Q3 2021 Magellan Midstream Partners LP Earnings Call

November 2, 2021

Okay.

Greetings and good afternoon, everyone and welcome to the third quarter 'twenty one 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 ask a question. Please press the one followed by the four on your telephone and if at any time you need to reach an operator, Please press star.

<unk> zero as a reminder, this conference is being recorded today Tuesday November 2nd for 2021. It is now my pleasure to turn the call over to Mike Mears Chief Executive Officer. Please go ahead Sir.

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

Onto the quarter, we are pleased with our third quarter results for a few reasons first of all Magellan generated strong financial results that significantly exceeded our EPS guidance for the quarter. While there were a number of favorable items that contributed to the earnings beat the main benefits related to additional refined products transportation volumes increased.

<unk> continued strong distillate demand across our entire pipeline system as well as lower than expected expenses in part due to our ongoing optimization efforts in.

In addition, as previously announced we also delivered on our commitment to maximize value for our investors with more than $390 million of equity repurchases during the quarter and what we believe to be attractive valuations as well as an increase to our quarterly cash distributions.

This increase marks 20 straight years of annual distribution growth for our company, which is a notable distinction that sets Magellan apart within both the MLP and midstream space.

Our CFO, Jeff Holman will now review a few highlights from our third quarter financial results, then I'll be back to discuss our guidance 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, including operating margin distributable cash flow or DCF on free cash flow.

We've included exhibits to our to our earnings release that reconcile these metrics to their nearest GAAP measures.

Earlier. This morning, we reported third quarter net income $237 million, an increase of $25 million compared to third quarter 2020.

Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1 nine.

As Mike pointed out exceeding our guidance for the quarter of 87.

DCF for the quarter with $277 million.

Was 7% higher than third quarter 2020, primarily due to additional contributions from our refined products segment.

Free cash flow for the quarter was $252 million, resulting in free cash flow after distributions of $25 million.

A detailed description of the quarter over quarter variances is available in the earnings release, we issued this morning, So I'm just going to touch on a few highlights of the quarter and resilience.

Starting with our refined products segment operating margin of $270 million for the quarter was approximately 19% higher than the 2020 period a.

Our refined products business continued to benefit from the recovery in travel economic and drilling activity in 2021 compared to the pandemic driven reductions experienced in 2020 as well as from the continued ramp up on our Texas expansion projects in particular, we benefited from outsized increases in diesel fuel during the quarter or.

Overall refined transportation volumes were up nearly 20% relative to the prior year period, the significant increases in all products versus 2020 and on an absolute basis volume set a new quarterly records for the second quarter in a row.

Refined products revenues also benefited from the 3% overall average tariff increase that went into effect on July <unk> of this year. As a reminder, this 3% increase consisted of a <unk>, 6% decrease to our index rates and an average increase of more than 4% to a competitive rates.

Turning to our crude oil business third quarter operating margin was approximately $112 million down 80% from the third quarter of 2020 with the themes for the segment remaining generally consistent with explanations, we've given throughout the year and with the assumptions behind our original guidance.

Volumes on Longhorn continued to be lower as a result of contract explorations late in 2020, averaging about 240000 barrels per day versus approximately 275000 barrels per day in the prior year.

While our affiliate marketing activities continued to offset much of the volume decline related to the expired contracts. The margins 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 benign on the previous contracts and so our average realized rate per barrel declined.

Volumes on our Houston distribution system increased versus the prior year period, primarily due to higher year over year refinery utilization driven by demand recovery. This increase in volume was offset by lower average rates, primarily due to deficiency revenue that benefited 2020 period and didn't recur in 'twenty one.

So just as a reminder, although we often see volatility in our Houston distribution system lies between quarters.

As volumes move at significantly lower rates than longer haul longhorn shipments, which means that their impact on our reported volumes and average rate is much greater and their impact on our actual revenues.

Similarly to last quarter storage revenues declined primarily because of the current year period.

Didn't benefit from the strong contango market that drove storage rates in 2020.

Moving on to our joint ventures Bridgetex volumes were just over 315000 barrels per day in the third quarter of 2009 compared to approximately 330000 barrels per day in 2020, primarily due to a decrease in uncommitted shipments in the current quarter, which is reflective of continued unfavorable pricing differentials while settlement volumes increase.

