Q2 2021 Magellan Midstream Partners LP Earnings Call

[music].

Okay.

Yes.

Greetings and good afternoon, everyone and welcome to the second quarter 2021 earnings call during the presentation all participants.

And within the only mode. Afterwards, we will have a question and answer session at that time. If you have a question. Please press. The 1 followed by the 4 on your telephone keypad and if at any time, you need to reach and operator. Please press star Zero as a reminder, this call is being recorded Thursday July 29, 2021. It is on my pleasure to turn the call over to Mike Mears.

<unk> Chief Executive Officer. Please go ahead Sir.

Hello, and thank you for joining us today for our second quarter earnings call before we get started I'll remind you that management will be making forward looking statements.

Find by the Securities and Exchange Commission.

Such statements are based on our current judgments regarding.

And the factors that could impact the future performance and Magellan, but actual outcomes could be materially different.

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

I would like to start by reviewing our asset portfolio activities.

And the second quarter last month, we announced that we had entered into an agreement to sell our independent terminal network for $435 million.

We have not floated and EBITDA multiple related to the sales, but we do view the sales price to be attractive and exceeding the net present value of our future expectations for these assets.

This transaction will close once regulatory approvals have been received which we hope will be by the end of the year.

As a reminder, the independent terminal sale, it's additive to the $270 million already received from the sale of a partial interest and our Pasadena Marine terminal joint venture that we announced and closed.

And in April.

And as discussed on the last earnings call, we were able to monetize a portion of our ownership position and a terminal and an attractive price, while retaining a meaningful position and the strategic refined product export facility and.

In addition, we have the opportunity to participate and any potential expansions and the Pasadena facility.

Those are future.

So while Magellan has not historically been a seller of significant assets. We do regularly review our asset portfolio for opportunities to create value through capital rotation with our strong balance sheet, we are and the fortunate position that only transacting, if we deem it and the best long term interest of our investors.

And so.

Which has been the case with both of these and other sales during the second quarter.

Moving to our earnings we announced this morning, we're pleased to Magellan generated another quarter of strong financial results exceeding our previous EPS guidance by a notable amount.

The outperformance was driven by a few key items, which included higher.

<unk> refined product shipments and part from additional volumes on our recently expanded Texas pipeline segments increased commodity.

Commodity prices that benefited both on our fractionation activities and the value of our product Overages and.

And the timing of certain expenses with lower expenses incurred and the current period that we now expect to occur.

Higher revenue later this year.

Our CFO, Jeff Holman will now review a few highlights from our second quarter financial results and I'll be back to discuss our outlook for the year before answering your questions.

Thanks, Mike first let me mention that as usual I'll be making references to certain non-GAAP financial metrics and create operating margin midstream.

Curve on cash flow and DCF and free cash flow and we've 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 $280 million compared to $134 million and second quarter 2020 adjust.

Adjusted earnings per unit for the quarter, which.

This includes the impact of commodity related mark to market adjustments was $1.38.

Which as Mike pointed out exceeded our guidance for the quarter of $1.15 zone.

DCF for the quarter of about $268 million or 28% higher than second quarter 2020, primarily due to improved refined products demand.

Which exciting margins compared to the pandemic driven low from the prior year, partially offset by lower crude oil revenue client exploration with several higher price contracts on longhorn and late 2020.

Free cash flow from the second quarter, 2021, which includes $270 million and proceeds from the sales of partial interest and our Pasadena.

And commodity and terminal joint venture with volume and then $6 million.

Resulting in free cash flow after distributions of $277 million.

A detailed description of quarter over quarter grants and is available on the earnings release, we issued this morning, so as usual I'll just touch on a few highlights and overall themes of our quarterly performance fee.

First let.

And you know that as a result of opinion and sale of our independent terminals and the results of operations from those assets, which were previously included within the results of our refined products segment have now been reclassified as discontinued operations for all periods.

Starting with our refined products segment second quarter operating margin from 267.

Let me know.

It was approximately 63% higher from the 2020 period.

Our refined products business naturally benefit from the recovery and travel economic and drilling activity in 2021, as well as from and improved commodity price environment compared to the pandemic lows experienced during the second quarter of 2020 and.

In addition, growing volumes from our recent Texas.

And our plant expansion projects contributed to the year over year increase.

Total refined transportation volumes, including both our base business and our recently completed growth projects were up more than 30% relative to the prior year period with significant increases and gasoline diesel and jet fuel and on an absolute basis represented.

And by quarterly record for our system underscoring the ongoing importance of our assets the safe and reliable delivery of essential fuels and the markets we serve.

Product margin increased about $38 million compared to the second quarter of 2020, primarily due to more favorable mark to market adjustments compared to the 2020 period as well as higher gas liquids.

Presented on volumes as a result of improved blending opportunities.

Turning to our crude oil business second quarter operating margin was approximately $106 million down 17% from the second quarter of 2020, mainly due to lower average tariffs and lower average storage rates.

Volumes on longhorn averaged about 200.

<unk> <unk> thousand barrels per day, compared to 270000 barrels per day and the second quarter of 2020 as we previously discussed we have some long haul and commitments expire in late 2020.

And while the resulting decrease from third party shipments has been largely offset by volumes related to our affiliate marketing and activities. The margin we realized on those activities is more reflective.

60 prevailing differential between the Permian Basin, and Houston, which is currently well below the tariff we had been earning on the previous contracts.

As a result, our average realized rate per barrel has declined as we had anticipated when we initially provided guidance for the year.

Volumes on our Houston distribution system increased versus the prior year period, primarily just.

And Thats, a higher year over year refinery utilization driven by demand recovery.

And with this increase in volume offset by lower average rates.

And as a reminder, although we often see volatility and our Acs volumes between quarters with volume through <unk>.

And with lower rates and longer haul longhorn shipments, which means that their impact on our reported volumes and average rate.

<unk> is much greater and their impact on our actual revenues.

Storage revenue declined primarily due to the 2020 period benefiting from increased short term storage utilization at higher rates as a result of the strong carrier and the market at that time.

Moving on to our joint ventures, Bridgetex volumes of approximately 315.

Right and on barrels per day, and the second quarter of 'twenty, 1 compared to nearly 355000 barrels per day and 2020 from.

Primarily due to a decrease and uncommitted shipments and the current quarter.

Adam on volumes increased to approximately 220000 barrels per day, and second quarter 'twenty, 1 compared to just over 165000 barrels per day, and a 2020 period.

Primarily as a result of our recent pipeline expansion, which as Youll recall was supported by additional commitments from our shippers. So as you can tell from my remarks, we continue to enjoy the benefits of long term commitments from creditworthy counterparties and on our crude oil pipelines.

Customers continuing to meet their obligations.

Just a few.

Other quick notes on our year over year results G&A expense increased between periods, primarily as a result of higher incentive compensation costs, reflecting our strong results year to date <unk>.

And we had higher benefit costs and the current quarter, primarily related to higher medical claims.

Non operating other expense was unfavorable due to.

Amounts recognized from second quarter, 'twenty, 1 related to certain legal matters.

We're not and are positioned to discuss details of those matters at this time.

We'll note these legal matters on a relatively unusual for our business and not expected to be recurring which is why we've recorded and and below operating profit.

Gain on disposition of assets was.

And was approximately $70 million following the sale of a partial interest and our Pasadena Marine terminal joint venture and second quarter 2021.

Net interest expense decreased primarily due to the absence of debt repayment costs incurred in 2020, when we retire notes are due in early 2021.

As of June 30, the face value of our long term debt outstanding was 5.

Billion.

And with a weighted average interest rate on net debt of about 4.4%.

Finally, as mentioned earlier the results of our independent terminals are now reflected in discontinued operations due to the pending sale, which we expect to close sometime later this year or early next day income from those assets increased.

And between periods and partly due to improved volumes as compared to the pandemic affected 2020 period and.

In addition, a significant portion of the operating margin from these assets is driven by commodity sensitive activities that can be volatile from period to period and a stronger commodity environment. During 2021 favorably impact the results from these assets.

And the form of higher liquids gas liquids blending profits and more favorable product overages, which reduced operating expenses as well as favorable unrealized noncash mark to market adjustments.

These assets most of which are located along the colonial pipeline also saw a net benefit from the temporary shutdown and Cornell during the second quarter.

<unk> of course, the income from discontinued operations line on our income statement does not reflect the maintenance capital associated with these assets.

While we have not disclosed either on EBITDA or cash flow and multiple for the sale of these assets and indeed on certain disclosure limitations and the sale agreement that limit how much we can say about it and we remain very pleased with the value.

Value in terms of the transaction and believe it will result in increased value for our unit holders and the coming periods.

