Q1 2020 Earnings Call
Please state your name to standby the conference will begin shortly we do appreciate your patience.
These remain on the line.
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Greetings and welcome to the Magellan Midstream Partners' first quarter 2020, <unk> earnings conference call. During the presentation. All participants will be in listen only mode. Later, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone if it anytime during the conference you need to reach the operator, Please press star zero.
I would now like to turn the conference over to Mike marriage, President and Chief Executive Officer. Please go ahead.
Thank you Hello, and thank you for joining us today to discuss Magellan's first quarter financial result.
As well as our latest outlook for 2020, including an update on refined product demand trends on the pipeline systems.
Where we get started I must remind you that manage that well be making forward looking statements as defined by the FCC such statements are based on current judgments regarding the factors that could impact the pizza performances, Magellan, but actual outcomes could be materially different.
You should review the risk factors and other information discussed in our filings with the FCC and form your own opinions about magellan's future performance.
I would like to begin by recognizing the tremendous response from our employees the challenges they have faced over the past few months.
Their dedication to operating safely to ensure the continuity appeal to play did communities we serve as Ed.
During this period of significant disruption that normal work processes all of our facilities. It remains fully operational and our internal environmental and safety targets where exceeded in almost every category.
In addition, we were also able to effect, we execute on our strategic objectives, such as closing on a marine terminal sale in mid March.
Turning now to our first quarter earnings.
The year started off well, let's we generated solid financial results that exceeded our previous guidance by 20 cents per unit.
This was primarily driven by lower operating expenses and higher gas liquids blending.
In addition, about six cents per unit, what's the results of the gain on the sale of a 10% interesting saddlehorn in February.
Our CFO, Jeff Holeman will now review Magellan's first quarter financial results versus a year ago period, and that I'll be back to discuss our latest outlook for 2020 before opening the call for your question.
Thank you, Mike as usual I'll be making references to certain non-GAAP financial metrics, including an operating margin and distributable cash flow.
Yeah.
We have included exhibits to our earnings release, the reconcile these metrics to their nearest GAAP measures.
Earlier. This morning, we reported first quarter net income of $287.6 million or dollar 26 cents per unit on a diluted basis compared to $207.7 million.91 per duty.
40 for first quarter at 29 T.
Excluding the impact mark to market activity in the current quarter adjusted diluted earnings per unit was $1.28 cents, which exceeded our guidance for the quarter.
Yes.
Distributable cash flow for the quarters $306.5 million $11.5 million lower than the $318 million reported in first quarter 90, primarily due to lower operating margin from our crude.
Before I discuss the performance of our segments in more detail, let me take the opportunity to remind everyone that as we discussed in our analyst day presentation. In late March We now report our businesses just two segments refined products and crude oil following the sale of three of our marine terminals.
The Winter Park Marine terminal and our interest in our Pasadena Retort terminal joint venture are now included in our refined products segments well our Corpus Christi terminal is included in our crude oil segment.
So turning to our refined products segment first refined products generated $305.8 million of operating margin in first quarter 2020, an increase of about $98 million 2019 period with most of that increase resulting from more positive mark to market adjustments our commodity hedges during the current period.
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Transportation and terminals revenue for the segment increased $4.7 million, driven primarily by higher average tariff rates, which were favorably impacted by the July 2019 tariff increase of 4.3%.
Partially offset by the impact of higher short haul.
On which we are in a lower rate.
Volumes also increased primarily as a result of incremental barrels on our east Houston Turnpike.
Which began service in second half between 90, partially offset by the impacts on our refined products volumes of both virus related restrictions and reduced drilling activity in the later part of the first quarter.
Operating expenses for the refined product segment increased $3.2 million between periods true due primarily to higher property taxes and the current quarter. While other operating income decreased $3.5 million at the 2019 period benefited from Hurricane Carvey related insurance.
Product margin increased $84.8 million compared to first quarter 2019, primarily due to the timing of mark to market in inventory valuation adjustment, which were approximately $75 million favorable current quarter versus the prior year period.
Course for GCF purposes, we adjust out the impact of those mark to market and inventory valuation adjustments until the period in which the related barrels are sold.
On a DCF basis. The current period product margin was approximately $9.6 million favorable to first quarter 19, mostly due to favorable fractionator margins unfavorable sales product overages.
The five products equity earnings increased approximately $15.3 million versus first quarter 2019, primarily due to favorable mark to market adjustments on hedge position at our powder Springs joint venture as well as higher contributions from our Pasadena Marine.
Sure as phase two of that project became began coming online in the first quarter. This year.
Moving now to our crude oil.
First quarter operating margin of $190.9 million as $23 million lower than first quarter 2019.
Crude oil transportation and terminals revenue decreased $6.5 million, primarily as result of lower spot volumes.
