Magellan Midstream Partners L.P. (MMP)

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Magellan Midstream Partners, L.P. (MMP)

Q4 2012 Earnings Call

February 5, 2013 1:30 am ET

Executives

Michael N. Mears – Chairman, President and Chief Executive Officer

John D. Chandler – Senior Vice President and Chief Financial Officer

Analysts

Brian J. Zarahn – Barclays Capital, Inc.

Steve Sherowski – Goldman Sachs

Noah Lerner – Hartz Capital, Inc.

Sharon Lui – Wells Fargo Advisors LLC

Stephen C. Tabb – Tocqueville Asset Management LP

Elvira Scotto – RBC Capital Markets

Dennis Coleman – Bank of America Merrill Lynch

Presentation

Operator

Good day, and welcome to the Magellan Midstream Partners Fourth Quarter 2012 Earnings Conference Call. As a reminder, today's conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Mears, President and Chief Executive Officer. Please go ahead, sir.

Michael N. Mears

Good afternoon and thank you for joining us today to discuss Magellan’s fourth quarter financial results and our guidance for another record year in 2013.

Before we get started, I’ll remind you that management will be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding some of the factors that could impact the future performance of Magellan. You should form your own opinions about Magellan's future performance based on the risk factors and other information discussed in our filings with the SEC.

As I am sure you saw this morning, we generated records for a number of financial metrics, including quarterly and annual records for operating profit, net income, earnings per unit and distributable cash flow. We generated $540 million of distributable cash flow for the year, which provided us with 1.3 times coverage ratio even after our significant distribution step change earlier in 2012, that allowed us to increase cash distributions to our investors by an impressive 18% for the year.

Our annual DCF exceeded the latest $525 million guidance we provided primarily due to stronger transportation revenues, driven by higher average tariffs and more crude volumes and higher commodity related profits due to more blending opportunities at higher margins. But even more importantly the year 2012 set Magellan on the path becoming a premier provider of crude oil distribution services, while maintaining our key position in the refined product space. We expanded the scope our project to reverse and convert the Longhorn pipeline, to begin transporting up to 225,000 barrels a day of crude oil from Crane, Texas to Houston over the next few months.

Further because this project received such overwhelming support from the industry, we launched the pipeline construction project with Occidental Petroleum to build the 400 mile BridgeTex pipeline to deliver additional Permian Basin crude to the Houston area. We’ve also been building at our pipeline network within the Houston and Texas City area, to be able to deliver crude oils to all the refineries within this region. And on top of those projects we’ve been working on our Double Eagle joint venture which will begin delivering Eagle Ford condensate to our Corpus Christi terminal over the next few months as well.

So as you can tell there are lot of exiting opportunities at Magellan that are coming to fruition and believe will generate significant future growth for our company. I’ll now turn the call over to our CFO, John Chandler to discuss our fourth quarter results in more detail compared to the 2011 period. And I’ll be back to discuss what we see ahead for 2013.

John D. Chandler

Thanks Mike. Before I begin discussing specific business unit performance, I want to mention that I will be commenting on the non-GAAP measure operating margin which is simply operating profit before G&A expenses and depreciation, and amortization. A reconciliation of operating margin to operating profit was included in our earnings release this morning. Management believes that investors benefit from this information because it get’s to the heart of evaluating the economic success with the partnerships cooperation’s.

As noted in our press release this morning, we had record net income and record earnings per unit this quarter. The quarter specially benefited from record commodity margins, as well as record profits from our terminals and from our petroleum pipeline businesses. In fact each of our business segments experienced increases for the quarter. Our net income was $153.8 million for the current period, which was $110.3 million for the 2011 period.

As it’s usual, I’ll go through the operating margin performance of each of our business lines and discuss variances in depreciation, G&A and interest to come to an overall explanation of the variance in net income.

So, first let's look at operating margin which was up $49.6 million or 25% higher in the same period last year. Our petroleum pipeline system experienced a strong increase for the quarter with operating margin increasing $43.2 million versus the same period last year going from $150.2 million to $193.4 this period.

Transportation and terminal revenues for the pipeline segment were 13.6 million more than the same period last year. Approximately, 90% of this increase came from increased tariff revenues, largely as a result of higher average tariff rates. Let us not to say the shipment volumes didn’t also increase.

Shipment volumes for the period increased 11.1 million barrels or about 10% more than the same period last year. However a big portion of the increased volume came from our South Texas pipeline system, were volume shipped at a much lower average tariff rate usually in the $0.20 to $0.30 per barrel range. In fact if you break out the South Texas system, where volumes increased 12.6 million barrels, that leaves a 1.5 million barrel or 2% volume decrease on the reminder of our system.

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