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Executives

Michael N. Mears – Chairman, President and Chief Executive Officer

John D. Chandler – Senior Vice President and Chief Financial Officer

Analysts

Brian J. Zarahn – Barclays Capital, Inc.

Steve Sherowski – Goldman Sachs

Noah Lerner – Hartz Capital, Inc.

Sharon Lui – Wells Fargo Advisors LLC

Stephen C. Tabb – Tocqueville Asset Management LP

Elvira Scotto – RBC Capital Markets

Dennis Coleman – Bank of America Merrill Lynch

Magellan Midstream Partners, L.P. (MMP) Q4 2012 Earnings Call February 5, 2013 1:30 AM ET

Operator

Good day, and welcome to the Magellan Midstream Partners Fourth Quarter 2012 Earnings Conference Call. As a reminder, today's conference call is being recorded. At this time, I would like to turn the conference over to Mr. Mike Mears, President and Chief Executive Officer. Please go ahead, sir.

Michael N. Mears

Good afternoon and thank you for joining us today to discuss Magellan’s fourth quarter financial results and our guidance for another record year in 2013.

Before we 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 in our filings with the SEC.

As I am sure you saw this morning, we generated records for a number of financial metrics, including quarterly and annual records for operating profit, net income, earnings per unit and distributable cash flow. We generated $540 million of distributable cash flow for the year, which provided us with 1.3 times coverage ratio even after our significant distribution step change earlier in 2012, that allowed us to increase cash distributions to our investors by an impressive 18% for the year.

Our annual DCF exceeded the latest $525 million guidance we provided primarily due to stronger transportation revenues, driven by higher average tariffs and more crude volumes and higher commodity related profits due to more blending opportunities at higher margins. But even more importantly the year 2012 set Magellan on the path becoming a premier provider of crude oil distribution services, while maintaining our key position in the refined product space. We expanded the scope our project to reverse and convert the Longhorn pipeline, to begin transporting up to 225,000 barrels a day of crude oil from Crane, Texas to Houston over the next few months.

Further because this project received such overwhelming support from the industry, we launched the pipeline construction project with Occidental Petroleum to build the 400 mile BridgeTex pipeline to deliver additional Permian Basin crude to the Houston area. We’ve also been building at our pipeline network within the Houston and Texas City area, to be able to deliver crude oils to all the refineries within this region. And on top of those projects we’ve been working on our Double Eagle joint venture which will begin delivering Eagle Ford condensate to our Corpus Christi terminal over the next few months as well.

So as you can tell there are lot of exiting opportunities at Magellan that are coming to fruition and believe will generate significant future growth for our company. I’ll now turn the call over to our CFO, John Chandler to discuss our fourth quarter results in more detail compared to the 2011 period. And I’ll be back to discuss what we see ahead for 2013.

John D. Chandler

Thanks Mike. Before I begin discussing specific business unit performance, I want to mention that I will be commenting on the non-GAAP measure operating margin which is simply operating profit before G&A expenses and depreciation, and amortization. A reconciliation of operating margin to operating profit was included in our earnings release this morning. Management believes that investors benefit from this information because it get’s to the heart of evaluating the economic success with the partnerships cooperation’s.

As noted in our press release this morning, we had record net income and record earnings per unit this quarter. The quarter specially benefited from record commodity margins, as well as record profits from our terminals and from our petroleum pipeline businesses. In fact each of our business segments experienced increases for the quarter. Our net income was $153.8 million for the current period, which was $110.3 million for the 2011 period.

As it’s usual, I’ll go through the operating margin performance of each of our business lines and discuss variances in depreciation, G&A and interest to come to an overall explanation of the variance in net income.

So, first let's look at operating margin which was up $49.6 million or 25% higher in the same period last year. Our petroleum pipeline system experienced a strong increase for the quarter with operating margin increasing $43.2 million versus the same period last year going from $150.2 million to $193.4 this period.

Transportation and terminal revenues for the pipeline segment were 13.6 million more than the same period last year. Approximately, 90% of this increase came from increased tariff revenues, largely as a result of higher average tariff rates. Let us not to say the shipment volumes didn’t also increase.

