Magellan Midstream Partners LP (MMP) Q2 2018 Results - Earnings Call Transcript

Magellan Midstream Partners LP (NYSE:MMP) Q2 2018 Earnings Call August 2, 2018 1:30 PM ET

Executives

Michael N. Mears - Magellan Midstream Partners LP

Aaron L. Milford - Magellan Midstream Partners LP

Analysts

Theresa Chen - Barclays Capital, Inc.

Christopher Paul Sighinolfi - Jefferies LLC

Jerren Holder - Goldman Sachs & Co. LLC

Sharon Lui - Wells Fargo Securities LLC

Elvira Scotto - RBC Capital Markets LLC

Operator

Good day, everyone, and welcome to the Magellan Midstream Partners Second Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Mears, President and Chief Executive Officer. Please go ahead.

Michael N. Mears - Magellan Midstream Partners LP

Good afternoon and thank you for joining us today for Magellan's Second Quarter Earnings Call. Before we dive into the discussion, 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 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.

With that out of the way, a busy time at Magellan with two significant expansion project (00:51) this week. Based on additional long-term (00:55) received from our recent supplemental open season, we are further expanding the Western leg of our Texas refined products pipeline, taking the capacity from its current 100,000 barrels per day up to 175,000 per day. We are gaining this additional space by increasing the pipeline diameter along a portion of the existing route and also building a new 140-mile twin pipeline from Hearne to Alexander, Texas.

Our Texas refined products pipeline system has (01:27) for quite some time. And not only does the construction of this new pipe increase our capacity to West Texas, it also increases our capacity to the Dallas-Fort Worth market by up to 100,000 barrels per day. The project is now expected to cost $500 million and generate 7 times EBITDA multiple on committed volumes to West Texas alone.

Significant upside potential exists since not all of the West Texas capacity is contracted and all of the new incremental Dallas to Fort Worth capacity is available for contracting or spot movements. And we're very excited about bringing this attractive project across the finish line. We also announced another expansion of our Seabrook Logistics joint venture, which is Magellan's crude oil export terminal. We recently commenced export capabilities at Seabrook, supported by 2.4 million of storage, an Aframax dock with 300,000 barrels per day of dock capacity and a new connection to Magellan's Houston crude oil distribution system which are now all in full operation.

Yesterday, we announced plans to build an incremental 700,000 barrels of storage and a new Suezmax dock with 400,000 barrels per day of dock capacity. Our share of the capital will be $60 million with the new assets online by late 2019. These additional assets will significantly increase the export capabilities of Seabrook and increase the attractiveness of Magellan service offering to seamlessly deliver crude oil from the Permian Basin to the Gulf Coast waterway to meet our customers' growing interest in crude exports. And of course this morning, we announced another solid quarter of financial results and also increased DCF guidance for the year.

So I'll hand over the call to our CFO, Aaron Milford to review our second quarter financial results in more detail, then I'll be back to discuss our outlook for the remainder of the year and the status of a few of our other expansion projects.

Aaron L. Milford - Magellan Midstream Partners LP

Thank you, Mike. During my comments today, I will be making references to certain non-GAAP financial metrics including operating margin and distributable cash flow. We've included exhibits to our earnings release, to reconcile these metrics to their nearest GAAP measure. This morning, we reported second quarter net income of $214.4 million or $0.94 per unit on a diluted basis, which was higher than the $210.4 million reported for the second quarter of 2017. Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit of $1.05 exceeded our guidance of $0.95 provided back in May.

Distributable cash flow of $266.6 million in the second quarter of 2018 was more than 6% higher than the $250.4 million reported in the second quarter of 2017.

I will now move to a discussion of the operating margin performance for each of our business segment. Our refined products segment generated $191.4 million of operating margin in the second quarter of 2018 compared to $214.5 million for the same period in 2017.

As we noted in our earnings release, this decline in operating margin between periods resulted from the impact of lower commodity margins, including the impact (04:56) recognized in the current period. Results from fee-based activities were essentially flat to the same period in 2017, with higher revenues being offset by higher expenses.

