MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. Organization,
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Basis of Presentation and Description of Business
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Unless indicated otherwise, the terms our, we, us and similar language refer to Magellan Midstream Holdings, L.P. We were formed in April 2003 as a Delaware limited partnership to hold ownership interests
in Magellan Midstream Partners, L.P. and Magellan GP, LLC.
We completed an initial public offering of our common units representing
limited partner interests in us (limited partner units) and became a publicly traded Delaware limited partnership effective February 15, 2006. See Note 2Initial Public Offering and Sale of Units by MGG MH for further
discussion of this matter.
Magellan Midstream Holdings GP, LLC, a Delaware limited liability company, serves as our general partner and
owns an approximate 0.01% general partner interest in us. MGG Midstream Holdings, L.P. owns approximately 14% of our limited partner units and the public owns approximately 86%. MGG Midstream Holdings, L.P. owns all of the membership interests of
Magellan Midstream Holdings GP, LLC. Our organizational structure at December 31, 2007 and that of our affiliate entities, as well as how we refer to these entities in our notes to consolidated financial statements, are provided below.
We sold all of our limited partner interests in MMP, a publicly-traded Delaware partnership, during 2004 and
2005. We own 100% of MMP GP, a Delaware limited liability company. MMP GP owns an approximate 2% general partner interest in MMP and all of MMPs incentive distribution rights. MMP GP serves as MMPs general partner. Through our ownership
of MMP GP, we have control of and, therefore, consolidate MMP (see Note 3Summary of Significant Accounting Policies
Basis of Presentation
). We have no operations other than those of MMP and our operating cash flows are totally
dependent upon MMP. Therefore, the
Description of Business
discussion below relates to MMP.
MMP, together with its subsidiaries,
owns and operates a petroleum products pipeline system, petroleum products terminals and an ammonia pipeline system.
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MMPs Operating Segments
Petroleum Products Pipeline System.
MMPs petroleum products pipeline system includes 8,500 miles of pipeline and 47
terminals that provide transportation, storage and distribution services. MMPs petroleum products pipeline system covers a 13-state area extending from Texas through the Midwest to Colorado, North Dakota, Minnesota, Wisconsin and Illinois. The
products transported on MMPs pipeline system are primarily gasoline, distillates, LPGs and aviation fuels. Product originates on the system from direct connections to refineries and interconnects with other interstate pipelines for
transportation and ultimate distribution to retail gasoline stations, truck stops, railroads, airports and other end-users. MMP also owns an agreement to supply petroleum products to a customer in the west Texas markets. The purchase, transportation
and resale of petroleum products associated with this supply agreement have been included in the petroleum products pipeline segment. See Note 24Subsequent Events for recent events involving our product supply agreement. MMP has an ownership
interest in Osage Pipe Line Company, LLC (Osage Pipeline) ,which owns the 135-mile Osage Pipeline that transports crude oil from Cushing, Oklahoma to El Dorado, Kansas and has connections to National Cooperative Refining
Associations (NCRA) refinery in McPherson, Kansas and the Frontier refinery in El Dorado, Kansas. MMPs petroleum products blending and fractionation operations are also included in the petroleum products pipeline system
segment.
Petroleum Products Terminals.
Most of MMPs petroleum products terminals are strategically located along or near
third-party pipelines or petroleum refineries. The petroleum products terminals provide a variety of services such as distribution, storage, blending, inventory management and additive injection to a diverse customer group including governmental
customers and end-users in the downstream refining, retail, commercial trading, industrial and petrochemical industries. Products stored in and distributed through the petroleum products terminal network include refined petroleum products,
blendstocks, crude oils, heavy oils and feedstocks. The terminal network consists of seven marine terminals and 27 inland terminals. Five of MMPs marine terminal facilities are located along the Gulf Coast and two marine terminal facilities
are located on the East Coast. MMPs inland terminals are located primarily in the southeastern United States.
Ammonia Pipeline
System
. The ammonia pipeline system consists of a 1,100-mile ammonia pipeline and six company-owned terminals. Shipments on the pipeline primarily originate from ammonia production plants located in Borger, Texas and Enid and Verdigris, Oklahoma
for transport to terminals throughout the Midwest. The ammonia transported through the system is used primarily as nitrogen fertilizer.
2. Initial
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Public Offering and Sale of Units by MGG MH
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Initial Public Offering
On February 15, 2006, we completed an initial public offering of our limited partner
units. The managing underwriters for this transaction were Citigroup Global Markets, Inc., Lehman Brothers, Inc., Goldman Sachs & Company and Wachovia Securities. In this transaction, we issued and sold 22.0 million of our limited
partner units to the public, which represented 35% of our limited partner units at $24.50 per unit. The other 40.6 million units, representing 65% of our limited partner units, were owned at that time by MGG MH. We received gross proceeds of
$539.0 million from the sale and net proceeds were $506.8 million, after underwriter commissions of $28.3 million, legal, accounting and other professional fees of $2.6 million and a structuring fee of $1.3 million. The net proceeds were distributed
to MGG MH, the previous owners of those units.
Sale of Units by MGG MH
On April 3, 2007, we entered into a Common Unit Purchase Agreement (the Purchase Agreement) in connection with the direct sale of
23.3 million common units (the Purchased Units) representing limited partner interests in us by MGG MH to a number of purchasers (the Purchasers). We did not receive any of the
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
proceeds of this sale. This sale reduced MGG MHs ownership in our limited partner units from 65% to 28%. In the Purchase Agreement, we made certain
representations and warranties to the Purchasers regarding the validity of the common units and the status of our partnership.
In
connection with this Purchase Agreement, we also entered into a Registration Rights Agreement with the purchasers of the common units (the Registration Rights Agreement). The Registration Rights Agreement required us to file a shelf
registration statement with the Securities and Exchange Commission (SEC) by June 2, 2007, providing for the resale from time to time of the Purchased Units held by the Purchasers. The required registration statement was filed with
the SEC prior to June 2, 2007, and was declared effective on June 6, 2007. The Registration Rights Agreement contains provisions which allow us, under certain circumstances, the right to delay the Purchasers from selling their common
units; however, this delay right is limited to 60 days in any 180-day period and 90 days in any 365-day period.
In addition, we entered
into an Indemnification Agreement dated April 3, 2007 (the Indemnification Agreement) with MGG MH, which expires on April 3, 2009. Under the Indemnification Agreement, MGG MH agreed to indemnify us for one-half of any
obligations, subject to a $10.0 million cap, we may incur related to the registration statement not being available for more than 60 days in any 180-day period or 90 days in any 365-day period. MGG MH also agreed to retain unencumbered net assets
sufficient to cover these indemnification obligations.
Further, the Registration Rights Agreement contains certain provisions which grant
certain of the Purchasers the right to join us, or piggyback, if we are selling our common units in a primary offering or another partys common units in a secondary offering, so long as the managing underwriter agrees that a
piggyback secondary offering of the common units will not have an adverse effect on the offering of common units. All of our registration obligations under the Registration Rights Agreement, excluding the piggyback rights, expire on April 3,
2008. The piggyback rights expire April 3, 2009.
In September 2007, MGG MH sold 8.5 million limited partner units in us in a
secondary offering. We did not receive any of the proceeds from these sales. This offering was made pursuant to the current shelf registration statement and supplemental prospectus filed by us with the SEC. MGG MHs limited partner ownership
interest in us decreased from 28% to 14% following this transaction.
3.
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Summary of Significant Accounting Policies
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Basis of Presentation.
Our ownership of MMP has historically included our ownership of limited partner interests of MMP, our ownership of MMP GP, which is MMPs general partner, and our ownership of all of the incentive
distribution rights in MMP. During 2004 and 2005, we sold all of our limited partner interests in MMP. Our sole ownership of MMP GP currently provides us with an approximate 2% general partner interest in MMP. Our general partner interest gives us
control of MMP as the limited partner interests of MMP: (i) do not have the substantive ability to dissolve MMP, (ii) can remove MMP GP as MMPs general partner only with a supermajority vote of MMPs common units representing
limited partner interest in it ( MMP limited partner units) and the MMP limited partner units which can be voted in such an election are restricted, and (iii) the MMP limited partners do not possess substantive participating rights
in MMPs operations. Therefore, our consolidated financial statements include the assets, liabilities and cash flows of MMP GP and MMP.
At December 31, 2007, we had no substantial assets and liabilities other than those of MMP, which we consolidate. Our consolidated balance sheet includes non-controlling owners interests of consolidated subsidiaries, which
reflect the proportion of MMP owned by its partners other than us. MMPs outside ownership interest was approximately 98.0% at December 31, 2005, 2006 and 2007. See Note 24Subsequent Events for a discussion of changes in our
ownership interest in MMP, which occurred after December 31, 2007. In addition, our consolidated balance sheet reflects adjustments to the historical amounts reflected on MMPs balance sheet
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
for the fair value of our proportionate share of MMPs assets and liabilities at the time of our acquisition of MMP and MMP GP. Our only cash-generating
asset is our ownership interest in MMP GP, which owns the general partner interest and incentive distribution rights in MMP. Therefore, our operating cash flows are dependent upon MMPs ability to make cash distributions and the distributions
we receive are subject to MMPs cash distribution policies.
Our consolidated financial statements include MMPs petroleum
products pipeline system, petroleum products terminals and ammonia pipeline system. All intercompany transactions have been eliminated.
Use of Estimates.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 the reported amounts of revenue and expense during the reporting periods.
Actual results could differ from those estimates.
Regulatory Reporting.
MMPs petroleum products pipelines are subject
to regulation by the Federal Energy Regulatory Commission (FERC), which prescribes certain accounting principles and practices for the annual Form 6 report filed with the FERC that differ from those used in these financial statements.
Such differences relate primarily to capitalization of interest, accounting for gains and losses on disposal of property, plant and equipment and other adjustments. MMP follows generally accepted accounting principles (GAAP) where such
differences of accounting principles exist.
Cash Equivalents.
Cash and cash equivalents include demand and time deposits and
other highly marketable securities with original maturities of three months or less when acquired.
Restricted Cash.
Restricted cash included cash held by MMP pursuant to the terms of the Magellan Pipeline Company, L.P. (Magellan Pipeline) notes (see Note 14Debt).
Accounts Receivable and Allowance for Doubtful Accounts.
Accounts receivable represent valid claims against non-affiliated customers and
are recognized when products are sold or services are rendered. MMP extends credit terms to certain customers based on historical dealings and to other customers after a review of various credit indicators, including the customers credit
rating. An allowance for doubtful accounts is established for all or any portion of an account where collections are considered to be at risk and reserves are evaluated 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 MMP and current and projected economic conditions. Accounts receivable are written off when the account is deemed
uncollectible.
Inventory Valuation.
Inventory is comprised primarily of refined petroleum products, natural gas liquids,
transmix and additives, which are stated at the lower of average cost or market.
Property, Plant and Equipment.
Property,
plant and equipment consist primarily of pipeline, pipeline-related equipment, storage tanks and terminal facility equipment. Property, plant and equipment are stated at cost except for impaired assets. Impaired assets are recorded at fair value on
the last impairment evaluation date for which an adjustment was required. At the time of our acquisition of general and limited partner interests in MMP on June 17, 2003, we recorded MMPs property, plant and equipment at 54.6% of their
fair values and at 46.4% of their historical carrying values as of June 17, 2003, reflecting our ownership percentages in MMP at that time.
Most of MMPs assets are depreciated individually on a straight-line basis over their useful lives; however, the individual components of certain assets, such as some of MMPs older tanks, are grouped together into a composite
asset and those assets are depreciated using a composite rate. MMP assigns asset lives based on reasonable estimates when an asset is placed into service. Subsequent events could cause MMP to change its
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
estimates, which would impact the future calculation of depreciation expense. The depreciation rates for most of MMPs pipeline assets are approved and
regulated by the FERC. Assets with the same useful lives and similar characteristics are depreciated using the same rate. The range of depreciable lives by asset category is detailed in Note 9Property, Plant and Equipment.
The carrying value of property, plant and equipment sold or retired and the related accumulated depreciation is removed from our accounts and any
associated gains or losses are recorded on our income statement in the period of sale or disposition.
Expenditures to replace existing
assets are capitalized and the replaced assets are retired. Expenditures associated with existing assets are capitalized when they improve the productivity or increase the useful life of the asset. Direct project costs such as labor and materials
are capitalized as incurred. Indirect project costs, such as overhead, are capitalized based on a percentage of direct labor charged to the respective capital project. Expenditures for maintenance, repairs and minor replacements are charged to
operating expense in the period incurred.
Asset Retirement Obligation.
We record asset retirement obligations under the
provisions of Statement of Financial Accounting Standard (SFAS) No. 143,
Accounting for Asset Retirement Obligations
and
Financial Interpretation (FIN) No. 47, Accounting for Conditional Asset
Retirement Obligations (as amended).
SFAS No. 143 requires the fair value of a liability related to the retirement of long-lived assets be recorded at the time a legal obligation is incurred, if the liability can be reasonably
estimated. When the liability is initially recorded, the carrying amount of the related asset is increased by the amount of the liability. Over time, the liability is accreted to its future value, with the accretion recorded to
expense. FIN No. 47 clarified that where there is an obligation to perform an asset retirement activity, even though uncertainties exist about the timing or method of settlement, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the liability can be determined.
MMPs operating assets
generally consist of underground refined products and ammonia pipelines and related facilities along rights-of-way and above-ground storage tanks and related facilities. MMPs rights-of-way agreements typically do not require the
dismantling, removal and reclamation of the rights-of-way upon permanent removal of the pipelines and related facilities from service. Additionally, management is unable to predict when, or if, MMPs pipelines, storage tanks and related
facilities would become completely obsolete and require decommissioning. Accordingly, except for a $1.4 million liability associated with anticipated tank liner replacements, MMP has recorded no liability or corresponding asset in conjunction
with SFAS No. 143 and FIN No. 47 because both the amounts and future dates of when such costs might be incurred are indeterminable.
Equity Investments.
MMP accounts for investments greater than 20% in affiliates which it does not control by the equity method of accounting. Under this method, an investment is recorded at its acquisition cost, plus its
equity in undistributed earnings or losses since acquisition, less distributions received and less amortization of excess net investment. Excess investment is the amount by which MMPs initial investment exceeded its proportionate share of the
book value of the net assets of the investment. Equity method investments are evaluated for impairment annually or whenever events or circumstances indicate that there is a loss in value of the investment which is other-than-temporary. In the event
that MMP determines that the loss in value of an investment is other-than-temporary, it would record a charge to earnings to adjust the carrying value to fair value. MMP recorded no equity investment impairments during 2005, 2006 or 2007.
Goodwill and Other Intangible Assets.
We have adopted SFAS No. 142,
Goodwill and Other Intangible Assets
. In
accordance with this Statement, goodwill, which represents the excess of cost over fair value of assets of businesses acquired, is no longer amortized but is evaluated periodically for impairment. Goodwill was $11.9
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
million at December 31, 2006 and 2007. All of our reported goodwill was acquired in transactions involving MMPs petroleum products terminals
segment and therefore is all allocated to that segment.
The determination of whether goodwill is impaired is based on managements
estimate of the fair value of MMPs reporting units as compared to their carrying values. Critical assumptions used in our estimates included: (i) time horizon of 20 years, (ii) revenue growth of 2.5% per year and expense growth
of 2.5% per year, except general and administrative (G&A) costs with an assumed growth of 4.0% per year, (iii) weighted-average cost of capital of 10.3% based on assumed cost of debt of 6.5%, assumed cost of equity of
14.0% and a 50%/50% debt-to-equity ratio, (iv) capital spending growth of 2.5% and (v) 8 times earnings before interest, taxes and depreciation and amortization multiple for terminal value. We selected October 1 as our impairment
measurement test date and have determined that our goodwill was not impaired as of October 1, 2006 or 2007. If impairment were to occur, the amount of the impairment would be charged against earnings in the period in which the impairment
occurred. The amount of the impairment would be determined by subtracting the implied fair value of the reporting unit goodwill from the carrying amount of the goodwill.
Judgments and assumptions are inherent in managements estimates used to determine the fair value of MMPs operating segments. The use of alternate judgments and assumptions could result in the recognition
of different levels of impairment charges in the financial statements.
Other intangible assets are amortized over their estimated useful
lives of 5 years up to 25 years. The weighted-average asset life of MMPs other intangible assets at December 31, 2007 was approximately 10 years. The useful lives are adjusted if events or circumstances indicate there has been a change in
the remaining useful lives. Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the recoverability of the carrying amount of the intangible asset should be assessed. MMP recognized no
impairments for other intangible assets in 2005, 2006 or 2007. Amortization of other intangible assets was $1.4 million, $1.6 million and $1.5 million during 2005, 2006 and 2007, respectively.
Impairment of Long-Lived Assets.
We have adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
. In accordance with this Statement, MMP evaluates its long-lived assets of identifiable business activities, other than those held for sale, for impairment when events or changes in circumstances indicate, in managements
judgment, that the carrying value of such assets may not be recoverable. The determination of whether impairment has occurred is based on managements estimate of undiscounted future cash flows attributable to the assets as compared to the
carrying value of the assets. The amount of the impairment recognized is calculated as the excess of the carrying amount of the asset over the fair value of the assets, as determined either through reference to similar asset sales or by estimating
the fair value using a discounted cash flow approach.
