Q4 2019 Earnings Call
Greetings, everyone and welcome to the Magellan Midstream Partners' fourth quarter earnings Conference call. During your presentation, all participants will be in listen only mode. Afterwards, we will have a question did answer session.
Time, if you have a question. Please press the wonderful for on your telephone if it anytime during a conference you need to reach an operator. Please press star Zero as a reminder, this conference call is being recorded today Thursday January Thirtyth 2020 . It is my pleasure now to turn the conference over to Mike Mirrors, Chief Executive Officer. Please go ahead Sir.
Good afternoon. Thank you for joining us today to discuss magellan's fourth quarter financial results and our outlook for 2020.
I must remind you that management will be making forward looking statements as defined by the FCC.
Such statements are based on our current judgments regarding the factors that could impact the future performance up Magellan, but actual outcomes could be materially different.
You should review the risk factors and other information discussed discussed in our filings with the FCC and form your own opinions about magellan's future performance.
Before we just got earnings you may have noticed that we announced last week, our intention to sell three of our marine terminals for $250 million.
This transaction was the result of a continuous evaluation of our existing assets.
We're always looking for ways to optimize our portfolio and the divesture of assets outside our strategic footprint is an important element of our capital discipline.
We believe the prices attractive with these three locations contributing cash flow in 2019 less than $20 million on a combined basis.
As part of that same news release, we also announced our board has authorized us to repurchase units on an opportunistic basis.
I will discuss our intentions around this do buyback plan a little later in the call.
Turning to financial results for 2019, Magellan closed out the year with another strong quarter genuine generating record DCF for both the quarter end the year [laughter] annual distribution coverage was higher than usual for our company at 1.4 times generating nearly $370 million of excess cash flow.
Our CFO , Jeff Coal mine will now review ever gels fourth quarter financial results in more detail then I'll be back to discuss the stat as far larger expansion projects our guidance for the year and how we think about capital allocation before opening the call to your question.
You might.
Before I begin please note that 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 that reconcile these metrics to their nearest GAAP measures.
Earlier. This morning, we reported fourth quarter 2019, net income of 286.4 million for 1.2 $5.
Per unit on a diluted basis compared to 314.1 million or $1.37 cents per diluted unit in fourth quarter 2018, excluding the impact of Mark to market activity fourth quarter 2019, adjusted diluted earnings per unit was $1.31, which exceeded our guidance for the quarter of $1.13.
Distributable cash flow for the quarter was $357.8 million 55.4 million higher than fourth quarter 2018.
Driven primarily by stronger results from both our refined products and crude oil segments.
I will now discuss the performance of each of our segments in turn starting with our refined products.
But fried products generated $264.9 million of operating margin in Fourq, Nike compared to $349.3 million in the prior year period.
As noted in our earnings release, lower 2019 figure primarily reflects the impact of mark to market adjustments for hedge positions related to the partnership's commodity related activities.
Excluding these adjusted operating margin for the segment increased approximately $16 million over the 2080 periods.
Transportation and terminals revenue for the segment increased $2.8 million refined products transportation rates increased primarily as a result at the mid year Terabits escalation of 4.3% well volumes increased largely due to our east Houston to her project, which came online in late third quarter 2019.
These higher revenues were mostly offset by the absence of ammonia revenues following the termination of ammonia service in second half 2019.
For the year total refined products volumes increased approximately 1%.
Base volumes across our system declined slightly eating the volume contributions from growth projects.
I'll note that if you look at our total shipments byproduct for the full year 2019, which includes volumes from growth projects gasoline appears to have decreased a little over 2%.
However, most of the decrease in gasoline volumes occurred in the South Texas portion of our system, which as we've noted previously experiences more volatility in both product mix and overall demand and which has significantly lower tariffs that most of our system such that variations on this portion of our system have relatively low.
Impact on our overall revenues.
Excluding both this portion of our system and growth projects based volumes gasoline volumes decreased approximately 1% in 2019, well based distillate volumes were essentially flat.
Operating expenses for the refined product segment were $10.7 million lower in the current period, primarily due to lower integrity spending as a result of the timing of maintenance work as well as lower asset retirements, partially offset by lower product gains, which reduced operating expenses.
Operating margin decreased $93.9 million compared to Fourq, you 18, primarily due to higher unrealized gains in 2018 on futures contracts for used to hedge future product sales.
Excluding these out of period items product margin for the refined products segment increased approximately $7 million, primarily as a result higher sales volume in the current period from our butane blending activities.
Moving now to our crude oil segment.
Fourth quarter operating margin of $151.3 million, the 21.5 million higher than fourth quarter 2018.
Crude oil transportation and terminals revenue increased $7.4 million, primarily due to higher storage utilization and higher ancillary revenues.
Our crude oil transportation volumes also increased in the current period with most of the increase resulting from higher volumes and our Houston distribution system.
As we have seen throughout 2019, the increase in Houston distribution volumes, which move at lower rates among a whole lot more shipments contributed to a declining the average rate we reported for a wholly owned crude oil pipeline.