Moving on to capital allocation balance sheet metrics and liquidity first in terms of liquidity. We continue to have our $1 billion credit facility available to us through mid 2024 and had approximately $258 million of cash.

And on hand, and thinking of the second quarter.

Our leverage ratio, which ended the second quarter was approximately 3.3 times for compliance purposes.

6 times, excluding the gain we realized on the sale as part of our interest and Pasadena.

And finally with respect to capital allocation I'll reiterate that we remain focused on delivering long term.

<unk> value for our investors through a disciplined combination of cash distributions and capital investments and equity repurchases.

During the second quarter, we repurchased approximately $1.7 million units at an average purchase price of $47.77 from.

Total spend of approximately $82 million, bringing.

Bringing the cumulative amount of units repurchase since early 2020 to $7.3 million units for just under $360 million.

Of course, because we are always careful to note the timing price and volume is and the unit repurchases will depend on a number of factors, including the expected expansion capital spending free.

Free cash.

Hello available balance sheet metrics legal and regulatory requirements as well as market conditions and the trading price of our equity and to that point I will further note that as a result of the negotiation trying and our recent asset sales there have been significant significant amounts of time and the 2 most recent quarters during which we have been in possession of material non public information.

Total and unable to conduct unit repurchases within the Safe Harbor rules coming on our <unk> 18 plan.

But subject to all of those aforementioned caveat, we continued to unit repurchases as an important focus of our ongoing capital allocation efforts, so with that I'll turn the call back over to Mike.

Thank you Jeff as part.

Good morning earnings release, we also read reiterated our expectation to generate annual DCF of 1.07 billion during 2021.

This guidance assumes contributions from the independent terminal through the remainder of the year given the uncertain timing of the sales transaction.

While we outperformed.

And for guidance for the second quarter some of the favorable impacts from endured during the quarter are expected to be offset by higher costs. During the second half of the year in part due to expenses that shifted from the second quarter to later in the year as well as by lower commodity margins compared to the margins we expected when we increased guidance in April.

And we've now hedged approximately 80% of our gas liquids blending for the fall season blood.

Blending margins compressed somewhat over the past few months, primarily due to higher costs for both butane and rins, while future gasoline prices did not increase by a similar amount as a result, we are now expecting and average margin.

And closer to 35 per gallon for the year versus $40.40 previously announced.

Additionally, we have also hedged about 80% of spring blending for next year as well at margins also around 35 per gallon.

Turning to refined products demand.

And we expect refined product shipments to be in line with our previous estimates for the year with total volume is still forecasted to be 13% higher than last year.

On a product we expect total gasoline shipments to be 13% higher.

And 10% higher and aviation fuel, 25% higher and our.

'twenty volumes with overall current year refined product shipments still expected to be about 3% above the more normal demand year of 2019.

Our estimates continue to project modest growth and demand associated with increased travel and economic activities as well as increased increased contribution.

20 of our recent Texas expansion projects, partially as a result of a customer recently completing a required connection that had encountered COVID-19 related delays.

We continue to see improvement and gasoline demand, especially during the peak summer vacation season, and we have also seen continued improvement and distillate and jet.

<unk> momentum.

Our estimates expect the improved level of activity will remain with people returning back to work and school and our markets and no additional lockdowns related to virus variants or otherwise.

On the subject of our refined products pipeline I'd like to briefly mentioned the midyear tariff changes that went into effect on July 1.

As expected we decreased rates by approximately 0.6% and those.

It's subject to the FERC index methodology, which historically have represented are up 40% of our shipments and.

And the remainder of our markets, we increased tariffs by an average of more than 4%, resulting on an overall average.

Byproducts midyear tariff increase of nearly 3%.

And I also want to mention that due to increased movements on our recently expanded Texas pipeline segment, which is not covered by the FERC. We expect the overall percentage of our shipments and subject to indexation to decline through time with more volume being subject to market based.

Average fee adjustments.

As Jeff mentioned earlier, we remain focused on delivering long term value for our investors through a disciplined combination of cash distributions equity repurchases and capital investments.

Based on our 1.07 billion DCF estimate for 2021, we expect to generate.

<unk> coverage of 1.107 times for the year, assuming the current quarterly payout and unit count we intend to keep distributions flat this year with our forecast and DCF projected to exceed distribution payments by almost $160 million for the year.

Concerning expansion capital we expect.

Distribute spent $75 million and 2021 and $15 million and 2022 to complete our current slate and construction projects.

Although the numbers remain the same as last quarter. These estimates now include new projects to increase our biodiesel blending capabilities within the states of Kansas and Missouri.

Expect this additional project spending has been offset by lower costs associated with other projects that are nearing completion.

We also continue to assess additional attractive expansion opportunities to expand our service offering and generate incremental value for our investors and we remain optimistic that additional projects with attractive returns.

Come to fruition, although most likely smaller scale and they happen in the past.

Like always we remain committed to Magellan longstanding capital discipline and balance sheet strength.

We expect to generate free cash flow after planned distributions and expansion capital expenditures of more.

More than $350 million.

For the year.

Another the closing of the independent terminal sale and another $435 million to the free cash flow pool, all of which will be available for use consistent with our capital allocation priorities.

Our capital allocation priorities for free cash flow after planned distributions remain.

Great growth capital investments with attractive returns and equity repurchases special distributions continued to be an option, but they are not currently our preferred path.

That concludes our prepared remarks, and operator, we will now turn it over to questions.

Thank you very much ladies and gentlemen, if you would like to register a question. Please press.

The 1 followed by the 4 on your telephone keypad and you will hear rates III, Tom prompt program on what your request. If your question has been answered and you'd like to remove yourself from the queue. You may price 103. Once again for a question. Please press the 1 followed by the 4.1 Michael please for the first question.

Our first question comes from the line of Spiro.

Zero newness with credit Suisse. Please go ahead.

Hey, good afternoon everybody.

Mike.

First question, just on and asset sales and stay.

And at a play in that market today, it's been another fairly active year for you again and.

And realize it's hard to predict what M&A it looks like going forward.

Curious.

Is this a trend you think can continue at this pace.

Or are you finding as you sort of pruning these assets down little by little that remaining portfolio starts to look maybe a little too core for you to part ways with.

And does it sort of lead you into maybe doing more of these joint ventures or optimizations that others have done as well and if you could just.

Maybe a pine on interest levels and M&A right now as we stand and the year versus earlier, this year and getting stronger or weaker.

St.

Well.

Let me address your first question I mean, we have been active and asset sales much more active than we've been historically.

And.

And that's.

That's been a process that we routinely and been engaged and is determining whether we have assets that are more likely to be more valuable somebody else and we think they are present value is to us.

As we look forward and I don't want to comment specifically on anything we might do but.

But if you look at the assets, we have sold and they've either been partial interest and joint ventures, where we have retained and ownership.

And in the case of the marine terminals and the southeast terminals.

And that for reasons that are probably obvious.

Not really connected as part of our net.

Network on our refined product system of our crude oil system. So those are assets that are much easier to sell and not have any lingering negative impact on the remainder of the company.

And and.

Youre right I mean, if you look at the suite of our remaining portfolio.

On the number.

And.

Assets that fall into that category.

And our smaller than before we sold these assets and that doesn't mean that we do.

Consider and evaluate.

We'll continue to consider and evaluate assets.

But we're.

We're not we're not and the business of selling everything we own either so.

<unk>.

We will make sure we make those decisions from a strategic standpoint, and also not just the absolute amount we can get from a transaction, but also what potential consequences. They would have the rest of the remaining system. So I'll just leave it at that and.

And I think your second question was with regards to whether there has been an uptake.

And a and 60 and the short answer at least from our view is it's still relatively.

Slow.

Obviously, we've been active and selling assets, but as far as assets through and the market that we're interested in.

We haven't been very active.

And then and I would anticipate.

Going.

Forward that its going to remain that way and less or something thats very attractive to us that we think we can get at a reasonable price.

Got it very helpful. Thanks.

Thanks, Mike.

Second question just on on MLP.

And need certainty.

And our net.

I guess you can't Mlps could eventually be taxed as a C Corp. Just curious from your perspective is that and automatic trigger for you to Mercury C Corp, or other consideration you can keep in mind.

Yeah.

Well.

Clearly if the MLP.

<unk> structure is no longer allowed and then yes, we will most likely convert.

There's really no reason to remain a partnership without the tax advantages associated with it and yes, the 1 caveat being of that and.

And some permutations of proposals there's been discussion of transition periods. It.

It can be and.

And the original and back into 80 use legislation I think there was a 10 year kind of transition period, so sort of a long transition period, there will still be decisions about timing and what makes the most sense, but that will just be based on obviously and facts and circumstances and the rules around that how people are looking through to the ultimate situations vs.