To more than 250000 barrels per day compared to nearly 165000 barrels per day in 2020, primarily as a result of the expansion project completed earlier this year.

So with respect to our long haul long haul crude oil pipelines, we continue to reap the benefits of long term commitments from credit worthy counterparties as our customers continue to shift in line with their contracts.

Just a few other quick notes on a year over year results G&A expense increased between periods, primarily as a result of higher incentive comp cost, reflecting our strong results year to date, while net interest expense increased primarily due to lower capitalized interest as a result of reduced expansion capital spending as well as higher debt outstanding.

As of September 30th the face value of our long term debt was $5 1 billion.

With a weighted average interest rate on that debt of about four 4%.

As a reminder, due to the pending sale of our independent terminals. The results of operations from those assets, which were previously included in the results of our refined product segment are now classified as discontinued operations.

For these assets increased between periods, primarily due to improved commodity margins as well as just the absence of depreciation which is no longer recorded now that the assets were classified as held for sale.

Base revenues for these assets slightly declined year over year as.

As we've noted previously a significant portion of the operating margin from these assets constant commodity sensitive activities that can be volatile from period to period.

Moving on to capital allocation and balance sheet metrics and liquidity first in terms of liquidity. We continue to have a $1 billion credit facility available to us through mid 2024, with a $123 million outstanding on our commercial paper program at September 30th. Additionally, our next bond maturity isn't until 2000.

Five.

Our leverage ratio at the end of the quarter was approximately three six times for compliance purposes, which incorporates the gain we realized from the sale of part of our interest in Pasadena earlier this year.

Excluding that gain leverage would have been approximately 375 times of course, those leverage metrics incorporate the impact of the $391 million in unit repurchases, we executed during the quarter, which.

Which brings us to the last time I'll touch on which is capital allocation.

Our history as a public company, we have always focused on the good stewards of capital that has historically been reflected most strikingly in our best in class return on invested capital and our disciplined financing our growth projects, including zero equity issuances since 2010, despite spending approximately $6 billion on growth projects.

During the intervening 11 years, all while delivering sector, leading credit metrics and 20 straight years.

Interrupted distribution growth.

That disciplined capital stewardship is currently reflected in the opportunistic execution of our equity buyback program.

The $391 million of units were purchased during the quarter at an average unit price of $48 50 per unit, bringing.

Bringing our total repurchases for the year to $473 million.

When complete the initial $750 million program authorized by our board over a year before the end of the program's three year term.

The cumulative units repurchase today equals $15 1 million units were about six 7% of total unit total units previously outstanding.

The reduction in total ongoing distributions, resulting from these repurchases will increase distribution coverage going forward, which was an important factor in our decision to reinstate small distribution decrease this quarter.

With the completion of that initial 750 million solid program and.

Taking into account the expected proceeds from our pending independent terminal sale and our expectation of continued free cash flow generation in coming years. Our board has authorized an additional $750 million in purchases over the next three years.

As 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 cash flow available balance sheet metrics legal and regulatory requirements as well as market conditions and the trading price of our equity in particular I'll note that we remain.

Committed to our long standing four times leverage loan and also the timing of proceeds from independent terminal sale remain subject to the governmental review process.

But as we continue to reiterate we remain focused on delivering long term value for our investors through a disciplined combination cash distributions capital investments and equity repurchases.

And with that I'll turn the call back over to Mike.

Thanks, Jeff <unk>.

Concerning guidance, we now expect to generate DCF of $1 1 billion for 2021, which is $30 million higher than our previous forecast.

Primarily on our stronger than expected financial performance during the third quarter.

Refined products' demand overall continues to be solid and it's actually trending a bit higher than we initially expected for the year, our latest forecast expects full year refined product shipments to be 14% above 2020 levels or 4% higher than the more normal year of 2019.

We continue to benefit from the final commitment ramp on our east Houston to Hearne expansion project and we've also seen stronger distillate and aviation fuel demand as the year has progressed.

Our forward guidance continues to assume that no additional pandemic related disruptions impact demand.

We've hedged nearly 90% of our gas liquids blending for the fourth quarter and are now expecting average margins in the 40 <unk> per gallon range for the full year.

