TULSA, Okla. – Magellan Midstream
Partners, L.P. (NYSE: MMP) today reported operating profit of $79.3 million for
third quarter 2012 compared to $137.8 million for third quarter 2011. Both
periods were significantly impacted by mark-to-market (MTM) adjustments for New
York Mercantile Exchange (NYMEX) positions used to economically hedge the
partnership’s commodity-related activities, with the 2011 period greatly benefitting
from MTM gains and the 2012 period negatively impacted by significant MTM losses
due to the increase in petroleum prices. Excluding MTM commodity-related
pricing adjustments, operating profit from the partnership’s core fee-based
transportation and terminals activities was $109.1 million for third quarter
2012 compared to $107.3 million for third quarter 2011, an increase of $1.8
Net income was $50.5 million for
third quarter 2012 compared to $110.2 million for third quarter 2011. Excluding
MTM commodity-related pricing adjustments, net income increased in the current
quarter by $0.6 million.
Operating profit excluding MTM
commodity-related adjustments and net income excluding MTM commodity-related
adjustments are non-generally accepted accounting principles (non-GAAP)
Diluted net income per limited
partner unit was 22 cents in third quarter 2012 versus 49 cents in the
corresponding 2011 period. Diluted net income per unit excluding MTM commodity-related
pricing adjustments, a non-GAAP financial measure, of 35 cents for third quarter
2012 was less than the 38-cent guidance provided by management in early Aug. due
to timing of product sales from the partnership’s blending activities that are
now expected to occur in fourth quarter 2012. All net income per unit amounts
reflect the partnership’s recent two-for-one split of its limited partner
Distributable cash flow (DCF), a non-GAAP
financial measure that represents the amount of cash generated during the
period that is available to pay distributions, increased 7% to $100.7 million
for third quarter 2012 from $94 million during third quarter 2011.
“During third quarter 2012,
Magellan’s core fee-based transportation and terminals assets generated
improved financial results due to increased demand for our pipeline and storage
services, and cutting through the implications of mark-to-market accounting on
our commodity hedges, the cash impact of our commodity-related activities was
comparable to the year-ago period,” said Michael Mears, chief executive
officer. “Magellan’s assets continue to produce solid results, and we remain on
track for a record year from both an operational and financial standpoint.”
An analysis by segment comparing third
quarter 2012 to third quarter 2011 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:
Petroleum pipeline system.
Pipeline operating margin was $97.7 million, a decrease of $51.4 million that
resulted exclusively from the timing of MTM adjustments for NYMEX positions
used to economically hedge the partnership’s commodity-related activities. Transportation
and terminals margin for this segment increased $8.6 million between periods.
Transportation and terminals
revenues increased between periods primarily due to a 19% increase in
transportation volumes, driven by significantly increased crude oil and gasoline
shipments. Crude volumes increased 53% resulting from deliveries to additional locations
that are now connected to the partnership’s pipeline system and increased
deliveries to existing customers. Gasoline shipments increased 28% primarily
attributable to higher volumes on the partnership’s South Texas pipeline
segments as well as higher consumer demand in the markets served by its
pipeline system. The average tariff rate decreased slightly as the 8.6% rate
increase implemented on July 1, 2012 was offset by more crude oil and South
Texas gasoline movements, which ship at a lower rate than the partnership’s
other pipeline shipments.
Operating expenses increased
between periods primarily due to additional asset integrity work, higher
property taxes, more losses on various asset retirements and replacements and
increased environmental remediation accruals for historical releases. These
items were partially offset by higher product overages (which reduce operating
expenses) in the current period.
Product margin (defined as product
sales revenues less product purchases) decreased $59.8 million between periods
primarily due to timing of MTM adjustments for open NYMEX hedges. Significant
MTM losses were recorded in the third quarter of 2012 due to an increasing commodity
price environment compared to significant MTM gains in the third quarter of
2011, resulting in a $60.3 million unfavorable variance associated with the timing
of MTM adjustments for NYMEX hedges and other inventory adjustments. Details of
these items can be found on the Distributable Cash Flow Reconciliation to Net
Income schedule that accompanies this news release. The partnership's actual
cash product margin, which reflects only transactions that settled during the
quarter, increased slightly between periods as higher blending profits offset lower
fractionation and linefill management profits.
Terminals operating margin was $36.1 million, a decrease of $4.2 million. Revenues
in the current period benefited primarily from recently-constructed crude oil
storage in Cushing, Oklahoma and new refined products tanks and higher rates at
the partnership’s marine terminals. Operating expenses increased due to more asset
integrity work, higher personnel costs and an environmental accrual in the
current period related to a historical acquisition. Product margin increased
slightly due to the sale of additional product overages in the current period.
Ammonia pipeline system.
Ammonia operating margin was $4 million, an increase of $5.7 million. Revenues increased
due to more volume transported at a higher average tariff during the 2012
period, and expenses decreased because of lower asset integrity costs now that the
pipeline’s hydrostatic testing is complete.
items. Depreciation and amortization increased due to
recent expansion capital expenditures, and G&A expenses increased primarily
due to enhanced payout expectations for annual bonus and equity-based incentive
compensation programs due to the partnership’s better-than-expected financial
results in 2012. Net interest expense also increased in the current quarter as
a result of additional borrowings due to the partnership’s Aug. 2011 debt
offering to fund capital spending and higher commitment fees on the partnership’s
revolving credit facility. As of Sept. 30, 2012, the partnership had $2.1
billion of debt outstanding and $100 million of cash on hand.
