Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan Midstream Partners third quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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, October 27, 2022. I would now like to turn the conference over to Aaron Milford, CEO. Please go ahead.

Hello, and thank you for joining us today to discuss Magellan's third 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. As you saw this morning, we reported third quarter results that beat our EPU guidance, continuing our trend of solid financial performance so far this year. Most notably, Our refined products transportation revenues exceeded our expectations, primarily due to higher average tariff rates, and our commodity margin benefited in part from the basis differential that flipped positive briefly just as the gas-liquids blending season began at the end of the quarter. There were a number of other favorable items, including overall lower expenses, that led to our performance. In addition, we announced a one-cent increase to our quarterly cash distribution last week, consistent with our guidance and general approach from last year, a current yield of over 8%. Our yield remains attractive, and we recognize that distribution growth is important to a portion of our investors. Magellan is proud to continue our trend of increasing the payout to investors each year. I'll now turn the call over to our CFO, Jeff Holman, to briefly review our third quarter financial results versus the year-ago period. Then I'll be back to discuss guidance for the remainder of the year, before answering your questions.

Thanks, Aaron. First, I'll note 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. This morning, we reported third quarter net income of $330 million compared to $237 million in third quarter 2021. Adjusted earnings per unit for the quarter, which excludes the impact of commodity-related mark-to-market adjustments, was $1.29, which, as Aaron pointed out, exceeded our guidance of $1.15. DCF for the quarter increased to $290 million, up $13 million from last year. Pre-cash flow for the quarter was $273 million, resulting in pre-cash flow after distributions of $58 million. A detailed description of quarter-over-quarter variances is available in the earnings release, so as usual, I'm just going to touch on a few highlights. Starting with refined products, operating margin of $384 million was 40% higher than the 2021 period, driven primarily by a more favorable commodity environment as well as higher average tariff rates. Total refined products volumes were slightly lower between periods, But the increase in the average transportation rate more than offset this model's volume decline. The higher average rate was driven primarily by the mid-year 2022 increase in our tariffs of about 6% on average. Just as a reminder, this 6% average increase consisted of an 8.7% increase in the 30% of our markets with index rates and an average increase of approximately 5% in our markets deemed workably competitive. In addition, rates in the current period benefited from more long-haul shipments, which move at higher rates. The increase in long-haul shipments was driven in part by our customers using the extensive connectivity of our system to satisfy market demand in areas along our network that were impacted by refinery disruptions during the quarter. Operating expenses for the refined segment decreased during the third quarter of 2022, primarily due to favorable product overages, which reduce operating expense. You may recall that we discussed product overages last quarter as an unfavorable item, and as we mentioned then, they can fluctuate period to period with the operation of the pipeline. But we generally expect these variances to more or less even out over time as we've recently experienced. Product margin increased between periods in part due to higher margins and volumes on our gas liquids blending activities. Our realized blending margins increased year over year to about 75 cents per gallon, versus closer to 40 cents per gallon in the prior year period. On our last couple of calls, you've heard us talk about how basis differentials between the Mid-Continent and New York Harbor have been wider than normal, negatively impacting the margins we earn on our blending activities. More recently, we saw that basis move in the other direction, resulting in a benefit to our realized margins as we kicked off the fall blending season before widening again of late. In addition to favorable gas liquids blending results, We had significant unrealized gains on futures contracts related to our hedging activities, which favorably impacted operating margin in the current period. Of course, we ignore these out-of-period gains on futures contracts in our calculations of DCF for the period to better match their DCF impact with the underlying product sales activity that will occur in future periods. Turning to our crude oil business, third quarter operating margin increased to $127 million nearly 14% higher than in the 2021 period. Longhorn volumes averaged 225,000 barrels per day, compared to around 240,000 in the third quarter of 2021, primarily due to lower committed shipments based on the timing of when our customers have elected to move volumes under their commitments. Volumes in our Houston distribution system increased versus the prior year period, with more tariff shipments resulting from a recent pipeline connection to our systems. In addition, terminal throughput fees increased as a result of more customers electing to move barrels under a simplified pricing structure for our services within the Houston area. Similarly to last quarter, storage revenue declined due to lower utilization and rates as we continue to see general softness in storage demand due to prolonged market backwardation. Crude oil product margin benefited from additional crude oil marketing activities in the current as well as unrealized gains on futures contracts related to our hedging activities. Moving on to our crude oil joint ventures, bridge text volumes were approximately 250,000 barrels per day in the third quarter of 22, down from just over 315,000 barrels per day in 2021, primarily due, again, to the timing of when our committed shippers have elected to move volumes under their commitments, while saddle horn volumes averaged a little more than 215,000 barrels per day. basically in line with the 2021 period. From an equity earnings perspective, we once again recognized additional deficiency revenue for both the bridge tax and double legal pipelines, which offset lower average rates on Saddlehorn, resulting in essentially flat equity earnings for the segment. It's important to note that although this recognition of deficiency revenue at our joint ventures 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. Moving beyond the individual segments, there are just a few other items I'd like to highlight from our year-over-year results. G&A expense increased between periods, primarily due to higher overall compensation costs due in part to an increase in incentive comp, reflecting our strong results year-to-date. In addition, some miscellaneous non-comp related items including elevated legal and technology costs, contributed to the year-over-year increase. Other expense was unfavorable, primarily due to additional expense recognized during the quarter associated with ongoing legal matters previously disclosed in our SEC filings. And finally, as everyone is aware, we sold our independent terminals in June, which of course resulted in lower income from discontinued operations. 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. As of September 30th, the face value of our long-term debt was still about $5 billion, with $29 million of commercial paper outstanding. The weighted average interest rate on our debt remains about 4.4%, with our next bond maturity in 2025. Our leverage ratio at the end of the quarter was 3.3 times for compliance purposes, which incorporates the gain we realized on the sale of our independent terminals. Excluding that gain, leverage would have been about 3.7 times. As for 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. We continue to execute on our buyback strategy during the quarter, repurchasing 2.7 million units at an average price of about $50 per unit for a total spend of nearly $130 million. Year to date, we've spent $377 million on unit repurchases, bringing the total since inception to a little under $1.2 billion. So far in 2022, we have returned a total of over $1 billion to our investors through a combination of unit repurchases and cash distributions. including our recently announced distribution, which pays out next month, that number will be over $1.2 billion. We continue to see unit repurchases as an important focus of our ongoing capital allocation efforts, and we continue to expect free cash flow after distributions to generally be used to repurchase our equity. But, 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, available free cash flow, balance sheet metrics, legal and regulatory requirements, as well as market conditions and the trading price of our equity. And of course, we remain committed to our longstanding four times leverage limit. And with that, I'll turn the call back over to Aaron.