Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan Midstream Partners first quarter 22 earnings call. During the presentation, all participants will be in the 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 Thursday, May 5th, 2022. I would now like to turn the conference over to the President and Chief Executive Officer, Aaron Milford. Please go ahead.

Hello, and thank you for joining us today to discuss Magellan's first quarter financial results. Before getting started, we must 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. Since this is my first opportunity to speak publicly as Magellan's CEO, I'd like to express how honored I am to lead this exceptional organization. As you know, I've spent my entire career with the company, including serving as chief financial officer and most recently as chief operating officer. So even though I'm new to the CEO role, I've been around for a while, and I intend to remain focused on the overarching goal of maximizing long-term investor value while retaining our strong financial position and consistent, disciplined approach that Magellan is known for. As reviewed at our recent analyst day, no matter which industry projections you consider, We expect our services to be needed for a very long time, and our company is poised to serve our nation's critical energy needs for decades to come. We remain committed to doing things the right way and ensuring that we are operating in a safe and efficient manner at all times. I'm confident in Magellan's future and our ability to create long-term value for our investors. With that, I'll turn the call over to our CFO, Jeff Holman, to briefly review our first quarter financial results Then I'll be back to discuss our latest outlook for the year, as well as the status of a few of our expansion projects, before answering your questions.

Thanks, Aaron. 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 first quarter net income of $166 million compared to $221 million in the first quarter of 2021. At a high level, the year-over-year decline primarily resulted from mark-to-market adjustments on commodity hedges in the current period, as well as from the favorable impact of winter storms on our 2021 results. Adjusted earnings per unit for the quarter, which excludes the impact of market-to-market adjustments, was $1.10, exceeding our guidance for the quarter of $1.02, primarily due to the impact of higher commodity prices and our tender revenue and product gains, as well as higher-than-expected refined product shipments. DCF for the quarter of $265 million was $11 million lower than last year. primarily due to the favorable impact on the prior year results of the 2021 winter storms just mentioned. As a reminder, we estimated a favorable impact of about $25 million from those storms last year. Free cash flow for the quarter was $240 million, resulting in free cash flow after distributions of about $19 million. 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 highlights of the quarterly results. Starting with our refined products segment, operating margin of $235 million is approximately 10% lower than the 21 period, mainly due to the mark-to-market adjustments I already mentioned. Our fee-based refined products business actually increased between periods. As we've seen throughout the past year, we continue to benefit from overall demand recovery as life has gotten more and more back to normal, along with additional contributions from our Texas expansion projects. We saw an 11% increase in total refined transportation volumes relative to the prior year period. Average transportation rates were slightly lower as a higher proportion of short haul shipments, which move at a lower tariff, more than offset mid-year 2021 tariff increases. As we've noted before, we expect this trend to continue throughout the year, mainly due to the final ramp of commitments on our East Houston to Hearn project that move at a shorter distance and at a lower rate than our average shipments. Operating expenses for the refined product segment decreased slightly between periods. A benefit from more favorable product overages, which reduce operating expenses, more than offset other expense increases we experienced this quarter, including higher power costs, which were higher primarily due to the benefit in the prior year from gains on power edges, again in connection with the winter storm I already mentioned. Equity earnings decreased due to the sale of a portion of our interest in our capacity in the joint venture. You'll recall that that sale occurred in April of last year, so this should be the last time we need to mention this variance. Product margin, the largest variance for the quarter, decreased between periods. As already noted, this was due to unrealized losses on our hedging activities in the current period as a result of the recent increase in commodity prices versus unrealized gains in the prior year. With respect to our gas-liquids blending sales, Our realized margins actually increased year-over-year to about 40 cents per gallon, versus closer to 30 cents per gallon in the prior year period. Turning to our crude oil business, first quarter operating margin was approximately $104 million, down 5% from the same period last year. Longhorn volumes averaged about 235,000 barrels per day during both periods, while we benefited from a higher average rate during the recent quarter, due to the mix of customer volumes moved during the period. On our Houston distribution system, lower tariff shipments were offset by higher terminal throughput fees as more customers elected to use the simplified pricing structure for our services within the Houston area. We've seen growing customer interest in such simplified pricing arrangements, with the result that even though we have added connections through the HDS and the volume of physical barrels we move has increased, the resulting incremental revenues are showing up as terminal throughput fees rather than as transportation revenues that are reflected in our transportation statistics. So to be clear, while this change impacts our reported volumes such that our HDS volumes for the year will be different from our original guidance, this change really just reflects a change in which bucket the related revenue falls in. Looking briefly at expenses, although operating expenses for the crude oil segment declined only slightly, I'll note that the 21 period also benefited from the winter storm related power hedge gains already mentioned. Lower integrity spending and lower pipeline rental costs more than offset the relatively higher power expense in the current period. Moving on to our crude oil joint ventures, grid sex volumes were approximately 285,000 barrels per day in the first quarter of 22, down from nearly 300,000 barrels per day in 2021. partially due to the timing of when our committed shippers have elected to move volumes under commitments, while saddle horn volumes increased to more than 220,000 barrels per day compared to approximately 180,000 barrels per day the year before, primarily driven by the ramp-up of new commitments associated with the pipeline's expansion. I did also want to point out that we recognized additional deficiency revenue for both the BridgeTex and Double Eagle pipelines during the quarter, which more than offset lower average rates on Saddlehorn, resulting in a slight increase in overall equity earnings for the crude oil segment. It's important to note that although this recognition of deficiency revenue results in higher equity earnings, the associated cash payments were already received from customers in prior periods, and our proportionate share of those payments were distributed to us by our joint ventures and recognized by us as DCF at that time. Just a few other items I'd like to touch on. First, G&A expense increased $18 million between periods, primarily due to higher incentive compensation costs related to the recent retirement of our former CEO, which resulted in an acceleration of the expense associated with his outstanding incentive comp awards. In addition, we also reported higher incentive comp expense overall, just due to Magellan's improved financial results. That interest expense increased slightly during the current quarter, primarily due to a higher average debt balance. As of March 31st, the face value of our outstanding debt was $5.3 billion, with a weighted average interest rate on that debt of about 4.2%. Our leverage ratio at the end of the quarter was 3.65 times for compliance purposes, which incorporates the gain we realized on the sale of part of our interest in Pasadena in 2021. Excluding that gain, leverage would have been a little over 3.8 times. 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 first quarter, we repurchased over 1 million units at an average purchase price of just under $48,000. for a total spend of $50 million, bringing total repurchases since inception to 17.5 million units for $850 million. As previously stated, we currently expect free cash flow after distributions to generally be used to repurchase our equity. 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 long-standing four times leverage limit, and also that the timing of the proceeds from the independent terminal sale remains subject to the government review process, which we believe is nearing completion. And with that, I'll turn the call back over to Aaron.