Shipment volumes for the period increased 11.1 million barrels or about 10% more than the same period last year. However a big portion of the increased volume came from our South Texas pipeline system, were volume shipped at a much lower average tariff rate usually in the $0.20 to $0.30 per barrel range. In fact if you break out the South Texas system, where volumes increased 12.6 million barrels, that leaves a 1.5 million barrel or 2% volume decrease on the reminder of our system.

The South Texas system increase in large part due to higher crude shipments coming through our connections our system has to new crude coming into the Eastern area, with a significant portion of this quarters crude increase resulted from new crude coming in from the Eagle Ford shale. Crude throughput also increased due to the expanded connectivity of our system and the high utilization from our existing customers.

The South Texas system also benefitted from increased gasoline shipments due in part to a new refurbished gas link unit coming on line by a Texas City refinery that is connected to our system and due in part to some new incentive tariffs put in place to attract volumes. Again, other than the South Texas asset, the rest of our pipeline system saw a 1.5 million barrel decrease mostly due to lower gasoline shipments. Tariff rates for the pipeline system went from $1.067 per barrel last year to $1.069 per barrel this year or essentially no increase. As mentioned with the volumes though, we shipped significantly more volumes on our South Texas system which again ships at a much lower average tariff rate again in the $0.20 to $0.30 per barrel range.

Therefore if you factor out the South Texas system, the tariffs on the reminder of our system increased to $1.49 per barrel versus $1.36 per barrel last year, or an approximate 9% increase. Obviously a major contributor to this variance is the fact that we raised rates on July 1, 2012 and all of our markets by approximately 8.6%.

Our operating margin for commodity related activities for the pipeline segment increased $35.3 million versus the fourth quarter of 2011, going from $33.4 million last year to $67.7 million this quarter. This increase is somewhat impacted from mark-to-market noise from out of period hedges. If you eliminate this noise and match up hedges with the actual sales made during the quarters, we made about $14 million more this quarter than the same period last year.

You can arrive at this number by taking the product margin from our income statement and make the adjustments identified as commodity related adjustments on the DCF reconciliation page attached to our press release this morning. This increase in commodity margins can largely be attributed to an increase in butane blending profits, of which about one half goes from higher realized margins due to high refined products price environment, with the other half due to increased volumes in large part due to the expansion of blending capabilities at several of our locations.

On pipeline expenses, our petroleum pipeline expenses were about $2.3 million more than the same period last year. The increase in expense was primarily due to lower product gains and losses and part due to lower prices in the fourth quarter of 2012, and due to lower gained volumes in the pipeline system. These lower gains were offset somewhat by lower environmental cost, where in the fourth quarter of last year we had a large accrual related to a third-party strike on our pipeline at Nebraska and lower integrity expenses really simply due to timing as we completed more of our integrity work earlier in the year this year.

Now going to our terminal segment, our operating margin from our petroleum terminals group was at $5.3 million or about 12% versus the same quarter last year. Our revenues for terminal segment was $1.8 million more than the same period last year with essentially the entire increase coming from our storage terminals where revenues increased predominantly due to tank additions at Galena Park, Texas; Marrero, Louisiana; and Cushing terminals and due to rate escalations at our marine terminals.

Our total lease storage utilization rose by 200,000 barrels for the quarter going from 34.2 million barrels per month leased for the fourth quarter of 2011 to 34.4 million barrels leased this quarter, with increase again at Galena Park, Texas; Marrero, Louisiana: and Cushing offset somewhat by lower utilization at our Delaware.

Net product margin for the terminal segment was about $2.1 million more than the same period last year largely due to additional sales of overage barrels at our inland terminals. And our terminal expenses were about $900,000 less than the same period last year, due to lower integrity expenses in part due to timing were work was completed earlier in the year this year, versus last year and due to higher cost in the fourth quarter of 2011 related to some product contamination cost. Also we had lower expenses due to incremental air emission fee accruals that were made in the fourth quarter of 2011 related to our Galena Park terminal. These lower expenses were offset somewhat by higher property taxes driven impart by a favorable tax settlement that benefitted the fourth quarter of 2011, and by a gain that benefited the fourth quarter 2011 from an interim settlement related to Hurricane Ike.

