Magellan Midstream Partners' (MMP) CEO Michael Mears on Q4 2015 Results - Earnings Call Transcript

| About: Magellan Midstream (MMP)

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

Q4 2015 Results Earnings Conference Call

February 04, 2016, 01:30 PM ET

Executives

Michael Mears - Chairman, President and Chief Executive Officer

Aaron Milford - Senior Vice President and Chief Financial Officer

Analysts

Brian Zarahn - Barclays Capital

John Edwards - Credit Suisse

Sharon Lui - Wells Fargo Securities

Mirek Zak - Citigroup

Selman Akyol - Stifel Nicolaus

Steve Sherowski - Goldman Sachs

James Van Halen - Philadelphia Investors

Operator

Good day and welcome to the Magellan Midstream Partners Fourth Quarter 2015 Earnings Results Conference. Today's call is being recorded.

At this time, I would like to turn the conference over to President and CEO, Mike Mears. Please go ahead.

Michael Mears

All right, thank you. Good afternoon and thank you for joining us today to discuss Magellan's fourth quarter financial results and our outlook for 2016. 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 form your own opinions about Magellan's future performance.

As announced this morning, we generated record quarterly distributable cash flow during the fourth quarter of 2015 closing out another strong year for Magellan despite the continued challenging environment for the energy industry. For the year we generated record DCF of $943 million and successfully reached our goal of increasing cash distributions to our investors by 15% for 2015 while achieving a coverage ratio of 1.4 times.

Clearly the current low crude oil environment has resulted in significant challenges for our industry. We have intentionally managed our business in a conservative fashion to focus on fee based activities that are complementary in nature and is resilient as possible to price volatility.

While a relatively small component of our overall operating margin comes from direct commodity related activities, we have allowed our distribution coverage to retire levels like 1.4 to 1.5 times coverage we've generated the last two years as we prepared for lower commodity price environment.

While I'm not sure that any of us expected to see crude oil in the 30s or lower, we believe this conservative approach should serve as well during the current environment. We don't know exactly how long this price environment will remain, but I'll address our views on the impact to Magellan's 2016 guidance shortly.

I'll now turn the call over to our CFO, Aaron Milford to review Magellan's fourth quarter financial results versus a year ago period, then I'll be back to discuss our guidance for 2016 and review the status of our largest expansion projects before opening the call for your questions.

Aaron Milford

Thank you, Mike. Today I will be making references to certain non-GAAP financial metrics, including operating margin and distributable cash flow. We have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measure.

We reported net income of $207 million earlier this morning, which is lower than the record $252 million reported for the same period in 2014, primarily due to mark to market adjustments related to our commodity activities. Excluding the impact of out-of-period NYMEX activity in the current quarter, earnings per unit of $0.86 exceeded guidance of $0.84 previously provided for the current quarter.

Distributable cash flow was a record $257 million for the fourth quarter representing a $9 million increase from the fourth quarter of 2014. For the year we generated a record $943 million of distributable cash flow and ended 2015 with a 1.4 times distribution coverage ratio.

Before discussing our business segment performance, I would like to mention that beginning in the fourth quarter of 2015 we will be presenting tender deductions received from our refined products and crude oil pipeline customers as revenue. You may recall that our past practice was to offset operating expenses by the amount of tender deductions received. As a reminder, these tender deductions relate to a very small amount of product we receive from our customers in conjunction with each of our pipeline shipments which is a common practice in the industry.

The tender deduction is meant to compensate the pipeline operator for any lost product during the shipment process due to metering inaccuracies, commingling a product between batches, shrinkage and other events that result in volume reductions during this process. This change in presentation will not impact net income, EBITDA or distributable cash flow as it is simply moving these amounts from offsetting operating expenses to revenue.

All periods have been adjusted accordingly for comparability and as it is the case with other ancillary revenues, tender deduction revenues are not included in the transportation revenue per barrel reported in the operating statistics exhibit to our earnings release.

I will now move on to discuss the operating margin performance of our business segments for the fourth quarter of 2015. Our refined products segment generated $204 million of operating margin in the fourth quarter of 2015 which was $48 million lower than in the same period in 2014. This decrease is attributable to reduced operating margin contribution from our commodity related activities.

Transportation and terminals revenue was $250 million for the quarter which was $5 million higher than the comparable quarter in 2014. Overall gasoline volumes were down 2% and diesel volumes were down 7% in the current quarter compared to 2014. However, average tariffs were higher due to the 4.6% tariff increase in July and slightly higher long-haul shipments which combined to more than offset the impact of lower volumes in the quarter.

Our diesel volumes continue to be impacted by lower drilling activity in West Texas and during the quarter some refinery issues in the northern part of our system resulted in lower gasoline shipments. I think it is important to keep in mind that volumes on an annual basis were essentially flat year-over-year with 5% year-over-year growth in gasoline volumes offsetting almost all of the 7% decline in diesel volumes which were at record levels in 2014.

Product margin decreased $50 million from the fourth quarter of 2014 to $42 million. Roughly $33 million of this decrease is attributed to an unfavorable variance from the fourth quarter of 2014 associated with mark-to-market impacts related to our NYMEX positions used to economically hedge our commodity margins and inventory.

