Item 7.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 December 31, 2020, our asset portfolio consisted of:
•our refined products segment, comprised of our approximately 9,800-mile refined petroleum products pipeline system with 54 connected terminals as well as 25 independent terminals not connected to our pipeline system and two marine storage terminals (one of which is owned through a joint venture); and
•our crude oil segment, comprised of approximately 2,200 miles of crude oil pipelines, a condensate splitter and 37 million barrels of aggregate storage capacity, of which approximately 27 million barrels are used for contract storage. Approximately 1,000 miles of these pipelines, the condensate splitter and 30 million barrels of this storage capacity (including 24 million barrels used for contract storage) are wholly-owned, with the remainder owned through joint ventures.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this annual report on Form 10-K for the year ended December 31, 2020.
See Item 1. Business for a detailed description of our business.
Overview
Resilient Business Model. The year 2020 presented the most challenging industry and economic conditions experienced in our 20-year history as a public company. Despite the backdrop of a difficult year, we generated solid financial results while ensuring continuity of critical fuel supply for our nation. Companies like ours are extremely important to keep the United States’ economy moving and our employees worked diligently to ensure our business ran safely throughout the pandemic.
Our nation experienced unprecedented travel and economic restrictions related to COVID-19 and reduced drilling activity from the lower commodity price environment. As a result, our company was negatively impacted by significantly reduced demand for petroleum products, such as gasoline, diesel fuel and crude oil.
However, our resilient business model and financial strength positioned us well to respond not only to the near-term industry challenges but to successfully manage our company for the long term. Even during a pandemic, our company proved to be resilient, and we were able to pay consistent cash distributions to our investors, generate solid distribution coverage and maintain industry-leading leverage well within our long-standing limit.
Our conservative, disciplined approach provides us the confidence to manage our business through this business cycle. We remain optimistic that demand for our services will continue to increase as vaccines become more readily available, travel and economic activity recover and drilling returns due to an improved demand and commodity price environment.
Long-Term Value Creation. We remain focused on delivering long-term value for our investors through a disciplined combination of cash distributions, equity repurchases and capital investments. Construction projects have been a primary source of growth for our company over the years. Although the current environment for large-scale capital investments is challenging and likely to remain so for the foreseeable future, we continue to look for opportunities to invest in attractive, low-risk projects to benefit our future.
Focus on Optimization. Efficiency and discipline are key to our business strategy, and we kicked off an optimization initiative over a year ago to identify opportunities throughout the organization. Our employees have been actively engaged in the process to identify better ways to run our business, with significant progress to date on this effort.
Optimization of our asset portfolio is an important element of our company’s discipline as well. During 2020, we divested three marine terminal facilities outside our strategic footprint to maximize value and our strong financial position.
Sustainability Commitment. Moving What Moves America® represents who we are and our commitment to safely and reliably deliver petroleum products that are essential and beneficial to everyday life.
Sustainability is not new to us. We have focused on long-term, sustainable operations and disciplined management since our creation two decades ago. However, we recognize the growing stakeholder interest in how these principles are incorporated into our daily operations, and we published our inaugural sustainability report last fall.
Our most important social obligation is to safely and reliably provide the fuels that our nation relies on each day, while protecting the communities where we live and work. In addition, we continue to be an industry leader in governance, with an independent board elected by our investors and all-employee annual compensation aligned with key environmental and safety metrics. We remain committed to providing transparency around how we manage and measure our environmental, social and governance performance.
Important Future Role. Looking ahead, investors are understandably curious how potential changes in energy policy could impact the long-term viability of our business. Based on industry and government forecasts, the demand for petroleum products is expected to remain strong for many years to come.
The vast majority of cars, trucks, tractors, locomotives and airplanes today depend on petroleum products to operate, especially in the markets served by our assets. Realistically, energy transition will take decades to accomplish, with petroleum products and Magellan continuing to play important roles in our nation’s energy future.
Recent Developments
COVID-19 and Decline in Commodity Prices. The COVID-19 pandemic has negatively impacted the global economy. In response to the pandemic, governments around the world have implemented stringent measures to help reduce the spread of the virus, including stay-at-home orders, travel restrictions and other measures. Due to reductions in economic activity, the world is experiencing reduced demand for petroleum products and depressed commodity prices for petroleum products, which has adversely affected our business. Continuing uncertainty regarding the global impact of COVID-19 is likely to result in continued weakness in demand for the services we provide while the pandemic continues. The reduction in refined products demand and lower crude oil prices have combined to put significant downward pressure on domestic crude oil production, and a sustained reduction in crude oil production could cause delays in the timing of our recognition of revenue from take-or-pay pipeline transportation commitments. These events have and will continue to adversely affect our business. However, we do not believe these events will impact our ability to meet any of our financial obligations or result in any significant impairments to our assets.
Distribution. In January 2021, the board of directors of our general partner declared a quarterly distribution of $1.0275 per unit for the period of October 1, 2020 through December 31, 2020. This quarterly distribution was paid on February 12, 2021 to unitholders of record on February 5, 2021.
Results of Operations
We believe that investors benefit from having access to the same financial measures utilized by management. Operating margin, which is presented in the following table, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a generally accepted accounting principles (“GAAP”) measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the following table. Operating profit includes expense items, such as depreciation, amortization and impairment expense and general and administrative (“G&A”) expense, which management does not focus on when evaluating the core profitability of our separate operating segments. Additionally, product margin, which management primarily uses to evaluate the profitability of our commodity-related activities, is provided in this table. Product margin is a non-GAAP measure but its components of product sales revenue and cost of product sales are determined in accordance with GAAP. Our gas liquids blending, fractionation and other commodity-related activities generate significant revenue. However, we believe the product margin from these activities, which takes into account the related cost of product sales, better represents its importance to our results of operations.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2020
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Financial Highlights ($ in millions, except operating statistics)
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Year Ended December 31,
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Variance
Favorable (Unfavorable)
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2019
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2020
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$ Change
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% Change
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Transportation and terminals revenue:
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Refined products
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$
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1,355.6
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$
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1,241.8
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$
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(113.8)
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(8)
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%
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Crude oil
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620.4
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559.6
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(60.8)
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(10)
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%
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Intersegment eliminations
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(5.4)
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(6.5)
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(1.1)
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(20)
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%
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Total transportation and terminals revenue
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1,970.6
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1,794.9
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(175.7)
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(9)
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%
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Affiliate management fee revenue
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21.2
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21.2
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—
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—
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%
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Operating expenses:
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Refined products
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471.7
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425.4
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46.3
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10
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%
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Crude oil
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173.3
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189.1
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(15.8)
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(9)
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%
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Intersegment eliminations
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(10.9)
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(13.2)
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2.3
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21
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%
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Total operating expenses
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634.1
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601.3
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32.8
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5
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%
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Product margin:
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Product sales revenue
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736.1
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611.7
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(124.4)
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(17)
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%
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Cost of product sales
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619.3
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513.7
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105.6
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17
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%
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Product margin
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116.8
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98.0
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(18.8)
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(16)
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%
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Other operating income (expense)
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3.0
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0.1
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(2.9)
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(97)
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%
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Earnings of non-controlled entities
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169.0
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153.3
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(15.7)
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(9)
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%
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Operating margin
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1,646.5
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1,466.2
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(180.3)
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(11)
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%
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Depreciation, amortization and impairment expense
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246.1
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258.7
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(12.6)
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(5)
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%
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G&A expense
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196.7
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173.5
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23.2
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12
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%
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Operating profit
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1,203.7
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1,034.0
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(169.7)
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(14)
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%
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Interest expense (net of interest income and interest capitalized)
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198.6
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221.8
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(23.2)
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(12)
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%
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Gain on disposition of assets
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(29.0)
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(12.9)
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(16.1)
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(56)
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%
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Other (income) expense
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11.8
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5.2
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6.6
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56
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%
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Income before provision for income taxes
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1,022.3
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819.9
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(202.4)
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(20)
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%
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Provision for income taxes
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1.5
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2.9
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(1.4)
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(93)
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%
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Net income
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$
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1,020.8
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$
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817.0
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$
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(203.8)
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(20)
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%
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Operating Statistics
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Refined products:
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Transportation revenue per barrel shipped
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$
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1.616
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$
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1.675
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Volume shipped (million barrels):
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Gasoline
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280.5
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270.8
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Distillates
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184.6
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175.5
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Aviation fuel
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41.1
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21.6
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Liquefied petroleum gases
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9.7
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0.9
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Total volume shipped
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515.9
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468.8
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Crude oil:
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Magellan 100%-owned assets:
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Transportation revenue per barrel shipped
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$
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0.939
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$
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1.028
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Volume shipped (million barrels)(a)
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317.2
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229.9
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Terminal average utilization (million barrels per month)
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23.0
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25.2
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Select joint venture pipelines:
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BridgeTex - volume shipped (million barrels)(b)
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156.3
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132.0
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Saddlehorn - volume shipped (million barrels)(c)
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56.1
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61.6
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(a) Volume shipped includes shipments related to our crude oil marketing activities. Volume shipped in 2020 reflects a change in the way our customers contract for our services pursuant to which customers are able to utilize crude oil storage capacity at East Houston and dock access at Seabrook. Subsequent to this change, the services we provide no longer include a transportation element. Therefore, revenues related to these services are reflected entirely as terminalling revenues and the related volumes are no longer reflected in our calculation of transportation volumes.
(b) These volumes reflect total shipments for the BridgeTex pipeline, which is owned 30% by us.
(c) These volumes reflect the total shipments for the Saddlehorn pipeline, which was owned 40% by us through January 31, 2020 and 30% thereafter.
Transportation and terminals revenue decreased by $175.7 million, resulting from:
•a decrease in refined products revenue of $113.8 million. Transportation volumes decreased primarily due to lower demand during 2020 associated with the ongoing impact from COVID-19 and related restrictions as well as reduced drilling activity in response to the lower commodity price environment. Revenues also decreased due to the sale of three marine terminals in first quarter 2020 and discontinuation of the ammonia pipeline operations in late 2019. These declines were partially offset by contributions from the recently-constructed East Houston-to-Hearne pipeline segment that became operational in late 2019 and the West Texas pipeline expansion that began operations in the third quarter of 2020, as well as an increase in the average tariff rate in the current period as a result of the 2019 and 2020 mid-year adjustments; and
•a decrease in crude oil revenue of $60.8 million. Revenues from our Longhorn pipeline declined due to lower third-party spot shipments resulting from less favorable differentials between the Permian Basin and Houston and the 2020 expiration of several higher-priced contracts, partially offset by the activities of our marketing affiliate. Average tariff rates increased as a result of fewer shipments on our Houston distribution system, which move at a lower rate than longer-haul shipments. Lower transportation volume on our Houston distribution system resulted primarily from a change in the way customers now contract for services at our Seabrook export facility and was offset by incremental revenue from the related terminal transfer fee. Tender deduction revenues also decreased due to lower crude oil prices. These declines were partially offset by increased storage revenues as more contract storage was utilized at higher rates.
Operating expenses decreased $32.8 million, resulting from:
•a decrease in refined products expenses of $46.3 million primarily due to lower throughput activity, less integrity spending due to timing of work, reduced compensation expense and the absence of costs in the current period associated with the sold or discontinued assets, partially offset by less favorable product overages (which reduce operating expenses); and
•an increase in crude oil expenses of $15.8 million primarily due to higher integrity spending, less favorable product overages and additional fees we pay to Seabrook for contract storage and ancillary services that we utilize to provide services to our shippers, partially offset by lower power costs from reduced shipments and our recent optimization efforts.
Product margin decreased $18.8 million primarily due to reduced profitability and lower sales volumes from our gas liquids blending activities, partially offset by lower losses recognized in the current year on futures contracts. See Note 13 – Derivative Financial Instruments in Item 8. Financial Statements and Supplementary Data, as well as Other Items – Commodity Derivative Agreements below, for more information about our futures contracts.
Other operating income decreased $2.9 million in 2020 primarily due to insurance settlements received in 2019 mainly related to Hurricane Harvey, partially offset by lower losses recognized on a basis derivative agreement during the current period.
Earnings of non-controlled entities decreased $15.7 million primarily due to lower earnings from BridgeTex related to decreased uncommitted shipments based on unfavorable market conditions as well as lower earnings from Saddlehorn following the sale of a 10% interest in early 2020. These decreases were partially offset by additional earnings from MVP from the 2020 start-up of newly-constructed storage and dock assets.
Depreciation, amortization and impairment expense increased $12.6 million primarily due to the impairment of certain terminalling assets in 2020.
G&A expense decreased $23.2 million primarily due to lower incentive compensation accruals to reflect the impacts of COVID-19 related reductions in economic activity and the significant decline in commodity prices.
Interest expense, net of interest income and interest capitalized, increased $23.2 million in 2020 primarily due to higher outstanding debt and higher costs associated with early debt retirement, as well as lower capitalized interest (due to lower ongoing construction project spending in 2020). Our average outstanding debt increased from $4.6 billion in 2019 to $4.9 billion in 2020. Our weighted-average interest rate decreased from 4.6% in 2019 to 4.4% in 2020.
Gain on disposition of assets was $16.1 million unfavorable. In 2020, we recognized a gain on the sale of a portion of our interest in Saddlehorn of $12.9 million. In 2019, we recognized a deferred gain of $11.0 million related to the 2018 sale of a portion of our investment in BridgeTex, a gain of $12.7 million related to our discontinued Delaware Basin crude oil pipeline construction project that was sold to a third party and a gain of $5.3 million resulting from the sale of an inactive terminal along our refined products pipeline system.
Other expense was $6.6 million favorable primarily due to lower pension costs.
For a comparative discussion of the years ended December 31, 2018 and 2019, see Part II, Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on May 4, 2020, which reflects changes in our reporting segments since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019.
Distributable Cash Flow
Distributable cash flow (“DCF”) and Adjusted EBITDA are non-GAAP measures. See Item 6. Selected Financial Data for a discussion of how management uses these non-GAAP measures. A reconciliation of DCF and Adjusted EBITDA for the years ended December 31, 2019 and 2020 to net income, which is the nearest comparable GAAP financial measure, is as follows (in millions):
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Year Ended December 31,
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2019
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2020
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Net income
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$
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1,020.8
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$
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817.0
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Interest expense, net
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198.6
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221.8
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Depreciation, amortization and impairment(1)
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240.9
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254.6
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Equity-based incentive compensation(2)
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14.2
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(2.7)
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Gain on disposition of assets(3)
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(16.3)
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(10.5)
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Commodity-related adjustments:
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Derivative (gains) losses recognized in the period associated with future transactions(4)
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29.7
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29.3
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Derivative gains (losses) recognized in previous periods associated with transactions completed in the period(4)
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71.2
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(20.9)
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Inventory valuation adjustments(5)
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(12.7)
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5.8
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Total commodity-related adjustments
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88.2
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14.2
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Distributions from operations of non-controlled entities in excess of (less than) earnings
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34.7
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54.3
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Adjusted EBITDA
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1,581.1
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1,348.7
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Interest expense, net, excluding debt issuance cost amortization(6)
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(186.9)
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(205.5)
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Maintenance capital(7)
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(96.7)
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(98.7)
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DCF
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$
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1,297.5
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$
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1,044.5
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(1) Depreciation, amortization and impairment expense is excluded from DCF to the extent it represents a non-cash expense.
(2) Because we intend to satisfy vesting of unit awards under our equity-based long-term incentive compensation plan with the issuance of common units, expenses related to this plan generally are deemed non-cash and excluded for DCF purposes. The amounts above have been reduced by cash payments associated with the plan, which are primarily related to tax withholdings.
(3) Gains on disposition of assets are excluded from DCF to the extent they are not related to our ongoing operations.
(4) Certain derivatives have not been designated as hedges for accounting purposes, and the mark-to-market changes of these derivatives are recognized currently in net income. We exclude the net impact of these derivatives from our determination of DCF until the transactions are settled and, where applicable, the related products are sold. In the period in which these transactions are settled and any related products are sold, the net impact of the derivatives is included in DCF.
(5) We adjust DCF for lower of average cost or net realizable value adjustments related to inventory and firm purchase commitments as well as market valuations of short positions recognized each period as these are non-cash items. In subsequent periods when we physically sell or purchase the related products, we adjust DCF for the valuation adjustments previously recognized.
(6) Interest expense includes $8.3 million of debt extinguishment costs in 2019 and $12.9 million in 2020 that are excluded from DCF as they are financing activities and are not related to our ongoing operations.
(7) Maintenance capital expenditures maintain our existing assets and do not generate incremental DCF (i.e. incremental returns to our unitholders). For this reason, we deduct maintenance capital expenditures to determine DCF.
Liquidity and Capital Resources
Cash Flows and Capital Expenditures
Operating Activities. Net cash provided by operating activities was $1,321.2 million and $1,107.4 million for the years ended December 31, 2019 and 2020, respectively. The $213.8 million decrease from 2019 to 2020 was due to lower net income as previously described and changes in our working capital, partially offset by adjustments for non-cash items and distributions in excess of earnings of our non-controlled entities.
Investing Activities. Net cash used by investing activities for the years ended December 31, 2019 and 2020 was $1,007.3 million and $199.2 million, respectively. During 2020, we used $439.6 million for capital expenditures, which included $0.2 million for undivided joint interest projects for which cash was received from a third party. Also, during 2020, we sold three marine terminals for cash proceeds of $251.8 million and sold a portion of our interest in Saddlehorn for cash proceeds of $79.9 million. Additionally, we made net capital contributions of $94.6 million to our joint ventures, which we account for as investments in non-controlled entities. During 2019, we used $944.0 million for capital expenditures, which included $92.1 million for undivided joint interest projects for which cash was received from a third party. Additionally, we made net capital contributions of $203.9 million to our joint ventures, of which $198.9 million related to capital projects.
Financing Activities. Net cash used by financing activities for the years ended December 31, 2019 and 2020 was $538.6 million and $970.3 million, respectively. During 2020, we paid distributions of $927.1 million to our unitholders and made common unit repurchases of $276.9 million. Additionally, we received net proceeds of $828.4 million from the issuance of long-term senior notes, which were used to repay our $550.0 million of 4.25% notes due 2021 and outstanding commercial paper borrowings at that time. Also, in January 2020, our equity-based incentive compensation awards that vested December 31, 2019 were settled by issuing 284,643 common units and distributing those units to the long-term incentive plan (“LTIP”) participants, resulting in payments primarily associated with tax withholdings of $14.7 million. During 2019, we paid distributions of $921.6 million to our unitholders. Additionally, we received net proceeds of $996.4 million from borrowings under long-term notes, which were used to repay our $550.0 million of 6.55% notes due 2019 and outstanding commercial paper borrowings at that time. Also, in January 2019, our equity-based long-term incentive compensation awards that vested December 31, 2018 were settled by issuing 208,268 common units and distributing those units to the LTIP participants, resulting in payments primarily associated with tax withholdings of $9.8 million.
