Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan Midstream Partners second quarter earnings conference call. During the presentation all participants will be in a listen only mode. Later 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 the operator please press star 0. As a reminder this conference is being recorded. Thursday, July 28th, 2022. It is now my pleasure to turn the conference over to Aaron Milford, President and CEO. Please go ahead.

Hello, and thank you for joining us today to discuss Magellan's second 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 Security and Exchange Commission and form your own opinions about Magellan's future performance. As we previously announced, we closed on the sale of our independent terminals network on June 8th and have been actively putting those proceeds to work. Including working capital adjustments, we received a total of $447 million for these assets and deployed $190 million during the second quarter into our equity buyback program, underscoring our commitment to maximizing long-term value for our investors. And today, we've continued our trend of solid financial performance with second quarter results that slightly beat our EPU guidance. With that, I'll now turn the call over to our CFO, Jeff Holman, to briefly review our second quarter financial results versus the year-ago period. Then I'll be back to discuss a few more areas of interest 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 second quarter net income of $354 million compared to $280 million in second quarter 2021. As noted in our press release, these results include a $162 million gain in the current period related to the sale of our independent terminals network, which is reflected in income from discontinued operations. And a $70 million gain in the prior period, primarily related to the sale of a portion of our interest and the Pasadena Marine Terminal Joint Venture. Excluding both of these gains, net income decreased about $18 million quarter over quarter. Adjusted earnings per unit for the quarter, which excludes the impact of mark-to-market adjustments, was $1.94. And further, excluding the $0.77 favorable impact of the gain on the sale of discontinued operations, earnings per unit was $1.17, exceeding our guidance for the quarter of $1.12. And I'll remind you that the EPU guidance we gave for the quarter did not include the gain on the sale. DCF for the quarter at $228 million was $40 million lower than last year. Free cash flow for the quarter was $649 million, resulting in free cash flow after distributions of about $429 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 product segment, operating margin of $246 million was 8% lower than the 2021 period. I'll provide more detail shortly, but in summary, the resulting decrease between periods was primarily due to an increase in operating expense, which is partially offset by an increase in transportation revenue and product margins. Drivers of the increase in transportation and terminals revenue included record high quarterly transportation volumes, resulting from additional contributions from our recent Texas expansions and higher South Texas volumes, which move at a lower rate, as well as continued demand recovery from pandemic levels, especially of aviation fuel. For the quarter, total refined products volumes were up 3% versus 21 levels. In addition, our average transportation rates increased year over year, due primarily to the mid-year 2021 tariff increase, while tender revenue benefited from the more favorable commodity environment. These benefits more than offset lower storage revenue, which similar to last quarter was impacted by lower utilization and rates following recent contract expiration. As a reminder, the prior period still benefited from some contracts entered when the market was in steep contango, and now those contracts have rolled off while the currently backward-rated market has resulted in lower demand for our storage services. Operating expenses for the refined segment increased during the second quarter 2022. I'll note that with the exception of power costs, which did increase slightly year over year, most of the increase for the quarter was not directly related to inflation, but instead represented a couple other discrete circumstances. In particular, we experienced less favorable product overages during the quarter, which reduced operating expense. Product overages and shortages fluctuate period to period with the operation of the pipeline, and these fluctuations can have a more pronounced effect in periods of elevated prices, which we saw this quarter. Additionally, the refined product segment experienced higher property taxes, primarily as a result of recently completed expansion projects. Product margin was favorable compared to the second quarter of 2021, primarily due to higher gas liquids blending margins and slightly higher volumes. our realized margins increased year over year to about 40 cents per gallon versus closer to 35 cents per gallon in the prior year period. As we noted on last quarter's call, basis differentials have been wider than normal recently, and these wider differentials have offset some of the benefit we otherwise would have expected from our blending business. Further, these favorable gas liquids blending results were partially offset by higher unrealized losses in the current period related to our hedging activities. just given the volatility in prices this year and the fact that we have outstanding hedges through next spring. Turning to our crude oil business, second quarter operating margin was approximately $108 million, slightly higher than the 2021 period. Longhorn volumes averaged a little over 200,000 barrels per day compared to 260,000 barrels a day in the second quarter of 2021, primarily due to the timing of when our committed shippers have elected to move volume under their commitments. as well as the expiration of a few of our smaller marketing commitments over the past year, which moved at a lower rate. Volumes on our Houston distribution system increased versus the prior year period, with more tariff shipments resulting from a new pipeline connection to our system. In addition, terminal throughput fees increased as more customers elected to use the simplified pricing structure for our services within the Houston area. We continue to see growing customer interest in such arrangements, with the result that while we have added connections to the HDS and the volume of physical barrels we move has increased, much of the resulting incremental revenues are showing up as terminal throughput fees rather than as transportation revenues that get reflected in our transportation statistics. Looking briefly at expenses, operating expenses for the crude oil segment increased slightly, primarily due to the higher integrity and maintenance spending, in particular on the splitter, which has increased which had a turnaround this quarter partially offset by lower power costs as a result both of lower longhorn volumes and our ongoing optimization efforts. Moving on to our crude oil joint ventures, bridge sex volumes were approximately 215,000 barrels per day in the second quarter of 22, down from nearly 315,000 barrels per day in 21, due primarily again to the timing of when our committed shippers have elected to move volumes under their commitments. We did, once again, recognize additional deficiency revenue for the bridge tax pipeline during the quarter, which offset the lower volumes. And I'll note that although this recognition of deficiency revenue results in a benefit to 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. Finally, on Saddlehorn, volumes averaged about 220,000 barrels per day, about the same as in the 2021 period, albeit at lower rates due to the expiration of the initial contracts on the line late last year. There are just a few other items I'd like to touch on. First, I'll note that net interest expense increased slightly, primarily due to a higher average debt balance during the quarter. That balance came down somewhat when we received the proceeds from the independent terminal sale. And as of June 30th, the face value of our outstanding debt was $5 billion, with a weighted average interest rate on that debt of about 4.4%. Our leverage ratio at the end of the quarter was 3.3 times for compliance purposes, which incorporates the gain we realized from the sale of our independent terminals. Excluding that gain, leverage would have been about 3.7 times. And that brings us to the last item I'll touch on today, which is capital allocation. I want to reiterate what I know you have 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. As already discussed, we received the proceeds from the sale of our independent terminals network during the second quarter and began actively putting those proceeds to work for our buyback program. We repurchased nearly 3.9 million units in the second quarter, at an average purchase price of $48.79 for a total spend of $190 million. Year-to-date, we have allocated $240 million to unit repurchases, bringing the total since inception to $1.04 billion. So far in 2022, we have returned nearly $680 million to our investors through a combination of unit repurchases and cash distributions, including our recently announced distribution, which pays out next month, That number is closer to $900 million. Further, we continue to see unit repurchases as an important focus of our ongoing capital allocation efforts, and 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. And in particular, I'll note that we remain committed to our long-standing full-time leverage limit. With that, I'll turn the call back over to Aaron.