As you know commodity prices are significantly higher than earlier this year, but continue to be quite volatile, especially as we look out to 2022 for this activity.

Like last quarter, we still have 80% of our spring 2022 blending hedged at an average margin of 35.

Following our typical approach we would expect to begin hedging fall of 2022 blending activity next spring once the markets become more liquid for the fall season.

Based on our $1 1 billion DCF estimates for 2021, we expect to generate distribution coverage of more than one two times, which translates to approximately $200 million of excess cash above our distribution payments for the year.

And while we don't plan to provide guidance for future years at this point, we do continue to target annual distribution coverage of at least one two times for the foreseeable future.

As a quick reminder, we continue to await regulatory approval for the pending sale of our independent terminals that we announced back in June.

While we have been responsive to the FTC's questions exact timing for the closing is not yet clear.

<unk> is already November I think it's very reasonable to assume closing will occur in 2022, which is consistent with our guidance.

Concerning expansion capital, we now expect to spend $80 million in 2021 and $20 million in 2022 to complete our current slate of construction projects.

These estimates of $10 million higher than last quarter due to the addition of a few smaller projects, including new investments to enhance our gas liquids blending capabilities and to increase connectivity of our Cushing crude oil terminal.

These projects are low risk and expected to generate returns at least in line with our six to eight times EBITDA multiple threshold.

We are continuously working to assess new opportunities to expand our service offering in a disciplined manner and remain optimistic that additional projects of similar size and returns will come to fruition.

For instance, we plan to launch an open season in the near future for potential small expansion of our refined products pipeline from Kansas into Colorado.

The state of Colorado continues to be short refined petroleum products in our line has been operating at full capacity on a consistent basis to help meet that need.

If warranted by sufficient customer commitments. This expansion of nearly 5000 barrels per day could be achieved for less than $20 million.

This potential project has not yet been included in our spending estimates, but it gives you a feel for the type of opportunities we are considering.

As always we remain committed to magellan's long standing capital discipline and balance sheet strength and our capital allocation priorities continue to be growth capital investments with attractive returns and equity repurchases.

Before I close I'd like to briefly hit on the topic of inflation.

For those watching the change in the producer price index. They know it has increased by more than seven 5% year to date through September.

As you'll recall a portion of our refined products tariffs followed the FERC indexation methodology that is linked to the change in PPI. We have historically changed the rates in these less competitive markets consistent with the index and most likely we will do so again on July 1st of next year.

Concerning our market base rates that comprised of around 60% of our shipments in the past.

We have generally been increasing those rates in the 3% to 4% annual range over the last few years, which has been higher than the corresponding index change over the same timeframe.

By definition those markets are subject to competitive pressures, so we need to ensure our rates remain competitive.

We will be preparing a detailed analysis over the coming months to determine the appropriate changes to our rate in the upcoming year.

Of course. The next question is how does the current inflationary environment impacting our actual costs.

As a reminder, approximately 70% of our operating costs are related to people power and integrity spending.

To date, we have not seen pricing pressure on our cost structure at nearly the same level as the PPI increase the component of our past that it's most likely to be impacted going forward as power, which represents about 10% of our total cost.

Most of the power cost increases this year have been mitigated by our ongoing optimization effort, but it is likely that we'll see marginally higher power costs as we move into 2022 and that will be incorporated into our 2022 guidance one announced next year.

Operator that concludes our prepared remarks, so we'll now open the call to questions. Thank you very much ladies and gentlemen, if you'd like to register a phone question. Please press one four on your telephone keypad, you will hear a three ton prompts to acknowledge your request once again per phone questions. Please press. The one followed by the four one marketplace.

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

Hi, Thanks for taking my question.

First I'd like to touch on the distillate strength youre seeing across your system and Mike and Vince.

Part related to temporary effects such as pull forward.

Harvest season, or do you expect this to continue going forward.

Well I think we've seen.

Strength in our digital demand across all the sectors I mean, it's been strong in the agricultural.

Market, it's been strong.

In the transportation markets has been strong in west, Texas in particular with regards to the drilling markets.

I wouldn't say that what we've seen in the third quarter is unusual.

Is unusually high due to the agricultural demand.