Lower spot volumes on Longhorn and fourth COVID-19 also contributed to the decrease in average rate between periods.
Volumes on longhorn were slightly lower than the current period at approximately 275000 barrels per day versus about 280000 barrels per day in fourth quarter 2018.
As anticipated lower price differentials between Midland and Houston resulted in our not receiving any spot nomination during the recent quarter. However, some of the resulting available space for use by our committed shippers and some which used by our own marketing affiliates as a reminder, revenues from those marketing activities are roughly.
After this product sales on our consolidated income statement.
Beginning this quarter. We have included the volumes associated with our affiliate marketing activities in the operating statistics quoted in the financial schedules that accompany our earnings release.
Operating expenses for the crude oil segment decreased $15.6 million, primarily due to lower asset write downs on the 2019 period as well as lower integrity spending and lower environmental accruals.
Crude oil equity earnings decreased slightly between periods as lower contributions from Bridgetex offset higher spot on corn earnings.
So on equity earnings were higher primarily as result of new commitments received in connection with expansion of the Saddlehorn pipeline.
On volumes averaged approximately 880000 barrels per day in the quarter compared to approximately 100000 barrels per day in the prior year period.
Higher average bridgetex volumes of approximately 425000 barrels per day compared to approximately 415000 barrels per day in fourth quarter 18 were offset by lower average bridgetex rates as the lower Midland to Houston differential already mentioned discouraged movements at the posted spot tariff and there.
Resulting available space was filled with volume shipped a person to other tariff arrangements.
Finally traffic the discussion if our performance by segment, our Marine segment generated $32.9 million of operating margin an increase of about $2.3 million over the 2018 period.
Revenues were $1.4 million higher primarily due to increased ancillary revenues that go into park slightly offset by lower rates on storage contract renewals, particularly Wilmington.
Equity earnings for the Marine segment increased approximately $1 million as a result of higher earnings at our Pasadena joint venture well commodity margin for the segment increased 1.8 million.
These increases were partially offset by higher tank integrity spending and higher operating taxes.
Moving now to other branches to last year's quarter, depreciation amortization and a permanent expense decreased $38.2 million between periods, primarily because of the 2018 period included the impairment of the ammonia pipeline system, while gene expense because essentially unchanged between periods.
Net interest expense was $3.5 million higher in the current quarter due to higher average debt outstanding as result of borrowings made to finance our growth projects, partially offset by a lower average interest rate.
Our weighted average rate was approximately 4.6% during the fourth quarter and our average debt outstanding with $4.8 billion.
As of December 31st 2019, the face value of long term debt off that outstanding was $4.75 billion and we had 58 million a cash on hand.
Touching briefly on balance sheet metrics and liquidity our leverage ratio for debt compliance purposes was approximately 2.8 times that band of 2019th.
Our expectation, we will find all of our forecasted growth projects with retained excess cash flow and that well staying well within our longstanding four times leverage limit remains unchanged.
In light of our significant significant available liquidity and lower growth capital forecast, we recently terminated our $500 million 364 day credit facility.
In addition, we allowed the shelf registration for our aftermarket equity issuance program to expire and renewed as we consider it unlikely we will need such a program in the next several years.
We continue to maintain our multiyear credit facility capacity of $1 billion, which is currently undrawn.
Ill now turn the call back over to Mike discussed guidance for 2020.
Thanks, Jeff.
Turning to our outlook for the new year, we announced DCF guidance of 1.2 billion for 2020.
While lower than our DCF generation in 2019, you may recall that our 19 results significantly exceeded initial expectations for the year.
These positive variances included significantly more crude transportation revenues for the expected due to favorable Permian differential for most of the year and more favorable butane blending margins than expected.
Both of which have now retreated closer to our original expectations.
In addition to 2019 also benefited from material onetime insurance recoveries in a onetime gain on the sale of our ownership in the discontinued weight the crane pipeline project.
As usual I'll now walk you through the building blocks, we use for 2020 projections. So you still have a better feel for how we're thinking about the new year.
[laughter], starting with our refined products segment, we expect based refined product volume to remain relatively flat between years similar to our base business in 2019, and further emphasizing the stable nature of our refined products pipeline system.
With the upcoming benefit of recent growth projects that expand our Texas capabilities. We expect total refined products pipeline shipments to increase closer to 10% 2020.
These growth projects include a mix is short haul movements from our new East Houston to hurt pipeline that began operations in late 2019, as well as our west Texas expansion that represents a higher tariff little bit was placed into service in mid 2020.
In addition to volume the average tariff rate for our refined products pipeline system is an important component to model the statement.
The tariff adjustment to occur on July burst 2020 is the best and final year to use the current FERC index, which is based on the change in the PPI plus 1.23%.
The preliminary changed and PPI for 2019 is less than 1%, resulting in an index rate adjustment of right at 2% for the 40% of our markets to follow the index. However, at the remaining 60% of our refining markets are not subject to the index methodology because they are either.
