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

Q2 2014 Earnings Conference Call

August 5, 2014 1:30 PM ET

Executives

Michael Mears – Chairman, President and CEO

Michael Osborne – SVP and CFO

Analysts

Steven Sherowski – Goldman Sachs

John Edwards – Credit Suisse

Abhi Sinha – Wunderlich

Brian Zarahn – Barclays

Faisel Khan – Citi

Sharon Lui – Wells Fargo

James Carreker – U.S. Capital Advisors

Stephen Tabb – Tocqueville Asset Management

Norman Kramer – Kramer Investments

Operator

Good day, and welcome to the Magellan Midstream Partners Second Quarter 2014 Earnings Results Conference Call. Today’s conference is being recorded.

At this time I would like to turn the conference over to Mike Mears, Chief Executive Officer. Please go ahead, sir.

Michael Mears

All right, thank you. Well hello and thank you for joining us today to discuss Magellan’s second quarter financial results and our outlook for the remainder of 2014.

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 review the risk factors and other information discussed in our filings with the SEC and forms your own opinions about Magellan’s future performance.

With that out of the way Magellan continued to perform well in 2014, generating another quarter of solid financial results. EPU was slightly less than the guidance we provided back in May due to the unfavorable impact of a $0.04 non-cash impairment charge related to a non-strategic pipeline terminal we may sell in the future. Otherwise our refined products, including oil transportation service, exceeded our guidance with higher rates and volume than expected. And on a DCF basis our second quarter results exceeded the same period last year by 16%, generating a distribution coverage of 1.3 times for the quarter and 1.6 times year-to-date.

I’ll now hand the call over to our CFO, Mike Osborne to discuss our second quarter results in more detail, and then I’ll be back to discuss our outlook for the rest of 2014 and the status of our expansion capital projects.

Michael Osborne

Thanks, Mike.

Before I begin I’ll mention that I will be commenting on the non-GAAP measure, operating margin. A reconciliation of operating margin to operating profit was included in our earnings release this morning. Management believes investors benefit from this information as it’s a tool we use in evaluating the economic success of the partnership’s core operations.

As noted in our earnings release we reported net income of $146.3 million or $0.64 per share this quarter versus net income of $153.6 million or $0.68 per share in the second quarter of 2013. Before discussing the results for each of our segments, I would like to highlight a few items that affect the comparability of net income between the periods. These include first our mark-to-market adjustments on our commodity activities which were a net loss of $11.7 million in the current period and a net gain of $7.6 million in the 2013 period. Details related to this activity can be found in our distributable cash flow reconciliation to net income which is attached to our earnings release.

In addition in the current period we recorded a $9.4 million non-cash impairment of certain pipeline terminal and related assets in the refined product segment and in the prior year period we recorded a reduction of expenses on reversing a $10.6 million air emission approval that affected both our refined products and marine terminal segments.

I’ll go to the operating margin performance of each of our segments now and discuss variances and depreciation, G&A and interest to come to overall explanation of the variance of net income. Our crude segment was the biggest mover this quarter in terms of period-to-period performance. This segment saw operating margin increase by $33 million to $73.5 million. This increase was primarily due to the increased crude deliveries on the Longhorn pipeline, partially offset by resulting higher cost including power and personnel associated with operating the line.

Longhorn began deliveries in mid-April 2013 and averaged approximately 90,000 barrels per day in the 2013 period. This quarter Longhorn averaged approximately 250,000 barrels per day, with an average tariff $2.13 per barrels. In addition, this segment also benefited from favorable results of the Houston area distribution system and higher equity earnings on our Double Eagle joint venture.

On the refined products segment operating margin for the quarter was $162.7 million compared to $177.8 million in 2013. There were a number of factors driving this period-to-period change. As previously mentioned the commodity-related adjustments for out of period mark-to-market activity accounted for a $19.3 million swing between periods. Our refined product system excluding the Rocky Mountain and New Mexico assets acquired in 2013, saw a 5% increase in volumes and an increase in tariff rates. The higher volumes reflected strong demand in the Central States and West Texas while the higher tariffs were primarily attributable to our annual tariff escalation that went into effect in July 2013. You’ll recall this 2013 increase was 4.6%.

We also benefited from the revenues generated by the Rocky Mountain and New Mexico assets that we had acquired in 2013 partially offset by the associated operating expenses on this assets. Our products margin benefited approximately $5 million from increased butane blending volumes and finally our operating costs increase due to unfavorable product outages, costs associated with the previously mentioned Rocky Mountain, New Mexico assets, the prior year benefit of the reversal of the air emission approval, that portion attributable to refined products. And then our asset integrity and personnel spending.

On our marine terminal segment revenues increased due to increased storage and ancillary fees with revenues benefiting from contractual renewals at higher rates. While operating cost increased period-over-period this was primarily due to the prior year reversal of the air emission approval. Excluding that item operating costs were up slightly for asset integrity spending.

