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Magellan Midstream Partners, L.P. (NYSE:MMP)

Q1 2010 Earnings Call

May 4, 2010 01:30 pm ET

Executives

Don Wellendorf - Chairman, President and CEO

John Chandler - SVP, CFO and Treasurer

Analysts

Stephen Maresca - Morgan Stanley

Michael Cerasoli - Goldman Sachs

Brian Zarahn - Barclays Capital

Darren Horowitz - Raymond James

John Tysseland - Citi Capital

Sharon Lui - Wells Fargo

Barrett Blaschke - RBC Capital Markets

Selman Akyol - Stifel Nicolaus

Presentation

Operator

Good day and welcome everyone to the first quarter 2010 earnings results conference call for Magellan Midstream Partners. This conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Don Wellendorf. Please go ahead, sir.

Don Wellendorf

Thank you, well appreciate you joined us today to discuss first quarter earnings for Magellan Midstream Partners. Here with me from the company are John Chandler, our CFO, Mike Mears, our COO and Paula Farrell, who is responsible for Investor Relations.

Before we discuss the quarter, I want to remind you that during this call, Magellan Management will make 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, should form your own opinion about Magellan’s future performance based on our risk factors and other information discussed in our filings with the SEC.

Okay, with that out of the way lets move on to the quarter.

MMP report first quarter EPU of $0.60. If you eliminate from that number, the impact of NYMEX mark-to-market adjustments associated with both butane blending and sales activity associated with Longhorn which we’re also calling now at times, it used to middle half their line. The [run rate] those two items. The mark-to-market adjustments reallocated those two items that resulted in an EPU of $0.67 and that slightly exceeds the $0.65 guidance we provide back in early February which as we say at the time, assumed NYMEX adjustments.

So overall, our first quarter performance was quite good and we expected it to be quite good. As most of you are aware, a (inaudible) probably we plan to pay our quarterly distribution related to the first quarter. The amount to be paid is $0.72 per MMP unit which is a little over a 1% increase, compared to the distribution related to the fourth quarter of 2009. We remain confident given the current conditions that we will be able to meet our goal of increasing our 2010 annual distribution by 4%.

I'll talk more about what we see for the rest of year in a few minutes and we’ll also discuss the other press release we issued this morning concerning to crude oil opportunities that we are working on. But first, I'll ask John to provide details on MMP’s first quarter compared to the same period in 2009. John?

John Chandler

Thanks Don. Before I begin discussing specific business unit performance, I do want to mention that I'll be commenting on the non-GAAP measure operating margin, which is simply operating profit before G&A expenses and depreciation and amortizations. A reconciliation of operating margin to operating profit was included in our earning release this morning.

Management believes that investors benefit from this in the information because it gets to the heart of evaluating the economic success of the partnerships core operations. As noted in our press release this morning we had a very solid quarter, where we recognized operating profit and net income that were higher than the same period last year.

Our operating profit was $86.3 million for the quarter versus $56.1 million for the 2009 period. While net income was $64.5 million for the current period versus $41.2 million for the 2009 period.

Quarter-over-quarter, we saw an increase in each of our business lines, we’ll guide you to some of the driving factors contributing to this in a moment. As usual I’ll go through the operating margin performance of each of our business lines then discuss variances and depreciation, G&A and interest to come to an overall explanation of the variance net income.

So let's first look at operating margin which was up $35.5 million or 35% versus the same period last year. The biggest contributor of that was the petroleum products pipeline system, this operating margin was at $27.7 million versus the same period last year.

Going from $75.2 million to $102.9 million this period. Within this number is an improvement in our core transportation and traveling related revenues, our product margins and slightly lower expenses. To this point, our transportation internal revenues were $8 million more than the period last year.

Approximately 40% of this increase came from increased tariff revenues. This increase was driven by higher average rates, that more than offset lower shipment volumes. The realized tariff rate of $1.22 per barrel was up 6.7% versus the first quarter of 2009. This is not surprising, given the 7.6% tariff increase we made on July 1st 2009 to a majority of our rates. The actual average rate this quarter was reduced by increased volumes to east Houston which has lower tariff lower than the system average.

Volumes for the quarter were down approximately 2 million barrels or 2.8% versus the first quarter of 2009. With reduced gasoline shipments making up a majority of the short fall. We believe this shortfall is due in large part of the high inventories our shipper had in our system during the quarter, which in some cases limited their ability to originate new barrels per shipment on the system.

