounts payable
2,960

 
(4,351
)
Accrued payroll and benefits
(14,552
)
 
(16,579
)
Accrued interest payable
5,194

 
(173
)
Accrued taxes other than income
(7,479
)
 
(5,801
)
Accrued product purchases
(19,978
)
 
(6,402
)
Deferred revenue
1,448

 
4,778

Current and noncurrent environmental liabilities
(1,393
)
 
15

Other current and noncurrent assets and liabilities
25,588

 
9,830

Net cash provided by operating activities
270,074

 
191,083

Investing Activities:
 
 
 
Additions to property, plant and equipment, net(1)
(75,514
)
 
(128,517
)
Proceeds from sale and disposition of assets
42

 
3,089

Investments in non-controlled entities
(127,698
)
 
(13,751
)
Distributions in excess of earnings of non-controlled entities
687

 
4,613

Net cash used by investing activities
(202,483
)
 
(134,566
)
Financing Activities:
 
 
 
Distributions paid
(132,835
)
 
(158,061
)
Net commercial paper repayments

 
(296,942
)
Borrowings under long-term notes
257,713

 
499,589

Debt placement costs
(2,648
)
 
(4,661
)
Net payment on financial derivatives
(3,613
)
 
(42,908
)
Settlement of tax withholdings on long-term incentive compensation
(14,813
)
 
(17,784
)
Net cash provided (used) by financing activities
103,804

 
(20,767
)
Change in cash and cash equivalents
171,395

 
35,750

Cash and cash equivalents at beginning of period
25,235

 
17,063

Cash and cash equivalents at end of period
$
196,630

 
$
52,813

 
 
 
 
Supplemental non-cash investing and financing activities:
 
 
 
Contribution of property, plant and equipment to a non-controlled entity
$

 
$
13,252

Issuance of limited partner units in settlement of equity-based incentive plan awards
$
7,315

 
$
8,045

 
 
 
 
(1)  Additions to property, plant and equipment
$
(70,295
)
 
$
(127,709
)
Changes in accounts payable and other current liabilities related to capital expenditures
(5,219
)
 
(808
)
Additions to property, plant and equipment, net
$
(75,514
)
 
$
(128,517
)


See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Organization, Description of Business and Basis of Presentation
Organization
Unless indicated otherwise, the terms “our,” “we,” “us” and similar language refer to Magellan Midstream Partners, L.P. together with its subsidiaries. We are a Delaware limited partnership and our limited partner units are traded on the New York Stock Exchange under the ticker symbol “MMP.” Magellan GP, LLC, a wholly-owned Delaware limited liability company, serves as our general partner.

Description of Business

We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil.  As of March 31, 2015, our asset portfolio, including the assets of our joint ventures, consisted of:

our refined products segment, comprised of our 9,500-mile refined products pipeline system with 52 terminals as well as 27 independent terminals not connected to our pipeline system and our 1,100-mile ammonia pipeline system;

our crude oil segment, comprised of approximately 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels, of which 12 million barrels are used for leased storage; and

our marine storage segment, consisting of five marine terminals located along coastal waterways with an aggregate storage capacity of approximately 26 million barrels.

Products transported, stored and distributed through our pipelines and terminals include:

refined products are the output from refineries and are primarily used as fuels by consumers. Refined products include gasoline, diesel fuel, aviation fuel, kerosene and heating oil.  Collectively, diesel fuel and heating oil are referred to as distillates;

liquefied petroleum gases, or LPGs are produced as by-products of the crude oil refining process and in connection with natural gas production. LPGs include butane and propane;

blendstocks are blended with refined products to change or enhance their characteristics such as increasing a gasoline's octane or oxygen content. Blendstocks include alkylates, oxygenates and natural gasoline;

heavy oils and feedstocks are used as burner fuels or feedstocks for further processing by refineries and petrochemical facilities. Heavy oils and feedstocks include No. 6 fuel oil and vacuum gas oil;

crude oil and condensate are used as feedstocks by refineries and petrochemical facilities;

biofuels, such as ethanol and biodiesel, are increasingly required by government mandates; and

ammonia is primarily used as a nitrogen fertilizer.

Except for ammonia, we use the term petroleum products to describe any, or a combination, of the above-noted products.
 

6

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Basis of Presentation

In the opinion of management, our accompanying consolidated financial statements which are unaudited, except for the consolidated balance sheet as of December 31, 2014 which is derived from our audited financial statements, include all normal and recurring adjustments necessary to present fairly our financial position as of March 31, 2015, the results of operations for the three months ended March 31, 2014 and 2015 and cash flows for the three months ended March 31, 2014 and 2015. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015 as profits from our blending activities are realized largely during the first and fourth quarters of each year. Additionally, gasoline demand, which drives transportation volumes and revenues on our pipeline systems, generally trends higher during the summer driving months. Further, the volatility of commodity prices impact the profits from our commodity activities and, to a lesser extent, the volume of petroleum products we ship on our pipelines.

Pursuant to the rules and regulations of the Securities and Exchange Commission, the financial statements in this report do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.


2.
Product Sales Revenue
The amounts reported as product sales revenue on our consolidated statements of income include revenue from the physical sale of petroleum products and from mark-to-market adjustments from New York Mercantile Exchange ("NYMEX") contracts. See Note 8 – Derivative Financial Instruments for a discussion of our commodity hedging strategies and how our NYMEX contracts impact product sales revenues.
For the three months ended March 31, 2014 and 2015, product sales revenue included the following (in thousands): 
 
Three Months Ended
 
March 31,
 
2014
 
2015
Physical sale of petroleum products
$
293,240

 
$
169,247

NYMEX contract adjustments:
 
 
 
Change in value of NYMEX contracts that were not designated as hedging instruments associated with our butane blending and fractionation activities(1) 
2,823

 
3,880

Total product sales revenue
$
296,063

 
$
173,127

(1) The associated petroleum products for these activities are, to the extent still owned as of the statement date, or were, to the extent no longer owned as of the statement date, classified as inventory in current assets on our consolidated balance sheets.


3.
Segment Disclosures

Our reportable segments are strategic business units that offer different products and services. Our segments are managed separately because each segment requires different marketing strategies and business knowledge. Management evaluates performance based on segment operating margin, which includes revenue from affiliates and external customers, operating expenses, cost of product sales and earnings of non-controlled entities.