In the current quarter.
While overall longhorn throughput, including barrels shipped by our marketing affiliate actually increased slightly to 276000 barrels per day from 274000 barrels per day. The average rate per barrel. We earned decreased between periods at the current period did not include any third party business and our posted spot.
Consistent with our previous forecast.
We currently anticipate receiving third party spot nominations online 2020, just given the for price curves. Similarly, we're not forecasting any meaningful marketing from ROE committed marketing activities for the rest of the year instead, our crude oil transportation volume and revenue expectation assumed that our customer ship at their commitment.
Levels, while our marketing affiliate continues to ship barrels pursuant to its committed by selling agreements.
Recall that our committed volumes on longhorn, including our marketing affiliates committed by sell volumes averaged about 240000 barrels per day in 2020.
Large majority of our committed revenues continue to be backed by creditworthy Counterparties and our forecast assumes those counterparties continued to perform on their commitments to us.
Given the current commodity price environment. It it's conceivable that some of our customers could choose to face deficiencies in lieu of transport in lieu of transporting a committed volumes, which could affect the timing of when we recognize that related revenues, although the timing of when we receive the cash payments for those commitments would remain unchanged.
Any such deficiency activity, it's impossible for us to predict however, and so we have not assumed any significant impact to 2020 earnings from deficiency payments at this time.
Turning now to our Houston distribution system volumes decreased slightly year over year, although the average rate on those volumes increased and the current period as a result of the origin destination mix immune system.
Crude oil segment operating expenses increased about $1 million during the period, primarily due to lower profit.
Other operating expense for the segment as $4 million unfavorable to first quarter 2020, as the Permian to Houston differential resulted in less favorable settlements on our basis derivative agreement as well as an unfavorable mark to market valuation adjustment of that agreement.
Crude oil equity earnings decreased $2.9 million between periods. The largest driver of that result is lower so earnings for the favorable impact of higher average volumes of approximately 180000 barrels per day versus 100000 barrels per day and the team period has more than offset by the combined impact.
Lower average tariffs and a lower ownership percentage, Paul I mean, our sale in the 10% interest early in the core.
Bridgetex equity earnings increased slightly primarily due to lower overall expenses bridgetex volumes at 407000 barrels per day were slightly lower than the 490000 barrels per day shift between 19 period, while the average rate per barrel shipped also decreased between periods as more barrels moved under joint tariffs.
First quarter 20, as opposed to spot tariff movements, we soft first quarter net tea.
Consistent with our remarks regarding spot barrels on more corn, we do not anticipate spot barrels or any other uncommitted barrels on either bridgetex or south board for the remainder of the year, just given current differentials and the production outlook for the rest of the year and our forecast assumes that volumes track customer commitments.
Finally product margin for the crude oil segment was about $9 million unfavorable to 2019, primarily as a result of noncash LCM adjustments to our crude oil inventories, which more than offset the cash margin earned by our affiliate marketing activities longhorn during the quarter.
Moving now to other branches to last year's quarter.
Depreciation amortization impairment expense increased $1.7 million compared to first quarter 90, largely due to the commencement depreciation assets recently placed into service.
DNA expense decreased 9.1 million versus the same period in 2019, primarily due to lower incentive comp.
Net interest expense was $4.5 million lower in the current quarter, primarily due to that a make whole payment made in the prior year period to retire our notes due 2019 early.
Otherwise higher debt outstanding was partially offset by lower average rate our weighted average interest rate was approximately 4.6% during the first quarter and our average outstanding debt was $4.8 billion.
At March 31st total long term debt was $4.75 billion, including zero commercial paper overhaul borrowings outstanding.
Gain on disposition of assets was $8.9 million lower first quarter 2020, as the gain we realized in the current period on the sale of a 10% interest and Saddlehorn was less than the gains we realized in the prior year on the sale of a portion of our Bridgetex our interest in Bridgetex and the sale of the discontinued.
Well were basing crude oil pipeline project.
Moving briefly to capital allocation balance sheet metrics liquidity.
We began opportunistically repurchasing units shortly after our fourth quarter investor call, we repurchased a little over a 3.6 million units in the quarter at an average price of $55 from 62 six.
62 cents per unit for a total spend of about $202 million as previously disclosed the vast majority of those repurchases were conducted prior to the collapse in oil prices and the implementation of lockdown measures.
As we have consistently note into discussion of our repurchase program the timing price and volume of unit repurchases will depend on a number of factors, including but not limited to our expected expansion capital spending needs alternative investment opportunities excess cash available balance sheet consideration.
Legal and regulatory requirements as well as market conditions and the trading price of our unit.
Given the events for the last two months, we've prioritized balance sheet strength that financial flexibility over additional unit repurchases for the time be.