Stepping down to operating margin, our firm operating margin to net income, depreciation and related expenses increased $12.7 million due to the impairment charge previously mentioned as well higher property balances associated with capital expenditures. Our G&A increased $6 million due to higher personnel and equity base compensation expenses and net interest cost increased $1.6 million due to higher average balances which were offset somewhat by increased capitalized interest for ongoing construction projects.

We ended the quarter with $2.87 billion in long-term debt. That’s the face value and it includes the $2.65 billion of notes and $221 million of commercial paper. And during the quarter we retired our $250 million of 2014 notes. This was funded primarily by borrowing of the commercial paper program.

Our debt-to-EBITDA computed on a rolling full quarter basis was 2.8 to one. That is ratio is based off our actual results and the pro forma ratio which is the metric used in our credit agreement and considers the contracted revenues for in progress projects was 2.6 to one.

I’ll now turn it back over to Mike to discuss capital projects and DCF guidance for the remainder of 2014.

Michael Mears

Thanks, Mike. Based on solid financial results to-date and our outlook for the rest of the year we have increased our DCF guidance by $30 million to $840 million. The increased guidance primarily incorporates continued strong demand for refined products and crude oil transportation services with our Longhorn Pipeline transporting roughly 250,000 barrels a day during the remainder of the year. Further, we have locked in commodity margins on nearly 90% of our expected fall butane blending activity and 75% of our spring 2015 butane blending activity at this point with strong margins similar to what we realized in the first quarter of this year. By increasing our DCF guidance to 840 million we now expect 2014 distribution coverage of about 1.4 times which result in excess cash close to $240 million for the year.

One reason for our high coverage ratio is the growth in cash flow from our commodity-related activities. We still project that 85% or more of our future operating margin will come from our fee-based activities and therefore we believe a long-term distribution coverage close to 1.1 times is appropriate for our business and we would expect to increase our distribution overtime to move closer to that level. We remain committed to our goal of increasing cash distributions by 20% for 2014 and 15% for 2015. As usual we plan to use any excess cash that we generate to fund our expansion growth projects.

With regards to expansion projects we are in the final stages of construction for the BridgeTex pipeline, our largest construction project to-date. Tank construction at Colorado City is complete and pipeline landfill activities are underway for portions of the pipe. At this time we expect pipeline shipments to begin in September to deliver up to 300,000 barrels per day of crude oil from the Permian Basin to the Houston area. We have been receiving a number of inquiries as to what we expect the volume ramp to be for this project. Like any significant new pipeline project we would expect some type of ramp in volume upon start up. We can’t quantify that any further at this point, but continue to work with our shippers and the third party pipelines that will be delivering crude oil to BridgeTex to ensure that we reach full capacity as quickly as possible.

As a reminder from a DCF perspective we will see the first impact from BridgeTex in our 2015 results, due to the timing of start-up and the related cash distribution payments from the joint venture to Magellan which will be paid quarterly in arrears. Although we are still in early development for a Corpus Christi splitter and Little Rock pipeline construction project we are making good progress. For the Corpus Christi splitter we are working on permitting and contractor selection at this phase. As a reminder the 50,000 barrel a day splitter is fully supported by long-term take-or-pay commitment for use of the entire facility, which we expect to be operational during the second half of 2016.

The nature of that contract provides customer the right to renew upon exploration at considerably lower rates, which we believe will be attractive regardless of our nation’s stance on condensate export capabilities. Between the original contract term and the renewal option we expect this splitter project to generate an average EBITDA multiple of six times with a better return during the initial contract term. You may recall that approximately two-thirds of the $250 million project cost will be spent on storage and other terminal infrastructure that could be used for multiple purposes on a longer term basis if need be even beyond the contract term for the splitter.

For our Little Rock pipeline project we are in the midst of right of way and permitting work to extend the reach of our refined products pipeline from Fort Smith Arkansas to the Little Rock market. Market reaction in this project continues to be positive with shippers excited about the new supply sources our project will provide with refined barrels coming from the Gulf Coast and Mid-Continent refineries for more supply optionality to the Little Rock market. The Little Rock pipeline is expected to be operational in early 2016 and then generate eight times EBITDA multiple based on committed volume, with upside potential. We also recently announced that we plan to reactivate an idle pipeline segment we own in Southern Oklahoma. We acquired this pipeline as part of the larger acquisition in 2010. The line was inactive at the time but we’ve been assessing the best use for this asset since that time.

We now expect to deliver crude oil and condensate from the SCOOP production area in Southern Oklahoma to Cushing beginning in the third quarter of 2015. Based on the expansion projects we currently have under construction, we expect to spend $775 million during 2014 with additional spending of $350 million in 2015 and $75 million in 2016 to complete the projects now in process. Total spending has increased to $100 million from the last guidance we provided primarily due to the addition of new projects including reactivation of the Southern Oklahoma pipeline and a number of new smaller projects.