The quarterly distribution amount related to fourth quarter 2020 earnings was $1.0275 per unit, which was paid in February 2021. If we were to continue paying distributions at this level on the number of common units currently outstanding, total distributions of approximately $918 million would be paid to our unitholders related to 2021 earnings. Management believes we will have sufficient DCF to fund these distributions.
For a discussion of cash flows for the year ended December 31, 2018, see Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Exhibit 99.1 to our Form 8-K filed with the Securities and Exchange Commission on May 4, 2020, which reflects changes in our reporting segments since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019.
Capital Requirements
Capital spending for our business consists primarily of:
•Maintenance capital expenditures. These expenditures include costs required to maintain equipment reliability and safety and to address environmental and other regulatory requirements rather than to generate incremental DCF; and
•Expansion capital expenditures. These expenditures are undertaken primarily to generate incremental DCF and include costs to acquire or construct additional assets to grow our business and to expand or upgrade our existing facilities and to construct new assets, which we refer to collectively as organic growth projects. Organic growth projects include, for example, capital expenditures that increase storage or throughput volumes or develop pipeline connections to new supply sources.
During 2020, our maintenance capital spending was $98.7 million. For 2021, we expect to spend approximately $85 million on maintenance capital projects.
During 2020, we spent $259.8 million for our expansion capital projects and contributed $94.6 million for expansion capital projects in conjunction with our joint ventures. Based on the progress of projects already
underway, we expect to spend approximately $75 million in 2021 to complete our current slate of expansion capital projects.
Liquidity
Cash generated from operations is a key source of liquidity for funding debt service, maintenance capital expenditures, quarterly distributions and unit repurchases. Additional liquidity for purposes other than quarterly distributions, such as expansion capital expenditures and debt repayments, is available through borrowings under our commercial paper program and revolving credit facility, as well as from other borrowings or issuances of debt or common units (see Note 9 – Debt and Note 18 – Partners’ Capital and Distributions in Item 8. Financial Statements and Supplementary Data of this report for detail of our borrowings and changes in partners’ capital).
Off-Balance Sheet Arrangements
None.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
< 1 year
|
|
1-3 years
|
|
4-5 years
|
|
> 5 years
|
Long-term debt obligations(1)
|
|
$
|
5,000.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
250.0
|
|
|
$
|
4,750.0
|
|
Interest obligations(1)
|
|
4,459.2
|
|
|
221.4
|
|
|
442.8
|
|
|
434.5
|
|
|
3,360.5
|
|
Operating lease obligations
|
|
186.7
|
|
|
33.2
|
|
|
61.3
|
|
|
49.5
|
|
|
42.7
|
|
Storage contract commitments(2)
|
|
11.9
|
|
|
8.4
|
|
|
2.5
|
|
|
0.6
|
|
|
0.4
|
|
Pipeline capacity commitments(3)
|
|
49.8
|
|
|
9.6
|
|
|
19.3
|
|
|
19.3
|
|
|
1.6
|
|
Right-of-way obligations(4)
|
|
11.4
|
|
|
1.8
|
|
|
3.4
|
|
|
2.2
|
|
|
4.0
|
|
Pension and postretirement medical obligations(5)
|
|
165.2
|
|
|
29.5
|
|
|
87.3
|
|
|
37.0
|
|
|
11.4
|
|
Purchase commitments:
|
|
|
|
|
|
|
|
|
|
|
Product purchase commitments(6)
|
|
79.9
|
|
|
69.8
|
|
|
10.1
|
|
|
—
|
|
|
—
|
|
Utility purchase commitments
|
|
15.9
|
|
|
8.2
|
|
|
4.5
|
|
|
3.1
|
|
|
0.1
|
|
Derivative instruments(7)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity-based incentive awards(8)
|
|
33.1
|
|
|
15.2
|
|
|
17.9
|
|
|
—
|
|
|
—
|
|
Capital project purchase obligations
|
|
29.2
|
|
|
29.1
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
Maintenance obligations
|
|
79.4
|
|
|
79.0
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
Other
|
|
11.8
|
|
|
7.7
|
|
|
3.9
|
|
|
0.2
|
|
|
—
|
|
Total
|
|
$
|
10,133.5
|
|
|
$
|
512.9
|
|
|
$
|
653.5
|
|
|
$
|
796.4
|
|
|
$
|
8,170.7
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)At December 31, 2020, we had no borrowings outstanding under our revolving credit facility or commercial paper program. For purposes of this table, we have reflected no assumed borrowings under our revolving credit facility or commercial paper program for any periods presented. We have included interest obligations based on the stated amounts of our fixed-rate obligations.
(2)Includes product storage we have contracted from third parties. The cost of storage services is recognized in cost of product sales on our consolidated statements of income.
(3)Includes pipeline capacity we have contracted from third parties. The cost of these commitments is recognized in operating expense on our consolidated statements of income.
(4)Represents right-of-way agreements with a contractual maturity date over one year. The cost of these obligations is recognized in operating expense on our consolidated statements of income.
(5)Represents the projected benefit obligation of our pension and postretirement medical plans less the fair value of plan assets.
(6)Includes product purchase commitments for which the price provisions are indexed based on the date of delivery. We have estimated the value of these commitments using the related index price curve as of December 31, 2020. Also, we have excluded certain product purchase agreements for which there is no specified or minimum quantity.
(7)As of December 31, 2020, we had entered into exchange-traded futures contracts representing 3.4 million barrels of petroleum products that we expect to sell in the future and 0.1 million barrels of gas liquids we expect to purchase in the future. At December 31, 2020, we had recorded a net liability of $21.3 million and made margin deposits of $34.2 million. We have excluded from this table the future net cash outflows, if any, under these futures contracts and the amounts of future margin deposit requirements because those amounts are uncertain.
(8)Settlements of our LTIP awards will differ from these reported amounts primarily due to differences between actual and current estimates of payout percentages and completion of the remaining portion of the requisite service periods.
Other Items
Executive Officer Retirements. Jeff R. Selvidge, Senior Vice President of Commercial – Refined Products, retired in November 2020 after 30 years of service with us and our predecessors.
Pipeline Tariff Changes. The Federal Energy Regulatory Commission (“FERC”) regulates the rates charged on interstate common carrier pipelines. Based on preliminary estimates, we expect to decrease rates in the 40% of our markets that are subject to the FERC’s index methodology by approximately 0.5% on July 1, 2021. While we continue to evaluate the remaining 60% of our markets, we generally intend to increase rates in those markets by 3% to 4% on July 1, 2021, similar to the 2020 rate increase for our competitive markets. Most of the tariffs on our long-
haul crude oil pipelines are established at negotiated rates that generally provide for annual adjustments in line with changes in the FERC index, subject to certain modifications. We expect to change the rates of our long-haul crude oil pipelines between 0% and 2% in July 2021.
Commodity Derivative Agreements. Certain of our business activities result in our owning various commodities, which exposes us to commodity price risk. We use forward physical commodity contracts and exchange-traded futures contracts to hedge against changes in prices of commodities that we expect to sell or purchase in future periods. We are a party to a basis derivative agreement for which settlements are determined based on the basis differential of crude oil prices at different market locations.
For further information regarding the quantities of refined products and crude oil hedged at December 31, 2020 and the fair value of open hedge and basis derivative contracts at that date, please see Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Related Party Transactions. See Note 17 – Related Party Transactions in Item 8. Financial Statements and Supplementary Data of this report for detail of our related party transactions.
Critical Accounting Estimates
Our management has discussed the development and selection of the following critical accounting estimates with the audit committee of our general partner’s board of directors, which has reviewed and approved these disclosures.
Pension Obligations
We sponsor a pension plan covering union employees and a pension plan for non-union employees. Various estimates and assumptions directly affect net periodic benefit expense and obligations for these plans. These estimates and assumptions include the expected long-term rates of return on plan assets, discount rates and the expected rate of compensation increase. Management reviews these assumptions annually and makes adjustments as necessary.
The following table presents the estimated increase (decrease) in net periodic benefit expense and obligations that would result from a 1% change in the specified assumption (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Expense
|
|
Benefit Obligation
|
|
|
1% Increase
|
|
1% Decrease
|
|
1% Increase
|
|
1% Decrease
|
Pension benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
$
|
(5,562)
|
|
|
|
$
|
6,801
|
|
|
|
$
|
(53,958)
|
|
|
|
$
|
67,603
|
|
|
Expected long-term rate of return on plan assets
|
|
$
|
(2,963)
|
|
|
|
$
|
2,963
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
Rate of compensation increase
|
|
$
|
5,210
|
|
|
|
$
|
(5,231)
|
|
|
|
$
|
31,234
|
|
|
|
$
|
(31,301)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the increase (decrease) in our pension funding based on our current funding policy assuming a 1% change in the specified criterion (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
Rate of compensation increase
|
|
$
|
517
|
|
|
$
|
(506)
|
|
The discount rate directly affects the measurement of the benefit obligations of our pension benefit plans. The objective of the discount rate is to determine the amount, if invested at the December 31 measurement date in a portfolio of high-quality fixed income securities, that would provide the necessary cash flows to make benefit payments when due. Decreases in the discount rate increase the obligation and generally increase the related expense, while increases in the discount rate have the opposite effect. Changes in general economic and market
conditions that affect interest rates on long-term high-quality fixed income securities as well as the duration of our plans’ liabilities affect our estimate of the discount rate.
We estimate the long-term expected rate of return on plan assets using expectations of capital market results, which includes an analysis of historical results as well as forward-looking projections. We base these capital market expectations on a long-term period and on our investment strategy and asset allocation. We develop our estimates using input from several external sources, including consultation with our third-party independent investment consultant. We develop the forward-looking capital market projections using a consensus of expectations by economists for inflation and dividend yield, along with expected changes in risk premiums. Because our determined rate is an estimate of future results, it could be significantly different from actual results. The expected rates of return on plan assets are long-term in nature; therefore, short-term market performance does not significantly affect our estimated long-term expected rate of return.
The expected rate of compensation increase represents average long-term salary increases. An increase in this rate causes the pension obligation and expense to increase.
Impairment of Long-Lived Assets, Goodwill and Investments
Impairment of Long-Lived Assets. Long-lived assets, including fixed assets and intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value.
Goodwill. The goodwill relating to each of our reporting units is tested for impairment annually as well as when an event or change in circumstances indicates an impairment may have occurred. Under GAAP, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, we are not required to perform any further testing. However, if we conclude otherwise, we perform the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.
For purposes of performing the impairment test for goodwill, our reporting units are our reportable segments. In 2018, we elected to complete the quantitative goodwill impairment test and began with step one of the test as required by GAAP. Based on this assessment, we calculated that the fair value of each of our reporting units was greater than its carrying amount. In 2019 and 2020, we elected to perform the qualitative assessment described above for purposes of our annual goodwill impairment test. Based on these assessments, we concluded that it was more likely than not that the fair value of each of our reporting units was greater than its carrying amount. Accordingly, no further testing was required.
Determination as to whether and how much goodwill or long-lived assets are impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses and the outlook for national or regional market supply and demand conditions. We base the impairment reviews and calculations used in our impairment tests on assumptions that are consistent with our business plans and long-term investment decisions. See Note 5 – Property, Plant and Equipment, Goodwill and Other Intangibles in Item 8. Financial Statements and Supplementary Data for additional information regarding impairments of goodwill and long-lived assets.
Investments. We evaluate investments in non-controlled entities for impairment whenever events or circumstances indicate that there is an other-than-temporary loss in value of the investment. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other-than-temporary, the excess of the carrying value over the fair value is recognized in our consolidated financial statements as an impairment charge.
New Accounting Pronouncements
See Note 2 – Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Data of this report for a summary of new accounting pronouncements.
Item 8. Financial Statements and Supplementary Data
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of its internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. As a result of this assessment management has concluded that, as of December 31, 2020, its internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2020. The report, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2020, is included herein under the heading “Report of Independent Registered Public Accounting Firm” relative to internal control over financial reporting.
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|
|
By:
|
/S/ MICHAEL N. MEARS
|
|
Chairman of the Board, President, Chief Executive Officer and Director of Magellan GP, LLC, General Partner of Magellan Midstream Partners, L.P.
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|
|
|
|
|
|
By:
|
/S/ JEFF HOLMAN
|
|
Senior Vice President, Chief Financial Officer and Treasurer of Magellan GP, LLC, General Partner of Magellan Midstream Partners, L.P.
|
Report of Independent Registered Public Accounting Firm
To the Common Unitholders of Magellan Midstream Partners, L.P. and the Board of Directors of Magellan GP, LLC, General Partner of Magellan Midstream Partners, L.P.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Magellan Midstream Partners, L.P. (the Partnership) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, partners’ capital and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated -February 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
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|
|
Defined Benefit Pension Obligation
|
Description of the Matter
|
|
At December 31, 2020, the Partnership’s defined benefit pension obligation was $444 million and exceeded the fair value of pension plan assets of $296 million, resulting in a net pension obligation of $148 million. As discussed in Note 11 to the consolidated financial statements, the Partnership reviews and updates the assumptions used to measure the defined benefit pension obligation on an annual basis.
Auditing the pension obligation was complex due to the judgmental nature of certain actuarial assumptions used in the measurement process, including the discount rate, mortality rates, retirement rate and future compensation levels. The projected benefit obligation was sensitive to these assumptions.
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Partnership’s review of the defined benefit pension obligation calculations, the significant actuarial assumptions and the data inputs provided to the third-party actuary.
To test the defined benefit pension obligation, our audit procedures included, among others, evaluating the methodology used, the significant actuarial assumptions discussed above and the underlying data used in the measurement process. We compared the actuarial assumptions used by management to historical trends and evaluated the change in the defined benefit pension obligation from the prior year resulting from the change in service cost, interest cost, actuarial gains and losses, benefit payments, contributions and other activities. In addition, we involved our actuarial specialists to assist with our procedures including, among others, evaluating management’s methodology for determining the discount rate that reflects the maturity and duration of the benefit payments and that is used to measure the defined benefit pension obligation. As part of this assessment, we compared the projected cash flows used in the current year measurement of the pension obligation to those in the prior year and compared the current year benefits paid to the prior year projected payments. To evaluate the future mortality rates, retirement rate and future compensation levels, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments were applied. We also tested the completeness and accuracy of the underlying data, including the participant data used in the actuarial calculations.
|
/s/ Ernst & Young LLP
We have served as the Partnership’s auditor since 1999.
Tulsa, Oklahoma
February 18, 2021
Report of Independent Registered Public Accounting Firm
To the Common Unitholders of Magellan Midstream Partners, L.P. and the Board of Directors of Magellan GP, LLC, General Partner of Magellan Midstream Partners, L.P.
Opinion on Internal Control Over Financial Reporting
We have audited Magellan Midstream Partners, L.P.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Magellan Midstream Partners, L.P. (the Partnership) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Partnership as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, partners’ capital and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
February 18, 2021
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Transportation and terminals revenue
|
|
$
|
1,878,988
|
|
|
$
|
1,970,630
|
|
|
$
|
1,794,854
|
|
Product sales revenue
|
|
927,220
|
|
|
736,092
|
|
|
611,719
|
|
Affiliate management fee revenue
|
|
20,365
|
|
|
21,190
|
|
|
21,229
|
|
Total revenue
|
|
2,826,573
|
|
|
2,727,912
|
|
|
2,427,802
|
|
Costs and expenses:
|
|
|
|
|
|
|
Operating
|
|
649,436
|
|
|
634,081
|
|
|
601,359
|
|
Cost of product sales
|
|
704,313
|
|
|
619,279
|
|
|
513,715
|
|
Depreciation, amortization and impairment
|
|
265,077
|
|
|
246,134
|
|
|
258,676
|
|
General and administrative
|
|
194,283
|
|
|
196,650
|
|
|
173,478
|
|
Total costs and expenses
|
|
1,813,109
|
|
|
1,696,144
|
|
|
1,547,228
|
|
Other operating income (expense)
|
|
—
|
|
|
2,975
|
|
|
101
|
|
Earnings of non-controlled entities
|
|
181,117
|
|
|
168,961
|
|
|
153,327
|
|
Operating profit
|
|
1,194,581
|
|
|
1,203,704
|
|
|
1,034,002
|
|
Interest expense
|
|
220,979
|
|
|
221,123
|
|
|
234,133
|
|
Interest capitalized
|
|
(17,455)
|
|
|
(19,284)
|
|
|
(11,270)
|
|
Interest income
|
|
(3,010)
|
|
|
(3,285)
|
|
|
(1,037)
|
|
Gain on disposition of assets
|
|
(353,797)
|
|
|
(28,966)
|
|
|
(12,887)
|
|
Other (income) expense
|
|
13,868
|
|
|
11,830
|
|
|
5,164
|
|
Income before provision for income taxes
|
|
1,333,996
|
|
|
1,022,286
|
|
|
819,899
|
|
Provision for income taxes
|
|
71
|
|
|
1,437
|
|
|
2,934
|
|
Net income
|
|
$
|
1,333,925
|
|
|
$
|
1,020,849
|
|
|
$
|
816,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common unit
|
|
$
|
5.84
|
|
|
$
|
4.46
|
|
|
$
|
3.62
|
|
|
|
|
|
|
|
|
Diluted net income per common unit
|
|
$
|
5.84
|
|
|
$
|
4.46
|
|
|
$
|
3.62
|
|
|
|
|
|
|
|
|
Weighted average number of common units outstanding used for basic net income per unit calculation
|
|
228,377
|
|
|
228,658
|
|
|
225,503
|
|
|
|
|
|
|
|
|
Weighted average number of common units outstanding used for diluted net income per unit calculation
|
|
228,573
|
|
|
228,842
|
|
|
225,531
|
|
See notes to consolidated financial statements.