Our leverage ratio for compliance purposes was approximately 2.7 times just ended the quarter as the impact on leverage from our unit repurchases is basically basically offset by the proceeds we received during the quarter from our marine terminal sale and our sale of a 10% interest saddlehorn.
In terms of liquidity, we continued to maintain or multiyear credit facility capacity of $1 billion and had approximately 139 million the cash on hand at the end of the first quarter.
I'll now turn the call back over to Mike to discuss our updated guidance for the year.
Thanks, Jeff.
I'd now like to walk you through our updated outlook for the year. This morning, we provided or revise DCF range of 1 billion to 1.075 billion per 2020.
We believe a range of estimates as appropriate at this time due to the continued uncertainty regarding the pace of refined product demand recovery and the continued volatility in commodity prices.
While a number of states within our operating footprint are beginning the process to reopen their economies.
The trajectory of the recovery and the length of time until these markets returned to more historical levels of refined products demand are not easily predictable.
For those of you joined us for our virtual Investor update on March 26, you may have knows the current DCF estimates are roughly $20 million to $30 million lower than what we discussed at that time.
The decline is primarily related to an even lower commodity price environment that was then was projected a month ago as well as expectations for a larger reduction in aviation fuel demand for the remainder of the year.
I would like to review the key assumptions related to our new 2020 Bcf range. So they can understand how we're thinking about the current environment compared to how the world look when we entered 2020 with our original $1.2 billion guidance.
In our press release. This morning, we included a table shows.
The range.
Original guidance adjustments that we now are are going to discuss this table is consistent with the table. We presented in our analyst day on March 26, just so that you can compare easily between the two of them.
So starting with the first item.
Which is lower Brendan blending profits and tenders range the word.
Range of reductions for that line item is 110 million to 140 billion for the year on the low end of that range, we're assuming which is consistent with what we're assuming back in March that we have zero blending profits in the second half the year and then the remainder of.
Of that the reduction has to do with the low commodity price applied to our fractionation business and our tender.
Most of the changes you can see was was related to.
The price impact on our tenders and Prac business since we had already been assuming zero blending profit.
On the higher end of that range. It just assumes a 10 dollar increase in the price of crude oil.
Which we're not necessarily predicting it's just it's just showing a range of what's possible over the course of the year that would be that shows the variance between those two numbers of $30 million.
So to the refined products demand impact that range is now $60 million to $70 million.
The assumptions in that range are listed in the table, it's 25% reduction for gasoline in the second quarter.
5% reduction in distillate and 70% reduction in aviation and then in July we would have half of those amounts before we returned to normal levels for gasoline and diesel, but we're keeping aviation declines at 25% through the remainder of 2020.
Just to give you a benchmark on actual data.
Hi, and those assumptions.
Our actual.
And this is for April. So this is a year over year comparison for April.
Our gasoline loadings were down 33% for the month of April.
Our distillate loadings were down 9%.
And our jet deliveries, which is a much smaller portion.
Of our movements was down 72%.
If I look at just the last seven days of April.
Those numbers have improved substantially.
Yes lean to the last seven days of April is down 24% year over year distillate is down 4%.
And jet is down 76% I would highlight on the distillate numbers that those are total reductions in throughput on our system and in our assumptions we have a separate line item for a reduction in.
In diesel demand associated with.
Drilling reductions in the basins that we serve.
All of that's included in the in the reduction side just gave you. So thats a comprehensive number I just just gave you so.
For instance, we're assuming 5% decline for the quarter on diesel.
What we saw an April was 9% in total including reductions in the drilling basins.
I know there's been some discussion regarding other data points with regards to total refined product demand reductions.
Both.
Year to date and forecast going forward for the quarter just to give you a sense of what our experiences Ben So you can compare against those reference points.
Our total.
For refined product reduction was 26% for April.
And our total refined product reduction for the last seven days of April was 20% so.
Clearly the markets that we serve have not seen as dramatic reduction as other parts of the country add the data would suggest that we've seen the bottom and we're starting to trajectory upward.
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Moving onto the other assumptions in the.
In the forecast again, I mentioned briefly that we have a separate line item for reduce distillate volumes.
Entirely associated with drilling reductions we've changed our assumption for the Permian Basin.
These assumptions from a 30% rig reduction declined to a 50% rig production decline.
And that generates a on the low end a reduction of 30 million.
Dollars for the year.
And then to the extent that that that soften somewhat later in the year. We've got on the high end at $20 million reduction.
The assumption on reduced volumes on the crude oil our accrual systems has not changed.
In March we were projecting that we would have no spot volumes and thats consistent with what we're still projecting so that decline has remained at $10 million for the remainder of the year and then the other items is a range from $50 billion to $75 billion that has an approved.
From.
The March forecast.