Transportation and terminals revenues increased $13.2 million or almost 5% compared to the 2017 quarter. We continue to see higher distillate volumes on our West Texas system and we also continue to see volume growth broadly across our system with total refined product volumes 3% higher than the same period in 2017. Further, our average rate per barrel was higher in the current period compared to last year.

Operating expenses were $12.6 million higher in the period compared to last year. This increase is attributable to higher personnel costs resulting from higher head count and (05:49) compensation as well as higher asset integrity costs and environmental accruals. A portion of these increased expenses is simply the result of maintenance work timing. In addition, property taxes were higher than last year due to last year's quarter benefiting from favorable tax adjustment.

Product margin decreased by $23.1 million compared to the second quarter of 2017 as a result of lower butane blending volumes (06:15) average butane costs as well as unrealized mark-to-market losses. Keeping in mind the seasonal nature of our blending activities where activity peaks during the first and fourth quarters of a calendar year, we still expect our blending activities to generate improving results as we move through the remainder of the year.

For our crude oil segment, current period operating margin of $152 million, $46.2 million higher than the second quarter of last year and a quarterly record for this segment. Transportation and terminals revenues increased by approximately $29.5 million, mostly due to full quarter contributions from our Corpus Christi splitter, which began operations in June of last year as well as higher average rates and volumes on our Longhorn Pipeline. The average – the higher average Longhorn rate is due to more spot shipments during the quarter, in response to market differentials being – between the Permian and Houston markets being significantly higher than our spot tariff rate. Our average transportation rate for the crude segment overall was also higher compared to the second quarter of last year.

This increase was also primarily driven by the higher spot rate earned on the Longhorn Pipeline during the current quarter. Segment operating expense for the period were essentially unchanged from 2017. For the quarter, the volumes in our Longhorn Pipeline averaged over (07:46) barrels per day.

As mentioned in our earnings release this morning, we now expect volumes in our Longhorn Pipeline average 270,000 barrels per day for 2018 on an annualized basis, which is 5,000 barrels per day higher than our previous annual guidance. Equity earnings from our various crude oil joint ventures increased $17.4 million compared to the second quarter of last year. This is primarily due to higher volumes on the BridgeTex Pipeline from new commitments which started in the first quarter of 2018 as well as increased spot shipments in response to higher differentials between the Permian Basin and Houston.

Volumes on the Saddlehorn Pipeline were also higher as a result of a full step-up in committed volumes in September of 2017. BridgeTex volumes averaged approximately 390,000 barrels per day during the second quarter 2018 compared to approximately 240,000 barrels per day in the second quarter of 2017.

Also, as mentioned in our earnings release this morning, we now expect BridgeTex to average about 370,000 barrels per day for 2018 on a full-year basis, which is 20,000 barrels per day higher than our previous annual guidance. Saddlehorn Pipeline averaged approximately (09:08) barrels per day during the current quarter compared to approximately 40,000 barrels per day during the second quarter of 2017.

Moving now to the Marine segment. The Marine segment generated $28.3 million of operating margin in the current quarter compared to $32.2 million in the second quarter of 2017. Terminaling revenues declined $3.6 million compared to the same period last year, primarily due to lower utilization from out-of-service maintenance activities as well as (09:43) bringing a tank damaged by Hurricane Harvey back online.

Operating expenses increased $2.3 million compared to the 2017 quarter due to lower product overages which (09:57) operating expenses, higher personnel costs, plus demolition costs incurred as part of our dock expansion project at our Galena Park terminal.

Now moving to other net income variances to last year's quarter. Our G&A expenses were $9.9 million higher than the 2017 quarter as a result of higher personnel costs associated with higher incentive plan expenses due to our strong performance this year. Depreciation and amortization increased as a result assets placed into service and interest expense increased as a result of higher debt outstanding compared to last year's quarter.

I'll now move to a discussion regarding our balance sheet and liquidity position. We had $4.7 billion of long-term debt outstanding as of June 30, which included $120 million of commercial paper borrowings. Our average interest rate was approximately 4.8%. Coverage ratio was approximately 3.4 times debt to EBITDA.

