Q2 2020 Magellan Midstream Partners LP Earnings Call

July 30, 2020

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Greetings, everyone and welcome to the Magellan Midstream Partners' second quarter earnings call. During the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question didn't answer session at that time. If you have a question. Please press star one followed by the four on your telephone and if at any time you need to reach an operator, Please press star zero.

As a reminder, this conference is being recorded today Thursday July Thirtyth 2020, I would now like to turn the call over to Mike Mirrors, Chief Executive Officer. Please go ahead.

Hello, Thank you for joining us today to discuss gel second quarter financial results as well as our latest outlook for the full year.

Before we get started I must remind you that management will be making forward looking statements as defined by the FCC.

These statements are based on current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different.

You should review the risk factors and other information discussed in our filings with the FCC inform your own opinions about magellan's future performance.

As you know the year 2020 has been challenged talent not only for our industry, but the nation as a whole Magellan has continued to confidently managed through the current challenges while remaining focused on executing our long term strategy to maximize value for investors.

We continue to focus on the health and safety of our employees as we operate through the pandemic.

I'm happy to report that we have had no material co that related disruptions to date and all of our facilities operating norm.

As you probably saw this morning, our second quarter results exceeded our expectations due to a number of favorable items, including additional product overages higher than expected commodity prices and lower operating.

Our overall refined products in crude oil pipeline shipments during the quarter trended very similar to the updated projections, our first quarter call.

Our CFO, Jeff Pullman will now review, our second quarter financial results versus a year ago period in more detail that I'll be back to discuss our latest outlook for 2020 before opening the call for your questions.

Thanks, Mike as usual I'll be make you references to certain non-GAAP financial metrics, including operating margin and distributable cash flow DCF. We have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures.

Earlier. This morning, we reported second quarter net income of $133.8 million.59 per unit on the diluted basis compared to $253.7 million dollar 11 cents per unit in second quarter of 2019, excluding the impact of mark to market activity in the current quarter.

Adjusted diluted earnings per unit, 65 cents, which exceeded the expected range of between 35, 50 cents, which we provided that the first quarter earnings release.

Distributable cash flow for the quarter was $209.5 million 105.3 million lower than the 314.8 million reported in second quarter 2019.

Primarily due to a combination of lower refined products transportation volumes, lower crude oil spot shipments and lower commodity margins in the current quarter.

Ill note as a reminder, that following the sale of three marine terminals in the first quarter of this year. We now report our businesses in just two segments refined products in crude oil so turning first to our refined product segment refined products generated $171.4 million of operating margin in second quarter 2020.

The decrease of about $80 million versus the 2019 period with most of that decrease resulting as expected from the impact of a pandemic on travel and economic activity as well as on commodity prices in particular transportation and terminals revenues for the segment decreased $60 million. So.

Largest driver of this decrease was the impact of Lockdowns during the quarter on volumes of all products are particularly on gasoline and aviation fuel while lower drilling activity also negative negatively impacted distillate volumes.

Overall second quarter based refined products volumes, excluding the impact of growth projects were about 24% lower the second quarter 2019, with gasoline distillate and aviation fuel seen decline of 21%, 16% and 68% respectively.

Revenues also decrease as results of the sale of three marine terminals and first quarter 2020 conducted decommissioning of our ammonia system in late 2019.

These declines were partially offset by higher average tariffs, reflecting the mid 2019 tariff increase as well as by contributions from recently completed growth projects, particularly our east Houston to earn pipeline.

Operating expenses for the refined products segment decreased $29.4 million between periods due primarily to lower integrity spending during the quarter as well as more favorable product overages, which reduced operating expense and lower expenses related to recently sold at decommissioned assets.

Product margin decreased $47.7 million compared to second quarter 2019, primarily due to lower property sales of product overages and from our gas liquids blending business as a result of lower commodity prices during the period as well as decreased unrealized losses on hedges, which do not affect our calculation.

Our gas liquids blending profits were also impacted by the lower second quarter gasoline volumes, I mentioned, a moment ago, which reduced the blending opportunities available to us.

Refined products equity earnings increased approximately $7.5 million versus second quarter 2019.

Primarily due to a higher contribution from the expansion of our Pasadena Marine terminal joint venture, which began coming online in first quarter 2020.

Moving now to our crude oil segment second quarter operating margin for the segment of $128.3 million was about $35 million lower than second quarter 2019.

Crude oil transportation and terminals revenue decreased $26.5 million, partially as a result of lower average rates among the current quarter.

Overall, longhorn throughput of 270000 barrels per day, which includes barrels shipped by our marketing affiliate was only slightly lower than in the 2019 period as our customers continue to shift at or near their committed levels. However, as expected. The current period did not include any third party movements in our posted spot.

Tariff rate.

In addition, the 2020 period reflects the recent assignment as a customer contract to our marketing affiliate and the profits related to this activity are reflected as product margin as opposed to transportation.

Consistent with our previous guidance, we are not currently expecting any third party spot volumes on longhorn for the remainder of 2020.

Nor do we currently anticipate any meaningful margins on any of our own uncommitted marketing activities, given where differentials currently are and the supply and demand dynamics that make it unlikely for those differentials to widen in the near future.

Instead, our forecast continues to reflect our assumption that our customers will ship at their commitment levels, while our marketing affiliate continues to shift barrels pursuant to its committed by selling agreements.

Turning now to other crude oil revenues reported volumes on our Houston distribution system decreased significantly in second quarter 2020 versus second quarter 2019, with most of the decrease resulting from a change in the way customers contract or access to our Siebrecht joint venture export terminal.

This change resulted in lower reported transportation volumes on our distribution system offset by higher Terminaling revenue.

Our HTS volumes were also negatively impacted by lower seats from Bridgetex, while lower crude oil prices negatively impacted the value of tender barrels we received on our crude oil pipeline.

These declines were partially offset by increased utilization of our east Houston storage at higher average rates during the quarter.

Crude oil segment's operating expenses increased about $7.2 million during the period, primarily due to the timing of scheduled asset integrity.

Other operating income for the segment was $9.8 million higher in the second quarter 2020.

As changes and the board Permian to Houston differential resulted in favorable noncash mark to market adjustments on our basis derivatives agreement compared to second quarter 2019, partially offset by unfavorable settlements on that agreement during the quarter.

Crude oil equity earnings decreased $14.6 million between periods.

Rich tax equity earnings declined primarily due to lower spot volumes in the current quarter as well as to a committed shipper using previously earn credits during the quarter, resulting in bridgetex volumes at 354000 barrels per day compared to.

427000 barrels per day in 2019.

Saddlehorn earnings were lower primarily as result of our sale at the 10% interest in the joint venture during first quarter 20.

Saddlehorn results were otherwise slightly unfavorable to 2019 period as higher volumes of 166000 barrels per day versus 147000 barrels per day between 19.

Were offset by lower average rates.

Consistent with our remarks regarding spot barrels on longhorn, we continue to anticipate no spot barrels or any other uncommitted barrels on either bridgetex or cycle for the remainder of the year, just given current differentials and production outlooks and our guidance assumes that volumes track existence.