Further, we have increased our estimates for the BridgeTex’s pipelines to $625 million from our previous $600 million projection as we near the end of the construction. Of note even with this slight cost increase we still expect to generate an EBITDA multiple of eight times on the BridgeTex’s pipelines based solely on the committed volumes with upside potential. And with our strong balance sheet we do not anticipate the need for any equity issuances in the foreseeable future to fund our growth. Magellan continues to analyze additional opportunities for our future growth with an extensive list of project of varying sizes and probabilities.

The combined list of opportunities under considerations totals well in excess of $500 million and we will provide details on these projects as they come to fruition. And while we see potential growth opportunities in all aspects of our business the majority of opportunities still relate to crude oil infrastructure projects at this time. We also continue to assess acquisition opportunities to draw on the market at this time and there are a number of prospects out there that we would like to own. However we intend to maintain our disciplined approach to ensure reasonable risk reward trade-off for any assets we don’t acquire.

That concludes our prepared comments. So operator we now turn the call over for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Steve Sherowski with Goldman Sachs.

Steven Sherowski – Goldman Sachs

Hi good afternoon. What is your CapEx estimates for the reactivation of the Oklahoma line and what volumes are you forecasting for that line.

Michael Mears

Well we – the capital for that project is roughly going be around $25 million. We – that project has a pretty strong payout, if we move as little as 10,000 barrels a day. We think the potential for that line, just based on some of the early indications we’ve had is significantly higher than that. So we’ve approached this project without commitments. It’s relatively low capital. There is relatively low volume it needs to move through at the pad out and it’s got tremendous upside.

Steven Sherowski – Goldman Sachs

Okay, thank you. And what are your Double Eagle pipeline volumes running at currently, and would you also remind me what is your crude and condensate dock loading capacity at Corpus Christi?

Michael Mears

On Double Eagle we’re at about 20% of capacity which as you’ll recall the capacity at the pipeline, the total capacity is 100,000 barrels a day. I don’t have the information in front of me on the total dock capacity at Corpus Christi. So we’ll have to get back to you on that one.

Steven Sherowski – Goldman Sachs

Okay. And if I could just have a quick follow up, is the second quarter G&A a good run-rate going forward.

Michael Mears

Well, I think for the most part it is and one variable in there is just our equity compensation. And if you noticed it our G&A is gone up quite a bit quarter-over-quarter. A significant portion of that is just the fact that we have equity-based incentive compensation and with the performance of our units in the market that expense has gone up. But I think generally speaking that’s probably a good estimates for our ongoing run rate.

Steven Sherowski – Goldman Sachs

Now understood. That’s it from me, thank you.

Operator

(Operator Instructions). We’ll go next to John Edwards with Credit Suisse.

John Edwards – Credit Suisse

Yes, hi everybody. Congrats on another good quarter. Just following up on Steve’s question on the G&A, as far as the equity-based comp, I mean how much of the G&A expense was due to the equity-base incentive comp, the run up in the price of the equity there.

Michael Mears

Hold on, I’m looking at some data. Yes, I think the number of quarter-over-quarter, that’s quarter-over-quarter is roughly $4 million of that $6 million increase.

John Edwards – Credit Suisse

Okay.

Michael Osborne

Yeah and this is Mike Osborne. Some of those units, not most of them, but some of those units get adjusted based on the current market price, just the accounting for those. That’s why you saw a bit of a run up with the enterprise this quarter.

John Edwards – Credit Suisse

Okay, all right. And then you indicated on BridgeTex, that it’s an eight multiple based solely on committed volumes. How much is left to commit on BridgeTex, how much additional capacity is there?

Michael Mears

We haven’t disclosed that since we announce BridgeTex. What we’ve said consistently is that the pipeline is not fully committed and that the commitments that we have generate an eight times EBIDTA multiple. As you may be aware we are in a supplemental open season on BridgeTex, as we speak, which closes later this week to contract that additional throughput on BridgeTex. But we haven’t disclosed what the sum of commitments are.

John Edwards – Credit Suisse

Okay. Fair enough. And then I missed, that you said that your total cap spending increased and then you gave the number I just missed. If you could just repeat that?

Michael Mears

It’s about a $100 million from what we provided last quarter.

John Edwards – Credit Suisse

Okay. All right. And then regarding your backlog you say it’s still above $500 million, is that up or down from the last quarter?

Michael Mears

Well, we probably don’t get in to those level of details. I mean one of the reasons why we don’t do that is because if you look at what we are working on I mean there is numerous projects. There is lot of small projects there, there is a number of projects that are very large in scale. But when you are in the process of negotiating those projects to assign a probability to success is difficult. And so to avoid having the number bounce around quite a bit based on projects appearing more likely to happen or less likely to happen we really just comment on that the number is over $500 million.