For two reasons one is additional storage revenue that we've been able to capture and also additional expense savings.
Has led to that increase.
All of that totals to our forecast range of 1 billion to 1.75 billion.
For the year.
So based on this latest Dcs sensitivity analysis as well as investor feedback, we intend to maintain our quarterly cash distribution at the current level for the remainder of 2020.
We have heard clearly from long term investors that the stability of the distribution and healthy distribution coverage remained at most importance to them, especially during this period of unprecedented economic activity uncertainty.
With our current distribution them out of $4.11 per unit on an annualized basis, we expect distribution coverage in the range of about 1.1 to 1.15 times based on our latest DCF sensitivity, which generates excess cash is $75 million to $150 million for 2020.
We do not intend to provide financial guidance beyond 2020 at this time that continue to target distribution coverage above 1.2 times, what's refined products demand returns to more historical levels and the commodity price environment stabilized.
Regarding expansion capital spending we still expect to spent $400 million during 2020 to complete the projects already underway with about 40% of that spending occurring during the first quarter.
We do not expect to defer any projects at this time as most of our expansion projects are nearing completion and are supported by long term agreements.
Our largest project relates to the expansion of our West, Texas refined products pipeline, which is in its final stages and expected to begin operation early third quarter.
So as discussed today, we clearly expect near term financial impacts from the current significantly lower commodity prices and significant reductions in refined products demand.
However, Magellan proven disciplined approach resilient business model and financial strength position us well to respond that onto the short term industry challenges, but the successfully manage our company for the long term.
That concludes our prepared remarks, so operator, we're now ready to turn the line over for questions.
Thank you if you'd like to register a question or comment. Please press. The one followed by the four on your telephones.
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One moment. Please first question.
Thank you. The first question comes from Theresa Chen of Barclays. Please go ahead.
Hi, Thank you for taking my question.
Mike I wanted to ask you about.
The guidance that you laid out in detail.
First just so we understand correctly the.
Last seven days at April number can give being comprehensive so if that is the pace for the rest of the quarter then the no.
Reduced drilling impact on this a falling that negative 20 to 30 million impacts like would not necessarily even be there it's not the way to interpret your comments.
I'm not sure I understood. The question is if it's.
If it continues at the current pace.
Then on the distillate assumption will beat our distant assumption.
Right for the second quarter.
Okay. That's yes.
Okay.
The other question I had about why.
Youre refined product demand deterioration has not or has been better than some of the on.
There are public data points.
Can you talk about does have to do with the markets that you serve on or at the.
Front types of end user population density any color around why that's happening.
Yes, I can tell you what our thoughts are I mean, obviously, we don't have any empirical data to go support our our assumptions, but I think theres a number of things to take into consideration first of all in may be.
One of the most important is that the the lockdown restrictions I think generally.
We are less severe in the in the central Midwest and they were in other places.
So thats one item the second item is.
There is significant.
Rural areas, where.
The distances of people need to travel to to get their basic supplies is further than in other locations.
There is no mass transit really have any significant.
Costs uplifts in these markets.
So I think that those those are tied into the things we think about from gasoline demand standpoint that is probably softened to the mitigation. Then that you may have seen on the coast for instance.
From diesel the band clearly were impacted by a lot of the same drivers as national demand with regards to freight.
Economic activity, but one thing we do have in our area that that is not true elsewhere as significant agricultural demand, which has been less impacted by the current environment.
Got it and when you are assuming.
Coppery in these numbers.
Is there any.
Sense, a permanent demand destruction built into the guidance or do you assume that everything bounces back to pre Kobe levels.
These assumptions with the exception the jet fuel assume the demand drop the returns to.
To pre cobot levels sometime mid third quarter.
Okay.
Except for him.
Yes, yes.
Jeff rather good point, except with regards to distillate demand.
In in the drilling base.
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Got it and.
And then lastly from me just the the 50 to 75.
Benefits from.
Cost reductions and storage revenue.
And can you just talk about how much is in each bucket and are those cost reductions sustainable.
Well.
I would say on the low end of that.
Range, the cost reductions and storage.
Bouncer about evenly split there.
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A large portion of those cost reductions, we believe our sustainable and in fact, we have.
Process programs in place.
Two increases cost reductions over a multiyear period so.
So yes, we do think that number sustainable.
Thank you very much.
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Thank you.
Our next question comes from Kristen Richardson of Suntrust. Please go ahead.
Hey, good afternoon, guys just to follow up on the last question.
Again really appreciate all the.
A detailed particularly around even just the last seven days.
As you look at that sensitivity thinking about the recovery again should we think.
An assumed recovery back towards.
The actual 2019 levels in terms of.
Volumes is that kind of conceptually what you're thinking about as you laid up the sensitivities or is it more when you say normalizes I kind of.