I think it's just a representation of strength across the entire spectrum demand points for for diesel fuel.

Got it.

And in terms of your unique.

Unique perspective on Cushing, given your exposure there as well.

Tie ins and refined product system in mid Con.

In terms of what we're seeing as far as the backwardation in the market and the level of Roth.

I understand that your contracts are typically on multiyear terms.

<unk>.

Near term volatility, but how should we think about re contracting as far as that swap of storage goes and what are your expectations for inventory from here.

Well, we have really tried to focus.

The the customers, our Cushing facility as those customers, who need storage for operational purposes.

That doesn't mean, we don't have some in there that are really just.

Taking storage for trading purposes, but the majority of our contracts are there for operational purposes. So it's less impacted.

Let me rephrase that their need for the storage is less impacted by the structure of the curve.

And we're looking at opportunities in Cushing actually that will.

Even emphasize that more and strengthen our profile in Cushing.

So that's been our strategy all along it's played out fairly well it doesn't mean that when you come to contract renewals.

<unk> are still somewhat price sensitive versus what the market is offering.

But.

At this point in time, given the tenure of our contracts, although we are expecting our cushing revenue to be relatively stable.

As far as what a short term projection is has worked at actual physical inventories go I don't know that I have a view on that in particular.

That can change dramatically as the price moves in the structure of the curve moves.

I don't think it is very surprising at this point in time that you have low inventories in Cushing low physical inventories in Cushing.

With a backward dated market.

And the fact that there is some pipelines that are being filled right. Now. So there is some demand for crude for lifestyles, but.

But we view, our cushing position as being relatively stable.

With potential upside.

With relation to some of the things we're working on.

Thank you.

Yes.

Our next question is from Spiro <unk> Credit Suisse. Please go ahead.

Hey, Mike Hey, Jeff.

Wanted to ask you guys about any potential slack you guys might still have in the system. It really hasnt fully rebounded yet from the pandemic or really any of them related fallout from that just trying to get a sense for what areas of the business can actually outperformed here over the next few years, obviously jet fuel kind of it seems like an obvious one that isn't back to normal. So just curious when you are.

We'll get MMP as a whole and the asset base in place.

How do you think about the earnings power there.

All of these other areas sort of get back to normal as well.

Well I think.

First thing that comes to mind with regards to the refined products business.

Is that.

Diesel fuel and jet fuel, however, rebounded very well.

As we've as we've recovered from the pie that pandemic, but our gasoline volumes are still lagging 2019 volumes.

<unk>.

And what.

The drivers behind that are still primarily in the metropolitan areas, where we're not seeing our metropolitan areas rebounding as fast.

They are rebounding, but theyre, just not getting there as fast as again I think thats.

Still mainly attributed to the fact that all the businesses are back in the office yet now I don't know, if that's permanent or not but I think theres still.

Room to recover on the gasoline side.

We've been through a cycle here, where the delta variant spiked. So it's probably slowed that returned to work recovery process is down in the third quarter, but hopefully <unk>.

That and so we still think that there is potential upside just to get back to 2019 levels.

On on our gasoline demand.

If you look at our crude oil business of course.

Were hampered by the fact that we have.

Crude system, that's overbuilt, particularly out of the Permian So recovery there is upside.

That's going to be dependent upon increased production in the Permian or it's going to be dependent on repurposing pipes in the Permian we think.

That a combination of those things are likely to happen and when I say that I don't necessarily mean in the next year or.

Or 18 months, but over time, our expectation is that's going to happen and that will have some improvement or upside potential in the crude oil business.

But the timing of that is probably a little less predictable.

Got it those are the first thing okay mines.

Yeah. That's helpful. Thanks for that Mike.

Good question, just thinking about growth projects for next year, you lifted the map by a little bit I know I think you said you're optimistic.

About some discussion youre, having with your customers and so I'm just curious.

Do you any sense from your customers in terms of timing on when they would be ready to kind of move forward with the project and kind of what's holding them up I know, we're going through budget season now.

A lot of them and so is it safe to say that I would just sort of come out and provide guidance next year, you'll be in a lot better positioned sort of guide around capex, if any of the uncertainty in Washington, preventing decisions to be made just curious with some of the gating items are.