John Edwards – Credit Suisse

Okay, fair enough. And then let me ask this then. As far as CapEx that that you were able to place in service during the second quarter, how much was that?

Michael Mears

I mean you are asking projects that were completed and put in to service?

John Edwards – Credit Suisse

Yeah, completed and put in service in the second quarter, I mean in terms of dollar amount.

Michael Mears

I don’t have that number in front of me.

John Edwards – Credit Suisse

Okay. I’ll follow up with Paul offline on that.

Michael Mears

Okay. We spent $218 million of expansion capital this quarter. But specific to your question we don’t have that number handy. You’ll have to call the Paul back for that.

John Edwards – Credit Suisse

That’s fine. And then following up on the line placed in service, you said 10,000 barrels to pay out. So I’m not sure what that means, is it payout over one year or over a different period of time, what do you mean there?

Michael Mears

No, it doesn’t payout in one year. That would be a pretty healthy tariff to pay out $25 million in one year. No, that’s assuming you got a long term project, that you’ve got 10,000 barrels a day for five to eight years plus kind of economics. The initial capacity of the pipe is going to be 30,000 barrels a day and it’s expandable from that. Again the interest we are getting out there in the market place is that we expect to be substantially above 10,000 barrels a day. But back to your specific question that assumes a 10,000 barrels a day for a number of years.

John Edwards – Credit Suisse

Okay. So it’s like a five to eight year pay back at 10,000 barrels, correct?

Michael Mears

I don’t have the actual pay back number in front of me. But it’s probably closer to the upper end of that. If you are asking just pay backs and not a return on your capital you’re probably right…

John Edwards – Credit Suisse

Yeah, okay. That’s all. And then just lastly, what’s the term of the contract on the splitter just remind us the duration?

Michael Mears

We haven’t disclosed that either. What we’ve said is that it’s long term and we use any contract that is five years or more we call that long term. So it’s five years or more.

John Edwards – Credit Suisse

Okay, great. And then just you indicated last year do we have the first number yet, what the increase will be, is that out there yet or not?

Michael Mears

For 2015?

John Edwards – Credit Suisse

Yeah, for the ‘14 to ‘15. Yeah, exactly.

Michael Mears

Yeah. It’s not out there. In fact it hasn’t been determined yet. We won’t know that. It’s based on the actual 2014 increase in the Producer Price Index. So we won’t know what that number is until the end of the year.

John Edwards – Credit Suisse

All right, okay, fair enough. Okay, great. Thank you, that’s all I had.

Michael Mears

All right, thanks.

Operator

(Operator Instructions). We’ll move to our next question from Abhi Sinha with Wunderlich Securities.

Abhi Sinha – Wunderlich

Yes, hi, good afternoon guys. Just wondering that if you could give some color like how is your facility position for incremental condensate filter opportunities? Like I believe you talked about building a second one at Corpus, is any word on that and how do we should think about adding more?

Michael Mears

Well we do have the capability to add another 50,000 barrel a day splitter at Corpus and that second splitter would actually be at a lower capital cost than the first one because we’re putting a lot of the supporting infrastructure in as we’re building the first one. So we do have that capability and really all I can tell you is those discussions continuing with regards to contracting that. But we don’t have any further update on that.

Abhi Sinha – Wunderlich

Sure and on butane blending, so I mean assuming what’s your take on the two components like gasoline prices and butane prices in the near to medium term, what do you expect from here?

Michael Mears

Well, I think certainly in the near term they have continued, the margins have continued to be very strong. As I mentioned they’ve been so strong that we’ve locked in 90% of our – we’ve hedged 90% of our blending for the fall and we’ve – we’ve hedged 75% of our blending for the spring and with regards to the spring, if I’m recalling correctly I mean we’re probably at a much higher level of hedging for the spring that we have been historically at this point in time, simply because the margins are so strong and we decided to lock demand.

If you go out beyond that we’re not seeing anything right now that gives us concern that we are going to see a substantial reduction in margins over the next couple of years and if you just look at the long-term kind of trend is in the market we would expect that given the continued production forecast for wet gas and NGLs that butane prices are going to stay relatively low versus historical standards for quite sometime. So you’ve got a generally pretty positive [D point] on blending margins going forward.

Abhi Sinha – Wunderlich

That’s fair. That’s all I have. Thank you very much.

Operator

We’ll take our next question from [Brian] Zarahn with Barclays.

Brian Zarahn – Barclays

Hi good afternoon it’s Brian Zarahn with Barclays.

Michael Mears

Hi Brian.

Brian Zarahn – Barclays

Hi good afternoon. On the splitter project can you just remind us the contractual terms, is the counterparty obligated or they have the ability to cancel the project?