7

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



We believe that investors benefit from having access to the same financial measures used by management. Operating margin, which is presented in the following tables, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a generally accepted accounting principles ("GAAP") measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the tables below. Operating profit includes depreciation and amortization expense and general and administrative ("G&A") expenses that management does not consider when evaluating the core profitability of our separate operating segments.


 
Three Months Ended March 31, 2014
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
210,236

 
$
67,903

 
$
39,498

 
$

 
$
317,637

Product sales revenue
293,710

 

 
2,353

 

 
296,063

Affiliate management fee revenue

 
4,595

 
311

 

 
4,906

Total revenue
503,946

 
72,498

 
42,162

 

 
618,606

Operating expenses
51,157

 
9,058

 
14,086

 
(804
)
 
73,497

Cost of product sales
197,756

 

 
284

 

 
198,040

Losses (earnings) of non-controlled entities

 
180

 
(646
)
 

 
(466
)
Operating margin
255,033

 
63,260

 
28,438

 
804

 
347,535

Depreciation and amortization expense
23,172

 
6,463

 
7,072

 
804

 
37,511

G&A expenses
23,019

 
5,994

 
5,922

 

 
34,935

Operating profit
$
208,842

 
$
50,803

 
$
15,444

 
$

 
$
275,089

 
 
Three Months Ended March 31, 2015
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
216,777

 
$
86,560

 
$
42,263

 
$

 
$
345,600

Product sales revenue
172,639

 

 
488

 

 
173,127

Affiliate management fee revenue

 
3,027

 
336

 

 
3,363

Total revenue
389,416

 
89,587

 
43,087

 

 
522,090

Operating expenses
70,306

 
13,861

 
15,335

 
(1,007
)
 
98,495

Cost of product sales
135,634

 

 
545

 

 
136,179

Losses (earnings) of non-controlled entities
55

 
(8,924
)
 
(721
)
 

 
(9,590
)
Operating margin
183,421

 
84,650

 
27,928

 
1,007

 
297,006

Depreciation and amortization expense
23,447

 
8,229

 
9,014

 
1,007

 
41,697

G&A expenses
22,599

 
8,086

 
4,813

 

 
35,498

Operating profit
$
137,375

 
$
68,335

 
$
14,101

 
$

 
$
219,811

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




4.
Investments in Non-Controlled Entities

Recently-Formed Companies

Saddlehorn Pipeline Company, LLC ("Saddlehorn"), which was formed during first quarter 2015, will own an approximate 550-mile pipeline to deliver various grades of crude oil from the DJ Basin, and potentially the broader Rocky Mountain production area, to Cushing, Oklahoma. We have a 40% equity ownership interest in Saddlehorn, with Plains All American Pipeline, L.P. and Anadarko Petroleum Corporation having 40% and 20% equity ownership interests, respectively. We will serve as construction manager and operator of the Saddlehorn system. Subject to receipt of necessary permits and regulatory approvals, the Saddlehorn pipeline is expected to be operational during mid-2016.

Powder Springs Logistics, LLC ("Powder Springs") was recently formed to construct and develop a butane blending system, including 120,000 barrels of butane storage, near Atlanta, Georgia. We have a 50% equity ownership interest in Powder Springs, with an affiliate of Colonial Pipeline Company having the other 50% equity ownership interest. We will serve as construction manager and operator of the Powder Springs facility. This facility is expected to be operational in early 2017.

Our investments in non-controlled entities at March 31, 2015 are comprised of:
Entity
 
Ownership Interest
BridgeTex Pipeline Company, LLC ("BridgeTex")
 
50%
Double Eagle Pipeline LLC ("Double Eagle")
 
50%
Osage Pipe Line Company, LLC ("Osage")
 
50%
Powder Springs Logistics, LLC
 
50%
Saddlehorn Pipeline Company, LLC
 
40%
Texas Frontera, LLC ("Texas Frontera")
 
50%

The management fees we receive from Texas Frontera, Powder Springs, Saddlehorn and BridgeTex are reported as affiliate management fee revenue on our consolidated statements of income.  For the three months ended March 31, 2014 and 2015, we received throughput revenue from Double Eagle of $0.5 million and $0.9 million, respectively, which we recognized as transportation and terminals revenue.  At December 31, 2014, we recognized a $0.3 million trade accounts receivable from Double Eagle and at December 31, 2014 and March 31, 2015, we had recognized liabilities of $2.2 million and $1.5 million, respectively, to BridgeTex for pre-paid construction management fees.

In November 2014, we entered into a long-term agreement with BridgeTex for capacity on our Houston area crude oil distribution system. We recognized $8.4 million of revenue from this agreement in first quarter 2015, which we included in transportation and terminals revenue on our consolidated statements of income. We recognized a $2.6 million receivable from BridgeTex at December 31, 2014 associated with this agreement.

The financial results from Texas Frontera are included in our marine storage segment, the financial results from Osage, Double Eagle, BridgeTex and Saddlehorn are included in our crude oil segment and the financial results from Powder Springs are included in our refined products segment as earnings/losses of non-controlled entities.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



A summary of our investments in non-controlled entities follows (in thousands):
 
 
BridgeTex
 
All Others
 
Consolidated
Investments at December 31, 2014
 
$
489,348

 
$
124,519

 
$
613,867

Additional investment
 
7,358

 
19,645

 
27,003

Earnings of non-controlled entities:
 
 
 

 
 
Proportionate share of earnings
 
9,019

 
1,269

 
10,288

Amortization of excess investment and capitalized interest
 
(510
)
 
(188
)
 
(698
)
Earnings of non-controlled entities
 
8,509

 
1,081

 
9,590

Less:
 
 
 
 
 
 
Distributions of earnings from investments in non-controlled entities
 
8,509

 
720

 
9,229

Distributions in excess of earnings of non-controlled entities
 
4,565

 
48

 
4,613

Investments at March 31, 2015
 
$
492,141

 
$
144,477

 
$
636,618

 
 
 
 
 
 
 

Summarized financial information of our non-controlled entities as of and for the three months ended March 31, 2015 follows (in thousands):
 