Intrastate movement or deemed to be competitive by the for.
As a result, we can adjust rates.
In these markets as competitive forces allow.
Our commercial team is analyzing each of the relevant markets at this time, but we generally tend to increase rates in our competitive markets by 3% to 4% in mid 2020 similar to our historical approach.
For modeling purposes, please keep in mind that our point to point pipeline movements.
Have an impact on the average rates if you see at our operating specific statistics.
Even though we intend to raise tariffs to the average of around 3% in mid 2020, our overall rate per barrel is expected to remain relatively flat between periods.
This is because a significant portion of the projected incremental throughput is expected to come from shorter haul movements that ship at a lower tariff rate.
Because this is the final year for the Fercs current index first we'll be working to determine what the appropriate index. The next five year period, beginning 2021.
As soon as the for FERC form six is our filed for the various refined products crude oil pipelines in the late spring up this year the cost data for most filings will be compiled and used by the birth to set the index to the next five years.
As usual the pipeline industry will be taking a very active role in this process to continue educated the commission about the index and how it impacts our industry, especially in light of continued turnover at the agency.
At this time there was no new information to report on how they plan to incorporate the MLP income tax allows change from two years ago into the new index calculations.
We don't believe it will have a material impact based on our internal evaluation that we publicly shared at our 2018 analyst day.
The other key assumption that significantly impacts the refined products segment is a commodity price environment, especially as it relates for butane blending activities.
We have about one half of our expected 2020, butane blending sales volume hedged at this point with virtually all of our spring blending margin locked in.
We generally use the forward commodity price curve to forecast expected margin for any unhedged volumes.
Based on final results blending margins ended up averaging around 60 cents per gallon during 2019.
No. This was the best margin we've seen in four years, primarily due to lower butane pricing environment that favorably impacted our blended profit.
Considering the hedges locked for approximately half of our total expected volume and a mid January forward curve for the remaining unhedged volume. We currently expect average blending margins of 50 cents per gallon per 2020.
Moving to our crude oil segment will set the stage by reminding you that the pricing differential between the Permian basin in Houston is not expected to be sufficient to encourage spot shipments on either longhorn and bridgetex pipeline to 2020 or the next few years after that for for that matter.
As a reminder, both systems benefited from spot shipments for much of 2019, resulting in greater volume at a much higher spot tariff rate of around $4 per barrel. Then we expect and we did I expect that to re occur in 2020.
[noise] addressing longhorn first.
We're pleased to advise the we've made substantial progress on re contracting the longhorn capacity that was set to expire in the fall 2020.
As a reminder, approximately half of the commitments on longhorn or about 130000 barrels per day elected to renewed renegotiate new long term agreements back in late 2018, when the initial contracts expire.
Those new contracts had average life of about eight years at that time, so closer to seven years at this point.
Shippers, representing the remaining 50% of the volume chose a two year extension, which is set to expire in late 2020.
We've been actively negotiating with potential shippers are some tied to build that space with our preference being to have longer term agreements, even if that requires except the accepting marginally lower rates for long term cash flow certainty.
To that end, we're pleased to recently signed a new 10 year take or pay commitment with the quality counterparty is substantially reduces our recontracting risk.
The volume commitment in this new agreement ramps up over the next few years as a result, magellan's marketing a bill it will step in to facilitate intrastate shipments.
We have secured multi year fixed differential agreements with third parties to backstop, our affiliate shipments to bridge the gap during the ramp up period.
The portion of our marketing ability shipments that are backed up by third parties are considered in our analysis as committed volume on longhorn.
The bottom line is that we're making excellent progress to term out capacity on longhorn with this new long term agreements taking substantial risk off the table.
Depict the 2020.
Magellan expects total committed volume to about average approximately 230000 barrels a day or lower.
Based on commitments secured to date.
Committed volume on lot going over the next five years is expected average nearly 200000 barrels per day.
We remain an active negotiations to secure additional commitments to lock in the remaining uncommitted space, both short term and long term and based on these discussions and the projected forward differentials, we expect longhorn to be essentially full in 2020.
As expected the average tariff for longboard going forward will be lower than 2019 as a result of the new committed volume at affiliate marketing agreements.
We're not disclosing the differentials that have been agreed to with third parties with it our marketing affiliates, which equates to about 40000 barrels per day of the 230000 barrels today have committed volumes at 2020.
Excluding those affiliate shipments and based on the current status of contract renewals. The all in average committed rate for the approximately 190000 barrels per day of third party committed shipments for longboard and 2020 is expected to be roughly a $1.95 per barrel with the current average remaining contract.
Seven years.
No gate negotiations continue for the remaining uncommitted space and we will provide updates on future average committed rates was the recovery re contracting process has run its course.
Moving on to Bridgetex, we expect shipments to average approximately 400000 barrels a day during 2020 compared to nearly 430000 barrels per day in 2019.