Michael Mears

Well, I mean the contract has performance requirements. It has triggers in it. I mean generally speaking it’s a credit contract, but I think to address your point directly there are provisions in the contract that would allow for terminations but there are financial consequences to that. So I mean that’s what’s in the contract and I don’t want to go into the details as to what those financial consequences are. On the other hand, I can tell you we’re not getting any indication whatsoever from our customer that they have any intention of doing that.

Brian Zarahn – Barclays

And then I guess a little bit broader in terms of condensate export opportunities how do you view that given your storage and docks in the Corpus?

Michael Mears

Well we certainly think we’re well positioned if condensate and/or crude exports were to be relaxed. I mean if the restrictions were to be relaxed and then we’ve got a facility at Corpus Christi, that is well positioned on the water. We have a condensate pipeline in to our facility our joint venture with Kinder Morgan that even with the contract the commitment does not fall and it can’t be expanded. And so we think we’re very well positioned.

Brian Zarahn – Barclays

Since the Commerce Department’s ruling on conden – on process – stabilized condensate any additional discussions with potential shippers, customers on exporting condensate?

Michael Mears

Well I think I mean the answer to that is yes. I mean obviously people are exploring their options. With regards to our facility there’s really nothing we need to do differently than to export condensate if that’s allowed. So we don’t need to spend capital, we don’t need to really change anything there. So it’s really a matter of whether they get the permits to do it or not and we can proceed with it.

As far as the expansions, I mean the ability to build more storage at Corpus, we have the ability as I said to expand Double Eagle. Those are the sort of things that we make – are making shippers aware of as they are asking those questions, I would not expect we would see any substantial movement on anything there with regards to the shippers being willing to commit to something like that until we get some more clarity on what’s going to happen. I think it’s safe to say that it’s pretty murky right now as to what, notwithstanding the fact that two permit us an issue that what happened since then has probably made it little less clear what the long term possibilities are going to be. So I think we just need to wait for that to get sorted out.

Brian Zarahn – Barclays

And do you have any condensate stabilization capacity in your system?

Michael Mears

We do not.

Brian Zarahn – Barclays

And last time one for me, obviously BridgeTex – Longhorn is having a great ramp-up, BridgeTex going to start up shortly. Do you view other opportunities, see other opportunities in the Permian near medium term as production continues to ramp or everything is focus on filling up…

Michael Mears

Yeah, there are certain things we are doing to improve what we have around the edges so to speak. As you may know, we are adding a new origin to longhorn which should be operational early next year. We are doing – we are looking at adding some storage around the assets both at the origin and destination as the market needs more storage, in Houston in particular as the crude head that’s way. Beyond that there is some things we are looking at. They’re probably further out on the development curve, upstream of Longhorn and BridgeTex but again there further out in the development curve.

If you look at the production forecast for the Permian, I think – I have said this before seems like every production forecast you get, every new one it’s larger than the one before it. Just some of the latest ones, I have seen would suggest that four or five years from now, you are going to reach a point where, you are back to supply-constrained environment in the Permian and you are going to need more capacity. I think that’s too far away, number one and still there is enough uncertainty into that to lead to really having producer rally around supporting another pipeline out of the Permian. But we are continuing to have those discussions with people to make sure that if we reach that point, that we are positioned to react to it.

I think these increased production is one of the reasons why we have initiated this supplement open season on BridgeTex because producers are really realizing that even though there is quite a bit of infrastructure being built that we could, in the next few years, be back in a supply constrained scenario.

Brian Zarahn – Barclays

Appreciate the color, Mike.

Michael Mears

Sure.

Operator

We will our next question from Faisel Khan with Citi.

Faisel Khan – Citi

Thanks good afternoon. Just a couple of questions. I think you mentioned in your prepared remarks but just on BridgeTex you said the landfill is complete or is about to be completed and when is that sort of due to be done?

Michael Mears

It’s underway, it’s not complete. It’s an ongoing process, I would say probably little more than half completed at this point, but it’s actively underway.

Faisel Khan – Citi

Okay, got it and then just on BridgeTex the process of batching is there – can you remind us what the limits are in terms of batching condensate, is there a specific sort of API gravity limit in terms of when you can put on the system?

Michael Mears

No, I mean obviously as long as the liquid there is no limitations to what you can put into pipe, I mean the limitations comes with regards to the tankage, and let me backup. We got specs for BridgeTex that do not extend into the condensate program but physically the pipeline can move it. So what I am trying to say is that initially we don’t expect to move condensate through the pipe.

Faisel Khan – Citi

Okay.

Michael Mears

But physically the pipe can move it if we want to move that directions. So the shippers would have to support it. We may have some limitations on tankage on either ends due to the higher wafer pressure, so you may need to make incremental tankage to store it but the pipeline itself can move it without a problem.