Long-lived assets to be disposed of through sales that meet specific criteria are
classified as held for sale and are recorded at the lower of their carrying value or the estimated fair value less the cost to sell. Until the assets are disposed of, an estimate of the fair value is re-determined when related events or
circumstances change. We had no assets classified as held for sale during 2005, 2006 or 2007.
Judgments and assumptions are
inherent in managements estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an assets fair value used to calculate the amount of impairment to recognize. The use of alternate
judgments and assumptions could result in the recognition of different levels of impairment charges in the financial statements. We recorded no impairments relative to MMPs long-lived assets during 2005.
In 2006, MMP recognized a $3.0 million charge against the earnings of its petroleum products pipeline system segment associated with an impairment of its
Menard, Illinois terminal. This impairment charge was
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
included in operating expenses on our consolidated statement of income for 2006 and in the petroleum products pipeline system segment amounts in the table
included in Note 18Segment Disclosures for the year ended December 31, 2006. The carrying value of the Menard, Illinois terminal prior to the impairment was $3.6 million. The fair value of the terminal was determined using
probability-weighted discounted cash flow techniques.
In 2007, MMP recognized $2.2 million in charges against the earnings of its
petroleum products pipeline system segment associated with the impairment of certain sections of its pipeline in Illinois and Missouri, most of which were idle. The impairment charges were included in operating expenses on our consolidated
statements of income for 2007 and in the petroleum products pipeline system segment amounts in the table included in Note 18Segment Disclosures for the year ended December 31, 2007. One impairment analysis was initiated as a result
of an offer from a third party to acquire a section of pipe. The carrying value of the pipeline prior to the impairment was $3.0 million. The fair value of this asset ($1.7 million) was determined using discounted cash flow techniques. The other
impairment analysis was initiated when management declared its intention to cease maintenance on a certain section of pipe. The $0.9 million carrying value of this section of pipe was completely written off.
Lease Financings.
Direct financing leases are accounted for such that the minimum lease payments plus the unguaranteed residual value
accruing to the benefit of the lessor is recorded as the gross investment in the lease. The net investment in the lease is the difference between the total minimum lease payment receivable and the associated unearned income.
Debt Placement Costs.
Costs incurred for debt borrowings are capitalized as paid and amortized over the life of the associated debt
instrument using the effective interest method. When debt is retired before its scheduled maturity date, any remaining placement costs associated with that debt are written off. When MMP increases the borrowing capacity of its revolving credit
facility, the unamortized deferred costs associated with the old revolving credit facility, any fees paid to the creditor and any third-party cost incurred are capitalized and amortized over the term of the new revolving credit facility.
Capitalization of Interest.
Interest on borrowed funds is capitalized on projects during construction based on the weighted average
interest rate of MMPs debt. MMP capitalizes interest on all construction projects requiring three months or longer to complete with total costs exceeding $0.5 million.
Pension and Postretirement Medical and Life Benefit Obligations.
MGG GP sponsors three pension plans, which cover substantially all of its
employees, a postretirement medical and life benefit plan for selected employees and a defined contribution plan. Our affiliate pension and postretirement benefit liabilities represent the funded status of the present value of benefit obligations of
these plans.
MGG GPs pension, postretirement medical and life benefits costs are developed from actuarial valuations. Actuarial
assumptions are established to anticipate future events and are used in calculating the expense and liabilities related to these plans. These factors include assumptions management makes with regard to interest rates, expected investment return on
plan assets, rates of increase in health care costs, turnover rates and rates of future compensation increases, among others. In addition, subjective factors such as withdrawal and mortality rates are used to develop actuarial valuations. Management
reviews and updates these assumptions on an annual basis. The actuarial assumptions that MGG GP uses may differ from actual results due to changing market rates or other factors. These differences could result in a significant impact to the amount
of pension and postretirement medical and life benefit expense we have recorded or may record.
Paid-Time Off Benefits.
Affiliate liabilities for paid-time off benefits are recognized for all employees performing services for MMP or us when earned by those employees. We recognized affiliate paid-time off liabilities of $8.0 million and $8.8 million at
December 31, 2006 and 2007, respectively. These balances
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
represent the remaining vested paid-time off benefits of employees who support MMP and us. Affiliate liabilities for paid-time off are reflected in the
affiliate payroll and benefits balances of the consolidated balance sheets.
Derivative Financial Instruments.
We use
interest rate derivatives to help manage interest rate risk. We account for derivative instruments in accordance with SFAS No. 133,
Accounting for Financial Instruments and Hedging Activities
, as amended, which establishes
accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet at fair value as either assets or liabilities.
For those instruments that qualify for hedge accounting, the accounting treatment depends on each instruments intended use and how it is designated. Derivative financial instruments qualifying for hedge
accounting treatment can generally be divided into two categories: (1) cash flow hedges and (2) fair value hedges. Cash flow hedges are executed to hedge the variability in cash flows related to a forecasted transaction. Fair value hedges
are executed to hedge the value of a recognized asset or liability. At 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 correlation and 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 hedge item. If we determine that a derivative, originally designed as a cash flow or fair value hedge, is no longer highly effective as a hedge, we discontinue hedge accounting prospectively by including changes in
the fair value of the derivative in current earnings.
As part of MMPs risk management process, it assesses the creditworthiness of
the financial and other institutions with which it executes financial derivatives. MMP uses, or has used, derivative agreements primarily for fair value hedges of its debt, cash flow hedges of forecasted debt transactions and for forward purchases
and forward sales of petroleum products. Such financial instruments involve the risk of non-performance by the counterparty, which could result in material losses to MMP.
Derivatives that qualify for and for which MMP designates as normal purchases and sales are exempted from the fair value accounting requirements of SFAS No. 133, as amended, and are accounted for using
traditional accrual accounting. As of December 31, 2007, MMP had commitments under future contracts for product purchases that will be accounted for as normal purchases totaling approximately $57.8 million. Additionally, MMP had commitments at
December 31, 2007 under future contracts for product sales that will be accounted for as normal sales totaling approximately $76.1 million.
We generally report gains, losses and any ineffectiveness from interest rate derivatives in other income in our results of operations. We recognize the effective portion of cash flow hedges, which hedge against changes in interest rates, as
adjustments to other comprehensive income. We record the non-current portion of unrealized gains or losses associated with fair value hedges on long-term debt as adjustments to long-term debt on the balance sheet with the current portion recorded as
adjustments to interest expense.
See
Comprehensive Income
in this Note 3 below for details of the derivative gains and losses
included in accumulated other comprehensive loss.
Revenue Recognition.
Petroleum pipeline and ammonia transportation
revenues are recognized when shipments are complete. Injection service fees associated with customer proprietary additives are recognized upon injection to the customers product, which occurs at the time the product is delivered. Leased tank
storage, pipeline capacity leases, terminalling, throughput, ethanol loading and unloading services, laboratory testing, data services, pipeline operating fees and other miscellaneous service-related revenues are recognized upon completion of
contract services. Product sales are recognized upon delivery of the product to customers.
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MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred Transportation Revenue and Costs.
Customers on MMPs petroleum products
pipeline are invoiced for transportation services when their product enters MMPs system. At each period end, MMP records all invoiced amounts associated with products that have not yet been delivered (in-transit products) as a deferred
liability. Additionally, at each period end MMP defers the direct costs it has incurred associated with these in-transit products until delivery occurs. These deferred costs are determined using judgments and assumptions that management considers
reasonable.
Excise Taxes Charged to Customers.
Revenues are recorded net of all amounts charged to MMPs customers for
excise taxes.
Variable-rate terminalling agreement
.
During 2006 and 2007, MMP had terminalling
agreements with customers under which it provided storage rental and throughput fees based on discounted rates plus a variable fee, based on a percentage of the net profits from certain trading activities conducted by MMPs customers. Under
these agreements, MMP recognized the storage rental and throughput fees as the services were performed; however, MMP does not receive any revenue from the variable fee if the net trading profits fall below a specified amount or are negative.
Therefore, the income MMP earns related to these shared trading profits is not determinable until the end of the contract term. MMP defers the recognition of this type of revenue until the end of the applicable contract term. MMP recognized $6.4
million of terminalling revenues when a contract term expired on January 31, 2006, $3.0 million when a contract term expired on December 31, 2006 and $2.8 million when a contract term expired on December 31, 2007.
Buy / Sell Arrangements.
To help manage its supply of inventory and provide specific quantities and grades of products at various locations
on its systems, MMP engages in certain buy / sell arrangements. For those transactions where MMP is the primary obligor and assumes credit risk and risk of ownership for the associated products, under Emerging Issues Task Force
(EITF) Issue No. 99-19,
Recording Revenue Gross as a Principle Versus Net as an Agent
, MMP records the gross amounts of such transactions in its consolidated statements of income. For those transactions
where MMP acts as an agent, is not the primary obligor and does not assume the risk of ownership for the associated products, MMP records the net amount of such transactions in its consolidated statements of income. The gross amounts recognized
under EITF No. 99-19 during 2005, 2006 and 2007 were insignificant.
G&A Expenses.
Under our omnibus agreement, MMP
pays MMP GP and MGG GP for direct and indirect G&A expenses incurred on MMPs behalf. We reimburse MMP for G&A expenses it incurs in excess of a G&A cap and these costs are, in turn, reimbursed to us by MGG MH. We record these
reimbursements as a capital contribution from our general partner and the associated expense is specifically allocated to our general partner.
Unit-Based Incentive Compensation Awards.
MMP GP has issued incentive awards of MMP phantom units without distribution equivalent rights representing limited partner interests in MMP to certain employees of MGG GP who support
MMP. MMP GP has also issued phantom units with distribution equivalent rights to certain of its directors. Additionally, our general partner has issued awards of phantom units to its directors. These awards are accounted for as prescribed in SFAS
No. 123(R),
Share-Based Payments
.
Under SFAS No. 123(R), MMP classifies unit award grants as either equity or
liabilities. Fair value for MMP award grants classified as equity is determined on the grant date of the award and this value is recognized as compensation expense ratably over the requisite service period. Fair value for MMP equity awards is
calculated as the closing price of MMPs common units representing limited partner interests in it on the grant date reduced by the present value of expected per-unit distributions to be paid by MMP during the requisite service period. MMP unit
award grants classified as liabilities are re-measured at fair value on the close of business at each reporting period end until settlement date. Compensation expense for MMP liability awards for each period is the re-measured value of the award
grants times the percentage of the requisite service period
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
completed less previously-recognized compensation expense. Compensation expense related to unit-based payments is included in operating and G&A expenses
on our consolidated statements of income.
Certain MMP unit award grants include performance and other provisions, which can result in
payouts to the recipients from zero up to 200% of the amount of the award. Additionally, certain MMP unit award grants are also subject to personal and other performance components which could increase or decrease the number of units to be paid out
by 20%. Judgments and assumptions of the final award payouts are inherent in the accruals recorded for unit-based incentive compensation costs. The use of alternate judgments and assumptions could result in the recognition of different levels of
unit-based incentive compensation costs in our financial statements.
Environmental.
Environmental expenditures that relate
to current or future revenues are expensed or capitalized based upon the nature of the expenditures. Expenditures that relate to an existing condition caused by past operations that do not contribute to current or future revenue generation are
expensed. Liabilities are recorded when environmental costs are probable and can be reasonably estimated. Environmental liabilities are recorded on an undiscounted basis except for those instances where the amounts and timing of the future payments
are fixed or reliably determinable. MMP uses the risk-free interest rate to discount these liabilities. Expected payments on discounted liabilities are $0.2 million during each year in 2008, 2009, 2010 and 2011 and $0.1 million in 2012. A
reconciliation of MMPs undiscounted environmental liabilities to amounts reported on our consolidated balance sheets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
Aggregate undiscounted environmental liabilities
|
|
$
|
62,721
|
|
|
$
|
63,165
|
|
Amount of environmental liabilities discounted
|
|
|
(5,509
|
)
|
|
|
(5,547
|
)
|
|
|
|
|
|
|
|
|
|
Environmental liabilities as reported
|
|
$
|
57,212
|
|
|
$
|
57,618
|
|
|
|
|
|
|
|
|
|
|
Environmental liabilities are recorded 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 prior remediation experience and include an estimate for costs such as fees paid to contractors and outside engineering, consulting and law firms. Accrued costs include compensation and benefit expense of internal employees directly
involved in remediation efforts. MMP maintains selective insurance coverage, which may cover all or portions of certain environmental expenditures. Receivables are recognized in cases where the realization of reimbursements of remediation costs is
considered probable. MMP would sustain losses to the extent of amounts it has recognized as environmental receivables if the counterparties become insolvent or are otherwise unable to perform their obligations to MMP.
Management has determined that certain costs would have been covered by the indemnifications of MMP by a former affiliate, which have been settled (see
Note 19Commitments and Contingencies). Management makes judgments on what would have been covered by these indemnifications. All costs charged to MMPs income that would have been covered by these indemnifications are charged directly to
MMPs general partner in determining MMPs allocation of net income (see
Non-Controlling Owners Interests of Consolidated Subsidiaries
discussion below).
The determination of the accrual amounts recorded for environmental liabilities include 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 in our financial statements.
83
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Non-Controlling Owners Interests of Consolidated Subsidiaries (Non-Controlling
Interest).
The non-controlling interest on our balance sheet reflects the outside ownership interest of MMP, which was approximately 98.0% at December 31, 2005, 2006 and 2007. Each quarter, we calculate non-controlling interest
expense by multiplying the non-controlling owners proportionate ownership of limited partner units in MMP by the limited partners allocation of MMPs net income, less allocations of amounts associated with each periods
amortization of the step-up in basis of the assets and liabilities of MMP. For purposes of calculating non-controlling interest, MMPs net income is allocated to its general and limited partners based on their proportionate share of cash
distributions for the period, with adjustments made for certain charges which are specifically allocated to MMPs general partner. However, for periods in which MMPs net income exceeds its distributions, the net income allocation is
adjusted as if the undistributed net income is allocated approximately 2% to the general partner and the remainder to the limited partners.
All amounts we received from the sale of MMP limited partner units during 2004 and 2005 were recorded as increases to non-controlling interest on our balance sheet. However, in 2006, following the termination of MMPs subordination
period, we recorded a reclassification of $277.4 million from non-controlling interest to partners capital. This reclassification recognized the gain on sale of MMPs limited partner units in 2004 and 2005.
Income Taxes.
We are a partnership for income tax purposes and therefore are not subject to federal income taxes or state income taxes. The
tax on our net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income of unitholders as a result 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 partners tax attributes in us is not available to us.
During 2006, the state
of Texas passed a law that imposed a partnership-level tax on MMP beginning in 2007 based on the financial results of MMPs assets apportioned to the state of Texas. This tax is reflected as provision for income taxes in our results of
operations for 2007.
Allocation of Net Income.
We allocate net income to our general partner and limited partners based on
their contractually-determined cash distributions declared and paid following the close of each period with adjustments made for any charges specifically allocated to our general partner.
Net Income Per Unit.
Basic net income per unit for each period is calculated each quarter by dividing the limited partners allocation
of net income by the weighted-average number of limited partner units outstanding. Certain directors of our general partner have been awarded phantom units that carry distribution equivalent rights. These phantom units are included in the
weighted-average number of limited partner units outstanding. Diluted net income per unit for each period is the same calculation as basic net income per unit, except the weighted-average units outstanding include the dilutive effect, if any, of
phantom unit grants associated with MMPs long-term incentive plan.
Comprehensive Income.
Comprehensive income is
accounted for in accordance with SFAS No. 130,
Reporting Comprehensive Income
. Comprehensive income is determined based on net income adjusted for changes in other comprehensive income (loss) from our derivative hedging
transactions, related amortization of realized gains/losses and adjustments to record affiliate pension and postretirement benefit obligation liabilities at the funded status of the present value of the benefit obligations. We have recorded total
comprehensive income with our consolidated statements of partners capital (deficit) as allowed under SFAS No. 130.
84
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Accumulated other comprehensive loss was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Gains
(Losses)
|
|
|
Minimum
Pension
Liability
|
|
|
Pension and
Postretirement
Liabilities
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance, January 1, 2005
|
|
$
|
(1,440
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,440
|
)
|
Amortization of loss on cash flow hedges
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Additional minimum pension liability
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
(1,230
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
(1,573
|
)
|
Amortization of loss on cash flow hedges
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
Net gain on cash flow hedges
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
236
|
|
Adjustment to additional minimum pension liability
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
343
|
|
Adjustment to recognize the funded status of our affiliate postretirement benefit plans
|
|
|
|
|
|
|
|
|
|
|
(9,305
|
)
|
|
|
(9,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
(782
|
)
|
|
|
|
|
|
|
(9,305
|
)
|
|
|
(10,087
|
)
|
Net gain on cash flow hedges
|
|
|
5,018
|
|
|
|
|
|
|
|
|
|
|
|
5,018
|
|
Amortization of net gain on cash flow hedges
|
|
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
|
(419
|
)
|
Pension settlement expense and amortization of prior service cost and net actuarial loss
|
|
|
|
|
|
|
|
|
|
|
1,833
|
|
|
|
1,833
|
|
Adjustment to recognize the funded status of our affiliate postretirement benefit plans
|
|
|
|
|
|
|
|
|
|
|
(939
|
)
|
|
|
(939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
3,817
|
|
|
$
|
|
|
|
$
|
(8,411
|
)
|
|
$
|
(4,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Pronouncements.