We continue to maintain a credit facility totaling $1 billion which also backstops our commercial paper program, but also continue to have a $750 million at the market equity program (11:11) but did not issue any units under this program during the quarter and had not issued any units under this program since it has been in place.

We expect that we will be able to fund our current slate of growth projects without needing to access the equity markets, maintaining debt levels within our longstanding 4 times (11:28). I will now turn the call over to Mike for updated guidance for the balance of the year as well as significant growth projects underway.

Michael N. Mears - Magellan Midstream Partners LP

Thank you, Aaron. Based on our solid start to 2018 and our expectations for the remainder of the year, we have now increased our annual DCF guidance by $20 million to $1.1 billion for 2018. (11:53) to the group, this represents a total increase of $50 million from the initial guidance we provided at the beginning of the year. As we mentioned last quarter, a number of industry dynamics moved in our favor since that initial guidance such as the favorable pricing differential between the Permian Basin and Houston.

Our 2018 guidance now (12:13) this favorable differential continues, resulting in (12:17) through the remainder of the year for both Longhorn and BridgeTex. Similar to last quarter, we still expect (12:25) margins to be around $0.40 per gallon for the year, with around 80% of our fall blending hedged at this point. We're also starting to lock in margins for 2019 as well, with 70% of our spring 2019 expected blending activity hedged at margins above $0.50 per gallon.

Concerning Longhorn, all existing customers have now either elected to extend their initial contracts for an additional two years under current terms or they have executed long-term contracts with terms up to 10 years at lower incentives.

As a reminder, the initial contract (13:00) September 30 and we remain in active discussions with (13:07) who have not yet executed long-term contracts. In fact, we currently have a process underway through August 15 for shippers to commit to long-term take-or-pay contracts if so desired. Since some customers are still making their selection, we are hesitant to provide an average expected rate just yet until the current commitment process runs its course, but we should be in a position to address publicly in the near future.

In saying that, all of these items have been factored into our latest DCF guidance and we remain comfortable and committed to our stated goal of increasing annual cash distributions by 8% for 2018 and by 5% to 8% for both 2019 and 2020.

Moving to expansion capital, we continue to identify new opportunities for future growth and now have (13:59) of expansion projects currently underway. Based on the progress of these projects, we expect to spend approximately $900 million in both 2018 and 2019 and $200 million in 2020 to complete our current slate of construction projects.

In addition to the West Texas refined pipe expansion and enhanced export capabilities at Seabrook Logistics, these spending estimates also include a new $50-million project to construct an 8-mile 20-inch diameter refined products pipeline between Galena Park and East Houston. This is fully supported by customer commitments and is expected to be operational in mid-2019.

We continue to make great strides at our Pasadena joint venture marine terminal with the initial 1 million barrels of storage substantially complete. The facility is expected to begin service in January 2019 after the pipe (14:55) and dock work are finished later this year. The additional 4 million barrels of storage that remains under construction is expected to come online by January of 2020, with substantially all steel already ordered from domestic mills and being delivered as needed to support ongoing construction.

Activity related to our long-haul pipeline construction projects is in full swing as well. Pipe material has been received for our East Houston-to-Hearne refined products pipeline, which expected to commence next month for a mid-2019 service date.

Our Delaware Basin crude oil pipeline has been ordered and is expected to arrive next quarter with a mid-2019 startup also anticipated for this pipeline. We continue to assess the potential optimization of the Delaware Basin project and are considering a number of options to best utilize this asset. We also continue to evaluate other potential expansion opportunities, pulling well in excess of (15:57).

Even though we've already announced a few expansion phases to date, active discussions continue to further develop both our Pasadena and Seabrook Logistics joint ventures even beyond yesterday's Seabrook announcement. Discussions also continue regarding new infrastructure projects in Texas for both crude oil and refined products including potential opportunities for additional storage and export capabilities.

There is some industry chatter about our participation in various potential projects. So as related to this, we can confirm that we are in advanced discussions with multiple parties regarding potential projects. However, we are not prepared at this time to discuss the details of these discussions. We remain committed to our disciplined model that focus on projects that provide fee-based activities, backstops by take-or-pay commitments, especially in light of the rapidly evolving landscape for new energy infrastructure.