We see value and continuing to avoid double taxation for a number of years et cetera. So that that's the only and they want to probably that we would have to work around yeah, and as you think about where we stand on that and I think 3 months ago and.

It looked like it was more likely than not and we were gonna have a requirement.

And.

New legislation to eliminate the structure as we sit here today.

It appears maybe it's a little less likely that that's going to happen and it's still a risk factor that's gonna overhanging the industry until there's some certainty.

And and as I said, I mean, it seems from week to week or month to month.

And the likelihood that something's going to change moves around quite a bit so it's.

It's kind of difficult to make any kind of long term planning with regards to that.

But we think at least at this point and time.

It looks like.

Perhaps.

And that.

Legislation is not going to require.

It looks like that's died down a little bit but.

And as everyone knows I mean.

Things can change quickly and Washington, but that that's what it looks like at the moment.

Okay.

Got it understood and I appreciate all the color. Thanks again guys.

Sure.

Our next question is from Theresa Chen with Barclays. Please go ahead.

Good afternoon, and thanks for taking my questions and first and that good luck good touched on that on the.

On guidance.

And it is just from the lightest and beat this quarter and keeping it flat and here.

And I appreciate.

Ill never bombed at just delving into this a little bit more related to the cost increases that or or cost that were you know artificially suppressed this quarter removed out of second half and how much was that and what is that related to <unk> versus the low expectations for butane blending and the fall now that you've hedged.

I'll flip it and.

Is there any other moving parts around it around full year guidance.

Well, Yeah, let me kind of simplify it because there's obviously a lot of moving parts and you just talked about the material ones I mean first of all.

Think you know there was some speculation that perhaps we.

And the bulk of every day.

Significantly on refined product demand forecast for the remainder of the year that hasn't happened and I can tell you that we've tweaked it a little bit.

Our internal forecast, we've lowered gasoline a little bit we've increased diesel the net.

Net of those is a slight reduction, but it is not a material.

And a contributor to the change and our forecast for.

For the most part our second half volume forecast is very close to what it was.

Back when we when we visited with you and.

And our last earnings call the big changes.

The.

Siri are reduced and the second half to offset.

The over performance and the second quarter is number 1 the commodity margins which are lower.

And then what we had anticipated.

As you know as we mentioned and the call last time, we had not fully hedge the spring and unfortunately.

And as time went forward margins compressed and when we did reach the point of locking and the remainder of for volume.

And those margins came down and so.

That is 1 of the significant changes and the second half of the year. The other is as you mentioned, it's the cost.

Timing of the pass and I don't.

Have the precise numbers here in front of me I can tell you 1 of the big items is on maintenance capital.

That just through the timing.

Not in any intentional way, but just through the timing of how these projects and <unk>.

Hold on.

And we significantly underspent, our expectations for maintenance capital.

And the second quarter and the first quarter quite frankly, and we're anticipating that we're still going to spend the same amount of maintenance capital by the end of the year as we originally planned and so.

And that's has a negative effect on the second half of the year. So those are the 2 primary elements.

And theres noise around a lot of different.

On individual line items, but those are those are the big items right there.

Thank you and.

And I guess switching gears.

Your pending sale on.

And the terminals along the southeast how is the FTC process going there and do you expect to second and second request related to the.

Well.

We have not yet received.

A second request and it's really hard for us to predict whether we will or not.

Process is going well and we don't have any there hasnt been anything thats been raised from the FTC that that's caused us any concern on this.

But whether we get a second request and how long the price it's going to take we really don't have.

Anything to comment on that at this point, we think we're going to have a successful approval.

Approval at the end of the day.

I think its assets more question of how and.

When rather than if.

Thanks.

But sometimes these processes go quick sometimes they don't.

We don't know, which 1 of them is going to be on this 1 yet.

Great. Thank you and lastly on <unk>.

I appreciate all the details you gave on the rates and the natural.

<unk> inflation exposure that many of your assets have and as we look to 2022, given the current inflationary environment and.

Can you just give us a sense of what your expectations are for.

Total tariffs and fees increases mid year next year. It seems that we have a lot of the data.

Is.

And can you remind us how much of your assets are subject to cash.

Caps and collars vs.

Alright.

Well I can tell you that on.

So the index is going to be formula driven and I don't have what PPI is year to date, but.

It is very strong and so we would expect that our index rates.

Are going to be.

<unk>.

Have a significant increase next year, driven by the index and driven by PPI.

What we do and the market base great locations.

Although we haven't done that analysis and when we typically wait until the spring and do a revenue.

Competitive analysis around our terminals to make a determination as to what.

And what those rate increases will be I don't know what the what that will show yet.

Obviously and in a high inflation market, we would probably be more.

More inclined to increase those rates more than we would in a low inflation market, but I don't have numbers for that yet and I won't have numbers, we won't have a sense of that until we get into next year and start doing our planning for the tariff increases, which typically takes place and late spring.

And.

And as far as a percentage of our <unk>.

Volumes that are subject to a revenue that's subject to index I mean, right now it's around 40%, but as I mentioned as time goes on we expect that percentage to decrease and it's not because we're losing volumes and that market and it's because we're increasing volumes.

And markets that are not subject to the index, particularly in Texas, which are intrastate rates and so as those volumes grow and the percentage of our transportation revenue that subject and index will decline over time.

Yeah.

Thank you.

Alright, Thank you and our next question is from Shneur <unk> with UBS. Please go ahead.

Hi, good afternoon, everyone.

Mike I was wondering if I could just go back to the conclusion, if youre prepared to Mark I guess I just wanted to make sure I heard everything correctly.

It's.

And like a special.

Distribution is something of a lower priority from a capital return perspective, and so if I understand it correctly.

It sounds like high return bronchial.

Capex opportunities is probably priority number 1, but otherwise opportunistic buybacks to help.

And prove your payout ratios and improve your coverage ratio is kind of the preferred avenue of incremental returns of capital and just kind of wanted to understand that at this point.

I think you framed it exactly right I want to make clear that we're not saying, we'll never do a special distribution, but when we look at the playing field right now it's low on our priority list.

And we're not planning on 1 at the current moment so.

So youre correct.

High return capital investments and equity repurchases are our top priority right now.

Okay perfect and.

And then secondly, just kind of wanted to revisit the PPI question net okay.

So it just stopped.

And when I sort of think about your business I would imagine that this P P I and stock or and.

The overall cost from your business this year or into next year, and so forth and when I sort of think of your base cost structure versus your revenue structure is it fair to conclude even.

And though not all of the revenue is tied to.

Regulated rate to the regulated index is that the revenue increase driven by P. P. I would be greater than anything that would happen on the cost side in terms of running your business.

I think that.

And then generally true I mean, if you look at.

Or I should I should qualify that by saying to date and that's been true I mean, our largest costs on our pipeline systems.

Typically people and power.

And we haven't seen.

Okay.

Cost increased.

Yeah.

On those 2 line items, consistent with what PPI and spend.

Year to date, now again that could change going forward.

That's where we are currently.

We are seeing cost increases.

Particularly on maintenance projects and capital.

<unk> this is <unk>.

Increases in steel costs and those sorts of things. So if we replace type replace valves do those sorts of thing we have seen significant cost increases, but we haven't seen it on our 2 biggest pieces now again.

And that's as of today.

I'll have to see how that plays out going forward, but.

Perfect.

I think that's that on that 1 does that answer your question.

Yeah no it is.

Definitely does have a few more but I'll go back into queue and respect the 2 questions.

Okay and on that.

Next question is from Jeremy Tonet from Jpmorgan. Please go ahead.

Hi this.

So on for Jeremy.

Wanted to start kind of digging and more on the capital allocation and and I guess buyback specifically.

You've talked about kind of like more regulatory certainty needed there, but but also kind of completed.

$80 million or so and buyback.

This is Joe during the quarter.

And that kind of came at pace continue without more regulatory uncertainty or was that kind of like considering the assets sales also and and how how are you kind of thinking about that in general.

Well I don't want to comment specifically on the pace.

On the buybacks, but I will say regulatory uncertainty has been and element and deciding.

When we execute and when we don't and.

Uh huh.

It will continue to be that way I think at this moment, we think the regulatory uncertainty has died down a little bit it has not gone away completely.

Buyback.

Yes.

Proposed legislation on Washington continues on the course, where it is right now where it doesn't look like this is going to happen there.

And just going to be required conversion to a C Corp, then that.

Put this in a more comfortable position with regards to our equity.

Pace.

And if that changes that can affect that.

Okay that makes sense that's helpful.