Ignoring these mark-to-market impacts, our cash margins were still lower than the fourth quarter of last year primarily due to lower realized margins from our butane blending activities offset partially by slightly improved performance from our fractionation activities. Within the context of a challenging commodity market in 2015 we are pleased with the performance of our commodity activities, especially considering that 2014 represented a record year for this portion of our business.

Operating expenses for our refined product segment increased $3 million quarter-over-quarter as a result of lower realized prices and product gains and higher asset integrity spending offset by slightly lower power costs and lower property taxes.

Moving now to our crude segment, our crude segment operating margin for the fourth quarter of $95 million was $6 million higher than the fourth quarter of 2014. Transportation and terminal revenue was $10 million higher resulting primarily resulting from a higher average tare, a full quarter contribution from the Houston pipeline acquisition completed in November of 2014, higher shipments on our Longhorn pipeline and higher terminal utilization.

These positive variances were offset by $3 million in lower management fee revenues compared to the 2014 period due to reduced BridgeTex construction activities in the current quarter compared to the 2014 quarter and a one-time startup fee received in the 2014 quarter. Longhorn volumes averaged nearly 260,000 barrels per day in the fourth quarter of 2015.

The equity earnings recognized related to our various crude oil joint ventures including BridgeTex were $2 million higher than the fourth quarter of last year primarily as a result of higher shipments on the Double Eagle pipeline. For the current quarter, BridgeTex volumes averaged approximately 200,000 barrels per day.

Operating expenses for the crude oil segment were $2 million higher compared to last year's quarter as a result of higher asset integrity spending, higher pipeline capacity rental fees and higher environmental costs. These higher costs were partially offset by lower power costs.

Lastly our Marine segment's operating margin was $29 million for the current quarter which was $2 million lower than the fourth quarter of 2014. This decrease is a result of the 2014 period benefiting by $3 million from a customer buying out of the contract. Ignoring this buyout in 2014 Marine segment operating margin was higher compared to last year due to higher storage fees and ancillary revenue as well as higher utilization due to fewer tanks being out of service for maintenance. Expenses were essentially flat period-over-period with higher environmental accruals for historical contamination being offset by lower product losses compared to the 2014 quarter.

Now moving to other net income variances our G&A expenses increased $2 million from the fourth quarter of 2014. Depreciation and amortization expense increased $3 million compared to the 2014 period due to expansion capital projects placed into service and our net interest expense increased $2 million due to higher debt balances being partially offset by higher capitalized interest related to project spending.

Finally, other expense was $5 million lower than the fourth quarter of 2014. This other expense line item relates to a non-cash adjustment for the change in the differential between spot and forward prices on the fair value hedges we have in place related to our crude oil tank bottoms in line fill.

If one sets aside our commodity activities for a moment which faced obvious headwinds and ignores the one-time benefit in 2014 from a customer contract buyout in our Marine segment, all of our operating segments realized year-over-year growth in the fourth quarter compared to 2014. Further, even after taking into account commodity activities which were down from a record level in 2014, Magellan generated record distribute cash flow for both the fourth quarter of 2015 and for the year.

I will now move to a brief discussion regarding our balance sheet and liquidity position. We had $3.4 billion of long-term debt outstanding at December 31, 2015 which included $280 million of commercial paper borrowings. Our weighted-average interest rate for the fourth quarter of 2015 was 4.6% we had no borrowings outstanding on our revolving credit facilities which have a total capacity of $1.25 billion and are also used to support our commercial paper program.

As of the end of the fourth quarter, our debt-to-EBITDA ratio was approximately 2.8 times on a pro forma basis. We continue to enjoy a strong balance sheet and strong distribution coverage. As a result we do not expect to access the equity markets to finance our currently identified or probable growth projects. As we move through 2016, we expect to see our debt-to-EBITDA ratio increase somewhat as our capital spending ramps up, but will remain well below four times.

Before turning the call back over to Mike, I would like to take a couple of moments to discuss our views on our exposure to counterparty credit and performance risk in light of the current weakness in the commodity markets and questions we continue to receive from analysts and investors.

If you look at 2015 revenues and for purposes of this analysis, exclude product sales revenue and include our share of our joint venture revenues, over half of our total revenue is derived from commitments or term contracts. These contracts and commitments are primarily associated with our Marine and crude segments in the form of storage and transportation agreements.

Considering only the contracts derived revenue in our crude and Marine segments, roughly three quarters is backed by investment grade counterparties. 15% is with non-rated entities some of which if rated we believe would be investment grade and the balance is from non-investment grade counterparties. Almost all of the non-investment grade counterparties are Marine or crude storage customers. Should those counterparties not perform under our commitments we believe that in most cases we would be successful in re-leasing the storage to other customers.

With regards specifically to our crude oil pipeline transportation commitments over 95% of this revenue stream in 2015 was supported by investment grade counterparties. So to the extent we have to rely on the ability and willingness of our counterparties to pay deficiency payments under these contracts due to the current commodity environment we feel that we are in a very good position.