 
BridgeTex
 
All Others
 
Consolidated
Current assets
 
$
50,901

 
$
21,535

 
$
72,436

Noncurrent assets
 
822,132

 
252,542

 
1,074,674

Total assets
 
$
873,033

 
$
274,077

 
$
1,147,110

Current liabilities
 
$
49,618

 
$
11,019

 
$
60,637

Noncurrent liabilities
 
236

 
1,785

 
2,021

Total liabilities
 
$
49,854

 
$
12,804

 
$
62,658

Equity
 
$
823,179

 
$
261,273

 
$
1,084,452

 
 
 
 
 
 
 
Revenue
 
$
37,136

 
$
9,520

 
$
46,656

Net income
 
$
18,037

 
$
2,581

 
$
20,618




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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



5.
Inventory

Inventory at December 31, 2014 and March 31, 2015 was as follows (in thousands):
 
 
December 31, 2014
 
March 31,
2015
Refined products
$
67,055

 
$
68,279

Liquefied petroleum gases
37,642

 
38,772

Transmix
36,867

 
33,721

Crude oil
10,015

 
14,068

Additives
6,183

 
6,109

Total inventory
$
157,762

 
$
160,949



6.
Employee Benefit Plans
We sponsor two pension plans for certain union employees and a pension plan primarily for non-union employees, a postretirement benefit plan for selected employees and a defined contribution plan. The following tables present our consolidated net periodic benefit costs related to the pension and postretirement benefit plans for the three months ended March 31, 2014 and 2015 (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
March 31, 2014
 
March 31, 2015
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
3,352

 
$
67

 
$
4,470

 
$
66

Interest cost
1,659

 
114

 
1,869

 
110

Expected return on plan assets
(1,697
)
 

 
(1,896
)
 

Amortization of prior service cost (credit)
33

 
(928
)
 

 
(928
)
Amortization of actuarial loss
629

 
195

 
1,347

 
225

Net periodic benefit cost (credit)
$
3,976

 
$
(552
)
 
$
5,790

 
$
(527
)
  
 
 
 
 
 
 
 
 
Contributions estimated to be paid into the plans in 2015 are $21.1 million and $1.1 million for the pension and postretirement benefit plans, respectively.

We match our employee's qualifying contributions to our defined contribution plan, resulting in expense to us. Expenses related to the defined contribution plan were $2.6 million and $2.8 million for the three months ended March 31, 2014 and 2015, respectively.

Amounts Included in AOCL

The changes in AOCL related to employee benefit plan assets and benefit obligations for the three months ended March 31, 2014 and 2015 were as follows:

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2014
 
March 31, 2015
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(36,184
)
 
$
3,053

 
$
(63,257
)
 
$
(1,696
)
Amortization of prior service credit
 
33

 
(928
)
 

 
(928
)
Amortization of actuarial loss
 
629

 
195

 
1,347

 
225

Ending balance
 
$
(35,522
)
 
$
2,320

 
$
(61,910
)
 
$
(2,399
)


7.
Debt
Consolidated debt at December 31, 2014 and March 31, 2015 was as follows (in thousands, except as otherwise noted):
 
 
December 31, 2014
 
March 31,
2015
 
Weighted-Average
Interest Rate for the Three Months Ended March 31, 2015 (1)
Commercial paper(2)
 
$
296,942

 
$

 
0.5%
$250.0 million of 5.65% Notes due 2016
 
250,758

 
250,652

 
5.7%
$250.0 million of 6.40% Notes due 2018
 
257,280

 
256,764

 
5.4%
$550.0 million of 6.55% Notes due 2019
 
567,868

 
566,939

 
5.7%
$550.0 million of 4.25% Notes due 2021
 
556,304

 
556,071

 
4.0%
$250.0 million of 3.20% Notes due 2025(2)
 

 
249,680

 
3.2%
$250.0 million of 6.40% Notes due 2037
 
249,017

 
249,021

 
6.4%
$250.0 million of 4.20% Notes due 2042
 
248,406

 
248,414

 
4.2%
$550.0 million of 5.15% Notes due 2043
 
556,320

 
556,296

 
5.1%
$250.0 million of 4.20% Notes due 2045(2)
 

 
249,913

 
4.6%
Total debt
 
$
2,982,895

 
$
3,183,750

 
4.7%
 
 
 
 
 
 
 

(1)
Weighted-average interest rate includes the amortization/accretion of discounts, premiums and gains/losses realized on historical cash flow and fair value hedges recognized as interest expense.

(2)
These borrowings were outstanding for only a portion of the three month period ending March 31, 2015. The weighted-average interest rate for these borrowings was calculated based on the number of days the borrowings were outstanding during the noted period.

All of the instruments detailed in the table above are senior indebtedness.

The face value of our debt at December 31, 2014 and March 31, 2015 was $2.9 billion and $3.2 billion, respectively. The difference between the face value and carrying value of the debt outstanding is the unamortized portion of terminated fair value hedges and the unamortized discounts and premiums on debt issuances. Realized gains and losses on fair value hedges and note discounts and premiums are being amortized or accreted to the applicable notes over the respective lives of those notes.

2015 Debt Offerings

In March 2015, we issued $250.0 million of our 3.20% notes due 2025 in an underwritten public offering. The notes were issued at 99.871% of par. Net proceeds from this offering were approximately $247.6 million, after underwriting discounts and offering expenses of $2.1 million.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Also in March 2015, we issued $250.0 million of our 4.20% notes due 2045 in an underwritten public offering. The notes were issued at 99.965% of par. Net proceeds from this offering were approximately $247.3 million, after underwriting discounts and offering expenses of $2.6 million.

The net proceeds from these offerings were used to repay borrowings outstanding under our commercial paper program and for general partnership purposes, including expansion capital.

Other Debt

Revolving Credit Facility. The total borrowing capacity under our revolving credit facility, which matures in November 2018, is $1.0 billion. Borrowings outstanding under the facility are classified as long-term debt on our consolidated balance sheets. Borrowings under the facility are unsecured and bear interest at LIBOR plus a spread ranging from 1.0% to 1.75% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate from 0.10% to 0.28%, depending on our credit ratings. The unused commitment fee was 0.125% at March 31, 2015. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of March 31, 2015, there were no borrowings outstanding under this facility and $5.6 million was obligated for letters of credit. Amounts obligated for letters of credit are not reflected as debt on our consolidated balance sheets, but decrease our borrowing capacity under the facility.

