Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Magellan Midstream Partners (NYSE:MMP)

Q2 2010 Earnings Call

August 03, 2010 1:30 p.m. ET

Executives

Don Wellendorf – President, CEO

John Chandler – SVP, CFO

Mike Mears – COO

Analysts

Darren Horowitz – Raymond James

Sharon Lui – Wells Fargo Securities

Brian Zarahn – Barclays Capital

Michael Cerasoli – Goldman Sachs

Barrett Blaschke – RBC Capital Markets

Elvira Scotto – Credit Suisse

Ross Payne – Wells Fargo Securities

Operator

Good day and welcome, everyone to the second quarter 2010 earnings results conference call for Magellan Midstream Partners. This call 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

Hello and thanks for joining us today to discuss our second quarter earnings. Here with me from the Company are John Chandler, our CFO, Mike Mears, our COO, Paula Farrell, who is responsible for Investor Relations and a number of other people.

During this call, Magellan management will make forward-looking statements as defined by the SEC. Such statements are based on our current judgements 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.

Alright, with that out of the way, let's talk about our performance for the quarter. Magellan reported a first quarter EPU of $0.96 which is a new quarterly record. If you eliminate from that number the impact of NYMEX mark-to-market adjustments and lower of cost of market adjustments associated with both butane blending and El Paso related sales activities, the result is an EPU of $0.86. That substantially exceeds the $0.64 guidance we provided back in early May, which also assumed no NYMEX adjustments. Items that beat our expectations and resulted in the positive variance to guidance include distillate volumes and rates, inland terminal throughput and product gains and book income on our El Paso product sales. Even after you remove the favorable NYMEX and LTM adjustments that benefited the quarter, we still had a very strong second quarter, both in earnings and cash flow.

Our distributable cash flow was the second highest in our history at $100.7 million, and we missed setting a new all-time quarterly record for distributable cash flow by only $4.5 million. While the second quarter ended in June, we had several significant events that occurred in July that I think warrant a quick mention here.

On July 13, we announced that we have agreed to acquire 7.8 million barrels of crude oil storage in Cushing, Oklahoma and more than 100 miles of crude and refined products pipelines in the Houston area for $289 million, plus approximately $50 million of tank bottom inventory. This transaction will make us one of the largest owners of crude storage in the Cushing hub and significantly moves forward our strategy of turning our East Houston facility into a key distribution hub for crude oil in the Gulf Coast area. We are targeting closing the transaction on or around September 1. We see no issues with regards to meeting this closing date, and I can tell you that we are very excited about the level of interest in these assets being expressed by our customers and the opportunities it looks like these assets may create.

On July 14, we priced what we view as a very successful equity offering that after the [she] was exercised, ended up totaling 5.750 million common units. Sale provided net proceeds of about $258 million, which we partially used to funding acquisition I just mentioned.

In July 22, we announced that we are raising our distribution relative to the second quarter, which will be 3% higher than the distribution paid relative to the second quarter of 2009. This keeps us on track to meet our goal of increasing our 2010 annual distribution by 4%. On July 27, we announced the signing of a significant long-term throughput commitment for our Houston to El Paso pipeline, the former Longhorn pipeline, for a minimum of 20,000 barrels per day for 12.5 years. That commitment begins August 1.

We expect the product moving under this agreement subsequently will be delivered to Juarez, Mexico, be a newly constructed third party pipeline that connects to Magellan El Paso terminal. While there are other supply sources for Juarez, I think it is worth noting that Juarez consumes around 25,000 barrels per day or more. So, we possibly might get more volumes than the contracted minimum. We also are working on other refined products throughput opportunities at the Longhorn that we hope we can to bring to fruition in the near future.

Also on July 27, we announced our plan to build an additional 1.5 million barrels of refined product storage at our Galena Park, Texas facility. We will jointly own 800,000 barrels at the new storage with a third party on a 50-50 basis. The remaining 700,000 barrels will be 100% Magellan owned. While our partner has asked that we do not to disclose their name, I can tell you we agreed to this partnership because we feel they are attractive potential upsides to establishing the relationship. The new tanks are expected to be operational beginning late in 2012, with Magellan's capital expenditure estimated to be around $65 million.