That now concludes my prepared remarks. So operator, we're ready to turn the call for questions.

Question-and-Answer Session

Operator

Thank you. I do have some questions. The first one comes from Theresa Chen from Barclays.

Theresa Chen - Barclays Capital, Inc.

Hi there. My first question is related to the Longhorn recontracting. I understand that you're not ready to provide any numerical color around what the new tariff will be, but could you give us a sense of what percentage of the current commitments have elected to extend their initial contracts for two years at current terms versus those who have executed new long-term agreements with you at lower rates? And of the ones that have executed new long-term agreements, can you help us think about what the average duration of that portion is? Are most of them 10 years or are majority 5 to 7? Any color would be great.

Michael N. Mears - Magellan Midstream Partners LP

Well, I wish I could give you more color. I mean, we've been hesitant to give those details until we complete the open season process. So, I'm not going to give you the percentages or the rates. I can tell you that the terms of the contracts that have been executed, the long-term contracts are in the 7 to 10-year range, that all of the current customers either have signed long-term contracts or two years, extensions. But at this point, since we're still actively negotiating with multiple customers, unfortunately, I can't give you more details on that. We do intend once it's complete to provide more color on where we stand. But unfortunately, I can't do that today.

Theresa Chen - Barclays Capital, Inc.

Okay. Turning to the expansion of the western leg of your Texas refined products system. Given recent announcements of projects and feasibility studies by competitors to provide similar services, is the reason why your project was able to be greenlit and get the necessary commitments because of the optionality on the broader system in terms of origins and destinations? And do you think there's enough distillate demand out there for the rest of the announcements to move forward?

Michael N. Mears - Magellan Midstream Partners LP

Well, the first part of your question, I do think that we have the advantage over some of our competitors in that we have access at the origin to the entire Gulf Coast refining complex and we have access to Mid-Continent refiners with Oklahoma and Kansas refiners. So we've got significant supply optionalities to support commitments.

And then we have significant diversity on demand points. We – even though diesel demand in the Permian Basin is the primary driver behind the expansion, with an existing terminal that we have in Odessa and the potential to build in Midland, we also have existing connectivity all the way to El Paso, which connects to pipelines that we own that run to the border to connect to pipelines in Mexico, connections to pipelines going to Arizona and then our own pipeline system up into New Mexico which also happens to fuel two large railroad fueling depots. So we've got significant – a significant network there that I presume is what got our customers comfortable making the commitments they would make.

With regards to diesel demand, if (21:15) which we've done, I mean our diesel demand as it correlates to crude oil production in the Permian. And you believe the current forward curves on oil production in the Permian, there is significant incremental growth for diesel demand even from where we are today going forward and we know not all of the demand today has been served by local refining or our pipeline system. So I'm not in a position to say whether there's demand there to support other people's proposed projects, but I don't think we're at the end of the growth in diesel demand (21:58).

Theresa Chen - Barclays Capital, Inc.

Got it. And sticking with the Permian theme, in terms of your potential maybe for a long-haul crude pipeline from the Permian (22:11) post, as you are currently recontracting Longhorn and in a couple of years you have the first swath of BridgeTex up for renewal, how do you balance the desire to get involved with building additional takeaway versus the potential of having periods of excess capacity given where numbers stand today, which could potentially put pressure on upcoming recontracting events for existing assets?

Michael N. Mears - Magellan Midstream Partners LP

Well, that's a very good question. We really are in a position here where the – this happens to be coincidental with (22:51) to the need to recontract Longhorn and the short takeaway capacity out of the basin. The reality is, is the demand, marketing a proposed pipeline from the Permian to Houston, the demand, that is significantly higher than available capacity we have on Longhorn or BridgeTex. And so it's apparent to us that a pipeline is needed. And if a pipeline solution is needed, we'd rather participate in it than not even to the extent that we own existing pipes.

And so I mean (23:38), I mean, we view again the need as great and the need is there to support a pipeline to the Eastern Gulf Coast and we want to participate in that if it's going to happen.

Theresa Chen - Barclays Capital, Inc.