Faisel Khan – Citi

Okay, fair enough. And just in terms of what we are seeing today in the market, we had Gulf Coast refining capacity sort of running at sort of record levels. What are you guys seeing on your system in terms of the impacts of the effects of this high utilization rates on the Gulf Coast?

Michael Mears

Well, it impacts our system somewhat but we really get more of an impact, I mean the Gulf Coast refining capacity doesn’t impact our system nearly as much as the utilization rate as the refineries in the Mid Continent, high utilization of Mid Continent refineries really is more of kind of a bell whether of what our refined product movements are than Gulf Coast refineries and if you look at the high utilization rates in the Mid Continent, that is what’s leading to these opportunities to pursue projects such as Little Rock and reversal line down to Dallas. And for that matter, I mean, I think, as Mike mentioned in his prepared comments our refined product volume quarter-over-quarter excluding the new assets we purchased was up about 5%.

So we really get the benefit from the high utilization rates from the Mid Continent refiners.

Faisel Khan – Citi

Do you think you are going to having any impact from the [inaudible] Refinery being down?

Michael Mears

At this point, we don’t think so. Obviously the longer it’s down there could be some implications but if there are they wouldn’t be material.

Faisel Khan – Citi

Okay, and also last question, do you see sort of – I think you mentioned in your analyst meeting, you seen a little bit more sort of, I guess north-south sort of movements from Mid Con refiners to the Gulf Coast to try to take advantage of the exports. Are you seeing any sort of change in those volumes from what you talked about in the – at the Analyst Day, are you seeing more volumes or you seeing the same sort of strength you saw earlier this year.

Michael Mears

Yeah, I think the trend is continuing and it’s doubtful that we will see anytime soon refined products in the Mid Continent get all the way down to the Gulf Coast. But what you will see is what we’ve started to see already especially in the winter is that you will push barrels out of the Northern Texas market so that you will have more barrels coming from Oklahoma and Kansas in the Northern Texas, less barrels coming from Houston into that market and the markets that you can get to out of Dallas into West Texas for instance and for that matter there is other opportunities to go east and west too, from our system.

I think the general trend is Mid Continent refiners are trying to find new markets. The new markets they are finding are typically markets that have been supplied historically by the Gulf Coast. So as they move into those markets and the Gulf Coast refiners will turn around and export more of their product. That trend we see – we anticipate continuing. It doesn’t happen so much in the summer when gasoline demand is strong but in the winter is really when you see that trend in full force.

Faisel Khan – Citi

Okay, fair enough. Thanks for the time, I appreciate it.

Michael Mears

Sure.

Operator

Our next question comes from Sharon Lui with Wells Fargo.

Sharon Lui – Wells Fargo

Hi, good afternoon.

Michael Mears

Hi Sharon.

Sharon Lui – Wells Fargo

Just following up on Brian’s question about condensate, what’s the potential for I guess Magellan to invest in stabilizers and potentially request its own permit from the government so that, I guess the company could have a real path to kind of pursue condensate opportunities?

Michael Mears

Well I think the potential for us to invest in stabilizers, if clarity is achieved on the ability to export condensate to stabilize, I think that is something that we would look to invest in. And I think we’ve had some preliminary discussions with folks on doing that. So again we would want to do it through a fee-based structure and we got some ideal places where we could put stabilizers.

With regard to your second question, that’s not likely. We’re not in the commodity business ourselves. So it unlikely that we would be filing for a permit as Magellan to export stabilized condensate but we certainly are in the business of providing that service to our customers.

Sharon Lui – Wells Fargo

Okay, makes sense. And then I guess given your commentary about butane-blending remaining pretty strong and how much you actually hedged for the following spring? I guess how do you view the potential of Magellan sort of accelerating that distribution growth targets for this year and next?

Michael Mears

Well, I mean – we always evaluate our distribution our distribution growth forecast and that really all I can tell you at this point we’ve decided at this point we’re not going to increase it. It’s – it continues to be a point in time analysis. We don’t see anything with regards to the data we have in front of us for this year, next year to feel compelled to increase it more than what we’ve already suggested. But we analyze each quarter as to what the proper thing to do is.

Sharon Lui – Wells Fargo

Okay, and then when do you think you would get back to 85% of fee-based target?

Michael Mears

Well, I think I don’t have a run rate chart here in front of me but the vast majority of our projects – I mean we’re in an environment right now first of all where commodity margins have increased substantially. If they stay at these levels the fee-based projects we have online will bring us back to that kind of ratio in the next few years, even with the commodity margin where they are now. So it’s probably in the next two years, three years kind of time frame, if the margins stay where they are now which as we’ve noted is very high versus historical margins.

Sharon Lui – Wells Fargo

Okay, great. Thank you, Mike.

Michael Mears

Sure.

Operator

We hear next from James Carreker with U.S. Capital Advisors.