Well first of all I would say I think the uncertainty in Washington isn't really impacting the types of projects. We're looking at I mean, they are really fundamentally.

Demand.

And or in some cases supply driven.

The things that are happening in Washington, We continue to have a view are going to have an impact in demand overall, a very long period of time.

And.

So we're mindful of that when we're making these kinds of these investments that we're looking for.

Strong returns in.

Not projects that have 20 year payouts to.

That makes sense, so so what's happening in Washington really isn't impacting it.

The majority of what we're looking at is just negotiations.

To make sure we can find projects that are mutually acceptable.

To shippers and to us to meet their needs and meet our return thresholds.

We're optimistic on a number of projects that we're going to get there I think.

We will probably have more clarity on what.

2022 will be in January but I will.

I can say that we will have 100% clear.

Because these negotiations are always ongoing and new projects come up.

Potential projects drop off and Thats, just the nature of project development I will say I mean, it's kind of a rule of thumb, we've been saying this for quite some time that our expectation is.

For the foreseeable future, we're going to be in the $100 million a year range on expansion capital.

I would say that that's probably true for 2022, even though we haven't obviously signed projects to commit to that yet, but just looking at the development pipeline. So to speak I think that thats a reasonable number.

But we will have more clarity on that in January.

Yes.

Great great. Thanks for all the time I appreciate it.

Sure.

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

Okay.

Hi, good afternoon.

I wanted to start on buybacks and so the $391 million for the third quarter and it looks like that was all in August and September due to earnings blackout I presume.

Just any commentary you have on why buyback at a much faster pace in Q3 than earlier in the year was it tied to having the Pasadena proceeds market conditions.

Or anything else and then how should we think about buybacks looking forward, particularly when you have the southeast terminal sale proceeds coming in the door hope.

Hopefully pretty soon.

Sure.

Part of the reason for the change in pace as we move out all the factors a lot of the package and it can influence that and different ones come into play in different times. So.

For example, disclosed we were tied up.

Nonpublic information in different parts of the first six months of the year not affected our ability to.

To buybacks at all times, so that was a factor for example, but there are different factors and different times valuation matters as well.

Outlook for leverage and liquidity matters as well some.

So things lined up.

In this quarter from us to be opportunistic and move quickly without any constraints on any front.

So thats what you saw.

We're going to continue to be optimistic as we go forward and it will depend on all of those same kinds of factors. So the pace before the inland terminal proceeds come in can depend on the same kinds of things will.

We will be keeping an eye on leverage.

We will be keeping an eye on windows proceeds come in.

But we don't necessarily have to wait for them to come in to execute on some of the new authorization. So.

It's just going to depend on all of those factors the same as it has before.

Yes.

Great. Thanks.

Sorry, another capital allocation, one just curious more of the thought process around the 1% distribution increase so.

On the one hand with how much stock you bought back which is becoming really significant.

The dollar amount of distributions being paid out is still declining even with that distribution increase.

But on the other hand, you kind of talk to how.

You are back above your coverage target and just how you think about I guess distribution increases moving forward is it an annual process and how you think about coverage.

And how the relationship changes with buybacks.

Well, there's a lot of moving parts, there and I would like to say there is.

Formula We just stick all the numbers that I may make a decision, but that's obviously not the way. It works. Our primary plan is to use excess cash to buyback equity, but for all the reasons that Jeff mentioned.

That can be lumpy it could be slow.

It's.

We can't say with certainty how much we're going to buyback in every quarter.

That being said if you look at what's happened over the course of the last year, maybe year and a half.

We bought back a significant amount of equity obviously, we've increased our coverage ratio.

And we feel good about the business going forward and we believe we have some investors that value of the distribution they value growth in the distribution.

So we had we took somewhat of a balanced approach there this quarter, even though I would say it wasn't really balance it was much more heavily weighted towards equity repurchases, but we did allocate.

All them out to a distribution growth.

I don't think you should you should take that as that's what's going to happen every quarter, we're going to make those decisions on a quarterly basis.

But I think it's reasonable to assume.

That.

If we execute on our equity buyback plan.

<unk> that we're going to continue to increase coverage and that some portion of that coverage will be allocated to distribution growth over time.