In December 2007, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141(R),
Business Combinations
. This Statement requires, among other things, that entities; (i) recognize, with certain exceptions, 100% of the fair values of assets acquired,
liabilities assumed and non-controlling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity; (ii) measure acquirer shares issued in consideration for a
business combination at fair value on the acquisition date; (iii) recognize contingent consideration arrangements at their acquisition-date fair values, with subsequent changes in fair value generally reflected in earnings; (iv) recognize,
with certain exceptions, pre-acquisition loss and gain contingencies at their acquisition-date fair values; (v) expense, as incurred, acquisition-related transaction costs; and (vi) capitalize acquisition-related restructuring costs only
if the criteria in SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (as amended)
are met as of the acquisition date. This Statement is to be applied prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is prohibited. We do not expect that the initial adoption of this Statement will have a
material impact on our results of operations, financial position or cash flows.
In December 2007, the FASB issued SFAS No. 160,
Non-Controlling Interests in Consolidated Financial Statements
. This Statement requires, among other things, that: (i) the non-controlling interest be clearly identified and presented in the consolidated statement of
financial position within equity, but separate from the parents equity; (ii) the amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the
consolidated statement of income; (iii) all changes in a parents ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently (as equity transactions); (iv) when a
subsidiary is deconsolidated, any retained
85
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
non-controlling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is
measured using the fair value of any non-controlling equity investment rather than the carrying amount of that retained investment; and (v) sufficient disclosures be made to clearly identify and distinguish between the interests of the parent
and the interests of non-controlling owners. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. This statement will have a
material impact on our results of operations as the non-controlling owners interest in income will no longer be reported as a deduction in arriving at net income but instead reflected as income attributable to non-controlling interest.
Additionally, our financial position will be materially impacted as the non-controlling owners interests of consolidated subsidiaries will be reported as a component of equity instead of being reported as a liability. We do not expect the
Statement will have a material impact on our cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value
Option for Financial Assets and Financial Liabilities.
This Statement permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of mitigating volatility in reported earnings
caused by measuring related assets and liabilities differently (without being required to apply complex hedge accounting provisions). We can make an election at the beginning of each fiscal year beginning after November 15, 2007 to adopt this
statement. We do not plan to adopt this statement.
In January 2007, the FASB issued Revised Statement 133 Implementation Issue No. G19,
Cash Flow Hedges: Hedging Interest Rate Risk for the Forecasted Issuances of Fixed-Rate Debt Arising from a Rollover Strategy.
This Implementation Issue clarified that in a cash flow hedge of a variable-rate financial asset or
liability, the designated risk being hedged cannot be the risk of changes in its cash flows attributable to changes in the specifically identified benchmark rate if the cash flows of the hedged transaction are explicitly based on a different index.
Our adoption of this Implementation Issue did not have a material impact on our results of operations, financial position or cash flows.
In January 2007, the FASB issued Statement 133 Implementation Issue No. G26,
Cash Flow Hedges: Hedging Interest Cash Flows on Variable-Rate Assets and Liabilities That Are Not Based on a Benchmark Interest Rate.
This
Implementation Issue clarified, given the guidance in Implementation Issue No. G19, that an entity may hedge the variability in cash flows by designating the hedged risk as the risk of overall changes in cash flows. Our adoption of this
Implementation Issue did not have a material impact on our results of operations, financial position or cash flows.
In October 2006, the
FASB adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 was required to be adopted for financial statements
issued after December 15, 2006. We adopted SFAS No. 158 in December 2006 and, as a result, recorded an increase in our pension and postretirement liabilities of $17.6 million, with an offsetting increase to accumulated other comprehensive
loss of $17.6 million.
In October 2006, the FASB adopted Financial Staff Position (FSP) No. FAS 123(R)-5,
Amendment
of FASB Staff Position FAS 123(R)-1.
This FSP addresses whether a modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R)
. This FSP clarified that awards issued to an employee in exchange for
past or future employee services that are subject to Statement 123(R) will continue to be subject to the recognition and measurement provisions of Statement 123(R) throughout the life of the instrument, unless its
86
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
terms are modified when the holder is no longer an employee. However, only for purposes of this FSP, a modification does not include a change to the terms of
the award if that change is made solely to reflect an equity restructuring that occurs when the holder is no longer an employee. The provisions in this FSP were required to be applied in the first reporting period beginning after October 10,
2006. We adopted this FSP on January 1, 2007, and its adoption did not have a material impact on our results of operations, financial position or cash flows.
In October 2006, the FASB adopted FSP No. FAS 123(R)-6,
Technical Corrections of FASB Statement No. 123(R).
This FSP clarifies that on the date any equity-based incentive awards are determined
to no longer be probable of vesting, any previously recognized compensation cost should be reversed. Further, the FSP clarifies that an offer, made for a limited time period, to repurchase an equity-based incentive award should be excluded from the
definition of a short-term inducement and should not be accounted for as a modification pursuant to paragraph 52 of Statement 123(R). The provisions in this FSP were required to be applied in the first reporting period beginning after
October 20, 2006. We adopted this FSP on January 1, 2007, and its adoption did not have a material impact on our results of operations, financial position or cash flows.
In September 2006, the FASB adopted SFAS No. 157
, Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. While SFAS No. 157 did not impact our valuation methods, it expanded our disclosures of assets and liabilities which are recorded
at fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We adopted this statement in 2007, and its adoption did not have a material impact on our results
of operations, financial position or cash flows.
In September 2006, the FASB issued FSP No. AUG AIR-a,
Accounting for Planned
Major Maintenance Projects.
This FSP prohibits the accrual of any estimated planned major maintenance costs because the accrued liabilities do not meet the definition of a liability under Statement of Financial Accounting Concepts
No. 6,
Elements of Financial Statements.
The FSP also requires disclosure of an entitys accounting policies relative to major maintenance. The guidance provided in this FSP was required to be applied to the first fiscal
year following December 31, 2006. We adopted this FSP on January 1, 2007, and its adoption did not have a material impact on our results of operations, financial position or cash flows. Our accounting policy regarding maintenance projects,
which states that expenditures for maintenance, repairs and minor replacements are charged to operating expense in the period incurred, is included under
Property, Plant and Equipment,
above.
In February 2006, the FASB issued FSP No. FAS 123(R)-4,
Classification of Options and Similar Instruments Issued as Employee Compensation That
Allow for Cash Settlement Upon the Occurrence of a Contingent Event.
This FSP provides that long-term equity incentive awards can still qualify for equity treatment if they contain a clause that allows for the payment of cash to award
recipients under certain circumstances, such as a change in control of the general partner of a limited partnership. We adopted this FSP in February 2006, and its adoption did not have a material impact on our results of operations, financial
position or cash flows.
In January 2005, we sold
5,471,082 common units of MMP to the public. We received $151.7 million from the unit sale, after underwriting discounts and commissions of $7.7 million. We used $25.9 million of the funds to repay a portion of the borrowings under our December 2004
term loan, and $125.8 million was distributed to our owners. On February 8, 2005, one day after MMPs quarterly cash distribution record date, 2,839,846 of
87
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MMPs subordinated units that we owned converted into MMP common units as provided in MMPs partnership agreement. In February 2005, we sold
450,288 common units of MMP to the public. We received $12.4 million from this sale, after underwriting discounts and commissions of $0.6 million. We used $6.2 million of the funds to repay a portion of the borrowings under our December 2004 term
loan, and the remaining $6.2 million helped fund a $13.0 million distribution to our owners. Following these sales, our ownership interest in MMP, including our general partner interest, decreased from 23% to 14%.
In April 2005, we sold 5,679,696 subordinated units representing limited partner interests in MMP in a privately negotiated transaction. We received net
proceeds of $163.2 million from this sale, of which we used $81.6 million to repay a portion of our December 2004 term loan, $0.1 million to pay accrued interest and $81.5 million was distributed to our owners. Following this sale, our ownership
interest in MMP decreased from 14% to 6%.
During May and June 2005, we sold our remaining 2,389,558 MMP limited partner units in privately
negotiated transactions. We received $72.9 million of proceeds, after deducting underwriter commissions of $3.0 million and transaction costs of $0.1 million. We used $36.3 million of the proceeds to repay a portion of our December 2004 term loan,
$0.2 million to pay accrued interest and $36.4 million to make a distribution to our owners. Following this transaction, we no longer owned any MMP limited partner units and our ownership interest in MMP consisted of our approximate 2% general
partner interest and related incentive distribution rights. See Note 24Subsequent Events for a discussion of changes in our ownership interest in MMP, which occurred after December 31, 2007.
5.
|
Consolidated Statements of Cash Flows
|
Changes in
the components of operating assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Accounts receivable and other accounts receivable
|
|
$
|
(1,901
|
)
|
|
$
|
(23,390
|
)
|
|
$
|
25,404
|
|
Inventory
|
|
|
(34,758
|
)
|
|
|
(13,395
|
)
|
|
|
(28,912
|
)
|
Accounts payable
|
|
|
5,154
|
|
|
|
15,786
|
|
|
|
(11,472
|
)
|
Affiliate payroll and benefits
|
|
|
(1,514
|
)
|
|
|
1,660
|
|
|
|
4,776
|
|
Accrued interest payable
|
|
|
(865
|
)
|
|
|
(362
|
)
|
|
|
(2,069
|
)
|
Accrued taxes other than income
|
|
|
1,729
|
|
|
|
(348
|
)
|
|
|
3,579
|
|
Accrued product purchases
|
|
|
17,459
|
|
|
|
28,326
|
|
|
|
(19,868
|
)
|
Long-term receivables
|
|
|
16,547
|
|
|
|
32,277
|
|
|
|
(562
|
)
|
Current and noncurrent environmental liabilities
|
|
|
(3,038
|
)
|
|
|
(67
|
)
|
|
|
406
|
|
Other current and noncurrent assets and liabilities
|
|
|
(1,078
|
)
|
|
|
4,603
|
|
|
|
(4,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,265
|
)
|
|
$
|
45,090
|
|
|
$
|
(33,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, in accordance with the additional minimum liability provisions of SFAS
No. 87
Employers Accounting for Pensions
and the transition provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,
we recorded an
increase in affiliate payroll and benefits of $0.2 million, an increase in long-term affiliate pension and benefits of $8.8 million and an increase in accumulated other comprehensive loss of $9.0 million. At December 31, 2007, we increased
long-term affiliate pension and benefits by $0.9 million, resulting in an increase in accumulated other comprehensive loss. We excluded these non-cash amounts from the statements of cash flows.
88
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
6.
|
Allocation of Net Income
|
The allocation of net
income for purposes of both calculating earnings per unit and determining the capital balances of the general partner and the limited partners is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2006
|
|
|
Year Ended
December 31, 2007
|
|
Net income
|
|
$
|
34,506
|
|
|
$
|
55,398
|
|
Portion of net income applicable to ownership interests for the period before completion of initial public offering on February 15, 2006
|
|
|
5,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of net income applicable to partners interest for the period after initial public offering
|
|
|
28,620
|
|
|
|
55,398
|
|
|
|
|
Direct charges to general partner:
|
|
|
|
|
|
|
|
|
Reimbursable G&A costs
(a)
|
|
|
4,454
|
|
|
|
6,191
|
|
|
|
|
|
|
|
|
|
|
Income before direct charges to general partner
|
|
|
33,074
|
|
|
|
61,589
|
|
General partners share of distributions
|
|
|
0.0141
|
%
|
|
|
0.0141
|
%
|
|
|
|
|
|
|
|
|
|
General partners allocated share of income before direct charges
|
|
|
5
|
|
|
|
9
|
|
Direct charges to general partner
|
|
|
4,454
|
|
|
|
6,191
|
|
|
|
|
|
|
|
|
|
|
Net loss allocated to general partner
|
|
$
|
(4,449
|
)
|
|
$
|
(6,182
|
)
|
|
|
|
|
|
|
|
|
|
Portion of net income applicable to partners interest for the period after initial public offering
|
|
$
|
28,620
|
|
|
$
|
55,398
|
|
Less: net loss allocated to general partner
|
|
|
(4,449
|
)
|
|
|
(6,182
|
)
|
|
|
|
|
|
|
|
|
|
Net income allocated to limited partners
|
|
$
|
33,069
|
|
|
$
|
61,580
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
A former executive officer of MMP GP had an investment in MGG MH, which is an affiliate of ours and our general partner. This former executive officer left the company during the
fourth quarter of 2006 and we were allocated $3.0 million of G&A compensation expense associated with certain distribution payments made by MGG MH to this individual over the previous three years. During 2007, payments by MGG MH of $2.1 million
were made to one of MMP GPs executive officers in connection with the sale by MGG MH of limited partner interests of our partnership and we were allocated $2.1 million of G&A compensation expense. Because our limited partners did not share
in either of the above-noted costs, all of these expenses were allocated to our general partner.
|
Charges in excess of the
G&A expense cap represent G&A expenses charged against our income during each respective period for which we either have been or will be reimbursed under the terms of a reimbursement agreement with our general partner. Consequently, these
amounts have been charged directly against our general partners allocation of net income. We record these reimbursements by our general partner as a capital contribution.
The acquisition discussed below was
accounted for as an acquisition of a business. This acquisition was accounted for under the purchase method and the assets acquired and liabilities assumed were recorded at their estimated fair market values as of the acquisition date.
On September 1, 2005, MMP acquired a refined petroleum products terminal near Wilmington, Delaware from privately-owned Delaware Terminal
Company. This marine terminal has 1.8 million barrels of usable storage capacity. Management believes this facility is strategic to MMPs efforts to grow and provide expanded services for MMPs customers needs in the
Mid-Atlantic markets. The operating results of this facility have
89
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
been included with MMPs petroleum products terminals segment results beginning on September 1, 2005. The land on which the facility sits was
purchased in a separate transaction from a local non-profit agency. The allocation of the purchase price was as follows (in thousands):
|
|
|
|
Purchase price:
|
|
|
|
Cash paid, including transaction costs
|
|
$
|
55,295
|
Environmental liabilities assumed
|
|
|
250
|
|
|
|
|
Total purchase price
|
|
$
|
55,545
|
|
|
|
|
Allocation of purchase price:
|
|
|
|
Property, plant and equipment
|
|
$
|
51,236
|
Goodwill
|
|
|
2,809
|
Other intangibles
|
|
|
1,500
|
|
|
|
|
Total
|
|
$
|
55,545
|
|
|
|
|
Pro Forma Information (unaudited)
The following summarized pro forma consolidated income statement information assumes that the petroleum product terminal acquisition discussed above had
occurred as of January 1, 2005. We have prepared these pro forma financial results for comparative purposes only. These pro forma financial results may not be indicative of the results that would have occurred if MMP had completed this
acquisition as of the period shown below or the results that will be attained in the future (in thousands):
|
|
|
|
|
|
|
|
|
Revenues
|
|
Net Income
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
As reported
|
|
$
|
1,138,200
|
|
$
|
11,548
|
Pro forma adjustments
|
|
|
5,585
|
|
|
602
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
1,143,785
|
|
$
|
12,150
|
|
|
|
|
|
|
|
Significant pro forma adjustments include revenues and expenses for the period prior to MMPs
acquisition of this business, net of non-controlling owners interest in income of consolidated subsidiaires.
The acquisitions
discussed below were accounted for as acquisitions of assets.
Petroleum Products Pipeline Terminals.
In fourth-quarter 2005,
MMP acquired two terminals connected to its 8,500-mile petroleum products pipeline system. The terminals included 0.4 million barrels of combined usable storage capacity and are located in Wichita, Kansas and Aledo, Texas. These terminals were
acquired from privately-held companies for cash of approximately $10.9 million, all of which was recorded to property, plant and equipment. The operating results of these terminals have been included in MMPs petroleum products pipeline system
segment since their respective acquisition dates.
In conjunction with the acquisition of the Aledo, Texas terminal, MMP negotiated a
partial settlement of the third-party supply agreement it assumed as part of its pipeline system acquisition in October 2004. As a result, MMP recorded a reduction in the supply agreement liability of $7.6 million.