Commercial Paper Program. The maturities of our commercial paper notes vary, but may not exceed 397 days from the date of issuance. The commercial paper notes are sold under customary terms in the commercial paper market and are issued at a discount from par, or alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. The commercial paper we can issue is limited by the amounts available under our revolving credit facility up to an aggregate principal amount of $1.0 billion and is, therefore, classified as long-term debt. As of March 31, 2015, there were no commercial paper borrowings outstanding.


8.
Derivative Financial Instruments

Interest Rate Derivatives

We periodically enter into interest rate derivatives to economically hedge debt, interest or expected debt issuances, and we have historically designated these derivatives as cash flow or fair value hedges for accounting purposes. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

In first quarter 2015, we entered into a $50.0 million forward-starting interest rate swap agreement to hedge against the risk of variability of future interest payments on a portion of debt we anticipate issuing in 2016. The fair value of this contract at March 31, 2015 was recorded on our balance sheet as an other noncurrent asset of $1.0 million. We account for this agreement as a cash flow hedge.

In third and fourth quarter of 2014, we entered into $250.0 million of forward-starting interest rate swap agreements to hedge against the risk of variability of future interest payments on a portion of debt we anticipated issuing in 2015. We accounted for these agreements as cash flow hedges. When we issued the $250.0 million of 4.20% notes due 2045 in first quarter 2015, we settled the associated interest rate swap agreements for a loss of $42.9 million. The loss was recorded to other comprehensive income ($26.5 million and $16.4 million recorded in 2014 and 2015, respectively) and will be recognized into earnings as an adjustment to our periodic interest expense accruals over the life of the associated notes. This loss was also reported as net payment on financial derivatives in the financing activities of our consolidated statements of cash flows.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During 2012, we terminated and settled certain interest rate swap agreements and realized a gain of $11.0 million, which was recorded to other comprehensive income as a deferred cash flow hedging gain. The purpose of these swaps was to hedge against the variability of interest payments on an anticipated debt issuance, which was completed during first quarter 2015. The effective portion of this gain in the amount of $10.6 million at March 31, 2015 will be recognized into earnings as an adjustment to our periodic interest expense over the life of the $250.0 million of 4.20% notes due 2045 that were issued in first quarter 2015.

Commodity Derivatives

Hedging Strategies

Our butane blending activities produce gasoline products, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of forward purchase and sale contracts, NYMEX contracts and Chicago Mercantile Exchange ("CME") butane futures agreements to help manage commodity price changes, which is intended to mitigate the risk of decline in the product margin realized from our butane blending activities that we choose to hedge. Further, certain of our other commercial operations generate petroleum products. We use NYMEX contracts to hedge against future price changes for some of these commodities.

We account for the forward physical purchase and sale contracts we use in our butane blending and fractionation activities as normal purchases and sales. Forward contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting. As of March 31, 2015, we had commitments under these forward purchase and sale contracts as follows (in millions):
 
Notional Value
 
Barrels
Forward purchase contracts
$
72.8


1.8
Forward sale contracts
$
4.5


0.1

We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods. Our NYMEX contracts fall into one of three hedge categories:
Hedge Category
 
Hedge Purpose
 
Accounting Treatment
Qualifies For Hedge Accounting Treatment
    Cash Flow Hedge
 
To hedge the variability in cash flows related to a forecasted transaction.
 
The effective portion of changes in the value of the hedge is recorded to accumulated other comprehensive income/loss and reclassified to earnings when the forecasted transaction occurs. Any ineffectiveness is recognized currently in earnings.
    Fair Value Hedge
 
To hedge against changes in the fair value of a recognized asset or liability.
 
The effective portion of changes in the value of the hedge is recorded as adjustments to the asset or liability being hedged. Any ineffectiveness is recognized currently in earnings.
Does Not Qualify For Hedge Accounting Treatment
    Economic Hedge
 
To effectively serve as either a fair value or a cash flow hedge; however, the derivative agreement does not qualify for hedge accounting treatment under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.
 
Changes in the fair value of these agreements are recognized currently in earnings.

During the three months ended March 31, 2014 and 2015, none of the commodity hedging contracts we entered into qualified for or were designated as cash flow hedges.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Period changes in the fair value of NYMEX agreements that are accounted for as economic hedges (other than those economic hedges of our pipeline product overages as discussed below), the effective portion of changes in the fair value of cash flow hedges that are reclassified from accumulated other comprehensive income/loss and any ineffectiveness associated with hedges related to our commodity activities are recognized currently in earnings as adjustments to product sales.

We also use CME-traded butane futures agreements, which are not designated as hedges for accounting purposes, to hedge against changes in the price of butane we expect to purchase in the future. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to cost of product sales.

We currently hold petroleum product inventories that we obtained from overages on our pipeline systems. We use NYMEX contracts that are not designated as hedges for accounting purposes to help manage price changes related to these overage inventory barrels. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to operating expense.

Additionally, we hold crude oil barrels that we use for operational purposes which we classify as long-term assets on our balance sheet and which are reported as tank bottom and linefill assets. We use NYMEX contracts to hedge against changes in the price of these crude oil barrels. We record the effective portion of the gains or losses for those contracts that qualify as fair value hedges as adjustments to the assets being hedged and the ineffective portions as well as amounts excluded from the assessment of hedge effectiveness as adjustments to other income or expense.

As outlined in the table below, our open NYMEX contracts and CME butane futures agreements at March 31, 2015 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
NYMEX - Fair Value Hedges
 
0.7 million barrels of crude oil
 
Between December 2015 and November 2016
NYMEX - Economic Hedges(1)
 
3.2 million barrels of refined products and crude oil
 
Between April 2015 and January 2016
CME Butane Futures Agreements - Economic Hedges
 
0.3 million barrels of butane
 
Between April and December 2015

(1) Of the 3.2 million barrels of products we have economically hedged at March 31, 2015, we had open agreements which swap the pricing on 0.1 million of those barrels from New York harbor to Platts Group 3 or Platts Gulf Coast, which are the geographic locations where these barrels will be sold.