Three year five year average type of type of number.
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Well. These this assumption assumes we go back to essentially 2019 level.
Sometime in the third quarter in fact.
There's a chance that were even higher than that because we've got a number of growth projects that are that have come online are coming online increase that volume, but from a base standpoint, that's the assumption that's built into the forecast.
It's probably worth mentioning we if aviation stays down 25%, which that's just.
We don't know exactly what that number is going to be we tried to model something with the exact number on that is not as pivotal as the other products given the small amount of jet we move.
But theres, there's potential upside on gas as people try to drive on vacations, rather than implies that we have not built into that and we're not assuming that by any stretch but.
It's hard to know exactly how things are going to look when we come out of this but I don't think we believe all the outcomes are necessarily negative.
Great and then just one quick follow more of a clarifying item just as we're reconciling things on our side just.
Maybe the op margin contribution in refined products this quarter.
From the Pasadena terminals or just generally the assets that were formerly in earnings bridge.
I don't have that total ready to hand.
The of the amount from the from the Marine terminals.
We did have some contribution from past even as we mentioned the phase two starting up this quarter. So there was some it wasnt a full quarter, but it's starting up this quarter.
So there were some contribution from that.
That's probably.
I'd say right now as of right now for Us and we don't really have a intentions of continuing to separately report the marine terminals that move in refined products.
Okay, great. Thank you guys very much appreciate the commentary.
Thank you. Our next question comes from Keith Stanley Wolfe Research. Please go ahead.
Hi, good afternoon.
Wanted to mitigate start somewhere a little different so.
The form six filings of has largely been made I believe at this point and so.
Thinking you guys have seen the cost data for 2019 that now goes into the next index calculation. So putting aside I guess, how FERC deals with the income tax issue do you have any preliminary views on how costs are shaking out both for yourselves and the industry and the 2019 data just as a key input obviously.
For for the next five years.
Well, we certainly know how to cost shook out for us because we made our filing but I mean, what's relevant is industry data.
Most of the pipelines did file on time, there are still some large pipelines that have not that it asked for an extension.
I don't have a preliminary.
Answer for you on that we have.
A consultant that is representing the industry through a LPL.
That is.
In the midst of co locating in processing and analyzing all of that data as we speak.
And.
I don't I don't have a report on that yet of the data at the filing date was the twentyth some less in two weeks from actually having the data filed.
So I don't have a preliminary number for you on that yet.
Okay.
And then sorry, just just some more clarifications on the very transparent.
Assumptions here did you say might be the 100 110 to 140 million impact from commodities was 140 based on current forward curves and 110 was if oil were to rise another $10 did I hear there.
I hear that correct, yes, I think that's that's directionally accurate.
Correct.
Okay, and then on the sorry in the prior question.
When you say, assuming similar gasoline and distillate volumes for August to December holding aside drilling.
Is that even with the West Texas expansion project that you're assuming volumes were flat year over year August December or is that the for the incremental volume you might see on West Texas expansion.
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It's just the base.
Once the West Texas expansion is in place.
Then we have commitments kick in that with would lay on top of that so that's just that's just a reduction in the baseball.
Got it thank you.
Thank you.
Our next question comes from Gabe Moreen of Mizuho Securities. Please go ahead.
Good afternoon, I, just had a little bit of a multi prong question on butane blending I guess my question is is that something that you have to do.
To serve customers, so regardless of where the price relationship goes or is it.
Really just all discretionary.
Given I guess the outlook for LPG supply.
Mark I know magellan's investors, a great deal historically, I think logistics around butane supply.
Tom can you talk about confidence and access to butane supply and I guess.
Getting.
And that's priced in a way that you could make some margin going forward if that makes sense.
Well on your first question, we have no obligation to blood.
Whatsoever, if the margins not available we won't do it we don't have any.
Supply contracts.
Associated with.
With gasoline from blending activities that would require us to blend. So so no we're not obligated to do it if if.
Theres not money to be made in doing it.
With regards to your second part of your question.
We are not concerned with access to butane supply.
That's not a concern for us and.
I mean, I should mention I don't want to.
Highlight this in a forecast because.
Yes.
I really don't want to.
Necessarily emphasized the upsides, but since you asked the question.
Bring it up.
This forecast as I said assumes no blending profits.
There maybe opportunities for us to buy butane that depressed prices and add recognize margins maybe not in every single market, we operate in but in some markets in the fall we're.
When you really evaluating and planning for those opportunities.
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And we're actively doing that as we speak.
Again, we have not forecast that will find any but there's certainly upside associated with that.
Thanks, Mike.
Thank you.
Our next question comes from Shneur Gershuni, Yes. Please go ahead.
Hi, good afternoon, everyone.
Just.
Well, what parts of the guidance sensitivity questions.