Also of note Longhorn did not meaningfully contribute to our volume rate or tariff revenue statistics for the quarter. during the quarter a majority of the shipment activity on the longhorn system involved customer selling products to us in Houston and taking that product in El-Paso therefore the profit from this activity shows up as a commodity margin and we show no volume statistics for shipments we make on the line for ourselves. The remaining 60% of the pipeline revenue increase has came from transportation and related revenues as a result of higher capacity lease revenues due to fees on renegotiated contracts and more capacity being leased.

Higher gasoline additive revenues, higher termnaling fees which is largely due to increased gasoline throughput, due to the expansion of our East Houston rig and higher ethanol loading and unloading fees.

Now going to our commodity margins, operating margins from the commodity-related activities for the pipeline was up 18.8 million versus the first quarter of 2009 going from 2.6 million last year to 21.4 million this quarter. A majority of this variance was driven by two things and first and most significantly the positive variance was due to timing related to out of period recognition our profits and losses on our NYMEX hedges. In fact when taking in a consideration the impact of hedges against our butane, blending and fractionation activities, the cash profit we made in the first quarter of 2009 was essentially equal to the cash profits we made in the first quarter of 2010.

However, we recognized approximately 15 million of the first quarter 2009 profits in 2008 due to the timing of recognizing mark-to-market barriers and hedges. Because of this timing, this quarter’s financial results for butane blending approximation appeared to be approximately 50 million higher than the first quarter of 2009.

This positive variance was offset by approximately $2 million from higher mark-to-market losses in the current period on open NYMEX positions that are being used to hedge future periods. I know that somewhat complex but bottom line, when you take out the mark-to-market noise, the distributable cash flow was essentially the same for butane and blending approximations of both the first quarter of 2009 and the first quarter of 2010.

And a remainder of the operating margin variance from commodity related activities came from the buy and sell activities to the cell they product movements on the long term pipeline system. This profit including the realized NYMEX hedges totaled 5.1 million for the first quarter of 2010. And of course we had no profit in the first quarter of 2009 from this activity.

While, this is a strong profit, and majority of this properties due to the fact that we do average costing of our inventory and we had lower priced at the beginning inventory. Adjusting for an inventory approach that more closely resembles current market prices, we estimate that the profit was close to zero on this activity.

We are using this alternative approachable when calculating our distributable cash flow. So you’ll see a reduction of 5.1 million from net income and our calculation of distributable cash flow as part of the commodity adjustment line in our DCF table. Now going to the pipeline expenses. Our petroleum products pipeline’s expenses were essentially unchanged versus the first quarter of 2009.

Our operating expense increased 4.8 million due to the Longhorn pipeline system .but these increases were offset by improved system gains, largely as a result of processing and selling lower cost over inventory in the current higher price market. Lower property taxes where we have taken proactive steps to negotiate lower appraised values for our assets. And lower power expenses due to reduced shipments and power optimization projects.

Now going to the terminals, our operating margin for the petroleum products terminals group was up by $6.8 million or 28% versus the same quarter last year, with increases at both our marine and inland terminals.

Our terminaling revenues were $8.3 million more than the same period last year with about 80% of this increase coming from our marine terminals where we experienced increased revenues at all of our facilities. Approximately 60% of the increased marine revenues came from rate increases primarily at Galena park in New Haven, there have been many contracts coming up for renewal allowing us to renegotiate new and higher rates.

The remaining 40% of our marine revenue increases came from new tankage being put into service. During the quarter, released 1.3 million barrels in new tankage with a largest increase coming from our Delaware terminal where we added an incremental 900,000 barrels of tankage. In addition released 500,000 barrels, new barrels at Marrero primarily due to our acquisition of the facility adjacent to our terminal in October of last year.

And on our inland terminal side those revenues were also up primarily as a result of higher fees earned from ethanol blending. Net product margin for our terminal segment was also, it was about approximately. 400,000 less in the same period last year as a result of selling fewer overage barrels gained at our terminals during the quarter. In our terminal expenses were about $1 million than the same period last year, largely due to higher compensation expenses which can be attributed in part to the growth for asset base in the terminal segment as well as higher integrity expenses due to timing.