Now going to our ammonia segment, our ammonia operations generated operating margin that was $1 million more than the same quarter last year, going from $3.3 million last year to $4.3 million this year. Transportation revenues for the ammonia segment were up $900,000 for the fourth quarter 2011 as a result of higher tariffs. In part the rate increase was a result of tariff rate increases of 8.6% that occurred at July 2012, as well as more full rate tonnage shipped on the pipeline as opposed to discount rate shipments that occurred in 2011. Shipment volumes were only about 3000 tons less than the same period last year. Expenses for our ammonia system were essentially unchanged versus last year.

Therefore in summary those are the reasons operating margin for the quarter increased $49.7 million going from a $199 million to $248.7 million this quarter. Now stepping down to net income, depreciation was up $2.4 million due to capital additions, G&A expenses were up $4.4 million largely due to incremental equity based incentive compensation accruals both due to higher unit prices and projected payout on future awards and due to higher benefit cost. And interest expense net of interest income and capitalized income was done $600,000 primarily as a result of the increased interest cost being capitalized due to the number of sizable long-term projects being pursued currently.

When you exclude capitalized interest, the interest expense on loans was up $1.6 million for the quarter and this because in November 2012 we proactively issued $250 million in debt to take advantage of the low rate environment and prefund future capital expansions. That bond offering went extremely well with now Magellan realizing a 4.2% keep on for the thirty year bond offering. Therefore in total, MMP’s net income increased $43.5 million going from $110.3 million last quarter – for the fourth quarter of 2011 to $153.8 million in the fourth quarter of 2012, again a new quarterly record.

Our leverage metrics include $2.4 million in debt outstanding at the end of the fourth quarter of 2012 and after reducing for cash on hand of approximately $328 million, our net debt of approximately $2 billion resulted in a net debt to EBITDA ratio of 3.04 times for the last 12 months. As of the end of the fourth quarter 2012, our $800 million revolver had zero outstanding on it.

Now before I turn the call back over to Mike, I do want to make you aware of the change we will be making in our 2013 reporting structure. Effective with our first quarter 2013 filings, we will report our earnings in three new segments. We are making this change because of the growing significance of crude oil storage and logistics assets, Magellan’s profitability.

Going forward our three segments will be as follows; first, we will have our crude pipelines and terminal segment; second, we will have our refined products pipeline to terminal segment that will include our refined product systems today include most of commodity related activities, it will include our inland terminals and it will also include our ammonia pipeline segment; and then our third segment will be our marine storage segment. We think this should further help you model our businesses going forward.

Before we file our first quarter 10-Q for the 2013 period, actually mostly likely by the end of March we will file an 8-K showing our quarterly resegmented data including volume and rate statistics for the periods 2009 to 2012.

I’ll now turn the call back over to Mike to discuss 2013 guidance. Mike?

Michael N. Mears

Thanks John. I’d like to provide more details about what we see ahead for 2013, as noted in this mornings earnings release, we expect another record year in 2013, estimating annual DCF of $570 million. Further we are targeting 10% annual distribution growth for 2013, building of the year where we generated 18% distribution growth.

Like usual, I’d like to spend a few minutes walking through the key assumptions we used to create our 2013 guidance, starting with our base business. First, regarding our pipeline assumptions in 2013, our guidance reflects about 3% growth in our refined petroleum shipments. We expect volume growth on our historical refined products pipeline systems to be about 1% with growth on our South Texas refined product systems to be substantially higher than that due in part to incentive tariffs that we put in place late last year.

As I have noted in the past, we unfortunately don’t have a crystal ball for petroleum demand estimates, but primarily look to government projections and our customer’s insights to help us create our volume assumptions for the refined products demand. For base crude shipments, we expect volumes to be similar to the levels we saw in 2012 on our Houston to Texas City distribution system.

For pipeline rates, we again expect to increase all of our tariffs by deferred indexation methodology which is driven by the change in the producer price index plus the 2.65% adder. Based on preliminary estimates, the change in PPI for 2012 is almost 2%, so we are assuming a tariff increase of approximately 4.6% on July 1, 2013. Like we saw in 2012, we don’t expect to readily see the full impact of that increase in our average tariff, since we expect the South Texas volumes to growth more than the rest of our system and the South Texas barrels shipping at a low tariff rate.

Our second key assumption relates to our commodity related activity, which primarily compose butane blending. We have about 25% of our 2013 activity hedged at this point and we have assumed an average crude price of $90 per barrel for the unhedged volumes to be sold in 2013. Although it’s not an exact science with the number of factors impacting the actual margin, directionally each $1 change in the food price can impact Magellan’s results by about $1 million per year.