And finally, the last item I will mention is our July 29 announcement of an open season to determine firm customer interest in transporting crude oil from West Texas to the Houston area. We mentioned some time ago that we are assessing the attractiveness of reversing a portion of our Longhorn line and converting it to crude service, moving from West Texas into our East Houston facility. The open season ends September 15, so we should be in a position to make a decision on this matter in October. In addition, the growth of crude oil and condensate production in the Eagle Ford shale may result in an additional throughput opportunity in the future if the line is converted to crude service.

So, all in all, it has really been a great quarter and July for us. I will talk more about what we see for the rest of the year in a few minutes. But first, John is going to provide the details on MMP's second quarter compared to the same period in 2009. John?

John Chandler

Thanks, Don. 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 amortizations.

A reconciliation of operating margin to operating profit was included in our earnings release this morning, and we believe that this information helps investors get to the hard and the core of the partnership's core corporations.

As noted in our press release this morning, we had record net income, record operating profit and record earnings per units this quarter, with significantly higher results from our petroleum products pipeline and petroleum products terminal segments. Our operating profit was $124.7 million for the quarter versus $63.9 million for the 2009 period, while net income was $102.5 million for the current period versus $49.1 million for the 2009 period. As is usual, I will go through the operating margin performance for each of our business lines then discuss variances in depreciation, G&A and interest to come to an overall explanation of the variance of net income.

So first, looking at operating margin, which was up $63.3 million or 59% versus the same period last year. Our petroleum products pipeline and systems operating margin was up $56.8 million versus the same period last year, going from $77.6 million to $134.4 million this period. Within this number is a significant increase in our core transportation internally related revenues and higher realized product margins, offset somewhat by higher expenses. And to that point, for the pipeline, our transportation terminal revenues were $19.5 million more than the same period last year.

Approximately 70% of this increase came from increased tariff revenues. This increase is driven both by higher average rates and higher shipment volumes. The realized tariff rate of $1.30 per barrel was up 8.5% versus the second quarter of 2009. This is not surprising, given the 7.6% tariff increase we made on July 1, 2009 to a majority of our rates.

Volumes for the quarter were up 4.8 million barrels, or approximately 7% versus the second quarter of 2009, with increased diesel shipments accounting for a majority of the shipment volume increases. This was the highest shipment volume during a quarter that we've seen since the fourth quarter of 2007. And while it is difficult to pinpoint exactly why diesel volumes increased so much, we believe the increased volume is consistent with the increased results that you have seen for the railroad and other transportation companies during the second quarter of 2010, suggesting some improvement in the economy.

Also of note, while we are seeing third party shipment volumes really pick up on Longhorn, a majority of this increased activity did not start until July and as a result, Longhorn did not meaningfully contribute to our volume, rate or tariff revenue statistics for the quarter. Also, you should note that to the extent we buy, move and sell, then sell product on the Longhorn system in lieu of having third shipments, we do not count that volume as having been shipped. The remaining 30% of our pipeline revenue increases came from transportation related activities, including higher system lease storage revenues due to additional tankage being brought into service. Higher diesel additive revenues due to additional diesel shipments during the quarter. Higher terminaling fees due in part to increased activity at our east Houston terminal and rack and higher ethanol loading and unloading fees due in part to increased blending in a few new terminals that are on our system that are now handling ethanol.