And going to ammonia our, ammonia operations generated operating margin that was about $1 million better than the same quarter last year going from $0.1 million to $1.1 million for this quarter. Transportation revenues for the ammonia pipeline were $1.9 million higher from the same period last year as a result of shipment volume increases 43,000 tons which is a 35% increase. During the first quarter of two of three production plants attached to our system were having some operational issues resulting in reduced throughput last year.

Expenses increased for the ammonia pipeline by 900,000 versus last year largely as a result of increased expense accruals related to the pipeline release in January of this year. So therefore in some of the operating margin for the quarter increased again $35.5 million going from a $100.3 million to 135.9 million.

Now stepping down from operating margin to net income, depreciation was up $3.2 million due to capital additions approximately one half of which is related to Longhorn. G&A expenses were $2.1 million higher than the same period last year largely as a result of incremental accruals related to our long term incentive compensation plans as a result of improved performance expectations on 2008 awards that were best at the end of 2010. And the interest expense, net of interest income and capitalized interest was up $6.5 million as a result of $595 million in additional leverage outstanding for the quarter. $406 million of this additional borrowing relates to the Longhorn pipeline and the related line fill inventory, while the remaining $189 million borrowings comes from additional organic spending and small acquisitions we have made over the last year. Therefore in total MMP’s net income increased $23.3 million going from $41.2 million for the first quarter of 2009 to $64.5 million for the first quarter of 2010.

I will now turn the call back over to Don to discuss capital spending and earnings guidance for the remainder of 2010.

Don Wellendorf

Thanks, John. Moving to maintenance capital spending, our spending during the first quarter was $6 million and we continue to expect our full year maintenance capital spending to be about $45 million which was the guidance that we provided back in February. For expansion capital we are increasing our expected spending for this year for projects currently under way to $250 million, it was $210 million previously with another $30 million in spending needed in 2011 to finish these projects.

The increase is primarily due to the acquisition of 1.2 million barrels of refined product storage already connected to Magellan terminals in Oklahoma, Canada and Iowa. As is usually the case, of this acquired storage is backed by a long term storage contract. In addition, several new organic growth opportunities that have come to provisions since our last conference call also are contributing to the increase in our spending estimate.

Many of you know some project have moved to a current status as just described. We do continue to have more than $500 million of additional potential projects that are in earlier stages of development and were not included in our guidance at this point. We remain optimistic that we will be able to move forward on a number of these projects in the future. With regard to how we intend to finance our organic spending, we expect to finance the forecast of 2010 spending of $250 million, using our revolver for a long term debt.

As we have said before, we are committed to maintain a strong balance sheet in our current debt to EBITDA ratio is around 3.9 times which is strong relative to our peers. With the $40 million increase in organic spending and a potential $40 million Cushing Stories joint venture announced today, we obviously are getting closer to thinking about an equity issuance.

However, the need for an equity offering will be driven somewhat by how quickly Longhorn’s cash flow ramps up, how quickly we can liquidate our Longhorn line fill position and off course, how many additional investment opportunities come to tuition.

The course like most of our peers, we are aggressively in the hunt for acquisitions. We are armed with a very competitive cost-to-capital and ample balance sheet capacity to finance any opportunities that we feel are providing attractive risk award profile for our unit holders.

Moving on to I guess somewhat related topic, want to spend a few minutes highlighting and expanding on the other press release we issued this morning, concerning a couple of crude related opportunities currently being developed.

The first set’s of opportunity is driven by the need for more crude oil storage in Cushing, Okalahoma due in part to the expected growth in movement of crude oil from Canada to Cushing. We have entered into a development agreement that involves the joint venture to build $2 million barrels of crude storage in Cushing back by long-term usage contract.

If warranted by demand, the agreement provides for the construction of a second $2 million barrels of crude storage. Magellan would be the majority owner of the joint venture construct the tanks and be the operator of the tanks.

The other participants in the joint venture are private investors. Definitive agreements have not been signed and that must happen obviously for the project to move forward however we currently believe there is high probability that the definitive agreements will be signed net at least the portion of the first 2 million barrels of storage could be operational as early as the first quarter next year.

Magellan’s investment in this project for the first 2 million barrels would be around $40 million dollars. The second crude opportunity mentioned in our press release involves reversing a portion of the Longhorn pipeline system from crane Texas which is just south of Odessa to Houston and converting that portion of the line to crude transportation.

