Targets Annual Distribution Growth of 8% for 2017 and 2018
TULSA, Okla. – Magellan Midstream Partners, L.P. (NYSE: MMP) today reported net income of $213.3 million for fourth quarter 2016 compared to $207.1 million for fourth quarter 2015 driven by record quarterly results for the partnership’s crude oil and marine storage segments.
Distributable cash flow (DCF), a non-generally accepted accounting principles (non-GAAP) financial measure that represents the amount of cash generated during the period that is available to pay distributions, was a record $277.2 million for fourth quarter 2016 compared to $256.9 million for fourth quarter 2015.
Diluted net income per limited partner unit was 93 cents in fourth quarter 2016 and 91 cents in fourth quarter 2015. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-GAAP financial measure, of $1.04 for fourth quarter 2016 was higher than the 91-cent guidance provided by management in early November primarily due to continued strong performance from the partnership’s fee-based activities, including higher-than-expected earnings from the BridgeTex pipeline and lower operating costs.
“Magellan finished 2016 on a strong note, generating record quarterly and annual distributable cash flow, increasing annual cash distributions to our investors by 10% and maintaining our solid, investment-grade balance sheet,” said Michael Mears, chief executive officer. “We expect the favorable momentum of 2016 to continue with another record year projected for 2017 as we benefit from recent expansion projects and continued strong demand within all of our business segments.”
An analysis by segment comparing fourth quarter 2016 to fourth quarter 2015 is provided below based on operating margin, a non-GAAP financial measure that reflects operating profit before general and administrative (G&A) expense and depreciation and amortization:
Refined products. Refined products operating margin was $191.1 million, a decrease of $12.7 million primarily related to the impact of MTM adjustments for exchange-traded futures contracts used to hedge the partnership’s commodity-related activities. Otherwise, financial results from this segment’s fee-based activities were relatively flat between periods.
Transportation and terminals revenue increased $11.1 million between periods primarily due to operating results from the partnership’s Little Rock pipeline that commenced commercial operations in July 2016, 3% higher shipments from other segments of the partnership’s pipeline system driven by stronger demand for gasoline and aviation fuel and slightly higher average tariffs from the partnership’s mid-2016 tariff adjustment, which resulted in a 2% average increase over all the partnership’s markets.
Operating expenses increased $11.3 million primarily due to higher accruals related to pipeline releases occurring during the fourth quarter of 2016, incremental costs associated with operation of the Little Rock pipeline and less favorable product overages in the current period (which reduce operating expenses).
Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) decreased $12.3 million between periods due to unrealized losses recognized in fourth quarter 2016 on futures contracts used to economically hedge the partnership’s commodity-related activities compared to unrealized gains during fourth quarter 2015. Details of these MTM commodity-related and other inventory adjustments can be found on the Distributable Cash Flow Reconciliation to Net Income schedule that accompanies this news release. The partnership’s cash product margin, which reflects only transactions that settled during the quarter, declined slightly between periods due to lower hedged margins for the partnership’s butane blending activities compared to the previous year, primarily offset by increased sales volumes attributable to additional blending opportunities in 2016.
Crude oil. Crude oil operating margin was $111.7 million, an increase of $16.5 million and a quarterly record for this segment. Transportation and terminals revenue increased primarily due to additional leased storage contracts at Magellan’s East Houston, Texas terminal. Lower shipments mainly on the partnership’s Houston distribution system were more than offset by higher average rates in part resulting from deficiency revenue for volume committed but not moved.
Earnings of non-controlled entities increased $10.9 million due to contributions from Saddlehorn Pipeline Company, LLC, which is owned 40% by Magellan and began operations in Sept. 2016, and improved earnings from BridgeTex Pipeline Company, LLC, which is owned 50% by Magellan, resulting from higher transportation volumes and recognition of deficiency revenue for volume committed but not moved.
Operating expenses declined slightly as costs related to incremental headcount to support the crude oil segment were more than offset by lower integrity spending primarily related to timing of tank maintenance work in the current period and more favorable product overages (which reduce operating expenses).
Marine storage. Marine storage operating margin was $35.1 million, an increase of $5.9 million and a quarterly record for this segment. Revenue increased due to higher average rates from contract renewals and escalations, new storage tanks at the partnership’s Corpus Christi, Texas facility as well as overall increased customer activity in the current period. Operating expenses decreased slightly due to lower environmental accruals for remediation sites.