I want to emphasis that our projections are based on long-term historical commodity margin averages correlated and can see actual price of crude oil. Our 2012 commodity results substantially exceeded these averages; as a result our 2013 projections from commodity related items are about $25 million less than our 2012 actual results.

We expect to continue generating the large majority of our operating margin from fee based transportations and terminal services continuing to expect commodity related activities to contribute 15% or less of our operating margin going forward especially as our fee based growth projects come online over the next few years.

With regards to maintenance capital, we plan to increase our spending on a few non-recurring system upgrades to our assets in 2013. To be clear, we believe we’ve been probably maintaining our assets in the past, but have a number of items that we feel are prudent to address now, bumping our 2013 expenditures to a higher level.

For maintenance capital, we plan to spend approximately $75 million in 2013, which is about $10 million more than we spent in 2012. For your models, we expect our run rate on the maintenance capital after 2013 to be in the $17 million per year range.

One final item I’d like to address for 2013 base business assumptions relates to our 50% investment in Osage pipeline, which transports crude oil from cushion to refineries in Kansas. We’ve mentioned in our quarterly SEC filings with a rate case has been pending on the tariffs charged by Osage. We believe we are close to reaching an agreement on this matter, which will result in a one-time settlement payment and lower rates going forward on this pipeline. We include that this recently received from our investment in Osage as DCF, and we are assuming no distribution to be paid to us in 2013 due to the impact of the settlement and the lower rates compared to about $8 million in the DCF in 2012.

We expect Osage to generate approximately $4 million per year in DCF beginning again in 2014. And to be clear, this was an issue unique to the Osage pipeline, and we do not see a similar issue with our remaining pipeline systems.

Now moving on to growth, one of the key drivers of growth in our 2013 plan obviously is expected to come from our crude reversal project coming online. As I mentioned earlier, we are very focused on getting the Longhorn pipeline system operational over the next two months, and our plan assumes that we’ll begin to fill the pipeline in mid-March and begin deliveries in Houston in mid-April.

We expect the initial flow rate to be approximately 75,000 barrels per day, ramping up over the next few months until we are up to the full 225,000 barrels per day capacity in the third quarter of 2013, as we complete the construction of additional pumping capacity and tankage.

As we’ve discussed, the capacity on this pipeline is fully committed with an average tariff of about $2 barrel. We plan to leave 10% of the capacity available for spot shippers, but the capacity will be filled with committed shippers, if no additional customers nominate to ship on a spot basis.

While we are getting very close to being in service, there are still a number of key items to complete such as connections to third-party pipelines at crane to source crude oil on the pipeline system. This project remains on time and budget, and we are excited about the value that we’ll bring to our Company and industry once up and running. Once fully operational, we still expect to reverse Longhorn pipeline to generate about a three times EBITDA multiple on the $375 million capital cost.

Assuming the reasonableness of these key assumptions, we expect to generate record distributable cash flow of approximately $517 million in 2013, and these assumptions get us comfortable with our targeted annual distribution growth of 10% for 2013 while still leaving us with a 1.2 times coverage ratio for the year.

In the past, we’ve discussed our views on distribution coverage and expressed our desire to maintain excess coverage of about $75 million each year based on the current industry dynamics. We feel this level is appropriate to give flexibility for potential changes in commodity prices and petroleum demand in general, as the economy continues to rebound.

While we still feel $75 million is a reasonable benchmark for this year. you may have noticed that the guidance we provided results in excess cash flow closer to $100 million. With a significant amount of growth this year coming from projects are still being completed. we feel it is prudent to keep a bit more cushion to allow these large-scale projects more than adequate time to come online safely and reliably.

While we do not plan to provide further DCF guidance for periods beyond 2013, Magellan’s management team believes we will also be able to grow distributions by at least 10% in 2014 as our crude oil growth projects come online and begin to generate sizable returns.

Concerning expansion capital, we spent right at $365 million on growth projects during 2012 representing a record year for expansion capital spending at Magellan. Based on the projects that we currently have under construction, we expect to spend $700 million during 2013 and another $290 million in 2014 to complete these projects. A significant amount of the remaining expansion capital relates to projects are nearing completion, such as the reverse Longhorn pipeline that we already discussed and our investment in the Double Eagle condensate pipeline project with related storage at our Corpus Christi terminal.