This opportunity is driven by the projected need for current West Texas crude oil production to access the Houston market as an alternative to the Cushing market which is expected to see reduced pricing due to the Canadian crude oil competition. Also the Longhorn system is well situated to connect to existing crude gathering systems to transport crude oil and compensate from the developing Eagle Ford Shale area to a Houston area.

In Houston, we have existing crude oil storage and the capability for significant new crude oil storage that would allow us to segregate crude oil and condensate for distribution to area refineries and for delivery to outbound pipeline systems. In this scenario, we will continue to build our refine progress movements from the gulf coast to El Paso using our other Texas assets and a section of the Longhorn system from Crane to El Paso. This configuration allows us to maintain the capacity to move at least 60,000 barrels per day of refined products west to El Paso, while moving up to 200,000 barrels of crude oil east to Houston.

Just wanted to be clear on one thing, we still remain enthusiastic about the long term potential Longhorn as a refined products pipeline and we still are projecting that Longhorn can reach our 2012 capacity target of 70% that we discussed last quarter, however there appears to be significant customer interest in moving crude oil east on Longhorn, and this scenario offers the potential for even better returns on our Longhorn investment.

Of course we are always interested in positioning our assets to earn the highest return for our unit holders. It will probably take three months or so to determine that this crude opportunity we will move forward.

Lets move on to our guidance for the second quarter and update to our full year 2010 guidance. Most of the major assumptions behind our EPU and DCF guidance are unchanged from the assumptions I communicated during the last quarter’s conference call. We are still expecting base volumes to be about flat for the year and after adding volumes for growth projects we still predict an overall volume increase of about 4%. And as John reported volumes were down a little under 3% in the first quarter, whatever I think its worth nothing that the volume statistics we quote are based on receipt the product into our systems.

Receipts were down this quarter partially because we had such high inventory levels and our system was so cruel that it limited the amount of receipt that we could accept for a period of time into our system. I think a part of these time of the quarter is that deliveries out of our system were actually up 2.5% for the quarter, which may suggest that overall user demand for refined products is increasing.

Under the next assumption, we are still using a $73 average crude price for the year when estimating profits for our un-hedged commodity related activities. However, despite this being unchanged, our overall expectations for earning from butane blending have increased, based on higher margins that we have already locked in on some of our future blending volumes and expectations for higher volumes blended during this summary and earlier anticipated.

We currently have locked in the margin of about 51% of our expected blending volume for the year. I’ve already mentioned that we still expect maintenance capital spending for 2010 to be about $45 million and our last key assumption I'll mention is Longhorn performance.

Our guidance obviously for now, it seems that Longhorn stays and refined product service. We are slightly lowering our projected average utilization rate for 2010 from about 25% to about 23%.

The 23% utilization rate equates to about 21,000 barrels per day. And we are not estimating that we will earn a gross margin of around $0.04 per gallon for volumes that we are moving under our own name. Our projection last quarter was around $0.07 per gallon for those moves. The security transportation on the line for third party, we are in discussions with various parties about volume commitments which may in some cases involve incentive tariffs. Bottom line for Longhorn, we are now incorporated into our guidance, an estimated 2010 negative DCF impact of about $36 million.

So taking in to consideration all the assumption I have just reviewed, we are increasing our estimated EPU for the full year to $2.69 that’s $0.03 higher than our previous estimate. Our guidance specifically for the second quarter is $0.64.

As usual our guidance seems no changes in NYMEX mark-to-market adjustment. We are also increasing our distributable cash flow estimate for the year by $5 million to $350 million which would be a new record. And finally, as I mentioned in my opening comments, we continue to target a 4% year-over-year distribution increase for 2010.

And with that operator, I think we are ready to time the line over to questions.

Question-and-Answer session

Operator

(Operator Instructions). We’ll take our first question from Stephen Maresca with Morgan Stanley

Stephen Maresca - Morgan Stanley

I had couple of questions on the second or the first press release as it came out. In terms of the transporting from crane to El Paso you talked about the ability to transport 60,000 barrels a day refined products the El Paso. What is it transporting now and how you are going to get to potentially 60,000 barrels a day.

Don Wellendorf

As we said in the first quarter on Longhorn was about 20% of the total capacity, total capacity of lines 90,000 barrels a day. So the shipments we moved in the first quarter was significantly below 60,000 barrels a day. The 60,000 barrels a day that we quoted in the press release is the capabilities of the system. Once we make the conversion so we will have the capability to move up to 60,000 barrels a day through our existing system from Houston over to Odessa and then through the western portion of the Longhorn system and El Paso.