But again, that's always going to be a quarter by quarter analysis supplied by us.

Yes.

That's helpful. Thank you.

Yes.

And the next question is from Shneur <unk> with UBS. Please go ahead.

Hi, good afternoon, everyone.

I was wondering if I can revisit a few questions one from Spiro <unk> from Keith just starting with Spiro's question about recovery in the system and so forth. If I can ask it a little differently, assuming gasoline volumes are back to 2019 levels, what kind of operating leverage do you see in your business, excluding the pipeline because we do.

The challenges there are crude pipe widened Robert Blake.

Do you see within the refined product system is there upside potential from where you were at 2019 levels and if so can you help characterize that for us.

Well, yes, I mean there.

I would characterize as significant upside opportunities that are available to us. So if you look at our product system in general it's not at capacity.

We have some exceptions for example, as I mentioned earlier to the Denver market.

We are at capacity.

But we're looking at some things there to improve that.

And we're also looking at some other logistics things around the front range that they can provide upsides for us, but if you look at the rest of our system and in particular in Texas.

If there is demand growth.

In Texas, which has.

<unk> to be especially the Dallas Fort worth area, one of the fastest growing areas in the country.

Have plenty of capacity to took.

To accommodate that without.

Well speaking about Dallas without really any capital investment.

You think about west, Texas, and access to Mexico and.

And Arizona.

Markets are further west.

We have opportunities there to expand capacity also so.

There are upsides around our system.

The other thing I mentioned that I've mentioned this before that as we go through.

And energy transition cycle over the next five or 10 years.

Reasonable to assume that you have more refinery rationalization.

And typically speaking for a pipeline company.

That is a net positive because it creates incremental transportation opportunities.

Basically to fill the hole that.

Final closure.

Is is creating and we have a system.

That's ideally situated for that since we're connected to half the refining capacity in the country.

So we're not supply constrained in any way.

So if we have a refinery clothes in a certain market, we've got plenty of sufficient supply.

In most cases sufficient capacity to fill that hole with barrels removed over a longer haul, which is typically a higher tariff. So.

I think we do have we do have operating leverage.

Going forward around our refined product system.

Great really appreciate the color there very thorough.

And maybe to follow up on the prior question with respect to the buyback I appreciated.

Your response about how it improves.

Average ratio payout ratio I think it's a good strategy you also mentioned that.

It can be lumpy at times, just due to blackout periods and different things that occur.

With that being said and the fact that your EBITDA is now kind of inflected and rising so your leverage ratios should roll forward and improve would you be willing to be in the market buying stock. If you felt it was an appropriate price.

Of the proceeds from the upcoming asset scale, just kind of getting ahead of it or do you feel that you need to wait until the cash is actually in the door just given that your leverage ratio is trying to get the right way.

No.

We don't have to wait for the proceeds to come in.

We can go as far as we could go with the proceeds obviously, but no there is a little bit of room as EBITDA allows.

Four times leverage limit allows and we've already demonstrated that to some extent.

We bought back some $150 million.

Of units and we haven't had $750 million of unit sales of asset sales. So we've already done buybacks with and.

That was that without excess cash flow during the same period. So for example in 2020, we bought back more than we had.

Sales for us is cash flow so.

Free cash flow excuse me. So we're not limited by that the leverage will be a limit and we'll be keeping an eye on that because we.

Has the four times.

Limit that we've discussed and we're going to be careful that we continue to manage that carefully conservatively.

Conservatively consistently with what we've done in the past.

Alright, perfect. Thank you very much really appreciate the color today. Thank you.

Ladies and gentlemen, as a reminder, if you'd like to queue up for a question. Please press one four on your telephone keypad one floor for questions.

Our next question is from Michael Lapides Goldman Sachs. Please go ahead.

Hey, guys. Thanks for taking my question just real quick Mike.

That's a little bit about tariff resets and updates that will happen in the middle of next year can you give a little more color on some of your comments about those that are on market or competitive rates. Please.

Well I think I mean again.

The fact that they're not indexed.

So they're competitive and either argue at all of our markets are competitive but these markets have been deemed to be competitive we have.

In most cases multiple competing pipelines in these markets.

So we need to be aware of that when we're increasing prices just like any competitive market would be.