And then also wanted to ask quickly on the on kind of the legal expense for the quarter.

Do you mind expanding on what.

What that was related to and and should we expect any continuing elevated legal cost or was that more 1 time.

Well, what I will say I don't want to talk about the specific cases involved but the.

There were multiple.

Legal.

And items that that we're.

And we're all netted to the number you saw and the financial statements. It wasn't just 1 issue.

And.

We expect those to be onetime deals these are not recurring.

Items. These are these are 1 time.

On.

Resolution of lawsuits or other legal disputes that were that were resolved in the second quarter.

Okay. Thank you very much and I'll stop there.

Our next question is from Tristan Richardson and what's the truest what's.

Hi, good afternoon, guys on.

Just a quick question on the rationalizing capacity and and the crude world I think you've noted that if the contract portfolios and timing of explorations are always going to be a limiting factor can you talk about any progress on that front either with peers are customers, but then.

What's going on I think you guys have talked in the past about looking at optimization opportunities that are.

Outside the scope of doing something with a peer.

Can you give us a simple.

What that could look like.

Well.

So the first point.

Don't have.

And then give you I can tell you we are actively and continue to actively look at opportunities.

But I'm not and are positioned to give you an update on any on any developments there.

And as far as the other optimization opportunities and we've.

We've.

<unk> executed on a number.

Have enough things to improve our cost profile with regards.

Your discussion and specifically with regards to optimization around assets.

Again, I don't really have an update to give you. There are some things we're doing that are going to lower our costs.

But theyre, probably not material things that are worth talking about at.

And so I guess the takeaway you should have here's this isn't something we've evaluated and.

On a shelf and a very active process for us.

And we.

We do believe asset rationalization, especially in the Permian.

It would be a good thing.

All of the relative.

This quarantine and skin can find a way to create incremental value through such and such and action and.

And we'll continue to evaluate and pursue it.

Okay.

I appreciate it and just a quick follow up I think in the past you've been asked about opportunities on the renewable fuels.

Side, and I think you've talked about.

There might be potential initiatives out there to pull that blending activity.

Backward into the value chain, so that that would be more of an opportunity for Magellan I'm just curious.

Is that something you guys continue to look at her.

Are there other potential updates there or maybe.

Some case studies that we should think about.

Well, we're very active in that regard I mentioned and our notes that we are adding biodiesel blending and at <unk>.

And facilities in Kansas and Missouri.

But we're doing a number of other things we have stock.

Started test movements of biodiesel blends and the pipelines that have been.

Total.

And we've got a number of areas that we're targeting 2 to start doing.

Particularly biodiesel blending.

And at hub locations, and then transported by pipe.

I would caution you that it's probably going to be more of a gradual process rather than a system wide process.

6.7 months.

I would also tell you that.

And the in an ideal situation, it's going to be something that we can do with very low capital.

So we're not going to be adding hopefully a lot of capital cost to do this.

And.

But it's evolving and we're very positive on it and.

So I think we're on a path to be able to talk about it more and the future.

But we are we are we are moving the ball on it.

Appreciate it thanks, Mike.

Sure.

And our next question is from Keith Stanley.

And with with Wolfe Research. Please go ahead.

Okay.

Hi, Good afternoon, I first I just wanted to ask on refined products volume so.

You're sticking with the guidance for the year to be 3% above 2019 or normal levels.

When I look at the first half of the year you're already.

Stanley 3% versus the first half of 2019. So this is probably overly simplified but.

Wouldn't that imply youre, not really assuming any incremental recovery and volumes in the second half and the guidance.

And kind of assuming the same level of recovery and the second half of the year to be 3% above 2019.

We already saw and the first half of the year.

Yes, if you if you look at our volume forecast for the second half of the year.

Fairly consistent with what we actually saw on the second quarter.

And so on an absolute basis, and it's different by products and on absolute basis or not expense.

That you arrange a tremendous volume growth from the second quarter of this year is that just saw some tremendous growth.

If you're comparing that to future periods, I mean past periods are still going to have and each of those quarters.

Growth percentage, because those those previous quarters were depressed.

Expect but just comparing what we're expecting for the third and fourth quarter versus the second part of this year.

And it's relatively.

Flat, but again, that's still and we do the math works out to about a 3% growth over 2019.

Okay.

Breast and that makes sense.

Second question I, just wanted to clarify I think.

I think you said, 80% of spring blending is now hedged as well.

And I'm, not misreading that and it might be a little earlier earlier than you typically do it. So just any thoughts on I guess why are you.

But.

To lock in more of the spring blending at an earlier point.

Well I don't know that its materially earlier.

And then when we would have done it.

Previously when we.

As you might expect knowing when the precise time.

And you decided to hedge and lock in a forward margin.

There is some science behind it and there is some are behind it.

And.

These markets have been very volatile as you can imagine.

Butane prices and gasoline prices not necessarily moving in tandem and RIN prices.

Being.

Being extraordinarily volatile and so.

I really don't have and other ads free other than taking all those things into consideration we felt it was appropriate to lock in the margins.

And as with any hedging program you can second guess it.

Okay.

After the fact.

And we are always subject to that whether you don't hedge and you made the wrong decision or you do hedge and you make the wrong decision you have to make a decision and.

And when we looked at everything going forward into the spring. We just made the decision to lock that in.

So I don't have any.

Detail on it than that.

No that makes sense, it's certainly been a volatile thank you very much.

Sure.

Yes.

And our next question is from Gabe Moreen with Mizuho. Please go ahead.

Hey, good afternoon, and maybe if I could just follow up on <unk> question just in terms of.

Any more and can you just put into context, the rins expense for this year relative to historical levels and.

And also whether you have some of your net exposure I guess for 23 at this point.

And I don't have the number on what our actuals expense is in front of me.

And being told that.

The average is about 13.

A gallon is what our cost is but I don't know on an absolute basis, what that works out too.

We don't typically hedge the RIN independent locking in the margin. So typically what we do and we lock in.

Gasoline.

Linda butane margin.

We also by the risk associated with that so we're not exposed at least on on our hedged production to the RIN price, but we typically don't hedge returns beyond that on a speculative basis.

Got it thanks, Mike and then maybe if I can ask there's obviously been a lot on media reports about smaller markets running out of various refined products crude oil from truckers and whatnot.

Just wondering to what extent that may or may not be impacting on maybe your markets from I.

I guess, whether there's any opportunity for some smaller projects to come out of that.

Well.

We have.

And where we've seen some stress on supply is in the Rockies.

Range Denver from range and.

And a.

Part of that is just due to the rapid recovery and demand.

Part of that's due to the conversion of the Cheyenne.

Moderate that's taken and supply out of the market.

We have already initiated some projects to get more supply out there were evaluating additional projects to get more supply up there and we think we're going to have a few of them, they're going to that we're going to be able to execute on.

And.

These are transformational projects.

And maybe adding 5000 barrels a day and that kind of range to the market, but they are highly but they're relatively low capital and if they are high return projects for us. So we're looking at that.

We're also looking at some rail capability and a rail more barrels and into the market into some.

Some of our facilities. So there are opportunities there, they're not they're not quick fix kind of opportunities they do require time and capital investment.

But we do anticipate we're going to have.

More throughput and <unk> and some high return projects to <unk>.

Supply and more barrels to the frontline.

Front range.

Got it thanks Michael.

Sure.

And next question is from Michael Peters Goldman Sachs. Please go ahead.

Hey, guys. Thanks for taking my question just a quick 1 here on the growth Capex outlook for next year, that's a pretty small number.

Or is that a placeholder.

At this time of the year, meaning a little more than halfway through in 'twenty, 1 or is that a hey, we've gone to our customers and you've kind of talked it through and there really isn't a whole lot they need from us from an infrastructure standpoint, and it kind of is what it is and and it's too early to even have a view on.

And that could be for 2020.3 or are you getting indications now already for 18.20 months out.

And good question.

First of all the $15 million number just to be clear on what that is that is that is on projects that have already been approved.

And kind of what's under construction and so that $15 million such as what's rolling over into next year to finish those projects. We do anticipate we're going to have incremental projects approved.

Before the end of this year and into early next year.

So that that number will come up I think to be realistic.

<unk> and our to see based on what we have in front of us.

That number for a full year for 2022 would be above $100 million.

Could get a.

And if a lot of these projects we're working on.

Actually happened what could get us close to that number for the year.

And it's too early for us to.

To forecast anything for 'twenty 3.

Got it thanks much appreciate it.

Sure.

And Mr. Mears I'll turn the call back over to you.

Alright, well. Thank you everyone for your time today, and your interest and Magellan and we will talk to you soon.

