Magellan Midstream Partners L.P.

Greetings and good afternoon, everyone. Welcome to the third quarter 21 earnings call. During the presentation, all participants will be in listen-only mode. Afterwards, we will have a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. And if at any time you need to reach an operator, please press star 0. As a reminder, this conference is being recorded today, Tuesday, November 2, 2021. It is now my pleasure to turn the call over to Mike Mears, Chief Executive Officer. Please go ahead, sir.

Well, hello, and thank you for joining us today for our third quarter earnings call. Before we get started, I need to remind you that management will be making forward-looking statements as defined by the Securities and Exchange Commission. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different. You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance. Moving on to the quarter, we are pleased with our third quarter results for a few reasons. First of all, Magellan generated strong financial results that significantly exceeded our EPU guidance for the quarter. While there were a number of favorable items that contributed to the earnings beat, the main benefits related to additional refined products transportation volumes, including continued strong distillate demand across our entire pipeline system, as well as lower than expected expenses in part due to our ongoing optimization efforts. In addition, as previously announced, we also delivered on our commitment to maximize value for our investors with more than 390 million of equity repurchases during the quarter at what we believe to be attractive valuations, as well as an increase to our quarterly cash distribution. This increase marks 20 straight years of annual distribution growth for our company, which is a notable distinction that sets Magellan apart within both the MLP and midstream space. Our CFO, Jeff Holman, will now review a few highlights from our third quarter financial results, then I'll be back to discuss our guidance for the year before answering your questions.

