Magellan Midstream Partners L.P. (MMP)

MMP 
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Magellan Midstream Partners (MMP)

Q2 2010 Earnings Call

August 03, 2010 1:30 p.m. ET

Executives

Don Wellendorf – President, CEO

John Chandler – SVP, CFO

Mike Mears – COO

Analysts

Darren Horowitz – Raymond James

Sharon Lui – Wells Fargo Securities

Brian Zarahn – Barclays Capital

Michael Cerasoli – Goldman Sachs

Barrett Blaschke – RBC Capital Markets

Elvira Scotto – Credit Suisse

Ross Payne – Wells Fargo Securities

Presentation

Operator

Good day and welcome, everyone to the second quarter 2010 earnings results conference call for Magellan Midstream Partners. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Don Wellendorf. Please go ahead, sir.

Don Wellendorf

Hello and thanks for joining us today to discuss our second quarter earnings. Here with me from the Company are John Chandler, our CFO, Mike Mears, our COO, Paula Farrell, who is responsible for Investor Relations and a number of other people.

During this call, Magellan management will make forward-looking statements as defined by the SEC. Such statements are based on our current judgements 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.

Alright, with that out of the way, let's talk about our performance for the quarter. Magellan reported a first quarter EPU of $0.96 which is a new quarterly record. If you eliminate from that number the impact of NYMEX mark-to-market adjustments and lower of cost of market adjustments associated with both butane blending and El Paso related sales activities, the result is an EPU of $0.86. That substantially exceeds the $0.64 guidance we provided back in early May, which also assumed no NYMEX adjustments. Items that beat our expectations and resulted in the positive variance to guidance include distillate volumes and rates, inland terminal throughput and product gains and book income on our El Paso product sales. Even after you remove the favorable NYMEX and LTM adjustments that benefited the quarter, we still had a very strong second quarter, both in earnings and cash flow.

Our distributable cash flow was the second highest in our history at $100.7 million, and we missed setting a new all-time quarterly record for distributable cash flow by only $4.5 million. While the second quarter ended in June, we had several significant events that occurred in July that I think warrant a quick mention here.

On July 13, we announced that we have agreed to acquire 7.8 million barrels of crude oil storage in Cushing, Oklahoma and more than 100 miles of crude and refined products pipelines in the Houston area for $289 million, plus approximately $50 million of tank bottom inventory. This transaction will make us one of the largest owners of crude storage in the Cushing hub and significantly moves forward our strategy of turning our East Houston facility into a key distribution hub for crude oil in the Gulf Coast area. We are targeting closing the transaction on or around September 1. We see no issues with regards to meeting this closing date, and I can tell you that we are very excited about the level of interest in these assets being expressed by our customers and the opportunities it looks like these assets may create.

On July 14, we priced what we view as a very successful equity offering that after the [she] was exercised, ended up totaling 5.750 million common units. Sale provided net proceeds of about $258 million, which we partially used to funding acquisition I just mentioned.

In July 22, we announced that we are raising our distribution relative to the second quarter, which will be 3% higher than the distribution paid relative to the second quarter of 2009. This keeps us on track to meet our goal of increasing our 2010 annual distribution by 4%. On July 27, we announced the signing of a significant long-term throughput commitment for our Houston to El Paso pipeline, the former Longhorn pipeline, for a minimum of 20,000 barrels per day for 12.5 years. That commitment begins August 1.

We expect the product moving under this agreement subsequently will be delivered to Juarez, Mexico, be a newly constructed third party pipeline that connects to Magellan El Paso terminal. While there are other supply sources for Juarez, I think it is worth noting that Juarez consumes around 25,000 barrels per day or more. So, we possibly might get more volumes than the contracted minimum. We also are working on other refined products throughput opportunities at the Longhorn that we hope we can to bring to fruition in the near future.

Also on July 27, we announced our plan to build an additional 1.5 million barrels of refined product storage at our Galena Park, Texas facility. We will jointly own 800,000 barrels at the new storage with a third party on a 50-50 basis. The remaining 700,000 barrels will be 100% Magellan owned. While our partner has asked that we do not to disclose their name, I can tell you we agreed to this partnership because we feel they are attractive potential upsides to establishing the relationship. The new tanks are expected to be operational beginning late in 2012, with Magellan's capital expenditure estimated to be around $65 million.

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