Energy Commodity Derivatives Contracts and Deposits Offsets

At March 31, 2015, we had received margin deposits of $31.5 million for our NYMEX and CME contracts with one of our counterparties, which were recorded as a current liability under energy commodity derivatives deposits on our consolidated balance sheet. Additionally, we made margin deposits of $1.1 million for our CME contracts with a second counterparty, which were recorded as a current asset under energy commodity derivatives deposits on our consolidated balance sheet. We have the right to offset the combined fair values of our open NYMEX contracts and our open CME butane futures agreements against our margin deposits under a master netting arrangement for each counterparty; however, we have elected to present the combined fair values of our open NYMEX and CME butane futures agreements separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our NYMEX agreements and CME butane futures agreements together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets. A schedule of the derivative amounts we have offset and the deposit

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



amounts we could offset under a master netting arrangement are provided below as of December 31, 2014 and March 31, 2015 (in thousands):
 
 
December 31, 2014
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Consolidated Balance Sheet(1)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
106,764

 
$
(10,622
)
 
$
96,142

 
$
(78,279
)
 
$
17,863

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Consolidated Balance Sheet(2)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
55,770

 
$
(1,691
)
 
$
54,079

 
$
(30,412
)
 
$
23,667

 
 
 
 
 
 
 
 
 
 
 
(1)
Net amount includes energy commodity derivative contracts classified as current assets, net, of $87,151, current liabilities of $5,413 and noncurrent assets of $14,404.
(2)
Net amount includes energy commodity derivative contracts classified as current assets, net, of $36,725, current liabilities of $814 and noncurrent assets of $18,168.
(3)
This represents the maximum amount of loss we would incur if our counterparties failed to perform on their derivative contracts.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three months ended March 31, 2014 and 2015 were as follows (in thousands):
 
 
Three Months Ended March 31,
Derivative Gains (Losses) Included in AOCL
2014
 
2015
Beginning balance
$
13,627

 
$
(16,587
)
Net loss on interest rate contract cash flow hedges
(3,613
)
 
(15,465
)
Reclassification of net loss (gain) on cash flow hedges to income
(26
)
 
200

Ending balance
$
9,988

 
$
(31,852
)
The following tables provide a summary of the effect on our consolidated statements of income for the three months ended March 31, 2014 and 2015 of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands):
 
 
Three Months Ended March 31, 2014
 
 
Amount of Loss Recognized in AOCL on Derivative
 
Location of Gain Reclassified from AOCL into  Income
 
Amount of Gain Reclassified from AOCL into Income
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
(3,613
)
 
 
Interest expense
 
 
$
26

 
 
 
$

 

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
 
Three Months Ended March 31, 2015
 
 
Amount of Loss Recognized in AOCL on Derivative
 
Location of Loss Reclassified from AOCL into  Income
 
Amount of Loss Reclassified from AOCL into Income
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
(15,465
)
 
 
Interest expense
 
 
$
(200
)
 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2015, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $1.5 million.
Income Statement
The following table provides a summary of the effect on our consolidated statements of income for the three months ended March 31, 2014 and 2015 of derivatives accounted for under ASC 815; Derivatives and Hedging—Overall, that were not designated as hedging instruments (in thousands):
 
 
 
 
 
Amount of Gain (Loss) Recognized on Derivative
 
 
 
 
Three Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivative
 
March 31,
Derivative Instrument
 
 
2014
 
2015
NYMEX commodity contracts
 
Product sales revenue
 
$
2,823

 
$
3,880

NYMEX commodity contracts
 
Operating expenses
 
365

 
1,303

CME butane futures agreements
 
Cost of product sales
 
144

 
(1,224
)
 
 
Total
 
$
3,332

 
$
3,959

The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

During 2014 and 2015, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the cumulative gains at December 31, 2014 and March 31, 2015 of $13.3 million and $17.5 million, respectively, from the agreements were offset by a cumulative decrease to tank bottoms and linefill. We exclude the differential between the current spot price and forward price from our assessment of hedge effectiveness for these fair value hedges. For the three months ended March 31, 2015, we recognized a loss of $0.3 million for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other expense on our consolidated statements of income.
Balance Sheet
The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2014 and March 31, 2015 (in thousands):

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
 
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
360

 
Energy commodity derivatives contracts, net
 
$

NYMEX commodity contracts
 
Other noncurrent assets
 
14,404

 
Other noncurrent liabilities
 

Interest rate contracts
 
Other current assets
 

 
Other current liabilities
 
26,478

 
 
Total
 
$
14,764

 
Total
 
$
26,478

 
 
 
March 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
541

 
Energy commodity derivatives contracts, net
 
$

NYMEX commodity contracts
 
Other noncurrent assets
 
18,168

 
Other noncurrent liabilities
 

Interest rate contracts
 
Other noncurrent assets
 
965

 
Other noncurrent liabilities
 

 
 
Total
 
$
19,674

 
Total
 
$

 

The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2014 and March 31, 2015 (in thousands):
 
 
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
92,000

 
Energy commodity derivatives contracts, net
 
$

CME butane futures agreements
 
Energy commodity derivatives contracts, net
 

 
Energy commodity derivatives contracts, net
 
10,622

 
 
Total
 
$
92,000

 
Total
 
$
10,622

 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
37,061

 
Energy commodity derivatives contracts, net
 
$
13

CME butane futures agreements
 
Energy commodity derivatives contracts, net
 

 
Energy commodity derivatives contracts, net
 
1,678

 
 
Total
 
$
37,061

 
Total
 
$
1,691

 


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



9.
Commitments and Contingencies

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $36.3 million and $36.4 million at December 31, 2014 and March 31, 2015, respectively. We have classified environmental liabilities as current or noncurrent based on management’s estimates regarding the timing of actual payments. Management estimates that expenditures associated with these environmental liabilities will be paid over the next 10 years. Environmental expenses recognized as a result of changes in our environmental liabilities are included in operating expenses on our consolidated statements of income. Environmental expenses for the three months ended March 31, 2014 and 2015 were $0.3 million and $1.4 million, respectively.

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters at December 31, 2014 were $5.1 million, of which $1.3 million and $3.8 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet. Receivables from insurance carriers and other third parties related to environmental matters at March 31, 2015 were $5.0 million, of which $1.2 million and $3.8 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet.
Other
We are a party to various other claims, legal actions and complaints arising in the ordinary course of business, including without limitation those disclosed in Item 1, Legal Proceedings of Part II of this report on Form 10-Q. While the results cannot be predicted with certainty, management believes the ultimate resolution of these claims, legal actions and complaints after consideration of amounts accrued, insurance coverage or other indemnification arrangements will not have a material adverse effect on our results of operations, financial position or cash flows.