For the remainder of the year.

Finally product margin for the crude oil segment was about $3.3 million favorable to the 2019 period, primarily as a result of the margin earned by our previously mentioned affiliate marketing activities during the quarter, partially offset by lower product owners sales.

Moving now to other variances depreciation amortization impairment expense decreased $4 million compared to the second quarter 19, largely due to the sales marine terminals during first quarter 2020.

DNA expense decreased $10.2 million, primarily due to lower incentive comp accruals, which reflect our lower forecasted 2020 results.

Net interest expense was $18.9 million higher in the current quarter, primarily due to a $12.9 million make whole payment we made to already retire our notes due 2021.

In addition, our average debt outstanding increased slightly as result of borrowings primary made to finance our growth projects, partially offset by a slightly lower average rate our weighted average interest rate was approximately 4.5% during the second quarter and our average outstanding debt was $4.9 billion.

At June Thirtyth total long term debt outstanding was $4.84 billion.

Gain on disposition of assets was $4.6 million lower as the 2019 period benefited from the sale of an inactive terminal on our refined products system.

Moving to capital allocation balance sheet metrics and liquidity.

We have continued to prioritize balance sheet strength and financial flexibility in the current environment, particularly given the uncertain timing of the recovery and refine products demand.

And as a result, we didn't execute any unit repurchases during the quarter as we have consistently noted in discussions over of our repurchase program the timing price and volume the unit repurchases for the pending the number of factors, including but not limited to Rx expected expansion capital spending.

Needs excess cash available balance sheet considerations legal and regulatory requirements as well as market conditions and the trading price of our common units.

In terms of liquidity and leverage we had $141 million commercial paper costs and at June thirtyth, but the remaining capacity of our $1 billion multiyear credit facility available, while our leverage ratio for compliance purposes was approximately three times it into the quarter.

With that I'll turn the call back over to Mike disk to discuss our updated guidance for the rest of year.

Thanks, Jeff.

As the year progresses, we have updated our DCF forecasts for 2020 to a range of one.

Billion to 1.05 billion.

We believe a range of estimates continues to be appropriate at this time.

As well as potential volatility in commodity prices.

The midpoint of our DCF range includes two key assumptions.

Worth pointing out with all other items remaining materially similar to our previous estimates.

First we now expect refined products demand to recover more slowly from a pandemic previously.

As you may recall, our previous forecast for the second half of 2020 assumed the gasoline demand would return to historical levels.

Total distillate demand combining both the impacts of the cobot economic shutdown convert and reductions in drilling activity would be down about 6% and jet fuel would be down 25%.

As a reminder, that previous forecast corresponded to the low end of the DCF range.

Our new assumptions now correspond to the midpoint of the range rather than the low end of the range, our new assumptions project average base volume for the second half of the year to be down 6% for gasoline, 12% for distillate and 40% for aviation fuel as compared to the second half of 29.

Team.

For simplicity, we have now combined the projected impact on distillate demand from both pandemic related economic restrictions and look the lower volume attributable to reduced drilling.

As you can see we've reduced our demand projections for the second half the year to more closely align with the current environment and raise the confidence level the associated DCF expectation for these projects.

Including the contribution from recent expansion projects, such as our expanded Texas pipeline capabilities. We expect total refined products volumes during the remainder of the year to be essentially flat with the same period in 2019.

These estimates are based on the combination of the latest trends on our pipeline system as well as industry and customer feedback on their volume expectations.

Obviously these estimates are based on predictions of a very dynamic environment.

To the extent actual are different than we forecasted the dcs sensitivity for each 10% change per month in volume is approximately $4.5 million for gasoline $3.5 billion for distillate and $500000 for aviation fuel based on the product mix of road.

Five products that we transport.

The second key assumption for the midpoint is is favorable is favorable could pick compared to our previous guidance and that relates to a higher commodity price environment than a quarter ago.

As a result, the improved spread between the price of gasoline and butane. We now expect to realize process profits from our gas liquids blending activities in the back half of the year.

Nearly 75% of expected fall blending activity now hedged.

Based on hedge is already in place plus the forward curve for the remaining volume we expect an average 30 cents per gallon margin on gas liquids blending during the second half of the year.

I would also like to point out that the primary reason, we have lowered the high end the forecast.

It's because of the significant amount of hedging that we have implemented for the second half of the year, which removes some of the potential for further upside if commodity prices improve but also removes a considerable a considerable amount of risk from our forecast.

As previously indicated Magellan and team intends to maintain our quarterly cash distribution at the current level for the remainder of 2020.

Based on our new deep DCF forecast range, we expect to generate $75 million to $125 million of excess cash, resulting in distribution coverage of approximately 1.1 to 1.14 times for the year.

Considering all of the volatility. The 2020 is offered so far we believe these solid metrics reinforce the message Magellan stable and resilient business model.

Moving to expansion capital I'm pleased to confirm that our west Texas refined products pipeline expansion was successfully placed into service on July Onest and that our new Midland terminal became operational this week.

This 500 million dollar project will increase capacity into the Dallas.

Midland Odessa, El Paso, and Mexico markets in the supported by long term commitments from solid investment grade Counterparties.

In total we expect to spend $400 million during 2020 on expansion capital was 60% already spent through the first half the year.

We also recently launched a number of small low risk bolt on projects, resulting in projected expansion capital spending of $40 million during 2021.

Magellan remains focused on delivering long term value for investors and we believe our historical approach to disclose capital management will continue to serve as well as opportunities present themselves going forward.

Operator that concludes our prepared comments, so we're now ready for questions.

Thank you very much ladies and gentlemen, if you like to register a question. Please press. The one followed by the 400 telephone keypad, you will hear Athree, Tom Tom toward knowledge or request.

Question has been answered and you'd like to withdraw your registration. Please press the one three.

Once again for phone questions. Please press the one followed by the for one moment. Please for the first question.

And our first question comes from line of Theresa Chen with Barclays. Please go ahead.

Good afternoon. Thank you for taking my questions Mike.

First.

Wanted to just clarifying comment about lowering the high end to end the guidance range, because you had hedged out permitting activities.

What's the hedging related to are you referring to your marketing business or is it butane blending hedging that your is talking about and.

And clarity bear.

All of our Oliver hedging is is around our butane blending our marketing affiliate has back to back agreements at lock in a margin.

So.

We're not referring to that what we're referring to specifically is the butane blending and just to clarify more on on that range on the DCF forecasts back at the beginning of the first quarter, we provided that range based on in part due to.

Potential uplift in commodity prices before the end of the year now that we've a lot did a significant portion of the blending margins a lot of that upside for example of prices crude goes $45. We can obtain so thats. That's the primary reason why we lowered the upside at the upper range.

Got it and I believe the previous guidance did not include any contribution from the butane blending business for the fall.

Just to simplify things since they are several moving pieces in the guidance change how much dollar with our Tcf are you expecting paulk detail blending in 2020 that previously but not in guidance range.

I don't have that number for me.

I had some folks in the room looking for.

If they find it in time I'll, let you know, but I think.

It's fair to say overall.