Stephen Maresca - Morgan Stanley

Okay and then on the portion of the line that’s going to go from Crane to Houston you have talked about, Don, is that coming from, where is the source of that crude that could run at 200,000 barrels a day that just increased west Texas production, is that what you were discussing?

Don Wellendorf

Its going to be west Texas production, it may not be increased production though, the anticipation is that some crude maybe redirected from the Cushing market to the Houston market in the future as Canadian crude moves into Cushing, so its not necessarily assuming growth in West Texas production, its assuming a redirection of existing production, in addition to that, the Longhorn line just between Houston and Austin runs very close to existing gathering systems that access the eagle ford shale so we would also anticipate a connection to those gathering systems so that we can transport crude and condensate production from the eagle ford shale formation in the Houston.

Stephen Maresca - Morgan Stanley

On the DCF guidance with the lower Longhorn tariffs and you said that 36 million negative impact, what’s the driving factor behind the 5 million overall DCF increase?

John Chandler

The primary thing that (inaudible) increase is the butane blending improvement over our earlier guidance. Margins that we have been able to lock in on the 51% that we’ve locked in so far for the year had just been better than we thought they’d be and then we’re expecting volumes to be better than they thought they were going to be as well.

Operator

We’ll take our next question from Michael Cerasoli with Goldman Sachs.

Michael Cerasoli - Goldman Sachs

Thanks and good afternoon. The Dallas to Odessa line, that’s currently running from east-to-west? Is that true?

John Chandler

That’s correct.

Michael Cerasoli - Goldman Sachs

And what’s the utilization of that pipe right now?

John Chandler

I don’t have utilization percentage of the top of my head but it is that section of pipe that has 60,000 barrels a day available capacity that we would that we could use to move to El Paso. So I'm not going to answer your question. I don’t have the exact current utilization available.

Michael Cerasoli - Goldman Sachs

Okay. And then, similarly the, how dependent would the oil part of the pipeline be on Eagle Ford connections? How dependent would it be on that part?

John Chandler

Well, that’s what we’re in the process of accessing right now but we are, we’re talking to various market participants from both transportation West Texas crude and Eagle Ford shale production to Houston. I think one of the advantages that we can offer is that we can do either or.

So we can provide transportation from West Texas as the Eagle Ford production ramps up and convert over to Eagle Ford production. Transportation as that play develops so that parties are looking at making commitments to the asset kind of optimize their usage. But we don’t have percentage breakdown on how much has to be from West Texas or from Eagle Ford right now in order to make the project work.

Michael Cerasoli - Goldman Sachs

Okay and so the attempt is to run as pretty much as a common carrier?

John Chandler

Yes, absolutely.

Michael Cerasoli - Goldman Sachs

And then just separately just real quick, you spoke on your pipeline segment that gasoline demand was a little bit lower, can you just talk a little bit about how diesel demand was?

Don Wellendorf

To get that statistic in front of us here real quick, we do have with us.

John Chandler

Seemed the bottom was essentially flat. Yes, the shipments for the quarter of diesel shipments were about flat for last year.

Operator

We will take our next question from Brian Zarahn with Barclays Capital.

Brian Zarahn - Barclays Capital

I guess comparing the Longhorn pipeline being this fully refined product pipeline versus it being self refined products and crude will the economics change with the conversion and reversal from the original estimated EBITDA in 2012?

John Chandler

Well, the crude scenario that we are looking at could have very significantly better economics than our original economic on Longhorn, as a refined products line. Now the original economics were 8 to 10 times or I mean 6 to 8 times EBITDA ultimately out of line which about 70,000 barrels day, 7% capacity if we were able to actually sell up this crude line to a volume approaching 200,000 barrels a day in the significantly better.

Brian Zarahn - Barclays Capital

Okay, I guess in terms of your Cushing potentially, looks likely Cushing potential it looks like likely Cushing expansion can talk about the process of enduring Cushing and why a JV versus doing a completely at the Magellan level.

Don Wellendorf

We believe there is demand for additional crude stories in Cushing and as a matter of fact the joint venture that we are contemplating entering already has a commitment for the large majority of the volume we would be building from a very reputable person or entity and the reason that we are doing the joint venture is because these private investors that are the other part of Joint venture are the ones that actually put the deal together and so that was their ticket into this deal. It was their deal initially.