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Net income
|
$
|
1,333,925
|
|
|
$
|
1,020,849
|
|
|
$
|
816,965
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Derivative activity:
|
|
|
|
|
|
Net gain (loss) on cash flow hedges
|
4,317
|
|
|
(25,216)
|
|
|
(9,484)
|
|
Reclassification of net loss on cash flow hedges to income
|
2,958
|
|
|
2,736
|
|
|
3,445
|
|
Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
Net actuarial loss
|
(2,323)
|
|
|
(27,351)
|
|
|
(23,499)
|
|
Curtailment gain
|
—
|
|
|
—
|
|
|
1,703
|
|
Recognition of prior service credit amortization in income
|
(181)
|
|
|
(181)
|
|
|
(181)
|
|
Recognition of actuarial loss amortization in income
|
10,352
|
|
|
5,820
|
|
|
5,934
|
|
Recognition of settlement cost in income
|
1,964
|
|
|
2,606
|
|
|
969
|
|
Total other comprehensive income (loss)
|
17,087
|
|
|
(41,586)
|
|
|
(21,113)
|
|
Comprehensive income
|
$
|
1,351,012
|
|
|
$
|
979,263
|
|
|
$
|
795,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,030
|
|
|
$
|
13,036
|
|
|
|
|
|
|
Trade accounts receivable
|
|
125,440
|
|
|
109,136
|
|
Other accounts receivable
|
|
23,887
|
|
|
37,075
|
|
Inventory
|
|
184,399
|
|
|
167,389
|
|
|
|
|
|
|
Commodity derivatives deposits
|
|
27,415
|
|
|
34,165
|
|
|
|
|
|
|
Other current assets
|
|
40,237
|
|
|
44,392
|
|
Total current assets
|
|
459,408
|
|
|
405,193
|
|
Property, plant and equipment
|
|
8,431,227
|
|
|
8,352,825
|
|
Less: accumulated depreciation
|
|
2,027,193
|
|
|
2,091,134
|
|
Net property, plant and equipment
|
|
6,404,034
|
|
|
6,261,691
|
|
Investments in non-controlled entities
|
|
1,240,551
|
|
|
1,213,856
|
|
Right-of-use asset, operating leases
|
|
171,868
|
|
|
166,078
|
|
Long-term receivables
|
|
20,782
|
|
|
22,755
|
|
Goodwill
|
|
53,260
|
|
|
52,830
|
|
Other intangibles (less accumulated amortization of $6,255 and $9,228 at December 31, 2019 and 2020, respectively)
|
|
47,898
|
|
|
44,925
|
|
Restricted cash
|
|
26,569
|
|
|
9,411
|
|
Other noncurrent assets
|
|
13,359
|
|
|
20,243
|
|
Total assets
|
|
$
|
8,437,729
|
|
|
$
|
8,196,982
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS’ CAPITAL
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
150,992
|
|
|
$
|
100,022
|
|
Accrued payroll and benefits
|
|
75,511
|
|
|
52,490
|
|
Accrued interest payable
|
|
64,276
|
|
|
58,998
|
|
Accrued taxes other than income
|
|
66,007
|
|
|
68,313
|
|
|
|
|
|
|
Deferred revenue
|
|
109,654
|
|
|
98,897
|
|
Accrued product liabilities
|
|
90,788
|
|
|
79,166
|
|
Commodity derivatives contracts, net
|
|
10,222
|
|
|
22,372
|
|
|
|
|
|
|
Current portion of operating lease liability
|
|
26,221
|
|
|
27,533
|
|
|
|
|
|
|
Other current liabilities
|
|
73,205
|
|
|
50,783
|
|
Total current liabilities
|
|
666,876
|
|
|
558,574
|
|
Long-term operating lease liability
|
|
144,023
|
|
|
137,483
|
|
Long-term debt, net
|
|
4,706,075
|
|
|
4,978,691
|
|
Long-term pension and benefits
|
|
145,992
|
|
|
163,776
|
|
Other noncurrent liabilities
|
|
59,735
|
|
|
54,652
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
Partners’ capital:
|
|
|
|
|
Common unitholders (228,403 units and 223,120 units outstanding at December 31, 2019 and 2020, respectively)
|
|
2,877,105
|
|
|
2,486,996
|
|
Accumulated other comprehensive loss
|
|
(162,077)
|
|
|
(183,190)
|
|
Total partners’ capital
|
|
2,715,028
|
|
|
2,303,806
|
|
Total liabilities and partners’ capital
|
|
$
|
8,437,729
|
|
|
$
|
8,196,982
|
|
See notes to consolidated financial statements.
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
1,333,925
|
|
|
$
|
1,020,849
|
|
|
$
|
816,965
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation, amortization and impairment expense
|
|
265,077
|
|
|
246,134
|
|
|
258,676
|
|
Gain on sale and retirement of assets
|
|
(328,055)
|
|
|
(28,966)
|
|
|
(12,887)
|
|
Earnings of non-controlled entities
|
|
(181,117)
|
|
|
(168,961)
|
|
|
(153,327)
|
|
Distributions from operations of non-controlled entities
|
|
196,686
|
|
|
203,602
|
|
|
207,600
|
|
Equity-based incentive compensation expense
|
|
32,053
|
|
|
24,012
|
|
|
11,985
|
|
Settlement cost, amortization of prior service credit and actuarial loss
|
|
12,135
|
|
|
8,245
|
|
|
6,722
|
|
Debt extinguishment costs
|
|
—
|
|
|
8,270
|
|
|
12,893
|
|
Changes in components of operating assets and liabilities (Note 8)
|
|
22,246
|
|
|
7,994
|
|
|
(41,249)
|
|
Net cash provided by operating activities
|
|
1,352,950
|
|
|
1,321,179
|
|
|
1,107,378
|
|
Investing Activities:
|
|
|
|
|
|
|
Additions to property, plant and equipment, net(1)
|
|
(552,257)
|
|
|
(943,990)
|
|
|
(439,574)
|
|
Proceeds from sale and disposition of assets
|
|
576,568
|
|
|
65,366
|
|
|
334,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in non-controlled entities
|
|
(216,424)
|
|
|
(212,380)
|
|
|
(95,068)
|
|
Distributions from returns of investments in non-controlled entities
|
|
1,786
|
|
|
8,494
|
|
|
501
|
|
Deposits received from undivided joint interest third party
|
|
71,071
|
|
|
75,258
|
|
|
—
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
(119,256)
|
|
|
(1,007,252)
|
|
|
(199,247)
|
|
Financing Activities:
|
|
|
|
|
|
|
Distributions paid
|
|
(865,431)
|
|
|
(921,606)
|
|
|
(927,117)
|
|
Repurchase of common units
|
|
—
|
|
|
—
|
|
|
(276,940)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under long-term notes
|
|
—
|
|
|
996,405
|
|
|
828,434
|
|
Debt placement costs
|
|
(404)
|
|
|
(12,012)
|
|
|
(7,583)
|
|
Payments on notes
|
|
(250,000)
|
|
|
(550,000)
|
|
|
(550,000)
|
|
Debt extinguishment costs
|
|
—
|
|
|
(8,270)
|
|
|
(12,893)
|
|
Net receipt (payment) on financial derivatives
|
|
24,619
|
|
|
(33,342)
|
|
|
(9,484)
|
|
Payments associated with settlement of equity-based incentive compensation
|
|
(9,285)
|
|
|
(9,764)
|
|
|
(14,700)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
(1,100,501)
|
|
|
(538,589)
|
|
|
(970,283)
|
|
Change in cash, cash equivalents and restricted cash
|
|
133,193
|
|
|
(224,662)
|
|
|
(62,152)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
176,068
|
|
|
309,261
|
|
|
84,599
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
309,261
|
|
|
$
|
84,599
|
|
|
$
|
22,447
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Additions to property, plant and equipment
|
|
$
|
(562,296)
|
|
|
$
|
(980,575)
|
|
|
$
|
(358,765)
|
|
Changes in accounts payable and other current liabilities related to capital expenditures
|
|
10,039
|
|
|
36,585
|
|
|
(80,809)
|
|
Additions to property, plant and equipment, net
|
|
$
|
(552,257)
|
|
|
$
|
(943,990)
|
|
|
$
|
(439,574)
|
|
See notes to consolidated financial statements.
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Unitholders
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
Total Partners’ Capital
|
Balance, January 1, 2018
|
|
$
|
2,267,231
|
|
|
|
$
|
(137,578)
|
|
|
|
|
|
$
|
2,129,653
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
1,333,925
|
|
|
|
—
|
|
|
|
|
|
1,333,925
|
|
Total other comprehensive income (loss)
|
|
—
|
|
|
|
17,087
|
|
|
|
|
|
17,087
|
|
Total comprehensive income (loss)
|
|
1,333,925
|
|
|
|
17,087
|
|
|
|
|
|
1,351,012
|
|
Distributions
|
|
(865,431)
|
|
|
|
—
|
|
|
|
|
|
(865,431)
|
|
Equity-based incentive compensation expense
|
|
32,053
|
|
|
|
—
|
|
|
|
|
|
32,053
|
|
Issuance of common units in settlement of equity-based incentive plan awards
|
|
120
|
|
|
|
—
|
|
|
|
|
|
120
|
|
Payments associated with settlement of equity-based incentive compensation
|
|
(9,285)
|
|
|
|
—
|
|
|
|
|
|
(9,285)
|
|
ASC 606 cumulative effect
|
|
5,975
|
|
|
|
—
|
|
|
|
|
|
5,975
|
|
Other
|
|
(663)
|
|
|
|
—
|
|
|
|
|
|
(663)
|
|
Balance, December 31, 2018
|
|
2,763,925
|
|
|
|
(120,491)
|
|
|
|
|
|
2,643,434
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
1,020,849
|
|
|
|
—
|
|
|
|
|
|
1,020,849
|
|
Total other comprehensive income (loss)
|
|
—
|
|
|
|
(41,586)
|
|
|
|
|
|
(41,586)
|
|
Total comprehensive income (loss)
|
|
1,020,849
|
|
|
|
(41,586)
|
|
|
|
|
|
979,263
|
|
Distributions
|
|
(921,606)
|
|
|
|
—
|
|
|
|
|
|
(921,606)
|
|
Equity-based incentive compensation expense
|
|
24,012
|
|
|
|
—
|
|
|
|
|
|
24,012
|
|
Issuance of common units in settlement of equity-based incentive plan awards
|
|
480
|
|
|
|
—
|
|
|
|
|
|
480
|
|
Payments associated with settlement of equity-based incentive compensation
|
|
(9,764)
|
|
|
|
—
|
|
|
|
|
|
(9,764)
|
|
Other
|
|
(791)
|
|
|
|
—
|
|
|
|
|
|
(791)
|
|
Balance, December 31, 2019
|
|
2,877,105
|
|
|
|
(162,077)
|
|
|
|
|
|
2,715,028
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
816,965
|
|
|
|
—
|
|
|
|
|
|
816,965
|
|
Total other comprehensive income (loss)
|
|
—
|
|
|
|
(21,113)
|
|
|
|
|
|
(21,113)
|
|
Total comprehensive income (loss)
|
|
816,965
|
|
|
|
(21,113)
|
|
|
|
|
|
795,852
|
|
Distributions
|
|
(927,117)
|
|
|
|
—
|
|
|
|
|
|
(927,117)
|
|
Equity-based incentive compensation expense
|
|
11,985
|
|
|
|
—
|
|
|
|
|
|
11,985
|
|
Repurchase of common units
|
|
(276,940)
|
|
|
|
—
|
|
|
|
|
|
(276,940)
|
|
Issuance of common units in settlement of equity-based incentive plan awards
|
|
600
|
|
|
|
—
|
|
|
|
|
|
600
|
|
Payments associated with settlement of equity-based incentive compensation
|
|
(14,700)
|
|
|
|
—
|
|
|
|
|
|
(14,700)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(902)
|
|
|
|
—
|
|
|
|
|
|
(902)
|
|
Balance, December 31, 2020
|
|
$
|
2,486,996
|
|
|
|
$
|
(183,190)
|
|
|
|
|
|
$
|
2,303,806
|
|
See notes to consolidated financial statements.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Organization
Unless indicated otherwise, the terms “our,” “we,” “us” and similar language refer to Magellan Midstream Partners, L.P. together with its subsidiaries. Magellan Midstream Partners, L.P. is a Delaware limited partnership, and its common 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 its general partner.
Description of Business
We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil. As of December 31, 2020, our asset portfolio consisted of:
•our refined products segment, comprised of our approximately 9,800-mile refined petroleum products pipeline system with 54 terminals as well as 25 independent terminals not connected to our pipeline system and two marine storage terminals (one of which is owned through a joint venture); and
•our crude oil segment, comprised of approximately 2,200 miles of crude oil pipelines, a condensate splitter and 37 million barrels of aggregate storage capacity, of which approximately 27 million barrels are used for contract storage. Approximately 1,000 miles of these pipelines, the condensate splitter and 30 million barrels of this storage capacity (including 24 million barrels used for contract storage) are wholly-owned, with the remainder owned through joint ventures.
Description of Products
The following terms are commonly used in our industry to describe products that we transport, store, distribute or otherwise handle through our petroleum pipelines and terminals:
•refined products are the output from crude oil refineries that are primarily used as fuels by consumers. Refined products include gasoline, diesel fuel, aviation fuel, kerosene and heating oil. Diesel fuel, kerosene and heating oil are also referred to as distillates;
•transmix is a mixture that forms when different refined products are transported in pipelines. Transmix is fractionated and blended into usable refined products;
•liquefied petroleum gases, or LPGs, are liquids produced as by-products of the crude oil refining process and in connection with natural gas production. LPGs include butane and propane;
•blendstocks are products 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;
•crude oil, which includes condensate, is a naturally occurring unrefined petroleum product recovered from underground that is used as feedstock by refineries, splitters and petrochemical facilities; and
•renewable fuels, such as ethanol, biodiesel and renewable diesel, are fuels derived from living materials and typically blended with other refined products as required by government mandates.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
We use the term petroleum products to describe any, or a combination, of the above-noted products.
2.Summary of Significant Accounting Policies
Significant Accounting Policies
Basis of Presentation. Our consolidated financial statements include our refined products and crude oil operating segments. We consolidate all entities in which we have a controlling ownership interest. We apply the equity method of accounting to investments in entities over which we exercise significant influence but do not control. We eliminate all intercompany transactions.
Reclassifications. Certain prior year amounts have been reclassified to conform with the current period’s presentation.
Use of Estimates. The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of our consolidated financial statements, as well as their impact on the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates.
Cash Equivalents. Cash and cash equivalents include demand and time deposits and funds that own highly marketable securities with original maturities of three months or less when acquired. We periodically assess the financial condition of the institutions where we hold these funds, and, at December 31, 2019 and 2020, we believed our credit risk relative to these funds was minimal.
Restricted Cash. Restricted cash includes cash that we are contractually required to use for the construction of fixed assets and is unavailable for general use. It is classified as noncurrent due to its designation to be used for the construction of noncurrent assets.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable represent valid claims against customers. We recognize accounts receivable when we sell products or render services and collection of the receivable is probable. We extend credit terms to certain customers after a review of various credit indicators. We establish an allowance for doubtful accounts using an expected credit loss approach and evaluate reserves no less than quarterly to determine their adequacy. Judgments relative to at-risk accounts include the customers’ current financial condition, the customers’ historical relationship with us and current and projected economic conditions. We write off accounts receivable when we deem an account uncollectible.
Product Overages and Shortages. Each period end we measure the volume of each type of product in our pipeline systems and terminals, which is compared to the volumes of our customers’ inventories (as adjusted for tender deductions). To the extent the product volumes in our pipeline systems and terminals exceed the volumes of our customers’ book inventories, we recognize a gain from the product overage and increase our product inventories. To the extent the product in our pipeline systems and terminals is less than our customers’ book inventories, we recognize a loss from the product shortage and we record a liability for product owed to our customers. The product overages we recognize are recorded based on market prices, and the resulting inventory is carried at weighted average cost. The product shortages we recognize are recorded based on our weighted average cost. Additionally, when product shortages result in a net short inventory position, the related liability is recorded based on period-end market prices. Product overages and shortages as well as adjustments to the value of net short inventory positions are recorded in operating expenses on our consolidated statements of income.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Income Taxes. We are a partnership for income tax purposes and therefore are not subject to federal or state income taxes for most of the states in which we operate. The tax on our net income is borne by our unitholders through allocation to them of their share of taxable income. Net income for financial statement purposes may differ significantly from taxable income of unitholders because of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each unitholder’s tax attributes is not available to us.
The amounts recognized as provision for income taxes in our consolidated statements of income are primarily
comprised of partnership-level taxes levied by the state of Texas. This tax is based on revenues less direct costs of sale for our assets apportioned to the state of Texas.
Net Income Per Unit. We calculate basic net income per common unit for each period by dividing net income by the weighted-average number of common units outstanding. The difference between our actual common units outstanding and our weighted-average number of common units outstanding used to calculate net income per common unit is due to the impact of: (i) the phantom units issued to our independent directors, which are included in the calculation of basic and diluted weighted average units outstanding, and (ii) the weighted-average effect of units actually issued or repurchased during a period. The difference between the weighted-average number of common units outstanding used for basic and diluted net income per unit calculations on our consolidated statements of income is primarily the dilutive effect of phantom unit awards granted pursuant to our long-term incentive plan, which have not yet vested in periods where contingent performance metrics have been met.
Index of Additional Significant Accounting Policies
|
|
|
|
|
|
|
|
|
Revenue from Contracts with Customers
|
|
|
Property, Plant and Equipment
|
|
|
Goodwill and Other Intangible Assets
|
|
|
Investments in Non-Controlled Entities
|
|
|
Inventory
|
|
|
Leases
|
|
|
Pension and Postretirement Medical and Life Benefit Obligations
|
|
|
Equity-Based Incentive Compensation
|
|
|
Derivative Financial Instruments
|
|
|
Contingencies and Environmental
|
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326). The new guidance is effective for reporting periods beginning after December 15, 2019. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We adopted the new guidance as of January 1, 2020 using the modified retrospective approach related to our accounts receivables and contract assets, resulting in no cumulative adjustment to retained earnings. The adoption of this guidance did not have a material impact on our consolidated statements of income for the year ended December 31, 2020.
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 third-party customers, operating expenses, cost of product sales, other operating (income) expense and earnings of non-controlled entities.