With regards to our forecast range.

You can almost view the increase in.

What we're going to capture on Wednesday that we work forecasting before is being offset by the now projected softer refined product recovery, but I do have the number to answer your questions about $20 million.

Great. Thank you.

On that point, Mike just.

In terms of the lower outlook on refined product demand.

So if we just to get a little bit more granular on your perspective on that and how youre thinking about it if it because of the resurgence in cases recently.

Or if it's something more structural unless you observed consumer behavior change if I definitely think beyond 2020 and into 2021.

Well.

Projecting future refine product demand is more of an art than it is a science I can tell you that.

One of the primary drivers is what we're actually see today and the numbers that we.

Have quoted for the remainder of the year are not that much different than what we're seeing in July. So we're really not projecting a huge improvement that's probably not true and gasoline were projecting maybe slight improvement through the through the second FDR gasoline diesel demand right now is kind of in the range of of the numbers were.

I think.

Jet fuel demand on our system.

In July is is only down about 40%, so thats consistent with our projection for the rest of the year and so that into the second part of your question just given the pause in reopening.

And.

The continued uncertainty on the surge and cases, and the timing of that plateauing or peaking and dropping back down.

We have not really built in a lot of improvement again, except with a little bit with regards to gasoline on what we're actually seeing right now.

Understood and lastly, I just want to ask about on the FERC index.

You are going on currently.

That we're going to get a new escalator middle of next year, So I guess coupled with.

You know PPI finished goods tracking to be negative this year and.

The escalator starting point of <unk>, 0.09%.

You have a view on what that final outcome for the escalator could be especially given your role Andy LPL.

Well Mike.

I can't predict with it.

Set accuracy, what the answer is going to be at the end of the process might my sense is that.

There is it there's a probability that we'll be able to.

Chiva, an adder that a little bit better than what the FERC has proposed idle no I think it's a stretch to say that we'll see anything materially better.

Than that.

So that's probably in the range, what I'd say in the range of.

All of a half a percentage point or so what is probably going to be and again I. Just wanted to clarify that to me speculating thats based on any insights knowledge on on anything.

And so thats, what Weve, that's where I kind of view, it's going to be so if you if you couple that with.

What.

PPI might likely be at the end of this year.

That doesn't add up to a very large.

Index adjustments for 2021.

So.

With regards to US specifically, we continue to evaluate alternative rate making options.

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If if we have to look to alternatives.

Specifically, if we don't believe that the index is actually covering our costs.

There were going to make sure we've looked at all our available options.

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Thank you very much.

Thank you Sir next our next questions from the line of Gabe Moreen with Mizuho. Please go ahead.

Hey, good afternoon, Mike kind just follow up on Turkey. So the answer to Theresa's last question, there and looking at all available options is there anything besides going into per rate cases clinically rate to split.

If you think about doing.

Well, that's the most obvious.

Lucian.

It's probably the most not the most desirable solution.

I don't want to go into a lot of details as to what else. We're looking at but if you'll recall in early May Commission did put out a notice that encouraged.

Pipeline operators, if they needed to to propose created.

Rate, making solutions.

Two.

To address the unusual circumstances are occurring in 2020, so we're evaluating what.

Creative mechanisms might make sense and be in compliance with the Interstate Commerce Act.

We have made any decisions on on any it anything.

And again, a cost to service filing is of option.

If none of the others are.

Are.

Available.

Yes.

Now I don't want to I don't want anyone to read into that we're planning to do a cost of service filing next year, because it's all going to be data driven.

And as we go into next year, we looked at what the index is going to be it looked at what our actual costs is that and what our actual revenue our in our actual cost to service calculations were going to see how much gap. There is make a determination as to whether we need to make.

It sounds like you need to get some data under your belt as opposed to during a forward test here something report.

While some fluid is falling through shirt.

If I can then asked maybe about distillate demand here and it seems like maybe there's been a pullback in distillate demand.

It's much more pronounced I think you. It also broken out the components of distillate demand.

Around.

Drilling activity of Im just broader disorder that maybe you could see demand or you can speak to those components on what some better than the guidance here.

Well certainly we've seen a decline in drilling.

That's got a significant.

Items this reduced the year over year performance I think the other one that stood out to US is railroad demand that has been soft.

But beyond that agricultural demand and trucking demand from what we can sell.

Our down but not to the same magnitude as the first two items I mentioned.

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Thanks, Mike and my last question just on some of the smaller projects you identified I think you mentioned the 40 million can you talk a little bit more about what kinds of projects. Those are how much more might be in the well and whether any of those are actually going to be impacting 2020 results here.

Well first of all none of them all of that 20 slave results, but the types of things were looking at.

Just to give you a couple of examples were looking at additional conductivity to our Houston distribution system from inbound pipes.

Which should benefit us with more volume on that on that system.

On another example is we're looking at a initial.

I should say looking at we're implementing an initial.

Incremental expansion of our mountain system, which moves us Denver and the front range to move more product.

There.

As a result of.

Cheyenne refinery closure and we're looking.

So thats underway, but we're also evaluating larger expansion opportunities up into that market.

We haven't made a decision off yet.

Thanks, Mike.

Thank you.

Next question is from lineup Tristan Richardson with Suntrust. Please go ahead.

Hey, good afternoon guys.

Just a quick question on me.

The comments you made around a customer that switch from a transportation contracts to your marketing affiliate.

Could you talk about just generally at a high level.

What occurred there, perhaps what a rationale might be to see that sort of a change.

Well the simple answer is we traded term for rate.

And that's what that's what the trade was we had a longer term contract for a lower rate.

And we were interested in doing that given the current.

Margin Mark so thats the simple answer.

And in DC opportunities for more of that.

Across the remaining customer base.

Uh huh.

We do.

But it's limited.

And the margins.

Of course, when we did that which was a year ago. The differentials were quite a bit better than what they are today. So.

Doing that kind of trade today.

As a little harder to do because the margins are sows small.

On the Midland in Houston differential that.

What we would have to offer as a lower rate to get a longer term may not make sense, but we're looking at a few things there.

Helpful and then just.

One follow up on the.

The blending items appreciate the comments around the opportunities you're seeing in second half.

Just looking backwards a bit had product margin in the segment can you talk about what that average funding margin came out to in either the second quarter or or the just the first half in general.

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If you give.

Staff in the room, a mall, but look that up I can answer I know that Andy.

Sure.

Okay.

Now I appreciate it thank you guys very much.

Okay, and just take about getting that number.

For the first half the year was about 60 cents a gallon.

Thats great. Thank you Mike.

Sure.

And the next question some Jeremy Tonet with Jpmorgan. Please go ahead.

Hi, good afternoon.

Just wanted to.

To start off I guess, we're building capital allocation, possibly thoughts on that 120 21, the Capex really falls out offer a bunch, there and looks like the free cash flow really kind of ticks up and so it seems like you have a lot of flexibility with regard to.

The dividend or repurchases or leverage.

Just wondering if you could update us there on kind of how you see those.

Priorities Interplaying.

Sure well I mean first of all.

We're not going to making decisions on 2021 now and.