It's actually we're focused on the quote unquote others section.
The change versus what you outlined for virtual analyst day.
Was wondering if you can give us a little bit of color about the change you said storage and cost as it were one then the other is a lot of incremental Opex savings is it specifically.
The fact that the crude contango got bigger or smaller and just.
Hello.
That's probably not big positive change.
Yes, the increases about half and half expense savings in storage.
Revenues, we've continued to find additional opportunities for storage revenue most of what we're doing that the vast majority of what we're doing this two leases rather than taking a contango position ourselves. So weve found opportunities to do that.
We also.
We're continuing to look for other opportunities, we're looking at storage right now Galena Park.
That we could potentially convert to crude oil. So we continue to try to optimize available storage.
Opportunities we also.
That ice contract.
At East Houston that has a component of it that.
Well we auction.
Leased storage space.
Monthly and so there's some benefit from that also in the improved number on the expense side.
It's continued focus on cost reduction and.
The success, we've had around that that.
That's also increase that number I would I would note that we.
Initiated.
A multi year cost reduction program late last year long before this happened.
And we're seeing the fruits of that work now and it's been accelerated so we weren't we didnt start flat footed with that with the cost reduction program. We we had been developing the framework for that well in advance of this crisis.
Okay, well I appreciate the color on that and maybe as a follow ups.
Just going back to the discussion about this.
Charles and so forth.
You had talked about the virtual analyst day now.
Theoretical but being able to actually increase tariffs that goes in structural decline in demand and so forth I mentioned that you can do that with your market based rates pretty quickly.
Yes.
Too late to put something like that into filings for the upcoming for review or would we have to wait five years to see something like that happen.
Well, there's a lot elements to what you said I'll break it down.
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As best I can first of all with our market based rates.
It's not related at all to the index proceeding in our market based rates.
Generally, we're we have the freedom to raise or lower those rates when.
And if we see fit it's not it's not tied to specific date, it's not tied to.
Anything other than what the market the competitive forces in the market will allow so the short answer is yes, we could increase those rates.
From a regulatory standpoint.
We need to evaluate that on a case by case basis because.
The fact that they are market based rates means that their competitive markets and so we need to be cautious as to what we do in those markets.
Just related to competitive pressures with regards to the index.
Markets.
The process for determining the index.
Is going to be based on 2019 actual data so none of the that.
Indicators or results from 2020 will be factored into the actual index calculation.
Again that index that their calculating now won't go into effect until 2021.
So anything that we might want to do to recover lost.
Income.
Due to the pandemic.
Well, we'll likely need be done outside of the index process, and we don't necessarily have that figured out yet we're evaluating it and thinking about it.
And.
And we'll take action, if we think it's appropriate it right time, but it's good it's likely to be completely separate from from the index process.
Maybe just a follow up and you are for his comments with just specifically to the market based rates I mean do you currently have claims to push through rate increase national or evaluating it now.
Well I'll say this in our planning for this year, we had assumed a certain rate increase in those markets.
And we're evaluating whether or not we should adjust that.
But we havent made any decisions on that yet.
And so that's probably all I can say at this point.
Okay. One last accounting clarification question, you're talking in my prepared remarks about 20 cents efficiencies.
I just wondering if I think they understood your thinking correctly that if you receive would just deficiency payment you would effectively CB cash on cash flow statement today.
But the timing of the revenue recognition can be later on so it's an area where you can see plush include global near term, but moxi corresponding increases we put on site right way to think about it.
Yes, thats possible.
And we've had that in some amounts before and then the question becomes.
Little bit which contract are we talking about how much of that period do they have to use deficiency credit.
And how many other people also trying to get through that same door same time. So what are the physical possibilities for them to realize that credit and so we just have to evaluate that what happens. If it happens you had ended just point we've had this this this half as happens.
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Really every year since we've had contracts in place.
And the numbers had not really been material enough for us to talk about we don't include we don't adjust our DCF for that so.
Historically, we haven't so for instance.
In a particular year, we received $2 million of cash, but we have to deferred recognition of that for some time period.
We wouldn't adjust our our dcs to reflect that.
If those numbers become material.
Yes, we likely won't.
Adjust our DCF, but we will disclose what that number is so that it's so that.
The market will be aware of the fact that we've received the cash we just haven't heard the been able recognize yet.
That makes perfect sense. Thank you very much and enjoy your weekend.
Thank you.
Our next question comes from Jeremy Tonet of Jpmorgan. Please go ahead.
Good afternoon.
Just wanted to fall from the storage situation, a little bit more didn't know if you're able to provide any more color with regards to kind of.
Typically what type of what level of rate increases might be happening in the marketplace today, given the contango structure out there and just exactly how full you guys are on storage at this point.
Well.