Now coming back to our refined products segment which is the primary source of the portion of our total revenue stream not driven by contracts but instead is generated by tariffs and fees on volumes as they are shipped. This segment's revenue was driven primarily by end user demand in the markets we serve. Our refined products customers are generally quite healthy, which should an existing customer experience credit related issues, we fully expect that other customers would step in to meet existing demand and do so by shipping on our systems.

Also keep in mind that we generally have attractive payment terms and liens on inventories in our refined product system that we would expect to respond in the event of nonpayment. Given these facts we do not feel that we have material counterparty exposure within our demand driven revenue stream.

This of course is looking at our current business mix, but some may also be wondering about our counterparty exposure on our major construction projects including Saddlehorn, our Little Rock pipeline, and our condensates splitter project. The anchor shippers we have disclosed on our without one Little Rock pipeline condensates for project shippers we have disclosed our Saddlehorn pipeline are both affiliated to investment grade companies.

While our Little Rock project is supported by commitments from refiners and marketers who are enjoying quite healthy market conditions that project like the rest of our refined product system will ultimately be driven by end-user demand in the market it serves.

Our splitter project does represent a higher risk relative to the rest of our business just because it is being built for one specific customer and should that customer not perform it might take us some time to find alternative uses for the assets in the current market environment. We currently have no reason to believe that our customer [indiscernible] would be unable or unwilling to perform. Further, given that over two thirds of our investment is being made in tanks and dock improvements we believe that over time we will be able to repurpose the majority of these assets if needed.

Bringing it all together, given the strength of the counterparties with which we conduct the majority of our business combined with the demand fundamentals of the markets we serve, we believe that our exposure to counterparty nonperformance within the context of our entire business is limited.

I will now turn the call back over to Mike to discuss our guidance for 2016 as well as the status of our growth projects.

Michael Mears

Thanks, Aaron. This morning we announced our 2016 DCF guides of $900 million and I will share with you the key assumptions that form the basis of our guidance. As you might expect in the current environment one of the most significant assumptions relates commodity prices and its impact on our financial results. As is typical for us, we use the forward commodity price curve as the basis for our guidance rather than more aggressive forecast. Therefore our guidance assumes an average crude oil price for 2016 of approximately $35 per barrel.

Although the significant majority of Magellan's operating margin comes from fee-based transportation and terminal services, we do have some direct impact from the current commodity environment, most notably in our butane blending activities. But that also impacts the value of the product overages on our refined products in crude oil pipelines.

Between our commodity related activities and the value of these product overages our guidance assumes these activities will generate about $80 million less DCF in 2016 than 2015 due to the price strip we are using.

We have about 50% of our expected 2016 butane blending sales volume hedged at this point with most of these hedges covering the spring blending season. For reference, our average blending margin in 2015 benefited from hedges put in place in 2014 prior to the significant drop in commodity prices and was close to $0.75 per gallon. The average blending margin in our 2016 guidance also benefits from hedges put in place in 2015 during higher commodity prices and its approximately $0.50 per gallon.

As mentioned previously, we have been preparing for lower commodity price environment and have not counted on the higher profits we have earned from these commodity related activities to grow the cash distributions to our investors, instead using those higher cash flows to reinvest in the business with expansion projects.

To the extent of prices improved from the levels we have assumed there was upside potential to our DCF guidance of approximately $3 million for each $1 change in the price of crude oil. I want to remind you that this is an estimate since the change in price of crude oil is not a perfect indicator for the change in the butane to gasoline margin.

Moving on to our fee based activities, we expect operating margin from our core fee-based activities to increase in 2016 driven by higher results from our base business and contributions from our growth projects. For our refined products pipeline most of you are aware that the board recently announced the new indexation methodology for the five-year period beginning July 2016.

The new index continues to be based on the change in the Producer Price Index with the new adder now being set at 1.23%. For those watching PPI you are aware the change in PPI for 2015 is negative due primarily to the drop in commodity prices which will result in an index of approximately negative 2% for the July 2016 tariff adjustment.

As a reminder, roughly 40% of our refined products system is deemed to be less competitive by the FERC. So we follow the index in those markets resulting in 40% of our refined tariffs decreasing by 2% in mid 2016. However, the remaining 60% of our refined markets are not subject to the index methodology because they are deemed to be competitive by the FERC. As a result, we can adjust rates in these markets as deemed appropriate. When the index has been negative in the past which it has been from time to time, we generally keep our competitive rates flat or increase them as we feel the market will allow.

Our commercial team is analyzing our markets at this time, but we expect to increase rates in our competitive markets during mid 2016. Most of our crude oil pipelines are in intrastate service, most notably in the state of Texas. So technically, they are governed by the related state rather than the FERC. However, our Longhorn and BridgeTex systems have customer contracts that connect the annual rate adjustment to the FERC index.

These contracts generally follow the FERC index but do contain provisions that do not require us to reduce our contracted rates if the index is negative. The other significant assumption for our pipeline system relates to volume. Despite all the volatility in the commodity markets, our refined products volumes were basically flat from 2014 to 2015 highlighting the stable nature of this business segment.

Gasoline volumes increased 7% for the year due to strong demand primarily as a result of the low pricing environment. These higher gasoline volumes were offset by 7% lower distilled volumes from decreased demand related to less activity in oil production regions of our pipeline systems such as West Texas and from wet weather conditions during much of 2015 in the Midcontinent which restricted farming activities.

