Magellan Midstream Partners LP Management Discusses Q2 2012 Results - Earnings Call Transcript

Magellan Midstream Partners LP (MMP)

Q2 2012 Earnings Call

August 01, 2012 1:30 pm ET

Executives

Michael N. Mears - Chairman of Magellan GP LLC, Chief Executive Officer of Magellan GP LLC, President of Magellan GP LLC and Chief Operating Officer of Magellan Gp LLC

John D. Chandler - Chief Financial Officer of Magellan Gp Llc - General Partner, Principal Accounting Office of Magellan Gp Llc - General Partner, Senior Vice President of Magellan Gp Llc - General Partner and Treasurer of Magellan Gp Llc - General Partner

Analysts

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Sharon Lui - Wells Fargo Securities, LLC, Research Division

James Jampel

Brian J. Zarahn - Barclays Capital, Research Division

Theodore Durbin - Goldman Sachs Group Inc., Research Division

Elvira Scotto - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good day, everyone, and welcome to today's Magellan Midstream Partners Second Quarter 2012 Earnings Results Conference. Just as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Mike Mears. Please go ahead, sir.

Michael N. Mears

Thank you. Well, good afternoon, and thank you, all, for joining us today to discuss our record quarterly financial results for the second quarter of 2012.

Before 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 on our filings with the SEC.

We reported second quarter net income per unit of $1.22 this morning. Normalizing for mark-to-market commodity adjustments, which we generally exclude from our guidance, we generated net income per unit of $1.01, per unit. Our quarterly results significantly exceeded the $0.83 guidance we gave back in early May, due to 2 primary factors. First, transportation volumes were higher than expected, with gasoline shipments improving with lower gasoline pricing during the start of the higher-demand summer driving season. Crude oil volumes were also significantly higher, as shippers increased their utilization of our Houston-area distribution network.

The second factor contributing to our improved performance in the quarter was an increase in product sales from our commodity activities. Our quarterly distributable cash flow increased to a record $134 million, resulting in a 1.3x coverage ratio for both the quarter and year-to-date, even with our latest quarterly distribution payout of $0.945 per unit. I know a number of you were pleasantly surprised with the significant increase to our distribution that was announced last week, and I think these very strong coverage ratios clearly demonstrate why our management team believe now is the time for a step change, in Magellan's distribution, to provide additional value back to our investors. Even though we had a strong second quarter, this was not the only reason for the decision to raise the distribution beyond guidance.

At the end of the first quarter, our DCF guidance was $490 million, which would have resulted in excess DCF of approximately $100 million for 2012, assuming a 9% distribution growth for the year. As you recall, we have indicated that we believe around $75 million of excess cash is prudent, based on the current market environment. So our DCF projections for 2012 were already in excess of what we felt was necessary. However, as you may also recall, there were a number of items still being worked out, when we first advertised the 9% distribution growth target for 2012 earlier this year.

First, we had not yet determined if we would keep our ammonia pipeline system, which is expected to generate close to $20 million of DCF this year. In addition, although we knew we were moving ahead with our Crane-to-Houston crude oil pipeline at the beginning of this year, the project's scope was still at its initial size of 135,000 barrels per day. Even though this project doesn't begin contributing until 2013, we do look out a few years in making distribution decisions, so we can be confident in the long-term sustainability to our investors.

Now that we have decided to retain the ammonia pipeline system and have increased the size of our Crane-to-Houston project to 225,000 barrels per day, of fully committed capacity, we see our base business and growth projects generating enough cash flow to comfortably increase our distribution to a higher level. We have now increased our growth expectation accordingly, and are targeting distributions for full year 2012 that are 18% higher than 2011, with the goal of raising distributions, an additional 10% for 2013, as our growth projects are expected to come online and benefit future periods.

With that being said, we also did see an improvement in our base business in the second quarter, which further strengthened our decision that this was the right time to step up the distribution. And with the increased DCF guidance of $520 million for 2012, that we provided in our earnings announcement this morning, we are even more confident in our new distribution level, and now expect to generate a still very healthy coverage ratio of 1.2x for the full year, generating almost $100 million of excess cash, giving us plenty of cushion this year.

Now that we've discussed our thoughts around the recent distribution step-change in detail, I'll turn the call over to our CFO, John Chandler, to discuss our second 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 larger growth capital projects.

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