Yeah, we'll wait till we get into the year and see what our capital forecast looks like and I want to emphasizes nothing's really changed with regards to what are our first choices with regards to spending our free cash flow and that's on projects that have good returns.

And so thats, we're continuing to look for those obviously, it's more difficult to find those in this environment.

As we just mentioned we've found $40 million worth of opportunities here in the last few months, we may find some more as time goes on.

But we intend to be very disciplined as we have passed with regards to those types of investments, especially in this environment that they really have low risk.

Opportunities to generate returns that are attracted to us. So that's our first choice now if we cannot find those and we don't increase our expansion capital budget for 2021, then we will definitely look at unit buybacks or distribution.

Increases and those decisions will be made really.

At a point in time in the future when it's abundantly that we need to make that decision that we'll have that excess cash and and then it will really be driven by what the current valuation is on our on our units and whether that we think thats the best place to put the cash versus versus a distribution.

Got it thanks for that and then.

Just one last one if I could.

With regards to the industry overall.

Energy industry is kind of slowing down here hitting more mature state.

What role does Magellan play in that environment, where maybe there is a period of consolidation or I don't know if you have any other kind of views this as the.

Industry matures at the here.

Well.

I agree with you I think we've reached a level of maturity and many many.

Parts.

This business and M&A consolidation makes sense in that environment, we're not opposed to it we actively look at that.

And.

If we can find a combination.

That makes economic sense, and we have a willing counterparty then we'll we'll pursue that.

So that's really all I can say with regards to that is something were.

Interested in it's something we'll participate in if the numbers work.

And so stay tuned.

Great Thanks for that.

Sure.

The next question is from one of Shneur Gershuni would you be Asquith crime.

Hi, good afternoon, everyone.

Maybe to start off I was wondering if we can go back to the guidance again, just under one a totally be leaving a point here but.

If I understood you correctly, you said that there was an expectation for butane blending in the original guidance that you gave and that was part of the commodity comment I just wanted to clarify that point.

No when we gave guidance in early May there was no.

Blending income.

Or maybe a better way to phrase as an immaterial amount of blending income.

In the second half of the year.

Okay.

So when I sort of think about the $25 million lowering.

Range or let's call it a 12 and a half million midpoint lowering and I think you said before its 18 to 20 million was for butane blending.

Sure.

Apples to apples basis is that the way we should look look at the lowering that you've lowered guidance range midpoint by about 30 million when I make those two adjustments.

I'm not sure followed your Matt Let me take hi would explain it.

When we provided the guidance in.

May.

For the forecast range in May I should say, we hadn't hedged anything in the fall and.

We looked at the range of possibilities as to where that margin could be.

No. It went from zero to a high end as I can't I can't recall exactly what the high end is that we.

Assumed in the upper end of our range back in May but that was driving a substantial portion of that potential upside on that forecast range and so and I am I don't know the number but let's just assume that was.

$45 per barrel crude price would have corresponded to the high into that range.

Such that if we hadn't hedged anything or the prices move to 45, and we've locked everything in at 45, we could have hit the high end of the range if nothing else change.

Well, what's happened is we got into the high Thirtys margins were available. So we started the edge the blending.

And locking in those profits and so as I said, we've locked in about $20 million with the profits will once we've done that we've taken away the upside if the price goes to 45 or higher we've taken away that upside and so thats, what weve essentially taken out of.

Well, that's a large portion of why we lowered the.

The guidance ranges because that upside is no longer available, but the flip side of that is we have now locked in 75%.

What we were able to capture so we had a lot more confidence on the range that.

That we've provided.

Yes.

So to paraphrase basically the bottom end of the range you weren't expecting to basically get any butane blending and led to high in the range. There should have been an opportunity to people to do that now that you've locked in we kind of know what that is at the bottom end in theory is more secure.

I paraphrase that correctly.

I think that that's right in and maybe another way of phrases midpoints more likely.

Okay perfect.

So sorry for be laboring that maybe to keep it a little bit to your commentary around the projects that you're backing.

I know that your backlog is often 500 million or more.

Just wondering what the ones that your.

Evaluating very closely right now.

Or front burner.

What's the range of capital spend on those types of projects.

Well.

You know we continue for instance to work on potentially expansions of our Pasadena.

Terminal.

And we're actively doing that as we speak.

Magellan's portion of that capital if we were to do that could be in the $100 million range or so.

We're looking in a number of potentially expansions to Denver, which could be in that similar.

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So there is I mean, there's a number of viable or would appear to be viable projects at this time, they could get us.

The 200 or $300 million, where the capital next year.

But.

Those projects are done yet and there is there's a chance they wont get done.

That's why it is cautious on the answering the previous question as to whether we're going to be looking in buybacks or or increased distribution.

It's all relative to how successful we are on some of these other opportunities, but I also want to reiterate that we are not pursuing growth project simply for the for the benefit of growth and they need to be solid secure.

Committed projects from Creditworthy Counterparties before we would proceed at.

In this environment those are more difficult to obtain so.

To see how this plays out.

No that makes perfect sense can actually that was where you are concluding part was where my head was headed in so when we think about dollars available for per unit buybacks.

If let's say you sanction $200 million worth of new projects.

The way you would pursue position it to the board would dollars available for buybacks have to be after you funded the full capex with internally generated cash flows so differently dollars would be available free cash flows after full capex and dividends is that kind of the way to think about.

Should we be available for buybacks.

I think generally speaking that's that's the right way to look at it.

I mean, you can take extreme cases leverage level kids, so low that just doesn't make sense to maintain.

Leverage levels say three times are below three times than we may change our view on that but thats. The way you just characterize is our current.

Okay, perfect all right well. Thank you very much guys really appreciate the color to that.

Thank you.

And our next question is from Derek Walker of Bank of America. Please go ahead.

Hi, good afternoon, everyone.

So quick clarification question on the on the guidance on those on products and a big volumes.

Like I believe you you alluded to some assumptions I guess, though there's a federal approval second half.

Are you thinking that the normal sort of by year end.

Based on what you're seeing from today on the mature under sensor without ramp for officials.

Well I mean, just give you a sense of.

How we came up with those numbers again.

But this little bit before.

For July.

We're kind of on gasoline demand, we're kind of in the range of 8% to 10% down.

For July in for Distillate, we're kind of in that 12% range down for distillate and on jet fuel were down 40%. So.

First of all with regards to.

Distillate and jet fuel.

In July is is consistent with the rest of the year expectation in our forecast. So we're not really projecting any.

Considerable improvement in.

What I said appetite material improvement in this letter jet through the rest of the year, but we're also not projecting it go down again, which could happen I don't want us.

Just portray the upside I mean, if we have resurgence in cases and we have more.

Backups on the Reopenings than it there's downside to that to a gasoline like said, we're in the 8% to 10% range down we're projecting 6%.

For the rest of the year on average to just based on the trends it's been improving through the month of July.

And so that's really kind of the basis for our projections there.

It's not.

I don't know this any more complicated than that we're we're not really trying to project.

Anything significantly changing either positively or negatively through the rest of the year, where the potential of either one of those things exists.