Ladies and gentlemen that does conclude our conference call for today. We thank you all for your participation have a great rest of your day you may disconnect your lines.

Okay.

[music] growth.

[music].

Yeah.

[music].

[music].

Greetings and good afternoon, everyone and welcome to the second quarter 2021 earnings call. During the presentation. All participants will be in listen only mode. Afterwards, we will have a question and answer session at that time. If you have a question. Please press the 1 followed by the 4 on your telephone keypad and if any.

And we need to reach and operator, Please press star Zero as a reminder, this call is being recorded Thursday July 29, 2021. It is on my pleasure to turn the call over to Mike Mears Chief Executive Officer. Please go ahead Sir.

Alright, well Hello, and thank you for joining us today for our second quarter earnings call.

Before we get started.

I'll remind you that management will be making forward looking statements.

And the defined by the Securities and Exchange Commission such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different.

Should review the risk factors and other information discussed on.

And filings with the SEC and form your own opinions about magellan's future performance.

I would like to start by reviewing our asset portfolio of activities from the second quarter last month, we announced that we had entered into an agreement to sell our independent terminal network for $435 million.

We have not floated.

And EBITDA multiple related to the sales, but we do view the sales price to be attractive and exceeded the net present value of our future expectations for these assets.

This transaction will close once regulatory approvals have been received which we hope will be by the end of the year.

As a reminder, the independent terminal.

Phil is additive to the $270 million already received from the sale of a partial interest and our Pasadena Marine terminal joint venture that we announced and closed during April and.

As discussed on last earnings call, we were able to monetize a portion of our ownership position and a terminal and an attractive price while retaining.

Retaining a meaningful position and the strategic refined product export facility.

In addition, we have the opportunity to participate and any potential expansions of capacity and the facility and the future.

So while Magellan has not historically been a seller of significant assets. We do regularly review our asset portfolio for opportunities to create.

Get value through capital rotation.

With our strong balance sheet, we are and the fortunate position that only transacting, if we deem it and the best long term interest of our investors, which has been the case with both of these and net sales during the second quarter.

Moving to our earnings that we announced this morning, we are pleased to Magellan generated.

And another quarter of strong financial results exceeding our previous EPS guidance by a notable amount. The outperformance was driven by a few key items, which included higher refined product shipments and part from additional volumes on our recently expanded Texas pipeline segments.

<unk> commodity prices that benefited both on.

And our fractionation activities and the value of our product Overages and.

And the timing of certain expenses with lower expenses incurred and current period that we now expect to occur later this year.

Our CFO, Jeff Holman will now review a few highlights from our second quarter financial results and I'll be back to discuss our outlook for the year before answering your.

Questions.

Thanks, Mike first let me mention that as usual I'll be making references to certain non-GAAP financial metrics and create operating margin distributable cash flow and DCF and free cash flow and we've included exhibits to our earnings release and reconciled these metrics to their nearest GAAP measures.

Earlier this morning.

We reported second quarter net income of $280 million compared to $134 million and second quarter 2020 and.

Adjusted earnings per unit for the quarter, which excludes the impact on commodity related mark to market adjustments was $1.38.

Which as Mike pointed out exceeded our guidance for the quarter of $1.15 zone.

Bcf for the quarter of about $268 million was 28% higher than second quarter of 2020, primarily due to improved refined products demand and commodity margins compared to the pandemic driven low from the prior year, partially offset by lower crude oil revenue component exploration several higher price contracts on longhorn and late.

Good morning.

Free cash flow from the second quarter, 2021, which includes $270 million and proceeds from the sales and partial interest and our Pasadena Marine terminal joint venture was by $106 million, resulting in free cash flow after distributions of $277 million.

A detailed description.

On a quarter over quarter grants and is available on the earnings release, we issued this morning, so as usual I'll just touch on a few highlights and overall themes of our quarterly performance.

First let me note that as a result of the pending sale of our independent terminals and the results of operations from those assets, which were previously included within the results of our refined products segment has now been reclassified.

<unk> and discontinued operations for all periods.

Starting with our refined products segment second quarter operating margin $267 million is approximately 63% higher than the 2020 period.

Our refined products business naturally benefit from the recovery and travel economic and drilling activity and 'twenty 'twenty 1.

And as well as from and improved commodity price environment compared to the pandemic lows experienced during the second quarter of 2020.

In addition, growing volumes from our recent Texas pipeline expansion projects contributed to the year over year increase.

Total refined transportation volume, including both our base business and our recently completed growth projects.

We're up more than 30% relative to the prior year period with significant increases and gasoline diesel and jet fuel and.

And on an absolute basis represented a quarterly record for our system underscoring the ongoing importance of our assets the safe and reliable delivery of essential fuels and the markets we serve.

Product margin increased about.

About $38 million compared to the second quarter of 2020, primarily due to more favorable mark to market adjustments compared to the 2020 period as well as higher gas liquids blending volumes as a result of improved planning opportunities.

Turning to our crude oil business second quarter operating margin was approximately $106 million down 17.

<unk> percent from the second quarter of 2020, mainly due to lower average tariffs and lower average storage rates.

Volumes on longhorn averaged about 250000 barrels per day compared to 270000 barrels per day and the second quarter of 2020 as we previously discussed we have some long on commitments expire in late 2020, while there.

Resulting decrease and third party shipments has been largely offset by volumes related to our affiliate marketing activities and the margin we realized on those activities is more reflective of the prevailing differential between the Permian basin, and Houston, which is currently well below the tariff we had been earning on the previous contracts.

As a result, our average realized rate per barrel has declined.

And as we anticipated and the initially provided guidance for the year.

Volumes on our Houston distribution system increase versus the prior year period, primarily just due to higher year over year refinery utilization driven by demand recovery.

With this increase in volume offset by lower average rates as a reminder, although we often see volatility and our Acs.

Between quarters with volume from significantly lower rates and longer haul long on shipments, which means that their impact on our reported volumes and average rate is much greater and their impact on our actual revenues.

Storage revenues declined primarily due to the 2020 period benefiting from increased short term storage utilization.

And at higher rates as a result of the strong carrier and the market at that time.

Moving on to our joint ventures, Bridgetex volumes were approximately 315000 barrels per day and the second quarter of 'twenty, 1 compared to nearly 355000 barrels per day, and 2020, primarily due to a decrease and uncommitted shipments and the current quarter.

It's Adam on volumes.

Volumes increased to approximately 220000 barrels per day, and second quarter 'twenty, 1 compared to just over 165000 barrels per day and the 2020 period, primarily as a result of our recent pipeline expansion, which as Youll recall was supported by additional commitments from our shippers and so as you can tell from my remarks, we continue to enjoy.

Joy, the benefits and long term commitments from creditworthy, Counterparties and on our crude oil pipelines with our customers continuing to meet their obligations.

Just a few other quick notes on our year over year results G&A expense increased between periods, primarily as a result of higher incentive compensation costs, reflecting our strong results and year to date.

Additionally, we had higher benefit costs and the current quarter, primarily related to higher medical claims.

Non operating other expense was unfavorable due to the amounts recognized from second quarter 'twenty, 1 related to certain legal matters.

We're not in a position to discuss details of those matters at this time I will note these legal matters.

A relatively unusual for our business and not expected to be recurring which is why we've recorded and below operating profit.

Gain on disposition of assets was approximately $70 million following the sale of a partial interest and our Pasadena Marine terminal joint venture and second quarter 2021.

Net interest expense decreased primarily due to.

And the absence of debt repayment costs incurred in 2020, when we retire notes are due in early 2021.

As of June 30, the face value of our long term debt outstanding was $5 billion.

The weighted average interest rate on that debt.

About 4.4%.

And finally as mentioned earlier the results of our independent terminals are now reflected in discontinued.

<unk> operations due to the pending sale, which we expect to close sometime later this year or early next the income from those assets increased between periods and partly due to improved volumes as compared to the pandemic affected 2020 period and.

In addition, a significant portion of the operating margin from these assets is driven by cash.

Any sensitive activities it can be volatile from period to period and the stronger commodity environment. During 2021 favorably impact the results from these assets and the form of higher liquids gas liquids blending profits and more favorable product overages, which reduced operating expenses as well as favorable unrealized noncash mark to market.

And what adjustments.

And these assets most of which are located along the colonial pipeline also saw a net benefit from the temporary shutdown and Cornell during the second quarter of course, the income from discontinued operations line on our income statement does not reflect the maintenance capital associated with these assets.

While we have not disclosed either on EBITDA or cash flow.

And multiple for the sale of these assets and indeed on certain disclosure limitations and the sale of payment that limit how much we can say about it and we remain very pleased with the value in terms of the transaction and believe it will result in increased value for our unit holders and the coming periods.