Going to product margins, operating margins from our commodity related activities for the pipeline was up $42.7 million versus the second quarter of 2009, going from a $2 million loss last year to a $40.7 million gain this quarter. Approximately $38 million of the positive variance was due to changes in the mark-to-market activity for NYMEX hedges related to periods other than the second quarter of 2009 and 2010. The second quarter '09 results had mark-to-market losses for hedges related to future periods, while the second quarter 2010 results had mark-to-market gains for hedges related to future periods. Also, this variance from out of period NYMEX activity was offset by a $5.2 million lower cost of market adjustment made during the second quarter of 2010. The NYMEX mark-to-market and lower costs of market adjustments create a lot of noise, but if you take this noise out, the fact is that we made $5 million more this quarter from our commodity related activities while combining our actual realized fiscal profits, the impact of the related realized hedges and adjusting for any benefit or cost associated with lower cost of market adjustments that impact the second quarter activity. This $5 million improvement is a result of higher fractionation profits and higher butane blending profits, largely due to incremental volumes.

In our distributable cash flow schedule attached to our earnings release, you will note we included a line entitled commodity related adjustments. This adjustment is intended to remove the out of period mark-to-market and lower cost of market noise. If you add this line to the product sales revenues less the product purchases lines on our income statement, you will see that actual distributable cash flow increased $5 million, the $5 million that I mentioned a moment ago.

On the pipeline expenses, our petroleum products pipeline expenses were $5.9 million more than the same period last year. Nearly 80% of this increase was result of additional costs from the Longhorn pipeline system which was acquired in the third quarter of 2009. The remaining increase in expense was primarily due to lower pipeline gains where during the second quarter of 2009, we benefited from a special settlement related to historical metering issues that provided incremental gains in the second quarter of 2009 period.

Now going to the terminal segment, operating margins for our petroleum products terminals group was up by $8.2 million, or 31% versus the same quarter of last year with increases both at our marine and inland terminals. Terminaling revenues were $8.5 million more that the same period last year, with about 60% of this increase coming from our marine terminals where we experienced increased revenues at all of our facilities. More than two-thirds of the marine terminal increases came from storage rate increases, most specifically, at our Galena Park and New Haven terminals where we have had many contracts coming up for renewal, allowing to negotiate new and higher rates.

The remaining one-third of our marine revenue increase came from new tankage being put into service. We brought on line approximately 700,000 barrels of new tankage in comparison to the second quarter of 2009, primarily as a result of the acquisition of tankage adjacent to our Marrero terminal in October of last year. However, we did not see the full impact of that in our results, because we took an incremental 500,000 barrels of tankage out of service for maintenance work during the quarter. And as a result and incremental 200,000 barrels was leased during the quarter versus the second quarter of 2009.

Our inland terminal revenues made up the other 40% of our terminating revenue increases and increased both as a result of incremental throughput and as a result of higher fees earned for ethanol blending. Throughput for our inland terminals increased this quarter by 2.4 million barrels, or 9% and was driven by higher gasoline and diesel throughput. Because of the ethanol blending and handling of some new grades of product at the terminals, we picked up incremental throughput that was previously at competing terminals.

Our net product margin for the terminal segment was 3 million more than the same period last year, primarily as a result of selling more acreage barrels gained at our terminals during the quarter and to a lesser degree, as a result of higher realized prices this quarter. And our terminal expenses were about 3.2 million more than the same period last year, largely due to higher tank maintenance and integrity expenses and to a lesser degree, higher compensation expense. The higher tank maintenance coincides with the fact that we have taken more tanks out of service for inspection during the quarter ,which was planned and is part of our API 653 inspection cycle.

And finally, our ammonia operations generated operating margin that was $1.5 million less than the same quarter last year, going from $2 million gain to about $0.5 million this quarter. Transportation revenues for the ammonia pipeline were down $1.5 from the same period last year as a result of shipment volumes decreasing 60,000 tons, which was a 35% decrease.

During the second quarter of 2010, we began hydro testing a significant section of the pipeline, resulting in reduced shipping opportunities. This is part of the increased integrity testing program for this line that we've previously mentioned. And our expenses for ammonia was essentially unchanged, with increases in integrity expenses being offset by a gain from the sale of a portion of an ammonia line fill that we have been holding as long as we have owned this pipeline. The sale of line fill was to the existing shippers. So, therefore in summary, operating margin for the quarter increased $63.3 million, going from $107.3 million to $170.6 million.