As that rolls into 2021.

But also we haven't really thought about 2021 too much it's.

It's too hard to predict the rest of this year much less worry about 2021 at this point.

I appreciate the color there and then maybe just a quick follow up on this so.

Let me optimization or cost savings initiatives and thank you.

Some baked into your guidance has there been any incremental based on that front.

Cost saving up the relative to what you previously provided.

There's there's really nothing new to speak of.

This material to affect 2020, but we have been making a lot of progress on efficiencies.

That will impact or improve in 2021 and beyond its when we're going to start seeing real benefit of lot of things we're doing.

Okay. That's helpful. Thank you.

Ladies.

And gentlemen goes or all the questions. We have at this time I'll turn the call back over to your customers for any closing comments.

Alright, well. Thank you for your time today and we appreciate all your supported Magellan have a good afternoon.

And that does conclude our conference call for today, everyone have a great rest of your day and you may disconnect your lines.

[music].

Greetings, everyone and welcome to be Magellan Midstream Partners' second quarter earnings call. During the presentation. All participants will be in listen only mode. Afterwards, we will conduct a question answer session at that time. If you have a question. Please press star one followed by the four on your telephone if at any time, we need to reach an operator. Please press star is there.

As a reminder, this conference is being recorded today Thursday July Thirtyth 2020, I would now like turn call over to Mike Meyers Chief Executive Officer. Please go ahead.

Hello, Thank you for joining us today to discuss gel in the second quarter financial results as well as our latest outlook for the full year.

Before we get started I must remind you that management will be making forward looking statements as defined by the SEC.

Such statements are based on current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different.

You should review the risk factors and other information discussed in our filings with the SEC and form your own opinions about magellan's future performance.

As you know the year 2020 has been challenged challenging not only for our industry, but the nation as a whole Magellan has continued to confidently manage through the current challenges while remaining focused on executing our long term strategy to maximize value for our investors. We continue to focus on the health and safety of our employees as we operate.

Through the pandemic and I'm happy to report that we have had no material co that related disruptions to date and all of our facilities operating loss.

Our overall refined products in crude oil pipeline shipments during the quarter trended very similar to the updated projections on our first quarter call.

Thanks, Mike as usual I'll be Mickey references to certain non-GAAP financial metrics, including operating margin and distributable cash flow or DCF. We've included exhibits to our earnings release that reconcile these metrics to their near staff measures.

Earlier. This morning, we reported second quarter net income of $133.8 million.59 per unit.

Basis compared to $253.7 million dollar 11 cents per unit and second quarter of 29, Tiet, excluding the impact of Mark to market activity in the current quarter adjusted diluted earnings per unit 65 cents, which exceeded the expected range of between 35 50 cents, which we.

Provided with our first quarter earnings release.

Distributable cash flow through the quarter was $209.5 million 105.3 million lower than the 314.8 million reported in second quarter 2019.

Primarily due to a combination of lower refined products transportation volumes, lower crude oil spot shipments and lower commodity margins in the current quarter.

I will note as a reminder, that following the sale of three marine terminals in the first quarter of this year. We now report our businesses just two segments refined products in crude oil so turning first to our refined product segment refined products generated $171.4 million of operating margin in second quarter 2020.

The decrease of about $80 million versus the 2019 period with most of that decrease resulting as expected from the impact of dependent Nick on travel and economic activity as well as on commodity prices in particular transportation and terminals revenue for the segment decreased $60 million.

The largest driver of this decrease was the impact of Lockdowns during the quarter on volumes of all products, particularly on gasoline in aviation fuel, while lower drilling activity also negative negatively impacted distillate volumes.

Overall second quarter based refined products volumes, excluding the impact of growth projects for about 24% lower the second quarter 2019, with gasoline distillate and aviation fuel declines of 21% 16%.

8% respectively.

Revenues also decrease as a result, and the sale of three marine terminals in first quarter 2020 and into decommissioning of our ammonia system in May 2019.

Product margin decreased $47.7 million compared to second quarter.

Primarily due to low property sales of product Overages and from our gas liquids blending business as a result of lower commodity prices during the period as well as decreased unrealized losses on hedges, which do not affect our calculation DCF.

Our gas liquids blending profits were also impacted by the lower second quarter gasoline volumes, I mentioned, a moment ago, which reduced the blending opportunities available to us.

Refined products equity earnings increased approximately $7.5 million versus second quarter 2019, primarily due to a higher contribution from the expansion of our Pasadena Marine terminal joint venture, which began coming online in first quarter 2020.

Moving now to our crude oil segment second quarter operating margin for the segment of $128.3 million was about $35 million lower than second quarter 2019.

Crude oil transportation and terminals revenue decreased $26.5 million, partially as a result of lower average rates along the current quarter.

Overall, longhorn throughput of 270000 barrels per day, which includes barrels shipped by our marketing affiliate was only slightly lower than in the 2019 period as our customers continue to ship at or near their committed levels. However, as expected. The current period did not include any third party movements in our posted.

Tariff rate.

In addition, the 2020 period reflects the recent assignment as a customer contract to our marketing affiliate and the profits related this activity are reflected as product margin as opposed to transportation.

Consistent with our previous guidance, we are not currently expecting any third party spot volumes on longhorn for the remainder of 29.

Nor do we currently anticipate any meaningful margins on any of our own uncommitted marketing activity, given where differentials currently are and the supply and demand dynamics that make it unlikely for those differentials to widen.

Okay.

Instead, our forecast continues to reflect our assumption that our customers will ship the commitment levels, while our marketing affiliate continues to shift barrels pursuant to its committed by some agreements.

Turning now to other crude oil revenues reported volumes on our Houston distribution system decreased significantly in second quarter 2020 versus second quarter 2019, with most of the decrease resulting from changing the way customers contract for access to our Siebrecht joint venture export terminal.

This change resulted in lower reported transportation volumes on our distribution system offset by higher Terminaling revenue.

Our HTS volumes were also negatively impacted by lower seats from Bridgetex, while lower crude oil prices negatively impacted the value of tend to barrels we received on our crude oil pipeline.

Declines were partially offset by increased utilization of our east Houston storage at higher average rates during the quarter.

Crude oil segment operating expenses increased about $7.2 million during the period, primarily due to the time scheduled asset integrity.

Other operating income for the segment was $9.8 million higher in second quarter 2020, as changes and the board Permian to Houston differential resulted in favorable noncash mark to market adjustments on our basis derivatives agreement compared to second quarter 2019, partially offset by unfavorable settlement.

On slide agreement during the quarter.

Crude oil equity earnings decreased $14.6 million between periods.

Bridgetex equity earnings declined primarily due to lower spot volumes in the current quarter as well as to a committed shipper easy previously earn credits during the quarter.

Okay, and Bridgetex volumes at 354000 barrels per day compared to.

427000 barrels per day and 90.

Saddlehorn earnings were lower primarily as result of our sale at the 10% interest in the joint venture during first quarter 20.

Several hundred results were otherwise slightly unfavorable to the 2019 period as higher volumes of 166000 barrels per day versus 147000 barrels per day between 19.