10.
Long-Term Incentive Plan
We have a long-term incentive plan (“LTIP”) for certain of our employees and for directors of our general partner. The LTIP primarily consists of phantom units and permits the grant of awards covering an aggregate payout of 9.4 million of our limited partner units. The estimated units available under the LTIP at March 31, 2015 total 1.0 million. The compensation committee of our general partner’s board of directors administers our LTIP.
 

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Our equity-based incentive compensation expense was as follows (in thousands):
 
Three Months Ended
 
March 31, 2014
 
Equity
Method
 
Liability
Method
 
Total
Performance-based awards:
 
 
 
 
 
2012 awards
$
1,022

 
$
924

 
$
1,946

2013 awards
1,181

 
548

 
1,729

2014 awards
904

 

 
904

Retention awards
509

 

 
509

Total
$
3,616

 
$
1,472

 
$
5,088

 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
4,974

Operating expense
 
 
 
 
114

Total
 
 
 
 
$
5,088

 
Three Months Ended
 
March 31, 2015
 
Equity
Method
 
Liability
Method
 
Total
Performance/market-based awards:
 
 
 
 
 
2013 awards
$
1,519

 
$
215

 
$
1,734

2014 awards
1,623

 

 
1,623

2015 awards
1,019

 

 
1,019

Retention awards
375

 

 
375

Total
$
4,536

 
$
215

 
$
4,751

 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
4,689

Operating expense
 
 
 
 
62

Total
 
 
 
 
$
4,751

 
 
 
 
 
 

In February 2015, 166,189 phantom unit awards were issued pursuant to our LTIP. These grants included both performance-based and retention awards and have a three-year vesting period.

In January 2015, we issued 358,072 limited partner units, of which 354,529 were issued to settle unit award grants to certain employees that vested on December 31, 2014 and 3,543 were issued to settle the equity-based retainer paid to certain members of our general partner's board of directors.



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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



11.
Distributions
Distributions we paid during 2014 and 2015 were as follows (in thousands, except per unit amounts):
 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
02/14/2014
 
 
$
0.5850

 
 
 
$
132,835

 
05/15/2014
 
 
0.6125

 
 
 
139,079

 
08/14/2014
 
 
0.6400

 
 
 
145,324

 
11/14/2014
 
 
0.6675

 
 
 
151,568

 
Total
 
 
$
2.5050

 
 
 
$
568,806

 
 
 
 
 
 
 
 
 
 
2/13/2015
 
 
$
0.6950

 
 
 
$
158,061

 
5/15/2015(1)
 
 
0.7175

 
 
 
163,178

 
Total
 
 
$
1.4125

 
 
 
$
321,239

 

(1) Our general partner's board of directors declared this cash distribution on April 23, 2015 to be paid on May 15, 2015 to unitholders of record at the close of business on May 4, 2015.
 

12.
Fair Value

Recurring

Fair Value Methods and Assumptions - Financial Assets and Liabilities.

We used the following methods and assumptions in estimating fair value for our financial assets and liabilities:

Energy commodity derivatives contracts. These include NYMEX futures and CME exchange-traded butane futures agreements related to petroleum products. These contracts are carried at fair value on our consolidated balance sheets and are valued based on quoted prices in active markets. See Note 8 – Derivative Financial Instruments for further disclosures regarding these contracts.

Interest rate contracts. These include forward-starting interest rate swap agreements to hedge against the risk of variability of interest payments on future debt. These contracts are carried at fair value on our consolidated balance sheets and are valued based on an assumed exchange, at the end of each period, in an orderly transaction with a market participant in the market in which the financial instrument is traded. The exchange value was calculated using present value techniques on estimated future cash flows based on forward interest rate curves. See Note 8 – Derivative Financial Instruments for further disclosures regarding these contracts.

Long-term receivables. These include lease payments receivable under a direct-financing leasing arrangement and insurance receivables. Fair value was determined by estimating the present value of future cash flows using current market rates.

Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2014 and March 31, 2015; however, where recent observable market trades were not available, prices were determined using adjustments to the last traded value for that debt issuance or by adjustments to the prices of similar debt instruments of peer entities that are actively traded. The carrying amount of borrowings, if any, under our revolving credit facility and

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



our commercial paper program approximates fair value due to the frequent repricing of these obligations.

Fair Value Measurements - Financial Assets and Liabilities

The following tables summarize the carrying amounts, fair values and recurring fair value measurements recorded or disclosed as of December 31, 2014 and March 31, 2015, based on the three levels established by ASC 820; Fair Value Measurements and Disclosures (in thousands):
 
 
As of December 31, 2014
Assets (Liabilities)
 
 
 
 
 
Fair Value Measurements using:
 
Carrying Amount
 
Fair Value
 
Quoted Prices  in Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Energy commodity derivatives contracts – assets
 
$
96,142

 
$
96,142

 
$
96,142

 
$

 
$

Interest rate contracts – liabilities
 
$
(26,478
)
 
$
(26,478
)
 
$

 
$
(26,478
)
 
$

Long-term receivables
 
$
28,611

 
$
30,200

 
$

 
$

 
$
30,200

Debt
 
$
(2,982,895
)
 
$
(3,212,462
)
 
$

 
$
(3,212,462
)
 
$


 
 
As of March 31, 2015
Assets (Liabilities)
 
 
 
 
 
Fair Value Measurements using:
 
Carrying Amount
 
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Energy commodity derivatives contracts – assets
 
$
54,079

 
$
54,079

 
$
54,079

 
$

 
$

Interest rate contracts – assets
 
$
965

 
$
965

 
$

 
$
965

 
$

Long-term receivables
 
$
27,116

 
$
28,820

 
$

 
$

 
$
28,820

Debt
 
$
(3,183,750
)
 
$
(3,481,995
)
 
$

 
$
(3,481,995
)
 
$



13.
Related Party Transactions

Barry R. Pearl is an independent member of our general partner's board of directors and is also a director of the general partner of Targa Resources Partners, L.P. ("Targa"). In the normal course of business, we purchase butane from subsidiaries of Targa. For the three months ended March 31, 2014 and 2015, we made purchases of butane from subsidiaries of Targa of $12.2 million and $8.8 million, respectively. These purchases were based on the then-current index prices. We had recognized payables to Targa of $0.9 million and $1.5 million at December 31, 2014 and March 31, 2015, respectively.

