Continues to Increase Expansion Capital Expectations, Maintain Strong Liquidity Position
TULSA, Okla. – Magellan Midstream Partners, L.P. (NYSE: MMP) today reported higher quarterly, and record annual, operating profit, net income and distributable cash flow compared to the same period in 2007.
Fourth-quarter 2008 operating profit of $100.6 million represented a 19% increase compared to $84.8 million for fourth quarter 2007. For the year ended Dec. 31, 2008, operating profit grew 33% to $399.5 million from $300.3 million in the comparable 2007 period.
Net income grew to $85.6 million during fourth quarter 2008, which is a 19% increase over the $72.2 million reported for fourth quarter 2007. For the year ended Dec. 31, 2008, net income grew 43% to $346.6 million from $242.8 million in the corresponding 2007 timeframe.
“Our strong performance for the quarter benefited from increased revenues in all three of our business units despite the impact of Hurricane Ike on Oct. throughput volumes and the weak economy,” said Don Wellendorf, chief executive officer. “Record results for the full year 2008 resulted from expansion projects, rate increases, higher commodity margins and the gain on assignment of a third-party supply agreement, all of which helped overcome poor economic conditions, unprecedented swings in commodity prices and natural disasters that affected Magellan during the year.”
An analysis of variances by segment comparing fourth quarter 2008 to fourth quarter 2007 is provided below based on operating margin, a financial measure that reflects operating profit before affiliate general and administrative (G&A) expense and depreciation and amortization:
Petroleum products pipeline system. Pipeline operating margin was $109.7 million, an increase of $13.0 million. Despite a 6.5% decrease in volumes for the quarter (4.5% excluding the impact of Hurricane Ike), transportation and terminals revenues increased between periods primarily due to higher average rates per barrel shipped resulting in part from mid-year 2008 tariff escalations. Transportation volumes decreased between periods primarily due to shipment disruptions attributable to Hurricane Ike and continued lower demand for refined products, especially aviation fuel, during fourth quarter 2008. Comparatively, the 2007 period had benefited from increased shipments after significant refinery supply disruptions during mid-2007 had subsided. The 2008 period also benefited from increased ethanol blending services and higher fees earned for incremental storage and pipeline capacity leases.
Operating expenses increased primarily due to $10.5 million less favorable system overages during the current period because of the rapidly declining commodity price environment during fourth quarter 2008 compared to rising prices in 2007. This increase was partially offset by lower integrity and maintenance spending due to acceleration of projects earlier in 2008.
Product margin increased during fourth quarter 2008 primarily due to higher margins on the partnership’s petroleum products blending activity attributable to higher product prices that had been locked in earlier in 2008.
Petroleum products terminals. Terminals operating margin was $23.9 million, an increase of $1.2 million. The current period benefited from increased revenues at the partnership’s marine and inland terminals primarily due to expansion projects and higher rates, partially offset by $2.5 million of lost revenue due to Hurricane Ike, including lower profits from the partnership’s variable rate storage agreement, and reduced inland volumes. While product margin was slightly higher due to the sale of additional product overages, operating expenses increased primarily due to hurricane clean-up costs.
Ammonia pipeline system. Ammonia operating margin was $1.9 million, an increase of $0.6 million. Revenues increased between periods due to higher average tariff rates and additional shipments. Operating expenses increased because of higher environmental accruals related to historical releases primarily offset by lower maintenance expenses due to project timing.
Other items. Depreciation and amortization increased due to recent capital spending whereas G&A declined due to lower equity-based incentive compensation expense resulting from the partnership’s lower unit price and fewer units expected to vest under the program. Net interest expense increased in the current quarter as a result of additional borrowings for expansion capital expenditures.
Diluted net income per limited partner was 83 cents for fourth quarter 2008 and 74 cents for fourth quarter 2007. For the full year, diluted net income per limited partner unit was $3.27 in 2008 compared to $2.60 in 2007.