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 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, amortization and impairment expense and general and administrative (“G&A”) expense that management does not consider when evaluating the core profitability of our separate operating segments.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
(in thousands)
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment
Eliminations
|
|
Total
|
Transportation and terminals revenue
|
|
$
|
1,316,616
|
|
|
$
|
566,063
|
|
|
|
|
$
|
(3,691)
|
|
|
$
|
1,878,988
|
|
Product sales revenue
|
|
880,453
|
|
|
46,767
|
|
|
|
|
—
|
|
|
927,220
|
|
Affiliate management fee revenue
|
|
5,533
|
|
|
14,832
|
|
|
|
|
—
|
|
|
20,365
|
|
Total revenue
|
|
2,202,602
|
|
|
627,662
|
|
|
|
|
(3,691)
|
|
|
2,826,573
|
|
Operating expenses
|
|
486,596
|
|
|
172,478
|
|
|
|
|
(9,638)
|
|
|
649,436
|
|
Cost of product sales
|
|
660,185
|
|
|
44,128
|
|
|
|
|
—
|
|
|
704,313
|
|
Earnings of non-controlled entities
|
|
(18,884)
|
|
|
(162,233)
|
|
|
|
|
—
|
|
|
(181,117)
|
|
Operating margin
|
|
1,074,705
|
|
|
573,289
|
|
|
|
|
5,947
|
|
|
1,653,941
|
|
Depreciation, amortization and impairment expense
|
|
202,047
|
|
|
57,083
|
|
|
|
|
5,947
|
|
|
265,077
|
|
G&A expenses
|
|
140,333
|
|
|
53,950
|
|
|
|
|
—
|
|
|
194,283
|
|
Operating profit
|
|
$
|
732,325
|
|
|
$
|
462,256
|
|
|
|
|
$
|
—
|
|
|
$
|
1,194,581
|
|
Additions to long-lived assets
|
|
$
|
357,359
|
|
|
$
|
148,995
|
|
|
|
|
|
|
$
|
506,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
Segment assets
|
|
$
|
4,687,351
|
|
|
$
|
2,803,895
|
|
|
|
|
|
|
$
|
7,491,246
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
256,291
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
$
|
7,747,537
|
|
Goodwill
|
|
$
|
41,178
|
|
|
$
|
12,082
|
|
|
|
|
|
|
$
|
53,260
|
|
Investments in non-controlled entities
|
|
$
|
292,820
|
|
|
$
|
783,486
|
|
|
|
|
|
|
$
|
1,076,306
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
(in thousands)
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment
Eliminations
|
|
Total
|
Transportation and terminals revenue
|
|
$
|
1,355,682
|
|
|
$
|
620,365
|
|
|
|
|
$
|
(5,417)
|
|
|
$
|
1,970,630
|
|
Product sales revenue
|
|
707,812
|
|
|
28,280
|
|
|
|
|
—
|
|
|
736,092
|
|
Affiliate management fee revenue
|
|
6,719
|
|
|
14,471
|
|
|
|
|
—
|
|
|
21,190
|
|
Total revenue
|
|
2,070,213
|
|
|
663,116
|
|
|
|
|
(5,417)
|
|
|
2,727,912
|
|
Operating expenses
|
|
471,743
|
|
|
173,261
|
|
|
|
|
(10,923)
|
|
|
634,081
|
|
Cost of product sales
|
|
591,228
|
|
|
28,051
|
|
|
|
|
—
|
|
|
619,279
|
|
Other operating (income) expense
|
|
(10,185)
|
|
|
7,210
|
|
|
|
|
—
|
|
|
(2,975)
|
|
Earnings of non-controlled entities
|
|
(8,070)
|
|
|
(160,891)
|
|
|
|
|
—
|
|
|
(168,961)
|
|
Operating margin
|
|
1,025,497
|
|
|
615,485
|
|
|
|
|
5,506
|
|
|
1,646,488
|
|
Depreciation, amortization and impairment expense
|
|
174,096
|
|
|
66,532
|
|
|
|
|
5,506
|
|
|
246,134
|
|
G&A expenses
|
|
140,735
|
|
|
55,915
|
|
|
|
|
—
|
|
|
196,650
|
|
Operating profit
|
|
$
|
710,666
|
|
|
$
|
493,038
|
|
|
|
|
$
|
—
|
|
|
$
|
1,203,704
|
|
Additions to long-lived assets
|
|
$
|
805,902
|
|
|
$
|
74,235
|
|
|
|
|
|
|
$
|
880,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Segment assets
|
|
$
|
5,411,920
|
|
|
$
|
2,894,733
|
|
|
|
|
|
|
$
|
8,306,653
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
131,076
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
$
|
8,437,729
|
|
Goodwill
|
|
$
|
41,178
|
|
|
$
|
12,082
|
|
|
|
|
|
|
$
|
53,260
|
|
Investments in non-controlled entities
|
|
$
|
422,384
|
|
|
$
|
818,167
|
|
|
|
|
|
|
$
|
1,240,551
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
(in thousands)
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment
Eliminations
|
|
Total
|
Transportation and terminals revenue
|
|
$
|
1,241,846
|
|
|
$
|
559,570
|
|
|
|
|
$
|
(6,562)
|
|
|
$
|
1,794,854
|
|
Product sales revenue
|
|
578,630
|
|
|
33,089
|
|
|
|
|
—
|
|
|
611,719
|
|
Affiliate management fee revenue
|
|
6,270
|
|
|
14,959
|
|
|
|
|
—
|
|
|
21,229
|
|
Total revenue
|
|
1,826,746
|
|
|
607,618
|
|
|
|
|
(6,562)
|
|
|
2,427,802
|
|
Operating expenses
|
|
425,443
|
|
|
189,087
|
|
|
|
|
(13,171)
|
|
|
601,359
|
|
Cost of product sales
|
|
471,292
|
|
|
42,423
|
|
|
|
|
—
|
|
|
513,715
|
|
Other operating (income) expense
|
|
(3,247)
|
|
|
3,146
|
|
|
|
|
—
|
|
|
(101)
|
|
Earnings of non-controlled entities
|
|
(32,555)
|
|
|
(120,772)
|
|
|
|
|
—
|
|
|
(153,327)
|
|
Operating margin
|
|
965,813
|
|
|
493,734
|
|
|
|
|
6,609
|
|
|
1,466,156
|
|
Depreciation, amortization and impairment expense
|
|
175,510
|
|
|
76,557
|
|
|
|
|
6,609
|
|
|
258,676
|
|
G&A expenses
|
|
125,742
|
|
|
47,736
|
|
|
|
|
—
|
|
|
173,478
|
|
Operating profit
|
|
$
|
664,561
|
|
|
$
|
369,441
|
|
|
|
|
$
|
—
|
|
|
$
|
1,034,002
|
|
Additions to long-lived assets
|
|
$
|
291,863
|
|
|
$
|
56,401
|
|
|
|
|
|
|
$
|
348,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Segment assets
|
|
$
|
5,269,691
|
|
|
$
|
2,836,888
|
|
|
|
|
|
|
$
|
8,106,579
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
90,403
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
$
|
8,196,982
|
|
Goodwill
|
|
$
|
40,748
|
|
|
$
|
12,082
|
|
|
|
|
|
|
$
|
52,830
|
|
Investments in non-controlled entities
|
|
$
|
429,193
|
|
|
$
|
784,663
|
|
|
|
|
|
|
$
|
1,213,856
|
|
4. Revenue
Revenue recognition policies
Revenue is recognized upon the satisfaction of each performance obligation required by our customer contracts. Transportation and terminals revenue is recognized over time as our customers receive the benefits of our service as it is performed on their behalf using an output method based on actual deliveries. Revenue for our storage services is recognized over time using an output method based on the capacity of storage under contract with our customers. Product sales revenue is recognized at a point in time when our customers take control of the commodities purchased. We record back-to-back purchases and sales of petroleum products on a net basis.
We recognize pipeline transportation revenue for crude oil shipments when our customers’ product arrives at the customer-designated destination. For shipments of refined products under published tariffs that combine transportation and terminalling services, we recognize revenue when our customers take delivery of their product from our system. For shipments where terminalling services are not included in the tariff, we recognize revenue when our customers’ product arrives at the customer-designated destination. We have certain contracts that require counterparties to ship a minimum volume over an agreed-upon time period, which are contracted as minimum dollar or volume commitments. Revenue pursuant to these take-or-pay contracts is recognized when the customers utilize their committed volumes. Additionally, when we estimate that the customers will not utilize all or a portion of their committed volumes, we recognize revenue in proportion to the pattern of exercised rights for the respective commitment period.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Our interstate common carrier petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission (“FERC”) under the Interstate Commerce Act, the Energy Policy Act of 1992 and rules and orders promulgated pursuant thereto. FERC regulation requires that interstate pipeline rates be filed with the FERC, be posted publicly and be nondiscriminatory and “just and reasonable.” The rates on approximately 40% of the shipments on our refined products pipeline system are regulated by the FERC primarily through an index methodology. As an alternative to cost-of-service or index-based rates, interstate pipeline companies may establish rates by obtaining authority to charge market-based rates in competitive markets or by negotiation with unaffiliated shippers. Approximately 60% of our refined products pipeline system’s markets are either subject to regulations by the states in which we operate or are approved for market-based rates by the FERC, and in both cases these rates can generally be adjusted at our discretion based on market factors. Most of the tariffs on our crude oil pipelines are established by negotiated rates that generally provide for annual adjustments in line with changes in the FERC index, subject to certain modifications.
For both our index-based rates and our market-based rates, our published tariffs serve as contracts, and shippers nominate the volume to be shipped up to a month in advance. These tariffs include provisions which allow us to deduct from our customer’s inventory a small percentage of the products our customers transport on our pipeline systems. We refer to this non-monetary consideration as tender deduction revenue. We receive tender deductions from our customers as consideration for product losses during the transportation of petroleum products within our pipeline systems. Tender deduction revenue is generally recognized as transportation revenue when the customer's transported commodities reach their destination and is recorded at the fair value of the product received on the date received or the contract date, as applicable.
Product sales revenue pricing is contractually specified, and we have determined that each barrel sold represents a separate performance obligation. Transaction prices for our other services including terminalling, storage and ancillary services are typically contracted as a single performance obligation with our customers. In circumstances where multiple performance obligations are contractually required, we allocate the transaction price to the various performance obligations based on their relative standalone selling price.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
The following tables provide details of our revenues disaggregated by key activities that comprise our performance obligations by operating segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment Eliminations
|
|
Total
|
Transportation
|
|
$
|
758,028
|
|
|
$
|
374,352
|
|
|
|
|
$
|
—
|
|
|
$
|
1,132,380
|
|
Terminalling
|
|
182,648
|
|
|
6,365
|
|
|
|
|
—
|
|
|
189,013
|
|
Storage
|
|
212,112
|
|
|
98,597
|
|
|
|
|
(3,691)
|
|
|
307,018
|
|
Ancillary services
|
|
136,122
|
|
|
26,151
|
|
|
|
|
—
|
|
|
162,273
|
|
Lease revenue
|
|
27,706
|
|
|
60,598
|
|
|
|
|
—
|
|
|
88,304
|
|
Transportation and terminals revenue
|
|
1,316,616
|
|
|
566,063
|
|
|
|
|
(3,691)
|
|
|
1,878,988
|
|
Product sales revenue
|
|
880,453
|
|
|
46,767
|
|
|
|
|
—
|
|
|
927,220
|
|
Affiliate management fee revenue
|
|
5,533
|
|
|
14,832
|
|
|
|
|
—
|
|
|
20,365
|
|
Total revenue
|
|
2,202,602
|
|
|
627,662
|
|
|
|
|
(3,691)
|
|
|
2,826,573
|
|
Revenue not under the guidance of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
Lease revenue(1)
|
|
(27,706)
|
|
|
(60,598)
|
|
|
|
|
—
|
|
|
(88,304)
|
|
(Gains) losses from futures contracts included in product sales revenue(2)
|
|
(85,643)
|
|
|
632
|
|
|
|
|
—
|
|
|
(85,011)
|
|
Affiliate management fee revenue
|
|
(5,533)
|
|
|
(14,832)
|
|
|
|
|
—
|
|
|
(20,365)
|
|
Total revenue from contracts with customers under ASC 606
|
|
$
|
2,083,720
|
|
|
$
|
552,864
|
|
|
|
|
$
|
(3,691)
|
|
|
$
|
2,632,893
|
|
(1) Lease revenue is accounted for under ASC 840, Leases.
(2) The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment Eliminations
|
|
Total
|
Transportation
|
|
$
|
787,688
|
|
|
$
|
381,654
|
|
|
|
|
$
|
—
|
|
|
$
|
1,169,342
|
|
Terminalling
|
|
185,008
|
|
|
17,822
|
|
|
|
|
—
|
|
|
202,830
|
|
Storage
|
|
215,042
|
|
|
119,330
|
|
|
|
|
(5,417)
|
|
|
328,955
|
|
Ancillary services
|
|
140,055
|
|
|
28,376
|
|
|
|
|
—
|
|
|
168,431
|
|
Lease revenue
|
|
27,889
|
|
|
73,183
|
|
|
|
|
—
|
|
|
101,072
|
|
Transportation and terminals revenue
|
|
1,355,682
|
|
|
620,365
|
|
|
|
|
(5,417)
|
|
|
1,970,630
|
|
Product sales revenue
|
|
707,812
|
|
|
28,280
|
|
|
|
|
—
|
|
|
736,092
|
|
Affiliate management fee revenue
|
|
6,719
|
|
|
14,471
|
|
|
|
|
—
|
|
|
21,190
|
|
Total revenue
|
|
2,070,213
|
|
|
663,116
|
|
|
|
|
(5,417)
|
|
|
2,727,912
|
|
Revenue not under the guidance of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
Lease revenue(1)
|
|
(27,889)
|
|
|
(73,183)
|
|
|
|
|
—
|
|
|
(101,072)
|
|
(Gains) losses from futures contracts included in product sales revenue(2)
|
|
69,538
|
|
|
3,024
|
|
|
|
|
—
|
|
|
72,562
|
|
Affiliate management fee revenue
|
|
(6,719)
|
|
|
(14,471)
|
|
|
|
|
—
|
|
|
(21,190)
|
|
Total revenue from contracts with customers under ASC 606
|
|
$
|
2,105,143
|
|
|
$
|
578,486
|
|
|
|
|
$
|
(5,417)
|
|
|
$
|
2,678,212
|
|
(1) Lease revenue is accounted for under ASC 842, Leases.
(2) The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Intersegment Eliminations
|
|
Total
|
Transportation
|
|
$
|
742,951
|
|
|
$
|
305,397
|
|
|
|
|
$
|
—
|
|
|
$
|
1,048,348
|
|
Terminalling
|
|
149,859
|
|
|
21,463
|
|
|
|
|
—
|
|
|
171,322
|
|
Storage
|
|
200,091
|
|
|
129,048
|
|
|
|
|
(6,562)
|
|
|
322,577
|
|
Ancillary services
|
|
125,268
|
|
|
26,936
|
|
|
|
|
—
|
|
|
152,204
|
|
Lease revenue
|
|
23,677
|
|
|
76,726
|
|
|
|
|
—
|
|
|
100,403
|
|
Transportation and terminals revenue
|
|
1,241,846
|
|
|
559,570
|
|
|
|
|
(6,562)
|
|
|
1,794,854
|
|
Product sales revenue
|
|
578,630
|
|
|
33,089
|
|
|
|
|
—
|
|
|
611,719
|
|
Affiliate management fee revenue
|
|
6,270
|
|
|
14,959
|
|
|
|
|
—
|
|
|
21,229
|
|
Total revenue
|
|
1,826,746
|
|
|
607,618
|
|
|
|
|
(6,562)
|
|
|
2,427,802
|
|
Revenue not under the guidance of ASC 606:
|
|
|
|
|
|
|
|
|
|
|
Lease revenue(1)
|
|
(23,677)
|
|
|
(76,726)
|
|
|
|
|
—
|
|
|
(100,403)
|
|
(Gains) losses from futures contracts included in product sales revenue(2)
|
|
(62,317)
|
|
|
3,624
|
|
|
|
|
—
|
|
|
(58,693)
|
|
Affiliate management fee revenue
|
|
(6,270)
|
|
|
(14,959)
|
|
|
|
|
—
|
|
|
(21,229)
|
|
Total revenue from contracts with customers under ASC 606
|
|
$
|
1,734,482
|
|
|
$
|
519,557
|
|
|
|
|
$
|
(6,562)
|
|
|
$
|
2,247,477
|
|
(1) Lease revenue is accounted for under ASC 842, Leases.
(2) The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Balance Sheet Disclosures
We invoice customers on our refined products pipelines for transportation services when their product enters our system. At each period end, we record all invoiced amounts associated with products that have not yet been delivered (in-transit products) as a contract liability. This liability is presented as deferred revenue on our consolidated balance sheets. Deferred revenue is also recorded for pre-payments received in conjunction with take-or-pay contracts, storage contracts and other service offerings in which the service to our customers remains unfulfilled. Additionally, at each period end, we defer the direct costs we have incurred associated with our customers’ in-transit products as contract assets. Contract assets are presented on our consolidated balance sheets as other current assets. These direct costs are estimated based on our per-barrel direct delivery cost for the current period multiplied by the total in-transit barrels in our system at the end of the period multiplied by 50% to reflect the average transportation costs incurred for all products across all of our pipeline systems. We use 50% of the in-transit barrels because that best represents the average delivery point of all barrels in our pipeline system. These contract assets and contract liabilities are determined using judgments and assumptions that management considers reasonable.
The following table summarizes our accounts receivable, contract assets and contract liabilities resulting from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2020
|
Accounts receivable from contracts with customers
|
|
$
|
124,701
|
|
|
$
|
108,843
|
|
Contract assets
|
|
$
|
8,071
|
|
|
$
|
12,220
|
|
Contract liabilities
|
|
$
|
111,670
|
|
|
$
|
102,964
|
|
For the year ended December 31, 2020, we recognized $93.4 million of transportation and terminals revenue that was recorded in deferred revenue as of December 31, 2019.
Unfulfilled Performance Obligations
We have certain contracts with customers that represent customer commitments to purchase a minimum amount of our services over specified time periods. These contracts require us to provide services to our customers in the future and result in our having unfulfilled performance obligations (“UPOs”) to our customers related to the periods remaining under each contract. We have UPOs in many of our core business services, including transportation, terminalling and storage services. The UPOs will be recognized as revenue in the future as our customers utilize our services or when we estimate that our customers are not likely to use all or a portion of their commitments.
The following table provides the aggregate amount of the transaction price allocated to our UPOs as of December 31, 2020 by operating segment, including the range of years remaining on our contracts with customers and an estimate of revenues expected to be recognized over the next 12 months (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Products
|
|
Crude Oil
|
|
|
|
Total
|
Balances at December 31, 2020
|
|
$
|
2,015,459
|
|
|
$
|
1,262,305
|
|
|
|
|
$
|
3,277,764
|
|
Remaining terms
|
|
1 - 18 years
|
|
1 - 11 years
|
|
|
|
|
Estimated revenues from UPOs to be recognized in the next 12 months
|
|
$
|
383,897
|
|
|
$
|
273,782
|
|
|
|
|
$
|
657,679
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
In computing the value of these future revenues, we have used the current rates in effect as of December 31, 2020 and have not included any estimates for future rate changes due to changes in the FERC index or other contractually negotiated rate escalations. Our UPO balances include the full amount of our customer commitments as of December 31, 2020 through the expiration of the related contracts. The UPO balances disclosed exclude all performance obligations for which the original expected term is one year or less, the consideration is variable or the future use of our services is fully at the discretion of our customers.
5.Property, Plant and Equipment, Goodwill and Other Intangibles
Property, Plant and Equipment
Property, plant and equipment consist primarily of pipeline, pipeline-related equipment, storage tanks and processing equipment. We state property, plant and equipment at cost except for certain acquired assets recorded at fair value on their respective acquisition dates and impaired assets. We record impaired assets at fair value on the last impairment evaluation date for which an adjustment was required.
We assign asset lives based on reasonable estimates when we place an asset into service. Subsequent events could cause us to change our estimates, which would affect the future calculation of depreciation expense.
When we sell or retire property, plant and equipment, we remove its carrying value and the related accumulated depreciation from our accounts and record any associated gains or losses on our consolidated statements of income in the period of sale or disposition.