The Double Eagle project is expected to be partially operational in March of 2013, increasing to its full capacity in the third quarter of 2013. The largest amount of future spending relates to the Bridge Tex pipeline, 50-50 joint venture with Occidental Petroleum, which we launched subsequent to our last quarterly earnings call. We expect our share of the project cost about $600 million and Magellan is serving as construction manager of the project and will serve as the operator once complete in mid-2014. The capacity of this system is expected to be 300,000 barrels per day. While this pipeline is not yet fully committed, we have sufficient volumes to move forward with the project at an attractive return. At the current committed volumes, we expect to generate an EBITDA multiple A times with substantial upside potential as we ship additional volumes above the current committed levels.

We also just announced the project yesterday about our Galena Park, Texas terminal, where we are adding infrastructure for this location to become an origination point for our Gulf Coast crude oil distribution system. This will be the first opportunity to add crude oil to our Galena Park facility, which we believe is ideally situated to handle crude oil for delivery into the Gulf Coast refinery hub via our own pipeline network. The project is expected to cost about $50 million and it will be fully operational by mid-2014.

And even though we have announced some significant new growth projects, we continue to have well over $500 million of potential growth projects under assessment. While we see potential expansion opportunities in all of our business segments, crude oil pipeline and storage prospect still make up the vast majority of our potential organic project list, with about 80% of the current list of potential growth opportunities related to crude oil.

And while we did not complete any acquisitions during 2012, we do not deem that to be a negative. Most recently announced acquisition still seems to be expensive for our appetite. We intend to maintain our disciplined approach while acquiring assets of prices that make sense to us. I can assure you that we continue to analyze all the acquisitions in our space that hit the market and we’re looking at number of opportunities at this time.

That concludes our prepared remarks. So operator, we can now turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Brian Zarahn with Barclays Capital.

Brian J. Zarahn – Barclays Capital, Inc.

Good afternoon.

Michael N. Mears

Hello Brian.

Brian J. Zarahn – Barclays Capital, Inc.

On the Galena Park project, do you have more crude pipe and storage expansions under evaluation on the Gulf Coast to expand your footprint down there?

Michael N. Mears

We do and there is really not a whole I can talk about this right now, but there are a number of other crude oil opportunities that we’re looking at in the Gulf Coast.

Brian J. Zarahn – Barclays Capital, Inc.

In terms of storage, do you have at your fingertips how much additional capacity you could add at Galena Park if there was demand for additional crude tankage?

Michael N. Mears

Well to be clear, Galena Park, this project is actually involving the conversion of refined products to crude oil storage. It’s also involved in connecting Galena Park into our distribution system and it’s also providing the capability for rail access and water access through a tunnel. At East Houston, however we’ve got significant amount of land and we’ve got land at East Houston to built somewhere between 5 million barrels and 6 million barrels of incremental storage at East Houston.

Brian J. Zarahn – Barclays Capital, Inc.

Okay, that is helpful. Looking at your portfolio as a whole, you have about $1 billion of projects coming online through 2014. Do you – it seems like the blended multiple is going to be at sort of the low-end of your sort of target of six to eight times, is that a fair estimate? And is that expected within the first full year of service, or is there a ramp period to get to that return?

Michael N. Mears

Well, with regards to Longhorn there is going to be somewhat of a ramp that I mentioned this year, when we start up in March. That ramp is going to be the physical constrains though to get to capacity from 75 a day up to 225 a day. We’re just going to need little bit more time to finish the pumping capacity. With regards to BridgeTex, we don't expect any ramp on BridgeTex, that it will be shipping at the committed volume when we put it in service.

Brian J. Zarahn – Barclays Capital, Inc.

Okay, and then given the increase in expansion CapEx, do you have cash position, do you have a sizable cash position from your debt offering and then you have excess coverage in 2013. But do you have any potential changes in your financing plans for that to fund the $1 billion over 2013 and 2014?