I wish I guess, I mean that rates are higher theres no doubt that it's hard to give you a single data point because.
Not every tank is the same.
Pending aware that for instance.
And in and it really depends too as to whether you're willing to do a six month contract or you want to try to secure a two year contract.
While the markets Hot so it's kind of hard to say on that undoubtedly if you're willing to do short term contracts the rates can be very high.
I mentioned the ice contract.
Or the ice auction, we have through the ice platform, which is relatively short term contracts, we were able to get some very very attractive rates there.
We tend to err on the side of longer terms. So we would prefer to get longer term contracts for lower rates than short term contracts were higher rates typically which is what we're trying to do.
I'm sure some of our peers may be doing something different so it's hard to say.
Exactly what everyone's experience is going to be as far as incremental revenue from.
What incremental revenue in 2020 will be.
For the current storage market.
Gotcha that makes sense.
Just wanted to take your high level question.
No that Magellan continuously reviews their portfolio.
Is it five.
The other market participants as time more value recently, having sold assets not too long ago here.
And and even just looking at where Magellan trades rate now.
We sell Buckeye taken out not too long ago, if I look at where you guys trade versus your 2021 Street estimates it seems like there's a discount there. So just at a higher level. If you could share any thoughts or thoughts on how you think about.
That dynamic where are you guys trade, what private equities billing to bid.
In this current environment.
Well, that's a loaded question I don't really have an answer for you on that and I clearly I would state that I think our company has more long term value than where we are trading right. Now so I don't know thats necessarily the right benchmark to compare against what private equities willing to pay.
So.
Probably won't have much more color on that.
We're not actually talking to private equity firms about acquiring Magellan and quite honestly that wouldn't be at the top of our list.
So we haven't spent a lot of time evaluating that.
Fair enough I'll leave it there thank you.
Thank you.
Thank you.
Our next question comes from Michael Mvpds of Goldman Sachs. Please go ahead.
Hey, guys. Thank you for taking my questions can you.
Andrew it's probably a little bit early but when you're thinking about growth capital spend per 21, and maybe 22 kind of Directionally do you think.
Do you think given whats going on the world that you kind of go down to a level of capital spend thats closer to just pure maintenance for a year or two and so you get a significant move either in normalization of gasoline demand in jet fuel at the same time or just simply higher.
WCS WTI pricing.
Well I.
I think that's certainly within the range of the possible.
I think it's more likely we're going to find some opportunities.
And those opportunities may be more skewed towards refined product opportunities then crude oil in the short term.
You as we sit here today.
Very little commitments beyond 2020.
But we're still actively working with with Counterparties on potential projects.
And some of those projects.
We think have a sick yes.
A significant prospect of happening.
Obviously, we haven't built any of those into our into our forecast.
And given the market the way. It is now we would not proceed with any project of significance without strong credit worthy contracts to underwrite it.
But those opportunities are still available.
I think it's.
Not likely that we're going to be in a capital environment similar to what we've seen the last three or four years that it will be significantly reduced from that but we're still approaching this as we're.
We're interested in growth.
We think the capital markets are open to us.
Our strong balance sheet and.
I want to set of capital markets and primarily talking about debt. We're not we're not looking at issuing equity anytime in the foreseeable future.
So.
Many of these projects on hold not because we're not interested in them, but the counterparties, obviously, our frozen so to speak with regards to their interest in committing to anything right now, but once that starts to free up I think we've got some opportunities in front of us and again.
I think refined products is going to be strong.
Or stronger I should say then crude oil opportunities at least in the short term.
Got it and I just want to try and see if I can understand when we think about both your refine product in your crude storage how much is that.
Percentage wise roughly how much of that is contracted or least long term to customers versus kind of what percent is opening and available for your marketing team to utilize.
That's a great question I don't have that percentage.
On the amid the.
We have a significant amount of storage in the crude oil in the crude oil business I mean, both the business are different.
In the crude oil business.
The majority of our storage is available for lease Cushing.
Storage is available for lease.
Almost all we'll all of it from our perspective is available for lease in Houston the percentage is very high.
The storage that we that we own that's available for lease.
The refined products business is different the majority of our refined products storage is operational in nature to maintain the flow of products throughout the Midwest and.
And it's a smaller percentage of that that's available for lease, but I don't have those precise numbers.
But it might be worth pointing out that even in that byproduct setting its operational not really marketing, it's not as if we had marketing activities going on that storage typically there are some opportunities for us to you storage in some cases, but generally speaking our model as everything available.
Tony for operational we try to lease it and we don't keep very much of that for ourselves for marketing purposes.
Got it thank you guys that much appreciated.
Sure.
Thank you.
Our next question comes from Darrick Walker of Bank of America. Please go ahead.
Okay.
Hi, good afternoon guys.