James Carreker – U.S. Capital Advisors

Good afternoon guys. How are you doing?

Michael Mears

Good.

James Carreker – U.S. Capital Advisors

Just a couple of questions around BridgeTex. When the launch is done and the pipeline is commissioned will it be at the full 300,000 barrel-a-day of capacity at that point?

Michael Mears

Well, the pipe will have the hydraulic capacity of moving 300,000 barrel-a-day when we start out. We really – it’s hard for us to determine at this point exactly how much we will be shipping. I can tell you that the shippers are doing everything they can to be in the position to maximize their throughputs on the pipe but what the flow rate will be the first month or two is somewhat difficult to predict. But if there is 300,000 barrel-a-day of supply available in Colorado City when we start out, we can ship 300,000 barrels a day.

James Carreker – U.S. Capital Advisors

Yeah, that’s kind of the point I was getting at. And then in terms of the volumes, I guess already committed to that from the first open season, will those all kind of – will you get payment from all those at the time of start-up or is there kind of a stair-step to how those shippers commit it overtime?

Michael Mears

Yeah, we don’t expect this fall for those commitments to be enforced. And the reason for that is, when we talk about a September start-up we’re going to starting up into the Houston area. We’re not going to be complete – the line extends down to Texas City and we’re not going to be complete with that by September. So we’re going to wait till that portion is complete before we – the systems fully complete and we can start those commitments.

I can tell you though the shippers fully intend to maximize their throughput even though those commitments won’t be in effect till we complete the Texas City. Our work in that Texas City is expected to be completed a little later in the year, before the end of the year.

James Carreker – U.S. Capital Advisors

That’s helpful and then I guess finally one last question on that. When can we get some – when we will get more information on the results of the second Open Season or more of an idea of kind of what the new committed tariffs will be on the pipeline?

Michael Mears

Well the terms of the supplemental open season were the same as the first open season. So the terms aren’t changing. It’s unlikely that when we complete the open season that we will disclose the precise number of commitments we may and we have a partner with regard – on BridgeTex. So we have to coordinate what we disclose and what we don’t. It’s likely we might disclose whether we received anything incremental or not but we still may not disclose what the total commitments are.

James Carreker – U.S. Capital Advisors

Fair enough. And then I am sorry one very last that 3,000 barrel a day capacity, is it similar to Longhorn in that, where that’s like the immediate capacity but if it were to run overtime it will be unlikely to sustain something along those lines or how do you think about that?

Michael Mears

Yeah, that’s correct. I mean 3,000 barrel a day is the total hydraulic capacity. So is unlikely that you are going to run well you will run at 300,000 barrel a day a day every day 365 days a year. I will say that there is difference and I mentioned this below that the Longhorn has restrictions on it that are unique to Longhorn, that are probably unique to just about any other pipeline in the country. When we have and have to do with some of the agreements we made with the regulatory agencies when we put Longhorn in service. But if we lose communication at the pump station or we lose power at the outside such that we can’t operate it we are obligated to shut the pipeline down.

So that creates periods of downtime on Longhorn that are unique to Longhorn that those requirements don’t exist for BridgeTex and so we would expect BridgeTex to be able to run in a higher run rate then Longhorn. But nevertheless it won’t run 300 a day you still have maintenance issues, you still have other things that will prevent you from running at 100% capacity 100% of the time.

James Carreker – U.S. Capital Advisors

Very helpful, thank you.

Operator

Our next question comes from Steve Tabb with Tocqueville Asset Management.

Stephen Tabb – Tocqueville Asset Management

Hi, I am stockholder, so my questions may have different meaning. But you mentioned that your equity base compensation, I heard you say is based on the market values at some of the assets. I didn’t get that, I thought it would be based on…

Michael Mears

It’s on the market value of the public units, not on any assets.

Stephen Tabb – Tocqueville Asset Management

I see, okay. Now you put in your report on page four that you expect a net income for [Limited Part] that will 330. Of course there is so many types of net income in an MLP here are you talking about tax above net income, are you talking about cash flow net income. What are you referring to in the 330?

Michael Mears

That’s just a GAAP net income number so that would correspond with your tax return.

Michael Osborne

Right and that projects – those projections we don’t assume that there will any mark-to-market adjustments. So that 30 projection is again assuming no mark-to-market adjustments if there is mark-to-market adjustments then they could move that number one way or another but we don’t try to forecast those.

Stephen Tabb – Tocqueville Asset Management

Great, is that likely to be the taxable net income because I am under the impression that we are wrong, that is part of the cash flow is being protected by excess depreciation and other assets other expenses?

Michael Mears

Yeah, we can try to help offline if you’d like, if you want to call Paula we can try to explain but there is going to quite a few difference between your taxable income and what you look at in terms of earnings per share because of basis difference and other items but if you want to give us call offline we can try to answer that for you.