See Note 4 – Investments in Non-Controlled Entities for a discussion of affiliate joint venture transactions we account for under the equity method.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)




14.
Subsequent Events

Recognizable events

No recognizable events occurred subsequent to March 31, 2015.

Non-recognizable events

In April 2015, our general partner's board of directors declared a quarterly distribution of $0.7175 per unit to be paid on May 15, 2015 to unitholders of record at the close of business on May 4, 2015. The total cash distributions expected to be paid under this declaration are approximately $163.2 million.

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Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

We are a publicly traded limited partnership principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil. As of March 31, 2015, our asset portfolio, including the assets of our joint ventures, consisted of:
our refined products segment, comprised of our 9,500-mile refined products pipeline system with 52 terminals as well as 27 independent terminals not connected to our pipeline system and our 1,100-mile ammonia pipeline system;

our crude oil segment, comprised of approximately 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels, of which 12 million barrels are used for leased storage; and

our marine storage segment, consisting of five marine terminals located along coastal waterways with an aggregate storage capacity of approximately 26 million barrels.

The following discussion provides an analysis of the results for each of our operating segments, an overview of our liquidity and capital resources and other items related to our partnership. The following discussion and analysis should be read in conjunction with (i) our accompanying interim consolidated financial statements and related notes and (ii) our consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Developments

Election to our General Partner's Board of Directors. On April 23, 2015, at our annual meeting of limited partners, Stacy P. Methvin was elected to our general partner's board of directors as an independent director.

Saddlehorn Pipeline.  During the first quarter of 2015, plans were finalized for the Saddlehorn pipeline, a 550-mile pipeline system to deliver various grades of crude oil from the DJ Basin, and potentially the broader Rocky Mountain production area, to Cushing, Oklahoma. Anadarko Petroleum Corporation ("Anadarko") exercised its option for partial equity ownership, resulting in 40% ownership of Saddlehorn Pipeline Company ("Saddlehorn") by us, with Plains All-American Pipeline, L.P. and Anadarko owning 40% and 20%, respectively.  We will serve as construction manager and operator for Saddlehorn. The Saddlehorn pipeline is expected to be operational in mid-2016.

Debt Offerings. During first quarter 2015, we issued $500.0 million of senior notes, consisting of $250.0 million of 3.2% notes due in 2025 and $250.0 million of 4.2% notes due in 2045. See 2015 Debt Offerings under Liquidity below for further discussion of this matter.

Cash Distribution. In April 2015, the board of directors of our general partner declared a quarterly cash distribution of $0.7175 per unit for the period of January 1, 2015 through March 31, 2015. This quarterly cash distribution will be paid on May 15, 2015 to unitholders of record on May 4, 2015. Total distributions expected to be paid under this declaration are approximately $163.2 million.


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Results of Operations

We believe that investors benefit from having access to the same financial measures utilized by management. Operating margin, which is presented in the following table, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a generally accepted accounting principles (“GAAP”) measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the following table. Operating profit includes expense items, such as depreciation and amortization expense and general and administrative (“G&A”) expenses, which management does not focus on when evaluating the core profitability of our separate operating segments. Additionally, product margin, which management primarily uses to evaluate the profitability of our commodity-related activities, is provided in this table. Product margin is a non-GAAP measure; however, its components of product sales revenue and cost of product sales are determined in accordance with GAAP. Our butane blending, fractionation and other commodity-related activities generate significant product revenue. We believe the product margin from these activities, which takes into account the related cost of product sales, better represents its importance to our results of operations.
 

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Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2015
 
 
Three Months Ended March 31,
 
Variance
Favorable  (Unfavorable)
 
2014
 
2015
 
$ Change
 
% Change
Financial Highlights ($ in millions, except operating statistics)
 
 
 
 
 
 
 
Transportation and terminals revenue:
 
 
 
 
 
 
 
Refined products
$
210.2

 
$
216.8

 
$
6.6

 
3
Crude oil
67.9

 
86.5

 
18.6

 
27
Marine storage
39.5

 
42.3

 
2.8

 
7
Total transportation and terminals revenue
317.6

 
345.6

 
28.0

 
9
Affiliate management fee revenue
4.9

 
3.4

 
(1.5
)
 
(31)
Operating expenses:
 
 
 
 
 
 
 
Refined products
51.2

 
70.3

 
(19.1
)
 
(37)
Crude oil
9.1

 
13.9

 
(4.8
)
 
(53)
Marine storage
14.1

 
15.3

 
(1.2
)
 
(9)
Intersegment eliminations
(0.8
)
 
(1.0
)
 
0.2

 
25
Total operating expenses
73.6

 
98.5

 
(24.9
)
 
(34)
Product margin:
 
 
 
 
 
 
 
Product sales revenue
296.1

 
173.1

 
(123.0
)
 
(42)
Cost of product sales
198.0

 
136.2

 
61.8

 
31
Product margin(1)
98.1

 
36.9

 
(61.2
)
 
(62)
Earnings of non-controlled entities
0.5

 
9.6

 
9.1

 
1,820
Operating margin
347.5

 
297.0

 
(50.5
)
 
(15)
Depreciation and amortization expense
37.5

 
41.7

 
(4.2
)
 
(11)
G&A expense
34.9

 
35.5

 
(0.6
)
 
(2)
Operating profit
275.1

 
219.8

 
(55.3
)
 
(20)
Interest expense (net of interest income and interest capitalized)
30.7

 
34.1

 
(3.4
)
 
(11)
Debt placement fee amortization expense
0.6

 
0.6

 

 
Other expense

 
0.3

 
(0.3
)
 
n/a
Income before provision for income taxes
243.8

 
184.8

 
(59.0
)
 
(24)
Provision for income taxes
1.2

 
1.2

 

 
Net income
$
242.6

 
$
183.6

 
$
(59.0
)
 
(24)
Operating Statistics:
 
 
 
 
 
 
 
Refined products:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.356

 
$
1.369

 
 