Moving on to capital allocation balance sheet metrics and liquidity.

Worse in terms of liquidity, we continue to have our 1 day and a credit facility available to us through mid 2024 and had approximately $258 million of cash on hand, and thing and the second quarter.

Our leverage ratio at the end of the second quarter was approximately 3.3 times for compliance purposes.

6 times, excluding the gain we realized.

<unk> on the sale of part of our interest and Pasadena.

And finally with respect to capital allocation I'll reiterate that we remain focused on delivering long term value for our investors through a disciplined combination of cash distributions and capital investments and equity repurchases.

During the second quarter, we repurchased.

Approximately $1.7 million units at an average purchase price of $47.77.

For a total spend of approximately $82 million.

And the cumulative amount of units repurchase since early 2020 to $7.3 million units for just under $360 million.

Of course, we are always.

Careful to note the timing price and volume of any unit repurchases will depend on a number of factors, including expected expansion capital spending free.

Free cash flow available balance sheet metrics legal and regulatory requirements as well as market conditions and the trading price of our equity and to that point I will further note that as a result of the negotiations.

And our recent asset sales there have been significant significant amounts of time and the 2 most recent quarters during which we have been in possession of material nonpublic information and so we've been unable to conduct unit repurchases within the safe Harbor rules coming on or <unk> 18 plan.

But subject to all those aforementioned caveat, we continue to use.

<unk> purchases as an important focus of our ongoing capital allocation efforts, so with that I will turn the call back over to Mike. Thank.

Thank you Jeff.

And as part of this mornings earnings release, we also read or reiterated our expectation to generate annual DCF of 1.07 billion during 2021.

This guidance assumes contributions from the independent terminal through the remainder of the year given the uncertain timing of the sales transaction.

While we outperformed our guidance for the second quarter some of the favorable impacts from Georgia. During the quarter are expected to be offset by higher costs. During the second half of the year in part due to.

<unk> shifted from the second quarter to later in the year as well as by lower commodity margins compared to the margins we expected when we increased guidance in April.

We have now hedged approximately 80% of our gas liquids blending for the fall season blending margins compressed somewhat over the past few months, primarily due to higher.

And explain us from both butane and Rins, while future gasoline prices did not increase by a similar amount as a result, we are now expecting and average margin closer to 35 per gallon for the year versus $40.40 previously announced.

Additionally, we have also hedged about.

Higher percentage of spring blending for next year as well at margins also around 35 per gallon.

Turning to refined products demand, we expect refined product shipments to be in line with our previous estimates for the year with total volume is still forecasted to be 13% higher than last year.

About a product we expect total gasoline shipments to be 13% higher distillate and 10% higher and aviation fuel, 25% higher and our 2020 volumes with overall current year refined product shipments still expected to be about 3% above the more normal demand year of 2019.

Our estimates continue to project modest growth and demand associated with increased travel and economic activities as well and to increase increased contributions from our recent Texas expansion projects, partially as a result of a customer recently completing a required connection that had and cowen and COVID-19 related delays.

We continue to see improvement and gasoline demand, especially during the peak summer vacation season, and we have also seen continued improvement and distillate and jet fuel demand.

Our estimates expect the improved level of activity will remain with people returning back to work and school and our markets and no additional lockdowns related to virus.

This variance or otherwise.

On the subject of our refined products pipeline I would like to briefly mentioned the midyear tariff changes that went into effect on July 1.

As expected we decreased rates by approximately 0.6% and those markets subject to the FERC index methodology, which historically have represented.

On a 40% of our shipments and.

And the remainder of our markets, we increased the tariffs by an average of more than 4%, resulting in an overall average refined products' midyear tariff increase of nearly 3%.

I also want to mention that due to increased movements on our recently expanded Texas pipeline segment, which is not.

And at a rather and by the FERC, we expect the overall percentage of our shipments and subject to indexation to decline through time with more volume being subject to market based rate adjustments.

And as Jeff mentioned earlier, we remain focused on delivering long term value for our investors through a disciplined combination of cash distributions.

And not to do repurchases and capital investments base.

Based on our 1.07 billion DCF estimate for 2021, we expect to generate distribution coverage of 1.107 times for the year, assuming the current quarterly payout and unit count we intend to keep distributions flat this year with our forecasts.

Equity DCF projected to exceed distribution payments by almost $160 million for the year.

Concerning expansion capital and we expect to spend $75 million, and 2021 and $15 million and 2022 to complete our current slate and construction projects on.

Although the.

Cash flow remained the same as last quarter. These estimates now include new projects to increase our biodiesel blending capabilities within the states of Kansas and Missouri.

This additional project spending has been offset by lower costs associated with other projects that are nearing completion.

We also continue to assess additional attractive expansion.

The number of opportunities to expand our service offering and generate incremental value for our investors and we remain optimistic that additional projects with attractive returns will come to fruition, although most likely smaller scale and they happen in the past.

Like always we remain committed to Magellan longstanding capital discipline.

And balance sheet strength.

We expect to generate free cash flow after planned distributions and expansion capital expenditures and <unk>.

More than $350 million for the year.

Further the closing of the independent terminal sale and another $435 million to the free cash flow pool, all of which will be available.

Spansion is consistent with our capital allocation priorities.

And our capital allocation priorities for free cash flow after planned distributions remain great growth capital investments with attractive returns and equity repurchases.

Special distributions continue to be an option, but they are not currently our preferred.

And where you path.

That concludes our prepared remarks, and operator, we will now turn it over for questions. Thank you very much ladies and gentlemen, if you would like to register a question. Please press. The 1 followed by the 4 on your telephone keypad and you will hear rates, 3% on prompt terminal with your request. If your question has been answered and you'd like to remove yourself from the queue. You May press 1.

Preferred.

Once again for a question. Please press the 1 followed by the 4.1 Michael please for the first question.

Okay.

Our first question comes from the line of Spiro <unk> with Credit Suisse. Please go ahead.

Hey, good afternoon everybody.

Mike.

First question, just on and asset sales.

And the state of play and that market today and another fairly active year for you again.

And realize it's hard to predict what M&A looks like going forward.

Curious is this a trend you think can continue at this pace.

Where are you finding as you sort of putting these assets down little by little that remaining portfolio starts to look maybe a.

Core for you to part ways with.

And does it sort of lead you into maybe doing more of these joint ventures or optimizations.

And that as well and if you could just maybe opine on interest levels and M&A right now as we stand and the year versus earlier, this year and getting stronger or weaker got the St.

Yes.

Well.

Let me address your first question I mean, we have been active and asset sales much more active than we've been historically.

And that's.

That's been a process that we routinely and been engaged and is determining whether we have assets that are more likely.

To be more valuable somebody else and we think they are present value is to us.

As we look forward and I don't want to comment specifically on anything we might do but.

And if you look at the assets, we have sold and they've either been partial interest and joint ventures, where we have retained and.

On a ship or in the case of the marine terminals.

<unk> and the southeast terminals.

That for reasons that are probably obvious.

And theyre not really connected as part of our network on our refined product system of our crude oil system. So those are assets that are much easier to sell and not have any lingering negative impact on.

<unk> of the company.

And and.

And Youre right I mean, if you look at the suite of our remaining portfolio.

On the number of.

Assets that fall into that category.

Our smaller than before we sold these assets and that doesn't mean that we do.

Consider and evaluate.

On the revolver, we'll continue to consider and evaluate assets but.

We're not we're not and the business of selling everything we own either so.

Well makes and we make those decisions from a strategic standpoint, and also not just the absolute amount we can get from a transaction, but also what potential.

But they would have the rest of the remaining system. So I'll just leave it at that and.

And I think your second question was with regards to whether there has been an uptake and M&A.

And I think and the short answer at least from our view is it's still relatively.

Slow.

Cautiously, we've been active and selling assets, but as far as assets are in the market that we're interested in.

We haven't been very active and and I would anticipate.

Going forward that its going to remain that way and lesser something thats very attractive to us that we think we can get at a reasonable price.

Got it okay, great and helpful. Thanks.

Thanks, Mike.

Second question just on on MLP.

Candy and certainty around that.

I guess can you extend mlps could eventually be taxed and seek or just curious from your perspective is that and automatic trigger for you to mercury.

C Corp, and other considerations and keep them.

And well.

Clearly if the MLP structure is no longer allowed then yes, we will most likely convert.

There's really no reason to remain a partnership without the tax advantages associated with it and yes, the 1 caveat being and of that and.

And some permutations.

Proposals, there's been discussion of transition periods it can be and.

And the original back into 80 use legislation I think there was a 10 year just.