Again, the differential is such that spot shipments are not motivated to move between the Permian in Houston as a reminder, commitments picked up approximately 80% of the pipeline capacity with an average remaining life of five years in Bridgetex is taken proactive measures to incur additional movements in this environment through the use of instead.
Of tariff rates.
The Saddlehorn pipeline is expected to move more than 180000 barrels per day. During 2020 due to new commitments were saved in conjunction with the pipeline expansion is currently in process and expected to come online in late 2020.
Once expansion is complete saddlehorn will be capable of transporting 290000 barrels per day was effectively three fourths of this full capacity secured with new long term commitments for seven years.
Switching to the Marine terminals segment, we expect space to the Pasadena expansion to be operational during the new year, which which will be partially offset by the pending sale of three of our marine terminals that we've indicated contributed cash results of less than $20 million in 2019 on a combined basis.
Concerning maintenance capital, we spent a little over $95 billion during 2019 and expect to spend a similar amount again in 2020.
Magellan spent significant time and effort each year to ensure the safety and reliability of our assets in considering both capital and expense, we expect to spend more than $240 million in total our maintenance and integrity work in 2020.
So in summary, those are the key assumption, we have used to build up to our 2020 Bcf guidance of 1.2 billion.
Turning now to distribution growth.
Managing our business in a prudent manner for the long term benefit of our investors remains our top priority.
While our business has continued to perform very well and demand for services remains strong.
Our outperformance into 2019 as was mentioned earlier was driven in part by favorable conditions for crude oil business that we do not think are likely to persist.
In light of this we plan to increase annual distributions by 3% for 2020.
Which we believe is more inline with our inherent long term growth profile in a low expansion capital environment.
We plan to achieve this goal lifted three quarters of a said quarterly increments consistent with our 2019 approach.
With DCF of 1.2 billion and 3% annual distribution growth targeted for 2020, we expect to generate distribution coverage of 1.25 times, which results in more than $240 million of excess cash flow that can be used to reinvest in the business or otherwise create additional value for investors.
At this time, we did not intend to provide financial guidance beyond 2020.
However, based on continued investor feedback that higher distribution coverage remains of high importance to them, especially in light of the volatility within the energy space, we intend to target distribution coverage above 1.2 times for the foreseeable future.
While we continue to evaluate well in excess $500 million a potential organic growth projects that would create incremental value for our investors. The reality is that we will most likely be at a lower capital spending environment over the next few years, so I'd like to spend a few mona moments discussing our capital allocation.
Yes.
Our first priority will continue to be to invest in attractive high quality growth projects.
In saying that Magellan remains committed to our long standing approach to capital discipline.
And only plan to move forward on new opportunities, if they meet or exceed our targeted six to eight times EBITDA multiple threshold.
And they are appropriately adjusted for risk and long term sustainability of cash flows.
To the extent opportunities of this nature are indeed, lower especially in light of the current competitive environment. We believe that excess cash flow can be returned to investors utilizing other tools, including unit repurchase program or special distributions.
As announced last week, our board has authorized us to repurchase up to $750 million of units over the next three years.
To clarify we do not deem this to be a defined program with a set schedule the rather intend to use the plant opportunistically purchase to Opportunistically purchase units from time to time.
In addition, we also believe that payment of a special distribution well not talked about much in the bid midstream space could make a lot of sense as well returning cash to investors immediately in a very tax efficient way.
I know that a number of European curious to know if we have a formulaic approach in mind for when each of these levers could be pulled.
The short answer is no we do not have a formulaic approach what we do intend to do is engaged in a point in time analysis using using a deliberate long term value focused approach taking into account our outlook for capital spending our liquidity and leverage.
Our leverage position at the time and our valuation.
The bottom line is that we remain focused on maximizing value for investors are poised with a number of attracted tools available to us including capital projects, a buyback program and potential special distributions to opportunistically increased value to our unit holders.
That.
Concludes our prepared remarks, so operator, we can open up for questions.
That you're much ladies and gentlemen, if you'd like to register a question. Please press. The one followed by the four on your telephone keypad, you will hear Athree Tom problems to acknowledge your request. Good question has answered and you'd like to withdraw you May press, one three and if you are using a speaker phone. Please lift your handset before entering your request once again for called question.
Please press one for on your telephone keypad is now one moment. Please for the first question.
And our first question comes from lineup Jeremy Tonet with JP Morgan. Please go ahead.
Hi, This is Joe on for Jeremy.
I wanted to start off with asset sales and it kind of seems like the recent hospitality completed we're kind of non core to the business.
Are there any other assets you have in mind where that.
<unk> represent stuff out of your footprint.
And can you talk about I guess, maybe kind of valuations are Stan and kind of banks you would explore there.
Well.
I'm not going to talk about a specific assets, we may or may not be looking at right. Now I can tell you that we routinely evaluate our portfolio and make determinations as to whether or not there there's portions of our business that.
Maybe have higher value elsewhere.