Now stepping down in net income, depreciation was up $2.6 billion due to capital additions, of which approximately one-third was the Longhorn pipeline system. G&A expenses were especially unchanged, and interest expense, net of interest income and capitalized interest was up $7.1 million as a result of $568 million in additional average borrowings outstanding for the quarter.

Approximately $380 million of these borrowings relate to the Longhorn pipeline and the related line fill inventory, with the remaining $188 million in average borrowings coming from additional organic capital spending in this small acquisitions we've made over the last year. Therefore, in total, MMP's net income increased $53.4 million, going from $49.1 million for the second quarter of 2009 to $102.5 million for the second quarter of 2010.

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

Don Wellendorf

Thanks, John. Moving to maintenance capital spending. Our spending during the second quarter was $9 million, and we continue to expect our full-year maintenance capital spending to be around $45 million. For growth capital, we have increased our expected spending this year for acquisitions announced to date and organic projects currently underway to $565 million, with another $100 million of spending needed primarily in 2011 to finish these projects.

The increased estimate is mostly due to all the items I reviewed in my earlier comments, obviously, the largest being our acquisition of assets from BP. In addition, several new relatively small organic growth opportunities have come to fruition since our last conference call. And just to make sure you know that our growth potential doesn't end after we finish the projects we are currently working on, I can still report that we continue to have more than $500 million of additional projects in earlier stages of analysis. We believe that we will be able to move forward on a number of these potential projects over time.

With regard to how we intend to finance our growth, we expect to finance the forecasted 2010 spending with proceeds raised from our recent $258 million equity issuance and from our available revolver capacity. And of course, with a strong bond market, we will look for opportunities to reduce the debt outstanding on our revolver so we can maintain more than adequate capacity on our revolver for future growth.

As we have said before, we are committed to maintaining a strong balance sheet and our current debt to EBITDA ratio after our equity issuance and pro forma for the expected first year cash flow from the BP assets is around 3.6 times, which is strong relative to our peers. Of course, we remain in the hunt for acquisitions, as you would expect, and we are armed with a very competitive cost of capital and ample balance sheet capacity.

Let's move on to our guidance for the third quarter and our 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 last quarter's conference call. We are still expecting overall volumes to increase by about 4% for the year after adding in volumes from growth projects. While volumes were down a little in the first quarter, volumes were up, as John reported, about 7% in the second quarter compared to the second quarter of last year.

We are still using a $73 average crude price for the year when estimating profits from our unhedged commodity related activities and haven't substantially changed our forecast for the second half of the year for these activities, even though the second quarter was a bit less than we expected. We currently have locked in the margin on over 50% of our expected blending volume for the second half of the year, with most of that in hedged volumes being in December. I already mentioned that we still expect maintenance capital spending for 2010 to be about $45 million.

The last key assumption I will mention is Longhorn performance. Our guidance obviously assuming that Longhorn stays in refined product service. We are increasing our projected average utilization rate for 2010 from about 23% to about 29%, due to refinery outage and west Texas in July that increased volumes on the line.

Note that our previous guidance already assumed a large portion of the throughput that is now supported by the recently announced 20,000 per day throughput commitment. The new 29% utilization rate equates to about 26,000 barrels per day. We are lowering our gross margin estimate for volumes moving under our own name to around $0.01 to $0.02 per gallon. Our previous projection was around $0.04 per gallon for these moves. The bottom line for Longhorn after the positives and the negatives are netted, we are incorporating into our guidance an estimated 2010 negative DCF impact of about $35 million, which is a very slight improvement over the negative $36 million estimate we communicated last quarter.

Again, we remain very enthusiastic about the long-term potential of Longhorn as a refined products pipeline. And we still are projecting that Longhorn can reach our 2012 capacity target, 70% utilization that we stated last quarter. Of course, we are always interested in positioning our assets to earn the highest return for our unit holders, and we will see by the end of October if there is interest in converting a portion of this line to crude service.

