Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan Midstream Partners fourth 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, February 2nd, 2023. It is now my pleasure to turn the conference over to Aaron Milford, CEO. Please go ahead.

Hello, and thank you for joining us today to discuss Magellan's fourth quarter, financial results, and perhaps even more of interest, our outlook for the new year. Before getting started, we must remind you that management will be making forward-looking statements as defined by the Securities and Exchange Commission and 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. Magellan wrapped up the year with another solid quarter, supported by record refined products transportation volumes and financial results that exceeded our expectations, excluding a non-cash impairment taken in the quarter. During 2022, we delivered over $1.3 billion of value to our investors via opportunistic equity repurchases and Magellan's attractive cash distribution, marking 21 years of continuous annual distribution growth. I will now turn the call over to our CFO, Jeff Holman, to review our fourth quarter financial results versus the year-ago period. Then I'll be back to discuss our annual guidance for 2023 before answering your questions.

Thanks, Erin. First, I'll note, as usual, that 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 $187 million, compared to $244 million in fourth quarter of 2021. These results include the $58 million impairment of our investment in the Double Eagle Pipeline joint venture. Adjusted earnings per unit for the quarter, which excludes the impact of commodity-related mark-to-market adjustments, was $1.06. Excluding the $0.28 negative impact of the Double Eagle impairment, adjusted earnings per unit was $1.34, exceeding our guidance of $1.22. DCF for the quarter increased to $345 million, up $48 million from last year, while free cash flow for the quarter was $324 million, resulting in free cash flow after distributions of $109 million. For the full year 2022, DCF was $1.128 billion, an increase of $10 million from 2021. DCF per unit in 2022 was $5.46. about 6% higher than in 2021. This per unit perspective reflects the significant impact of our buyback program and highlights our ability to deliver per unit growth in excess of the underlying DCF growth that our business experiences. Full year free cash flow for 2022 was $1.486 billion, resulting in free cash flow after distributions of $660 million for the year. A detailed description of quarter over quarter variances is available in the earnings release, so as usual, I'll just touch on a few highlights. Starting with refined products, fourth quarter operating margin of $303 million was essentially flat with fourth quarter 2021. Record quarterly transportation volumes and higher average transportation rates from our core fee-based transportation and terminaling activities offset unfavorable mark-to-market adjustments on our commodity hedges. Higher rates were driven primarily by the mid-year 2022 increase in our tariffs of about 6% on average. In addition, rates in the current period continue to benefit from more long-haul shipments, which move at higher rates. Similar to the third quarter, the increase in long-haul shipments was driven largely by our customers using the extensive connectivity of our system to satisfy market demand in areas along our network that continue to be impacted by refinery outages. Operating expenses for the refined segment increased about $6 million versus the prior year period, primarily due to less favorable product overages, which reduced operating expense, as well as higher power costs, primarily as a result of the increase in long-haul movements just mentioned. These unfavorable expense items were partially offset by a favorable property tax true-up in the current quarter. Product margin decrease between periods is favorable results from our gas-liquids blending activities which saw both higher margins and higher sales volume, were more than offset by the recognition of additional unrealized losses on commodity hedges in fourth quarter 2022. Our realized blending margins increased year over year to about 55 cents per gallon versus closer to 45 cents per gallon in the prior year period. Turning to our crude oil business, fourth quarter operating margin increased to $128 million, nearly 24% higher than in the 21 periods. Longhorn volumes average just over 245,000 barrels per day, slightly down from 250,000 in the fourth quarter of 2021 due to lower marketing affiliate shipments, partially offset by higher committed volumes. Longhorn revenue actually increased overall as the margin we earn on committed barrels is currently higher than the margin we realize on marketing affiliate barrels. Volumes on our Houston distribution system increased versus the prior year period, in part due to higher tariff shipments resulting from a new pipeline connection in 2022. These shipments move at a lower rate than long-haul volumes, so this increased HDS activity resulted in a lower average rate for the segment overall. In addition, terminal throughput fees increased, partially as a result of more customers electing to move barrels under a simplified pricing structure for our services within the Houston area, as well as higher dock activity in the quarter driven by the recent increase in export demand. Crude oil product margin increased versus the prior year period as we again benefited from additional crude oil marketing opportunities. As we noted on our call last quarter, these opportunities involve different factors, such as quality or location differentials, and are less rateable than our core transportation and terminaling business, but provide low-risk returns that we continue to pursue when available. Moving on to our crude oil joint ventures, Bridge text volumes were nearly 270,000 barrels per day in the fourth quarter of 22, down from nearly 300,000 barrels per day in 2021. And saddle horn volumes averaged nearly 230,000 barrels per day, slightly lower than 235,000 barrels per day in the 21 period. For both of these pipelines, the decrease in volume is primarily due to the timing of when our committed shippers utilize our services and emphasizes the importance of take or pay commitments from quality counterparties to ensure we get paid regardless of our customer's short-term logistics decisions. From an equity earnings perspective, we once again recognized additional deficiency revenue for both the bridge tax and double legal pipelines, resulting in an increase in equity earnings for the segment. It's worth noting 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. Moving beyond the individual segments, there are just a few other items I'd like to highlight from our quarterly results. Depreciation, amortization, and impairment expense increased primarily due to the previously mentioned impairment of our investment in double legal. You'll recall that the Double Eagle pipeline, which delivers condensate from the Eagleford Basin directly to Corpus and indirectly to Houston through a connection to a third-party pipeline, was backed by long-term customer commitments when it began operations nearly 10 years ago. Those initial contracts expire later this year, and our customers did not provide notice of their intention to extend their commitments as provided for in those contracts. Further, those customers have consistently shipped below their commitment levels, and consequently paid deficiency payments, while current market rates for transportation out of the Eagle Ford are significantly lower than the rates provided for in their expiring contracts. As a result, we recorded an impairment of our investment in Double Eagle during the fourth quarter. Finally, as everyone will remember, we sold our independent terminals in June, which of course resulted in lower income from discontinued operations in the current 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 with the maturity of most of those commitments under that facility extended to 2027 during the fourth quarter. As of December 31st, the face value of our long-term debt was still about $5 billion with $32 million of commercial paper outstanding. The weighted average interest rate on our debt remains about 4.4% with our next bond maturity in 2025. And as a reminder, Essentially, all of our interest rates remain fixed, other than that small amount of commercial paper borrowings. Our leverage ratio at the end of the quarter was 3.2 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 3.6 times. As for capital allocation, our story hasn't changed. We continue to believe it is important for us to execute a balanced capital allocation strategy using a combination of capital investments cash distributions, and equity repurchases, all while remaining committed to the financial discipline we are known for. We continue to execute on our buyback strategy during the quarter, repurchasing 1.9 million units at an average price of about $50 per unit for a total spend of $95 million. For the full year 2022, we invested $472 million in unit repurchases, bringing the total since inception to nearly $1.3 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 repurchases 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 a strong balance sheet and our longstanding four times leverage limit. With that, I'll turn the call back over to Aaron.