Magellan Midstream Partners L.P.

Greetings and welcome to the Magellan Midstream Partners First 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, May 4, 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 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 and form your own opinions about Magellan's future performance. We are pleased to report that Magellan began 2023 with strong financial results that exceeded our initial guidance. This beat primarily related to higher than expected commodity profits as improved location differentials in our markets resulted in higher sales prices, and we simply had the opportunity to blend additional volumes during the quarter Refined transportation revenues were similar to our projections as we expected long-haul shipments to continue early this year in both the MidCon and West Texas regions as our extensive pipeline network has provided much-needed supply to backfill various refinery turnarounds throughout the heart of our system. Headline refined shipments may have been lighter than some expected as supply disruptions also impacted the more volatile volume on our supply push South Texas pipeline segment as well, which has a relatively nominal impact on actual revenues. Bottom line, overall demand remains solid in the core market served by our refined products pipeline system. I'll now turn the call over to our CFO, Jeff Holman, to review a few highlights from our first quarter earnings. Then I'll be back to discuss our latest outlook for the year before answering your questions.

Thanks, Aaron. First, let me note 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 first quarter net income of $274 million compared to $166 million in first quarter of 2022. At a high level, the year-over-year increase primarily resulted from higher product margin, in part due to mark-to-market adjustments on commodity hedges in the current period, as well as improved financial results overall from our core fee-based transportation and terminal services. Adjusted earnings per unit for the quarter, which excludes the impact of commodity-related mark-to-market adjustments, was $1.32, which, as Aaron just mentioned, exceeded our guidance of $1.20. DCF for the quarter increased to $313 million, up nearly $48 million from last year, while free cash flow for the quarter was $281 million, resulting in free cash flow after distributions of $68 million. A detailed description of quarter over quarter variances is available in our earnings release, so as usual, I'll just touch on a few highlights. Starting with refined products, first quarter operating margin of $337 million was $101 million higher than first quarter 2022, primarily due to higher product margin as well as higher average transportation rates. These higher rates were driven largely by the mid-year 2022 increase in our tariffs of about 6% on average. In addition, as Aaron mentioned, the current period continued to benefit from more long-haul shipments, which move at higher rates. Over the past few quarters, you've heard us talk about refinery outages and how they've benefited us by driving incremental long-haul shipments on our system, thanks to the extensive connectivity of our pipeline network. This quarter, we again saw a higher proportion of long-haul shipments overall compared to first quarter 2022, driven by supply disruptions in the Mid-Continent and West Texas regions. But we were also impacted by supply disruptions in South Texas, which decreased our transportation volumes in that area. This disproportionate decline in volumes on the more supply-driven South Texas portion of our system, which, as a reminder, moves at a lower rate and, in general, can experience more volatility compared to the rest of our system, contributed to a decrease in our overall refined products volumes without significantly impacting our revenues and contributing to a higher average rate. To put that phenomenon into context, the South Texas volume contributes around 10% of the total volume on our system, but only around 1% of the total transportation revenue. Excluding those South Texas volumes, total refined product volumes on the rest of our system were essentially flat year over year. Product margin, the largest variance for the quarter, increased between periods as a result of favorable results from our gas-liquids blending activities. which saw both higher margins and higher sales volume, as well as the recognition of unrealized gains on commodity hedges compared to losses in the first quarter of last year. Our realized blending margins increased year over year to nearly 75 cents per gallon versus closer to 40 cents per gallon in the prior year period. Sales volumes increased in part because higher blending margins, like those we experienced during the quarter, generally make more blends profitable, but also as a result of the dedicated efforts by several of our teams, particularly our operations, engineering, and commercial organizations, to continually improve our processes and identify efficiencies that allow us to capture additional blending opportunities. Turning to our crude oil business, first quarter operating margin increased $109 million, up $6 million from the 22 period. Longhorn volumes averaged a little over 225,000 barrels per day, down from about 235,000 barrels per day in the first quarter of 2022 due to lower marketing affiliate shipments, partially offset by higher third-party committed volumes. Even with lower volumes, Longhorn revenue actually increased slightly as the margin we earn on third-party barrels is 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 shipments from a new pipeline connection that began to ramp up in early 2022, as well as additional shipments related to our HOU joint futures contract that was launched early last year. Similar to what we discussed on the refined side, 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 in part as a result of higher dock activity in the quarter as we continue to experience an increase in export demand. Crude oil product margin increased versus the prior year period due to higher contributions from crude oil marketing opportunities that we've seen since mid-2022, as well as favorable mark-to-market adjustments on futures contracts in the current quarter. Moving on to our crude oil joint ventures, BridgeTex volumes were just over 140,000 barrels per day in the first quarter of 23, down from nearly 285,000 barrels per day in 2022, due to lower volumes from committed shippers, emphasizing again the importance of take-or-pay commitments from quality counterparties that ensure that we get paid regardless of our customers' short-term logistics decisions. For the full year, we now forecast BridgeTex volumes to average 140,000 barrels per day, in line with the activity we saw in the first quarter. Saddlehorn volumes increased to a record level of more than 240,000 barrels per day compared to approximately 220,000 barrels per day the year before as a result of higher shipments from both committed and uncommitted shippers. We currently expect this trend to continue as well and are updating our outlook on saddlehorn volumes to an average of 240,000 barrels per day for the full year. Moving beyond the individual segments, the only other item I want to highlight from our quarterly results is G&A, which decreased between periods. You may recall that in the first quarter of last year, we had incremental G&A expense related to our former CEO's retirement. This expense, of course, did not recur in first quarter of 2023, but that positive variance was mostly offset in the current quarter by increased compensation across the organization, as well as an increase in technology costs, primarily related to our ongoing automation and optimization efforts. Moving on to liquidity, balance sheet metrics, and capital allocation. First, in terms of liquidity, we continue to have our $1 billion credit facility available, and that quarter end had no borrowing outstanding on our commercial paper program. As of March 31st, the face value of our long-term debt remained unchanged at $5 billion, with a weighted average interest rate on that debt at about 4.4%. Our leverage ratio at the end of the quarter was 3.1 times for compliance purposes, which still incorporates the gain we realized on the sale of our independent terminals last year. Excluding that gain, leverage would have been about 3.4 times. As for capital allocation, our strategy remains the same as we continue to take a balanced approach using a combination of capital investments, cash distributions, and equity repurchases, all while remaining committed to the financial discipline we are known for. During the first quarter, we repurchased 1.2 million units at an average price of $53.65 per unit for a total spend of $64 million, bringing the total repurchases since inception to more than 27 million units for over $1.3 billion, representing a 12% reduction in units outstanding. We continue to see unit repurchases as an important focus of our ongoing capital allocation efforts and continue to 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 as detailed in our earnings release. Additionally, we remain committed to a strong balance sheet, solid investment grade credit rating, and our longstanding four times leverage limit, which we believe remains appropriate for Magellan given the nature of our assets and the stability of our business model. With that, I'll turn the call back over to Aaron.