Were offset by lower average rates.

Consistent with our remarks regarding spot barrels on longhorn, we continue to anticipate no spot barrels or any other uncommitted barrels on either bridgetex or satellite for the remainder of the year, just given current differentials and production outlook and our guidance assumes that volumes tracking consistent.

For the remainder of the year.

Finally product margin to the crude oil segment was about $3.3 million favorable to the 2019 period, primarily as a result at the margin earned by our previously mentioned affiliate marketing activities during the quarter, partially offset by lower product sales.

Moving now to other variances depreciation amortization impairment expense decreased $4 million compared to the second quarter.

Largely due to the sales marine terminals during first quarter 2020.

GNS expense decreased $10.2 million, primarily due to lower incentive comp accruals, which reflect our lower forecasted 2020 results.

Net interest expense was $18.9 million higher in the current quarter, primarily due to a $12.9 million make whole payment. We made to early retire our notes due 2021.

In addition, our average debt outstanding increased slightly as result of borrowings primarily made to finance our growth projects, partially offset by a slightly lower average rate our weighted average interest rate approximately 4.5% during the second quarter and our average outstanding debt was $4.9 billion.

At June Thirtyth total long term debt outstanding was 4.84 billion.

Gain on disposition of assets was $4.6 million lower as between 19 period benefited from the sale of an inactive terminal on our refined products system.

Moving to capital allocation balance sheet metrics and liquidity.

We have continued to prioritize balance sheet strength and financial flexibility in the current environment, particularly given the uncertain timing recovery and refine products demand.

And as a result, we didn't execute any unit repurchases during the quarter as we have consistently noted in discussions our of our repurchase program the timing price and volume the new unit repurchases for the pin a number of factors, including but not limited to Rx expect an expansion capital spending.

Excess cash available balance sheet considerations legal and regulatory requirements as well as market conditions and the trading price of our common units.

In terms of liquidity and leverage we had $141 million commercial paper costs and at June thirtyth, but the remaining capacity of our $1 billion multiyear credit facility available our leverage ratio for compliance purposes was approximately three times into the quarter.

With that I'll turn the call back over to Mike disk to discuss our updated guidance for the rest of year.

Thanks, Jeff.

As the year progresses, we updated our DCF forecast for 2020 to a range of one.

Billion to $1.05 billion.

We believe a range of estimates continues to be appropriate at this time.

As well as potential volatility in commodity prices.

The midpoint of our DCF range includes two key assumptions worth pointing out with all other items remaining materially similar to our previous estimates.

First we now expect refined products demand to recover more slowly from a pandemic previously.

As you may recall, our previous forecast for the second half of 2020 assume that gasoline demand would return to historical levels.

Total distillate demand combining both the impacts of the cobot economic shutdowns.

And reductions in drilling activity would be down about 6%.

Jet fuel would be down 25%.

As a reminder, that previous forecast corresponded to the low end of the DCF range.

Yeah.

For simplicity, we have now combine the projected impact on distillate demand from both pandemic related economic restrictions and look to lower volume attributable to reduced drilling.

As you can see we've reduced our demand projections for the second half the year to more closely aligned with the current environment and raise the confidence level the associated DCF expectation for these projects.

These estimates are based on a combination that the latest trends on our pipeline system as well as industry and customer feedback on their volume expectations.

Obviously these estimates are based on predictions of a very dynamic environment.

To the extent actuals are different than we forecasted the DCF sensitivity for each 10% change per month in volume is approximately $4.5 million for gasoline $3.5 billion for distillate and $500000 for aviation fuel based on the product mix it up.

Five products that we transport.

The second key assumption for the midpoint is is favorable is favorable could pick compared to our previous guidance and that relates to a higher commodity price environment than a quarter ago.

As a result, the improved spread between the price of gasoline and butane. We now expect to realize process profits from our gas liquids blending activities in the back half of the year.

Nearly 75% expected fall blending activity now hedged.

Based on hedges already in place plus the forward curve for the remaining volume we expect an average 30 cents per gallon margin on gas liquids blending during the second half of the year.

I would also like to point out that the primary reason, we have lowered the high end the forecast.

Is because it's a significant amount of hedging that we have implemented for the second half of the year, which removes some of the potential for further upside if commodity prices improve but also removes a considerable a considerable amount of risk from our forecast.

As previously indicated Magellan and team intends to maintain our quarterly cash distribution at the current level for the remainder of 2020.

Based on our new seat DCF forecast range, we expect to generate $75 million to $125 million excess cash, resulting in distribution coverage of approximately 1.1 to 1.14 times for the year.

Considering all of the volatility that 2020 has offered so far we believe these solid metrics reinforce the method to Magellan stable and resilient business model.

This 500 million dollar project will increase capacity into the Dallas.

Midland Odessa, El Paso, and Mexico markets in the supported by long term commitments from solid investment grade Counterparties.

In total we expect the spent $400 million during 2020 on expansion capital with 60% already spent through the first half the year.

We also recently launched a number of small low risk bolt on projects, resulting in projected expansion capital spending of $40 million during 2021.

Operator that concludes our prepared comments, so we're now ready for questions.

Thank you very much ladies and gentlemen, if you like to register a question. Please press. The one followed by the 400 telephone keypad you will reiterate three Tom prompt towards knowledge. Your request. If your question has been answered and you'd like to withdraw your registration. Please press the one three.

So again for phone questions. Please press the one followed by the for one moment. Please for the first question.

And our first question comes from line of Theresa Chen with Barclays. Please go ahead.

Good afternoon. Thank you for taking my questions Mike.

First.

So just clarifying.

Comment about lowering the high end at the guidance range, because you had hedged out some of your activities.

What's the hedging related to are you referring to your marketing business or is that the butane blending hedges that you're talking about.

Clarity bear.

All of our Oliver hedging is is around our butane blending our marketing affiliate has back to back agreements at lock in a margin.

So.

The year now that we've a lot did a significant portion of the blending margins a lot of that upside for example of prices crude goes to $45. We can obtain so that's that's the primary reason why we lowered the upside as the upper range.

Got it and I believe the previous guidance did not include any contribution from the butane blending business for the fall.

Just to simplify things since they are several moving pieces in the guidance tools, how much dollars with our Tcf are you expecting paulk butane blending in 2020 that previously but not guidance range.

I don't have that number for me.

I have some folks in the room looking for.

If they find it in time I'll, let you know, but I think.

It's fair to say overall.

With regards to our forecast range.

You can almost view the increase in.

What we're going to capture on Wednesday that we weren't forecasting before is being offset by the now projected softer refined product recovery, but I do have the number to answer your questions about $20 million.

Great. Thank you.

On that point Mike.

And in terms of the lower outlook on refined product demand.

So if we just to get a little bit more granular on what are your perspective on the can how youre thinking about it if it because of the research in cases recently.

Oriented something more structural I'm, asking you observe consumer behavior change.

Thats me think beyond 2020 and into 2021.

Well.

That projecting future upon price man is more of an art than it is a science I can tell you that.

One of the primary drivers is what we're actually see today and the numbers that we.