Brian Zarahn - Barclays Capital

On that lease you will be the majority owner and operator what percentage is that?

Don Wellendorf

We will be the very substantial majority owner and the operator and we will be building the asset so in effect other than I think a few items so we were essentially in control of the joint venture.

Brian Zarahn - Barclays Capital

I guess given your announcement this morning on both Longhorn and then Cushing is this an indication that you are looking to diversify more into Crude going into the future?

Don Wellendorf

Well I mean we wouldn’t mind doing that, we have some ideas about some things we can do with crude particularly surrounding our East Houston facility that looked pretty promising but still we would certainly not we are certainly happy to do to be involved in the Crude business that’s where the opportunity like this present themselves.

Brian Zarahn - Barclays Capital

Okay and finally on Longhorn I am not sure if I missed it earlier about how much did Longhorn contribute to your pipeline segment product margin?

Don Wellendorf

$5 million to the pipeline segment product margin. I try to be as, disclosed to you as the can about Longhorn, specifically kind of individually because you see the results of Longhorn and couple of different spots.

John Chandler

Yeah. And just to break it down, we head $5 million of commodity margin basically from Longhorn but we had bout $5 million of expense from Longhorn as well. So, bottom line is profit contribution, not even, not including interest expenses was essentially zero.

Don Wellendorf

But if you look at just the pipeline segment result it gets down to 0.

Operator

We’ll take our next question from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

Good. A couple of questions for you around your recent Houston footprint and when you talked about explaining the capacity there which is around 7.5 million barrels of storage for, crude and condensate planning based on that business it would seem like expansions there would be likely.

So can you just give us a little bit more color as to what it would take for you guys in order to allocate capital to expanding that capacity and then secondly, when you look at kind of being more vertically integrated there, if the connections from East Houston to the refining complex are already in place, what do you think is involved in the linking up East Houston to a lot of these outbound pipelines? If you could just quantify, maybe incremental capital spend to enhance capacity or just give us a little more detail as to the scope of what that project could impale?

John Chandler

Okay. Let me address those pieces. First of all, East Houston, we already have existing or under construction of $2 million barrels of storage. So the 7.5 that was floated in the press release is an additional 7.5 so that we can eventually get up close to 10 million barrels of storage in East Houston and that's with an existing issues footprint. There are some other areas where we can put some crude storage also but that's addressing the storage piece and of course the capital associated with that it is what it is for storage its typically $20 to $30 a barrel with built storage.

As far as the existing connections, we do have existing connections to distribute crude to the refining complex around the shift channel but its somewhat capacity constraint we estimate probably somewhere in the neighborhood of 50,000 barrels a day of capacity available today. So we are looking at expanding that and that cost to expand that is included in the $100 million capital that we estimated and we have put in our press release with regards to the conversion. And then we involved building a new line from East Houston down to near the ship channel to connect to the existing distribution points around the ship channels. So the point there is we have got existing capability to start up quickly and then we got expansion capability at relatively modest levels of capital to basically reach an unlimited level of expansion for our crude capacity to the refining complex.

With regards to outbound pipeline capacity, what we were looking at there was primarily outbound capacity for compensates primarily to move out to at other blending market. The capital to do that is relatively minor I mean again it's within that $100 million of estimated capital that we had included in press release.

Operator

We will take our next question from (inaudible) with Credit Suisse

Unidentified Analyst

On the Longhorn conversion, so just to confirm what you are looking for to actually move forward with this project is commitments from customers?

Don Wellendorf

We would be seeking commitments; we have already started that process. But I think it’s safe to say it would require some level of commitment before we’ve spend the capital to make the conversion.

Unidentified Analyst

And I think you had mentioned that you probably have some sense in about three months of whether you move forward, if you were to move forward how long are the processes that you actually do the conversions.

John Chandler

We are estimating and we are scoping all of that work right now, but we are estimating it will probably be around 18 months. And that would be to all of the work to convert Longhorn to crude and to put in all of the capacity to move 60,000 barrels a day of refined products through the alternative route to El Paso.

Unidentified Analyst

And then your guidance now doesn’t include the conversion, but now the guidance assumes 23% utilization on Longhorn, is that what Magellan is doing on Longhorn or does that include third parties?

John Chandler

It includes both

Unidentified Analyst

So do you have third parties on Longhorn right now?