Probably not going to have it more on that.
Specifically I will say, though as a reminder.
But we do that we are likely.
Two.
A sale of course sell a portion of our Saddlehorn pipeline.
Later this year as you recall third party as an option to purchase that and our expectations are they will exercise that in.
And do that so that is.
Likely upcoming and just as a point of reference that reduction of income for that sale is embedded in our plan.
Okay. That's helpful.
And then I also wanted to.
Dig in a little more on the buybacks you mentioned both.
Actual distribution and a buyback.
I wanted to see if any scenario makes one of those situations more likely than the either and kind of you also had kind of been intrinsic value in your head where you would kinda.
Accelerate buybacks or or.
Thanks for execution.
Well valuation.
Our mind is an important element of determining whether we buyback units or.
Or issue a special distribution, but evaluation.
This is always a point in time.
Alkylation.
And so we don't have a number out there that was going to trigger this.
And even if we did we probably won't be talking about it.
[music].
But so thats how the process is going to go when we reach a point, where we feel like it's something's actionable one way or another.
Then, we'll make a value judgment as to what we think.
That return of value is to our unit holders, whether it's a buyback or special distribution and make a decision at that time.
That's helpful. Thank you Thats all from it.
Thanks.
And our next question comes from Tristan Richardson with Suntrust. Please go ahead.
Hey, good afternoon guys.
Question.
About.
Commodity related.
We can't hear you need speak up or closer to the.
Apology says is better.
Much better.
Sorry about that.
Just a.
With respect to your commodity related activities contributing less than 15% of the operating margin does that include.
Activities by the marketing affiliate in the crude business.
Ed and or the.
The marketing affiliate activities that are backstopped by third parties, just kind of curious about that 15% or less than 15% number.
Well historically, we've quoted that really just based on our blending business.
I don't know if we run the math on that to determine whether that we have and it's probably still under 15, but we'd need to run it and.
Thats what exactly.
That ends up being will depend a little bit on how the year goes as well.
But.
That's the number we quoted was not specifically designed to incorporate the market activities.
Very helpful. Thanks, that's it on my end thank you.
And our next question comes from Shneur Gershuni with GBS. Please go ahead.
Hi, good afternoon, everyone.
Good afternoon I was wondering.
Maybe we can start off on the on the buyback side again.
Just kind of want to understand philosophically, how youre thinking about it you said you slowed your distribution growth rate, obviously, you're trying to match up.
How you see things.
With your business and targeting higher coverage ratio.
What I think about the authorization just like the simple math right now you can eliminate effectively 5% to 6% fewer units outstanding which would then allow you to recycle that capital back into or the same distributions into a higher growth rate is is the idea that we should be thinking about it is that you'd like to target kind of.
The same type of growth rate longer term.
Where you had been previously it's just it's going to be now in a form of buybacks and.
And the lower distribution growth rate.
Could we see someone like a 5% increase in total return of capital to unit holders, 3% by the distribution distribution and let's say, 2% via buybacks just kind of wondering how you're you're sort of thinking about philosophically without giving us a price or anything of resorts.
Well I think we don't think of it that way I think I think the math may work out that way and I haven't run the bat. So I don't know, but it may work out that way of it if you if you assume that.
We have no capital projects and we use all of our excess cash flow.
To pay a distribution or buyback equity clearly that would work out to a higher total return than just the normal distribution growth rate.
But that's not the way we're thinking about it again.
Our first preference.
Is to find good projects to investors.
And so the buybacks and the special distributions are the alternative that add.
We really think about as just the most efficient way to return value to the shareholders not really trying to target any kind of specific return.
So.
That's that's why we're looking at it.
Okay.
Fair enough.
Two more follow up questions just yes.
Thank you for all the color that you gave about the long or re contracting and so forth.
I was wondering if you can sort of talk about the difference in the rates you're getting for term today kind of on the incremental.
Versus the last round of re contracting I think you did.
Early last year.
Or is it is the rate fairly similar to where it was when you first had the longhorn contracts roll and you did the blend and extend when you sort of think about the new rates is that lower today kind of similar and so forth and then secondly.
Where do you see the market in terms of getting spot volumes, which had been a surprise and most of the quarters throughout last year that you hadn't guide to.
Just wondering if there's opportunity for that or you should we should not we're thinking the be thinking about spot at all this year.
The contract rate.
In today's environment, if you want any kind of term.
Our less than they were.
A year and half ago.
So they are directionally down.
Uh huh.
So.
The.
Yes.
ROFO upfront provide a whole lot more color on that.
But you're you're talking rates that.
I am to give you extreme bounce here, but.
Or.
A dollar Ted dollar 50, a barrel is kind of the range. That's that you can get in the market today for any kind of term.
There is exceptions to that based on other other conditions, but.
But thats kind of the market range right now and that can change.
A week or or.
In a month given the dynamic nature of new pipeline starting up.
And when they're going to start up.
And what's happening with the current production forecast so.