So, taking into consideration all the assumptions I just reviewed, we are increasing our estimated EPU for the full year to $2.73. That's $0.04 higher than our previous estimate. The logical question you might have is why guidance for the year is increasing by only $0.04 when we beat our second quarter guidance provided in early May by $0.22. $0.07 of that $0.18 difference is due to our equity issuance, which dilutes earnings now without any positive cash flow offset from the BP asset acquisition which we have not yet closed. Another $0.04 of the difference is due to unwinding swaps to take advantage of low fixed rates, which obviously has a short-term cost, but a bigger long-term benefit. The remaining $0.07 difference is due to a number of cats and dog benefits to the second quarter that we expect to reverse in the second half of the year.

Our guidance specifically for the third quarter is $0.48. As usual, our guidance assumes no changes in NYMEX mark-to-market adjustments or lower cost of market adjustments. We also are increasing our distributable cash flow estimate for the year by $10 million to $360 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. So, with that operator, I will think we are ready to turn the call over to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Darren Horowitz with Raymond James.

Darren Horowitz – Raymond James

Yes, good afternoon, guys. Don, congratulations on the quarterly results.

Don Wellendorf

Thanks, Darren.

Darren Horowitz – Raymond James

Sure, first question as it relates to the open season for moving crude from West Texas to Houston. And I think you had quantified the total scope of everything involved to be about $150 million. If you decide to convert a portion of the line to move crude and condensate from the Eagle Ford over to East Houston, do you have an early estimate as to what the scope would ultimately be?

Don Wellendorf

I will have to ask Mike that question. I haven't heard one. Mears?

Mike Mears

Well, is your question is the $150 million accurate?

Don Wellendorf

No, it's if we decide to expand into Eagle Ford shale area, what sort of additional costs there would be?

Mike Mears

Right, well, I mean just to clarify, the initial open season is for movements of West Texas crude from Crane to East Houston. They Eagle Ford shale opportunity is not part of the initial open season, but in order to connect the gathering systems into the Eagle Ford shale, we are estimating it probably be in the neighborhood of somewhere between $10 million and $20 million. We haven't done a detailed scope on that yet, though.

Darren Horowitz – Raymond James

Okay. Don, shifting gears a little bit over to the petroleum products pipelines volume strength. You highlighted the strength in diesel fuel and also, you talked about the pickup in dissolute volumes. But when you look at the composition of what is driving that year-over-year volume increase, can you give us a little bit more color on where you think gasoline and jet fuel volumes can trend? I think your previous guidance was for gasoline to be up about 0.5% year-over-year, I think dissolute jet fuel flat?

Don Wellendorf

I think that is right, yes.

Darren Horowitz – Raymond James

Is that still fair? I mean, it seems like your experience could be a bit more of a dissolute pickup now.

Don Wellendorf

Well, I think for the rest of the year, I think we are expecting dissolute, let me just take a look, I've got a number right in front of me here. Yeah, we are expecting dissolute for the year now to be up about 10%. I don't know what it was last year. And gasoline to be up a little under 2%. So, that is our best guess. I would say to some extent, your guess is as good as ours. That is what we are using in our forecast.

Darren Horowitz – Raymond James

Okay, I appreciate it, thanks guys.

Don Wellendorf

Yes.

Operator

And we will go next to Michael Bloom with Wells Fargo.

Don Wellendorf – Magellan Midstream Partners L.P. - President, CEO

Hi, Michael.

Sharon Lui – Wells Fargo Securities

Hi, actually it is Sharon.

Don Wellendorf

Hi, Sharon.

Sharon Lui – Wells Fargo Securities

How are you doing?

Don Wellendorf

All right.

Sharon Lui – Wells Fargo Securities

Quick question on, in terms of the potential conversion of Longhorn, the CapEx increased a bit from $100 million to $150 million. Just wondering if there was a change in the scope of the project?

Mike Mears

There hasn't been a change in the scope of project. I think when we gave you the $100 million, we had not completed a full detailed scope of what was going to be required. And, now that we have, the numbers is about $150 million.