Thank you very much.

Michael N. Mears - Magellan Midstream Partners LP

You're welcome.

Operator

And we have another question that comes from Jeremy Tonet from JPMorgan.

Unknown Speaker

Good afternoon. This is Bill (24:11) on for Jeremy. Just curious, the guidance puts you above 1.2 times coverage for 2018 (24:20) to utilize that additional financial flexibility.

Michael N. Mears - Magellan Midstream Partners LP

Well, you're breaking out there just a little bit on your question. But I think you were asking if this increased guidance is going to change our distribution outlook at all, and at least for 2018, it is not. To the extent that our coverage moves up to above 0.2 times for the year, we're not going to change our distribution coverage.

I mean, our distribution growth for this year, really as we look at 2019 and 2020, as we revised those DCF forecasts, which obviously we haven't given guidance on, we'll evaluate exactly what we're going to do in 2019 and 2020. As we said, we've given a range of 5% to 8% in 2020 and we'll make that decision in January. But this point, we're not changing our distribution forecast for 2008 at all, I mean 2018.

Unknown Speaker

Thanks. And then any update on the PDO that you filed with FERC?

Michael N. Mears - Magellan Midstream Partners LP

We have none. As I mentioned, I think (25:43) because it's (25:47) proceeding, we're not allowed to (25:51) status with the commission, and even if we did they wouldn't tell us. So I don't have an update. I wish I did, but I don't.

Unknown Speaker

All right. That's helpful. That it's for me. Thank you.

Michael N. Mears - Magellan Midstream Partners LP

All right. Thanks.

Operator

Our next question is from Josh O'Brien from Jefferies.

Christopher Paul Sighinolfi - Jefferies LLC

Hey guys. It's actually Chris. How are you Mike?

Michael N. Mears - Magellan Midstream Partners LP

Good.

Christopher Paul Sighinolfi - Jefferies LLC

Just wanted to follow up on a question that – or a topic that came up at your analyst day and then potential IMO effect. I know it was something your team at that time was sort of trying to get a handle on. I think a lot of people are trying to get a handle on it. Just a couple of months have passed, a lot's been said by the refining community. I'm just curious if you have any, I guess, a more refined view of 2019 of the crude system or refined product system?

Michael N. Mears - Magellan Midstream Partners LP

Well, again I think as we said at the Analyst Day, I mean, our exposure to high sulfur fuel oil terminaling is fairly limited around our system. It's really kind of confined to our Louisiana terminal and our Delaware and to a small extent our terminal in Connecticut. So I mean that has changed, our exposure is pretty (27:14).

As far as those facilities, I mean, we are not at this point in time concerned about not being able to lease those tanks either and continued in high sulfur service from other service past (27:33). So we feel like that those two terminals are going to remain pretty stable and again they're pretty small terminals in the context of our whole system. With regard to opportunities, clearly we're expanding our Galena Park Facility. We are building our Pasadena facility to the extent that there's incremental opportunities for low sulfur fuel oil to be exported or moved to areas for fueling vessels. I think we're very well positioned to take advantage of that.

Christopher Paul Sighinolfi - Jefferies LLC

Okay. That's very helpful. And I guess to dovetail just on that – on that last question about the FERC process. I mean you had given us a pretty detailed and very helpful interpretation at the Analyst Day. And I'm just curious if anything from the final rules that either enhanced your view or gave you greater confidence. I know you say it's a process I'm just curious if any of the public information that's available changed, any that wasn't in there.

Michael N. Mears - Magellan Midstream Partners LP

Nothing has changed. The recent ruling and again you were breaking up a little bit too. And I think correct me if I'm wrong when I answer this, but I think you're asking about the income tax allowance issue at the FERC. But nothing in the recent ruling surprised us. In fact it was very consistent with the assumptions we've made all along, especially with regards to the cumulated deferred income taxes. But, so nothing's changed with regards to our view.

And it's really, again for liquid declines, going – the impact of this decision is going to be determined when the next index review occurs. And the commission has given really no guidance on that other than clarity on the (29:34) issue at this point. And again, I don't expect them to until we get closer to the date they initiate the index.