90
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Inventories at December 31, 2006
and 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2006
|
|
2007
|
Refined petroleum products
|
|
$
|
45,839
|
|
$
|
65,215
|
Natural gas liquids
|
|
|
28,848
|
|
|
16,233
|
Transmix
|
|
|
14,449
|
|
|
32,824
|
Additives
|
|
|
2,026
|
|
|
5,812
|
Other
|
|
|
388
|
|
|
378
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
91,550
|
|
$
|
120,462
|
|
|
|
|
|
|
|
9.
|
Property, Plant and Equipment
|
Property, plant and
equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Estimated
Depreciable
Lives
|
|
|
2006
|
|
2007
|
|
Construction work-in-progress
|
|
$
|
67,330
|
|
$
|
112,891
|
|
|
Land and rights-of-way
|
|
|
57,232
|
|
|
56,769
|
|
|
Carrier property
|
|
|
1,528,073
|
|
|
1,403,461
|
|
6 59 years
|
Buildings
|
|
|
13,751
|
|
|
15,548
|
|
20 53 years
|
Storage tanks
|
|
|
323,215
|
|
|
427,259
|
|
20 40 years
|
Pipeline and station equipment
|
|
|
130,114
|
|
|
225,880
|
|
3 59 years
|
Processing equipment
|
|
|
255,865
|
|
|
301,134
|
|
3 56 years
|
Other
|
|
|
51,374
|
|
|
59,293
|
|
3 48 years
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,426,954
|
|
$
|
2,602,235
|
|
|
|
|
|
|
|
|
|
|
|
Carrier property is defined as pipeline assets regulated by the FERC. During 2007, MMP
reclassified $167.6 million of carrier property, primarily into buildings, storage tanks, processing equipment and pipeline and station equipment. Other includes interest capitalized of $19.3 million and $22.5 million at December 31, 2006 and
2007, respectively. Depreciation expense for the years ended December 31, 2005, 2006 and 2007 was $70.3 million, $74.6 million and $77.6 million, respectively.
MMP uses the equity method to
account for its 50% ownership interest in Osage Pipeline. The remaining 50% interest is owned by NCRA. The 135-mile Osage Pipeline transports crude oil from Cushing, Oklahoma to El Dorado, Kansas and has connections to the NCRA refinery in
McPherson, Kansas and the Frontier refinery in El Dorado, Kansas. MMPs agreement with NCRA calls for equal sharing of Osage Pipelines net income. Income from MMPs equity investment in Osage Pipeline is included with its petroleum
products pipeline system. Summarized financial information for Osage Pipeline is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
Revenue
|
|
$
|
12,573
|
|
$
|
14,446
|
|
$
|
15,787
|
Net income
|
|
$
|
7,537
|
|
$
|
7,976
|
|
$
|
9,382
|
91
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The condensed balance sheet for Osage Pipeline as of December 31, 2006 and 2007 is presented
below (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2006
|
|
2007
|
Current assets
|
|
$
|
5,015
|
|
$
|
6,180
|
Noncurrent assets
|
|
$
|
4,278
|
|
$
|
4,917
|
Current liabilities
|
|
$
|
697
|
|
$
|
719
|
Members equity
|
|
$
|
8,596
|
|
$
|
10,378
|
A summary of MMPs equity investment in Osage Pipeline is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2007
|
|
Investment at beginning of period
|
|
$
|
24,888
|
|
|
$
|
24,087
|
|
Earnings in equity investment:
|
|
|
|
|
|
|
|
|
Proportionate share of earnings
|
|
|
3,988
|
|
|
|
4,691
|
|
Amortization of excess investment
|
|
|
(664
|
)
|
|
|
(664
|
)
|
|
|
|
|
|
|
|
|
|
Net earnings in equity investment
|
|
|
3,324
|
|
|
|
4,027
|
|
Cash distributions
|
|
|
(4,125
|
)
|
|
|
(3,800
|
)
|
Other
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Equity investment at end of period
|
|
$
|
24,087
|
|
|
$
|
24,324
|
|
|
|
|
|
|
|
|
|
|
MMPs initial investment in Osage Pipeline included an excess net investment amount of $21.7
million, which is being amortized over the average lives of Osage Pipelines assets. Excess investment is the amount by which MMPs initial investment exceeded its proportionate share of the book value of the net assets of the investment.
The unamortized excess net investment amount at December 31, 2006 and 2007 was $19.8 million and $19.1 million, respectively, and represents additional value of the underlying identifiable assets.
11.
|
Major Customers and Concentration of Risks
|
Major Customers.
The percentage of revenue derived by customers that accounted for 10% or more of MMPs consolidated total revenues is provided in the table below. Customers A, B and C were customers of MMPs
petroleum products pipeline system. Customer C purchased petroleum products from MMP pursuant to a third-party supply agreement during 2005 and 2006. In 2006, Customer C assigned this third-party supply agreement to Customer A. See Note
24Subsequent Events for recent events involving our product supply agreement. No other customer accounted for more than 10% of MMPs consolidated total revenue for 2005, 2006 or 2007. In general, accounts receivable from these customers
are due within 10 days. In addition, we use letters of credit and cash deposits from these customers to mitigate our credit exposure.
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Customer A
|
|
0
|
%
|
|
18
|
%
|
|
33
|
%
|
Customer B
|
|
9
|
%
|
|
11
|
%
|
|
13
|
%
|
Customer C
|
|
42
|
%
|
|
29
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
51
|
%
|
|
58
|
%
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
Concentration of Risks.
MMP transports petroleum products for refiners and
marketers in the petroleum industry. The major concentration of MMPs petroleum products pipeline systems revenues is derived from activities conducted in the central United States. Sales to and revenues from MMPs customers
generally are
92
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
secured by warehousemans liens, providing MMP with the ability to sell stored customer products to recover unpaid receivable balances, if necessary.
MMP periodically evaluates the financial condition and creditworthiness of other customers to whom they make unsecured sales. MMP also requires additional security, as it deems necessary.
The employees assigned to conduct MMPs and our operations are employees of MGG GP. As of December 31, 2007, MGG GP employed 1,127 employees.
We consider our employee relations to be good.
At December 31, 2007, the labor force of 596 employees assigned to MMPs
petroleum products pipeline system was concentrated in the central United States. Approximately 35% of these employees are represented by the United Steel Workers Union (USW) and covered by a collective bargaining agreement that expires
January 31, 2009. The labor force of 242 employees assigned to MMPs petroleum products terminals operations at December 31, 2007 is primarily concentrated in the southeastern and Gulf Coast regions of the United States. Approximately
10% of these employees are represented by the International Union of Operating Engineers (IUOE) and covered by a collective bargaining agreement that expires in October 2010. A third-party contractor operates MMPs ammonia pipeline
and no employees are specifically assigned to those operations.
12.
|
Employee Benefit Plans
|
Prior to December 2005, we
sponsored a union pension plan for certain hourly employees (USW plan) and a pension plan for certain non-union employees (Salaried plan), a postretirement benefit plan for selected employees and a defined contribution plan.
We transferred the sponsorship of these plans to MGG GP on December 24, 2005. During 2007, MGG GP established a separate pension fund for the IUOE union employees assigned to MMPs New Haven, Connecticut terminal (IUOE plan).
MMP is required to reimburse the plan sponsor for all costs the plan sponsor incurs in connection with the pension plans, postretirement plan and defined contribution plan for qualifying individuals assigned to MMPs operations.
In December 2006, we adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans.
Upon adoption of SFAS No. 158, we recognized the funded status of the present value of our affiliate benefit obligations of MGG GPs pension plans and its postretirement medical and life benefit plan. The effect of adopting SFAS
No. 158 on amounts reported in our consolidated balance sheets is described later in this note. SFAS No. 158 prohibited retroactive application of this statement.
93
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The annual measurement date of the aforementioned plans is December 31. The following table
presents the changes in affiliate benefit obligations and plan assets for pension benefits and other postretirement benefits for the years ended December 31, 2006 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement
Benefits
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Change in affiliate benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate benefit obligation at beginning of year
|
|
$
|
39,122
|
|
|
$
|
43,849
|
|
|
$
|
19,280
|
|
|
$
|
15,004
|
|
Service cost
|
|
|
5,587
|
|
|
|
5,765
|
|
|
|
469
|
|
|
|
533
|
|
Interest cost
|
|
|
2,206
|
|
|
|
2,539
|
|
|
|
834
|
|
|
|
1,026
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
61
|
|
Actuarial (gain) loss
|
|
|
332
|
|
|
|
(837
|
)
|
|
|
720
|
|
|
|
661
|
|
Plan amendment
(a)
|
|
|
|
|
|
|
|
|
|
|
(6,159
|
)
|
|
|
|
|
Benefits paid
|
|
|
(3,398
|
)
|
|
|
(951
|
)
|
|
|
(195
|
)
|
|
|
(216
|
)
|
Pension settlement
|
|
|
|
|
|
|
(8,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate benefit obligation at end of year
|
|
|
43,849
|
|
|
|
42,117
|
|
|
|
15,004
|
|
|
|
17,069
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
25,465
|
|
|
|
29,416
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
5,259
|
|
|
|
15,000
|
|
|
|
140
|
|
|
|
155
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
61
|
|
Actual return on plan assets
|
|
|
2,090
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(3,398
|
)
|
|
|
(951
|
)
|
|
|
(195
|
)
|
|
|
(216
|
)
|
Settlement benefits paid
|
|
|
|
|
|
|
(8,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
29,416
|
|
|
|
36,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(14,433
|
)
|
|
$
|
(5,518
|
)
|
|
$
|
(15,004
|
)
|
|
$
|
(17,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated affiliate benefit obligation
|
|
$
|
32,042
|
|
|
$
|
31,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During 2006, MGG GP increased the deductibles and premiums of the plan participants, which resulted in a decrease in our obligation to MGG GP for the postretirement and medical and
life benefit plan.
|
The amounts included in pension benefits in the above table combine the union pension plans with the
Salaried pension plan. At December 31, 2006, the USW plan had an accumulated benefit obligation of $23.2 million, which exceeded the fair value of plan assets of $20.4 million. At December 31, 2007, the fair value of MGG GPs USW and
Salaried pension plans assets exceeded the fair values of their respective accumulated benefit obligations and the fair value of MGG GPs IUOE plan assets was equal to the fair value of its accumulated benefit obligation.
Amounts recognized in our consolidated balance sheets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement Benefits
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Amounts recognized in consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current accrued affiliate benefit cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(159
|
)
|
|
$
|
(217
|
)
|
Long-term accrued affiliate benefit cost
|
|
|
(14,433
|
)
|
|
|
(5,518
|
)
|
|
|
(14,845
|
)
|
|
|
(16,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,433
|
)
|
|
|
(5,518
|
)
|
|
|
(15,004
|
)
|
|
|
(17,069
|
)
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
6,390
|
|
|
|
4,980
|
|
|
|
5,411
|
|
|
|
5,384
|
|
Prior service cost (credit)
|
|
|
2,184
|
|
|
|
1,876
|
|
|
|
(4,680
|
)
|
|
|
(3,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in consolidated balance sheet
|
|
$
|
(5,859
|
)
|
|
$
|
1,338
|
|
|
$
|
(14,273
|
)
|
|
$
|
(15,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Net affiliate pension and other postretirement benefit expense for the years ended December 31,
2005, 2006 and 2007 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
2006
|
|
|
2007
|
|
Components of net periodic affiliate pension and postretirement benefit expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
4,215
|
|
|
$
|
5,587
|
|
|
$
|
5,765
|
|
|
$
|
530
|
|
$
|
469
|
|
|
$
|
533
|
|
Interest cost
|
|
|
1,866
|
|
|
|
2,206
|
|
|
|
2,539
|
|
|
|
994
|
|
|
834
|
|
|
|
1,026
|
|
Expected return on plan assets
|
|
|
(1,918
|
)
|
|
|
(1,906
|
)
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
|
|
|
307
|
|
|
|
307
|
|
|
|
308
|
|
|
|
155
|
|
|
(851
|
)
|
|
|
(851
|
)
|
Amortization of actuarial loss
|
|
|
25
|
|
|
|
538
|
|
|
|
414
|
|
|
|
575
|
|
|
675
|
|
|
|
688
|
|
Pension settlement expense
(a)
|
|
|
|
|
|
|
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic expense
|
|
$
|
4,495
|
|
|
$
|
6,732
|
|
|
$
|
7,803
|
|
|
$
|
2,254
|
|
$
|
1,127
|
|
|
$
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Twenty-six participants took a lump sum distribution from the USW plan in 2007, resulting in a pension settlement expense of $1.3 million.
|
Additionally, expenses related to the defined contribution plan were $3.8 million, $4.1 million and $4.6 million in 2005, 2006 and 2007, respectively.
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other
comprehensive income into net periodic benefit cost in 2008 are $0.1 million and $0.3 million, respectively. The estimated net loss and prior service credit for the other defined benefit postretirement plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost in 2008 are $0.6 million and $(0.9) million, respectively.
The weighted-average
rate assumptions used to determine benefit obligations as of December 31, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
Discount rate
|
|
5.75
|
%
|
|
6.50
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
Rate of compensation increase Salaried plan
|
|
5.00
|
%
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase USW Plan
|
|
4.50
|
%
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase IUOE plan
|
|
N/A
|
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
The weighted-average rate assumptions utilized to determine net pension and other postretirement
benefit expense for the years ended December 31, 2005, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other
Postretirement
Benefits
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Discount rate
|
|
5.75
|
%
|
|
5.50
|
%
|
|
5.75
|
%
|
|
5.75
|
%
|
|
5.50
|
%
|
|
6.00
|
%
|
Expected rate of return on plan assets
|
|
8.50
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase Salaried plan
|
|
5.00
|
%
|
|
5.00
|
%
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase USW Plan
|
|
5.00
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase IUOE plan
|
|
N/A
|
|
|
N/A
|
|
|
5.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
95
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 managements 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 2008 is 12.8% decreasing
systematically to 5.4% by 2015 for pre-65 year-old participants and 8.2% decreasing systematically to 5.4% by 2015 for post-65 year-old participants. The health care cost trend rate assumption has a significant effect on the amounts reported. As of
December 31, 2007, a 1.0% change in assumed health care cost trend rates would have the following effect (in thousands):
|
|
|
|
|
|
|
|
|
1%
Increase
|
|
1%
Decrease
|
Change in total of service and interest cost components
|
|
$
|
242
|
|
$
|
226
|
Change in postretirement benefit obligation
|
|
|
2,519
|
|
|
2,350
|
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 pension plans and target weightings of each asset classification. Our investment objective for the assets within the pension plans is to earn a
return which exceeds the growth of our obligations that results from interest cost and changes in interest rates, 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. We evaluate risks based on the potential impact on 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 target allocation percentages and the actual weighted-average asset allocation at December 31, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
Actual
|
|
|
Target
|
|
|
Actual
(a)
|
|
|
Target
|
|
Equity securities
|
|
65
|
%
|
|
67
|
%
|
|
55
|
%
|
|
63
|
%
|
Debt securities
|
|
31
|
%
|
|
32
|
%
|
|
29
|
%
|
|
36
|
%
|
Other
|
|
4
|
%
|
|
1
|
%
|
|
16
|
%
|
|
1
|
%
|
|
(a)
|
We made cash contributions of $15.0 million to the pension plans in the 2007 fiscal year. Amounts contributed in 2007 in excess of benefit payments made were to be invested in debt
and equity securities over a twelve-month period, with the amounts that remained uninvested as of December 31, 2007 scheduled for investment over the following six months. Excluding these uninvested cash amounts, our actual allocation
percentages at December 31, 2007 would have been 66% equity securities and 34% debt securities. In 2008, these uninvested cash amounts will be invested in equity and debt securities to bring the total asset allocation in line with the target
allocation.
|
As of December 31, 2007, the benefit amounts expected to be paid through December 31, 2017 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
2008
|
|
$
|
1,797
|
|
$
|
217
|
2009
|
|
|
2,240
|
|
|
331
|
2010
|
|
|
2,311
|
|
|
443
|
2011
|
|
|
2,442
|
|
|
562
|
2012
|
|
|
2,670
|
|
|
688
|
2013 through 2017
|
|
|
15,934
|
|
|
4,887
|
96
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MMP expects to make payments to MGG GP of $4.6 million and $0.2 million in 2008 to reimburse MGG GP
for contributions MGG GP estimates it will make to its pension and postretirement benefit plans, respectively.
13.
|
Related Party Transactions
|
Affiliate Entity
Transactions.
Transactions between us and our affiliates are accounted for as affiliate transactions. MMP has a 50% ownership interest in Osage Pipeline and is paid a management fee for its operation. During each of 2005, 2006 and 2007, MMP
received operating fees from Osage Pipeline of $0.7 million, which was reported as affiliate management fee revenue.
The following table
summarizes affiliate costs and expenses that are reflected in the accompanying consolidated statements of income (in thousands):
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
MGG GPallocated operating expenses
|
|
1,551
|
|
73,920
|
|
81,184
|
MGG GPallocated G&A expenses
|
|
870
|
|
41,368
|
|
46,195
|
MGG MHallocated G&A expenses
|
|
|
|
3,000
|
|
2,149
|
Under our services agreement with MMP, MMP reimbursed us for all payroll and benefit costs it
incurred through December 24, 2005. On December 24, 2005, the employees necessary to conduct MMPs operations were transferred to MGG GP and a new services agreement between MMP and MGG GP was executed. Consequently, we and MMP now
reimburse MGG GP for the costs of employees necessary to conduct our operations and administrative functions. The affiliate payroll and benefits accruals associated with this agreement at December 31, 2006 and 2007 were $18.8 million and $23.6
million, respectively. The long-term affiliate pension and benefits accrual associated with this agreement at December 31, 2006 and 2007 was $29.3 million and $22.4 million, respectively. We and MMP settle our respective affiliate payroll,
payroll-related expenses and non-pension postretirement benefit costs with MGG GP on a monthly basis. MMP settles its long-term affiliate pension liabilities through payments to MGG GP when MGG GP makes contributions to its pension funds.