Michael N. Mears

Now, we pointed out we ended the year with around $328 million in cash, nothing on a revolver, our leverage ratio was three times. As we looked at the reminder of this year, we could obviously debt finance everything that we talked about and still be mid three times range. And we’ve indicated our desire to operate at four times or less and then would leave even the capacity for even $500 million to $700 million of even additional deal flow at ten times type acquisition that can be financed with that. So as we stand today with everything on our play we can easily debt finance everything.

Brian J. Zarahn – Barclays Capital, Inc.

Okay, thanks for the color.

Operator

And we’ll now go to Steve Sherowski with Goldman Sachs.

Steve Sherowski – Goldman Sachs

Hi, thanks for taking my question. Sorry if I missed this, but the three times target multiple on Longhorn, how do you account for the 10% spot volumes? Do you assume that those are all at the contracted rate or how does that factor into your…?

Michael N. Mears

We have assumed that those would be shifted in contracted rate.

Steve Sherowski – Goldman Sachs

At the contracted rate?

Michael N. Mears

And obviously create some upside. If we have spot shipper nominations, the spot tariff is considerably higher than the committed tariff, and so there is some upside to that. But our assumptions assume committed rates.

Steve Sherowski – Goldman Sachs

Okay. And on BridgeTex, is there any spot volume assumptions on the eight times multiple?

Michael N. Mears

That’s just the committed volume.

Steve Sherowski – Goldman Sachs

Just the committed volumes, and can you remind me what the committed volumes are for that?

Michael N. Mears

We haven’t disclosed the committed volumes on BridgeTex. I would just say that there is significant opportunity for upside from spot shipments on BridgeTex, but we haven’t disclosed the precise commitment level.

Steve Sherowski – Goldman Sachs

Okay, no, understood. And last question, has your strategy in the Eagle Ford changed at all, just given the proposed acquisition of Copano?

Michael N. Mears

The Copano acquisition doesn’t really affect our strategy in the Eagle Ford. So it’s not directly affecting us.

Steve Sherowski – Goldman Sachs

No, okay. That’s it from me. Thank you.

Michael N. Mears

All right. Thank you.

Operator

And we’ll go next to Noah Lerner with Hartz Capital.

Noah Lerner – Hartz Capital, Inc.

Good afternoon, everybody. Quick question, I was just curious with some of the – I guess the regulations and changes to the CAFE limits coming down out of the government and the volumes for gasoline, although maybe not in your system, but generally have come down. And in the future, it looks like they are going to continue to come down. I'm just curious are you seeing – what kind of impact you’re seeing to your blending business at the various terminals?

Michael N. Mears

Well, I mean, clearly the blending businesses is driven by volume. And so to the extent that volumes decline, it would have a potential impact on our blending volumes. Yeah, we’ve got that built into our guidance, going forward and obviously if there is a long-term sector or demand in gasoline, it’s going to have some impact on our volumes going forward.

However, the last few years and what we’ve seen on the horizon, we received additional blending opportunities around our system that we haven’t pursued in the past. These are opportunities at existing facilities that we own, and we haven’t blended historically and we’re looking at growing that to some extent around the system. So that’s at least the last few years, as obviously as you’ve seen our results more than offset the decline in gasoline demand.

Noah Lerner – Hartz Capital, Inc.

Great. Thanks a lot.

Michael N. Mears

Sure.

Operator

We will now go to Sharon Lui with Wells Fargo.

Sharon Lui – Wells Fargo Advisors LLC

Hi, good afternoon.

Michael N. Mears

Good afternoon.

Sharon Lui – Wells Fargo Advisors LLC

Just following up on the question with regards to Copano, just wondering in your 2013 guidance, what’s the assumption in terms of the contributions from the Double Eagle project? And has any of, I guess, your assumptions behind that project changed now that Kinder is buying those assets?

Michael N. Mears

Well first of all the impact that we have in our 2013 guidance for Double Eagle is relatively small. If you recall, Double Eagle has commitments on it that are at 50% of its capacity. But on that project those commitments do ramp up over time. So initially the contributions are very small with regards to 2013 since it’s only a partial year of operation there, that much smaller. With regards to beyond 2013, we have assumed as we look at our long range planning that we are going to ship the committed volumes and anything above that would be upside. So it really doesn’t – Kinder’s acquisition, Copano doesn’t really affect the base economics of Double Eagle. And it’s hard to tell at this point what effect that’s going to have for long-term impact of Double Eagle. I mean we still have significant interest from the producing community with regards to the service we plan to off run Double Eagle which is differentiated from what some of the other projects the Eagle Ford are offering, that’s specifically to shift only chemical grade condensate to the Gulf Coast which has somewhat of an advantage because you can protect the quality of that condensate. So at this point, we’re not seeing, we are anticipating any significant impact on the project.