We have been raising the tariffs in those markets by higher than the index for the last few years.

On average they are already higher than index markets.

And we just need to be.

Yes.

Very deliberate about how we address that and what that means in practice is that we are willing to evaluate every market.

What's our competitive position.

Of course, we don't know is how much is are our competitors going to raise our tariffs and we won't know that until they actually do it but we can make some reasonable guesses and.

That will likely wind up is we'll have a range. We will have some markets, where we may not raise it very much and we will have some markets, where we may raise it closer to what the what the actual PPI is.

But what that what the average of those will be I don't know yet.

We're not going to know that until we get through the process.

Got it okay, but are you kind of painting, a little bit that maybe next year, you won't be at the 3% to 4% growth rate year over year on the competitive customers.

No I'm not indicating that at all I cant tell you that we will be but.

We're certainly not sitting here today, knowing we won't be.

It's going to be the product of the evaluation.

Yeah.

And 3% to 4%, maybe a reasonable number but I can't tell you that.

Until we go through to the process.

Got it thank you Mike much appreciate it.

Sure.

And gentlemen, those are all the questions. We have I'll turn it back to you for closing remarks.

Alright, well. Thank you for everyone's time today and we appreciate your interest in Magellan will talk to you next time.

Ladies and gentlemen that concludes our call for today, we thank you all for your participation and have a great rest of your day you may disconnect Your line.

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Greetings and good afternoon, everyone and welcome to the third quarter 'twenty one 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 with a question. Please press. The 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 Tuesday November 2nd for 2021. It is now my pleasure to turn the call over to Mike Mears Chief Executive Officer. Please go ahead Sir.

Well Hello, and thank you for joining us today for our third quarter earnings call before we get started I need to remind you that management will be making forward looking statements as 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 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.

Moving onto the quarter, we are pleased with our third quarter results for a few reasons first of all Magellan generated strong financial results that significantly exceeded our EPS guidance for the quarter. While there were a number of favorable items that contributed to the earnings beat the main benefits related to additional refined products transportation volumes increased.

<unk> continued strong distillate distillate demand across our entire pipeline system as well as lower than expected expenses in part due to our ongoing optimization efforts in.

This increase marks 20 straight years of annual distribution growth for our company, which is a notable distinction that sets Magellan apart within both the MLP and midstream space.

Our CFO, Jeff Holman will now review a few highlights from our third quarter financial results, then I'll be back to discuss our guidance 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, including operating margin distributable cash flow or DCF and free cash flow.

We've included exhibits to our to our earnings release that reconcile these metrics to their nearest GAAP measures.

Earlier. This morning, we reported third quarter net income $237 million, an increase of $25 million compared to third quarter of 2020.

Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1 91.

As Mike pointed out exceeding our guidance for the quarter of 87.

DCF for the quarter with $277 million.

With 7% higher than third quarter 2020, primarily due to additional contributions from our refined products segment.

Free cash flow for the quarter was $252 million, resulting in free cash flow after distributions of $25 million.

A detailed description of quarter over quarter variances is available in the earnings release, we issued this morning, So I'm just going to touch on a few highlights of the quarterly results.

Starting with our refined products segment operating margin of $270 million for the quarter was approximately 19% higher than the 2020 period.

<unk> products business continued to benefit from the recovery in travel economic and drilling activity in 2021 compared to the pandemic driven reductions experienced in 2020.

As well as from the continued ramp up on our Texas expansion projects in particular, we benefited from outsized increases in diesel fuel during the quarter overall.

The final product revenues also benefited from the 3% overall average tariff increase and went into effect on July one of this year. As a reminder, this 3% increase consisted of a <unk>, 6% decrease to our index rates and an average increase of more than 4% to a competitive rates.

Turning to our crude oil business third quarter operating margin was approximately 112 million.

Down 18% from the third quarter of 2020 with the themes for the segment remained generally consistent with the explanations we've given throughout the year and with the assumptions behind our original guidance.

Volumes on Longhorn continued to be lower as a result of contract explorations late in 2020, averaging about 220000 barrels per day versus approximately 275000 barrels per day in the prior year.

While our affiliate marketing activities continued to offset much of the volume decline related to the expired contracts.