We capitalize expenditures to replace existing assets and retire the replaced assets. We capitalize expenditures when they extend the useful life, increase the productivity or capacity or improve the safety or efficiency of the asset. We capitalize direct project costs such as labor and materials as incurred. Indirect project costs, such as overhead, are capitalized based on a percentage of direct labor charged to the respective capital project. We charge expenditures for maintenance, repairs and minor replacements to operating expense in the period incurred.
During construction, we capitalize interest on all construction projects requiring a completion period of three months or longer and total project costs exceeding $0.5 million. The interest we capitalize is based on the weighted-average interest rate of our debt. The weighted average rates used to capitalize interest on borrowed funds were 4.8%, 4.6% and 4.4% for the years ended December 31, 2018, 2019 and 2020, respectively.
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Depreciable Lives
|
|
|
December 31,
|
|
|
|
2019
|
|
2020
|
|
Construction work-in-progress
|
|
$
|
515,312
|
|
|
$
|
125,173
|
|
|
|
Land and rights-of-way
|
|
336,982
|
|
|
385,190
|
|
|
|
Buildings
|
|
125,772
|
|
|
126,619
|
|
|
10 to 53 years
|
Storage tanks
|
|
2,206,839
|
|
|
2,085,601
|
|
|
10 to 49 years
|
Pipeline and station equipment
|
|
2,917,059
|
|
|
3,327,078
|
|
|
10 to 59 years
|
Processing equipment
|
|
2,044,589
|
|
|
2,006,835
|
|
|
3 to 56 years
|
Other
|
|
284,674
|
|
|
296,329
|
|
|
3 to 53 years
|
Property, Plant and Equipment, Gross
|
|
$
|
8,431,227
|
|
|
$
|
8,352,825
|
|
|
|
|
|
|
|
|
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Other includes total interest capitalized on construction in progress as of December 31, 2019 and 2020 of $86.4 million and $98.4 million, respectively. Depreciation expense for the years ended December 31, 2018, 2019 and 2020 was $214.4 million, $242.9 million and $256.0 million, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management.
During 2018, we made the decision to discontinue commercial operations of our ammonia pipeline due to the system’s low profitability and challenging economic outlook. We estimated the fair value of the ammonia pipeline assets based on expected future cash flows and recognized a $49.1 million impairment charge in depreciation, amortization and impairment expense on our consolidated statements of income in 2018.
Goodwill
We record the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in a business acquisition (or combination) as goodwill. The goodwill relating to each of our reporting units is tested for impairment annually as well as when an event or change in circumstances indicates an impairment may have occurred.
For purposes of performing the impairment test for goodwill, our reporting units are our refined products and crude oil segments. In 2018, we elected to complete the quantitative goodwill impairment test and calculated that the fair value of each of our reporting units was greater than its carrying amount. In 2019 and 2020, we elected to perform the qualitative assessment for purposes of our annual goodwill impairment test and concluded that it was more likely than not that the fair value of each of our reporting units was greater than its carrying amount. Based on this assessment, we concluded goodwill was not impaired.
Other Intangibles
Other intangible assets with finite lives are amortized over their estimated useful lives of seven years up to 30 years. The weighted-average asset life of our other intangible assets at December 31, 2020 was approximately 18 years. We adjust the useful lives of our other intangible assets if events or circumstances indicate there has been a change in the remaining useful lives. We eliminate from our balance sheets the gross carrying amount and the related accumulated amortization for any fully amortized intangibles in the year they are fully amortized. During the years ended December 31, 2018, 2019 and 2020, amortization of other intangible assets was $1.6 million, $3.3 million and $2.7 million, respectively.
6.Investments in Non-Controlled Entities
We account for interests in affiliates that we do not control using the equity method of accounting. Under this method, an investment is recorded at our acquisition cost or capital contributions, as adjusted by contractual terms, plus equity in earnings or losses since acquisition or formation, plus interest capitalized, less distributions received and amortization of interest capitalized and excess net investment. Excess net investment is the amount by which our investment in a non-controlled entity exceeded our proportionate share of the book value of the net assets of that investment. We amortize excess net investment over the weighted-average depreciable asset lives of the equity investee. Our unamortized excess net investment was $33.9 million and $33.0 million at December 31, 2019 and 2020, respectively. The amount of unamortized excess investment is primarily related to our investment in
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
BridgeTex. We evaluate equity method investments for impairment whenever events or circumstances indicate that there is an other-than-temporary loss in value of the investment. In the event that we determine that the loss in value of an investment is other-than-temporary, we would record a charge to earnings to adjust the carrying value to fair value. We recognized no equity investment impairments during 2018, 2019 and 2020.
Our equity investments in non-controlled entities at December 31, 2020 were comprised of:
|
|
|
|
|
|
|
|
|
Entity
|
|
Ownership Interest
|
BridgeTex Pipeline Company, LLC (“BridgeTex”)
|
|
30%
|
Double Eagle Pipeline LLC (“Double Eagle”)
|
|
50%
|
HoustonLink Pipeline Company, LLC (“HoustonLink”)
|
|
50%
|
MVP Terminalling, LLC (“MVP”)
|
|
50%
|
Powder Springs Logistics, LLC (“Powder Springs”)
|
|
50%
|
Saddlehorn Pipeline Company, LLC (“Saddlehorn”)
|
|
30%
|
Seabrook Logistics, LLC (“Seabrook”)
|
|
50%
|
Texas Frontera, LLC (“Texas Frontera”)
|
|
50%
|
In the first quarter of 2020, we sold a 10% interest in Saddlehorn to an affiliate of Black Diamond Gathering LLC, which is majority-owned by Noble Midstream Partners LP, reducing our ongoing investment in Saddlehorn to a 30% interest. We received $79.9 million in cash from the sale, and we recorded a gain of $12.9 million on our consolidated statements of income for the year ended December 31, 2020.
We serve as operator of BridgeTex, HoustonLink, MVP, Powder Springs, Saddlehorn, Texas Frontera and the pipeline activities of Seabrook. We receive fees for management services as well as reimbursement or payment to us for certain direct operational payroll and other overhead costs. The management fees we receive are reported as affiliate management fee revenue on our consolidated statements of income. Cost reimbursements we receive from these entities in connection with our operating services are included as reductions to costs and expenses on our consolidated statements of income and totaled $3.9 million, $5.3 million and $3.6 million, respectively, for the years ended December 31, 2018, 2019 and 2020.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
We recorded the following revenue and expense transactions from certain of these non-controlled entities in our consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Transportation and terminals revenue:
|
|
|
|
|
|
|
BridgeTex, capacity lease
|
|
$
|
39,596
|
|
|
$
|
41,806
|
|
|
$
|
42,286
|
|
Double Eagle, throughput revenue
|
|
$
|
5,250
|
|
|
$
|
6,213
|
|
|
$
|
4,917
|
|
Saddlehorn, storage revenue
|
|
$
|
2,180
|
|
|
$
|
2,234
|
|
|
$
|
2,483
|
|
Operating costs:
|
|
|
|
|
|
|
Seabrook, storage lease and ancillary services
|
|
$
|
10,572
|
|
|
$
|
25,851
|
|
|
$
|
29,116
|
|
MVP, sale of air emission reduction credits (reduction of operating costs)
|
|
$
|
(2,161)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Product sales revenue:
|
|
|
|
|
|
|
Powder Springs, butane sales
|
|
$
|
4,899
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Seabrook, product sales
|
|
$
|
—
|
|
|
$
|
328
|
|
|
$
|
—
|
|
Cost of product sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powder Springs, butane purchases
|
|
$
|
410
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other operating income:
|
|
|
|
|
|
|
MVP, easement sale
|
|
$
|
—
|
|
|
$
|
289
|
|
|
$
|
—
|
|
Seabrook, gain on sale of air emission credits
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,410
|
|
Our consolidated balance sheets reflected the following balances related to our investments in non-controlled entities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Trade Accounts Receivable
|
|
Other Accounts Receivable
|
|
Other Accounts Payable
|
|
Long-Term Receivables
|
BridgeTex
|
|
$
|
392
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Double Eagle
|
|
$
|
445
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
HoustonLink
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
MVP
|
|
$
|
—
|
|
|
$
|
418
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Powder Springs
|
|
$
|
161
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,006
|
|
Saddlehorn
|
|
$
|
—
|
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Seabrook
|
|
$
|
941
|
|
|
$
|
—
|
|
|
$
|
1,349
|
|
|
$
|
—
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Trade Accounts Receivable
|
|
Other Accounts Receivable
|
|
Other Accounts Payable
|
|
Long-Term Receivables
|
BridgeTex
|
|
$
|
355
|
|
|
$
|
27
|
|
|
$
|
970
|
|
|
$
|
—
|
|
Double Eagle
|
|
$
|
277
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
HoustonLink
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
144
|
|
|
$
|
—
|
|
MVP
|
|
$
|
—
|
|
|
$
|
467
|
|
|
$
|
2,297
|
|
|
$
|
—
|
|
Powder Springs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,223
|
|
Saddlehorn
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Seabrook
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,274
|
|
|
$
|
—
|
|
We entered into a long-term terminalling and storage contract with Seabrook for exclusive use of dedicated tankage that provides our customers with crude oil storage capacity and dock access for crude oil imports and exports on the Texas Gulf Coast (see Note 10 – Leases for more details regarding this lease).
The financial results from Powder Springs, MVP and Texas Frontera are included in our refined products segment and the financial results from BridgeTex, Double Eagle, HoustonLink, Saddlehorn and Seabrook are included in our crude oil segment, each as earnings of non-controlled entities.
A summary of our investments in non-controlled entities (representing only our proportionate interests) follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Investments at December 31, 2019
|
|
$
|
1,240,551
|
|
Additional investment
|
|
95,068
|
|
Sale of ownership interest in Saddlehorn
|
|
(66,989)
|
|
|
|
|
Earnings of non-controlled entities:
|
|
|
Proportionate share of earnings
|
|
155,140
|
|
Amortization of excess investment and capitalized interest
|
|
(1,813)
|
|
Earnings of non-controlled entities
|
|
153,327
|
|
Less:
|
|
|
Distributions from operations of non-controlled entities
|
|
207,600
|
|
Distributions from returns of investments in non-controlled entities
|
|
501
|
|
Investments at December 31, 2020
|
|
$
|
1,213,856
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Summarized financial information of our non-controlled entities (representing 100% of the interests in these entities) follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
Current assets
|
|
$
|
260,033
|
|
|
$
|
243,828
|
|
Noncurrent assets
|
|
2,768,696
|
|
|
2,846,747
|
|
Total assets
|
|
$
|
3,028,729
|
|
|
$
|
3,090,575
|
|
Current liabilities
|
|
$
|
160,566
|
|
|
$
|
143,638
|
|
Noncurrent liabilities
|
|
60,886
|
|
|
57,515
|
|
Total liabilities
|
|
$
|
221,452
|
|
|
$
|
201,153
|
|
Equity
|
|
$
|
2,807,277
|
|
|
$
|
2,889,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Revenue
|
|
$
|
631,420
|
|
|
$
|
782,013
|
|
|
$
|
752,685
|
|
Net income
|
|
$
|
416,128
|
|
|
$
|
507,464
|
|
|
$
|
471,438
|
|
7.Inventory
Inventory is comprised primarily of refined products, liquefied petroleum gases, transmix, crude oil and additives, which are stated and relieved at the lower of average cost or net realizable value.
Inventory at December 31, 2019 and 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
Refined products
|
|
$
|
96,128
|
|
|
$
|
79,473
|
|
Liquefied petroleum gases
|
|
29,982
|
|
|
26,734
|
|
Transmix
|
|
39,546
|
|
|
23,397
|
|
Crude oil
|
|
12,714
|
|
|
32,431
|
|
Additives
|
|
6,029
|
|
|
5,354
|
|
Total inventory
|
|
$
|
184,399
|
|
|
$
|
167,389
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
8.Consolidated Statements of Cash Flows
Changes in the components of operating assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
|
|
|
|
|
|
|
Trade accounts receivable and other accounts receivable
|
|
$
|
24,169
|
|
|
$
|
(20,156)
|
|
|
$
|
(1,172)
|
|
Inventory
|
|
(3,390)
|
|
|
1,336
|
|
|
15,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
21,146
|
|
|
(1,237)
|
|
|
4,225
|
|
Accrued payroll and benefits
|
|
14,015
|
|
|
4,931
|
|
|
(23,269)
|
|
Accrued interest payable
|
|
(7,399)
|
|
|
1,018
|
|
|
(5,278)
|
|
Accrued taxes other than income
|
|
1,750
|
|
|
12,914
|
|
|
4,131
|
|
Deferred revenue
|
|
5,191
|
|
|
(11,431)
|
|
|
(10,757)
|
|
Accrued product liabilities
|
|
(20,677)
|
|
|
15,306
|
|
|
(11,622)
|
|
|
|
|
|
|
|
|
Other current and noncurrent assets and liabilities
|
|
(12,559)
|
|
|
5,313
|
|
|
(13,278)
|
|
Total
|
|
$
|
22,246
|
|
|
$
|
7,994
|
|
|
$
|
(41,249)
|
|
Other current and noncurrent assets and liabilities above exclude certain non-cash items that were reflected in the consolidated balance sheets but were not reflected in the statements of cash flows. At December 31, 2018, 2019 and 2020, the long-term pension and benefits liability was increased by $2.3 million, $27.0 million and $21.5 million, respectively, resulting in a corresponding increase in accumulated other comprehensive loss (“AOCL”).
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
9.Debt
Long-term debt at December 31, 2019 and 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25% Notes due 2021
|
|
$
|
550,000
|
|
|
$
|
—
|
|
3.20% Notes due 2025
|
|
250,000
|
|
|
250,000
|
|
5.00% Notes due 2026
|
|
650,000
|
|
|
650,000
|
|
3.25% Notes due 2030
|
|
—
|
|
|
500,000
|
|
6.40% Notes due 2037
|
|
250,000
|
|
|
250,000
|
|
4.20% Notes due 2042
|
|
250,000
|
|
|
250,000
|
|
5.15% Notes due 2043
|
|
550,000
|
|
|
550,000
|
|
4.20% Notes due 2045
|
|
250,000
|
|
|
250,000
|
|
4.25% Notes due 2046
|
|
500,000
|
|
|
500,000
|
|
4.20% Notes due 2047
|
|
500,000
|
|
|
500,000
|
|
4.85%Notes due 2049
|
|
500,000
|
|
|
500,000
|
|
3.95% Notes due 2050
|
|
500,000
|
|
|
800,000
|
|
Face value of long-term debt
|
|
4,750,000
|
|
|
5,000,000
|
|
Unamortized debt issuance costs(1)
|
|
(35,263)
|
|
|
(40,143)
|
|
Net unamortized debt premium (discount)(1)
|
|
(8,662)
|
|
|
18,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
$
|
4,706,075
|
|
|
$
|
4,978,691
|
|
|
|
|
|
|
(1) Debt issuance costs, note discounts and premiums and realized gains and losses of historical fair value hedges are being amortized or accreted to the applicable notes over the respective lives of those notes.
All of the instruments detailed in the table above are senior indebtedness.
At December 31, 2020, maturities of our debt were as follows: $0 in 2021 through 2024; $250 million in 2025; and $4.75 billion thereafter.
2020 Debt Issuances
In December 2020, we issued $300.0 million of our 3.95% senior notes due 2050. The notes, which are additional notes of the series originally issued in August 2019, were priced at 109.678% of par. Net proceeds from this offering were approximately $329.2 million after underwriting discounts and offering expenses, and including accrued interest. The net proceeds from this offering will be used for general partnership purposes, which may include repayment of indebtedness, including borrowings under our revolving credit facility and commercial paper program, capital expenditures and repurchases of our common units.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
In May 2020, we issued $500.0 million of 3.25% senior notes due 2030 in an underwritten public
offering. The notes were issued at 99.88% of par. Net proceeds from this offering were approximately $495.2 million after underwriting discounts and offering expenses. The net proceeds from this offering, along with commercial paper borrowings and cash on hand, were used to redeem our $550.0 million senior notes due in 2021. We recognized $12.9 million of debt extinguishment costs that were recorded as interest expense in our consolidated statements of income related to this early redemption, partially offset by the recognition of a $0.7 million unamortized debt premium, for the year ended December 31, 2020.
Other Debt
Revolving Credit Facility. At December 31, 2020, the total borrowing capacity under our revolving credit facility maturing in May 2024 was $1.0 billion. Any borrowings outstanding under this 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 0.875% to 1.500% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate from 0.075% to 0.200% depending on our credit ratings. The unused commitment fee was 0.125% at December 31, 2020. Borrowings under this facility may be used for general purposes, including capital expenditures. As of December 31, 2019 and 2020, there were no borrowings under this facility and $3.5 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.
Our revolving credit facility requires us to maintain a specified ratio of consolidated debt to EBITDA (as defined in the credit agreement) of no greater than 5.0 to 1.0. In addition, the revolving credit facility and the indentures under which our senior notes were issued contain covenants that limit our ability to, among other things, incur indebtedness secured by certain liens or encumber our assets, engage in certain sale-leaseback transactions and consolidate, merge or dispose of all or substantially all of our assets. We were in compliance with these covenants as of and during the year ended December 31, 2020.
Commercial Paper Program. We have a commercial paper program under which we may issue commercial paper notes in an amount up to the available capacity under our $1.0 billion revolving credit facility. The maturities of the commercial paper notes vary, but may not exceed 397 days from the date of issuance. Because the commercial paper we can issue is limited to amounts available under our revolving credit facility, amounts outstanding under the program are classified as long-term debt. 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 weighted-average interest rate for commercial paper borrowings based on the number of days outstanding was 2.6% and 0.4% for the year ended December 31, 2019 and 2020, respectively. There were no borrowings outstanding under this program at December 31, 2019 and 2020.
During the years ending December 31, 2018, 2019 and 2020, total cash payments for interest on all indebtedness, excluding the impact of related interest rate swap agreements, were $227.8 million, $217.1 million and $234.5 million, respectively.
10.Leases
We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842, Leases. Our lessee arrangements primarily include a terminalling and storage contract where we have exclusive use of dedicated tankage, leased pipelines and office buildings. Our lessor arrangements include pipeline capacity and storage contracts and our condensate splitter tolling agreement that qualify as operating leases under ASC 842. In addition,
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
we have a long-term throughput and deficiency agreement with a customer that is being accounted for as a sales-type lease under ASC 842.
In accordance with ASC 842, we have made an accounting policy election to not apply the standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.
We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components do not result in significant timing differences in the recognition of rental expenses or income.
Operating Leases – Lessee
We recognize a lease liability for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. We also recognize a right-of-use asset for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.
Related Party Operating Lease. We entered into a long-term terminalling and storage contract with Seabrook for exclusive use of dedicated tankage that provides our customers with crude oil storage capacity and dock access for crude oil imports and exports on the Texas Gulf Coast.
Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our consolidated statements of income. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Variable payments consist of amounts that exceed the contractual minimum rental payment (for example, payment increases tied to a change in a market index). Future minimum rental payments under operating leases with initial terms greater than one year as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Party Leases
|
|
Seabrook Lease
|
|
All Leases
|
2021
|
$
|
20,463
|
|
|
$
|
12,701
|
|
|
$
|
33,164
|
|
2022
|
20,609
|
|
|
9,919
|
|
|
30,528
|
|
2023
|
20,854
|
|
|
9,919
|
|
|
30,773
|
|
2024
|
16,956
|
|
|
9,643
|
|
|
26,599
|
|
2025
|
16,250
|
|
|
6,612
|
|
|
22,862
|
|
Thereafter
|
18,541
|
|
|
24,246
|
|
|
42,787
|
|
Total future minimum rental payments
|
113,673
|
|
|
73,040
|
|
|
186,713
|
|
Present value discount
|
11,593
|
|
|
$
|
10,104
|
|
|
$
|
21,697
|
|
Total operating lease liability
|
$
|
102,080
|
|
|
$
|
62,936
|
|
|
$
|
165,016
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
The following tables provide further information about our operating leases (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 12/31/2019
|
|
Year Ended 12/31/2020
|
|
|
Third Party Leases
|
|
Seabrook Lease
|
|
All Leases
|
|
Third Party Leases
|
|
Seabrook Lease
|
|
All Leases
|
Fixed lease expense
|
|
$
|
19,171
|
|
|
$
|
10,834
|
|
|
$
|
30,005
|
|
|
$
|
19,224
|
|
|
$
|
14,262
|
|
|
$
|
33,486
|
|
Short-term lease expense
|
|
1,603
|
|
|
—
|
|
|
1,603
|
|
|
1,334
|
|
|
—
|
|
|
1,334
|
|
Variable lease expense
|
|
3,058
|
|
|
15,017
|
|
|
18,075
|
|
|
4,105
|
|
|
14,854
|
|
|
18,959
|
|
Total lease expense
|
|
$
|
23,832
|
|
|
$
|
25,851
|
|
|
$
|
49,683
|
|
|
$
|
24,663
|
|
|
$
|
29,116
|
|
|
$
|
53,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
|
|
|
December 31, 2019
|
|
December 31, 2020
|
|
|
Third Party Leases
|
|
Seabrook Lease
|
|
All Leases
|
|
Third Party Leases
|
|
Seabrook Lease
|
|
All Leases
|
Current lease liability
|
|
$
|
15,136
|
|
|
$
|
11,085
|
|
|
$
|
26,221
|
|
|
$
|
17,099
|
|
|
$
|
10,434
|
|
|
$
|
27,533
|
|
Long-term lease liability
|
|
$
|
81,508
|
|
|
$
|
62,515
|
|
|
$
|
144,023
|
|
|
$
|
84,982
|
|
|
$
|
52,501
|
|
|
$
|
137,483
|
|
Right-of-use asset
|
|
$
|
98,268
|
|
|
$
|
73,600
|
|
|
$
|
171,868
|
|
|
$
|
103,142
|
|
|
$
|
62,936
|
|
|
$
|
166,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
23,253
|
|
|
25,870
|
|
|
$
|
49,123
|
|
|
$
|
24,098
|
|
|
29,116
|
|
|
$
|
53,214
|
|
Weighted average remaining lease term (years)
|
|
6
|
|
8
|
|
7
|
|
6
|
|
7
|
|
7
|
Weighted-average discount rate
|
|
3.9%
|
|
4.0%
|
|
4.0%
|
|
3.7%
|
|
4.0%
|
|
3.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $42.1 million for the year ended December 31, 2018 and was recognized in accordance with ASC 840.
Operating Leases – Lessor
We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our consolidated statements of income. Variable rental payments are recognized as revenue in the period in which the circumstances on which the variable lease payments are based occur.
Future minimum payments receivable under operating leases with initial terms greater than one year as of December 31, 2020 are estimated as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
30,235
|
|
2022
|
21,322
|
|
2023
|
18,820
|
|
2024
|
18,562
|
|
2025
|
13,911
|
|
Thereafter
|
40,645
|
|
Total
|
$
|
143,495
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
We recognized variable lease revenue of $51.8 million, $58.4 million and $61.4 million, respectively, for the years ended December 31, 2018, 2019 and 2020, primarily related to our condensate splitter.
At December 31, 2020, property, plant and equipment utilized by our customers in operating lease arrangements consisted of: $226.4 million of processing equipment; $58.3 million of storage tanks; $48.7 million of pipeline and station equipment; and $30.5 million of other assets. The processing equipment primarily relates to our condensate splitter.
Sales-Type Lease – Lessor
We entered into a long-term throughput and deficiency agreement with a customer on a pipeline and related assets that we constructed in Texas and New Mexico, which contains minimum volume/payment commitments. Our customer has the option to purchase this pipeline and related assets at the end of the lease term for a nominal amount. This agreement is accounted for as a sales-type lease under ASC 842. The net investment under this arrangement as of December 31, 2019 and 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2020
|
Total minimum lease payments receivable
|
|
$
|
15,721
|
|
|
$
|
13,974
|
|
Less: Unearned income
|
|
2,814
|
|
|
2,257
|
|
Recorded net investment in sales-type lease
|
|
$
|
12,907
|
|
|
$
|
11,717
|
|
The net investment in this sales-type lease was classified in the consolidated balance sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2020
|
Other accounts receivable
|
|
$
|
1,190
|
|
|
$
|
1,245
|
|
Long-term receivables
|
|
11,717
|
|
|
10,472
|
|
Total
|
|
$
|
12,907
|
|
|
$
|
11,717
|
|
Future minimum payments receivable under this sales-type lease for the next five years are $1.7 million each year with $5.3 million due thereafter.
11.Employee Benefit Plans
Our pension and postretirement benefit liabilities represent the funded status of the present value of benefit obligations of our employee benefit plans. We develop pension, postretirement medical and life benefit costs from third-party actuarial valuations. We establish actuarial assumptions to anticipate future events and use those assumptions when calculating the expense and liabilities related to these plans. These factors include assumptions management makes concerning expected investment return on plan assets, discount rates, health care costs trend rates, turnover rates and rates of future compensation increases, among others. In addition, we use subjective factors such as withdrawal and mortality rates to develop actuarial valuations. Management reviews and updates these assumptions on an annual basis. The actuarial assumptions that we use may differ from actual results due to changing market rates or other factors. These differences could affect the amount of pension and postretirement medical and life benefit expense we will recognize in future periods.
Defined Contribution Plan. We sponsor a defined contribution plan in which we match our employees’ qualifying contributions, resulting in additional expense to us. Expenses related to the defined contribution plan
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
were $11.0 million, $11.4 million and $12.2 million in 2018, 2019 and 2020, respectively.
Defined Benefit Plans. We sponsor two pension plans, including one for all non-union employees and one that covers union employees, and a postretirement benefit plan for certain employees. The annual measurement date of these plans is December 31.
The following table presents the changes in benefit obligations and plan assets for pension benefits and other postretirement benefits, as well as the end-of-period accumulated benefit obligation for the years ended December 31, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year
|
|
$
|
308,949
|
|
|
$
|
381,240
|
|
|
$
|
12,080
|
|
|
$
|
15,207
|
|
Service cost
|
|
25,406
|
|
|
27,736
|
|
|
193
|
|
|
258
|
|
Interest cost
|
|
12,163
|
|
|
10,989
|
|
|
507
|
|
|
479
|
|
Plan participants’ contributions
|
|
—
|
|
|
—
|
|
|
564
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
54,171
|
|
|
53,165
|
|
|
3,300
|
|
|
2,540
|
|
Benefits paid
|
|
(11,409)
|
|
|
(23,097)
|
|
|
(1,437)
|
|
|
(1,758)
|
|
Curtailment gain
|
|
—
|
|
|
(1,703)
|
|
|
—
|
|
|
—
|
|
Settlement payments
|
|
(8,040)
|
|
|
(4,685)
|
|
|
—
|
|
|
—
|
|
Benefit obligations at end of year
|
|
381,240
|
|
|
443,645
|
|
|
15,207
|
|
|
17,293
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
197,590
|
|
|
249,293
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
31,630
|
|
|
29,338
|
|
|
873
|
|
|
1,191
|
|
Plan participants’ contributions
|
|
—
|
|
|
—
|
|
|
564
|
|
|
567
|
|
Actual return on plan assets
|
|
39,522
|
|
|
43,560
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(11,409)
|
|
|
(23,097)
|
|
|
(1,437)
|
|
|
(1,758)
|
|
Settlement payments
|
|
(8,040)
|
|
|
(3,343)
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
|
249,293
|
|
|
295,751
|
|
|
—
|
|
|
—
|
|
Funded status at end of year
|
|
$
|
(131,947)
|
|
|
$
|
(147,894)
|
|
|
$
|
(15,207)
|
|
|
$
|
(17,293)
|
|
Accumulated benefit obligations
|
|
$
|
274,353
|
|
|
$
|
324,770
|
|
|
|
|
|
At December 31, 2019 and 2020, the accumulated benefit obligations of each of our plans exceeded the fair value of the related plans’ assets.
The pension plans actuarial loss in 2020 of $53.2 million is primarily due to the impact of decreases in the discount rates used to calculate the benefit obligations, partially offset by demographic changes. The pension benefit obligations experienced an actuarial loss of $54.2 million in 2019 primarily due to the impact of decreases in the discount rates used to calculate the benefit obligations, partially offset by changes in salary assumptions and higher asset returns.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
The following table summarizes information for pension plans with obligations in excess of plan assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2020
|
Plans with a projected benefit obligation in excess of plan assets:
|
|
|
|
|
Projected benefit obligation
|
|
$
|
381,240
|
|
|
$
|
443,645
|
|
Fair value of plan assets
|
|
$
|
249,293
|
|
|
$
|
295,751
|
|
|
|
|
|
|
Plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
274,353
|
|
|
$
|
324,770
|
|
Fair value of plan assets
|
|
$
|
249,293
|
|
|
$
|
295,751
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets included in these financial statements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Amounts recognized in consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Current accrued benefit cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,162
|
|
|
$
|
1,411
|
|
Long-term pension and benefits
|
|
131,947
|
|
|
147,894
|
|
|
14,045
|
|
|
15,882
|
|
|
|
131,947
|
|
|
147,894
|
|
|
15,207
|
|
|
17,293
|
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
(107,625)
|
|
|
(120,487)
|
|
|
(8,378)
|
|
|
(10,409)
|
|
Prior service credit
|
|
2,886
|
|
|
2,705
|
|
|
—
|
|
|
—
|
|
|
|
(104,739)
|
|
|
(117,782)
|
|
|
(8,378)
|
|
|
(10,409)
|
|
Net amount of liabilities and accumulated other comprehensive loss recognized in consolidated balance sheets
|
|
$
|
27,208
|
|
|
$
|
30,112
|
|
|
$
|
6,829
|
|
|
$
|
6,884
|
|
Net periodic benefit expense for the years ended December 31, 2018, 2019 and 2020 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2018
|
|
2019
|
|
2020
|
|
2018
|
|
2019
|
|
2020
|
Components of net periodic pension and postretirement benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
38,167
|
|
|
$
|
25,406
|
|
|
$
|
27,736
|
|
|
$
|
243
|
|
|
$
|
193
|
|
|
$
|
258
|
|
Interest cost
|
|
14,907
|
|
|
12,163
|
|
|
10,989
|
|
|
416
|
|
|
507
|
|
|
479
|
|
Expected return on plan assets
|
|
(12,090)
|
|
|
(9,401)
|
|
|
(11,354)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service credit
|
|
(181)
|
|
|
(181)
|
|
|
(181)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
|
9,763
|
|
|
5,489
|
|
|
5,425
|
|
|
589
|
|
|
331
|
|
|
509
|
|
Settlement cost
|
|
1,964
|
|
|
2,606
|
|
|
969
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement gain on disposition of assets
|
|
—
|
|
|
—
|
|
|
(1,342)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic expense
|
|
$
|
52,530
|
|
|
$
|
36,082
|
|
|
$
|
32,242
|
|
|
$
|
1,248
|
|
|
$
|
1,031
|
|
|
$
|
1,246
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
The service component of our net periodic benefit expense (credit) is presented in operating expense and G&A expense, and the non-service components are presented in other (income) expense in our consolidated statements of income.
Net periodic benefit expense for the year ended December 31, 2018 includes corrections of $19.4 million resulting from an error in our third-party actuary’s valuation of our pension liabilities and net periodic pension expense. In addition, long-term pension and benefits increased $22.2 million and accumulated other comprehensive loss increased $2.8 million in our 2018 consolidated balance sheets as a result of this valuation error.
Changes in plan assets and benefit obligations recognized in other comprehensive income (loss) during 2018, 2019 and 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2018
|
|
2019
|
|
2020
|
|
2018
|
|
2019
|
|
2020
|
Beginning balance
|
|
$
|
(97,226)
|
|
|
$
|
(88,602)
|
|
|
$
|
(104,739)
|
|
|
$
|
(6,597)
|
|
|
$
|
(5,409)
|
|
|
$
|
(8,378)
|
|
Net actuarial gain (loss)
|
|
(2,922)
|
|
|
(24,051)
|
|
|
(20,959)
|
|
|
599
|
|
|
(3,300)
|
|
|
(2,540)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
(181)
|
|
|
(181)
|
|
|
(181)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
|
9,763
|
|
|
5,489
|
|
|
5,425
|
|
|
589
|
|
|
331
|
|
|
509
|
|
Curtailment gain
|
|
—
|
|
|
—
|
|
|
1,703
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement cost
|
|
1,964
|
|
|
2,606
|
|
|
969
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amount recognized in other comprehensive loss
|
|
8,624
|
|
|
(16,137)
|
|
|
(13,043)
|
|
|
1,188
|
|
|
(2,969)
|
|
|
(2,031)
|
|
Ending balance
|
|
$
|
(88,602)
|
|
|
$
|
(104,739)
|
|
|
$
|
(117,782)
|
|
|
$
|
(5,409)
|
|
|
$
|
(8,378)
|
|
|
$
|
(10,409)
|
|
Actuarial gains and losses are amortized over the average future service period of the current active plan participants expected to receive benefits. The corridor approach is used to determine when actuarial gains and losses are to be amortized and is equal to 10% of the greater of the projected benefit obligation or the market related value of plan assets. The amount of gain or loss in excess of the calculated corridor is subject to amortization. The estimated net actuarial loss and prior service credit for the defined benefit pension plans that will be amortized from AOCL into net periodic benefit cost in 2021 are $6.2 million and $0.2 million, respectively. The estimated net actuarial loss for the other defined benefit postretirement plan that will be amortized from AOCL into net periodic benefit cost in 2021 is $0.6 million.
The weighted-average rate assumptions used to determine projected benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
Discount rate
|
|
3.01%
|
|
2.23%
|
|
3.06%
|
|
2.30%
|
Rate of compensation increase
|
|
4.58%
|
|
4.53%
|
|
n/a
|
|
n/a
|
Cash balance interest crediting rate
|
|
2.16%
|
|
1.70%
|
|
n/a
|
|
n/a
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
The weighted-average rate assumptions used to determine net pension and other postretirement benefit plans expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
For the Year Ended December 31,
|
|
For the Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
|
2018
|
|
2019
|
|
2020
|
Discount rate
|
|
3.63%
|
|
3.98%
|
|
3.01%
|
|
3.43%
|
|
4.08%
|
|
3.06%
|
Rate of compensation increase
|
|
6.38%
|
|
6.48%
|
|
4.58%
|
|
n/a
|
|
n/a
|
|
n/a
|
Expected rate of return on plan assets
|
|
6.00%
|
|
6.00%
|
|
4.50%
|
|
n/a
|
|
n/a
|
|
n/a
|
Cash balance interest crediting rate
|
|
3.15%
|
|
2.78%
|
|
2.16%
|
|
n/a
|
|
n/a
|
|
n/a
|
The non-pension postretirement benefit plans provide for retiree contributions and contain other cost-sharing features such as deductibles and coinsurance. The accounting for these plans anticipates future cost sharing that is consistent with management’s expressed intent to increase the retiree contribution rate generally in line with health care cost increases.
The annual assumed rate of increase in the health care cost trend rate for 2021 is 6.0% decreasing systematically to 5.08% by 2028 for pre-65 year old participants.
The fair values of the pension plan assets at December 31, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Total
|
|
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Domestic Equity Securities:(1)
|
|
|
|
|
|
|
|
|
Small-cap fund
|
|
$
|
5,087
|
|
|
$
|
5,087
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mid-cap fund
|
|
5,095
|
|
|
5,095
|
|
|
—
|
|
|
—
|
|
Large-cap fund
|
|
40,884
|
|
|
40,884
|
|
|
—
|
|
|
—
|
|
International equity fund
|
|
25,580
|
|
|
25,580
|
|
|
—
|
|
|
—
|
|
Fixed Income Securities:(1)
|
|
|
|
|
|
|
|
|
Short-term bond fund
|
|
3,590
|
|
|
3,590
|
|
|
—
|
|
|
—
|
|
Intermediate-term bond fund
|
|
29,485
|
|
|
29,485
|
|
|
—
|
|
|
—
|
|
Long-term investment grade bond funds
|
|
132,096
|
|
|
132,096
|
|
|
—
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
Short-term investment fund
|
|
7,300
|
|
|
7,300
|
|
|
—
|
|
|
—
|
|
Group annuity contract
|
|
176
|
|
|
—
|
|
|
—
|
|
|
176
|
|
Fair value of plan assets
|
|
$
|
249,293
|
|
|
$
|
249,117
|
|
|
$
|
—
|
|
|
$
|
176
|
|
|
|
|
|
|
|
|
|
|
(1) We hold equity and fixed income securities through investments in mutual funds, which are dedicated to each category as indicated.
The fair values of the pension plan assets at December 31, 2020 were as follows (in thousands):
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Total
|
|
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Domestic Equity Securities(1):
|
|
|
|
|
|
|
|
|
Small-cap fund
|
|
$
|
5,798
|
|
|
$
|
5,798
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mid-cap fund
|
|
5,853
|
|
|
5,853
|
|
|
—
|
|
|
—
|
|
Large-cap fund
|
|
47,598
|
|
|
47,598
|
|
|
—
|
|
|
—
|
|
International equity fund
|
|
29,876
|
|
|
29,876
|
|
|
—
|
|
|
—
|
|
Fixed Income Securities(1):
|
|
|
|
|
|
|
|
|
Short-term bond fund
|
|
4,209
|
|
|
4,209
|
|
|
—
|
|
|
—
|
|
Intermediate-term bond fund
|
|
34,894
|
|
|
34,894
|
|
|
—
|
|
|
—
|
|
Long-term investment grade bond funds
|
|
161,007
|
|
|
161,007
|
|
|
—
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
Short-term investment fund
|
|
6,354
|
|
|
6,354
|
|
|
—
|
|
|
—
|
|
Group annuity contract
|
|
162
|
|
|
—
|
|
|
—
|
|
|
162
|
|
Fair value of plan assets
|
|
$
|
295,751
|
|
|
$
|
295,589
|
|
|
$
|
—
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
(1) We hold equity and fixed income securities through investments in mutual funds, which are dedicated to each category as indicated.