Looking to 2016 we expect our base refined volumes to increase approximately 1% primarily based on government projections in the markets we serve and input from our customers. However, with the addition of our expansion projects to deliver refined products to Little Rock and additional connectivity to deliver more refined products from South Texas into our pipeline system, we expect all-in refined products transportation volumes to increase closer to 7% during 2016. For our crude oil shipments, we expect volumes to be relatively flat between years.

As you recall, our Longhorn pipeline system is fully committed and we expect to average around 260,000 barrels a day again into 2016. Also similar to last year, we do not expect spot shippers to nominate barrels on Longhorn during the year due to the current pricing environment.

We also expect BridgeTex pipeline volumes to average around 200,000 barrels per day in 2016 similar to our 2015 results. As we have discussed in the past, although we technically have commitments for 80% of the BridgeTex pipe capacity, we expect commitments of approximately 70% of the pipe capacity to actively ship on BridgeTex which still results in an eight times EBITDA multiple for Magellan’s investment.

With regards to maintenance capital, we expect to spend approximately $90 million in 2016 which is in line with our 2015 spending level. You may be interested to know that we actually spend more than $200 million in total each year to maintain our assets with the biggest portion of that cost deemed to be operating expenses rather than maintenance capital from an accounting perspective.

Safe operations are important to Magellan and we allocate sufficient resources accordingly to maintain the safety of our operations. So assuming the reasonableness of these key assumptions, we expect to generation DCF of approximately $900 million in 2016. These assumptions provide us with confidence in our annual distribution coverage growth – excuse me, our annual distribution growth target of 10% for 2016 while leaving us with a 1.2 times coverage ratio and approximately $150 million of excess cash flow for the year.

While we do not plan to provide DCF guidance for periods beyond 2016, we are targeting annual distribution growth of at least 8% for 2017 while maintaining distribution coverage of at least 1.2 times. We have continued to hear from the investors that distribution coverage is becoming increasingly important to them during these challenging times for industry. Based on the stability of Magellan’s assets portfolio we have historically indicated our comfort with the 1.1 times distribution coverage on a long-term basis and we still believe that to be the case.

With that said, we believe our goal of 10% distribution growth for 2016 and at least 8% distribution growth for 2017 while maintaining coverage of at least 1.2 times each year provides a healthy mix of distribution growth and excess coverage that our investors have come to expect from Magellan.

The one key assumption I will mention with regards to 2017 is that we are using an average crude oil price of $42 per barrel in our planning which is consistent with the current forward market.

Concerning expansion capital, we spent almost $750 million on growth projects during 2015 with the significant portion of this spending related to construction of the Corpus Christi condensate splitter and the Little Rock and Saddlehorn pipelines as well as the purchase of an additional terminal in Atlanta and 100 acres of land on the Corpus Christi Ship Channel for future development.

Based on the projects we currently have under construction, we expect to spend $800 million during 2016 with an additional $100 million thereafter to complete the projects now in progress. We are making excellent progress on our construction projects with our three largest projects expected to come online during 2016.

Construction of our Little Rock pipeline is nearing completion with startup expected to occur in mid-2016. For Saddlehorn 75% of the pipeline installation is complete for the Platteville-to-Cushing segment with operations expected to commence during the third quarter. Right-of-way work continues for the car extension with that segment expected to be operational by the end of 2016.

A few months ago we announced an undivided joint interest between our Saddlehorn pipeline and Grand Mesa Pipeline. As part of this arrangement we have agreed to build one physical pipeline while maintaining our own separate customer relationships and revenue streams. The combination of these projects makes strong economic sense by reducing our overall construction cost and better aligning pipeline capacity with current DJ Basin production.

Based on the minimum commitments we have from Anadarko and Noble we expect to generate a nine times EBITDA multiple on Saddlehorn with significant upside potential. Good progress also continues for our condensate splitter and we remain on track to be operational during the second half of 2016.

A few months ago we announced our plans to add crude oil, marine capabilities and build an additional dock at our Galena Park Terminal. Permitting for these projects is well underway and we expect crude oil service to be operational by the end of 2016 and the new dock to be operational in 2018. We are also evaluating the construction of an additional 1.6 million barrels of storage at Galena Park.

We've also recently added a number of new expansion projects to further Magellan’s growth. These projects include connectivity of our East Houston Terminal to the market linked crude oil pipeline, the addition of jet fuel service capabilities for our Little Rock Pipeline and a new origin point on BridgeTex in the Eaglebine production area that is supported by long-term commitments.

While these projects are smaller in scale, we expect all to be the good returning low risk opportunities to grow our business. As you can see, Magellan has not slowed down in its ability to grow its core business and we continue to find opportunities to do so. And as we’ve stated in the past with Magellan’s solid balance sheet and the low leverage ratio, we do not anticipate any need to issue equity in the foreseeable future to finance the growth projects that we have committed to at this time.

As always, we continue to evaluate well in excess of $500 million of other potential organic growth opportunities. We continue to see a large number of potential opportunities for additional infrastructure projects in all areas of our business. These include a healthy mix of opportunities for both refined products and crude oil and include incremental storage, new pipeline connections, expansions of our existing facilities and ways to further improve profitability for our butane blending activities.