Kind of transition period, so sort of a long transition period, there'll still be decisions about timing and what makes the most assets, but that will just be based on obviously and facts and circumstances and the rules.

<unk> net how people are looking through to the ultimate situations versus do we see value and continuing to avoid double taxation for a number of years et cetera. So.

That's the only and they want to probably that we would have to work around yeah, and as you think about where we stand on that I think 3 months ago.

It looked like it.

And with more likely than not and we're going to have a requirement.

And new legislation to eliminate the structure as we sit here today.

It appears maybe it's a little less likely that that's going to happen, it's still a risk factor, that's going to overhang and the industry until there's some certainty.

And.

And as around and as I said, I mean, it seems from week to week or month to month.

The the likelihood that something sort of change moves around quite a bit so.

It's kind of difficult to make any kind of long term planning with regards to that but we think at least at this point and time.

And it looks like perhaps.

That legislation is not going to require.

It looks like that the die down a little bit, but as everyone knows I mean.

Things can change quickly and Washington, but thats, what it looks like at the moment.

Okay understood and I appreciate all the color. Thanks again guys.

Sure.

Our next question is from Theresa Chen with Barclays. Please go ahead.

Good afternoon, and thanks for taking my questions.

And Mike I'd like to touch on that on the <unk>.

Guidance.

And just in light of.

This quarter and keeping it flat.

And I appreciate all the color around it just delving into this a little bit more related to the cost increases or cost that were artificially suppressed this quarter and moved after second half and how much was that and what is that related to vs.

And the low expectations for butane blending and default and that that you've hedged on the bulk of it and.

Is there any other moving parts around it around full year guidance.

Well, let me kind of simplify it because there's obviously a lot of moving parts and just talk about the material ones I mean first of all.

And I think.

There was some speculation that perhaps we have reduced significantly our refined product demand forecast for the remainder of the year.

And that Hasnt happened and I can't tell you, we've tweaked it a little bit.

Our internal forecast, we've lowered gasoline and a little bit we've increased diesel.

Seasonal and the net of those is a slight reduction, but it's not a material contributor to the change and our forecast for.

For the most part our second half volume forecast is very close to what it was.

Back when we when we visited with you and.

And our last.

With all the big changes.

On the are reduced and the second half to offset that.

And.

And the over performance of the second quarter is number 1 and commodity margins, which are lower.

And then what we had anticipated.

As you know as we.

I started the call last time, we had not fully hedge the spring and unfortunately as time went forward margins compressed and when we did reached a point of locking and the remainder for volume.

And those margins came down and so.

That is 1 of the significant changes and the second half of the year.

The other is as you mentioned, it's the cost the timing of the pass and I don't have the precise numbers here in front of me I can tell you 1 of the big items is on maintenance capital.

Net just through the timing.

Not in any intentional way, but just through the timing of how these projects and <unk>.

Hold on.

We significantly underspent, our expectations for maintenance capital.

And the second quarter and the first quarter quite frankly, and we're anticipating that we're still going to spend the same amount of maintenance capital by the end of the year as we originally planned and so.

And as a negative effect on the second half of the year. So those are the 2 primary.

And that's again theres noise around a lot of different individual line items, but those are those are the big items right there.

And.

Thank you and and.

And I guess switching gears to your pending sale and independent terminals, along the southeast How's the FTC.

Process going there on and do you expect to second and second requests related to this.

Well.

We have not yet received.

Second request and it's really hard for us to predict whether we will or not the.

And the process is going well and we don't.

Have any there hasnt been anything thats been raised from the FTC that that's caused us any concern on this.

But whether we get a second request and how long the process is going to take and we really don't have.

Anything to comment on that at this point, we think we're going to have a successful.

<unk>.

Approval at the end of the day.

I think its assets more question of how and.

When rather than if.

But sometimes these processes go quick sometimes they don't.

We don't know, which 1 of them is going to be on this 1 yet.

Great.

Thank you and lastly, and I appreciate all the details you gave on a on the rates and the natural and.

<unk> and exposure at that many of your assets have and as we've looked at 2020.2 given the current inflationary environment and.

Can you just give us a sense of what your expectations are for.

Or.

Total tariffs and fees increases midyear next year and that we have a lot of the data and as is and can you remind us how much of your assets are subject to caps and collars versus those that are not.

Well I can tell you that on.

On.

And.

So the index is going to be formula driven and I don't have what PPI as year to date, but.

It's very strong and so we would expect that our index rates.

Are going to be.

<unk>.

Have a significant increase next year.

And your driven by the index and driven by PPI.

What we do and the market base great locations.

Although we haven't done that analysis and when we typically wait until the spring and do a revenue.

On a competitive analysis around on terminals to make a determination as to what.

Those rate increases.

I don't know what the what that 1 yet.

Obviously and a high inflation market, we would probably be more inclined to increase those rates more than we would in a low inflation market, but I don't have numbers for that yet and I won't have numbers, we won't have a sense of that until we get into next year and start doing.

And our planning for the tariff increases, which typically takes place and late spring.

And as far as a percentage of our.

Volumes that are subject or revenue that's subject to index I mean, right now it's around 40%, but as I mentioned as time goes on.

And this will expect that percentage to decrease and it's not because we're losing volumes and that market is because we're increasing volumes in markets that are not subject to the index, particularly in Texas, which are intrastate rates and <unk>.

So as those volume to grow and the percentage of our transportation.

And we are and it is subject and the index will decline over time.

Thank you.

Alright, Thank you and our next question is from Shneur <unk> with UBS. Please go ahead.

Hi, good afternoon, everyone I'm Mike.

If I can just go back to the conclusion, if youre procurement and Mark I guess I just wanted to make sure I heard everything correctly.

It sounded like a special.

Distribution is something of a lower priority from a capital return perspective, and so if I understand correctly it sounds like high returns.

And I was wondering if you will.

Capex opportunities is probably priority number 1, but otherwise opportunistic buybacks to help improve your payout ratios and improve your coverage ratio is kind of the preferred avenue of incremental returns of capital and just kind of wanted to understand that at this point.

I think you framed it exactly right.

<unk> made clear that we're not saying, we'll never do a special distribution, but when we look at the playing field right now it's low on our priority list and we're not planning on 1 at the current moment. So so youre correct.

High return capital investments and equity repurchases are a top priority right now.

Okay perfect.

And then secondly, just kind of wanted to revisit the PPI question net.

And that Teresa just asked.

And when I sort of think about your business.

And the P P.

And stock.

On the impacts the overall cost of your total this year into next year and so forth.

And I sort.

Think of your base cost structure versus your revenue structure is it fair to conclude even though not all of the revenue is tied to.

Regulated to the regulated and index is that the revenue increase driven by PPI would be greater than anything that would happen on the cost side.

Now in terms of money your business.

I think that's generally true I mean, if you look at.

Or I should I should qualify that by saying to date and that's been true I mean are our largest cost on our pipeline systems.

Our typically people.

And power and we haven't seen.

And.

And cost increases.

On those 2 line items, consistent with what PPI and spend a.

Year to date, now again that could change going forward.

That's where we are currently.

People and we are seeing cost increases, particularly on maintenance projects and capital purchases.

Increases in steel costs and those sorts of things. So if we replace type replace valves to those sorts of thing we have seen significant cost increases, but we haven't seen it on our 2 biggest pieces now again.

Sure.

And that's as of today.

And we'll have to see how that plays out going forward, but.

I think.

I think that's that on that 1 does that answer your question.

Yes it.

Definitely does have a few more but I'll go back into queue and respect the 2 questions.

Okay and on that.

Our next question is from Jeremy Tonet from Jpmorgan. Please go ahead.

Hi, This is Joe on for Jeremy.

Wanted to start kind of digging and more on the capital allocation and and I guess buyback specifically.

You've talked about kind of like.

And more regulatory certainty needed there, but but also kind of completed.

$80 million or so and buybacks during the quarter.

And kind of came at pace continue without more regulatory uncertainty or was that kind of like considering the assets sales also and.

And how.

You're kind of thinking about that in general.

Well I don't want to comment specifically on the pace of the buybacks, but I will say regulatory uncertainty has been and element and deciding.

When we execute and when we don't and.

Sure.

It.

How are you going to be that way I think at this moment, we think the regulatory uncertainty has died down a little bit it's not going away completely.

Yes.

Proposed legislation on Washington continues on course, where it is right now where it doesn't look like this is going to happen there.

Is it going to be required conversion.

It will to a C Corp.

Net.

Put this in a more comfortable position with regards to our equity base.

And if that changes that can affect that.

Okay that makes sense that's helpful.

And then also.

<unk> wanted to ask quickly on <unk>.