John Chandler

We did have third party shipments in the first quarter, but just to be clear I mean the activity that Magellan is doing is on behalf of third party so its essentially as if they are shipping, we are buying products from them in Houston and selling it back to them at El Paso.

Unidentified Analyst

You are using a $73 oil price in your guidance, what’s your sensitivity to changes in the price of oil?

Don Wellendorf

Primarily it’s the way that we estimate a margin on our butane blending business. It’s not a perfect science, but we’ve seen a correlation between crude price and the margin between butane and gasoline. And so, to the extent that we’ve not locked in our volumes, which is about, around 50% of our total expected volumes this year. It would be drive, that would be a driver in the guidance that we’re, putting together and giving to you guys.

Unidentified Analyst

Okay. So look at it directionally, more than trying to quantify at this point?

Don Wellendorf

Yes.

Operator

We’ll take our next question from John Tysseland with Citi Capital

John Tysseland - Citi Capital

Couple of questions. Longhorn, was originally a crude pipeline and then it was converted over into refined products. Is that correct?

John Chandler

That’s correct.

John Tysseland - Citi Capital

And so, when you go to converting it back to crude, is the cost predominantly based on that conversion back to crude or is it mainly the cost and the time that I takes to expand the Dallas for [worth to address] into a 60,000 barrel a day increase

John Chandler

Well it’s really probably equally a combination of both. The actual conversion to product I mean, from products to crude is not a difficult thing to do. The cost are primarily for storage and connections on either ends, so that you are adequately connected to the crude supply on one end and the distribution system on the other and storage. The actual conversion cost, itself are not very high and then likewise on directing product movements through the Dallas line and west Odessa. Again, it’s primarily storage and then there is one small section of pipe we would need to expand to get to the 60,000 barrels a day capacity.

John Tysseland - Citi Capital

So I take it the crude capacity on the storage side that originally was with the Longhorn pipeline is now unavailable or is that you wouldn't convert that and just leave it as refined product terminals.

John Chandler

It wasn't acquired, the crude storage on the destination end was owned by Exxon and with Exxon on the line when they were supplying crude into [Bay town]. So that was a part of the acquisition Longhorn didn't buy any crude storage when it acquired the pipeline. And on the other hand in West Texas there is a lot of crude storage out there. We don't know that but there is a lot of crude storage available so we are not anticipating that we have got to build a lot of crude storage in West Texas, but we do need to connect the storage if there

John Tysseland - Citi Capital

Got it. And then also when you look at your working capital that's tied up in Longhorn as it stands in terms of line fill, if you make the convergent do you see a working capital release in a benefit or would you just reinvest that working capital back into crude oil line fill.

Unidentified Company Speaker

Now we definitely see a reduction in working capital might be another (inaudible) line so let me do the conversion.

John Tysseland - Citi Capital

Would you own the line fill on the crude side as well or is that --

Don Wellendorf

We don’t anticipate earning the line fill on the crude oil side.

John Tysseland - Citi Capital

Okay and then lastly on the crude storage project in Cushing, could you just give us a little bit more detail in terms of the evaluation of that I mean you said it was private investors do they own land and they are bringing new end to develop the project and your customer relationships with it or did they get a contract or initial indications of interest and you are going to do the land and development of everything.

Don Wellendorf

They brought to the table the land the third party contract for the usage of the facility, that’s what they brought to the table and they will be involved in their commercial aspects of the joint venture in terms of filling up the piece of that, relatively small piece of the tanks that are not committed to under that storage agreement so that’s why there is a joint venture because they affected and we put this deal together and they were looking for someone that could help finance it and act operated.

Operator

We will take our next question from Sharon Lui with Wells Fargo.

Sharon Lui - Wells Fargo

Just a question on the conversion project, its seems like based on the timing there is really no change, is the reason we will presume that there is no change in terms of when you expect to achieve their target at the multiple.

Don Wellendorf

Our target what?

Sharon Lui - Wells Fargo

Your target return of 6 to 8 times.

Don Wellendorf

If we don’t do the conversion and we continue on the path that we are on as we find products, our guidance is still that I think it was like a 3 or 5 year timeframe and we would get to the 6 to 8 times and we still believe that we can do that.

Sharon Lui - Wells Fargo

But if you do, do the conversion and it takes 18 months would you be able to achieve that 8 times multiple by 2012?