In June 2003, we agreed to reimburse MMP for G&A expenses (excluding equity-based compensation) in excess of a G&A cap as defined
in MMPs omnibus agreement. The amount of G&A costs required to be reimbursed to MMP under this agreement was $3.3 million, $1.7 million and $4.1 million in 2005, 2006 and 2007, respectively. The owner of our general partner reimburses us
for the same amounts we reimburse to MMP for these excess G&A expenses. We record the reimbursements from the owner of our general partner as a capital contribution from our general partner. Although this agreement does not expire until
December 31, 2010, we do not expect that we will be required to make reimbursements to MMP for excess G&A costs beyond 2008.
A
former executive officer of MMP GP had an investment in MGG MH. This former executive officer left the company during the fourth quarter of 2006 and at that time we recognized $3.0 million of G&A compensation expense associated with certain
distribution payments made by MGG MH to this individual over the previous three-year period, with a corresponding increase in partners capital. During 2007, we recognized $2.1 million of G&A compensation expense, with a corresponding
increase in partners capital, for payments made by MGG MH to one of MMPs executive officers.
A former affiliate of MMP had
indemnified MMP against certain environmental costs. We recognized receivables from MMPs former affiliate associated with the indemnification settlement of $33.9 million and $0 at December 31, 2006 and 2007, respectively. See
Indemnification Settlement
in Note 19Commitments and Contingencies for further discussion of these items.
97
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other Related Party Transactions.
We are partially owned by an affiliate of
Carlyle/Riverstone Global Energy and Power Fund II, L.P. (CRF). During the period June 17, 2003 through January 30, 2007, one or more of the members of MMP GPs and our general partners eight-member boards of
directors were representatives of CRF. Our general partners board of directors and MMP GPs board of directors adopted procedures internally to assure that MMPs proprietary and confidential information was protected from disclosure
to competing companies in which CRF owned an interest. As part of these procedures, CRF agreed that none of its representatives would serve on our or MMP GPs board of directors and on the boards of directors of competing companies in which CRF
owned an interest. CRF is part of an investment group that has purchased Knight, Inc. (formerly known as Kinder Morgan, Inc.). To alleviate competitive concerns the Federal Trade Commission (FTC) raised regarding this transaction, CRF
agreed with the FTC to permanently remove their representatives from our general partners board of directors and MMP GPs board of directors. CRFs agreement with the FTC was announced on January 25, 2007, and as of
January 30, 2007, all of the representatives of CRF voluntarily resigned from the boards of directors of our general partner and MMP GP.
During periods that CRF had representatives on our and MMP GPs board of directors, CRF had total combined general and limited partner interests in SemGroup, L.P. (SemGroup) of approximately 30%. During that period, one of
the members of the seven-member board of directors of SemGroups general partner was a representative of CRF, with three votes on that board. Through its affiliates, MMP was a party to a number of arms-length transactions with SemGroup and its
affiliates, which MMP had historically disclosed as related party transactions. For accounting purposes, we have not classified SemGroup as a related party since the voluntary resignation of the CRF representatives from our general partners
board of directors and MMP GPs board of directors as of January 30, 2007. A summary of MMPs transactions with SemGroup during 2006 and for the period from January 1, 2007 through January 30, 2007 is provided in the
following table (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
January 25, 2005
through
December 31,
2005
|
|
Year Ended
December 31,
2006
|
|
January 1, 2007
through
January 30, 2007
|
Sales of petroleum products
|
|
$
|
144.8
|
|
$
|
177.1
|
|
$
|
20.5
|
Purchases of petroleum products
|
|
|
90.0
|
|
|
63.2
|
|
|
14.5
|
Terminalling and other services revenues
|
|
|
5.9
|
|
|
4.4
|
|
|
0.3
|
Storage tank lease revenue
|
|
|
2.8
|
|
|
3.4
|
|
|
0.4
|
Storage tank lease expense
|
|
|
1.0
|
|
|
1.0
|
|
|
0.1
|
In addition to the above, MMP provides common carrier transportation services to SemGroup. As of
December 31, 2006, MMP had recognized a receivable of $4.0 million from and a payable of $18.8 million to SemGroup and its affiliates. The receivable was included with the accounts receivable amount and the payable was included with the
accounts payable amount on our December 31, 2006 consolidated balance sheets.
In February 2006, MMP signed an agreement with an
affiliate of SemGroup under which MMP agreed to construct two 200,000 barrel tanks on its property at El Dorado, Kansas, to sell these tanks to SemGroups affiliate and to lease these tanks back under a 10-year operating lease. During 2006, MMP
received $6.1 million associated with this transaction from SemGroups affiliate, which was reported as proceeds from sale of assets on our consolidated statements of cash flows that accompany this report. MMP received no funds associated with
this transaction during the 2007 period in which SemGroup was classified as a related party.
During the period January 1, 2005
through June 25, 2007, CRF also had an ownership interest in the general partner of Buckeye Partners, L.P. (Buckeye). In 2005, MMP incurred $0.3 million of operating expenses with Norco Pipe Line Company, LLC, which is a subsidiary
of Buckeye. MMP incurred no operating expenses with Buckeye or its subsidiaries during 2006 or 2007.
98
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During May 2005, MMPs general partners board of directors appointed John P. DesBarres as
an independent board member. Mr. DesBarres currently serves as a board member for American Electric Power Company, Inc., of Columbus, Ohio (AEP). For the period May 1, 2005 through December 31, 2005, and the years ended
December 31, 2006 and 2007, MMPs operating expenses included $1.7 million, $2.9 million and $2.7 million, respectively, of power costs it incurred with Public Service Company of Oklahoma (PSO), which is a subsidiary of AEP.
MMP had no amounts payable to or receivable from PSO or AEP at December 31, 2006 or 2007.
Because MMPs distributions have
exceeded target levels as specified in its partnership agreement, MMP GP receives approximately 50%, including its approximate 2% general partner interest, of any incremental cash distributed per MMP limited partner unit. Because we own MMP GP, we
benefit from these distributions. As of December 31, 2007, the executive officers of our general partner collectively owned approximately 3.0% of MGG MH, which owns 14% of our limited partner interests; therefore, the executive officers of our
general partner also indirectly benefit from these distributions. In 2005, 2006 and 2007, distributions paid to MMP GP based on its general partner interest and incentive distribution rights totaled $30.1 million, $56.3 million and $70.3 million,
respectively. In addition, during 2005 we received distributions totaling $5.0 million related to the MMP common and subordinated limited partner units we owned at the time.
During February 2006, we sold 35% of our limited partner units in an initial public offering. In connection with the closing of this offering, MMPs
partnership agreement was amended to remove the requirement for MMP GP to maintain its 2% interest in any future offering of MMP limited partner units. In addition, MMPs partnership agreement was amended to restore the incentive distribution
rights to the same level as before an amendment was made in connection with MMPs October 2004 pipeline system acquisition, which reduced the incentive distributions paid to MMP GP by $5.0 million for 2005 and $3.0 million for 2006. In return,
we made a capital contribution to MMP on February 9, 2006 equal to the present value of the remaining reductions in incentive distributions, or $4.2 million. On January 26, 2007, MMP issued 185,673 limited partner units primarily to settle
the 2004 unit award grants to certain employees, which vested on December 31, 2006. MMP GP did not make an equity contribution associated with this equity issuance and as a result its general partner ownership interest in MMP changed from
2.000% to 1.995%.
Consolidated debt at December 31, 2006
and 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2006
|
|
2007
|
Revolving credit facility
|
|
$
|
20,500
|
|
$
|
163,500
|
6.45% Notes due 2014
|
|
|
249,589
|
|
|
249,634
|
5.65% Notes due 2016
|
|
|
248,520
|
|
|
252,494
|
6.40% Notes due 2037
|
|
|
|
|
|
248,908
|
Magellan Pipeline notes
|
|
|
272,678
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
791,287
|
|
$
|
914,536
|
|
|
|
|
|
|
|
Magellan Midstream Holdings, L.P. Debt:
Affiliate Working Capital Loan.
In February 2006, we entered into a $5.0 million revolving credit facility with MGG MH as the lender, which
matured on December 31, 2006. There were no borrowings under this facility at any time during 2007. During both 2007 and 2008, we entered into agreements with MGG MH with similar terms that matured or will mature at the end of each respective
year. The facility is available exclusively
99
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
to fund our working capital borrowings. Borrowings, if any, under the facility bear interest at LIBOR plus 2.0%, and we pay a commitment fee to MGG MH on the
unused portion of the working capital facility of 0.3%. Borrowings under this facility are non-recourse to our general partner.
MMP Debt:
The face value of MMPs debt outstanding as of December 31, 2007 was $913.5 million. The difference between the face value
and carrying value of MMPs debt outstanding was amounts recognized for discounts incurred on debt issuances and market value adjustments to long-term debt associated with qualifying hedges. At December 31, 2007, maturities of MMPs
debt were as follows: $0 each year in 2008, 2009, 2010 and 2011; $163.5 million in 2012; and $750.0 million thereafter. MMPs debt is non-recourse to its general partner and to us.
Revolving Credit Facility.
In September 2007, MMP amended and restated its revolving credit facility to increase the borrowing capacity
from $400.0 million to $550.0 million and extend the maturity date from May 2011 to September 2012. Borrowings under the facility remain unsecured and incur interest at LIBOR plus a spread that ranges from 0.3% to 0.8% based on MMPs
credit ratings and amounts outstanding under the facility. Borrowings under this facility are used primarily for general corporate purposes, including capital expenditures. Net borrowings under this revolver during 2007 were $143.0 million. As
of December 31, 2007, $163.5 million was outstanding under this facility, and $3.3 million of the facility was obligated for letters of credit. The obligations for letters of credit are not reflected as debt on our consolidated balance
sheets. The weighted-average interest rate on borrowings outstanding under the facility at December 31, 2006 and 2007 was 5.8% and 5.4%, respectively. Additionally, a commitment fee is assessed at a rate from 0.05% to 0.125%, depending on
MMPs credit rating.
6.45% Notes due 2014.
In May 2004, MMP sold $250.0 million aggregate principal of 6.45%
notes due 2014 in an underwritten public offering. The notes were issued for the discounted price of 99.8%, or $249.5 million, and the discount is being accreted over the life of the notes. Including the impact of amortizing the gains realized on
the interest hedges associated with these notes (see Note 15Derivative Financial Instruments), the effective interest rate of these notes is 6.3%.
5.65% Notes due 2016.
In October 2004, MMP issued $250.0 million of senior notes due 2016 in an underwritten public offering. The notes were issued for the discounted price of 99.9%, or $249.7 million,
and the discount is being accreted over the life of the notes. Including the impact of amortizing the losses realized on the hedges associated with these notes, and the interest rate swap which effectively converts $100.0 million of these notes from
fixed-rate to floating-rate debt (see Note 15Derivative Financial Instruments), the weighted-average interest rate of these notes at December 31, 2006 and 2007 was 6.0% and 5.5%, respectively. The outstanding principal amount of the notes
was decreased by $1.2 million at December 31, 2006 and increased by $2.7 million at December 31, 2007 for the fair value of the associated hedge.
6.40% Notes due 2037.
In April 2007, MMP issued $250.0 million of 6.4% notes due 2037 in an underwritten public offering. The notes were issued for the discounted price of 99.6%, or $248.9
million, and the discount is being accreted over the life of the notes. Net proceeds from the offering, after underwriter discounts of $2.2 million and offering costs of $0.3 million, were $246.4 million. The net proceeds from this offering were
used to repay a portion of MMPs Magellan Pipeline notes, as discussed below. Including the impact of amortizing the gains realized on the interest hedges associated with these notes (see Note 15Derivative Financial Instruments), the
effective interest rate of these notes is 6.3%.
The revolving credit facility described above requires MMP to maintain a specified ratio
of consolidated debt to EBITDA of no greater than 4.75 to 1.00. In addition, the revolving credit facility and the indentures under which MMPs public notes were issued contain covenants that limit MMPs ability to, among other things,
incur
100
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
indebtedness secured by certain liens or encumber its assets, engage in certain sale-leaseback transactions, and consolidate, merge or dispose of all or
substantially all of its assets. MMP was in compliance with these covenants as of December 31, 2007.
The revolving credit facility
and notes described above are senior indebtedness.
Magellan Pipeline Notes.
In connection with the long-term
financing of MMPs acquisition of Magellan Pipeline, MMP and Magellan Pipeline entered into a note purchase agreement in October 2002. At December 31, 2006, $272.6 million of senior notes were outstanding pursuant to this agreement.
Because the notes were due in October 2007, this amount less $1.8 million for the change in fair value of associated hedges (see Note 15Derivative Financial Instruments) was reflected as current portion of long-term debt on our consolidated
balance sheet at December 31, 2006. The remaining difference between the face value and the reported value of these notes at December 31, 2006 was the unamortized step-up in value of $1.9 million. MMP repaid these notes in May 2007,
together with a make-whole premium of $2.0 million and accrued interest of $1.5 million, with net proceeds from a $250.0 million public offering of 30-year senior notes (see
6.40% Notes due 2037
above) and borrowings under MMPs
revolving credit facility. Prior to this repayment, MMP made deposits in an escrow account in anticipation of semi-annual interest payments on these notes. Deposits of $5.3 million at December 31, 2006 were reflected as restricted cash on our
consolidated balance sheet.
During the years ending December 31, 2005, 2006 and 2007, total cash payments for interest on all
indebtedness, including the impact of related interest rate swap agreements, net of amounts capitalized, were $66.8 million, $57.2 million and $59.2 million, respectively.
15.
|
Derivative Financial Instruments
|
MMP uses interest
rate derivatives to help it manage interest rate risk. The following table summarizes cash flow hedges MMP had settled and recorded to other comprehensive income (loss) as of December 31, 2007 associated with various debt offerings (in
millions):
|
|
|
|
|
|
|
|
|
Hedge
|
|
Date
|
|
Gain/(Loss)
|
|
|
Amortization Period
|
Interest rate swaps and treasury lock
|
|
May 2004
|
|
$
|
5.1
|
|
|
10-year life of 6.45% notes
|
Interest rate swaps
|
|
October 2004
|
|
|
(6.3
|
)
|
|
12-year life of 5.65% notes
|
Interest rate swaps
|
|
April 2007
|
|
|
5.3
|
|
|
30-year life of 6.40% notes
|
In addition to the table above and during 2007, the remaining net gain on the cash flow hedge
associated with the Magellan Pipeline notes was fully amortized. Total amortization of this hedge in 2007 was $0.3 million.
The following
hedges were settled during 2007:
|
|
|
In September and November 2006, MMP entered into forward starting interest rate swap agreements to hedge against the variability of future interest payments on
$250.0 million of debt it issued in April 2007. We accounted for these agreements as cash flow hedges. As of December 31, 2006, we recorded a $0.2 million gain associated with these agreements to other comprehensive income. These agreements
were unwound and settled in April 2007, in conjunction with MMPs public offering of $250.0 million of notes. MMP received $5.5 million from the settlement of these agreements, of which an additional gain of $5.0 million ($5.3 million total
gain recognized) was recorded to other comprehensive income and is being amortized against interest expense over the life of the notes, $0.2 million was recorded as an adjustment to other current assets and $0.3 million was considered ineffective
and recorded as other income. The total $5.3 million gain on this hedge settlement is included in the above table.
|
|
|
|
During May 2004, MMP entered into certain interest rate swap agreements with notional amounts of $250.0 million to hedge against changes in the fair value of a
portion of the Magellan Pipeline notes.
|
101
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
The fair value of these hedges at December 31, 2006 was $(1.8) million, which was recorded to other current liabilities and current portion of long-term
debt. MMP unwound these agreements in May 2007 in conjunction with the repayment of the Magellan Pipeline notes, resulting in payments totaling $1.1 million to the hedge counterparties, of which $0.9 million was recorded to other expense and $0.2
million was recorded as a reduction of accrued interest.
|
Additionally, in October 2004, MMP entered into an interest
rate swap agreement to hedge against changes in the fair value of a portion of the $250.0 million of senior notes due 2016, which were issued in October 2004. MMP has accounted for this agreement as a fair value hedge. The notional amount of this
agreement is $100.0 million and effectively converts $100.0 million of MMPs 5.65% fixed-rate senior notes issued in October 2004 to floating-rate debt. Under the terms of the agreement, MMP receives the 5.65% fixed rate of the notes and pays
LIBOR plus 0.6%. The agreement began in October 2004 and terminates in October 2016, which is the maturity date of the related notes. Payments settle in April and October each year with LIBOR set in arrears. During each period MMP records the impact
of this swap based on the forward LIBOR curve. Any differences between actual LIBOR determined on the settlement date and MMPs estimate of LIBOR results in an adjustment to our interest expense. A 0.25% change in LIBOR would result in an
annual adjustment to MMPs interest expense of $0.3 million associated with this hedge. The fair value of this hedge at December 31, 2006 was $(1.2) million, which was recorded to other deferred liabilities and long-term debt. The fair
value at December 31, 2007 was $2.7 million, which was recorded to other long-term assets and long-term debt.
