TULSA, Okla. – Magellan Midstream Partners, L.P. (NYSE: MMP) today reported net income of $146.3 million for second quarter 2014 compared to $153.6 million for second quarter 2013. The 2014 results include a $9.4 million non-cash impairment charge related to a non-strategic pipeline terminal that may be sold in the future. 

Diluted net income per limited partner unit was 64 cents in second quarter 2014 and 68 cents in second quarter 2013. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-generally accepted accounting principles (non-GAAP) financial measure, of 70 cents for second quarter 2014 was lower than the 72-cent guidance provided by management in May 2014 primarily due to the 4-cent unfavorable impact of the non-cash impairment charge. Otherwise, the partnership’s assets generated better financial results than expected due to continued strong demand for refined products transportation and higher crude oil shipments during the quarter.  

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 to $195.8 million for second quarter 2014, an increase of $27.6 million or 16% higher than the second-quarter 2013 DCF of $168.2 million.  

“Magellan has generated strong financial results so far this year with solid demand for our fee-based transportation and terminal services in our refined products, crude oil and marine storage businesses and an attractive environment for our commodity-related activities,” said Michael Mears, chief executive officer. “We remain on track to produce record annual financial results in 2014, increasing distributable cash flow guidance again this quarter, while making significant progress on construction projects designed to fuel Magellan’s future growth.” 

An analysis by segment comparing second quarter 2014 to second quarter 2013 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 operating margin was $162.7 million, a decrease of $15.1 million primarily related to timing of MTM adjustments for New York Mercantile Exchange (NYMEX) positions. Transportation and terminals revenue increased $30.1 million between periods due to higher shipment volumes, driven by increased demand for gasoline and distillates in the markets served by the partnership, and additional fees for ancillary services, such as storage, additives and terminaling. Revenues also benefited from higher average tariffs, resulting from the mid-2013 tariff increase, and operating results from a New Mexico pipeline system acquired in July 2013 and a Rocky Mountain pipeline system acquired in Nov. 2013. 

Operating expenses increased $30.8 million between periods primarily due to operating costs related to the recently-acquired New Mexico and Rocky Mountain pipeline systems, a favorable adjustment in second quarter 2013 to reverse an accrual for potential air emission fees as well as less favorable product overages (which reduce operating expenses) during the current period. 

Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) decreased $14.3 million between periods resulting from a $19.3 million unfavorable variance associated with the timing of MTM adjustments for NYMEX positions used to economically hedge the partnership’s commodity-related activities 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 between periods primarily due to improved profitability of the partnership’s butane blending activities as a result of higher sales volumes in the current period.  

Crude oil. Crude operating margin was $73.5 million, an increase of $33.0 million. Transportation and terminals revenue increased $38.4 million primarily due to increased crude oil shipments on the Longhorn pipeline. From its mid-April 2013 start-up, Longhorn pipeline shipments averaged approximately 90,000 barrels per day (bpd) during second quarter 2013 compared to approximately 250,000 bpd during second quarter 2014. Operating expenses increased between periods as power costs associated with higher volumes and additional personnel and integrity spending were partially offset by more favorable product overages (which reduce operating expenses). 

Marine storage. Marine operating margin was $27.4 million, a decrease of $5.5 million primarily related to a favorable expense adjustment in the 2013 period. Revenue increased between periods primarily due to higher average storage rates and fees for additional customer activity. Expenses increased due to reversal of an accrual in second quarter 2013 for potential air emission fees as well as higher asset integrity costs in the current period.  

Other items. Depreciation, amortization and impairments increased due to recent expansion capital expenditures and the impairment charge for a pipeline terminal the partnership may sell in the future, and higher G&A expenses reflect the partnership’s increasing unit price that impacts equity-based incentive compensation and deferred board of director expense. Net interest expense increased primarily due to additional borrowings to fund capital spending. As of June 30, 2014, the partnership had $2.9 billion of debt outstanding, including $221.0 million outstanding under its new commercial paper program that was used to refinance the partnership’s June 2014 note maturity.  

Expansion capital projects 

Magellan continues to assess additional opportunities to grow the business and is making significant progress on its current slate of expansion projects. 

The BridgeTex pipeline is in the final stages of construction. Tank construction at the Colorado City, Texas origin point is complete, and pipeline linefill activities are underway on portions of the pipeline. Pipeline shipments are expected to begin in Sept. to deliver up to 300,000 barrels per day of crude oil from the Permian Basin to the Houston area. 

Progress continues on permitting and contractor selection for the partnership’s condensate splitter in Corpus Christi, Texas, which is expected to be operational during the second half of 2016. 

Right-of-way and permitting work are underway for the partnership’s Little Rock pipeline project, which is expected to be operational in early 2016. 

Further, the partnership has announced plans to reactivate an idle 135-mile segment of pipeline in southern Oklahoma to deliver crude oil and condensate from Healdton to Cushing beginning in the third quarter of 2015. 

Based on the progress of expansion projects already underway, including the reactivated pipeline and a number of new smaller projects, the partnership currently plans to spend approximately $775 million in 2014 with additional spending of $350 million in 2015 and $75 million in 2016 to complete its current slate of construction projects. The partnership now estimates that its share of spending for the BridgeTex pipeline will be approximately $625 million. 

In addition, Magellan continues to evaluate well in excess of $500 million of potential growth projects in earlier stages of development as well as possible acquisitions, both of which have been excluded from the partnership’s spending estimates. 

Financial guidance for 2014 

Based on solid financial results to date and outlook for the remainder of the year, management is raising its 2014 DCF guidance by $30 million to $840 million and remains committed to its goal of increasing annual cash distributions by 20% for 2014 and 15% for 2015. 

For DCF purposes, operating results of the BridgeTex pipeline will not impact 2014, with the initial DCF benefit expected to occur in 2015 due to the timing of the pipeline’s start-up and cash distribution payments from the joint venture to Magellan, which will be paid in arrears on a quarterly basis.  

Including actual results so far this year, net income per limited partner unit is estimated to be $3.30 for 2014, with third-quarter guidance of 62 cents. Guidance excludes future MTM adjustments on the partnership’s commodity-related activities.  

Earnings call details 

An analyst call with management regarding second-quarter results and outlook for the remainder of 2014 is scheduled today at 1:30 p.m. Eastern. To join the conference call, dial (888) 401-4669 and provide code 3902777. 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 Aug. 11. To access the replay, dial (888) 203-1112 and provide code 3902777. 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 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 unrealized NYMEX gains and losses associated with petroleum products that will be sold in future periods. 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 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 more than 90 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. More information is available at www.magellanlp.com. 

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Forward-Looking Statement Disclaimer 

Portions of this document constitute forward-looking statements as defined by federal law. 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 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 or other terms imposed by state or federal regulatory agencies; (4) shut-downs or cutbacks at major refineries or other businesses that use or supply the partnership’s services; (5) changes in the throughput or interruption in service on pipelines owned and operated by third parties and connected to the partnership’s terminals or pipelines; (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 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, 2013 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 today's date.