Further, we are diligently working on and making significant progress on our goal to increase marine infrastructure capabilities, primarily in the Gulf Coast region and hope to have something further to announce in the near future.

We are also actively analyzing acquisition opportunities of all shapes and sizes. As you know, all assets and companies for that matter are not created equal and we are careful in assessing acquisitions to ensure that they are a good fit for our company. Even if an asset can be purchased at a relatively low price, we’re making sure it fits well with our current business model.

We remain optimistic that the current environment may provide opportunities for us to acquire attractive assets, but we remain committed to our disciplined approach for that growth. That concludes our prepared comments, so I will now turn the call over for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we’ll go first to Jeremy Tonet with JPMorgan.

Unidentified Analyst

Hi good afternoon. It is actually Andy on for Jeremy, two quick questions. In terms of the distribution guidance for 2017, is the primary intent to manage towards the 1.2 times coverage or to manage towards the 8% at least growth?

Michael Mears

Well I think it’s a combination of both, I would say we were on the side of 1.2 times coverage as a floor target coverage for 2017.

Unidentified Analyst

Okay, helpful, thanks. And then the thinking about growth kind of past 2017 and should bolt-on CapEx projects not necessarily moved the needle relative to historic investments, how do you balance the puts and takes of continuing growth at Magellan versus keeping that portfolio pure? In other words, if there weren’t ample organic or M&A opportunities within your bread and butter to grow, how do you think about in search of growth or I guess not growing and balancing those two things?

Michael Mears

Well, I mean first I'd say is, we don’t lack adequate opportunities for investment to grow. I mentioned we’ve got over $500 million of potential growth projects that we’re developing and I'd say it's well in excess of $500 million and all of those projects are using your term peer with regards to the kind of things that invest in.

So we’re very optimistic that we’re going to continued to bring those projects across the goal line over the next couple of years to continue to have growth beyond 2017. That being said, I mean if you look at our assets particularly our crude oil assets we’ve got pipeline systems that are, we’re assuming in our guidance period to be operating minimum volume run rate.

And if we get any kind of recovery in crude oil prices we’ve got significant available unused capacity on those pipes, where we can capture some growth with no capital investments. So we think we are very well positioned.

Unidentified Analyst

Great, great, good to hear you are sticking to the bread and butter and I’ll just – sort of final question on the M&A outlook for marine based assets is that - how is the market there, if you've seen multiples come in or more assets come to market and then also on the other end competitive bidders have you seen more or less come into the play? Thank you.

Michael Mears

Well, over the last six months or so there has not specifically speaking the marine assets there is really not a lot of marine assets that are in the market. Our focus has been on developing marine assets either from a grass roots standpoint or entering into partnerships with existing facilities to grow those assets into the crude oil space, so that’s been our primary focus.

Unidentified Analyst

Great, that’s it for us and thanks for taking our call.

Michael Mears

Thank you.

Operator

We’ll go next to Brian Zarahn with Barclays Capital.

Brian Zarahn

Good afternoon.

Michael Mears

Good afternoon, Brian.

Brian Zarahn

Appreciate the counterparty risk overview on the assumptions for your guidance and just maybe a clarifying question on BridgeTex, with the volumes running around 70% of capacity can you just remind us on when the revenue is recognized on that delta versus at 80% contracted.

Brian Zarahn

Well, we – what we’ve assumed in guidance just to be clear on BridgeTex is we have assumed that the majority of the shippers will ship their contacted volumes and not be paying deficiencies. To the extent that that doesn’t happen, did they ship less than that and they paid efficiencies and there is a lag from an earnings perspective is when we record those earnings. We haven’t had that materially take place in 2015 and if it happens in the future will be clear about that when we talk to you about DCF and earnings, but there is a potential for that if they are paying deficiencies and typically those might lag up to a year before we could recognize deficiency payments to revenue and it all depends on the contractual terms on the specific line.

With regards to our 70% versus 80% assumption though, we have one contracted shipper on BridgeTex that its – when Aaron mentioned that we’ve got 95% investment grade it’s really – the one that's not is the one I am talking about. We have not assumed in any of our guidance that did that particular shipper ship nor have we assumed that they pay a deficiency payment. We have assumed that they are going to default. We don’t know that they will at this point in time, but those are the assumptions we've made in our guidance and if they don’t and they perform then that’s upside our guidance, but that’s the assumption we’ve made at this point.

Brian Zarahn

I appreciate the clarification and just turning to M&A, you seem a little bit more positive on the opportunities there. Any additional color on the desire to diversify your assets since we're – entering it in 2016 in the market.

Michael Mears

Well, yes I hate to sound like a broken record but I will kind of repeat our position. We are most interested in from a growth perspective is really the things that fall right into our wheel house with regards to crude oil and refined products fee based businesses and in addition to that our two kind of primary growth focus areas, our marine facilities which we've talked about in number of instances. It is not just crude oil, it is both refined products and crude oil.

And we’re also evaluating expansions closer to the wellhead in a fee based mechanism. So evaluating, gathering systems, not the marketing piece that goes with the gathering systems, but gathering systems that can attract or direct volumes to our long-haul pipelines. Those are kind of our primary focus areas, so we’re evaluating M&A in those spaces, but we’re also evaluating grass roots expansion in those spaces.

