Magellan Midstream Partners L.P. (MMP)

MMP 
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Magellan Midstream Partners (MMP)

Q3 2010 Earnings Call

November 2, 2010 1:30 p.m. ET

Executives

Don Wellendorf – President, CEO

John Chandler – SVP, CFO

Mike Mears – COO

Paula K. Farrell – IR Director

Analysts

Michael Cerasoli – Goldman Sachs

Darren Horowitz – Raymond James

Jeremy Tonet - UBS

Elvira Scotto – Credit Suisse

Ross Payne – Wells Fargo Securities

Sharon Lui – Wells Fargo Securities

Barrett Blaschke – RBC Capital Markets

Brian Zarahn – Barclays Capital

Presentation

Operator

Good day, and welcome, everyone to the third 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

Thank you. Good afternoon. Welcome to our third quarter conference call. Here with me from the company are Mike Mears, our COO, John Chandler, our CFO, Paula Farrell, who is our 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 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.

With that out of the way, I want to begin with a few highlights about this quarter. Magellan reported third quarter EPU of $0.51. 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 $0.54. That exceeds our $0.48 guidance we provided back in early August, that also assumes no NYMEX mark-to-market adjustments or [inaudible] cost of market adjustments.

Factors that performed above our earlier expectations, include higher distillate volumes and rates on our refined product systems to better-than-expected performance by the BP crude system we just acquired, and by Longhorn, and higher inland terminal throughput and product gains.

Of course, as I just alluded to, on September 1, we closed our acquisition of 7.8 million barrels of crude storage in Cushing, Oklahoma and more than 100 miles of crude and refined products pipeline in the Houston area for $289 million plus approximately $55 million for tank-bottom inventory.

This transaction makes Magellan one of the largest owners of crude storage in the Crushing hub, and significantly moves forward our strategy of turning out East Houston facility into a key distribution hub for crude oil in the Gulf Coast Area.

Our first month of ownership of these assets produced results above our acquisition economics, and customer interest in these assets is very strong; it’s the same phenomenon that we’ve seen with other assets we’ve acquired from Majors. Once the assets are in the hands of a service provider like us, a lot of people begin to express interest.

In late July, we announced our plans to build an addition of 1.5 million barrels of refined product storage at our Galena Park, Texas facility. We will jointly own 800,000 barrels of this new storage with a third-party on a 50/50 basis. And the remaining 700,000 barrels will be 100% owned by Magellan.

The new tanks are expected to be operational beginning in late 2012, with Magellan’s capital expenditures estimated to be around $65 million. In early September, we announced plans to build in conjunction with a private investor group, additional 2.25 million barrels of crude storage in Cushing, supported by long-term customer contracts.

Magellan’s capital cost for this project is $25 million and this brings our total new crude tank construction in Cushing’s to 4.25 million barrels. The funding growth project and others, in mid-July we conducted a very successful sale of 5.8 million common units, providing net proceeds of $258 million. We followed that up with a very favorable price, $300 million public debt issuance in early August. This leaves Magellan with probably the lowest overall cost of capital among our peers, a very strong balance sheet with a debt-to-EBITDA ratio of about 3.6 times, and at this point, we have no floating-rate debt at all.

And then finally, on October 20, we announced that we are raising our distribution relative to the third quarter which leads 5% higher than the distribution paid relative to the third quarter of 2009, and this keeps us on track to meet our goal of increasing our 2010 annual distribution by 4%.

So all in all, it’s been another solid quarter for us. I’ll talk more about what we see for the rest of the year, and Mike will give you a Longhorn update in minutes. But first, John is going to provide the details on MMPs third quarter compared to the same period in 2009. John.

John Chandler

Thanks, Don. Before I begin discussing specific business unit performance, I do 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.

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 gets to the heart of evaluating the economic success of the partnership’s core operations.

As was noted in our press release this morning, we had higher net income, higher operating profit, and higher earnings per units this quarter as demand continues to rebound on a petroleum pipeline system, and as profit from our historical investments continue to materialize. Our operating profit was $82.3 million for the quarter versus 74.8 million for the 2009 period, while net income was 56.6 million for the current period versus 54.2 million for the 2009 period.

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