Sharon Lui – Wells Fargo Advisors LLC

Okay. That's helpful. And you did mention, I guess, the focus has shifted to crude oil based growth opportunities. Maybe if you could talk about, I guess your appetite or desire to look at third-party acquisitions related to refined products, like the Hess assets that are out there?

Michael N. Mears

Well, that’s a good question, because we do talk a lot about crude oil because it’s where a lot of growth is. But it doesn’t change the fact that we’re still primarily refined products, transportation, drilling company. And we’re still interested in growing that business where the opportunities are appropriate, and we’re interested in doing that through acquisitions if the price is right. So we will look at refined products acquisition opportunities here on the market. And I won’t comment on Hess specifically, but I will say that if it’s an asset that fits well with our system or fits well with our strategy and we can buy it for a reasonable price then we will look at pursuing it.

Sharon Lui – Wells Fargo Advisors LLC

Okay, great. Thank you.

Michael N. Mears

Thank you.

Operator

And we’ll now go to Steve Tabb with Tocqueville Asset Management.

Stephen C. Tabb – Tocqueville Asset Management LP

Hello hi everybody. Excuse me. You have a tremendous increase in net gross profit on the product sales. I'd like an explanation of it and is it likely to persist this higher gross profit?

Michael N. Mears

You’re talking about the 2012 results on commodity blending.

Stephen C. Tabb – Tocqueville Asset Management LP

Yes, it’s just as product sales revenues for the three months ended December. If that’s the gross…

Michael N. Mears

Right. Well, first of all in the fourth quarter that’s our highest month with regards that in the first quarter, our highest quarters I should say with regards to product sales. And so we had a significant increase in volume that we sold in the fourth quarter versus the fourth quarter of last year. We had an increase in overall margin. And again, that’s driven by the gasoline to butane spread. And it was very strong this year, as we went into fourth quarter. So that’s a simple answer to that. It’s just more volume and higher margin.

Stephen C. Tabb – Tocqueville Asset Management LP

Well, the total product sales revenues actually in the fourth quarter about $2 million less. And it’s the gross profit that – product margin that more than doubled. I mean, I'm not talking about a smaller change here. You went from $32 million to $67 million.

John D. Chandler

I guess, it’s been a long time, we don’t focus on individual revenues, it’s a margin business, and a margin activity. So I’d really encourage as you’re thinking about the profitability from the activity, you need to look product revenues as product cost to sales. And that margin is quite a bit larger.

Michael N. Mears

The other thing that you have impacts sales is to the extent we have hedges, we have mark-to-market gains in certain periods and mark-to-market losses in other periods for hedges that impact not just the current period but periods in the future. So you really need to look also at our DCF reconciliation page that normalizes that mark-to-market activity. But I encourage you to look at that net not in absolute dollars, look at the net margin.

Stephen C. Tabb – Tocqueville Asset Management LP

Well, is this something – when we come along for the fourth quarter of next year, that we are going to see a substantial shrinkage in that figure, the product margins, it will depend (inaudible) average?

Michael N. Mears

Let me explain to you what the way we forecasted and the mechanics of what actually happens and maybe that will be helpful. We forecast blending as I mentioned earlier, I mean we look at it just kind of a long-term average of what the butane versus gasoline margins are and that we correlate that against the absolute price of crude oil. The absolute price of crude oil has historically been – had the highest level correlation to predict what that margin will be. So when we provide a forecast for 2013, we assume a price accrued which we’ve assumed at $90 a barrel. And that we use that correlation to forecast what the margin is going to be and therefore how much we’re going to make of that blending business.

When you look at what happened in 2012, I mean obviously the price of crude oil was in $85 to $90 range in 2012. So, why is it, that commodity margins were so high in 2012 if you’re using the same correlation on $90 crude? Well the first answer to that is, correlation is not perfect. I mean it’s based on a long-term average and you’re going to have some years that are higher, some years are lower. In 2012, we had a particularly strong margin when we looked at what butane was selling for in the summer, which is when we typically buy butane, and our forward sales on gasoline in the fourth. So we locked in very high margins this year, much higher than what our correlation would predict for the lock in.