As reflected in the tables above, Level 3 activity was not material.
The investment strategies for the various funds held as pension plan assets by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Fund’s Investment Strategy
|
Domestic Equity Securities:
|
|
|
Small-cap fund
|
|
Seeks to track performance of the Center for Research in Security Prices (“CRSP”) US Small Cap Index
|
Mid-cap fund
|
|
Seeks to track performance of the CRSP US Mid Cap Index
|
Large-cap fund
|
|
Seeks to track performance of the Standard & Poor’s 500 Index
|
International equity fund
|
|
Seeks long-term growth of capital by investing 65% or more of assets in international equities
|
Fixed Income Securities:
|
|
|
Short-term bond fund
|
|
Seeks current income with limited price volatility through investment in primarily high quality bonds
|
Intermediate-term bond fund
|
|
Seeks moderate and sustainable level of current income by investing primarily in high quality fixed income securities with maturities from five to ten years
|
Long-term investment grade bond funds
|
|
Seek high and sustainable current income through investment primarily in long-term high grade bonds
|
Other:
|
|
|
Short-term investment fund
|
|
Invests in high quality short-term money market instruments issued by the U.S. Treasury
|
Group annuity contract
|
|
Earns interest quarterly equal to the effective yield of the 91-day U.S. Treasury bill
|
The expected long-term rate of return on plan assets was determined by combining a review of projected returns, historical returns of portfolios with assets similar to the current portfolios of the union and non-union pension plans and target weightings of each asset classification. Our investment objective for the assets within the
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
pension plans is to earn a return that meets or exceeds the growth of obligations that result from interest and changes in the discount rate, while avoiding excessive risk. Defined diversification goals are set in order to reduce the risk of wide swings in the market value from year to year, or of incurring large losses that may result from concentrated positions. As a result, our plan assets have no significant concentrations of credit risk. Additionally, liquidity risks are minimized because all of the funds that the plans have invested in are publicly traded. We evaluate risks based on the potential impact to the predictability of contribution requirements, probability of under-funding, expected risk-adjusted returns and investment return volatility. Funds are invested with multiple investment managers. Our liabilities are calculated using rates defined by the Pension Protection Act of 2006. Approximately 70% of the plans’ investments are allocated to fixed-income securities and invested to match the durations of the plans’ short, intermediate and long-term pension liabilities, with the amount invested in each duration reflecting that duration’s proportion of the plans’ liabilities. The remaining approximately 30% of the plans’ investments are allocated to equity securities.
The target allocation and actual weighted-average asset allocation percentages at December 31, 2019 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
|
Actual
|
|
Target
|
|
Actual
|
|
Target
|
Equity securities
|
|
30%
|
|
30%
|
|
30%
|
|
30%
|
Fixed income securities
|
|
67%
|
|
67%
|
|
68%
|
|
67%
|
Other
|
|
3%
|
|
3%
|
|
2%
|
|
3%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, the benefit amounts expected to be paid from plan assets through December 31, 2030 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
2021
|
|
$
|
21,404
|
|
|
$
|
1,410
|
|
2022
|
|
$
|
17,855
|
|
|
$
|
1,275
|
|
2023
|
|
$
|
21,413
|
|
|
$
|
1,168
|
|
2024
|
|
$
|
22,878
|
|
|
$
|
1,016
|
|
2025
|
|
$
|
23,629
|
|
|
$
|
975
|
|
2026 through 2030
|
|
$
|
145,885
|
|
|
$
|
3,929
|
|
Contributions estimated to be paid by us into the plans in 2021 are $29.7 million and $1.4 million for the pension and other postretirement benefit plans, respectively.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
12.Long-Term Incentive Plan
The compensation committee of our general partner’s board of directors administers our long-term incentive plan (“LTIP”) covering certain of our employees and the independent directors of our general partner. The LTIP primarily consists of phantom units and permits the grant of awards covering an aggregate of 11.9 million of our common units. The estimated units remaining available under the LTIP at December 31, 2020 totaled approximately 1.1 million. The awards include: (i) performance-based awards issued to certain officers and other key employees (“performance-based awards”), (ii) time-based awards issued to certain officers and other key employees (“time-based awards,” and together with performance-based awards, “employee awards”), and (iii) awards issued to independent members of our general partner’s board of directors (“director awards”) that may be deferred and if deferred may be paid in cash. All of the awards include distribution equivalent rights, except non-deferred director awards.
The LTIP requires employee awards to be settled in our common units, except the settlement of distribution equivalents, which we pay in cash. As a result, we classify employee awards as equity. Fair value for these awards is determined on the grant date, and we recognize this value as compensation expense ratably over the requisite service period, which is the vesting period of each award. The vesting period for employee awards is generally three years; however, certain awards have been issued with shorter vesting periods while others have vesting periods of up to four years. Because employee awards contain distribution equivalent rights, the fair value of our employee awards is based on the closing price of our units on the grant date.
Payouts for performance-based awards are subject to the attainment of a financial metric. Additionally, the 2018 and 2019 performance-based awards are subject to an adjustment for our total unitholder return (the “TUR adjustment”), and the fair value of these awards is adjusted for the fair value of the TUR adjustment. The financial metric for the performance-based awards is our distributable cash flow per unit excluding commodity-related activities for the last year of the three-year vesting period as compared to established threshold, target and stretch levels. The payouts for the performance-related component of the awards can range from 0% for results below threshold, up to 200% for actual results at stretch or above. The TUR adjustment is based on our total unitholder return at the end of the three-year vesting period of the awards in relation to the total unitholder returns of certain peer entities and can increase or decrease the payout of the award by as much as 50%. Payouts related to time-based awards are based solely on the completion of the requisite service period by the employee and contain no provisions that provide for a payout other than the original number of units awarded and the associated distribution equivalents.
Performance-based awards are subject to forfeiture if a participant’s employment is terminated for any reason other than for termination within two years of a change-in-control that occurs on an involuntary basis without cause or on a voluntary basis for good cause, or due to retirement, disability or death prior to the vesting date. These awards can vest early under certain circumstances following a change in control. Time-based awards are subject to forfeiture if a participant’s employment is terminated for any reason other than retirement, death or disability prior to the vesting date, or as the result of certain other employment restrictions. If an employee award recipient retires, dies or becomes disabled prior to the end of the vesting period, the award is prorated based upon months of employment completed during the vesting period, and the award is settled shortly after the end of the vesting period.
Compensation expense for our equity awards is calculated as the number of unit awards less forfeitures, multiplied by the grant date fair value of those awards, multiplied by the percentage of the requisite service period completed at each period end, multiplied by the expected payout percentage, less previously-recognized compensation expense.
Non-deferred director awards are paid in units valued on the grant date, with compensation expense calculated as the number of units awarded multiplied by the fair value of those units at that date. We classify deferred director awards as liability awards because they may be settled in cash. Because deferred director awards have distribution
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
equivalent rights, the fair value of these awards equals the closing price of our units at the measurement date. Compensation expense for deferred director awards is calculated as the number of units awarded, multiplied by the fair value of those awards on the measurement date, less previously-recognized compensation expense. Director awards deferred prior to 2015 are paid in January of the year following the director’s resignation from the board of directors of our general partner or death. Director awards deferred after January 1, 2015 are paid 60 days following the director’s death or resignation from the board of directors of our general partner.
Non-Vested Unit Awards
The following table includes the changes during the current fiscal year in the number of non-vested units that have been granted by the compensation committee. The amounts below do not include adjustments for above-target or below-target performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Awards
|
|
Time-Based Awards
|
|
Total Awards
|
|
|
Number of Unit
Awards
|
|
Weighted-Average Fair Value
|
|
Number of Unit
Awards
|
|
Weighted-Average Fair Value
|
|
Number of Unit
Awards
|
|
Weighted-Average Fair Value
|
Non-vested units - 1/1/2020
|
|
379,904
|
|
|
$
|
69.14
|
|
|
260,316
|
|
|
$
|
63.92
|
|
|
640,220
|
|
|
$
|
67.02
|
|
Units granted during 2020
|
|
189,632
|
|
|
$
|
61.16
|
|
|
198,450
|
|
|
$
|
61.18
|
|
|
388,082
|
|
|
$
|
61.17
|
|
Units vested during 2020
|
|
(196,142)
|
|
|
$
|
73.79
|
|
|
(75,089)
|
|
|
$
|
70.50
|
|
|
(271,231)
|
|
|
$
|
72.88
|
|
Units forfeited during 2020
|
|
(33,230)
|
|
|
$
|
65.70
|
|
|
(30,133)
|
|
|
$
|
62.90
|
|
|
(63,363)
|
|
|
$
|
64.37
|
|
Non-vested units - 12/31/20
|
|
340,164
|
|
|
$
|
62.35
|
|
|
353,544
|
|
|
$
|
61.07
|
|
|
693,708
|
|
|
$
|
61.70
|
|
The table below summarizes the total non-vested unit awards outstanding, including estimated targeted financial performance adjustments, to determine our total equity-based liability accrual.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Non-Vested Unit Awards
|
|
Performance Adjustment to Unit Awards
|
|
Total Unit Award Accrual
|
|
Vesting Date
|
|
Unrecognized Compensation Expense (in millions)(a)
|
|
Performance-Based Awards:
|
|
|
|
|
|
|
|
|
|
|
|
2019 Awards
|
|
164,706
|
|
|
(82,353)
|
|
|
82,353
|
|
|
12/31/2021
|
|
$
|
1.7
|
|
|
2020 Awards
|
|
175,458
|
|
|
—
|
|
|
175,458
|
|
|
12/31/2022
|
|
7.0
|
|
|
Time-Based Awards:
|
|
|
|
|
|
|
|
|
|
|
|
2021 Vesting Date
|
|
170,837
|
|
|
—
|
|
|
170,837
|
|
|
12/31/2021
|
|
3.4
|
|
|
2022 Vesting Date
|
|
182,707
|
|
|
—
|
|
|
182,707
|
|
|
12/31/2022
|
|
7.6
|
|
|
Total
|
|
693,708
|
|
|
(82,353)
|
|
|
611,355
|
|
|
|
|
$
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Unrecognized compensation expense will be recognized over the remaining vesting period of the awards.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Weighted-Average Fair Value
The weighted-average fair value of awards granted during 2018, 2019 and 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based Awards
|
|
Time-Based Awards
|
|
|
Number of
Unit
Awards
|
|
Weighted-Average Fair Value
|
|
Number of Unit
Awards
|
|
Weighted-Average Fair Value
|
Units granted during 2018
|
|
218,923
|
|
|
$
|
73.80
|
|
|
83,564
|
|
|
$
|
71.03
|
|
Units granted during 2019
|
|
182,834
|
|
|
$
|
63.65
|
|
|
195,031
|
|
|
$
|
62.91
|
|
Units granted during 2020
|
|
189,632
|
|
|
$
|
61.16
|
|
|
198,450
|
|
|
$
|
61.18
|
|
Vested Unit Awards
The table below sets forth the numbers and values of units that vested in each of the three years ended December 31, 2020. The vested common units include adjustments for above-target financial and market performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting Date
|
|
Vested
Common Units
|
|
Fair Value of Unit Awards on Vesting Date (in millions)
|
|
Intrinsic Value of Unit Awards on Vesting Date (in millions)
|
12/31/2018
|
|
317,037
|
|
$22.1
|
|
$18.1
|
12/31/2019
|
|
436,629
|
|
$31.0
|
|
$27.5
|
12/31/2020
|
|
235,127
|
|
$15.2
|
|
$10.0
|
|
|
|
|
|
|
|
Cash Flow Effects of LTIP Settlements
The difference between the common units issued to the participants and the total number of unit awards vested primarily represents the tax withholdings associated with the award settlement, which we pay in cash.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement Date
|
|
Number of Common Units Issued, Net of Tax Withholdings
|
|
Tax Withholdings and Other Cash Payments
(in millions)
|
|
Employer Taxes (in millions)
|
|
Total Cash Payments (in millions)
|
January 2018
|
|
168,913
|
|
$9.3
|
|
$1.1
|
|
$10.4
|
January 2019
|
|
199,792
|
|
$9.8
|
|
$0.9
|
|
$10.7
|
January 2020
|
|
275,093
|
|
$14.7
|
|
$1.3
|
|
$16.0
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Compensation Expense Summary
Equity-based incentive compensation expense for 2018, 2019 and 2020, primarily recorded as G&A expense on our consolidated statements of income, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Performance awards
|
|
$
|
28,728
|
|
|
$
|
17,920
|
|
|
$
|
3,087
|
|
Time-based awards
|
|
3,325
|
|
|
6,092
|
|
|
8,898
|
|
Total
|
|
$
|
32,053
|
|
|
$
|
24,012
|
|
|
$
|
11,985
|
|
|
|
|
|
|
|
|
During 2020, LTIP expense related to performance awards vesting in 2020 and 2021 decreased, reflecting the impacts of COVID-19-related reductions in economic activity.
13.Derivative Financial Instruments
We use derivative instruments to manage market price risks associated with inventories, interest rates and certain forecasted transactions. For those instruments that qualify for hedge accounting, the accounting treatment depends on their intended use and their designation. We classify derivative financial instruments qualifying for hedge accounting treatment into two categories: (1) cash flow hedges and (2) fair value hedges. We execute cash flow hedges to hedge against the variability in cash flows related to a forecasted transaction and execute fair value hedges to hedge against the changes in the value of a recognized asset or liability. At the inception of a hedged transaction, we document the relationship between the hedging instrument and the hedged item, the risk management objectives and the methods used for assessing and testing hedge effectiveness. We also assess, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in cash flows or fair value of the hedged item. If we determine that a derivative originally designated as a cash flow or fair value hedge is no longer highly effective, we discontinue hedge accounting prospectively and record the change in the fair value of the derivative in current earnings. The changes in fair value of derivative financial instruments that are not designated as hedges for accounting purposes, which we refer to as economic hedges, are included in current earnings.
As part of our risk management process, we assess the creditworthiness of the financial and other institutions with which we execute financial derivatives. Such financial instruments involve the risk of non-performance by the counterparty, which could result in material losses to us.
Interest Rate Derivatives
We periodically enter into interest rate derivatives to hedge the fair value of debt or hedge against variability in
interest rates. For interest rate cash flow hedges, we record the unrealized gains or losses as an adjustment to other comprehensive income. The realized gains and losses from our cash flow hedges are recognized into earnings as an adjustment to our periodic interest expense over the life of the related debt issuance. For fair value hedges on long-term debt, we record the unrealized gains or losses as an adjustment to long-term debt, and realized amounts as an adjustment to our periodic interest expense. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
In December 2020, upon issuance of an additional $300.0 million of 3.95% notes due 2050, we terminated and settled treasury lock agreements that we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a gain of $1.0 million, which was included in our statements of cash flows as a net receipt on financial derivatives. These agreements were accounted for as cash flow hedges. The gain was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the term of the life of the associated notes.
In May 2020, upon issuance of $500.0 million of 3.25% notes due 2030, we terminated and settled treasury lock agreements that we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $10.4 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the term of the life of the associated notes.
In August 2019, upon issuance of our $500.0 million of 3.95% notes due 2050, we terminated and settled treasury lock agreements we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $25.3 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes.
In 2019, upon issuance of $500.0 million of 4.85% notes due 2049, we terminated and settled treasury lock agreements that we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $8.0 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes.
During 2018, we terminated and settled $200.0 million of interest rate derivative agreements with cumulative gains of $24.6 million. These agreements were previously entered into to protect against the risk of variability of interest payments on debt we issued in 2019. These agreements were accounted for as cash flow hedges. The gains were recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes. These gains were also reported as a net receipt on financial derivatives in the financing activities of our consolidated statements of cash flows in 2018.
Commodity Derivatives
Our gas liquids blending activities produce gasoline, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of exchange-based commodities futures contracts and forward purchase and sale contracts to help manage commodity price changes and mitigate the risk of decline in the product margin realized from our gas liquids blending activities. Further, certain of our other commercial operations generate petroleum products, and we also use futures contracts to hedge against price changes for some of these commodities.
Forward physical purchase and sale contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting, whereby changes in the mark-to-market values of such contracts are not recognized in income, rather the revenues and costs associated with such transactions are recognized during the period when commodities are physically delivered or received. Physical forward commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically tested once the forecasted period has passed to determine whether similar forward contracts are probable of physical delivery in the future.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
We record the effective portion of the gains or losses for commodity-based contracts designated 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. We recognize the change in fair value of economic hedges that hedge against changes in the price of petroleum products that we expect to sell or purchase in the future currently in earnings as adjustments to product sales revenue, cost of product sales, or operating expenses, as applicable.
Our open futures contracts at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Contract/Accounting Methodology
|
|
Product Represented by the Contract and Associated Barrels
|
|
Maturity Dates
|
Futures - Economic Hedges
|
|
3.4 million barrels of refined products and crude oil
|
|
Between January 2021 and November 2022
|
Futures - Economic Hedges
|
|
0.1 million barrels of gas liquids
|
|
Between January and April 2021
|
Commodity Derivatives Contracts and Deposits Offsets
At December 31, 2019 and 2020, we had made margin deposits of $27.4 million and $34.2 million, respectively, for our futures contracts with our counterparties, which were recorded as current assets under commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open futures contracts 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 futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts 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 amounts we could offset under a master netting arrangement are provided below as of December 31, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts of Assets Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
|
|
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
|
|
Net Asset Amount(1)
|
As of December 31, 2019
|
|
$
|
(11,033)
|
|
|
$
|
811
|
|
|
$
|
(10,222)
|
|
|
$
|
27,415
|
|
|
$
|
17,193
|
|
As of December 31, 2020
|
|
$
|
(22,988)
|
|
|
$
|
1,690
|
|
|
$
|
(21,298)
|
|
|
$
|
34,165
|
|
|
$
|
12,867
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.