Other items. Depreciation and amortization increased due to recent expansion capital expenditures, whereas G&A expense decreased primarily due to lower payout estimates for the partnership’s equity-based incentive compensation plan and annual bonus accruals. Other income was favorable between periods related to more favorable non-cash MTM adjustments for hedged crude oil tank bottom inventory owned by the partnership.
Net interest expense increased due to additional borrowings to finance expansion capital spending, partially offset by more interest capitalized for construction projects in the current period. As of Dec. 31, 2016, the partnership had $4.1 billion of debt outstanding, including $50.0 million outstanding under its commercial paper program, and $14.7 million of cash on hand.
For the year ended Dec. 31, 2016, net income was $802.8 million compared to $819.1 million in 2015 primarily related to MTM adjustments and overall lower margins for the partnership’s commodity-related activities. Otherwise, Magellan’s fee-based activities increased between years primarily due to higher refined products and crude oil pipeline tariffs and contributions from recently-completed growth projects such as the Little Rock and Saddlehorn pipelines. Full-year diluted net income per limited partner unit was $3.52 in 2016 and $3.59 in 2015. Annual DCF was a record $947.5 million in 2016, or 1.25 times the amount needed to pay distributions related to 2016, compared to $942.9 million in 2015.
Expansion capital projects
Magellan remains focused on expansion opportunities, spending a record $736 million on organic growth construction projects during 2016. Based on the progress of expansion projects already underway, the partnership expects to spend $550 million in 2017 and $350 million in 2018 to complete its current slate of construction projects. These estimates include spending for recently announced projects, such as expansion of the Seabrook Logistics joint venture to construct an incremental 1.7 million barrels of storage and to connect the facility to Magellan’s Houston crude oil distribution system, expansion of the BridgeTex pipeline to 400,000 barrels per day and construction of a new pipeline segment from Magellan’s East Houston terminal to Holland Avenue to handle incremental volume.
Significant progress has been made on the partnership’s joint venture construction projects. HoustonLink is now operational, and the Powder Springs blending joint venture will commence operations during mid-February. The initial phase of Seabrook Logistics is also expected to be operational during the second quarter of 2017. Further, the Carr-to-Platteville segment of the Saddlehorn pipeline is nearing completion, with linefill expected to begin in late February. Project costs for the Saddlehorn pipeline have continued to be favorable, with Magellan’s share of the spending expected to be approximately $220 million, or $10 million lower than previous estimates.
Magellan’s Corpus Christi condensate splitter is mechanically complete, and the unit has been operating and generating products meeting market specifications. However, the sole customer, an affiliate of Trafigura, AG, has recently given notice to terminate its contract. Magellan believes this notice is in breach of the agreement and has initiated legal action. Magellan is continuing negotiations with Trafigura and has also initiated discussions with other potential customers regarding the future use of the splitter. Management believes current market conditions support the economic operation of the splitter and is optimistic that this investment will begin contributing positively to Magellan’s DCF in the future.
Magellan also continues to evaluate well in excess of $500 million of potential organic growth projects in earlier stages of development and acquisition opportunities, all of which have been excluded from the partnership’s spending estimates at this time. Examples of potential construction projects include further development of the partnership’s to-be-constructed Pasadena, Texas marine terminal, additional phases of its Seabrook Logistics joint venture and expansion of its Texas refined products pipeline system, pending the results of a currently in-process open season.
Financial guidance for 2017
Management remains committed to its previously-stated goal of increasing annual cash distributions by 8% for 2017 and currently expects to generate annual DCF of $1.0 billion in 2017, resulting in 1.2 times the amount needed to pay cash distributions for 2017. Current DCF guidance assumes an average crude oil price of approximately $55 per barrel for 2017, consistent with recent futures contract pricing. Further, while the partnership fully expects to generate some level of profitability from the condensate splitter this year, initial 2017 guidance conservatively assumes no revenue generated from the splitter during the year.
Net income per limited partner unit is estimated to be $3.75 for 2017, with first-quarter guidance of 90 cents. Guidance excludes future MTM adjustments on the partnership’s commodity-related activities.
Management is also targeting annual distribution growth of 8% for 2018 while maintaining distribution coverage of 1.1 to 1.2 times the amount needed to pay cash distributions for 2018. Distribution growth guidance specific to 2018 has not been provided previously.
Management continues to believe the large majority of the partnership’s operating margin will be generated by fee-based transportation and terminals services, with commodity-related activities contributing less than 15% of the partnership’s operating margin.