What we are not interested in is diversifying into businesses that are not "Magellan". We're not particularly interested in any businesses that’s got a high degree of commodity sensitivity, processing businesses, those sorts of things are not something that we're actively pursuing.

Brian Zarahn

And then last one for me and given some of your, some MLP peers are not in as strong a shape from a balance sheet perspective, do you foresee any potential opportunities to joint venture with some folks that you need financing?

Michael Mears

We do, probably all I can say about that, but there are some opportunities potentially in that arena.

Brian Zarahn

Okay, thanks Mike.

Operator

And we’ll go next to John Edwards with Credit Suisse.

John Edwards

Yes, good afternoon everybody. Thanks for taking my question. Just as a followup Mike, you were talking about the one contracted shipper that you are assuming defaults, but you know there is upside if they don’t, I mean can you provide any quantification there and what the potential upside there is if they go ahead and fulfill their commitment?

Michael Mears

Well, it’s 10% of the capacity at BridgeTex is what it is, so you can run your math on that. But I should highlight too and I didn’t mention this earlier is that particular shipper hasn’t been shipping and so we don’t have any risk from a historical perspective. If you are looking at our cash flow historically we don’t have any risk of losing revenue because they haven’t been shipping to-date and our guidance assumes that they won't start to ship, but its 10% of the capacity at BridgeTex.

John Edwards

Okay, thanks for that clarification there and then just can you remind us you've mentioned the litany of projects that you are putting into service in '16 in terms of the total amount of invested capital being in place in the service can you just remind us about what that is?

Michael Mears

Well, the total and the projects we have under construction as we speak is about $900 million, of that amount projects will be placed into service in 2016 I'd probably say its roughly 700 or 650 to 700 that range.

John Edwards

Okay, that’s helpful. And then you mentioned in terms of that there was a certain commodity component this past year and if I understood your comment correctly and you are really counting on that, so if I guess what is that amount or can you quantify that commodity component that you were referring to in your initial remarks?

Michael Mears

Well what I was referring to was the fact that couple of things, one is we – in 2015 we had a significant reduction in commodity income versus '14, but our guidance for '16 has a further reduction in that commodity amount. If you are asking what the absolute number is for commodity projected income in 2016 well I have that number handy…

John Edwards

Just what the change, we’re just trying to gauge back just to give us a reference because you said that was - you had a pretty - a larger number in '14 and it came down in '15 further in '16 just to give us a rough the change in that amount that’s what I’m just trying to get a reference?

Michael Mears

I understand now, our guidance for '16 is on commodity items is about $50 million or less than '15

John Edwards

About 50 or?

Michael Mears

50.

John Edwards

50 okay.

Michael Mears

So we had $80 million reduction from 2014 to 2015 and then we’re projecting a $50 million reduction from 2015 to 2016 and I would emphasize again that that's assuming a $35 barrel crude oil price. So we believe we’re very conservative on that projection.

John Edwards

Sounds right, yes that’s very helpful. Thank you. All right, that’s it from me. Thank you.

Operator

And we will go next to [indiscernible] Capital.

Unidentified Analyst

Hello, thanks very much for taking my question. So what I'm wondering about is, what sort of precedent do you think the company will set for other Midstream players in terms of this record distributable cash flow growth?

Michael Mears

What sort of precedent was that your question?

Unidentified Analyst

Yes, so what sort of precedent do you expect to set for other Midstream players in the area of distributable cash flow growth?

Michael Mears

Well, I don’t know that I really have a comment to that. I mean I think we’re happy with our results and we think we've got a very stable business. But I don’t know that I really should comment on comparing us to others in this environment. I'd just highlight that we're – I think we've got a very strong company and we’re demonstrating that by being able to set record distribution growth in this commodity environment.

Unidentified Analyst

Okay. Well thanks for that and that is the latest question I have here, so do you think it will be helpful if you could offer more color on the joint venture opportunities you mentioned could that enroll other private equity players or other player level entities, what is the idea there?

Michael Mears

Well, the primary opportunities we’re looking at with regard to joint ventures are with other operating entities, not private equity. There are a couple of opportunities we’re looking at with private equity, but the majority of what we’re looking at is with other operating entities and they are across the board, but again primarily focused on our primary growth areas which are marine facilities and in perhaps gathering systems and so that’s where the focus is.

Unidentified Analyst

Okay. And then one final question, so you mentioned a $35 barrel assumption for crude oil prices, so does that mean is that the assumption for towards end of 2016 or for that?

Michael Mears

That is the average – that is our average for the year. We just took the forward strip and averaged it for the year and it comes out to $35 when we set our guidance and so that is where the $35 comes from. I think if you look at the forward curve and you look at and exit from 2016 the numbers are right around $40 a barrel, and so that’s – if the question is what was our guidance assumed for an exit from 2014 is about, I mean 2016 is about $40 a barrel.

Unidentified Analyst

Okay, all right. Thanks very much, Mike.

Michael Mears

Thank you.

Operator

And we will go next to [indiscernible] with D.A. Davidson.