LeasesLessee.
We and
MMP lease land, office buildings, tanks and terminal equipment at various locations to conduct our respective business operations. Several of the agreements provide for negotiated renewal options and cancellation penalties, some of which include the
requirement to remove MMPs pipeline from the property for non-performance. Total rent expense was $6.3 million, $6.3 million and $4.6 million for the years ended December 31, 2005, 2006 and 2007, respectively. Future minimum annual
rentals under non-cancelable operating leases as of December 31, 2007, are as follows (in thousands):
|
|
|
|
2008
|
|
$
|
2,953
|
2009
|
|
|
2,944
|
2010
|
|
|
2,930
|
2011
|
|
|
2,872
|
2012
|
|
|
2,144
|
Thereafter
|
|
|
8,528
|
|
|
|
|
Total
|
|
$
|
22,371
|
|
|
|
|
LeasesLessor.
MMP has entered into capacity and storage leases with remaining
terms from one to 10 years that are accounted for as operating-type leases. All of the agreements provide for negotiated extensions. Future minimum lease payments receivable under operating-type leasing arrangements as of December 31, 2007,
were as follows (in thousands):
|
|
|
|
2008
|
|
$
|
92,826
|
2009
|
|
|
87,287
|
2010
|
|
|
72,512
|
2011
|
|
|
54,091
|
2012
|
|
|
34,672
|
Thereafter
|
|
|
34,938
|
|
|
|
|
Total
|
|
$
|
376,326
|
|
|
|
|
102
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In December 2001, MMP purchased an 8.5-mile natural gas liquids pipeline in northeastern Illinois
from Aux Sable Liquid Products L.P. (Aux Sable) for $8.9 million. MMP then entered into a long-term lease arrangement under which Aux Sable is the sole lessee of these assets. MMP has accounted for this transaction as a direct financing
lease. The lease expires in December 2016 and has a purchase option after the first year. Aux Sable has the right to re-acquire the pipeline at the end of the lease for a de minimis amount. Future minimum lease payments receivable under this
direct-financing leasing arrangement as of December 31, 2007, were $1.3 million each year in 2008, 2009, 2010, 2011 and 2012 and $5.0 million cumulatively for all periods after 2012. The net investment under direct financing leasing
arrangements as of December 31, 2006 and 2007 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2006
|
|
2007
|
Total minimum lease payments receivable
|
|
$
|
12,793
|
|
$
|
11,514
|
Less: Unearned income
|
|
|
5,043
|
|
|
4,192
|
|
|
|
|
|
|
|
Recorded net investment in direct financing leases
|
|
$
|
7,750
|
|
$
|
7,322
|
|
|
|
|
|
|
|
The net investment in direct financing leases was classified in the consolidated balance sheets as
follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2006
|
|
2007
|
Classification of direct financing leases:
|
|
|
|
|
|
|
Current accounts receivable
|
|
$
|
511
|
|
$
|
563
|
Noncurrent accounts receivable
|
|
|
7,239
|
|
|
6,759
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,750
|
|
$
|
7,322
|
|
|
|
|
|
|
|
17.
|
Long-Term Incentive Plan
|
In December 2005, our
general partner approved a long-term incentive plan for independent directors of our general partner and employees of MGG GP that perform services for us and our general partner. The long-term incentive plan primarily consists of phantom units. Our
general partners board of directors administers the long-term incentive plan. The long-term incentive plan permits the grant of awards covering an aggregate of 150,000 of our limited partner units.
MMPs general partner has also adopted a long-term incentive plan (the MMP LTIP) for certain MGG GP employees who perform services for
MMP and for directors of MMPs general partner. The MMP LTIP primarily consists of phantom units and permits the grant of awards covering an aggregate of 3.2 million MMP limited partner units. The compensation committee of MMPs
general partners board of directors (the MMP Compensation Committee) administers the MMP LTIP.
The MMP LTIP awards
discussed below are subject to forfeiture if employment is terminated for any reason other than retirement, death or disability prior to the vesting date. If an award recipient retires, dies or becomes disabled prior to the end of the vesting
period, the recipients award grant is prorated based upon the completed months of employment during the vesting period and the award is settled at the end of the vesting period. The award grants do not have an early vesting feature except
under certain circumstances following a change in control of MMPs general partner.
103
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following MMP LTIP awards have vested:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Unit Awards
Granted
|
|
Forfeitures
|
|
Adjustments to Unit
Awards for Attaining
Above-Target
Financial Results
|
|
Units Paid
Out to
Retirees
Prior to
Vesting Date
|
|
Units Paid Out
on Vesting
Date
|
|
Vesting Date
|
|
Value of Unit
Awards on
Vesting Date
(Millions)
|
February 2003
|
|
105,650
|
|
|
|
91,052
|
|
16,100
|
|
180,602
|
|
12/31/05
|
|
$
|
5.8
|
October 2003
|
|
21,280
|
|
|
|
|
|
|
|
21,280
|
|
Various
|
|
$
|
0.6
|
January 2004
|
|
21,712
|
|
|
|
|
|
|
|
21,712
|
|
Various
|
|
$
|
0.7
|
February 2004
|
|
159,024
|
|
14,648
|
|
140,794
|
|
|
|
285,170
|
|
12/31/06
|
|
$
|
11.0
|
February 2005
|
|
160,640
|
|
11,348
|
|
149,292
|
|
|
|
298,584
|
|
12/31/07
|
|
$
|
12.9
|
June 2006
|
|
1,170
|
|
|
|
1,170
|
|
|
|
2,340
|
|
12/31/07
|
|
$
|
0.1
|
In January 2006 MMP settled certain of the February 2003 award grants by purchasing 43,208 MMP
limited partner units for $1.4 million and distributing those units to the participants. The remaining awards, including the awards paid out to retirees prior to the vesting date, were settled by issuing net cash payments to the participants. MMP
made payments for tax withholdings totaling $4.4 million and employer taxes of $0.3 million associated with these awards.
The award grants
in October 2003 and January 2004 were made to certain employees who became dedicated to providing services to MMP following the change in control of MMPs general partner in June 2003. These awards vested as follows: 9,700 in 2003; 21,506
vested in 2004 and 11,786 vested in 2005. In January 2004, MMP settled the awards that vested in 2003 by issuing net cash payments to the participants and payments for tax withholdings and employer taxes totaling $0.3 million. During 2004, MMP
settled certain awards by purchasing 7,540 MMP limited partner units for $0.2 million and distributing those units to the participants and paying associated tax withholdings and employer taxes of $0.1 million. MMP settled the remainder of the awards
in 2005 by purchasing 13,785 MMP limited partner units for $0.4 million and distributing those units to the participants and paying associated tax withholdings and employer taxes of $0.3 million.
MMP settled the February 2004 award grants in January 2007 by issuing 184,905 MMP limited partner units and distributing those units to the participants.
The difference between the MMP limited partner units issued to the participants and the total units accrued for represented the minimum tax withholdings associated with this award settlement. MMP paid associated tax withholdings and employer taxes
totaling $4.4 million in January 2007.
MMP settled the February 2005 and June 2006 award grants in January 2008 by issuing 196,856 MMP
limited partner units and distributing those units to the participants (See Note 24Subsequent Events). There was no impact on our cash flows associated with these award grants for the periods presented in this report. The difference between
the MMP limited partner units issued to the participants and the total units accrued for represented the minimum tax withholdings associated with this award settlement. MMP paid associated tax withholdings and employer taxes totaling $5.1 million in
January 2008.
104
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The table below summarizes the MMP LTIP awards granted by the MMP Compensation Committee that have
not yet vested. There was no impact to our cash flows associated with these award grants for the periods presented in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Unit
Awards
Granted
|
|
Estimated
Forfeitures
|
|
Adjustment to Unit
Awards in
Anticipation of
Achieving Above-
Target Financial
Results
|
|
Total Unit
Awards
Being
Accrued
|
|
Vesting Date
|
|
Unrecognized
Compensation
Expense at
December 31, 2007
(in Millions)
|
|
Period Over
Which the
Unrecognized
Expense Will
Be Recognized
|
February 2006
|
|
168,105
|
|
12,607
|
|
139,948
|
|
295,446
|
|
December 31, 2008
|
|
$
|
2.8
|
|
Next 12 months
|
Various 2006
|
|
9,201
|
|
3,132
|
|
5,462
|
|
11,531
|
|
December 31, 2008
|
|
$
|
0.2
|
|
Next 12 months
|
March 2007
|
|
2,640
|
|
|
|
|
|
2,640
|
|
December 31, 2008
|
|
$
|
0.1
|
|
Next 12 months
|
January 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 1
|
|
49,310
|
|
2,219
|
|
47,091
|
|
94,182
|
|
December 31, 2009
|
|
$
|
2.2
|
|
Next 24 months
|
Tranche 2
|
|
49,310
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Tranche 3
|
|
49,310
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Various 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche 1
|
|
3,920
|
|
177
|
|
3,743
|
|
7,486
|
|
December 31, 2009
|
|
$
|
0.2
|
|
Next 24 months
|
Tranche 2
|
|
3,920
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
Tranche 3
|
|
3,920
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
The intrinsic value of the units being accrued for under the awards granted during 2006 at
December 31, 2007 was $13.3 million. MMP is accounting for these award grants as follows:
|
|
|
The payout for 80% of the unit awards granted during 2006 is based on the attainment of long-term performance metrics. Upon vesting, these award grants must be paid
out in MMP limited partner units and MMP is accounting for these grants as equity. The weighted-average grant date fair value of the award grants was $24.66 per unit, which was based on MMPs unit price on the grant date less the present value
of the per-unit estimated cash distributions during the vesting period.
|
|
|
|
The payout for 20% of the unit awards granted during 2006 is based on the attainment of long-term performance metrics and the individual participants personal
performance. MMP is accounting for these grants as liabilities; therefore, the compensation expense recognized is based on the fair value of MMPs units and the percentage of the service period completed at the end of each accounting period.
The fair value of these award grants on December 31, 2007 was $40.68 per unit.
|
The March 2007 unit grants have no
performance metrics and no ability to vest beyond the original number awarded. MMP is accounting for these grants as equity awards. The grant date fair value of these awards was $42.05 per unit. The intrinsic value of these units at
December 31, 2007 was $0.1 million.
The unit awards approved during 2007 (excluding the March 2007 award grants discussed above) have
a three-year vesting period; however, the grants are broken into three equal tranches. Under the first tranche, 80% of the payout was based on the attainment of performance metrics set for the 2007 year. Under the second and third tranches, 80% of
the payout will be based on the attainment of performance metrics established during the first quarter of each respective fiscal year. Under all three tranches, 20% of the payouts are based on personal performance. Since MMPs financial results
for 2007 exceeded the established stretch targets, the accrual units for the first tranche of the 2007 awards included in the table above reflect the maximum number of payout units. The intrinsic value of the units being accrued for under the awards
granted during 2007 was $4.4 million at December 31, 2007. MMP is accounting for these awards as follows:
|
|
|
80% of the unit awards are based on the attainment of performance metrics and are being accounted for as equity. The weighted-average grant date fair value of the
first tranche of these equity awards was
|
105
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
$32.76 per unit, which was based on MMPs closing unit price on the grant date, less the present value of the per-unit estimated cash distributions
during the vesting period. The grant date fair value of these award grants was $2.7 million.
|
|
|
|
20% of the unit awards are based on personal performance and are being accounted for as liabilities. The compensation expense recognized for these unit awards is
based on the fair value of the awards and the percentage of the requisite service period completed at the end of each accounting period. The fair value of these award grants was $37.86 per unit on December 31, 2007.
|
Accounting for the second tranche of the 2007 unit awards began in the first quarter of 2008, when the performance
metrics for that fiscal year were established by the MMP Compensation Committee. The compensation expense associated with the second tranche will be recognized over a two-year period. Accounting for the third tranche of these unit awards will begin
in the first quarter of 2009, when the performance metrics for that fiscal year are established, and the associated compensation expense will be recognized over a one-year period.
Our equity-based incentive compensation expense for 2005, 2006 and 2007 is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2005
|
|
2006
|
|
|
2007
|
2003 awards
|
|
$
|
2,440
|
|
$
|
(89
|
)
|
|
$
|
|
2004 awards
|
|
|
3,937
|
|
|
4,355
|
|
|
|
519
|
2005 awards
|
|
|
3,134
|
|
|
4,096
|
|
|
|
5,721
|
2006 awards
|
|
|
|
|
|
2,458
|
|
|
|
3,171
|
2007 awards
|
|
|
|
|
|
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,511
|
|
$
|
10,820
|
|
|
$
|
10,513
|
|
|
|
|
|
|
|
|
|
|
|
Long-term incentive awards were also granted to the independent members of MMPs general
partners board of directors pursuant to MMPs LTIP. MMP units granted to directors of MMPs general partner were approximately 5,000, 4,000 and 3,600 in 2005, 2006 and 2007, respectively, and the related expense recognized was
approximately $0.2 million in each of 2005, 2006 and 2007. MGG units granted to directors of our general partner were approximately 4,000 and 5,900 in 2006 and 2007, respectively, and the related expense recognized was $0.1 million in 2006 and $0.2
million in 2007.
MMPs reportable segments
are strategic business units that offer different products and services. MMPs segments are managed separately because each segment requires different marketing strategies and business knowledge. MMPs management evaluates performance
based upon segment operating margin, which includes revenues from affiliates and external customers, operating expenses, product purchases and equity earnings. Transactions between MMPs business segments are conducted and recorded on the same
basis as transactions with third-party entities.
We believe that investors benefit from having access to the same financial measures used
by management. Operating margin, which is presented in the tables below, is an important measure used by management to evaluate the economic performance of MMPs core operations. This measure forms the basis of MMPs internal financial
reporting and is used by its management in deciding how to allocate capital resources between segments. Operating margin is not a GAAP measure but the components of operating margin are computed by
106
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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, alternatively, includes expense items, such as depreciation and amortization and affiliate G&A costs, that management does not consider when evaluating the core profitability
of MMPs operations.