Financial guidance for 2012
Management is raising its 2012 DCF
guidance by $5 million to approximately $525 million and remains committed to
its goal of increasing cash distributions by 18% for 2012 and an additional 10%
for 2013. Including actual results through Sept. 30, 2012, net income per
limited partner unit is estimated to be $1.93 for 2012, resulting in fourth-quarter
guidance of 68 cents. Guidance excludes future NYMEX MTM adjustments on the
partnership’s commodity-related activities.
Expansion capital spending expectations
Management continues to pursue expansion
opportunities, including organic growth construction projects and acquisitions.
Based on the progress of expansion projects already underway, the partnership currently
plans to spend approximately $450 million during 2012 with an additional $280
million of spending in 2013 to complete these projects.
The partnership completed
construction of 1.2 million barrels of new refined products storage at its
Galena Park, Texas marine terminal during late Oct., a portion of which is
jointly owned with a third party. Construction of an additional 0.6 million
barrels of storage at Galena Park is expected to come online during early 2013.
Magellan’s Crane-to-Houston pipeline
project remains on schedule to begin transporting crude oil at partial capacity
in early 2013, increasing to its full 225,000 barrel-per-day capacity during mid-2013.
The Double Eagle joint venture is also proceeding and expected to be partially
operational in early 2013, with full operation expected in mid-2013.
Magellan and Occidental Petroleum remain
in advanced discussions regarding the potential BridgeTex pipeline. As
currently contemplated, Magellan would own 50% of the joint project, with its
share of the project cost expected to be approximately $600 million. A final
decision will be made on the BridgeTex pipeline pending completion of
definitive agreements, and the related spending has been excluded from the
partnership’s estimates at this time, accordingly.
In addition, the partnership
continues to evaluate more than $500 million of other potential growth projects
in earlier stages of development, which also have been excluded from its spending
Earnings call details
An analyst call with management
regarding third-quarter results and outlook for the remainder of 2012 is
scheduled today at 1:30 p.m. Eastern. To participate, dial (888) 329-8893 and
provide code 6471308. Investors also may listen to the call via the
partnership’s website at www.magellanlp.com/webcasts.aspx.
Audio replays of the conference
call will be available from 4:30 p.m. Eastern today through midnight on
Nov. 6. To access the replay, dial (888) 203-1112 and provide code 6471308. 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, 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 revenues less product purchases, is used by management to
evaluate the profitability of the partnership’s commodity-related activities.
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 measure as a basis
for recommending to the board of directors the amount of cash distributions to
be paid each period.
Reconciliations of operating margin
to operating profit and DCF to net income accompany this news release.
The partnership uses NYMEX futures
contracts to hedge against price changes of petroleum products associated with
its commodity-related activities. Most of these NYMEX contracts do not qualify
for hedge accounting treatment. However, because these NYMEX contracts are
generally effective at hedging price changes, management believes the
partnership’s profitability should be evaluated excluding the MTM gains and
losses associated with these NYMEX contracts. Because the third-quarter 2011
financial results were significantly impacted by MTM gains and third-quarter
2012 results were significantly impacted by MTM losses, management believes a
comparison of the partnership’s operating results between periods adjusted for
these MTM gains / losses is appropriate in evaluating the partnership’s
financial results for the current period. A reconciliation of actual results to
those excluding these adjustments is provided for comparability. Further,
because the financial guidance provided by management generally excludes future
MTM commodity-related pricing adjustments, a reconciliation of actual results
to those excluding these adjustments is provided for comparability to previous financial
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.
Midstream Partners, L.P. (NYSE: MMP) is a publicly traded partnership that primarily
transports, stores and distributes petroleum products. The partnership owns the
longest refined petroleum products pipeline system in the country, with access to
more than 40% of the nation’s refining capacity, and can store 80 million
barrels of petroleum products such as gasoline, diesel fuel and crude oil. More
information is available at www.magellanlp.com.
of this document constitute forward-looking statements as defined by federal
law. Although management believes any such statements are based on reasonable
assumptions, there is no assurance that actual outcomes will not 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 or 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 or storage of those commodities through its existing or planned
facilities; (3) changes in the partnership’s tariff rates imposed by the
Federal Energy Regulatory Commission, the United States Surface Transportation
Board or state regulatory agencies; (4) shut-downs or cutbacks at major
refineries, petrochemical plants, ammonia production facilities or other
businesses that use or supply the partnership’s services; (5) changes in the
throughput or interruption in service on petroleum pipelines owned and operated
by third parties and connected to the partnership’s petroleum terminals or
petroleum pipeline system; (6) the occurrence of an operational hazard or
unforeseen interruption for which the partnership is not adequately insured;
(7) the treatment of the partnership as a corporation for federal or state
income tax purposes or if the partnership becomes 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, 2011 and subsequent reports on
Forms 8-K and 10-Q. The partnership undertakes no obligation to revise its
forward-looking statements to reflect events or circumstances occurring after