Unidentified Analyst

Yes, thanks for taking my call. I wanted to double check and see if you are changing your view on the counterparty risk on the condensate splitter and then if there are any provisions in the operating agreements to get credit support there?

Michael Mears

We are not changing any assumptions with regard to our credit risk with Trafigura. We believe that Trafigura is well financed and is going to support this project and I guess that’s my only comment to that. When Aaron went through that credit discussion and we called out the splitter in Trafigura specifically. We only did that just from the view that you would be interested because that splitter is supported by one customer and we weren’t trying to indicate that we have any concern there at all.

Unidentified Analyst

Thanks, just had to double check. And then what makes your commodity price assumptions, your crude oil price assumptions for 2016?

Michael Mears

For 2016?

Unidentified Analyst

No for 2015 sorry it is just to refresh my memory?

Michael Mears

We don’t have an assumption for 2015 because that's historical and I don’t have that number.

Unidentified Analyst

No, but you, when you are talking about the [indiscernible] service 50 million down from 2015?

Michael Mears

Yes, well let me just talk about that, it is hard to compare period to period because of the hedging activity that we engage in. So if you think that 2015 our actual results in 2015 benefited significantly from the fact that a large percentage of our sales in 2015 were hedged in 2014 when crude oil was still $80 or above and those are the results we've recognized in 2015. And so it is hard to just look at an absolute crude price in 2015 and compare 2015 results with what we're projecting for 2016. Likewise in 2016 in our guidance for this year we've got significant portion of our spring blending hedged and we hedged that back in the late spring of last year when crude oil was close to $60 a barrel.

So we're benefiting from that in the 2016 period also. So but the reason we give you crude oil price assumptions for '16 and '17 going forward is that those are the crude oil prices that we're assuming are going to apply to all of our unhedged volumes which includes about half of our blending in 2016 and all of our blending in 2017.

Unidentified Analyst

Thank you.

Operator

And we'll go next to Sharon Lui with Wells Fargo.

Sharon Lui

Hi, good afternoon. In looking at the 2016 credit, CapEx guidance, it looks like it increased about $150 million. If maybe you could just walk through some of that the projects for the incremental spending?

Aaron Milford

Sure, there were a number of them, none of them are huge in magnitude but a larger one is our announced connection to the TransCanada and Marketlink pipeline in Houston. We also, the origin that we're adding on BridgeTex in the Eaglebine production area, we've got a number of tanks we're adding both refined products tank and crude oil tanks at various facilities. The Little Rock jet fuel project is adding substantial, is adding storage and additional capabilities in Little Rock to move jet fuel into that market. Those are the big items and those collectively add up to roughly that $150 million number.

Sharon Lui

Okay, so for the TransCanada- Marketlink project so it is '15 now for the JV, is there additional spending for I guess expanding your Houston terminal?

Aaron Milford

There is, I mean our total was about $45 million, so that's our half of the JV plus we needed to do some more into that at East Houston in order to accommodate the additional volumes.

Sharon Lui

Okay and it sounds like the Eaglebine origin for BridgeTex you are going forward with that project?

Aaron Milford

That is correct.

Sharon Lui

Okay and what's the additional CapEx tied to that project?

Michael Mears

It is roughly, our piece is roughly $25 million, remember it is a joint venture with claims [ph] and our piece is about $25 million.

Sharon Lui

Okay great, that's helpful. And then I guess, moving on to just your financing plans for 2016 is there a potential to term out debt as you draw on the facility to fund CapEx is that baked into your guidance as well?

Michael Mears

We have made some financing assumptions for next year obviously as we mentioned we're not planning on exiting the equity market. So everything we do it will be funded in the debt markets.

Sharon Lui

And then I guess the last question, in terms of your '17 target is that assuming just the base commitments on some of the larger scale projects implying some potential upside?

Michael Mears

That is essentially and there is a little bit of noise around there, but generally speaking that is that the guidance assumes minimum commitments on just about everything, minimum commitments on BridgeTex, minimum commitments on Saddlehorn, minimum commitments on the splitter. We haven’t built any upside into 2017 with regards to the guides we've given.

Sharon Lui

Great, thank you.

Operator

And we'll go next to Mirek Zak with Citigroup.

Mirek Zak

Hi guys, how are you doing?

Michael Mears

Good.

Mirek Zak

Just one quick one if I may, looking at your crude and refined product storage contracts on the Gulf Coast primarily what is the average contract lengths remaining on those assets? And what have you've been seeing as far as magnitude of the tariff increase if at all that the market is able to tolerate on those contracts as they come up for renewal?

Michael Mears

For the average remaining life on those contracts in the Gulf Coast is probably three years or so. We're in a very strong market for refined product storage and crude oil storage and we are having contracts roll-off periodically and in almost every case we're able to renew those contracts immediately at higher rates. And so we're looking to build more storage. I mean the demand for both crude oil and refined product storage the Marine facility is very strong and so we're looking to add storage in those markets. So we're not seeing really any recontracting risk in the storage market on the Gulf Coast right now at all.

Mirek Zak

Are you able to sort of give us an idea of sort of the magnitude of rate increases you are able to pass on there?

Michael Mears

Every contract is different. I mean we're not talking large percentages but I think in the low single digit percentages is probably something that we're on average seeing.