That's just a point.
Analysis with regards to your second question on I think it was is there any opportunity for spot shipments this year, which I mean technically speaking a spot shipments.
The way, we think of it would be a third party who is willing to pay the post of Terra which are pipes is about $4 a barrel, let's say the probability of that happening this year is zero.
I'd love to be wrong on that but just based on where the market is today and the new capacity coming online.
That's extremely unlikely to happen and so.
[noise] movements in that space are going to need to be done.
Thats sort affiliate transaction.
At different rates.
Okay Fair enough one last question.
Is there been any.
Discussion I'm sure you get this question all the time about seacorp conversions and so forth but.
Is the board sort of engaged in the advisors or are taking a deeper look at the question.
Whether it's either to think about it from a C corps perspective, or even to consider or which seems to be fully this trend that people are talking about.
Were you everybody still comfortable with where the structure currently sits today.
Well, we frequently evaluate a C corp conversions, we frequently have discussions with our board about seeker C Corp conversions.
Add.
We it's not something what we've analyzed watts and put on a shelf, it's an ongoing process.
And our position today is the same as it's been for quite some time is.
Is it.
Our view if you do a long term present value of our current tax efficient structure versus a C corp structure, which is ultimately going to pay taxes at some point, there's a higher value remained the way we are.
There is there's still the question of.
Perhaps you can get a higher valuation.
Today, if you convert to a C Corp.
I know, there's a lot of analysis on that we're not 100% convinced that theres a long term increase in value.
We already trade at a premium value.
So it's unclear to us that we would get any kind of significant pop right out of the gate.
But even if we did.
We also manage the business for the long term and so the question remains is would we still be trading it at a similar multiple.
In the future if we're paying cash taxes versus what today, we're not paying cash taxes and so we evaluate all of that.
With regards to our.
To our determination to add up as of right now.
We're not intending to convert C Corp.
Yes, if I can sort of follow up on that first second there.
Completely understand the argument about from a from a tax perspective.
But you know.
Just looking at your own guidance.
Where you're you're expecting slower distribution growth rate, just a little casual grocery and so forth kind of a more mature capex environment does the restructuring makes sense, because you would not be in the taxable situation.
And you'd be able to distribute your cash flow under the restructure.
Just given kind of the maturity of where you are in the Capex phase.
This is Jeff the restructure is interesting, but our appreciation of is that the qualifications for rents would not fit with a large portion of our business model.
Tariff tariffs that are not subject to launch with commitments probably are not rents and that makes it.
Very complicated for us to consider a restructure without multiple securities.
And maybe just more clarity on that.
Jordi of shipments of our refined product pipelines.
We're not done under a contract there Doug only I'd are posted tariff.
And we don't believe that rather there from a posted Tara.
Qualified or restructure.
And if theres no contract term contracts associated with it.
Got it okay that makes sense and appreciate the clarification. Thank you very much guys.
For the rest is day.
Okay.
Thank you.
Next question comes from keeps steadily with Wolfe Research. Please go ahead.
Hi, good afternoon.
You talked at the start about how you beat the initial 29 seen guidance really very significantly.
With crude spreads and butane blending probably some other things I imagine.
When you're looking at this year are there areas, where you would say you feel like you, maybe even conservative or have opportunities to perform better than the guidance in 2020, and I'm I'm just thinking whether its tariff increases you haven't done yet and competitive areas or timing of growth projects cost control or anything along those lines.
Where are you might have opportunities.
Let me let me answer that question just a second because I do want to highlight I know there's been a lot it.
I think a focus on our guidance this year versus the actual performance in 2019, let me just address that per second that I'll get back to your question.
If you recall our initial guidance.
In 2019, it was 1.4.
1.14 billion. So we we beat our guidance.
Additional guidance by almost $150 million last year.
There are number of things that.
Were associated with that but but the value we wind up with almost a 1.3 billion dollar level of DCF performance last year at 1.2 billion of DCF guidance. This year.
I want to highlight a couple of things relative to that first of all if I look at the material.
Changes between 19 and 20, obviously one of the biggest of those.
If not the biggest those is the change in crude oil well the income we're going to base based on the reduced Tara and the reduced margins.
The crude oil business.
So thats one item the other item that's a variance is the sale of our marine terminals in the pending potential sale of Saddlehorn portion of Saddlehorn.
The other change is a decline in blending butane blending margins for 2019 versus the forecast for 2020.
And the at the fourth one is a material variation.
We had significant insurance recoveries in 2019.
We also had a significant gain on the sale of growing to crane assets.
If I add those all up together just those items. It's a variance in 2019 2020 of almost $170 million a DCF. So that's our starting point is to take those out and then build a DCF for Htwo 2020 from that.
And as.
Our DCF for 2020 significantly above.
2019 minus those about so I'll start with that because I think.
It's important to point out what those material variances are now to your question.
Where is there upside.
Well, there's the upsides or are in some extent in those areas.
If the if the Permian to Houston differential.