Stephen Tabb – Tocqueville Asset Management

All right, a last point and it’s more major with me as a stockholder then perhaps some of the analysts. But I got the feeling after the last call, it was a very optimistic call and you expected to do some excess cash flow. And somebody asked well if you have excess cash flow will possibly be giving any special cash distributions? And you said well it remains to be seen how things go. Whereas today you made a definite statement that if there is excess cash income it’s going to in to the capital expenditures and it’s not going to go to the shareholder, to unit holders, is that correct?

Michael Mears

Well, that’s correct. I don’t believe we have talked about any kind of special distribution. That you may have been – you may have misheard that, because we haven’t talked about that.

Stephen Tabb – Tocqueville Asset Management

Sorry to interrupt you. May be it wasn’t called special distribution, it was called additional cash distribution, at the last meeting, if the cash flow was going to be – you weren’t sure of it yet, but this is what you expected and it was left open as to where it could go, in an increased cash distribution?

Michael Mears

Right now we are not planning to increase our distribution. But perhaps we can take Paula would be happy to take your call for more detailed questions on that if you like, we can do that offline.

Operator

And at this time we will move to our next question from John Edward with Credit Suisse.

John Edwards – Credit Suisse

Hi. Just a follow up. Earlier question you were mentioning that perhaps the way things are going in the Permian, it could be infrastructure constrained. So I was just curious in what areas – where do you think the constrain might be if that turns up, is it in take away capacity, storage or across the board, what are you thinking there?

Michael Mears

Well, I think it’s probably across the board. I mean if we hit some of those targets I shouldn’t targets, some of the forecasts, that I’ve seen you’re going to have constrains across the board, including takeaway capacity. And I mean to make it clear, we are talking about forecasts that are five to seven years out. So they are worth what they are worth as far as forecast. I mean there is assumptions that go in to that forecast not least of which is the crude price assumption. So but those forecast exist and I think when we talk to producers, assuming that prices stay where they are at, that they wouldn’t dispute those forecast.

John Edwards – Credit Suisse

Okay. That’s helpful. That was just the only follow-up I had. Thanks.

Michael Mears

Sure.

Operator

And we will take our next question from Norman Kramer with Kramer Investments.

Norman Kramer – Kramer Investments

Good afternoon guys. Mike, can I ask you to go back to the typical yearly rate tariff increase. I’m not clear what you said exactly. Did you raise the tariff rates beginning of July like is typical or did that not that happened this year? I wasn’t quite sure what you talked about that.

Michael Mears

It did happen. Yeah, we increased our rates by 3.9% on July 1st. So that did happen this year.

Norman Kramer – Kramer Investments

Okay, and so how does the fork adjustment that you mentioned relating to the PPI which doesn’t become available till the end of the year. How does the timing piece sort of fit together, would that be for the next year increase?

Michael Mears

Yeah. I think the question if I heard it right earlier was what is the increase going to be July of next year in 2015. July of this year was 3.9% and that was – we applied that to our tariffs. The July 2015 increase is based off, if you recall the index increase is PPI plus 2.65%. The PPI component of that is for the previous calendar year. So the increase in PPI from calendar year 2013 to calendar ‘13 to calendar year ‘14 will be the PPI that used for the increase in July of 2015.

Norman Kramer – Kramer Investments

Okay, thank you for that clarification. And one other thing, you mentioned on the last quarter’s call a significant refined product volumes had gone in to Chicago on a third party pipeline. Did that continue in the second quarter?

Michael Mears

I think it continued. I can’t tell you what the volume is. We wouldn’t expect it to be as large as what we would have seen in the first quarter. But that connection is in place and we didn’t make movements in to that third party pipe.

Norman Kramer – Kramer Investments

Okay, and one last question, regarding volumes of gasoline shipments. Do you know what your sort of comparable gallons were year-over-year? I think the [EIA] have been forecasting around the 2% gasoline volume increase this year. Do you know what yours were?

Michael Mears

I do. If you exclude our – the assets we acquired last year and if you exclude our South Texas pipes which are dedicated pipes out of one refinery in South Texas to the ship channel, if you exclude those two our gasoline shipments quarter-over-quarter were up little over 4%.

Norman Kramer – Kramer Investments

Okay, all right. That’s all I have. Thank you Mike.

Michael Mears

Sure.

Operator

I am seeing no further questions in our phone queue at this time. I’ll turn the call back over to Mr. Mears for any additional or closing remarks.

Michael Mears

Well, thank you for your time today. We are pleased with our results this quarter and we want to thank you for your time. And appreciate your continued support for Magellan. Have a good afternoon.

Operator

That will conclude today’s conference. Thank you all once again for your participation. And have a wonderful day.

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Source: Magellan Midstream Partners' (MMP) CEO Michael Mears on Q2 2014 Results - Earnings Call Transcript

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