Just to put the brackets around in case anyone who wasn't at the Analyst Day, (29:53) that in the worst case scenario, our view in the worst case scenario is that the commission took an extreme position on how to calculate the index after the elimination of the income tax allowance. It would have a negative, about 1.3% effect, on whatever the adder is to PPI in the index. We do think we've got, as an industry very strong arguments to suggest that this income tax law change would have really no effect on the way the index is calculated. So, those are kind of the bookends of what we think the exposure is on this policy statement.

Christopher Paul Sighinolfi - Jefferies LLC

That's very helpful Mike. Thanks for all the added detail.

Michael N. Mears - Magellan Midstream Partners LP

Sure.

Operator

Moving on, we have another question that comes from Jerren Holder from Goldman Sachs.

Jerren Holder - Goldman Sachs & Co. LLC

Thanks. Good afternoon. On Seabrook Logistics, how should we think about the (30:59) there and where we can see upside? So are the (31:02) that guarantees the return you're targeting, is that just based on storage and to the degree that you do see volumes move across the docks, that's all upside? Am I thinking about it the right way?

Michael N. Mears - Magellan Midstream Partners LP

Well we've got a variety of contracts at Seabrook in place and under development and they're all across the board. But suffice it to say, I mean obviously, there's a storage component of the contracts and there's a throughput fee associated with those contracts. In some cases, there's requirements to move certain volumes through the facility, in some cases, there's not. So I don't know if there's really – I can provide more detail on that, but I can tell you that our expectation at this point is that Seabrook pretty much out of the gate is going to be highly, if not, 100% utilized going forward

Jerren Holder - Goldman Sachs & Co. LLC

Any sort of indication, let's say, if everything is fully contracted, meaning storage fully utilized as well as some dock capacity fully utilized, just how low the EBITDA multiple could be?

Michael N. Mears - Magellan Midstream Partners LP

I don't have that number handy. It's going to be attractive, but we'll have to get back to you. I don't have that handy.

Jerren Holder - Goldman Sachs & Co. LLC

Okay.

Michael N. Mears - Magellan Midstream Partners LP

It's going to be an eight multiple or below.

Jerren Holder - Goldman Sachs & Co. LLC

As a base case and, okay.

Michael N. Mears - Magellan Midstream Partners LP

Correct.

Jerren Holder - Goldman Sachs & Co. LLC

Thanks.

Operator

Moving on, we'll take another question from Sharon Lui from Wells Fargo.

Sharon Lui - Wells Fargo Securities LLC

Hi, good afternoon.

Michael N. Mears - Magellan Midstream Partners LP

Hey, Sharon.

Sharon Lui - Wells Fargo Securities LLC

Just inquiring about the expected return on the expansion of your refined products project. Just wondering if there has been, I guess, a change in your expectations.

Michael N. Mears - Magellan Midstream Partners LP

You're talking about the West Texas refined products expansion?

Sharon Lui - Wells Fargo Securities LLC

Yes.

Michael N. Mears - Magellan Midstream Partners LP

Okay. Our expectation is, well, the contracted EBITDA multiple on that expansion is about a seven times multiple on the full $500 million. Now, as I mentioned earlier though, that has significant upside to it. (33:49) the full – we're creating 75,000 barrels a day of capacity, just not all of that capacity is contract. So, there is available capacity above the contracts and the rate out to West Texas is one of our highest rates on our system.

So, that provides significant upside. But probably, just as importantly, the way we've built this – the second part of the expansion, it gives us incremental capacity to the Dallas-Fort Worth market of 100,000 barrels a day, which is not contracted at all at this point. That's all available for contracting or spot movements. So, those two things alone, we think, have tremendous upside potential and we'll make this project ultimately much, much better than the seven times multiple.

Sharon Lui - Wells Fargo Securities LLC

Okay. Great. Thanks for the color.

Operator

And you have another question that comes from Elvira Scotto from RBC. Elvira Scotto, your line is open. Please go ahead with your question.

Elvira Scotto - RBC Capital Markets LLC

Yeah. Hi. Just a couple of questions. The line was breaking up. Can you repeat what you had hedged for butane blending season of 2019?