Basis Derivative Agreement
During 2019, we entered into a basis derivative agreement with a joint venture co-owner’s affiliate, and, contemporaneously, that affiliate entered into an intrastate transportation services agreement with the joint venture. Settlements under the basis derivative agreement are determined based on the basis differential of crude oil prices at different market locations and a notional volume of 30,000 barrels per day. As a result, we account for this agreement as a derivative. The agreement will expire in early 2022. We recognize the changes in fair value of this agreement based on forward price curves for crude oil in West Texas and the Houston Gulf Coast in other operating income (expense) in our consolidated statements of income. The liability for this agreement at December 31, 2019 and 2020, respectively, was $17.3 million and $10.2 million.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Impact of Derivatives on Our Financial Statements
Comprehensive Income
The changes in derivative activity included in AOCL for the years ended December 31, 2018, 2019 and 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivative Gains (Losses) Included in AOCL
|
|
2018
|
|
2019
|
|
2020
|
Beginning balance
|
|
$
|
(33,755)
|
|
|
$
|
(26,480)
|
|
|
$
|
(48,960)
|
|
Net gain (loss) on interest rate contract cash flow hedges
|
|
4,317
|
|
|
(25,216)
|
|
|
(9,484)
|
|
Reclassification of net loss on cash flow hedges to income
|
|
2,958
|
|
|
2,736
|
|
|
3,445
|
|
Ending balance
|
|
$
|
(26,480)
|
|
|
$
|
(48,960)
|
|
|
$
|
(54,999)
|
|
The following is a summary of the effect on our consolidated statements of income for the years ended December 31, 2018, 2019 and 2020 of derivatives that were designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
|
|
Amount of Gain (Loss) Recognized in AOCL on Derivatives
|
|
Location of Loss Reclassified from AOCL into Income
|
|
Amount of Loss Reclassified from AOCL into Income
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
$
|
4,317
|
|
|
|
Interest expense
|
|
|
$
|
(2,958)
|
|
|
|
Year Ended December 31, 2019
|
|
|
$
|
(25,216)
|
|
|
|
Interest expense
|
|
|
$
|
(2,736)
|
|
|
|
Year Ended December 31, 2020
|
|
|
$
|
(9,484)
|
|
|
|
Interest expense
|
|
|
$
|
(3,445)
|
|
|
|
As of December 31, 2020, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.3 million. This amount relates to the amortization of losses on interest rate contracts over the life of the related debt instruments.
The following table provides a summary of the effect on our consolidated statements of income for the years ended December 31, 2018, 2019 and 2020 of derivatives that were not designated as hedging instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized on Derivative
|
|
|
|
|
Year Ended December 31,
|
Derivative Instrument
|
|
Location of Gain (Loss)
Recognized on Derivatives
|
|
2018
|
|
2019
|
|
2020
|
Futures contracts
|
|
Product sales revenue
|
|
$
|
85,012
|
|
|
$
|
(72,562)
|
|
|
$
|
58,693
|
|
Futures contracts
|
|
Cost of product sales
|
|
(15,947)
|
|
|
(1,931)
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
Basis derivative agreement
|
|
Other operating income (expense)
|
|
—
|
|
|
(10,252)
|
|
|
(4,253)
|
|
|
|
Total
|
|
$
|
69,065
|
|
|
$
|
(84,745)
|
|
|
$
|
56,623
|
|
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Balance Sheets
The following tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2019 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivative Instrument
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Futures contracts
|
|
Commodity derivatives contracts, net
|
|
$
|
811
|
|
|
Commodity derivatives contracts, net
|
|
$
|
11,033
|
|
|
|
|
|
|
|
|
|
|
Basis derivative agreement
|
|
Other current assets
|
|
—
|
|
|
Other current liabilities
|
|
8,457
|
|
Basis derivative agreement
|
|
Other noncurrent assets
|
|
—
|
|
|
Other noncurrent liabilities
|
|
8,847
|
|
|
|
Total
|
|
$
|
811
|
|
|
Total
|
|
$
|
28,337
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivative Instrument
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
Futures contracts
|
|
Commodity derivatives contracts, net
|
|
$
|
616
|
|
|
Commodity derivatives contracts, net
|
|
$
|
22,988
|
|
Futures contracts
|
|
Other noncurrent assets
|
|
1,074
|
|
|
Other noncurrent liabilities
|
|
—
|
|
Basis derivative agreement
|
|
Other current assets
|
|
—
|
|
|
Other current liabilities
|
|
8,774
|
|
Basis derivative agreement
|
|
Other noncurrent assets
|
|
—
|
|
|
Other noncurrent liabilities
|
|
1,468
|
|
|
|
Total
|
|
$
|
1,690
|
|
|
Total
|
|
$
|
33,230
|
|
14.Fair Value Disclosures
Fair Value Methods and Assumptions - Financial Assets and Liabilities
The following methods and assumptions were used in estimating fair value for our financial assets and liabilities:
•Commodity derivatives contracts. These include exchange-traded futures contracts 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 13 – Derivative Financial Instruments for further disclosures regarding these contracts.
•Basis Derivative Agreement. During 2019, we entered into a basis derivative agreement with a joint venture co-owner’s affiliate, and, contemporaneously, that affiliate entered into an intrastate transportation services agreement with the joint venture. Settlements under the basis derivative agreement are determined based on the basis differential of crude oil prices at different market locations and a notional volume of 30,000 barrels per day (see Note 13 - Derivative Financial Instruments for further disclosures regarding this agreement). The fair value of this derivative was calculated based on observable market data inputs, including published commodity pricing data and market interest rates. The key inputs in the fair value calculation include the forward price curves for crude oil, the implied forward correlation in crude oil prices between West Texas and the Houston Gulf Coast, and the implied forward volatility for crude oil futures contracts.
•Long-term receivables. These primarily include payments receivable under a sales-type leasing arrangement and cost reimbursement payments receivable. These receivables were recorded at
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
fair value on our consolidated balance sheets, using then-current market rates to estimate the present value of future cash flows.
•Guarantees and contractual obligations. At December 31, 2020, these primarily included a long-term contractual obligation we entered into in connection with the sale of our three marine terminals to a subsidiary of Buckeye Partners, L.P. (“Buckeye”). This obligation requires us to perform certain environmental remediation work on Buckeye’s behalf at the New Haven, Connecticut terminal. The contractual obligation was recorded at fair value on our consolidated balance sheets upon initial recognition and was calculated using our best estimate of potential outcome scenarios to determine our liability for the remediation costs required in this agreement.
•Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2019 and 2020; 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 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 fair value measurements recorded or disclosed as of December 31, 2019 and 2020, based on the three levels established by ASC 820; Fair Value Measurements and Disclosures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
December 31, 2019 using:
|
Assets (Liabilities)
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives contracts
|
|
$
|
(10,222)
|
|
|
$
|
(10,222)
|
|
|
$
|
(10,222)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis derivative agreement
|
|
$
|
(17,304)
|
|
|
$
|
(17,304)
|
|
|
$
|
—
|
|
|
$
|
(17,304)
|
|
|
$
|
—
|
|
Long-term receivables
|
|
$
|
20,782
|
|
|
$
|
20,782
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,782
|
|
Guarantees and contractual obligations
|
|
$
|
(408)
|
|
|
$
|
(408)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(408)
|
|
Debt
|
|
$
|
(4,706,075)
|
|
|
$
|
(5,192,685)
|
|
|
$
|
—
|
|
|
$
|
(5,192,685)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
December 31, 2020 using:
|
Assets (Liabilities)
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives contracts
|
|
$
|
(21,298)
|
|
|
$
|
(21,298)
|
|
|
$
|
(21,298)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Basis derivative agreement
|
|
$
|
(10,242)
|
|
|
$
|
(10,242)
|
|
|
$
|
—
|
|
|
$
|
(10,242)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivables
|
|
$
|
22,755
|
|
|
$
|
22,755
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,755
|
|
Guarantees and contractual obligations
|
|
$
|
(11,207)
|
|
|
$
|
(11,207)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,207)
|
|
Debt
|
|
$
|
(4,978,691)
|
|
|
$
|
(5,880,850)
|
|
|
$
|
—
|
|
|
$
|
(5,880,850)
|
|
|
$
|
—
|
|
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
15.Commitments and Contingencies
Certain conditions may exist as of the date our consolidated financial statements are issued that could result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management assesses such contingent liabilities, which inherently involves significant judgment. In assessing loss contingencies related to legal proceedings that are pending against us or for unasserted claims that may result in proceedings, our management, with input from legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
Environmental expenditures are charged to operating expense or capitalized based on the nature of the expenditures. Environmental expenditures that meet the capitalization criteria for property, plant and equipment, as well as costs that mitigate or prevent environmental contamination that has yet to occur, are capitalized. We expense expenditures that relate to an existing condition caused by past operations. We initially record environmental liabilities assumed in a business combination at fair value; otherwise, we record environmental liabilities on an undiscounted basis. We recognize liabilities for other commitments and contingencies when, after analyzing the available information, we determine it is probable that an asset has been impaired, or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. When we can estimate a range of probable loss, we accrue the most likely amount within that range, or if no amount is more likely than another, we accrue the minimum of the range of probable loss. We expense legal costs associated with loss contingencies as incurred.
We record environmental liabilities independently of any potential claim for recovery. Accruals related to environmental matters are generally determined based on site-specific plans for remediation, taking into account currently available facts, existing technologies and presently enacted laws and regulations. Accruals for environmental matters reflect our prior remediation experience and include an estimate for costs such as fees paid to contractors, outside engineering and consulting firms. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Such accruals are adjusted as further information develops or circumstances change.
We maintain specific insurance coverage, which may cover all or portions of certain environmental expenditures less a deductible. We recognize receivables in cases where we consider the realization of reimbursements of remediation costs as probable. We would sustain losses to the extent of amounts we have recognized as environmental receivables if the counterparties to those transactions were unable to perform their obligations to us.
The determination of the accrual amounts recorded for environmental liabilities includes significant judgments and assumptions made by management. The use of alternate judgments and assumptions could result in the recognition of different levels of environmental remediation costs.
Butane Blending Patent Infringement Proceeding
On October 4, 2017, Sunoco Partners Marketing & Terminals L.P. (“Sunoco”) brought an action for patent infringement in the U.S. District Court for the District of Delaware alleging Magellan Midstream Partners, L.P. (“Magellan”) and Powder Springs Logistics, LLC (“Powder Springs”) have infringed patents relating to butane blending at the Powder Springs facility located in Powder Springs, Georgia. Sunoco subsequently submitted pleadings alleging that Magellan is also infringing various patents related to butane blending at nine Magellan facilities, in addition to Powder Springs. Sunoco is seeking monetary damages, attorneys’ fees and a permanent injunction enjoining Magellan and Powder Springs from infringing the subject patents. We deny and are vigorously defending against all claims asserted by Sunoco. Although it is not possible to predict the ultimate outcome, we
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
believe the ultimate resolution of this matter will not have a material adverse impact on our results of operations, financial position or cash flows.
Environmental Liabilities
Liabilities recognized for estimated environmental costs were $14.9 million and $14.3 million at December 31, 2019 and December 31, 2020, respectively. We have classified environmental liabilities as other current or noncurrent based on management’s estimates regarding the timing of actual payments. 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 were $15.0 million, $4.4 million and $3.8 million for the years ended December 31, 2018, 2019 and 2020, respectively.
Other
In 2020, we entered into a long-term contractual obligation in connection with the sale of three marine terminals to Buckeye. This obligation requires us to perform certain environmental remediation work on Buckeye’s behalf at the New Haven terminal. As of December 31, 2020, our consolidated balance sheets reflected a current liability of $0.6 million and a noncurrent liability of $10.2 million to reflect the fair value of this obligation.
We have entered into an agreement to guarantee our 50% pro rata share, up to $25.0 million, of obligations under Powder Springs’ credit facility. As of December 31, 2020, our consolidated balance sheets reflected a $0.4 million other current liability and a corresponding increase in our investment in non-controlled entities on our consolidated balance sheets to reflect the fair value of this guarantee.
We and the non-controlled entities in which we own an interest are a party to various other claims, legal actions and complaints. 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.
16.Concentration of Risks
We transport, store and distribute petroleum products for refiners, producers, marketers, traders and end users of those products. Our revenue producing activities are concentrated in the central U.S. Concentrations of customers may affect our overall credit risk as our customers may be similarly affected by changes in economic, regulatory or other factors. We generally secure transportation and storage revenue with warehouseman’s liens. We periodically evaluate the financial condition and creditworthiness of our customers and require additional security as we deem necessary.
As of December 31, 2020, we had 1,720 employees, primarily concentrated in the central and Gulf Coast regions of the U.S. There were 934 employees assigned to our refined products segment, 253 employees assigned to our crude oil segment and 533 employees assigned to provide G&A services. Approximately 13% of our employees are represented by the United Steel Workers and covered by a collective bargaining agreement that expires in January 2022.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
17.Related Party Transactions
Stacy Methvin is an independent member of our general partner’s board of directors and is also a director of one of our customers. We received tariff, terminalling and other ancillary revenue from this customer of $21.7 million, $29.6 million and $37.4 million for the periods ending December 31, 2018, 2019 and 2020, respectively. We recorded a receivable of $3.8 million and $3.9 million from this customer at December 31, 2019 and 2020, respectively. We also made a one-time payment of $0.2 million in 2019 to a subsidiary of this customer for an easement related to one of our expansion projects. Additionally, we received storage and other miscellaneous revenue of $0.5 million for the period ending December 31, 2020 from a subsidiary of a separate company for which Stacy Methvin serves as a director.
See Note 6 – Investments in Non-Controlled Entities for a discussion of transactions with our joint venture affiliates.
18.Partners’ Capital and Distributions
Partners’ Capital
Our general partner’s board of directors authorized the repurchase of up to $750 million of our common units through 2022. The timing, price and actual number of common units repurchased will depend on a number of factors including our expected expansion capital spending needs, excess cash available, balance sheet metrics, legal and regulatory requirements, market conditions and the trading price of our common units. The repurchase program does not obligate us to acquire any particular amount of common units, and the repurchase program may be suspended or discontinued at any time.
The following table details the changes in the number of our common units outstanding from January 1, 2018 through December 31, 2020:
|
|
|
|
|
|
Common units outstanding on January 1, 2018
|
228,024,556
|
January 2018—Settlement of employee LTIP awards
|
168,913
|
During 2018—Other(a)
|
1,691
|
Common units outstanding on December 31, 2018
|
228,195,160
|
February 2019—Settlement of employee LTIP awards
|
199,792
|
During 2019—Other(a)
|
8,476
|
Common units outstanding on December 31, 2019
|
228,403,428
|
Units repurchased during 2020
|
(5,568,260)
|
February 2020—Settlement of employee LTIP awards
|
275,093
|
During 2020—Other(a)
|
9,550
|
Common units outstanding on December 31, 2020
|
223,119,811
|
(a)Common units issued to settle the equity-based retainer paid to independent directors of our general partner.
Our partnership agreement allows us to issue additional partnership securities for any partnership purpose at any time and from time to time for consideration and on terms and conditions as our general partner determines, all without approval by our unitholders.
Common unitholders have the following rights, among others:
•right to receive distributions of our available cash within 45 days after the end of each quarter;
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
•right to elect the board members of our general partner;
•right to remove Magellan GP, LLC as our general partner upon a 100% vote of outstanding unitholders;
•right to transfer common unit ownership to substitute common unitholders;
•right to receive an annual report, containing audited financial statements and a report on those financial statements by our independent public accountants, within 120 days after the close of the fiscal year end;
•right to receive information reasonably required for tax reporting purposes within 90 days after the close of the calendar year;
•right to vote according to the unitholder’s percentage interest in us at any meeting that may be called by our general partner; and
•right to inspect our books and records at the unitholder’s own expense.
In the event of liquidation, we would distribute all property and cash in excess of that required to discharge all liabilities to the unitholders in proportion to the positive balances in their respective capital accounts. The common unitholders’ liability is generally limited to their investment.
Distributions
Distributions we paid during 2018, 2019 and 2020 were as follows (in thousands, except per unit amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Date
|
|
Per Unit Distribution Amount
|
|
Total Distribution
|
2/14/2018
|
|
$
|
0.9200
|
|
|
$
|
209,940
|
|
5/15/2018
|
|
0.9375
|
|
|
213,933
|
|
8/14/2018
|
|
0.9575
|
|
|
218,497
|
|
11/14/2018
|
|
0.9775
|
|
|
223,061
|
|
Total
|
|
$
|
3.7925
|
|
|
$
|
865,431
|
|
|
|
|
|
|
2/14/2019
|
|
$
|
0.9975
|
|
|
$
|
227,832
|
|
5/15/2019
|
|
1.0050
|
|
|
229,545
|
|
8/14/2019
|
|
1.0125
|
|
|
231,258
|
|
11/14/2019
|
|
1.0200
|
|
|
232,971
|
|
Total
|
|
$
|
4.0350
|
|
|
$
|
921,606
|
|
|
|
|
|
|
2/14/2020
|
|
$
|
1.0275
|
|
|
$
|
234,774
|
|
5/15/2020
|
|
1.0275
|
|
|
231,245
|
|
8/14/2020
|
|
1.0275
|
|
|
231,245
|
|
11/13/2020
|
|
1.0275
|
|
|
229,853
|
|
Total
|
|
$
|
4.1100
|
|
|
$
|
927,117
|
|
|
|
|
|
|
19. Subsequent Events
Recognizable events
No recognizable events have occurred subsequent to December 31, 2020.
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
Non-recognizable events
On February 12, 2021, we paid distributions of $1.0275 per unit on our outstanding common units to unitholders of record at the close of business on February 5, 2021.
Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Revenue
|
|
$
|
628,935
|
|
|
$
|
701,699
|
|
|
$
|
656,596
|
|
|
$
|
740,682
|
|
Total costs and expenses
|
|
$
|
422,985
|
|
|
$
|
436,718
|
|
|
$
|
385,927
|
|
|
$
|
450,514
|
|
Operating margin
|
|
$
|
352,012
|
|
|
$
|
415,655
|
|
|
$
|
428,262
|
|
|
$
|
450,559
|
|
Net income
|
|
$
|
207,663
|
|
|
$
|
253,703
|
|
|
$
|
273,038
|
|
|
$
|
286,445
|
|
Basic net income per common unit
|
|
$
|
0.91
|
|
|
$
|
1.11
|
|
|
$
|
1.19
|
|
|
$
|
1.25
|
|
Diluted net income per common unit
|
|
$
|
0.91
|
|
|
$
|
1.11
|
|
|
$
|
1.19
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
782,806
|
|
|
$
|
460,408
|
|
|
$
|
598,264
|
|
|
$
|
586,324
|
|
Total costs and expenses
|
|
$
|
499,186
|
|
|
$
|
297,324
|
|
|
$
|
367,939
|
|
|
$
|
382,779
|
|
Operating margin
|
|
$
|
427,211
|
|
|
$
|
301,394
|
|
|
$
|
376,435
|
|
|
$
|
361,116
|
|
Net income
|
|
$
|
287,564
|
|
|
$
|
133,843
|
|
|
$
|
211,638
|
|
|
$
|
183,920
|
|
Basic net income per common unit
|
|
$
|
1.26
|
|
|
$
|
0.59
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|
Diluted net income per common unit
|
|
$
|
1.26
|
|
|
$
|
0.59
|
|
|
$
|
0.94
|
|
|
$
|
0.82
|
|