Have quoted for the remainder of the year are not that much different than what we're seeing in July. So we're really not projecting a huge improvement that's probably not try and gasoline were projecting maybe slight improvement through the through the second FDR gasoline diesel demand right now is kind of in the range of of the numbers were.

I think.

Jet fuel demand of our system.

In July is is only down about 40%, so thats consistent with our projection for the rest of the year and so that into the second part of your question just given the pause in reopening.

And.

The continued uncertainty on the surge in cases, and the timing of that plateauing, or peaking and dropping that down.

We have not really built in a lot of improvement again, except with a little bit with regards to gasoline on what we're actually seeing right now.

Understood and lastly, I just want to ask about FERC index.

You are going on currently.

So that we're going to get a new escalating next year, So I guess coupled with.

You know PPI of finished goods tracking to be negative this year and.

The escalator starting point of <unk>, 0.09%, Kevin view on what that final outcome for the escalator could be especially given your goal Andy LPL.

Well my.

I can't predict.

Understood accuracy, what the answer is going to be at the end of the process might.

My sense is that.

There is it theres a probability that we'll be able to.

She event at or that a little bit better than what the FERC has proposed idle no I think it's a stretch to say that we'll see anything materially better.

Than that.

So that's probably in the range, what I'd say in the range of.

The half a percentage point or so what is probably going to be and again I just want to clarify that may speculating thats based on any insights already touched on anything.

And so thats, where we that's where I kind of view, it's going to be so if you couple that with.

What.

PPI might likely be at the end of this year.

That doesn't add up to a very large.

Index adjustment for 2021.

So.

With regards to US specifically, we continue to evaluate alternative rate making options.

[music].

If if we have to look to alternatives.

Specifically, if we don't believe that the index is actually covering our costs.

There were going to make sure we've looked at all or available options.

Thank you very much.

Thank you Sir next our next questions from the line of Gabe Moreen with Mizuho. Please go ahead.

Hey, good afternoon, Mike just follow up on Turkey. So.

Answer to Theresa's last question there looking at all available options is there anything besides going into Korea cases clinically rate case that.

That you'd think about doing.

Well, that's the most obvious.

Lucian.

It's probably the most if not the most desirable solution.

I don't want to go into details as to what else. We're looking at but if you'll recall in early May Commission did put out a notice that encourage.

Pipeline operators, if they needed to to propose created.

Rate, making solutions.

Two.

To address the unusual circumstances are occurring in 2020, so we're evaluating what.

Creative mechanisms might make sense and be in compliance with the Interstate Commerce Act.

We havent made any decisions on on any anything.

And again, a cost to service filing is of option.

If not any others are.

Our.

Hello.

Now I don't want to I don't want anyone to read into that we're planning to do a cost of service filing next year, because it's all going to be data drip.

And as we go into next year, we looked at with the index is going to be it looked at what our actual costs is that and what our actual revenue in our actual cost to service calculation.

We're going to see how much gap there is make a determination as to whether we need to make.

[music].

On the topic, you've made could get some data under your belt as opposed to during a forward test here something report.

While simply rig is falling through shirt.

If I could then asked maybe about distillate commander and it seems like maybe theres been a pullback in distillate demand.

Well look more pronounced I think you. It also broken out the components of distillate demand.

Around.

Drilling activity of Im just broader Dysport, Matt maybe you could see demand that you can speak to those components on what's embedded in the guidance here.

Well certainly we've seen a decline in drilling.

That's but a significant.

Items this reduce the year over year performance I think the other one that stood out.

That is railroad demand that has been soft.

But beyond that agricultural demand and trucking demand from what we can sell.

Our down but not to the same magnitude as the first two items I mentioned.

Thanks, Mike and my last question just on some of the smaller projects you identified I think you mentioned the 40 million can you talk a little bit more about what kinds of projects schools or how much more might be on the well and whether any of those are actually going to be impacting 2020 results here.

Well first of all none of them all of that 20 slave result, but the types of things were looking at.

Just give you a couple of examples were looking at additional conductivity to our Houston distribution system from inbound pipes.

Which should benefit us with more volume on that on that system.

Another example is we're looking at a initial.

I should say looking at we're implementing an initial.

Incremental expansion of our mountain system, which moves us Denver and the front range to move more product.

There.

As a result.

The Cheyenne refinery closure and we're looking.

So thats underway, but we're also evaluating larger expansion opportunities up into that market.

We haven't made a decision.

Thanks, Mike.

Thank you.

Next question is from lineup Tristan Richardson with Suntrust. Please go ahead.

Hey, good afternoon guys.

Just a quick question on me.

The comments you made around a customer that switch from a transportation contracts to your marketing affiliate.

Could you talk about just generally at a high level.

What occurred there, perhaps what a rationale might be to see that sort of a change.

Well the simple answer is we traded term for rate.

Well, that's what that's what the trade was longer term contract.

For a lower rate.

And we were interested in doing that given the current.

Margin Mark so thats the simple answer.

And in DC opportunities for more of that across the.

Remaining customer base among.

We do.

But it's limited.

And the margins.

Of course, when we did that which was a year ago. The differentials were quite a bit better than what they are today. So.

Doing that how to trade today.

As a little harder to do because the margins are so.

Small.

On the middle of the Houston differential that.

What we would have to offer as a lower rate to get a longer term may not make sense, but we're looking at a few things there.

Helpful. And then just one follow up on the.

The blending items appreciate the comments around the opportunities you're seeing in second half.

Looking backwards a bit product margin in the segment can you talk about what that average pointing margin came out to in either the second quarter or or the just the first half in general.

[music].

If you give.

Staff in the room, a mall, but look that up I can answer I don't know that Andy.

Sure.

Now I appreciate it thank you guys very much.

Okay, and just take about getting that number.

For the first half the year was about 60 cents a gallon.

That's great. Thank you Mike.

Sure.

And the next question some Jeremy Tonet with Jpmorgan. Please go ahead.

Hi, good afternoon.

Just wanted to.

To start off I guess, we're building capital allocation, possibly thoughts on that what can 2021, the capex really falls out off of a bunch, there and looks like the free cash flow really kind of tech softened. So it seems like you have a lot of flexibility with regard to.

The dividend for repurchases or leverage.

Just wondering if you could update us there on kind of how you see those.

Priorities Interplant.

Sure well I mean first of all.

We're not going to making decisions on 2021.

Now and.

Yeah, we'll wait till we get into the year and see what our capital forecast looks like and I want to emphasize nothing's really changed with regards to what are our first choices with regards to spending our free cash flow and that's on projects that have good returns.

And so thats, we're continuing to look for those obviously, it's more difficult to find those in this environment. As we just mentioned we thought around $40 million worth of opportunities here in the last few months, we may find some more as time goes on.

We intend to be very disciplined as we have passed with regards to those types of investments, especially in this environment that they really have low risk.

Increases and those decisions we made really.

At a point in time in the future when it's abundantly that we need to make that decision that we will have that excess cash and and it will really be driven by what the current valuation is our on our units and whether that we think thats the best place to put the cash versus versus distribution.