Earnings call details
An analyst call with management to discuss fourth-quarter results, 2017 guidance and the status of significant expansion projects is scheduled today at 1:30 p.m. Eastern. To join the conference call, dial (800) 768-6544 and provide code 8285621. Investors also may listen to the call via the partnership’s website at www.magellanlp.com/investors/webcasts.aspx.
Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on Feb. 8. To access the replay, dial (888) 203-1112 and provide code 8285621. The replay also will be available at www.magellanlp.com.
Non-GAAP financial measures
Management believes that investors benefit from having access to the same financial measures utilized by the partnership. As a result, this news release and supporting schedules include the non-GAAP financial measures of operating margin, product margin, adjusted EBITDA, DCF and net income per unit excluding MTM commodity-related pricing adjustments, which are important performance measures used by management.
Operating margin reflects operating profit before G&A expense and depreciation and amortization. This measure forms the basis of the partnership’s internal financial reporting and is used by management to evaluate the economic performance of the partnership’s operations.
Product margin, which is calculated as product sales revenue less cost of product sales, is used by management to evaluate the profitability of the partnership’s commodity-related activities.
Adjusted EBITDA is an important measure utilized by management and the investment community to assess the financial results of an entity.
DCF is important in determining the amount of cash generated from the partnership’s operations that is available for distribution to its unitholders. Management uses this performance measure as a basis for recommending to the board of directors the amount of cash distributions to be paid each period and for determining the payouts under the partnership’s equity-based incentive plan.
Reconciliations of operating margin to operating profit and adjusted EBITDA and DCF to net income accompany this news release.
The partnership uses exchange-traded futures contracts to hedge against price changes of petroleum products associated with its commodity-related activities and its crude oil tank bottom inventory. Most of these futures contracts do not qualify for hedge accounting treatment. However, because these futures contracts are generally effective at hedging price changes, management believes the partnership’s profitability should be evaluated excluding the unrealized gains and losses associated with petroleum products that will be sold in future periods. Further, because the financial guidance provided by management excludes future MTM commodity-related pricing adjustments, a reconciliation of actual results to those excluding these adjustments is provided for comparability to previous financial guidance.
Because the non-GAAP measures presented in this news release include adjustments specific to the partnership, they may not be comparable to similarly-titled measures of other companies.
About Magellan Midstream Partners, L.P.
Magellan Midstream Partners, L.P. (NYSE: MMP) is a publicly traded partnership that primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation’s refining capacity, and can store approximately 100 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. More information is available at www.magellanlp.com.
Forward-Looking Statement Disclaimer
Portions of this document constitute forward-looking statements as defined by federal law. Forward-looking statements can be identified by words such as: plan, goal, believe, estimate, expect, projected, future, may, will and similar references to future periods. Although management of Magellan Midstream Partners, L.P. believes any such statements are based on reasonable assumptions, actual outcomes may be materially different. Among the key risk factors that may have a direct impact on the partnership’s results of operations and financial condition are: (1) its ability to identify growth projects and to complete identified projects on time and at expected costs; (2) price fluctuations and changes in demand for refined petroleum products, crude oil and natural gas liquids, or changes in demand for transportation, storage, blending or processing of those commodities through its existing or planned facilities; (3) changes in the partnership’s tariff rates or other terms imposed by state or federal regulatory agencies; (4) shut-downs or cutbacks at refineries or other businesses that use or supply the partnership’s services; (5) changes in the throughput or interruption in service on pipelines or other facilities owned and operated by third parties and connected to the partnership’s terminals, pipelines or other facilities; (6) the occurrence of operational hazards or unforeseen interruptions; (7) the treatment of the partnership as a corporation for federal or state income tax purposes or the partnership becoming subject to significant forms of other taxation; (8) an increase in the competition the partnership’s operations encounter; (9) disruption in the debt and equity markets that negatively impacts the partnership’s ability to finance its capital spending; and (10) failure of customers to meet or continue contractual obligations to the partnership. Additional information about issues that could lead to material changes in performance is contained in the partnership's filings with the Securities and Exchange Commission, including the partnership’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2015 and subsequent reports on Forms 8-K and 10-Q. Forward-looking statements made by the partnership in this release are based only on information currently known, and the partnership undertakes no obligation to revise its forward-looking statements to reflect events or circumstances learned of or occurring after today's date.