Magellan Midstream Partners L.P. (MMP)

MMP 
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Magellan Midstream Partners, LP (MMP)

Q3 2012 Earnings Call

October 31, 2012 1:30 pm ET

Executives

Michael N. Mears – Chairman of the Board, President & Chief Executive Officer of Magellan GP, LLC

John D. Chandler – Chief Financial Officer & Senior Vice President of Magellan GP, LLC

Analyst

Darren Horowitz – Raymond James

Kathleen King – Bank of America Merrill Lynch

Brian Zarahn – Barclays Capital Market

John Edwards – Credit Suisse

Elvira Scotto – RBC Capital Markets

Presentation

Operator

Welcome to the Magellan Midstream Partners third quarter 2012 earnings result conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Mike Mears.

Michael N. Mears

Good afternoon and thank you everyone for joining us today to discuss our financial results for the third quarter of 2012. 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.

During this busy earnings season our thoughts are with those impacted by the storms in the Northeast. As you know, Magellan has employees and assets that were in Hurricane Sandy’s path and we are pleased to report that other some water at the facilities, our terminals and people handled the storm very well. Our assessment at this time indicates no significant damage and the facilities are in the process of being restored to operation. We appreciate all that our dedicated employees have done to diligently implement our safety procedures in advance of the storm and getting the assets back operational now that the storm has passed.

Now, on to earnings. We reported third quarter net income per unit of $0.22 per unit this morning which was heavily impacted by mark-to-market accounting on our NYNEX hedges. Normalizing for those mark-to-market adjustments which we generally exclude from our guidance, we generated net income per unit of $0.35. Our normalized net income per unit is slightly less than our normalized third quarter guidance of $0.38 primarily due to the timing of gasoline sales that were produced in the third quarter from our blending activities that weren’t sold until the fourth quarter.

As a reminder these pre unit amounts do reflect our two for one unit split that we completed at the close of business on October 12th. We also recently increased our quarterly cash distribution to $0.485 per unit which keeps us on track for 18% annual distribution growth for the year while continuing to generate a healthy distribution coverage of 1.2 times year-to-date.

I will now turn the call over to our CFO John Chandler to discuss our third quarter results versus the comparable 2011 period. Then I’ll be back to discuss our forecast for the rest of 2012 and the status of some of our large growth capital projects.

John D. Chandler

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 appreciation and amortizations. 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 cooperation.

As noted in our press release this morning we reported net income of $50.5 million this quarter versus net income of $110.2 million in the third quarter of 2011. It is important to note that both periods were significantly influenced by out of period hedge gains and losses with the third quarter 2011 benefiting from $30.5 million of out of period hedge gains and the third quarter of 2012 being negatively impacted by $29.8 million of out of period hedge losses.

If you factor out the out of period activity net income between the periods actually increased by about $600,000 or about half a percent. Details reflecting the out of period activity can be found on our distributable cash flow reconciliation to net income which can be found attached to our earnings release this morning. On that reconciliation you will also see that our distributable cash flow for the quarter increased $6.7 million or 7% versus the third quarter of 2011.

Again, factoring out the out of period hedge activity, the quarter benefited from profit increases in our pipelines where we benefited from higher pipeline shipment volumes, higher tariff rates in a majority of our pipeline systems, higher commodity related profits and even higher throughput on our ammonia pipeline system. Those increases were mostly offset by higher G&A, depreciation and interest expense.

As is usual, I’ll go through the operating margin performance of each of our business lines and then discuss variances in depreciation, G&A and interest to come to an overall explanation of the variance in net income. First, let’s look at operating margin which was down $50 million versus the same period last year. Again, factoring out the out of period activity it was actually up $10.3 million when you exclude those out of period activities.

Our petroleum pipeline system saw operating margin decrease $51.4 million versus the same period last year going from $149.1 million to $97.7 million this period. The out of period hedge activity explains $60.3 million of this variance. So if you exclude that, all the other activities for the pipeline netted to an aggregate increase of $8.9 million in profit.

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