Beginning in 2007, commercial and operating responsibilities for MMPs two inland terminals in the Dallas,
Texas area were transferred from the petroleum products terminals segment to the petroleum products pipeline system segment. As a result, historical financial results for MMPs segments have been adjusted to conform to the current periods
presentation. Consolidated segment profit did not change as a result of these historical reclassifications.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Petroleum
Products
Pipeline
System
|
|
|
Petroleum
Products
Terminals
|
|
Ammonia
Pipeline
System
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Transportation and terminals revenues
|
|
$
|
386,769
|
|
|
$
|
101,848
|
|
$
|
15,849
|
|
$
|
(3,142
|
)
|
|
$
|
501,324
|
|
Product sales revenues
|
|
|
627,573
|
|
|
|
9,596
|
|
|
|
|
|
(960
|
)
|
|
|
636,209
|
|
Affiliate management fee revenue
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,009
|
|
|
|
111,444
|
|
|
15,849
|
|
|
(4,102
|
)
|
|
|
1,138,200
|
|
Operating expenses
|
|
|
187,417
|
|
|
|
40,180
|
|
|
8,162
|
|
|
(6,039
|
)
|
|
|
229,720
|
|
Product purchases
|
|
|
580,073
|
|
|
|
4,027
|
|
|
|
|
|
(1,469
|
)
|
|
|
582,631
|
|
Equity earnings
|
|
|
(3,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
250,623
|
|
|
|
67,237
|
|
|
7,687
|
|
|
3,406
|
|
|
|
328,953
|
|
Depreciation and amortization
|
|
|
49,085
|
|
|
|
18,108
|
|
|
1,056
|
|
|
3,406
|
|
|
|
71,655
|
|
G&A expenses
|
|
|
44,910
|
|
|
|
14,453
|
|
|
2,143
|
|
|
|
|
|
|
61,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
$
|
156,628
|
|
|
$
|
34,676
|
|
$
|
4,488
|
|
$
|
|
|
|
$
|
195,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,569,089
|
|
|
$
|
547,395
|
|
$
|
38,200
|
|
|
|
|
|
$
|
2,154,684
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,264,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
12,387
|
|
$
|
|
|
$
|
|
|
|
$
|
12,387
|
|
Additions to long-lived assets
|
|
$
|
32,905
|
|
|
$
|
119,611
|
|
$
|
564
|
|
$
|
|
|
|
$
|
153,080
|
|
Investment in equity method investee
|
|
$
|
24,888
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
$
|
24,888
|
|
107
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Petroleum
Products
Pipeline
System
|
|
|
Petroleum
Products
Terminals
|
|
Ammonia
Pipeline
System
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Transportation and terminals revenues
|
|
$
|
420,283
|
|
|
$
|
125,962
|
|
$
|
16,473
|
|
|
$
|
(3,397
|
)
|
|
$
|
559,321
|
|
Product sales revenues
|
|
|
649,172
|
|
|
|
15,397
|
|
|
|
|
|
|
|
|
|
|
664,569
|
|
Affiliate management fee revenue
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,070,145
|
|
|
|
141,359
|
|
|
16,473
|
|
|
|
(3,397
|
)
|
|
|
1,224,580
|
|
Operating expenses
|
|
|
189,151
|
|
|
|
47,256
|
|
|
13,919
|
|
|
|
(6,466
|
)
|
|
|
243,860
|
|
Product purchases
|
|
|
598,575
|
|
|
|
7,280
|
|
|
|
|
|
|
(514
|
)
|
|
|
605,341
|
|
Equity earnings
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
285,743
|
|
|
|
86,823
|
|
|
2,554
|
|
|
|
3,583
|
|
|
|
378,703
|
|
Depreciation and amortization
|
|
|
50,790
|
|
|
|
20,743
|
|
|
1,084
|
|
|
|
3,583
|
|
|
|
76,200
|
|
G&A expenses
|
|
|
47,893
|
|
|
|
19,356
|
|
|
2,254
|
|
|
|
|
|
|
|
69,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
187,060
|
|
|
$
|
46,724
|
|
$
|
(784
|
)
|
|
$
|
|
|
|
$
|
233,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,612,636
|
|
|
$
|
610,511
|
|
$
|
30,499
|
|
|
|
|
|
|
$
|
2,253,646
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,316,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
11,902
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,902
|
|
Additions to long-lived assets
|
|
$
|
79,914
|
|
|
$
|
80,143
|
|
$
|
641
|
|
|
$
|
|
|
|
$
|
160,698
|
|
Investment in equity method investee
|
|
$
|
24,087
|
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Petroleum
Products
Pipeline
System
|
|
|
Petroleum
Products
Terminals
|
|
Ammonia
Pipeline
System
|
|
|
Intersegment
Eliminations
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Transportation and terminals revenues
|
|
$
|
460,709
|
|
|
$
|
132,693
|
|
$
|
18,287
|
|
|
$
|
(2,908
|
)
|
|
$
|
608,781
|
|
Product sales revenues
|
|
|
692,355
|
|
|
|
17,209
|
|
|
|
|
|
|
|
|
|
|
709,564
|
|
Affiliate management fee revenue
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,153,776
|
|
|
|
149,902
|
|
|
18,287
|
|
|
|
(2,908
|
)
|
|
|
1,319,057
|
|
Operating expenses
|
|
|
178,894
|
|
|
|
56,181
|
|
|
21,282
|
|
|
|
(5,422
|
)
|
|
|
250,935
|
|
Product purchases
|
|
|
626,194
|
|
|
|
8,233
|
|
|
|
|
|
|
(518
|
)
|
|
|
633,909
|
|
Equity earnings
|
|
|
(4,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin (loss)
|
|
|
352,715
|
|
|
|
85,488
|
|
|
(2,995
|
)
|
|
|
3,032
|
|
|
|
438,240
|
|
Depreciation and amortization
|
|
|
51,936
|
|
|
|
23,078
|
|
|
1,094
|
|
|
|
3,032
|
|
|
|
79,140
|
|
G&A expenses
|
|
|
54,016
|
|
|
|
18,165
|
|
|
2,678
|
|
|
|
|
|
|
|
74,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit (loss)
|
|
$
|
246,763
|
|
|
$
|
44,245
|
|
$
|
(6,767
|
)
|
|
$
|
|
|
|
$
|
284,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,692,688
|
|
|
$
|
661,164
|
|
$
|
32,444
|
|
|
|
|
|
|
$
|
2,386,296
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,416,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
|
|
|
$
|
11,902
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,902
|
|
Additions to long-lived assets
|
|
$
|
92,692
|
|
|
$
|
92,766
|
|
$
|
2,002
|
|
|
$
|
|
|
|
$
|
187,460
|
|
Investment in equity method investee
|
|
$
|
24,324
|
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,324
|
|
108
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
19.
|
Commitments and Contingencies
|
Environmental
Liabilities.
Liabilities recognized for estimated environmental costs were $57.2 million and $57.6 million at December 31, 2006 and 2007, respectively. Environmental liabilities have been classified as current or noncurrent based on
managements estimates regarding the timing of actual payments. Management estimates that expenditures associated with these environmental liabilities will be paid over the next ten years.
MMPs environmental liabilities include, among other items, accruals for the items discussed below:
Petroleum Products EPA Issue
. In July 2001, the Environmental Protection Agency (EPA), pursuant to Section 308 of the Clean
Water Act (the Act), served an information request to MMPs former affiliate with regard to petroleum discharges from its pipeline operations. That inquiry primarily focused on the petroleum products pipeline system that MMP
subsequently acquired. The response to the EPAs information request was submitted during November 2001. In March 2004, MMP received an additional information request from the EPA and notice from the U.S. Department of Justice (DOJ)
that the EPA had requested the DOJ to initiate a lawsuit alleging violations of Section 311(b) of the Act in regards to 32 releases. The DOJ stated that the maximum statutory penalty for the releases was in excess of $22.0 million, which
assumed that all releases are violations of the Act and that the EPA would impose the maximum penalty. The EPA further indicated that some of those releases may have also violated the Spill Prevention Control and Countermeasure requirements of
Section 311(j) of the Act and that additional penalties may be assessed. In addition, MMP may incur additional costs associated with these releases if the EPA were to successfully seek and obtain injunctive relief. MMP responded to the March
2004 information request in a timely manner and has entered into an agreement that provides both parties an opportunity to negotiate a settlement prior to initiating litigation. MMP has accrued an amount for this matter based on its best estimates
that is less than $22.0 million. Most of the amount MMP has accrued was included as part of the environmental indemnification settlement MMP reached with its former affiliate (see
Indemnification Settlement
description below). The DOJ and EPA
have added to their original demand a release that occurred in the second quarter of 2005 from MMPs petroleum products pipeline near its Kansas City, Kansas terminal and a release that occurred in the first quarter of 2006 from MMPs
petroleum products pipeline near Independence, Kansas. MMPs accrual includes these additional releases. MMP is in ongoing negotiations with the EPA; however, it is unable to determine what its ultimate liability could be for these matters.
Adjustments to MMPs recorded liability, which could occur in the near term, could be material to MMPs results of operations and cash flows.
Ammonia EPA Issue
. In February 2007, MMP received notice from the DOJ that the EPA had requested the DOJ to initiate a lawsuit alleging violations of Sections 301 and 311 of the Act with respect to two
releases of anhydrous ammonia from the ammonia pipeline owned by MMP and operated by a third party. The DOJ stated that the maximum statutory penalty for alleged violations of the Act for both releases combined was approximately $13.2 million. The
DOJ also alleged that the third-party operator of MMPs ammonia pipeline was liable for penalties pursuant to Section 103 of the Comprehensive Environmental Response, Compensation and Liability Act for failure to report the releases on a
timely basis, with the statutory maximum for those penalties as high as $4.2 million for which the third-party operator has requested indemnification. In March 2007, MMP also received a demand from the third-party operator for defense and
indemnification in regards to a DOJ criminal investigation regarding whether certain actions or omissions of the third-party operator constituted violations of federal criminal statutes. The third-party operator has subsequently settled this
criminal investigation with the DOJ by paying a $1.0 million fine. MMP believes that it does not have an obligation to indemnify or defend the third-party operator for the DOJ criminal fine settlement. The DOJ stated in its notice to MMP that it
does not expect MMP or the third-party operator to pay the penalties at the statutory maximum; however, it may seek injunctive relief if the parties cannot agree on any necessary corrective actions. MMP has accrued an amount for these matters based
on its best estimates that is less than the maximum statutory penalties.
109
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MMP is currently in discussions with the EPA, DOJ and the third-party operator regarding these two releases but is unable to determine what its ultimate
liability could be for these matters. Adjustments to MMPs recorded liability, which could occur in the near term, could be material to MMPs results of operations and cash flows.
PCB Impacts.
MMP has identified polychlorinated biphenyls (PCB) impacts at two of its petroleum products terminals that it is
in the process of assessing. It is possible that in the near term, the PCB contamination levels could require corrective actions. MMP is unable at this time to determine what the corrective actions and associated costs might be. The costs of
any corrective actions associated with these PCB impacts could be material to MMPs results of operations and cash flows.
Indemnification Settlement
.
Prior to May 2004, a former affiliate had agreed to indemnify MMP against, among other things, certain environmental losses associated with assets that were contributed to MMP at the time of
its initial public offering or which MMP subsequently acquired from this former affiliate. In May 2004, we and MMP GP entered into an agreement under which the former affiliate agreed to pay MMP $117.5 million to release it from these
indemnifications. On June 29, 2007, MMP received the final $35.0 million installment payment associated with this agreement. While the settlement agreement releases this former affiliate from its environmental and certain other
indemnifications, some indemnifications remain in effect. These remaining indemnifications cover issues involving employee benefits matters, rights-of-way, easements and real property, including asset titles, and unlimited losses and damages related
to tax liabilities.
In conjunction with this settlement:
|
|
|
We recorded $61.8 million as a receivable from MMPs former affiliate with an offsetting reduction of the June 2003 purchase price we paid for our interest in
MMP. The $61.8 million amount represented the difference between the discounted value of the future cash proceeds to be received as of June 2003 from MMPs former affiliate ($106.9 million) less the amount of previously recognized environmental
receivables from MMPs former affiliate ($45.1 million); and
|
|
|
|
The difference between the undiscounted amounts received from MMPs former affiliate and the discounted value of those cash payments was $10.6 million, which
we recognized as interest income and an increase to our receivable with MMPs former affiliate over the period from May 25, 2003 to the final payment made on June 29, 2007.
|
Our receivable balance with MMPs former affiliate was $33.9 million at December 31, 2006 and $0 at December 31, 2007. We contributed to
MMP all amounts received pursuant to the indemnification settlement. At December 31, 2006 and 2007, known liabilities that would have been covered by this indemnity agreement were $45.7 million and $42.9 million, respectively. Through
December 31, 2007, MMP has spent $45.5 million of the $117.5 million indemnification settlement amount for indemnified matters, including $20.1 million of capital costs. The cash MMP has received from the indemnity settlement is not reserved
and has been used by MMP for its various other cash needs, including expansion capital spending.
Environmental
Receivables
.
MMP had recognized receivables from insurance carriers and other entities related to environmental matters of $5.9 million and $6.9 million at December 31, 2006 and 2007, respectively.
Unrecognized Product Gains
.
MMPs petroleum products terminals operations generate product overages and shortages. When
MMPs petroleum products terminals experience net product shortages, MMP recognizes expense for those losses in the periods in which they occur. When MMPs petroleum products terminals experience net product overages, MMP has product on
hand for which it has no cost basis. Therefore, these net overages are not recognized in MMPs financial statements until the associated barrels are either sold or used to offset product losses. The combined net unrecognized product overages
for MMPs petroleum products terminals
110
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
operations had a market value of approximately $11.1 million as of December 31, 2007. However, the actual amounts MMP will recognize in future periods
will depend on product prices at the time the associated barrels are either sold or used to offset future product losses.
Other
.
We and MMP are parties to various other claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, 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 future financial position, results of operations or cash flows.
20.
|
Quarterly Financial Data (unaudited)
|
Summarized
quarterly financial data is as follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
279,515
|
|
$
|
311,788
|
|
$
|
316,891
|
|
$
|
316,386
|
Operating margin
|
|
|
93,520
|
|
|
103,099
|
|
|
76,880
|
|
|
105,204
|
Total costs and expenses
|
|
|
221,255
|
|
|
245,233
|
|
|
277,497
|
|
|
250,919
|
Net income
|
|
|
10,780
|
|
|
12,898
|
|
|
915
|
|
|
9,913
|
Basic and diluted net income per limited partner unit
|
|
|
0.08
|
|
|
0.21
|
|
|
0.01
|
|
|
0.22
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
292,221
|
|
$
|
328,389
|
|
$
|
322,191
|
|
$
|
376,256
|
Operating margin
|
|
|
98,195
|
|
|
113,047
|
|
|
105,081
|
|
|
121,917
|
Total costs and expenses
|
|
|
232,295
|
|
|
254,343
|
|
|
255,736
|
|
|
296,469
|
Net income
|
|
|
11,533
|
|
|
14,874
|
|
|
14,113
|
|
|
14,878
|
Basic and diluted net income per limited partner unit
|
|
|
0.19
|
|
|
0.26
|
|
|
0.26
|
|
|
0.28
|
Revenues and operating margin were favorably impacted in all quarters during 2007 by increases in
tariff rates and from capital projects completed in 2006 and early 2007. Product price increases during 2007 favorably impacted commodity revenues and margins and net product overages for all quarters during 2007. Second-quarter 2007
net income was negatively impacted $2.9 million by transactions associated with the repayment of MMPs pipeline notes. Fourth-quarter 2007 revenues and operating margin were favorably impacted by $2.8 million from the revenues
recognized from MMPs variable-rate terminalling agreements.
Third-quarter 2006 operating margin was negatively impacted by lower
product margins as a result of rapidly declining petroleum product prices. First-quarter 2006 and fourth-quarter 2006 revenues were favorably impacted by $6.4 million and $3.0 million, respectively, associated with the revenues MMP recognized from
variable-rate terminalling agreements.
21. Fair Value Disclosures
Fair Value of Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosure for financial instruments:
Cash and cash
equivalents and restricted cash.
The carrying amounts reported in the balance sheet approximate fair value due to the short-term maturity or variable rates of these instruments.
Accounts receivableindemnification receivable.
This asset represents amounts due from a former affiliate of MMP related to MMPs
indemnification settlement agreement (see Note 19Commitments and
111
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Contingencies). Fair value was determined by discounting expected future cash receipts at our estimated lending rate to the former affiliate.
Long-term receivable.
Fair value was determined by discounting estimated future cash flows by the rates inherent in the long-term instruments
plus/minus the change in the risk-free rate since inception of the instrument.
Debt.
The fair value of MMPs publicly traded
notes was based on the prices of those notes at December 31, 2006 and 2007. The fair value of MMPs Magellan Pipeline notes was determined by discounting estimated future cash flows using its incremental borrowing rate. The carrying amount
of floating-rate borrowings at December 31, 2007 approximates fair value due to the variable rates of those instruments.
Interest
rate swaps.
Fair value was determined based on forward market prices and approximates the net gains and losses that would have been realized if the contracts had been settled at year-end. The 2006 values represent long-term liabilities and the
2007 values represent long-term assets.
Other deferred liabilitiesdeposits
. This liability represents a long-term deposit MMP
holds associated with a third-party supply agreement. Fair value was determined by discounting the deposit amount at MMPs incremental borrowing rate.
The following table reflects the carrying amounts and fair values of our financial instruments as of December 31, 2006 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2007
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
Fair
Value
|
Cash and cash equivalents
|
|
$
|
6,977
|
|
|
$
|
6,977
|
|
|
$
|
938
|
|
$
|
938
|
Restricted cash
|
|
|
5,283
|
|
|
|
5,283
|
|
|
|
|
|
|
|
Accounts receivableindemnification receivable.
|
|
|
33,915
|
|
|
|
33,718
|
|
|
|
|
|
|
|
Long-term receivables
|
|
|
7,239
|
|
|
|
6,525
|
|
|
|
7,801
|
|
|
6,849
|
Debt
|
|
|
794,222
|
|
|
|
800,385
|
|
|
|
911,801
|
|
|
933,650
|
Interest rate swaps
|
|
|
(2,935
|
)
|
|
|
(2,935
|
)
|
|
|
2,735
|
|
|
2,735
|
Other deferred liabilitiesdeposits
|
|
|
13,500
|
|
|
|
7,042
|
|
|
|
18,500
|
|
|
9,886
|
Fair Value Measurements
In September 2006, the FASB adopted SFAS No. 157,
Fair Value Measurements
. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years; however, earlier application was encouraged. We elected to adopt SFAS No. 157 effective January 1, 2007. Our fair value
measurements as of December 31, 2007 using significant other observable inputs for MMPs interest rate swap derivatives were $2.7 million.