Margins, 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 benign on the previous contracts and so our average realized rate per barrel declined.

Volumes on our Houston distribution system increased versus the prior year period, primarily due to higher year over year refinery utilization driven by demand recovery. This increase in volume was offset by lower average rate primarily due to deficiency revenue that benefited 2020 period and didn't recur in 'twenty one.

And so just as a reminder, although we often see volatility in our Houston distribution system by three quarters, those volumes move at significantly lower rates than longer haul longhorn shipments, which means that their impact on our reported volumes and average rate is much greater and their impact on our actual revenues.

Similarly to last quarter storage revenues declined primarily because of the current year period didn't benefit from the strong contango market that drove storage rates in 2020.

Moving on to our joint ventures Bridgetex volumes were just over 315000 barrels per day in the third quarter of 2009 compared to approximately 330000 barrels per day in 2020.

Primarily due to a decrease in uncommitted shipments in the current quarter, which is reflective of continued unfavorable pricing differentials while settlement volumes increased to more than 250000 barrels per day compared to nearly 165000 barrels per day in 2020, primarily as a result of the expansion project completed earlier this year.

So with respect to our long haul long haul crude oil pipelines we.

We continue to reap the benefits of long term commitments from credit worthy counterparties as our customers continue to shift in line with their contracts.

As of September 30, the face value of our long term debt was $5 1 billion.

With a weighted average interest rate on that debt of about four 4%.

As a reminder, due to the pending sale of our independent terminals. The results of operations from those assets, which were previously included in the results from our refined product segment are now classified as discontinued operations.

The results for these assets increased between periods, primarily due to improved commodity margins as well as just the absence of depreciation which is no longer recorded now that the assets were classified as held for sale fee based revenues for these assets slightly declined year over year.

As we've noted previously a significant portion of the operating margin from these assets constant commodity sensitive activities that can be volatile from period to period.

Moving on to capital allocation and balance sheet metrics and liquidity first in terms of liquidity. We continue to have a $1 billion credit facility available to us through mid 2024, with a $122 million outstanding on our commercial paper program at September 30. Additionally, our next bond maturity isn't until 2000.

Five.

Our leverage ratio at the end of the quarter was approximately three six times for compliance purposes, which incorporates the gain we realized from the sale of <unk> interest in Pasadena earlier this year.

Which brings us to the last time I'll touch on which is capital allocation.

Our history as a public company, we have always focused on the good stewards of capital that has historically been reflected most strikingly in our best in class return on invested capital and our disciplined external growth projects, including zero equity issuances since 2010, despite spending approximately $6 billion on growth projects.

During the intervening 11 years, all while delivering sector, leading credit metrics and 20 straight years.

Interrupted distribution growth.

That disciplined capital stewardship is currently reflected in the opportunistic execution of our equity buyback program.

The $391 million of units were purchased during the quarter at an average unit price of $48 50 per unit, bringing.

Bringing our total repurchases for the year to $473 million.

When complete the initial $750 million program authorized by our board over a year before at the end of their programs three year term.

The cumulative units repurchase today equals $15 1 million units were about six 7% of total unit total units previously outstanding.

With the completion of that initial 750 million dollar program and.

Taking into account the expected proceeds from our pending independent terminal sale and our expectation of continued free cash flow generation coming years. Our board has authorized an additional $750 million in purchases over the next three years.

Committed to our long standing four times leverage limit and also the timing of proceeds from independent terminal sale remain subject to the government will review process.

But as we continue to reiterate we remain focused on delivering long term value for our investors through a disciplined combination cash distributions capital investments and equity repurchases.

And with that I'll turn the call back over to Mike.

Thanks, Jeff <unk>.

Concerning guidance, we now expect to generate DCF of $1 1 billion for 2021, which is $30 million higher than our previous forecast.

Is it primarily on our stronger than expected financial performance during the third quarter.

We continue to benefit from the final commitment ramp on our east Houston to Hearne expansion project and we've also seen stronger distillate and aviation fuel demand as the year has progressed.

Our forward guidance continues to assume that no additional pandemic related disruptions impact demand.

Hedged nearly 90% of our gas liquids blending for the fourth quarter and are now expecting average margins in the 40 <unk> per gallon range for the full year.