And of the legal expense for the quarter.

Do you mind expanding on what that was related to and should we expect any continuing elevated legal cost or was that more 1.

On time.

But what I will say I don't want to talk about.

Specific cases involved but the.

And multiple.

Legal items that.

And we're all netted to the number you saw and the financial statements. It wasn't just 1 issue.

And.

We expect those.

And this 1 time deals these are not recurring.

Items. These are these are 1 time.

Resolution of lawsuits or other legal disputes that were that were resolved in the second quarter.

Yes.

Okay. Thank you very much and I'll stop there.

Our next question is from Tristan Richardson and whats the truest. Please go ahead.

Hi, good afternoon guys.

Just a quick question on the rationalizing capacity and the crude world I think you've noted that the contract portfolios and.

Timing of explorations, there are always going to be a limiting factor can you talk about any progress on that front either with peers are customers. But then also I think you guys have talked in the past about looking at optimization opportunities that are <unk>.

Outside the scope of doing something with a peer.

Can you give us a sense of what that.

And took like.

Yeah.

Well.

To your first point.

I don't have an update to give you I can tell you we are actively and continue to actively looked at opportunities.

But I'm not and are positioned to give you an update on any on any developments there.

Sure.

As far as other optimization opportunities and we've.

We've.

<unk> executed on a number of things to improve our cost profile with regards if your discussion and specifically with regards to optimization around assets.

Again, I don't really have an update.

And that could be there are some things we're doing that are going to lower our costs.

But theyre, probably not material things that are worth talking about at this point. So I guess the takeaway you should have years and this isn't something we've evaluated and put on a shelf and very active process for us and.

And.

And again, we do believe asset rationalization, especially in the Permian.

And would be a good thing on.

All of the relative parties skin care and find a way to create incremental value through such and such and action and.

And we'll continue to evaluate and pursue it.

And I appreciate it and just a quick follow up I think in the past you've been asked about opportunities on the renewable fuel side and I think you've talked about but there might be potential initiatives out there to pull that blending activity.

Backward into the value chain, so that that would be more of an opportunity for Magellan.

I'm just curious.

Is that something you guys continue to look at or.

Are there other potential updates there may be some case studies that we should think about.

Well, we're very active in that regard I mentioned and our notes that we are adding biodiesel blending and some facilities and Kansas and Missouri.

We're doing a number of other things we have star.

Started test movements of biodiesel blends and the pipelines that have been successful.

We've done a number of areas that we're targeting 2 to start doing.

Particularly biodiesel blending.

And hub locations and then transporting.

Blake.

I would caution you that it's probably going to be more of a gradual process rather than a system wide process all at once.

I would also tell you that.

And in an ideal situation is going to be something that we can do with very low capital.

So we're not going to be adding.

Hopefully a lot of capital cost to do this.

But it's evolving and we're very positive on it and we think we're on a path to be able to talk about it more on the future.

Sure.

But we are we are.

We are moving the ball on it.

Okay.

And I appreciate it thanks, Mike.

Sure.

And our next question is from Keith Stanley with Wolfe Research. Please go ahead.

Yeah.

Hi, Good afternoon, I first I just wanted to ask on refined products volume so.

You're sticking with the guidance for the year to be.

And above 2019 or or at normal levels.

When I look at the first half of the year you are already up 3% versus the first half of 2019. So this is probably overly simplified but.

Wouldn't that imply youre, not really assuming any incremental recovery and volumes in the second half and.

3 brands.

And kind of assuming the same level of recovery and the second half of the year to be 3% above 2019 that you already saw and the first half of the year.

Yes, if you if you look at our volume forecast from the second half of the year.

Fairly consistent with what we actually saw on the second quarter.

And the guide on an absolute basis, and it's different by products, but on an absolute basis, we're not expecting a tremendous volume growth from the second quarter of this year that just saw some tremendous growth.

If you are comparing that to future periods, I mean past periods are still going to have and each of those.

First.

Our growth percentage because those those previous quarters were depressed, but just comparing what we're expecting for the third and fourth quarter versus the second part of this year.

And it's relatively.

Flat, but again, that's still when we.

Quarter on works out to about a 3% growth over 2019.

Okay that makes sense.

Second question I, just wanted to clarify.

Yeah.

I think you said, 80% of spring blending is now hedged as well.

If im not misreading that and it might be a little earlier earlier than you typically do it. So just any thoughts on I guess, why you decided to to lock in more of the spring blending at an earlier point.

Well I don't know that its materially earlier.

And then when we would have done it.

Previous.

It doesn't matter when we.

As you might expect knowing when the precise time.

And to hedge and lock in on a forward margin.

There is some science behind it and Theres some are behind it.

And these markets have been very volatile as you can imagine with butane price.

<unk> and gasoline prices and not necessarily moving in tandem and RIN prices.

And being extraordinarily volatile and.

And so.

And I really don't have and other ads free other than taking all those things into consideration we felt it was appropriate.

And in the margins.

Price and.

As with any hedging program you can second guess it.

After the fact.

Yes.

And you are always subject to that whether you don't hedge and you made the wrong decision or you do hedge and you make the wrong decision you have to make a decision.

And when we looked at everything going forward.

And does this spring we just made the decision to lock that in.

So I don't have any more detail on it than that.

No that makes sense, it's certainly been a volatile thank you very much.

Sure.

And our next question is from Gabe Moreen with Mizuho.

Please go ahead.

Hey, good afternoon, and maybe if I could just follow up on <unk> question. Just in terms of can you just put into context sort of the rins expense for this year relative to historical levels and and.

And also whether you have some of you on exposure I guess for 23 at this point.

And I don't have the number on.

And what our actual expenses and in front of me.

It's and being told is the average is about 13.

A gallon is what our cost is but I don't know on an absolute basis, what that works out too.

We don't typically hedge the Ren independent.

Locking in the margin so typically what we do and we lock in.

Gasoline to butane margin, we also by the Red.

Associated with that.

We're not exposed at least on our hedged production to the RIN price, but we typically.

Cash rent beyond that on a speculative basis.

Yeah.

Got it thanks, Mike and then maybe if I can ask there's obviously been a lot of media reports about smaller markets running out of various refined products due to lack from truckers and whatnot and I'm just wondering to what extent that may or may not be impacting any of your markets and.

And I don't think that's whether there's any opportunity for some smaller projects to come out of that.

Well.

We have.

We've seen some stress on supply is in the Rockies and the front range Denver front range and.

And.

Part of that.

Just due to their rapid recovery and demand.

And that's due to the conversion of the Cheyenne refinery assets.

Taken and supply out of the market.

We have already initiated some.

On projects to get more supply out there were evaluating additional projects to get more supply out there.

And we think we're going to have a few of them and theyre going to that we're going to be able to execute on.

These arent transformational projects.

And maybe adding 5000 barrels a day and that kind of range to the market, but they are highly but they are relatively low capital and that they are high return projects for us. So we're looking at.

That is.

We're also looking at some rail capability and our rail more barrels and into the market and to some of our facilities. So there are opportunities there, they're not they're not quick fix kind of opportunities they do require time and capital investment.

But we do anticipate we're going to have.

<unk>.

And that.

And.

And some high return projects too.

Supply and more barrels to the front range.

Got it thanks Michael.

Sure.

And next question is from Michael <unk> Goldman Sachs. Please go ahead.

Hey, guys.

Thanks for taking my question just a quick 1 here on the growth Capex outlook for next year, that's a pretty small number is that a placeholder.

At this time of the year, meaning a little more than halfway through and 21 or is that a hey, we've gone to our customers, we've kind of talked it through and and there really isn't a whole lot they need from us from.

Throughput and cost structure standpoint, and it kind of is what it is and and is it too early to even have a view on kind of what that could be for 2023 or are you getting indications now.

And already for 18.20 months out.

And.

And good question I mean first of all the $15 million.

From an and just to be clear on what that is that is that is on projects that have already been approved and are under construction and so that $15 million, which is what's rolling over into next year's and finished those projects. We do anticipate we're going to have incremental projects approved.

And before the end of this year.

And number and into early next year.

So that that number will come up I think to be realistic it's hard to see based on what we have in front of us that number for a full year for 2022 would be above $100 million, but we could get up.

A lot of these projects we're working on.

Actually happen, we could get up close to that number for the year.

And it's too early for us to forecast anything for 'twenty 3.

Got it thanks much appreciate it.

Sure.

And Mr. Mears I'll turn the call back over to you.

Alright.

Year. Thank you everyone for your time today, and your interest and Magellan and we will talk to you soon.

Ladies and gentlemen that does conclude our conference call for today. We thank you all for your participation have a great rest of your day you may disconnect your line.