My questions have been answered but.
It's going to update on how you guys are thinking about the special distribution.
Talking about in the past and you alluded to.
You're talking about further on the Capex and buyback but.
Thanks.
I think about that special distribution.
Thank you.
Well.
As we've said we've we've.
Guided towards a flat distribution for this year keeping it at this level for this year and in our view, that's really out of the abundance of caution given the uncertainty in the market.
I can tell you I mean, we had.
Long discussion about whether we're going to maintain or 3% growth or.
But flat this year.
And.
I think it's clear the market is really not paying for growth right now.
Maintaining.
A focus on a solid balance sheet.
Strong distribution coverage.
Even though the many of the events were seeing right now, especially on the planned product side, our transient in nature and when we think about 21 and 22 and beyond that there should be little lingering impact from that.
We still out of the abundance of caution decided to keep the distribution flat this year as far as what we would do next year.
We have made decisions on that will.
To make that that decision that letter point when we see you will we have a view on what 21 and 22 will look like.
But nothing's really changed with regards to our thoughts on capital allocation.
We are still interested in stock buybacks at the right time and at the right price.
And that will still be in the mix when the time is right the times right at the moment.
And we'll be balancing all of those decisions going forward.
Okay, Great and maybe just a follow up on my question on the growth Capex.
You talked about.
Okay.
You growth opportunities on that front products in crude at the moment.
Given kind of how you're thinking about the guidance cadence and trajectory I was just want to on loans there but.
Do you feel like the yes again to the second half a year that some of these projects that I guess there.
Yes could be.
I would say pull forward, but really kind of and we look forward on the.
Getting past the for that but he paid or do you really think it's one of the kind of the rest this year needs to happen and kind of 20.1 plays out before you really capture some of those opportunities just trying to set for some of the discussions you're having with your counterparties.
Thanks, the ready to move forward, maybe this year, thanks, Kevin improving second half or if it's really just going be a cautionary kind of environment and 20, and what's really kind of 21, where you think think will probably before.
Well, it's really going to depend on the pace.
However, we get into the third quarter in fourth quarter and refine products demand in the refining industry is back to normal.
That I think that that's going to.
Make counterparties more receptive to to push forward some of the things we're talking about if we have lingering issues into the third and fourth quarter than than it's probably going to delay so it's really hard to.
To predict that.
We think we have projects that.
Our very attractive and interesting to both us and the counterparties in a normalized environment.
And so when we get to a normalized environment whenever that is I think we've got potentially actionable projects.
Got it. Thank you appreciate it.
Thank you.
And our next question comes Spira doing this at credit Suisse. Please go ahead.
Hey afternoon, everyone.
Sorry, if it was covered already just wanted to go back to that discussion around some of deficiency payments and we think about crude volumes specifically.
One of your peers is out last week thing today, not being a major supply response, yet on their assets and I think the refine product demand response.
We are pretty well documented at this point just curious if you've seen any meaningful pullback in volumes on crude side.
On the uncommitted spot movements.
We have not.
We have had strong movements, our crude oil pipelines to date.
Strong nominations for May.
And again.
At this point, we're talking about contracted volumes so.
We were not surprised by that because we had contract commitments to ship at those volume levels.
So no we haven't seen a reduction in volume any material reduction other than the uncommitted volumes to date.
Great Thats good to hear second question just wants to start some of the $500 million of future projects that understandably is not a focus right now, but just curious if you could talk to maybe how this downturn is changed the profile of those projects if at all.
Basically the same project slate has it was before.
If I could lead us all happened and how would you characterize the timing of when you think those projects to come to market now versus before cobot.
Well I think.
Touched on this little bit earlier, but I think.
The more most likely projects most taxable projects.
And our view over the next year, so our refined products projects crude oil projects are going to be much more challenging.
In our view.
For the time being in the end the tight in the action analogy of those is really driven by how quickly we get back to a normal refined product demand environment. So.
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It might be just worked overlaying our approach to projects, which really hasn't changed we always would be for a large.
Product.
Products project be looking for strong counterparty.
To be either side of that that's not changed it's not as if we were going to take a lot of risk before now we're not going to we're always going to be looking for the right risk will balance and that hasn't really changed and so a lot as to mikes point a lot of it depends on credit worthy counterparties being willing to make investments and that will probably require.
Some clarity.
But again most of the disruptions. We think are short lived and so is that clears up will be applying basically the same.
Methodical risk reward balanced approach that we've always use going forward.
Got it makes sense thats it from me thanks, everyone.
Thank you that was a final question Mr. mirrors I'll turn the call back over to you for any closing remarks.
Well. Thank you all for taking time on a Friday afternoon to listen to what we have to say and we want to thank you all for your continued interest in Magellan.
Everyone has a great weekend.
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