Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan fourth quarter 21 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, February 2, 2022. I would now like to turn the conference over to Mike Mears, Chief Executive Officer. Please go ahead.

Well, good afternoon, and thank you for joining us today to discuss Magellan's fourth quarter financial results and our guidance for the new year. Before we get started, I'll 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, inform your own opinions about Magellan's future performance. Magellan finished 2021 with another strong quarter, generating financial and operational results that exceeded our expectations and solidified 2021 as a year of robust demand recovery for our services. Our CFO, Jeff Holman, will now review our fourth quarter financial results in general. Then I'll be back to discuss our guidance 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 fourth quarter net income of $244 million, compared to $184 million in fourth quarter 2020. Adjusted earnings per unit for the quarter which excludes the impact of commodity-related mark-to-market adjustments, was $1.24, which, as Mike pointed out, exceeded our guidance for the quarter of $1.10. DCF for the quarter of $297 million was 10% higher than fourth quarter of 2020. And similarly to last quarter, the primary driver of that increase was additional contributions from our refined product segments. Pre-cash flow for the quarter was $291 million, resulting in pre-cash flow after distributions of $70 million. Full year 2021 DCF was $1.118 billion, approximately 7% higher than in 2020, resulting in a distribution coverage ratio for 2021 of 1.24 times. DCF per unit in 2021 was $5.14, about 10% higher than in 2020. This per unit perspective reflects the significant impact of our buyback program and underscores our ability to deliver per unit growth in excess of the top line DCF growth that our business experiences. I should note that the DCF per unit calculation I just mentioned is based on the weighted average number of units outstanding on the record dates related to the period. Full year free cash flow for 2021 was $1.316 billion. resulting in free cash flow after distributions of about $410 million for the year. A detailed description of quarter-over-quarter variances is available in the earnings release we issued this morning, so as usual, I'll just touch on a few of the highlights of the fourth quarter results. Starting with our refined product segment, operating margin of $303 million for the quarter was approximately 27% 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 final revenue commitment ramp on our Texas expansion projects. Overall, refined transportation volumes were at 14% relative to the prior year period, with significant increases in all products. And on an absolute basis, volumes once again set a new quarterly record. Reflecting the sharp rebound in travel, aviation fuel once again saw an 80% plus increase versus the prior year period. Though as usual, I'll note for context that aviation fuel typically constitutes less than 10% of our overall volumes. Refined products revenues also benefited from the 3% overall average tariff increase that went into effect on July 1st of 2021. 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 remaining rates. As I imagine most of you are probably aware, the FERC recently revisited the index calculation. With the result, we will be reducing our index rates by about 1% effective March 2022, which Mike will discuss further in a few moments as part of our guidance discussion. Product margin was favorable compared to the fourth quarter of 2020, primarily due to higher gas liquids blending margins and volumes as a result of the better commodity environment and improved blending opportunities. In addition, we had lower unrealized losses in the current period related to our hedging activities. Turning to our crude oil business, fourth quarter operating margin was approximately $104 million, down 5% from the fourth quarter of 2020, due to reductions in some of our rates, lower volume shipped, and reduced storage revenue. Longhorn volumes of 250,000 barrels per day were in line with the prior year. While the story on Longhorn for most of 2021 has been the contract expirations on the pipeline in late 2020, the fourth quarter was a full year past that step change, resulting in pretty consistent performance on the line between the 2021 and 2020 periods. Volumes on our Houston distribution system decreased versus the prior year period and were lower than we had expected, primarily due to the delay in the startup of the new connecting pipeline, which we now believe will begin deliveries to us in early 2022. Just as a reminder, although we often see volatility in our Houston distribution system volumes between quarters, those volumes move at significantly lower rates and longer haul long-haul shipments, which means that their impact on our reported volumes and average rate is much greater than their impact on actual revenues. Which brings me to our average crude oil tariff rate. Even though the competitive environment we are currently operating in has led to generally lower tariffs across our crude pipes, the overall average rate per barrel shipped actually increased between periods due to a proportionately lower volume of those short haul Houston distribution movements at lower rates. Similar to last quarter, we also saw reduced storage revenues due to lower utilization and rates following recent contract expirations. You may recall that we entered numerous short-term contracts during the early period of the pandemic, and the market was in deep contango, and storage in general was in very high demand. As the short-term contracts have rolled off and the market has been pretty backward, we've seen lower rates for our storage services. Moving on to our joint ventures, Rich text volumes were approximately 300,000 barrels per day in the fourth quarter of 21 compared to nearly 350,000 barrels per day in 2020, partially due just to the timing of when our committed shippers have elected to move volume under their commitments, as well as due to the expiration of a few smaller commitments earlier in the year. Saddlehorn volumes increased to 235,000 barrels per day compared to about 165,000 barrels per day the year before, primarily as a result of new commitments in 2021 associated with the pipeline's expansion. 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 $108 million outstanding on our commercial paper program as of December 31st. Additionally, our next bond maturity isn't until 2025. The face value of a long-term debt as of the end of 2021 was $5.1 million, with a weighted average interest rate on that debt of about 4.4%. Our leverage ratio at the end of the quarter was a little less than 3.5 times for compliance purposes, which incorporates the gain we realized from the sale of part of our interest in Pasadena earlier in 2021. Excluding that gain, leverage would have been a little over 3.6 times, And it is really that metric, excluding the gain on sale, that we are looking to as we manage leverage, including, of course, the impact on leverage of our unit repurchase program. And that brings us to the last item I'll touch on today, which is capital allocation. As you've heard us say before, we remain committed to maintaining the financial discipline we are known for while delivering long-term value for our investors through a combination of capital investments, cash distributions, and equity repurchases. During the fourth quarter, we repurchased nearly 1.1 million units at an average purchase price of $47.29 for a total spend of $50 million, bringing the cumulative amount of units repurchased during 2021 to 10.9 million units for $523 million. Since we began our buyback program in 2020, Magellan has repurchased $800 million worth of units under our $1.5 billion repurchase program The unit repurchases made over the past two years have decreased our units outstanding by about 7%, thereby, of course, increasing our DCF per unit by a similar amount, and in addition, contributing to better distribution coverage going forward. Of course, as we are always careful to note, the timing, price, and volume of any unit repurchases will depend on a number of factors, including expected expansion capital spending, free 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 the independent terminal sale remains subject to the government review process. With that, I'll turn the call back over to Mike.