Sharon Lui – Wells Fargo Securities

Okay, okay. And then just looking at, I guess the Longhorn throughput agreement; can you provide some color on the rate that you were able to secure?

Mike Mears

Yes, it is a public volume incentive rate, so it is out there for anyone who wants to make that level of commitment. And the committed tariff rate is $0.05 a gallon, or $2.10 per barrel versus our posted spot tariff, which is $0.06 a gallon.

Sharon Lui - Wells Fargo Securities

Okay, great. Thank you.

Operator

And we will go next to Brian Zarahn with Barclays Capital

Brian Zarahn – Barclays Capital

Good afternoon.

Don Wellendorf

Good afternoon.

Brian Zarahn – Barclays Capital

Can you give an update on your Cushing storage JV? Are you still looking to potentially add more capacity, given your acquisition of storage in Cushing?

Don Wellendorf

Well, the Cushing JV is going as expected. The tanks that we have announced we are building are underway and on schedule. And yes, we are looking for other opportunities there for a joint venture.

Brian Zarahn – Barclays Capital

Okay. Can you also provide the availability on your revolver at the end of the second quarter and then pro forma ?

John Chandler

Well, I mean, at the end of the second quarter, we had a $185 million drawn on the revolver. But of course, with the equity offering, it's completely paid off, and we have $108 million in cash if you pro forma for the equity offering that happened post the end of the quarter.

Brian Zarahn – Barclays Capital

Okay.

John Chandler

So, zero on the revolver, $108 million in cash pro forma.

Don Wellendorf

Zero drawn on the revolver.

John Chandler

Zero drawn on the revolver.

Brian Zarahn – Barclays Capital

Okay. And then finally, obviously you are active in the BP storage and pipeline assets. Can you give your view of how the M&A market looks as of now?

Don Wellendorf

Well, we are very happy with the deal that we were able to strike with BP. I don't know that that's enough evidence to, or input to have a overall view of the acquisition market. I think there's a number of items that are out there for sale, but at what prices they end up going at, it's still too early to know. But I mean all I can say is we feel like we got the assets we purchased at an attractive price for our unit holders.

Brian Zarahn – Barclays Capital

Thank you, Don.

Operator

And we'll go next to Michael Cerasoli with Goldman Sachs.

Michael Cerasoli – Goldman Sachs

Thanks, just a little bit more on that last question. Are you guys participating in some of the auctions that are still ongoing?

Don Wellendorf

I don't know that I want to get into any details about what we might be working on right now like that, but --

Michael Cerasoli – Goldman Sachs

Okay.

Don Wellendorf

I think it's better we kept it to ourselves at the moment.

Michael Cerasoli – Goldman Sachs

Okay, and then kind of switching to Longhorn . If you give us a better sense of just exactly the timeline on contracting and then the construction phase, when you think you can have this up and running. And also if you could remind us if shipper interest was more supply push or demand pull.

Mike Mears

You're talking about crude reversal, I presume?

Michael Cerasoli – Goldman Sachs

Yes, I am.

Mike Mears

Well, assumingly get sufficient interest in the open season, we are looking at probably an 18 month conversion period, with most of that work being preparing our other Houston to El Paso pipeline to handle the increase for refined products, movements that would go through the alternative route. But it would be about 18 months to get that done. And, as far as supply or demand pull, I think most of the initial interest, and again, this is just a verbal interest. Until we actually have contracts in hand, we won't know who is willing to commit and who is not. Most of the discussions have been on the supply side.

Michael Cerasoli – Goldman Sachs

Okay, and then finally, just an update to the process of adjusting the FERC-based formula. I think that's going to take effect next year. Could you just give us an idea of how that process is coming along and if you have any thoughts on where it could go?

Mike Mears

We are in the comment period. The comments are due to the FERC on August 20. The industry is going to present its position on the 20. It may be a little premature for me to indicate what that position is going to be, but I can tell you that the historical cost of the industry has been pretty high. And so that would suggest that we are going to ask for a strong increase to the index on this go around. I think our expectations are, that the current PPI plus 1.3 is kind of a worst case scenario. I think that we are optimistic that the index will be higher than that in the next revision.