Michael N. Mears - Magellan Midstream Partners LP

Yeah. I'm sorry about that. It's breaking up on our end also. I had said was that we are – for 2018, we're 80% hedged for the fall. In 2019, we are (35:50) hedged for the spring, which if you normalize that for the whole year, it's about 30% hedged for the whole year for 2019 at this point.

Elvira Scotto - RBC Capital Markets LLC

Okay. Great. Thanks for that. And then I know you talked about the Longhorn Pipeline expand sort of – you're not really giving the mix between who's contracted Longhorn versus who's taken the two-year extension. But what's embedded in your guidance with respect to the Longhorn contracts?

Michael N. Mears - Magellan Midstream Partners LP

Well, we've – that's a tricky way to get me to answer the question. We have an expectation to where we're going to be at the end of this open season based on discussions we've had with shippers. And we've had expectation for our (36:48). But that's all I can say at this point. Again, we'll give you more details in the future since we've closed this, but – so it's based on projections as to who's going to sign and who's not.

Elvira Scotto - RBC Capital Markets LLC

Got it. And then, what do you think is the gating factor that's keeping shipping from signing onto the long terms? I know there's more pipeline capacity coming online, but production out of the basin looks pretty supportive. So what do you think is holding those back?

Michael N. Mears - Magellan Midstream Partners LP

Oh, I mean, I think that it's really just the competitive market. This is a space that – you have to take it from the context that all of the existing customers have certainty of capacity past two years on Longhorn because they've extended (37:51) all the others that have it (37:54) years; so they have the space.

So they have space certainty. Now, the rate that they'll be paying is above the incentive tariffs that we've offered. But so when they look two years out, that's really when they have a space problem and that's when a number of these proposed and pipelines under construction will be done. And so that's really what we're competing against is that market out in the future.

And we believe we've got one advantage, which is we can provide our rates for the next two years if they sign long-term agreement. But I think that's really the gating factor and I think in some cases, there may be customers that are trying to determine whether they want to commit to any space at all on any pipeline. So there's a mix of things.

As you know, it's an extremely dynamic market right now. And to petition for customer or shipper commitments on pipelines, Permian is one of the most dynamic and intense environments (39:10) as you can expect. So all that's into the mix.

Elvira Scotto - RBC Capital Markets LLC

Got it. No, that makes sense. And then just the last one for me, at this point, what's your appetite for M&A? I mean, I know you constantly evaluate M&A opportunities. There seemed to be some interesting crude pipeline and terminal assets out there for sale; so maybe with respect to M&A, what sort of assets do you look at and what do you see out there in terms of asset valuations?

Michael N. Mears - Magellan Midstream Partners LP

Well, I mean we're – as we've always said, I mean we're not opposed to M&A. I mean even though we don't or haven't done much of it, (39:52) lack of interest and so any asset that fits well with our strategy, it's something (40:06) I think the fact of the matter is, is we're very disciplined, we're very cautious. We take a long-term view on (40:23) revenue streams from assets, not short-term views. And we don't take a three-year view and expect that to last forever if the market's changing quite a bit.

And so, we don't often win. But we're still very interested. And far as valuations, I don't have a lot of recent data points. When I say recent, the last two months (40:51) been involved in, but I mean, just from what I'm hearing from the market, the valuation's not moderated much from where they've been.

So I mean, and to be candid, I mean, like I said, we look at everything, we evaluate, we likely bid on almost everything. We don't build any of that into our growth profile. I mean our expectation, when we talk about guidance and growth is that we will buy nothing. And so that – it's not built into really our planning models, but it doesn't mean we're not active in trying to acquire assets.

Elvira Scotto - RBC Capital Markets LLC

Got it. Okay. Thanks.

Operator

And it appears there are no further questions at this time.

Michael N. Mears - Magellan Midstream Partners LP

All right. Well, thank you for your time this afternoon, thank you for your questions and thank you for your interest in Magellan. Have a good afternoon.

Operator

And that does conclude our conference call today. Thank you for your participation. You may now disconnect.