John Chandler

If we elect to go with the conversion and if you step through the timing of what’s going to happen we are going to continue to ship for 5 products on Longhorn over the next 18 months, while we are doing the work, we don’t have to shut the system down to do the capital work necessary to prepare for the conversion so we would continue to build refined products volume on the system over the next 18 months. And then 18 months from now, there would probably be a short period of time, of couple of months where we actually do the conversion. But this is in an instance where we would announce that we’re converting into crude and then we have to shut it down for 18 months to do that.

Sharon Lui - Wells Fargo

Okay. Just turning to other crude projects that you have with storage, can you maybe just talk about your explicit returns on that project and maybe relative to some of the acquisition multiple of storage assets available?

John Chandler

Sure well, I think our returns are consistent with what we’ve said in all of our other organic growth projects. This is 6 to 8 multiple project on the Cushing storage.

Sharon Lui - Wells Fargo

Okay. And have you been exploring I guess opposition acquisition opportunities in terms of storage?

Don Wellendorf

On the crude storage or just in general?

Sharon Lui - Wells Fargo

Crude storage?

Don Wellendorf

We’ve looked at some acquisition opportunities. As a matter of fact, we look at a lot of them as them come up.

John Chandler

We probably can't comment on any activate acquisitions that are under way but we look at storage whenever packages are available.

Sharon Lui - Wells Fargo

Would you be able to comment whether those multiples are trending towards the high end of that range?

Don Wellendorf

Generally, acquisitions multiples are going to be higher than organic growth multiples. So we haven’t, I think what we along with a lot of people are waiting to see some deals get done here. There are several deals that are out there right now that are kind of bidding type deals. But at some point, here it will reach a conclusion and we are itching to see what kind of prices people are paying now for logistics assets, I don't know that we have a real good feel for that right now. We know that they were paying that their prices were extremely high a year or so ago, two years or one year ago. Whether or not it is in the economy has changed that or not I think it still remains to be seen a little bit.

Sharon Lui - Wells Fargo

Okay, and just one housekeeping item. Your debt balance and liquidity?

John Chandler

Yes, we had at the end of the quarter $1.7 billion in debt outstanding and $152 million out on our revolver and our revolver again flat $150 million facility.

Operator

We take our next question from Barrett Blaschke with RBC Capital Markets.

Barrett Blaschke - RBC Capital Markets

Just kind of quick question that is you are looking to adding 2 million barrels of storage to Cushing with essentially even take that to 4 million. Just looking at the kind of the Cushing complex, where do you see kind of capacity being of what actually needed in terms of crude oil storage there?

John Chandler

We are asking not to tell you what the maximum opportunity is in the market. I can tell you that I mean first of all here is the back up from the starting point. We don't have any history in Cushing, this is an entry for us into Cushing. What we have in this instance is a contract, a long-term contract for storage in sense we started working on this JV, we had significant interest from other parties for storage in Cushing, incremental storage in Cushing. So the best way I can answer that is I don't think the markets reached its point at full capacity in Cushion but I cant, I don’t know if I can tell you where that point is.

Barrett Blaschke - RBC Capital Markets

And then over to Longhorn as eagle ford continues to expand, is there a potential that at some point you might need to either live the line or add some additional capacity there?

Don Wellendorf

We hope so, let’s get those projects in place before we start leaking it.

Operator

(Operator Instructions). We will take our next question from Selman Akyol with Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

Most of my questions have been answered but I do have one lingering regarding Longhorn and that is I was just curious as to the genesis of the idea, the conversion and is that a customer approaching you or is that sort of you looking around for other uses to the capacities.

John Chandler

There was a customer approaching us.

Operator

It appears there are no further questions. At this time I would like to turn the conference back over to Mr. Wellendorf for any additional or closing comments.

Don Wellendorf

Okay well I will just close by saying that we believe that Magellan remains one of the strongest companies in the MMP space. First and foremost we have a solid base business, its primarily fee based cash flows that also offer substantial growth potential is relatively low risk and consistent with the attractive risk reward profile that is the trademark of Magellan. So thank you again for your time today and your continued support toward Magellan, we will talk to you soon. Good bye.

Operator

Thank you ladies and gentlemen. Once again that does conclude today's conference. We thank you for your participation.

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Source: Magellan Midstream Partners, L.P. Q1 2010 Earnings Call Transcript
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