Mirek Zak

Okay, all right, thanks. That's all from me.

Operator

And we'll go next to Selman Akyol with Stifel Nicolaus.

Selman Akyol

Thank you, good afternoon. When you guys talked about your DCF guidance there, you noted that $80 million of that was or there was an $80 million delta there due to butane blending and product overtures, so if you could actually break that out on how much of that $80 million was to product overtures?

Michael Mears

I want to be clear of what we said was that we saw $80 million less in 2015 versus 2014 and '15 to '16. So you said right, a breakdown on that roughly two thirds blending and one third product overtures.

Selman Akyol

All right, thank you. And then just the other last one from me your comment that you are looking at building additional storage on the Gulf Coast and I guess any way to characterize that in terms of with customers who are looking more towards doing export with the export ban being lifted or is that just immaterial to the additional demand you are seeing?

Michael Mears

Well, with regards to crude oil, clearly the market is not supporting large scale crude oil exports right now, but we see people wanting to position themselves to be able to take advantage of the export market once it opens up. And so I think you are starting from a point where you have customers are interested in additional storage to start with and if there is some additional storage they want it on the water, so they’ve got optionality and that’s the driver.

Selman Akyol

Right, thank you very much.

Operator

And we’ll go next to Yu-lin Shin with High Definition Management [ph].

Unidentified Analyst

Hi, thanks for taking my call. For your crude pipelines, both Longhorn and BridgeTex what are the average remaining life of your [indiscernible] contracts?

Michael Mears

Well on Longhorn it is roughly three years and of course the shippers have extension options on that and then BridgeTex is probably roughly around eight years.

Unidentified Analyst

Great, thank you and also Mike you mentioned that you already see one of your customer which is non IG [ph] grade, is not shaping at the BridgeTex which 10% of capacity, does that mean that you already accrued some deficient payment, did you already receive them?

Michael Mears

We haven’t accrued anything with regards to that shipper and so no.

Unidentified Analyst

But you, I mean just to clarify is that you were supposed to receive some deficiency but you are not sure if you can receive that?

Michael Mears

That's correct. It is highly doubtful that we will.

Unidentified Analyst

Okay, got it, thank you very much.

Operator

And we'll go next to Steve Sherowski with Goldman Sachs.

Steve Sherowski

Hi good afternoon, just a quick one from me and apologies if I missed this, but on the M&A front, I'm just wondering what is your ability or really willingness to flex your balance sheet? Was the size of any potential transaction be limited in your sort of self imposed four times leverage metric or would you be willing to go beyond that?

Michael Mears

Well, we don’t feel balance sheet constrained really to consider any opportunity. I mean if an opportunity was big enough and strategic enough, we're not opposed to issuing equity if we need to. We do not have any plan to do it. We do not have any foreseeable projects to do it, but we don’t feels constrained from doing it if the opportunity is right. That being said we've got a lot of balance sheet coverage to finance our debt before we get to that level. So, we don’t really feel constrained.

Steve Sherowski

That's hard to try to do, hey [indiscernible].

Michael Mears

Okay, thank you.

Operator

And we'll go next to James Van Halen with Philadelphia Investors.

James Van Halen

Yes, could you please give us the crude storage capacity utilization and the refined product storage capacity utilization presently?

Michael Mears

Are you asking from a contract standpoint or how much is actually in the Tank?

James Van Halen

How much is in the tank so and how much from a contract?

Michael Mears

Well from a contract standpoint essentially all of our pegs that are availed to be leased or leased. Now when we report our utilization, from a revenue strand point and again you customers need to pay for the tanks whether they are using or not. When we report numbers that are less than 100% that's primarily because we have to take tanks out of service for maintenance and when we do that we don’t charge the customer, but we have contracts on all of our tanks. And so, excluding tanks that are out of service for maintenance, essentially 100% of our tankage that is available to be leased, is leased.

Now with regards to how much is physically in the tank that changes day to day. I am not going to tell you Cushing is pretty full. But everybody already knows that. Refined product storage at this point in time is pretty full in the Midcontinent, but I don’t have any precise figures on that.

And then to be honest with you, we don’t track that from a management perspective because it does not impact our revenue. I mean, its storage, it is available for us customers to use and they are paying the same amount whether it is full or empty. And so we – I don’t have those figures here right in front of me, but I could tell you that Cushing is pretty full and refined products tanks are pretty full right now.

James Van Halen

Do you see growth opportunities there?

Michael Mears

We do, as mentioned earlier we are evaluating up to 1.6 million barrels of additional storage at Galena Park which would be primarily refined product storage. We're building additional refined product storage tanks on our pipeline system that we just initiated in the last few months and with that a number of additional opportunities were evaluating and crude oil storage, both East Houston and at potential marine facilities we've actively developing and the interest there is very strong.

James Van Halen

Thank you very much.

Michael Mears

Sure.

Operator

And at this time, there are no other questions in queue. I'll turn it back to our presenters for any closing remarks.

Michael Mears

Great, well thank you very much for your time today and we're pleased with Magellan's record results for 2015 and we appreciate your continued support. So, thank you and have a good day.

Operator

And that does conclude today's conference call. We appreciate your patience.

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