Thanks, Mike. First, let me mention that, as usual, I'll be making references to certain non-GAAP financial metrics. including operating margin, distributable cash flow, or DCF, and free cash flow. And we've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning, we reported third quarter net income of $237 million, an increase of $25 million compared to third quarter 2020. Adjusted earnings per unit for the quarter, which excludes the impact of commodity-related mark-to-market adjustments, was $1.09. which, as Mike pointed out, exceeded our guidance for the quarter of 87 cents. DCF for the quarter of $277 million was 7% higher than the third quarter of 2020, primarily due to additional contributions from our refined product segment. Pre-cash flow for the quarter was $252 million, resulting in pre-cash flow after distributions of $25 million. A detailed description of quarter-over-quarter variances is available in the earnings release we issued this morning So I'm just going to touch on a few highlights of the quarterly results. Starting with our refined product segment, operating margin of $272 million for the quarter was approximately 19% higher than the 2020 period. Our refined products business continued to benefit from the recovery in travel, economic, and drilling activity in 2021 compared to the pandemic-driven reductions experienced in 2020, as well as from the continued ramp up on our Texas expansion projects. In particular, we benefited from outsized increases in diesel fuel during the quarter. Overall, refined transportation volumes were up nearly 20% relative to the prior year period, with significant increases in all products versus 2020. And on an absolute basis, volume set a new quarterly record for the second quarter in a row. Refined products revenues also benefited from the 3% overall average tariff increase that went into effect on July 1st of this year. As a reminder, this 3% increase consisted of a 0.6% decrease to our index rates and an average increase of more than 4% to our competitive rates. Turning to our crude oil business, third quarter operating margin was approximately $112 million, down 18% from the third quarter of 2020, with the themes for the segment remaining generally consistent with the explanations we've given throughout the year and with the assumptions behind our original guidance. Volumes on Longhorn continued to be lower as a result of contract expirations late in 2020, averaging about 240,000 barrels per day versus approximately 275,000 barrels per day in the prior year. While our affiliate marketing activities continued to offset much of the volume decline related to the expired contracts, the margin we realized on those activities is more reflective of the prevailing differential between the Permian Basin and Houston, which is currently well below the tariff we had been earning on the previous contracts. And so our average realized rate per barrel declined. Volumes on our Houston distribution system increased versus the prior year period, primarily due to higher year-over-year refinery utilization driven by demand recovery. This increase in volume was offset by lower average rates, primarily due to deficiency revenue that benefited the 2020 period and didn't recur in 2021. And so just as a reminder, although we often see volatility in our Houston distribution system values between quarters, those volumes move at significantly lower rates and longer haul and long-horn shipments. which means that their impact on our reported volumes and average rate is much greater than their impact on our actual revenues. Similarly to last quarter, storage revenues declined, primarily because the current year period didn't benefit from the strong contango market that drove storage rates in 2020. Moving on to our joint ventures, bridge text volumes were just over 315,000 barrels per day in the third quarter of 2021, compared to approximately 330,000 barrels per day in 2020. primarily due to a decrease in uncommitted shipments in the current quarter, which is reflective of continued unfavorable pricing differentials. While saddle horn volumes increased to more than 215,000 barrels per day compared to nearly 165,000 barrels per day in 2020, primarily as a result of the expansion project completed earlier this year. So, with respect to our long-haul crude oil pipeline, we continue to reap the benefits of long-term commitments from creditworthy counterparties, as our customers continue to ship in line with their contracts. Just a few other quick notes on our year-over-year results. G&A expense increased between periods primarily as a result of higher incentive comp costs, reflecting our strong results year-to-date, while net interest expense increased primarily due to lower capitalized interest as a result of reduced expansion capital spending, as well as higher debt outstanding. As of September 30th, the face value of our long-term debt was $5.1 billion, with a weighted average interest rate on that debt of about 4.4%. As a reminder, due to the pending sale of our independent terminals, the results of operations from those assets, which were previously included in the results of our refined product segment, are now classified as discontinued operations. The results from these assets increase between periods primarily due to improved commodity margins, as well as just the absence of depreciation, which is no longer recorded now that the assets are classified as out for sale. fee-based revenues for these assets slightly declined year over year. As we've noted previously, a significant portion of the operating margin from these assets comes from commodity-sensitive activities that can be volatile from period to period. Moving on to capital allocation, balance sheet metrics, and liquidity. First, in terms of liquidity, we continue to have our $1 billion credit facility available to us through mid-2024. With $123 million outstanding on the commercial paper program on September 30th, Additionally, our next bond maturity isn't until 2025. Our leverage ratio at the end of the quarter was approximately 3.6 times for compliance purposes, which incorporates the gain we realized on the sale of part of our interest in Pasadena earlier this year. Excluding that gain, leverage would have been approximately 3.75 times. Of course, those leverage metrics incorporate the impact of the $391 million in unit repurchases we executed during the quarter. which brings us to the last item we'll touch on, which is capital allocation. Throughout our history as a public company, we've always focused on being good stewards of capital. That has historically been reflected most strikingly in our best-in-class returns on invested capital and our discipline to maintain growth projects, including zero equity issuances since 2010, despite spending approximately $6 billion on growth projects during the intervening 11 years. all while delivering sector-leading credit metrics and 20 straight years of uninterrupted distribution growth. That disciplined capital stewardship is currently reflected in the opportunistic execution of our equity buyback program. The $391 million of units we repurchased during the quarter at an average unit price of $48.15 per unit brings our total repurchases for the year to $473 million, and completes the initial $750 million program authorized by our Board over a year before the end of that program's three-year term. The cumulative units repurchased to date equals 15.1 million units, or about 6.7% of total units previously outstanding. The reduction in total ongoing distributions resulting from these repurchases will increase distribution coverage going forward, which was an important factor in our decision to reinstate small distribution increase this quarter. With the completion of that initial $750 million program and taking into account the expected proceeds from our pending independent terminal sale and our expectation of continued pre-cash flow generation in coming years, our Board has authorized an additional $750 million in purchases over the next three years. Of course, as we are always careful to note, the timing, price, and volume of any unit or purchases will depend on a number of factors, including expected expansion capital spending, pre-cash flow available, balance sheet metrics, legal and regulatory requirements, as well as market conditions and the trading price of our equity. In particular, I'll note that we remain committed to our longstanding four times leverage limit, and also that the timing of the proceeds from independent terminal sale remains subject to the governmental review process. But as we continue to reiterate, we remain focused on delivering long-term value for our investors through a disciplined combination of cash distributions, capital investments, and equity with purchases. And with that, I'll turn the call back over to Mike.