112
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Distributions paid by MMP during
2005, 2006 and 2007 were as follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
Date
Cash
Distribution
Paid
|
|
Per Unit
Cash
Distribution
Amount
|
|
Common
Units
|
|
Subordinated
Units
|
|
General
Partner
(a)
|
|
Total Cash
Distribution
|
02/14/05
|
|
$ 0.45625
|
|
$ 26,390
|
|
$ 3,887
|
|
$ 5,201
|
|
$ 35,478
|
05/13/05
|
|
0.48000
|
|
29,127
|
|
2,726
|
|
6,778
|
|
38,631
|
08/12/05
|
|
0.49750
|
|
30,189
|
|
2,825
|
|
7,939
|
|
40,953
|
11/14/05
|
|
0.53125
|
|
32,236
|
|
3,018
|
|
10,178
|
|
45,432
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 1.96500
|
|
$ 117,942
|
|
$ 12,456
|
|
$ 30,096
|
|
$ 160,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/14/06
|
|
$ 0.55250
|
|
$ 33,526
|
|
$ 3,138
|
|
$ 12,839
|
|
$ 49,503
|
05/15/06
|
|
0.56500
|
|
37,494
|
|
|
|
13,668
|
|
51,162
|
08/14/06
|
|
0.57750
|
|
38,324
|
|
|
|
14,497
|
|
52,821
|
11/14/06
|
|
0.59000
|
|
39,153
|
|
|
|
15,327
|
|
54,480
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 2.28500
|
|
$ 148,497
|
|
$ 3,138
|
|
$ 56,331
|
|
$ 207,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/14/07
|
|
$ 0.60250
|
|
$40,094
|
|
$
|
|
$ 16,197
|
|
$ 56,291
|
05/15/07
|
|
0.61625
|
|
41,009
|
|
|
|
17,112
|
|
58,121
|
08/14/07
|
|
0.63000
|
|
41,924
|
|
|
|
18,027
|
|
59,951
|
11/14/07
|
|
0.64375
|
|
42,839
|
|
|
|
18,942
|
|
61,781
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 2.49250
|
|
$ 165,866
|
|
$
|
|
$ 70,278
|
|
$ 236,144
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes amounts paid to MMP GP for its incentive distribution rights.
|
Distributions paid by MMP to us and MMP GP were as follows (in thousands except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
Date
Cash
Distribution
Paid
|
|
Per Unit
Cash
Distribution
Amount
|
|
Common
Units
|
|
Subordinated
Units
|
|
General
Partner
(a)
|
|
Total Cash
Distribution
|
02/14/05
|
|
$ 0.45625
|
|
$
|
|
$ 3,887
|
|
$ 5,201
|
|
$ 9,088
|
05/13/05
|
|
0.48000
|
|
1,147
|
|
|
|
6,778
|
|
7,925
|
08/12/05
|
|
0.49750
|
|
|
|
|
|
7,939
|
|
7,939
|
11/14/05
|
|
0.53125
|
|
|
|
|
|
10,178
|
|
10,178
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 1.96500
|
|
$ 1,147
|
|
$ 3,887
|
|
$ 30,096
|
|
$ 35,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/14/06
|
|
$ 0.55250
|
|
$
|
|
$
|
|
$ 12,839
|
|
$ 12,839
|
05/15/06
|
|
0.56500
|
|
|
|
|
|
13,668
|
|
13,668
|
08/14/06
|
|
0.57750
|
|
|
|
|
|
14,497
|
|
14,497
|
11/14/06
|
|
0.59000
|
|
|
|
|
|
15,327
|
|
15,327
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 2.28500
|
|
$
|
|
$
|
|
$ 56,331
|
|
$ 56,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/14/07
|
|
$ 0.60250
|
|
$
|
|
$
|
|
$ 16,197
|
|
$ 16,197
|
05/15/07
|
|
0.61625
|
|
|
|
|
|
17,112
|
|
17,112
|
08/14/07
|
|
0.63000
|
|
|
|
|
|
18,027
|
|
18,027
|
11/14/07
|
|
0.64375
|
|
|
|
|
|
18,942
|
|
18,942
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ 2.49250
|
|
$
|
|
$
|
|
$ 70,278
|
|
$ 70,278
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes amounts paid to MMP GP for its incentive distribution rights.
|
113
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In February 2006, MMPs partnership agreement was amended to restore the incentive distribution
rights to the same level as before an amendment made in connection with MMPs October 2004 pipeline system acquisition that reduced the incentive distributions paid to MMP GP by $1.3 million in 2004, $5.0 million in 2005 and $3.0 million in
2006. In return, we made a capital contribution to MMP on February 9, 2006 equal to the present value of the remaining reductions in incentive distributions, or $4.2 million. The owner of our general partner reimbursed us for this amount.
On February 14, 2008, MMP paid cash distributions of $0.6575 per unit on its outstanding limited partner units to unitholders of
record at the close of business on February 6, 2008. Because MMP issued 197,433 limited partner units in January 2008 and MMP GP did not make an equity contribution to MMP associated with that equity issuance, MMP GPs ownership interest
in MMP changed from 1.995% to 1.989%. See Note 24 Subsequent Events for further discussion of this matter. The total distributions paid on February 14, 2008 were $63.8 million, of which $1.3 million was paid to MMP GP on its 1.989%
general partner interest and $18.6 million on its incentive distribution rights.
Distributions we made to our affiliate owners during 2005
and 2006 prior to our becoming a public company are as follows (in thousands):
|
|
|
|
Date Distribution Paid
|
|
Amount
|
2005
|
|
|
|
January
|
|
$
|
125,795
|
February
|
|
|
13,000
|
April
|
|
|
81,500
|
May
|
|
|
32,000
|
June
|
|
|
162,000
|
November
|
|
|
7,000
|
December
|
|
|
34,621
|
|
|
|
|
Total
|
|
$
|
455,916
|
|
|
|
|
2006
|
|
|
|
January
|
|
$
|
74
|
February
|
|
|
522,194
|
|
|
|
|
Total
|
|
$
|
522,268
|
|
|
|
|
Distributions we made during 2006 and 2007 subsequent to our becoming a public company are as
follows (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Date
|
|
Distribution
Amount
|
|
Common
Units
|
|
General
Partner
|
|
Total Cash
Distribution
|
05/15/06
(a)
|
|
$
|
0.20800
|
|
$
|
13,031
|
|
$
|
1
|
|
$
|
13,032
|
08/14/06
|
|
|
0.22000
|
|
|
13,782
|
|
|
1
|
|
|
13,783
|
11/14/06
|
|
|
0.23300
|
|
|
14,597
|
|
|
1
|
|
|
14,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.66100
|
|
$
|
41,410
|
|
$
|
3
|
|
$
|
41,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
02/14/07
|
|
$
|
0.2460
|
|
$
|
15,411
|
|
$
|
2
|
|
$
|
15,413
|
05/15/07
|
|
|
0.2615
|
|
|
16,382
|
|
|
2
|
|
|
16,384
|
08/14/07
|
|
|
0.2760
|
|
|
17,291
|
|
|
2
|
|
|
17,293
|
11/14/07
|
|
|
0.2900
|
|
|
18,168
|
|
|
3
|
|
|
18,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.0735
|
|
$
|
67,252
|
|
$
|
9
|
|
$
|
67,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
MGG GP declared a cash distribution of $0.208 associated with the first quarter of 2006. The distribution paid to our public unitholders for that quarter was prorated for the
45-days that we were a public entity, or $0.104 per unit.
|
114
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On February 14, 2008, we paid cash distributions of $0.3070 per unit to unitholders of record at
the close of business on February 6, 2008. Total distributions paid were $19.2 million.
Total distributions paid to outside and
affiliate owners by us and MMP are determined as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Cash distributions paid by MMP
|
|
$
|
160,494
|
|
|
$
|
207,966
|
|
|
$
|
236,144
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid by MMP to its general partner
|
|
|
(30,096
|
)
|
|
|
(56,331
|
)
|
|
|
(70,278
|
)
|
Distributions paid by MMP to us on limited partner units
|
|
|
(5,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid by MMP to outside owners
|
|
|
125,364
|
|
|
|
151,635
|
|
|
|
165,866
|
|
Distributions we paid to our affiliate owners before we became a public company
|
|
|
455,916
|
|
|
|
522,268
|
|
|
|
|
|
Distributions we paid after becoming a public company
|
|
|
|
|
|
|
41,413
|
|
|
|
67,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions paid to outside and affiliate owners
|
|
$
|
581,280
|
|
|
$
|
715,316
|
|
|
$
|
233,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.
|
Partners Capital (Deficit)
|
MMP
Capital.
The following table details the changes in the number of MMP units outstanding and their ownership by affiliates and the public from January 1, 2005 through December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Subordinated
|
|
|
|
|
|
Public
|
|
Affiliates
|
|
|
Public
|
|
|
Affiliates
|
|
|
Total
|
Units outstanding on January 1, 2005
|
|
52,370,000
|
|
5,471,082
|
|
|
|
|
|
8,519,542
|
|
|
66,360,624
|
01/05Sale of units by us
|
|
5,471,082
|
|
(5,471,082
|
)
|
|
|
|
|
|
|
|
|
02/05Conversion of subordinated units to common units
|
|
|
|
2,839,846
|
|
|
|
|
|
(2,839,846
|
)
|
|
|
02/05Sale of units by us
|
|
450,288
|
|
(450,288
|
)
|
|
|
|
|
|
|
|
|
04/05Sale of units by us
|
|
|
|
|
|
|
5,679,696
|
|
|
(5,679,696
|
)
|
|
|
05/05Sale of units by us
|
|
2,100,000
|
|
(2,100,000
|
)
|
|
|
|
|
|
|
|
|
06/05Sale of units by us
|
|
289,558
|
|
(289,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding on December 31, 2005
|
|
60,680,928
|
|
|
|
|
5,679,696
|
|
|
|
|
|
66,360,624
|
01/06Conversion of subordinated units to common units
(a)
|
|
5,679,696
|
|
|
|
|
(5,679,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding on December 31, 2006
|
|
66,360,624
|
|
|
|
|
|
|
|
|
|
|
66,360,624
|
01/07Settlement of 2004 award grants
|
|
184,905
|
|
|
|
|
|
|
|
|
|
|
184,905
|
Other
|
|
768
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units outstanding on December 31, 2007
(b)
|
|
66,546,297
|
|
|
|
|
|
|
|
|
|
|
66,546,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
MMPs subordination period ended on December 31, 2005 when it met the final financial tests provided for in its partnership agreement. As a result, on January 31,
2006, one day following the distribution record date, the 5,679,696 outstanding subordinated units representing limited partner interests in MMP converted to common units.
|
(b)
|
For the year ended December 31, 2007, the weighted-average number of limited partner units outstanding for basic net income per unit calculation includes phantom limited
partner units associated with deferred compensation of certain directors of MMPs general partner.
|
115
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
MMPs limited partner units outstanding at December 31, 2007 were all held by the public.
Our ownership interest in MMP at December 31, 2007 was limited to our approximate 2% general partner interest and incentive distribution rights, which we derive through our 100% ownership interest in MMP GP.
MMPs subordination period ended on December 31, 2005, when it met the final financial tests provided for in its partnership agreement. As a
result, there are no longer restrictions on MMP GPs ability to issue MMP limited partner units.
For purposes of determining capital
balances, MMP allocates net income to its general partner and limited partners based on their contractually-determined cash distributions declared and paid following the close of each quarter with adjustments for amounts directly charged to its
general partner for specific costs that we have assumed and for which the limited partners are not responsible. However, for periods in which MMPs net income exceeds its distributions, the net income allocation is adjusted as if the
undistributed net income is allocated an approximate 2% to its general partner and the remainder to the limited partners.
During 2007,
cash distributions paid by MMP to its general partner and limited partners were made based on the following table:
|
|
|
|
|
|
|
|
|
|
MMP Quarterly Distribution Per Unit
|
|
Distributions to
MMPs Limited
Partners as a
Percentage of
Total Distributions
|
|
|
Distributions to Us as
a Percentage of Total
Distributions
|
|
|
|
General
Partner
Interest
|
|
|
Incentive
Distribution
Rights
|
|
up to $0.289
|
|
98.005
|
%
|
|
1.995
|
%
|
|
0.000
|
%
|
above $0.289 up to $0.328
|
|
85.005
|
%
|
|
1.995
|
%
|
|
13.000
|
%
|
above $0.328 up to $0.394
|
|
75.005
|
%
|
|
1.995
|
%
|
|
23.000
|
%
|
above $0.394
|
|
50.005
|
%
|
|
1.995
|
%
|
|
48.000
|
%
|
See Note 24Subsequent Events for a discussion of the changes in the percentage of
distributions to the limited and general partner interests that occurred after December 31, 2007.
In the event of liquidation, all
property and cash in excess of that required to discharge all liabilities will be distributed to the partners in proportion to the positive balances in their respective capital accounts. The limited partners liability is generally limited to
their investment.
Our Capital
In February 2006, we completed an initial public offering of our limited partner units. In that transaction, we issued and sold 22.0 million limited partner units to the public, which represented 35% of our
limited partner units. The other 40.6 million units were retained by MGG MH. During 2007, MGG MH sold 31.8 million of their limited partner units in us. Please see Note 2Initial Public Offering and Sale of Units by MGG MH for further
detail on these transactions. As of December 31, 2007, 62.6 million units remained outstanding.
The limited partners holding our
common units have the following rights, among others:
|
|
|
right to receive distributions of our available cash within 50 days after the end of each quarter;
|
|
|
|
right to remove MGG GP as our general partner upon a 66.7% majority vote of outstanding unitholders;
|
|
|
|
right to transfer limited partner unit ownership to substitute limited partners;
|
116
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
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 limited partners 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 unitholders own expense.
|
MGG GPs general partner ownership interest in us is 0.0141%. Therefore, the quarterly distributions declared by our general partners board of
directors and paid to the limited unitholders represent 99.9859% of total distributions paid, with the remaining 0.0141% paid to our general partner.
Following the termination of MMPs subordination period, we reclassified $277.4 million from non-controlling owners interests of consolidated subsidiaries to partners capital. This reclassification
recognized the gain on sale by us of MMPs limited partner units in 2004 and 2005.
In the event of liquidation, all property and cash
in excess of that required to discharge all liabilities will be distributed to the partners in proportion to the positive balances in their respective capital accounts. The limited partners liability is generally limited to their investment.
On January 24, 2008, the
MMP Compensation Committee approved 199,542 unit award grants pursuant to MMPs long-term incentive plan, of which 184,051 have been granted to-date. These award grants have a three-year vesting period which will end on December 31, 2010.
On January 24, 2008, MMP issued 197,433 of MMP limited partner units, of which 196,856 were issued to settle the 2005 unit award
grants to certain employees, which vested on December 31, 2007, and 577 were issued to settle the equity-based retainer paid to one of the directors of MMP GP. MMP GP did not make an equity contribution to MMP associated with this equity
issuance and as a result its general partner ownership interest in MMP changed from 1.995% to 1.989%. MMP GPs incentive distribution rights were not affected by this transaction. As a result, cash distributions paid by MMP after
January 24, 2008 will be made based on the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Distributions
|
|
|
|
|
|
|
General Partner
|
|
Quarterly Distribution Amount per Unit
|
|
Limited
Partners
|
|
|
General
Partner
Interest
|
|
|
Incentive
Distribution
Rights
|
|
Up to $0.289
|
|
98.011
|
%
|
|
1.989
|
%
|
|
0.000
|
%
|
Above $0.289 up to $0.328
|
|
85.011
|
%
|
|
1.989
|
%
|
|
13.000
|
%
|
Above $0.328 up to $0.394
|
|
75.011
|
%
|
|
1.989
|
%
|
|
23.000
|
%
|
Above $0.394
|
|
50.011
|
%
|
|
1.989
|
%
|
|
48.000
|
%
|
During January 2008, MMP acquired a petroleum products terminal in Bettendorf, Iowa from CITGO
Petroleum Corporation for $12.0 million. MMP has subsequently leased the Bettendorf terminal to a third-party entity under a long-term lease that has an initial term of five years.
117
MAGELLAN MIDSTREAM HOLDINGS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Also during January 2008, MMP entered into a total of $200.0 million of forward starting interest
rate swap agreements to hedge against the variability of future interest payments on a portion of borrowings under our revolving credit facility. MMP anticipates refinancing up to $250.0 million of its revolver borrowings with either new
variable-rate debt or with ten-year fixed-rate debt by the end of the second quarter of 2008. MMPs objective is to limit its exposure to changes in the benchmark interest rate between now and the date of the refinancing. MMP will account for
the interest rate swap agreements as cash flow hedges.
On February 14, 2008, MMP paid cash distributions of $0.6575 per unit on its
outstanding limited partner units to unitholders of record at the close of business on February 6, 2008. The total distributions paid were $63.8 million, of which $1.3 million was paid to MMP GP on its approximate 2% general partner interest
and $18.6 million on its incentive distribution rights.
Also on February 14, 2008, we paid cash distributions of $0.3070 per unit to
unitholders of record at the close of business on February 6, 2008. Total distributions paid were $19.2 million.
During February
2008, MMP entered into an agreement to assign its third-party supply obligation to a third-party entity effective March 1, 2008. MMP will continue to earn transportation revenues for the product it ships related to this supply agreement but
will no longer recognize associated product sales and purchases. However, MMP will share in a portion of the assignors trading profits or losses relating to the assigned product supply agreement, but it will not be required to fund inventory
requirements. As of December 31, 2007, MMP held inventory valued at $49.3 million for the third-party supply agreement. Upon the March 1, 2008 effective date, MMP will sell any remaining inventory to the assignor and recognize the
resulting gain or loss based on inventory values on that date. In the event the third-party entity assuming this obligation from MMP is unable to perform on this agreement through the 2018 expiration date, the supply agreement obligation will revert
back to MMP.
118