Is better than what the forward curve suggests that thats an upside.
It blending margins improve from where they are right now that's a potential upside I think thats, one that that's pretty real given.
Were low 50 dollar crude environment, depending on what's your view is what's going to happen to crude oil for the rest of the year, there's some potential for upside there.
Those are probably the two biggest pieces of upside we do.
We are focused.
Initiated cost control measures.
We're very early on in the process there.
Difficult tell how much of an impact thats going to have a 2020.
But we expect it's going to have some impact and hopefully it's going to have more impact in future years. So those those are I think probably some of the most notable.
Upside to the course.
With refined products business, there's probably not a lot of upside on terra but.
Uh huh, we could be surprised.
Volume as we go through the year.
That's that's a really helpful answer.
Follow up quick question, just how discussions going on a more capital efficient version of whereas your Cushing to Houston pipe have you made progress since since the last quarter on on that.
We've made progress, but not enough progress to announce that we've we're starting the project I will say that.
Yeah.
There is interest Theres significant interest in this project, we're still working with our partners on it.
As I've mentioned before the scale and size of this project or not is not the same as some of the other projects out there really only depends.
On one or two.
Key shippers to make a commitment.
Those shippers are still actively talking to us.
However, they are very patient and so we're being patient.
We have not built any of that into our forward models.
And that's just one project we have we have other projects that.
May be very attractive and have very solid returns.
There were working hard.
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Yeah, we're going to see how those play out too but.
But to be clear, we're not counting on any of those to happen. We're planning for a very low capital environment going forward.
We think we have inherent growth in our business even in the absence of spending capital.
Add Intel these projects happen, that's how we're going to manage our business.
Thank you very much.
Next question comes from Vikram I agree with Jefferies. Please go ahead.
Good afternoon, everyone.
I wanted to touch on operating expenses, they were lower than what we expected I think there were lower than what was baked into the consensus.
I think you mentioned lower integrity spending on crude by us and several other smaller factors does that mean, there wouldn't be some catch up spending in 2020 on food pipes, one and two I think Mike just mentioned that there are some cost control measures that you're working on I was wondering how impactful these measures.
I just couldn't be in 2020 and going forward at how should we think about opex.
Yes, Indeed 2021 years beyond.
Well I can tell yet I mean, there was a little bit a catch up in 2020, it's already in our guidance.
I don't know I'd call it material.
And with regards to the cost control efforts our expectations for 2020 are fairly modest.
And we're going to be putting some bounce around what we expect we can do in years to come I mean, there's there's a chance and I think.
Reasonable chance that weaken.
Capture some meaningful.
Cost reductions in our in our business over over the next three years and what we've really we're just starting to focus on that if you're if you're in a high growth environment, which we've been in for the last.
Number of years.
The organization tends to focus on that.
If you pivot to a low growth environment. It gives the organization time to focus on efficiency. So we're going to take advantage of that.
And these are as a follow up and the source of these cost control measures is sad automation, a new technology with is what I was trying to understand what the sources.
Thank you.
Yes, it's it's all of those and more.
Yes.
Efficiency and processes, it's a it's potential.
Automation processes.
There is there's a range of things that are that we're going to be evaluating investigating.
That could.
Capture some significant savings.
That's all I had thanks.
Our next question comes from David came on Us with.
Heikkinen Energy Advisors. Please go ahead.
Hey, Mike just wanted to spend a quick minute, making sure that I understand the commentary on longhorn volumes correctly, if I remember properly.
Two years ago, you had half of your commitment to extend.
At term and the other half it.
Exercise there to your option.
And so are those to your option still good through September of this year and can you use that assumption to get to the volume guidance that you gave earlier.
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I'm hesitating, because it's a very complicated answer that question.
The best I can tell you it's just to reiterate.
And we tried to go out of our way to explain this in my notes, but.
For 2020.
When we when we.
Well, the 230000 barrels a day of committed volume.
Again, a portion of that.
And you can gather from this that contracts have been restructured.
But a portion of that which is 190000 barrels a day.
His third party commit but that's the average volume for the year from third party commitments.
And then 40000 barrels a day is the average volume.
That our affiliate is going to ship that supported by third party commitments, but it will show up as affiliate shipments.
Which adds up to the 230 and our expectation is.
That our affiliate will ship more than that it's not committed but we'll ship more the that to fill the pipe up.
Thats.
That's probably the best clarity I can give you without going into a lot of details on specific contracts and specific structure.
Okay. That's helpful. Thanks, and then just a follow up.
You said that the current.
You know rate for term is a buck tend to about 50, obviously a wide range there.
Are you trying to re contracted debt level or are you waiting for a higher price.
I guess the remaining option would be that it's just hard to put together.
That many barrels that at that term right.
No we're not waiting for a higher price if you look at the forward curve or the differential it it.
It's going downward and not approve it for quite some time, so we're not waiting for higher price and the long term agree that we just signed.
We've been working on that for quite some time evidence.