Got it thanks for that and then.

Just one last one if I could.

With regard to the industry overall.

Energy industry is kind of slowing down here hitting more mature state.

Roll those Magellan play in that environment, where maybe there is a period of consolidation or I don't know if you have any other kind of views this as the the.

The industry matures at the here.

Well I agree with you I think we've reached a level of maturity in many in many.

Parts.

This business and M&A consolidation makes sense in that environment, we're not opposed to it we actively look at that.

And.

If we can find a combination that makes economic sense and we have a willing counterparty then we'll we'll pursue that.

So that's really all I can say with regards to that is something we're.

Interested in it's something we'll participate in if the numbers work.

And so stay tuned.

Great Thanks for that.

Sure.

The next question is from one of Shneur Gershuni would you be ask Brian.

Hi, good afternoon, everyone.

Maybe to start off I was wondering if we can go back to the I'd. Once again, just want to totally be leaving a point here, but.

If I understood you correctly, you said that there was an expectation for butane blending in the original guidance could you gave and that was part of the commodity comment I just wanted to clarify that point.

No when we gave guidance.

In early May there was no.

Blending income.

Or maybe a better way to phrase as an immaterial amount of blending income.

In the second half of the year.

Okay.

So when I sort of think about the $25 million lowered.

Range or let's call it 12, and a half million midpoint, lowering and I think you said before its 18 to 20 LOE was for butane blending.

Sure.

An apples to apples basis is that the way we should look look at the lowering that you've lowered guidance range midpoint by about 30 million when I make those two adjustments.

I'm not sure if all of your math, let me take hi would explain it up when we provided the guidance in.

May.

For the forecast range in May I should say, we hadn't hedged anything in the fall and.

When we looked at the range of possibilities as to where that margin could be.

No. It went from zero to a high end as I can't I can't recall exactly what the high end is that we.

$45 barrel crude price would have corresponded to the high into that range.

Such that if we hadn't hedged anything or the prices moved to 45 and we've locked everything in at 45, we could have hit the high end of the range if nothing else change.

Well, what's happened is we got into the high Thirtys margins were available. So we started the edge the blending.

Add locking in those profits and so as I said, we've locked in about $20 million with the profits will once we've done that we've taken away the upside if the price goes to 45 or higher we've taken away that upside and so that's what we've essentially taken out.

Well, that's a large portion of why we lowered the.

The guidance ranges because that upside is no longer available, but the flip side of that is we have now locked in 75%.

What we were able to capture so we had a lot more confidence on the range that.

That we provided.

Yes, it shouldn't you seem to paraphrase basically at the bottom end of the range you weren't expecting to basically get any butane blending and led to higher range. There should have been an opportunity to nickel to do that now that you've locked in we kind of know what that is at the bottom end in theory is more secure a good I paraphrase that correct.

[music].

I think that that's right in and.

Maybe another way of phrases midpoints more likely.

Okay perfect.

Sorry for be laboring that maybe to keep it a little bit to your commentary around the projects that you're backing.

I hear that your backlog is often 500 million or more.

I just wondering what the ones that you are.

Valuating very closely right now.

Or front burner.

What's the range of capital spend on those types of projects.

Well.

We continue for instance to work on potentially expansions of our Pasadena.

Terminal.

And we're actively doing that as we speak.

Magellan's portion of that capital if we were to do that could be in the $100 million range or so.

We're looking in a number of potentially expansions to Denver, which could be in that similar right.

So there's I mean, there's a number of viable or it would appear to be viable projects at this time, they could get us.

The 200 $300 million, where the capital next year.

But.

Those projects are done yet and there is there's a chance they wont get done.

That's why I was cautious on the answering the previous question as to whether we're going to be looking in buybacks or or increased distribution.

It's all relative to how successful we are some of these other opportunities, but I also want to reiterate that we are not pursuing growth project simply for the for the benefit of growth and they need to be solid secure.

Committed projects from credit worthy Counterparties before we would proceed at.

In this environment those are more difficult to obtain so.

To see how this plays out.

That makes perfect sense can actually got was where you are concluding part was where my head was headed in so when we think about dollars available for per unit buybacks.

If let's say you sanction $200 million worth if new projects.

The way you would pursue position it to the board would dollars available for buybacks have to be after you funded the full capex with internally generated cash flows so differently dollars.

Would be available free cash flows after full capex and dividends is that kind of the way to think about.

Could potentially be available for buybacks.

I think generally speaking that's that's the right way to look at it.

You can take extreme cases leverage level kids so low.

It just doesn't make sense to maintain.

Leverage levels say it three times are below three times.

And we May change our view on that but Thats. The way you just characterize is our current.

Perfect Alright, well. Thank you very much guys really appreciate the color to that.

Thank you.

And our next question is from Derek Walker of Bank of America. Please go ahead.

Hi, good afternoon, everyone.

So quick clarification question on the on the guidance some of the fund products Big volumes.

Like I believe you you alluded to some assumptions I guess, though there's a federal approval second half.

Are you expecting that to normalize sort of by year end.

Based on what you're seeing from today on the mature.

So with that ramp expectation will.

Well I mean, just give you a sense of.

How we came up with those numbers again.

But this little bit before.

For July.

We're kind of on gasoline demand, we're kind of in the range of 8% to 10% down.

For July in for Distillate, we're kind of in that 12% range down for distillates and on jet fuel were down 40%. So.

First of all with regards to.

Distillate and jet fuel.

I mean July is is consistent with the rest of the year expectation in our forecast. So we're not really projecting any.

[music].

Considerable improvement in.

[music].

What I said appetite material improvement in this letter jet through the rest of the year, but we're also not projecting it go down again, which could happen I don't want us.

Just portray the upside I mean, if we have resurgence in cases that we have more.

Backups on the Reopenings than it theres downside to that to a gasoline like said, we're in the 8% to 10% range down we're projecting 6%.

For the rest of the year on average just based on the trends has been improving through the month of July.

And so that's really kind of the basis for our projections there.

It's not.

I don't know this any more complicated than that were truck, we're not really trying to project.

Anything significantly changing either positively or negatively through the rest of the year, where the potential of either one of those things exists.

As that rolls into 2021.

For us that we haven't really thought about 2021 too much it's.

It's too hard to predict the rest of this year much less worry about 2021 at this point.

I appreciate the color there the Memphis quick follow up on this so.

Let me up additional cost savings initiatives and thank you.

Some baked into your guidance has there been any incremental updates on that front.

Cost maybe update relative to what you previously provided.

There's really nothing new to speak of.

This material to affect 2020, but we have been making a lot of progress on efficiencies.

That will impact or approved in 2021 and beyond this when we're going to start seeing real benefit of lot of things we're doing.

Okay. That's helpful. Thank you.

Thanks.

Gentlemen goes or all the questions. We have at this time I'll turn the call back over to your customers for any closing comments.

Alright, well. Thank you for your time today and we appreciate all your support Magellan have a good afternoon.

And that does conclude our conference call for today, everyone have a great rest of your day and you may disconnect your lines.

Q2 2020 Magellan Midstream Partners LP Earnings Call

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