Distributable cash flow, which represents the amount of cash generated during the period that is available to pay distributions, grew to $91.8 million during fourth quarter 2008 from $86.3 million for the corresponding 2007 quarter. Distributable cash flow for the full year grew 13%, increasing to $338.2 million in 2008 from $298.1 million in 2007. In total, the partnership estimates that distributable cash flow was negatively impacted by more than $14 million in 2008 due to hurricane-related lost business and clean-up costs.
Expansion capital expectations
Management remains focused on expansion opportunities and spent $266 million during 2008 on growth projects, $65 million of which was spent in the fourth quarter. Based on the progress of expansion projects already underway, including the addition of new projects, the partnership has increased its growth spending estimates to approximately $215 million during 2009, with spending of $30 million in 2010 required to complete these projects. These estimates include about $27 million the partnership expects to spend to construct 0.7 million barrels of crude oil storage at its East Houston, Texas marine terminal, supported by a long-term customer commitment. In addition, the partnership continues to analyze more than $500 million of potential growth projects in earlier stages of development, which have been excluded from these spending estimates.
Liquidity update
The partnership’s primary source of liquidity for funding debt service, maintenance capital expenditures and quarterly distributions comes from cash generated from its operations. However, the partnership also employs its revolving credit facility to provide additional liquidity for working capital needs and expansion capital financing. The partnership has a $550 million revolving credit facility comprised of 18 banks with only $70 million drawn as of Dec. 31, 2008. This facility does not expire until Sept. 2012. In addition, the partnership had more than $30 million of cash reserves available at year-end. The partnership intends to finance its current slate of expansion projects with borrowings under its revolving credit facility and cash reserves.
Guidance for 2009
The partnership currently is assessing a number of variables potentially impacting 2009 results and believes that the uncertainty surrounding any earnings or distribution guidance makes such guidance unwarranted at this time. However, the partnership recognizes the value that investors place not only on distribution growth but more importantly on the stability of the existing distribution and firmly believes the current distribution amount remains achievable for 2009 even in the current environment.
Earnings call details
An analyst call with management regarding fourth-quarter earnings is scheduled today at 1:30 p.m. Eastern. To participate, dial (888) 596-2581 and provide code 2344675. Investors also may listen to the call via the partnership’s web site at http://www.magellanlp.com/webcasts.aspx.
Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on Feb. 9. To access the replay, dial (888) 203-1112 and provide code 2344675. The replay also will be available at http://www.magellanlp.com.
Non-GAAP 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-generally accepted accounting principles (“non-GAAP”) measures of operating margin and distributable cash flow, which are important performance measures used by management to evaluate the economic success of the partnership’s operations.
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 in deciding how to allocate capital resources between segments.
Distributable cash flow 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 general partner’s board of directors the amounts of distributions to be paid each period.
Reconciliations of operating margin to operating profit and distributable cash flow to net income accompany this news release.
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 formed to own, operate and acquire a diversified portfolio of energy assets. The partnership primarily transports, stores and distributes refined petroleum products. More information is available at http://www.magellanlp.com. MMP’s general partner interest and related incentive distribution rights are owned by Magellan Midstream Holdings, L.P. (NYSE: MGG).
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Portions 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 projected costs; (2) price fluctuations for natural gas liquids and refined petroleum products; (3) overall demand for natural gas liquids, refined petroleum products, natural gas, oil and ammonia in the United States; (4) changes in the partnership’s tariff rates implemented by the Federal Energy Regulatory Commission, the United States Surface Transportation Board and state regulatory agencies; (5) shut-downs or cutbacks at major refineries, petrochemical plants, ammonia production facilities or other businesses that use or supply the partnership’s services; (6) changes in the throughput or interruption in service on petroleum products pipelines owned and operated by third parties and connected to the partnership’s petroleum products terminals or petroleum products pipeline system; (7) the occurrence of an operational hazard or unforeseen interruption for which the partnership is not adequately insured; (8) 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; (9) an increase in the competition the partnership’s operations encounter; (10) continued disruption in the debt and equity markets that negatively impacts the partnership’s ability to finance its capital spending and (11) 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. The partnership undertakes no obligation to revise its forward-looking statements to reflect events or circumstances occurring after today's date.