To get it in our view of the get a 10 year agreement.
At the front or the party.
In this market and there is substantial volume, we have disclosed volume, but substantial volume.
We feel very good about that because it yet.
We're going to have some ups and downs starting to ramp up period over the next couple of years booked for the long term.
Rates.
Takes a lot of risk off the table for long.
Thank you I appreciate the clarity.
Our next question is from Derek Walker of Bank of America. Please go ahead.
Hi, Good afternoon, guys. Thanks for the time to.
Most of my question to answer maybe just a couple a touch up.
Questions.
You mentioned in guidance. It also includes the portion of Saddlehorn and there's obviously been lot of commentary already around.
Just the balance of especial distribution and buybacks and that there is no formula but.
Point in time valuation.
But should we think about the point kind of valuation sort of at the time.
We're in and around.
The potential saddlehorn.
Sale.
So sort of more of a year end event as far as how 2020 might unfold.
I would I wouldn't characterize it that way I'd say, there's a couple of things occurring here as I've told you a their.
Voyager and other projects are still under development.
And there's going to be at period of time here, where we need some clarity on what are those projects are going to materialize or not.
So that's one factor into the timing of this.
It probably makes sense for us too.
Wait until we have certainty of closing on the rate assets. We have closed on those yet so there's a number of there's a number of issues here that were that were juggling before we.
Make a decision to.
To do either one of those it's not driven by Saddlehorn.
It's possible, we could we could do something before with the Saddlehorn transaction and it's possible that will there will be after that.
It's possible that will fiber good projects of best and then we won't do either one.
So.
Thats kind of.
Got it all around the all around the question, but that's where we said at the moment.
I appreciate and that's helpful. And then maybe just a quick high level one talks about the FERC indexing process a little bit.
Form six is there sort of in the spring timeframe and they'll use that to make an assessment do you kind of.
I see that wrapping up at the end of this year or is it sort of a early next year sort of.
Sort of process and you talked about the turnover and.
Do you see yourself.
Engaging more.
This year as far as making sure that.
They are well informed as far as how you want that process unfolds.
Well the expectation is that a decision.
As issues before the end of the year, there's no mandate for that and that could bleed into next year, but our expectation is before the end of the year.
Yes.
The industry.
We'll be very engaged.
With the commission in this process through the course of the year.
Okay. Thank you I appreciate it.
Sure.
And there were last question comes from Spiro Dounis. Please go ahead.
Hi, everyone. Thanks for squeezing man two quick ones here first on the special dividends just any thoughts around maybe a profit sharing mechanism that maybe could result in more multiple expansion, but the stock that also reward shareholders for maybe sticking with you over time as opposed to onetime payment I guess, we've always viewed as special dividends a potential wouldn't really expand the multi.
So much and doesn't reward loyalty just curious how you're thinking about the mechanics around that.
Well, we haven't we haven't really thought about a profit sharing mechanism. It for two reasons I guess what is.
Uh huh.
Either a buyback or a.
A a.
Special dividends is dependent upon what our actual expansion capital spending is which give which can fluctuate I understand perhaps you could you could adjusted profit sharing a calculation based on.
How about your spending on capital, but it can be highly Uh huh.
Volatile.
You can see it as it is for us that we spend a billion dollars last year, we're spending $400 million this year.
Add.
So it can be volatile I guess, the second piece is how that would work with the opposite the buyback units because.
There may be periods of time, where it doesn't make sense to use our profit.
Two.
Pay a distribution and we.
We would rather use the buyback units. So we have we haven't given that.
I can sit here and say, we won't ever think about that but it hasn't been top of mind today.
Okay understood last one for me just just under 500 million plus expansion backlog, how would you characterize where these projects are under development and just generally speaking and maybe what they look like just trying to get a sense, if he's a crude products or crude a product oriented on the brownfield or greenfield and maybe just any sense on if they're kind of more demand pull or ER.
Supply push type projects.
I wish I could give you a short answer on that it I'm. The truth is it's and it's in crude oil and refined products.
And it's brownfield and Greenfield.
Add some of these projects are fairly mature.
Some of them are.
But I, but I'd caution to even a fairly mature project doesn't mean it gets done.
I can't overemphasize.
How.
Focus we are being disciplined though I think I think we showed a track record of being able to walk away from projects. When we don't think that meet our.
Return thresholds in our risk profile and that hasn't changed.
Add it makes it tougher to get project, Doug, but I think thats, what the market watts right now is that kind of discipline.
So there's no guarantee on any of these projects, but on the other high end.
If if a project meet all of those criteria, that's still the best place to deploy capital.
Got it thanks for the time today gentlemen.
Yes. Thank you.
Mr Mirrors I'll now turn the call back over to you for closing remarks.
All right well. Thank every thank you everyone for your time today and we appreciate your continued interest the Magellan have a good afternoon.
And that does conclude our conference call for today, everyone have a grid rest of your day and you may disconnect Your line.
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