Now is that going to happen again next year, I can’t say. I mean, we prefer to give guidance based on what the long term history is, it’s possible that those margins will be that strong again next year. It’s possible that those margins we write on where our correlation is. That’s the problem we’re trying to forecast commodity margins in aggregate, but – so our forecast, our guidance does assume that there will be a reduction in commodity margin in 2013 based on that explanation.

Stephen C. Tabb – Tocqueville Asset Management LP

I thank you very much for that.

Michael N. Mears

Welcome.

Stephen C. Tabb – Tocqueville Asset Management LP

That's it.

Operator

And we’ll go to Elvira Scotto with RBC Capital Markets.

Elvira Scotto – RBC Capital Markets

Good afternoon. The Galena Park project, the $50 million, would the returns on that be sort of at the lower end of your six to eight times EBITDA multiple?

John D. Chandler

Yes.

Elvira Scotto – RBC Capital Markets

Okay, great. And then, this $500 million sort of backlog or potential opportunities that you are looking at, is there a substantial amount that you are looking across your asset base and you are looking at potentially repurposing or converting pipelines to crude oil service or is this more sort of greenfield type opportunities?

Michael N. Mears

It’s much, much more greenfield opportunities. There may be one or two small projects and that we repurpose it, but the vast majority of it is Greenfield opportunities.

Elvira Scotto – RBC Capital Markets

Okay. And then the last questions from me. As you kind of are expanding your crude oil business, are you looking at potentially expanding into some of the rail opportunities, or is that a little kind of beyond your fairway?

Michael N. Mears

We are opposed to looking at rail facilities. We’ve looked at the rail facilities that have transacted in the last year. So I would answer that by saying it’s not outside of our fairway to consider that. However, as with lot of other acquisitions, we think the price is paid, we’re just too high for our appetite.

Elvira Scotto – RBC Capital Markets

Thanks. That’s all I had.

Michael N. Mears

All right, thank you.

Operator

(Operator Instructions) And we’ll now go to Dennis Coleman with Bank of America Merrill Lynch.

Dennis Coleman – Bank of America Merrill Lynch

Yeah, great. Thanks very much. I wondered – just one question with regard to the financing plan or the comment that you made about being able to finance the capital plan with all debt. Obviously, you have the positive outlooks by both the Moody's and S&P. And I wonder if you might talk a little bit about how you view the ratings and whether $700 million or so of financing is consistent with possibly getting an upgrade over time.

John D. Chandler

I mean obviously, I can’t predict what the rating agencies will do with debt. We have been on positive outlook for a long period of time S&P. Still a long period of time with Moody’s I think, as of March or April this year it will be 12 months on positive outlook with Moody’s and by 2014 or 2016 with S&P. So our business continues to – our leverage ratio continues to move down, our EBITDA continues to grow, we continue to maintain a conservative distributable cash flow equation. Our leverage on balance if you compare with our peers is very low. So I think we’re doing all the things that would be indicative of being on the top end of the credit. That’s all I can say, it’s up to the agencies to deal with, to what they are going to do with that, but I would say that we consistently told the rating agencies that we intend to operate around 4 times or less and we demonstrated that when we paid some acquisitions along the way, we proactively should able to – to live in those amount. So I would get obviously good history with the agencies and clearly I believe they’re comfortable with our notation that we could – it’s every thing on the table with that and even more. And still again have a leverage ratio that’s well within – well inside of where most of our peers operate.

Dennis Coleman – Bank of America Merrill Lynch

Okay. That's very helpful. Obviously, the leverage is very strong and those comments are helpful.

Operator

And it appears there are no further questions at this time, Mr. Mears, I will turn the conference back to you for any additional or closing remarks.

Michael N. Mears

All right, well thank you everyone for your time today. I am pleased with our financial results for 2012 and even more excited about Magellan’s future, as our company expands to be a key crude oil transportation service provider. And as always we appreciate your ongoing support and look forward to a successful 2013. Thank you.

Operator

And ladies and gentlemen that does conclude today’s conference call. Thank you for your participation.

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