 
 
Volume shipped (million barrels):
 
 
 
 
 
 
 
Gasoline
59.8

 
62.2

 
 
 
 
Distillates
37.5

 
36.9

 
 
 
 
Aviation fuel
5.0

 
5.2

 
 
 
 
Liquefied petroleum gases
1.5

 
1.0

 
 
 
 
Total volume shipped
103.8

 
105.3

 
 
 
 
Crude oil:
 
 
 
 
 
 
 
Magellan 100%-owned assets:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.113

 
$
1.112

 
 
 
 
Volume shipped (million barrels)
41.8

 
50.0

 
 
 
 
Crude oil terminal average utilization (million barrels per month)
12.1

 
12.6

 
 
 
 
Select joint venture pipelines:
 
 
 
 
 
 
 
BridgeTex - volume shipped (million barrels) (2)

 
15.0

 
 
 
 
 
 
 
 
 
 
 
 
Marine storage:
 
 
 
 
 
 
 
Marine terminal average utilization (million barrels per month)
22.7

 
23.6

 
 
 
 

(1) Product margin does not include depreciation or amortization expense.
(2) These volumes reflect the total shipments by BridgeTex, of which our ownership interest is 50%.

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Transportation and terminals revenue increased $28.0 million resulting from:
an increase in refined products revenue of $6.6 million. Refined products revenue increased primarily due to a 1% increase in transportation volumes, higher weighted average tariff rates and higher ancillary revenues associated with increased activity. Shipments were higher primarily due to increased demand for gasoline in the markets we serve. Tariff rates were favorably impacted by our mid-year 2014 tariff rate increase of 3.9%, partially offset by more shorter-haul shipments (which have a lower rate);
an increase in crude oil revenue of $18.6 million primarily due to higher crude oil deliveries on our Longhorn pipeline and capacity revenue received in first quarter 2015 from BridgeTex Pipeline Company, LLC ("BridgeTex") for capacity on our Houston area crude oil distribution system. Shipments on our Longhorn pipeline averaged approximately 250,000 barrels per day in first quarter 2015, an increase of approximately 50,000 barrels per day over first quarter 2014; and
an increase in marine storage revenue of $2.8 million primarily due to improved utilization and higher storage rates at our marine facilities.
Affiliate management fee revenue decreased $1.5 million due to lower construction management fees related to BridgeTex.
Operating expenses increased by $24.9 million primarily resulting from:
an increase in refined products expenses of $19.1 million primarily due to less favorable product overages (which reduce operating expense) as a result of significantly lower commodity prices in 2015, as well as higher asset integrity spending and additional property taxes; and
an increase in crude oil expenses of $4.8 million primarily due to less favorable product overages (which reduce operating expense) as a result of significantly lower commodity prices in 2015 and higher power costs associated with moving additional volume in the current period; and
an increase in marine storage expenses of $1.2 million primarily due to higher asset integrity costs and additional asset retirements during the current period.
Product sales revenue primarily resulted from our butane blending activities, transmix fractionation and product gains from our independent terminals. We utilize New York Mercantile Exchange (“NYMEX”) contracts to hedge against changes in the price of petroleum products we expect to sell in the future, and we use butane futures agreements to hedge against changes in the price of butane we expect to purchase in future periods. See Note 8 –Derivative Financial Instruments in Item 1 – Consolidated Financial Statements for a discussion of our hedging strategies and how our use of NYMEX contracts and butane futures agreements impacts our product margin. Product margin decreased $61.2 million primarily due to the impact of lower commodity prices on physical product sales in the current period as the related gain on the economic hedges was recognized mainly in the prior quarter. See Other Items—Commodity Derivative Agreements—Impact of Commodity Derivatives on Results of Operations below for more information about our NYMEX contracts.
Earnings of non-controlled entities increased $9.1 million primarily due to our share of earnings from BridgeTex, which began operations late in 2014.
Depreciation and amortization increased $4.2 million primarily due to expansion capital projects placed into service over the last year and a $1.8 million charge recognized during first quarter 2015 to write off an office/warehouse building.
G&A expense increased $0.6 million primarily due to higher personnel costs resulting from an increase in employee headcount, partially offset by lower costs associated with deferred board of director compensation due to a decrease in the price of our limited partner units in the first quarter of 2015.
Interest expense, net of interest income and interest capitalized, increased $3.4 million primarily due to lower capitalized interest now that the BridgeTex pipeline project is operational. Our average outstanding debt increased

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from $2.8 billion in first quarter 2014 to $3.1 billion in first quarter 2015 primarily due to borrowings for expansion capital expenditures, including $250.0 million of 3.20% senior notes and $250.0 million of 4.20% senior notes issued in March 2015. Our weighted-average interest rate decreased from 5.2% in first quarter 2014 to 4.7% in first quarter 2015 due to the impact of our commercial paper borrowings and March 2015 debt issuances, which are both at lower rates than the debt we retired in mid-2014.


Distributable Cash Flow

We calculate the non-GAAP measures of distributable cash flow ("DCF") and adjusted EBITDA in the table below. Management uses DCF as a basis for recommending to our general partner's board of directors the amount of cash distributions to be paid to our limited partners each period. Management also uses DCF as a basis for determining the payouts for the performance-based awards issued under our equity-based compensation plan. Adjusted EBITDA is an important measure that we and the investment community use to assess the financial results of an entity. We believe that investors benefit from having access to the same financial measures utilized by management for these evaluations. A reconciliation of DCF and adjusted EBITDA for the three months ended March 31, 2014 and 2015 to net income, which is its nearest comparable GAAP financial measure, follows (in millions):
 
 
Three Months Ended March 31,
 
Increase
 
 
2014
 
2015
 
(Decrease)
Net income
 
$
242.6

 
$
183.6

 
$
(59.0
)
Interest expense, net, and provision for income taxes
 
31.9

 
35.3

 
3.4

Depreciation and amortization expense(1)
 
38.1

 
42.3

 
4.2

Equity-based incentive compensation expense(2)
 
(9.7
)
 
(13.0
)
 
(3.3
)
Asset retirements
 
1.2

 

 
(1.2
)
Commodity-related adjustments:
 
 
 
 
 
 
Derivative losses (gains) recognized in the period associated with future product transactions(3)
 
(0.1