Michael Cerasoli – Goldman Sachs

That's helpful. Thank you, that's it for me.

Operator

And we'll go next to Barrett Blaschke with RBC Capital Markets

Barrett Blaschke – RBC Capital Markets

Hi, you mentioned an incremental $100 million for projects in 2011. Can you give us an idea of what you are looking at for total growth CapEx in 2011 at this point?

Don Wellendorf

Well, that's the way we generally report growth CapEx is we just include in our number of projects that we are currently working on. We don't make estimates of what we might be working on next year that we haven't started working on yet. So, when you get a number, you get basically acquisitions that we have already done, plus you are getting growth projects that are currently underway. And $100 million is what we are going to need to spend next year to finish the projects that are currently underway. So, beyond that, you can make your own judgments as to how much you want to assume we might do. You want to base it on historical performance or whatever, but it's not in the number that we are providing.

Michael Cerasoli – Goldman Sachs

Okay. Thank you.

Operator

(Operator Instructions) We will go next to Elvira Scotto with Credit Suisse

Elvira Scotto – Credit Suisse

Hi, just to a follow-up on Sharon's question, the $150 million of capital for the potential conversion of the pipeline. That is a pretty big delta from that $100 million. Can you remind us what the returns are that you would expect on that project and if there is a commensurate increase in returns?

Mike Mears

Well, I can tell you the way we are going to do the evaluation. I mean, we have got a as-is case, which is we continue to operate Longhorn as it is. We have got a projected growth profile for Longhorn, and that is our base case. And so a conversion to crude oil would have to earn incremental EBITDA that gave us something close to our target, which is six to eight multiple on the $150 million of incremental capital. So, that is the way we are going to do the evaluation. And if it doesn't generate that kind of return on incremental capital, then we won't proceed with the conversion.

Elvira Scotto - Credit Suisse

Okay, great, that's helpful. Just switching gears, I have seen a little bit of press on that potential long haul ethanol pipeline. Do you have any updates on that?

Don Wellendorf

Not any updates of any consequence. I mean the gating event still is to get something into a bill that Congress passes that provides a loan guarantee, and there is activity on that front. There is some interest there. I think those provisions have been put in a bill that is moving on the floor. I can't remember if it is in the house or senate, I think it is in the house. But that is what we are waiting on, basically.

Elvira Scotto – Credit Suisse

Okay. Thanks.

Don Wellendorf

That's the first step anyway. Even if that got done, we still have to do an analysis, a thorough analysis of the cost and all that. But first step is to get that bill passed.

Elvira Scotto – Credit Suisse

Great, thank you.

Operator

And we will go next to Ross Payne with Wells Fargo.

Ross Payne – Wells Fargo Securities

Nice quarter, guys. John, do you have the debt balance at quarter end?

John Chandler

Yes, again, just face value of the debt outstanding at quarter end $1.735 billon. But again, remember we paid the $185 million off on our revolver with the equity offering. That was after the end of the quarter, so it was $1.735 billion at the end of the quarter.

Ross Payne – Wells Fargo Securities

Okay. And you basically paid off all of your revolver?

John Chandler

Correct.

Ross Payne – Wells Fargo Securities

Okay, great. Okay, thanks, guys.

Operator

And we have no further questions. At this time, I would like to turn it back to Mr. Wellendorf for any additional or closing remarks.

Don Wellendorf

Okay, well I will just close by saying that, at least in our opinion, an investment in Magellan continues to offer one of the most attractive risk reward profiles in the MMP universe. We think it is hard to beat our combination of a solid based business with primarily fee-based cash flows, substantial growth potential with relatively low risk projects, knowing the same distribution rights and investment grade rating. The future looks bright for us, and we appreciate your continued support of Magellan. Good-bye.

Operator

And this concludes today's conference, thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Magellan Midstream Partners Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts