Q4 2021 Magellan Midstream Partners LP Earnings Call

February 2, 2022

Okay.

Greetings and welcome to the Magellan fourth quarter 'twenty, one earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.

At that time, if you have a question. Please press the one followed by the four on your telephone.

At times during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Wednesday February 2nd 2022, I would now like turn the conference over to Mike Mears Chief Executive Officer. Please go ahead.

Well good afternoon, and thank you for joining us today to discuss magellan's fourth quarter financial results and our guidance for the new year.

Before we get started I'll remind you that management will be making forward looking statements as defined by the Securities and Exchange Commission.

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.

Magellan finished 2021 with another strong quarter generating financial and operational results that exceeded our expectations and solidified 2021 as a year of robust demand recovery for our services.

Our CFO , Jeff Holman will now review, our fourth quarter financial results in General then I'll be back to discuss our guidance before answering your questions.

Thanks, Matt.

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 and we have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures.

Earlier. This morning, we reported fourth quarter net income of $244 million.

Prior to $184 million reported order 2020.

Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1 24.

Which as Mike pointed out exceeded our guidance for the quarter of $1 10.

DCF for the quarter to $197 million was.

It was 10% higher in the fourth quarter of 2020.

Similarly to last quarter. The primary driver of that increase was additional contributions from our refined products segment.

Free cash flow for the quarter was $291 million, resulting in free cash flow after distributions of $70 million.

<unk> full year 2021 Bcf was 111 8 billion.

Approximately 7% higher than in 2020.

Resulting in a distribution coverage ratio for 2021 of one four times.

DCF per unit in 2021 was $5 14.

About 10% higher.

Then in 2020 this per unit perspective reflects the significant impact of our buyback program and underscores our ability to deliver for unit growth in excess of the topline DCF growth that our business experiences.

I should note that the DCF per unit calculation I. Just mentioned is based on the weighted average number of units outstanding on the record dates related to the period.

Full year free cash flow for 2021 was $1 316 billion.

Resulting in free cash flow after distributions of about $410 million for the year.

A detailed description of quarter over quarter variance is available in the earnings release, we issued this morning, so as usual I'll just touch on a few of the highlights for the fourth quarter results.

Starting with our refined products segment operating margin of $303 million for the quarter was approximately 27% higher than the 2020 period.

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 final revenue commitment ramp on our Texas expansion projects.

Overall refined transportation volumes were up 14% relative to the prior year period with significant increases in all products and on an absolute basis volumes once again set a new quarterly record.

Reflecting the sharp rebound in travel aviation fuel once against an 80% plus increase versus the prior year period.

As usual I'll note for context, the aviation fuel typically constitutes less than 10% of our overall volumes.

Refined products revenues also benefited from the 3% overall average tariff increase that went into effect on July <unk> 2001.

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 our remaining rates.

I imagine most of you are probably aware the FERC recently revisited the index calculation with the result, we will be reducing our index rates by about 1% effective March 2022, which Mike will discuss further in a few moments as part of our guidance discussion.

Product margin was favorable compared to the fourth quarter of 2020, primarily due to the higher due to higher gas liquids blending margins and volumes as a result of the better commodity environment and improved blending opportunities.

In addition, we had lower unrealized losses in the current period related to our hedging activities.

Turning to our crude oil business fourth quarter operating margin was approximately $104 million down 5% from the fourth quarter of 2020 due to reductions in some of our rates lower volume shipped and reduced storage revenue.

Longhorn volumes of 250000 barrels per day were in line with the prior year, while the story on milestones for most of 2021, then the contract explorations on the pipeline in late 2020, the fourth quarter with a full year pass that that change, resulting in a pretty consistent performance on a line between the 2021 and 2020 period.

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Volumes on our Houston distribution system decreased versus the prior year period and were lower than we had expected primarily due to the delay in the start up of the new connecting pipeline, which we now believe we will begin deliveries to us in early 2022.

Just as a reminder, although we often see volatility in our Houston distribution system volumes for two 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 than their impact on our actual revenues.

Which brings me to our average crude oil tariff rate, even though the competitive environment. We are currently operating and has led to generally lower tariffs across our crude pipes. The overall average rate per barrel shipped actually increased between periods.

Due to a proportionately lower volume of those short haul Houston distribution movements at lower rates.

Similar to last quarter, we also saw reduced storage revenues due to lower utilization and rates following recent contract explorations.

Recall that we entered numerous short term contracts during the early period of the pandemic and the market was in steep contango storage in general was a very high demand.

As a short term contracts have rolled off and the market has been pretty backward dated we've seen lower rates for our storage services.

Moving onto our joint ventures rich tax volumes were approximately 300000 barrels per day in the fourth quarter of 'twenty, one compared to nearly 250000 barrels per day in 2020.

Partially due just to the timing of when our committed shippers have elected to move volume under their commitments as well as due to the exploration of a few smaller commitments earlier in the year.

Saddle Horn volumes increased to 235000 barrels per day compared to about 165000 barrels per day of the year before.

Primarily as a result of new commitments in 2021 associated with the pipeline expansion.

Moving on to capital allocation balance sheet metrics on liquidity first in terms of liquidity. We continue to have our $1 billion credit facility available to us through mid 2024 with $108 million outstanding on our commercial paper program as of December 31.

Additionally, our next bond maturity isn't until 2025.

A face value of our long term debt as of the end of 2021 was $5 1 million.

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

Our leverage ratio ended the quarter with a little less than three five times for compliance purposes, which incorporates the gain we realized from the sale of part of our interest in Pasadena earlier in 2021.

Excluding that gain leverage would have been a little over three six times and.

And it is really that metric excluding the gain on sale that we're looking to as we manage leverage including of course, the impact on leverage of our unit repurchase program.

And that brings us to the last time I'll touch on today, which is capital allocation.

As you've heard us say before we remain committed to maintaining the financial discipline. We are known for while delivering long term value for our investors through a combination of capital investments cash distributions and equity repurchases.

During the fourth quarter, we repurchased nearly $1 1 million units at an average purchase price of $47 29.

For a total spend of $50 million.

The cumulative amount of units were purchased during 2021 to $10 9 million units for <unk>.

$523 million.

Since we began our buyback program in 2020, Magellan has repurchased $800 million.

<unk> units under our $1 5 billion repurchase program.

The unit repurchases made over the past two years decrease our units outstanding by about 7%, thereby of course, increasing our DCF per unit by a similar amount. In addition, contributing to better distribution coverage going forward.

Of course, if we are always careful to note.

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 limit and also that the timing of the proceeds from the independent terminal sale remains subject to the government review process.

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

Thank you Jeff.

Turning to our outlook for the new year. This morning, we announced DCF guidance of $1 70.

<unk> 75 billion for 2022.

We recognize this guidance is a bit lower than the street was expecting but considering that there is about $35 million of assumed reduced earnings associated with recently completed and pending asset sales, we have essentially forecast the remainder of our business to generate results very similar to our 21 actuals while we.

We expect continued growth in refined products demand and healthy mid year tariff increases. This year. We further expect these positives to be offset by a few unfavorable items, including reduced revenues for both refined products and crude oil storage, which is a theme. We've mentioned to you in the last few quarters as well as the $25 million over.

Were all favorable impact from the 2021 winter storms that we do not expect to recur in the new year.

As usual I'd like to spend the next few minutes walking you through the key assumptions, we have used to develop our 'twenty two projections, which.

Which we hope will help you better understand how we're thinking about in the year.

Starting with our refined products segment, which comprises about 70% of our operating margin, we assume that refined products pipeline shipments continued to increase during 2022 due to a combination of improved overall demand as the economy drilling in travel in general continue to recover as well as the full year.

Benefit of our Texas expansion projects.

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Now that the committed volumes that ramped up to their full commitment level.

As a result, we expect refined product shipments to increase about 4% compared to 2021 results driven by a 4% higher gasoline, 2% higher distillate and 15% higher aviation fuel demand.

For sensitivity purposes, we ballpark estimate that every 1% change in total refined products transportation volumes represents about $10 million of DCF on an annual basis.

In addition to volume the average tariff rate for our refined products pipeline system is an important component to model this segment, especially in the current inflationary environment.

Our current plan assumes that we will increase our refined products' rates by an average of approximately 6% on July one.

There are multiple components in the calculation of this average so I'll briefly go through them.

Currently about 30% of our refined product shipments followed the FERC index methodology for annual tariff adjustments with the remaining 70% deemed to be competitive markets and are generally adjusted as market conditions allow.

Jeff mentioned, the FERC recently changed its methodology for the industry's index rates for a bit of background. The index calculation Hasnt based on the change in the producer price index, plus 0.7% to 8%.

With that adjustment going into effect on July one 2021, resulting in a 0.6% decline in our index markets last year.

Just a few weeks ago the FERC adjusted the methodology to now be based on the change in producer price index minus zero to 1%. So essentially 1% below the initial approach. This change will become effective on March FERC.

So we will lower our index rates by 1% next month, then follow the typical July 1st cycle after that.

Through the year 2025, using this new formula.

In case of interest we estimated a negative 1% change in the.

Index currently results in about $3 million annually to Magellan.

As you May know the preliminary change in PPI for 2021 is a positive eight 9%, which will result in an index rate increase of eight 7% on July one using this new methodology, which is the planned tariff increase for these markets.

The remaining 70% of our refined markets are either intrastate movements or markets that have been deemed to be work complete competitive by the FERC.

As a result, they are not subject to the index methodology and what generally adjust these rates each year as competitive forces allow.

We have been increasing our competitive rates in the 3% to 4% annual range or.

Over the last few years, which has been higher than the corresponding index change over the same timeframe.

For instance, as we've already mentioned the index declined by 0.6% last year, which given the recent FERC index change discussed will now be at a one 6% decline comparatively we increased our competitive market rates by more than 4% on average last year.

While we will continue to analyze our rates on a market by market basis to ensure we remain competitive our guidance assumes that we increased rates with 70% of our market based tariffs by approximately 5% on July one.

I will point out that because of the complexity of our pipeline system. The average rate per barrel. We report is based on a mixture of long haul and short haul movements and therefore changes based on the actual point to point movements, we make and.

In the new year, we expect more short haul movements due to additional volumes at our east Houston to Hearne expansion project as well as fewer barrels moving from Texas into the mid continent, both of which result in lower overall average rates.

In addition, we do not currently expect approximately $20 million of deficiency revenue recognized in 'twenty, one to recur again, which also negatively impacts the average rate per barrel as deficiencies represent revenue recognized with no related barrels.

During these factors, we expect our overall average rate per barrel shipped to remain relatively flat to 'twenty. One results, even though we intend to raise refined products' tariffs by an average of 6% in mid 2022.

Also for our refined products segment, the commodity price environment is important as it directly impacts our gas liquids blending profits.

We have a hedge we have hedged essentially all of our spring blending margin at this point at a 40% margin, which equates to about 50% of our total expected blending sales volume for the year.

Between the margins, we have already hedged in last week's forward curve for the unhedged volume. We currently expect an average blending margin of about 40 per gallon for 2022, which is similar to 'twenty. One results was slightly lower than the 45% average margin over the last five years.

Following our typical approach we would expect to begin hedging blending activity for the fall of 'twenty two in the next few months once the markets become more liquid for the fall season.

Moving to our crude oil segment, which comprises the remaining 30% of our operating margin. We expect volumes on our longhorn pipeline to average 240000 barrels per day, which is very similar to the 245000, we averaged in 2021.

We have recently added a new third party commitment to longhorn and a tariff rate, which generally reflects the current market differentials, resulting in approximately 75% of the <unk> 275000 barrel per day capacity being committed at this point with an average remaining life of six years.

Although we prefer to third parties to move product on our pipes whenever possible any incremental movement above the committed level are expected to result from our marketing affiliate stepping in to fill the unused space as market conditions allow.

But as we've discussed in the past the profitability of these marketing activities closely reflects the prevailing Permian to Houston differential, which currently remains very low.

Our other wholly owned crude oil pipeline into Houston distribution system, which as Jeff pointed out can fluctuate between periods.

We have recently connected our Houston Houston distribution system to new long haul pipelines moving crude oil to the Houston area. So we expect volume on the HTS or the distribution system to rebound by more than 50% during 'twenty two as more barrels utilize our extensive system to connect to all of the refinery.

<unk> in the Houston, Texas City area.

As a reminder rates charged on the Houston distribution system are significantly lower than.

And longhorn due to the short distance moved which impacts the overall average crude oil rate per barrel that we reported in our financials with the expected volumes in 'twenty two our average crude oil rate per barrel ship should be closer to 60.

Per barrel this year versus 80 per barrel and 21, reflecting the incremental portion of shorter haul movements.

Concerning our joint venture pipelines, we expect shipments on Bridgetex to average around 300000 barrels per day during 2022, which is similar to activity in 'twenty. One at this point Bridgetex has commitments for approximately 70% of the pipeline is 440000 barrel per day capacity.

With an average remaining life of four years with the current low differential between the Permian and Houston spot shipments generate remain uneconomical. So we expect shipments basically in line with the commitment levels.

For saddled worn and we expect to move about 230000 barrels per day during 'twenty, two which is in line with current contracted levels.

Based on the final step up of commitments under the new contract for the recent expansion of the line.

<unk> has commitments for 80% of the pipeline to 290000 barrel per day capacity with an average remaining life of five years.

On the expense side, we've discussed in the past that Magellan kicked off the initiative a few years ago to identify cost savings and efficiency opportunities throughout the organization.

This initiative has served as well to ensure we are operating as efficiently as possible, especially considering the current inflationary environment, while safeguarding the integrity of our assets with the benefit of these initiatives. We currently expect total expenses inclusive of both operating expenses and G&A cost to increase.

By about 2% and 22.

Yes.

Concerning maintenance capital, we expect to spend around $80 million during 'twenty, two which is very similar to last year's actuals and.

In Magellan, we believe that our most important social obligation is to safely and reliably transport and store. The fuels that are nascent relies on everyday while protecting the communities, where we live and work.

Our dedicated workforce spend significant time and effort each year to ensure the integrity of our assets between capital and expense, we expect to spend more than $200 million on maintenance and integrity work in 'twenty. Two as you are aware both maintenance capital and expense are considered in determining distributable cash flow and free cash flow.

As a quick reminder, we still await regulatory approval for the pending sale of our independent terminals announced last June we continue to expect the transaction to close this year, although exact timing is still a bit unclear for guidance purposes. We have assumed that we own these assets through the first half of the year.

In summary, all of these key assumptions buildup to our DCF guidance of 1.0 75 billion for 2022.

Recognizing that investors value steady increases to the cash distributions. We currently target annual distribution growth for 'twenty two similar to the increase provided last year, which would result in distribution coverage of one two times the amount necessary to pay cash distributions declared on the current unit cap for 2022.

While we are not providing guidance beyond 2022, we do expect DCF growth for the next few years from the tailwind of modest refined product demand growth, a higher inflationary period, which will benefit tariff rates and continued strength in commodity prices.

Management continues to expect that free cash flow after distributions will generally be used to repurchase equity subject to the considerations. Jeff mentioned previously as a result DCF per unit is expected to grow at a greater rate in DCF, providing increased value for our investors in the future.

Although we have executed on substantial equity repurchase to date and expect to continue our equity repurchase strategy going forward. We also remain focused on developing attractive growth capital investments to create future value for our company.

Based on projects already committed we expect to spend approximately $50 million and 22 on expansion capital.

Following a successful open season. These estimates now include a 5000 barrel per day expansion of our refined product system from Kansas to Colorado that should be operational by late 2022. In addition to the previously announced expansion of our new Mexico refined products pipeline is nearing completion and expect to be operational to APRA.

All of this year.

These projects are fully underwritten by commitment from strong counterparties and demonstrate the flexibility of our network to step up to film market supply gaps that may arise.

As you know the environment for large scale capital investments has been challenging over the last few years.

However, we expect to add more growth projects throughout the year, although most likely smaller scale like these recent pipeline expansions as a result, we still expect our expansion capital spending would be close to $100 million for 2022 additional projects are approved as the year progresses.

Bottom line is we remain patient and committed to our disciplined investment approach and continue to look for opportunities to invest in attractive low risk projects that meet or exceed our six to eight times EBITDA multiple threshold.

Before we open the phone lines I would like to briefly comment on announcement last week that I'll be retiring from Magellan on April 30.

I've spent my entire career with the company it couldnt be more proud of the organization. We have created over the last 20 years.

My role as CEO for the last 11 years has been rewarding and I sincerely appreciate.

Appreciate the support I received from the Investor and analyst community.

I truly believe Magellan has a best in class company in the energy space from almost every perspective, including financial performance dedication operational safety and.

Company culture.

We've been intentional to build the company on these strong principles from the very beginning to ensure our long term success.

Aaron Milford, who is here with us today will be my successor, as President and CEO and I and our board of directors have complete confidence in his abilities to lead Magellan into the future.

The investment community community should be familiar with Aaron as he served as CFO prior to taking on its current.

Responsibilities.

Aaron has also spent his entire career at the company and we have worked together closely for many years his leadership capability strategic vision and disciplined approach to ensure a seamless transition.

Elements in a strong financial position with a resilient business model and experienced management team that prepares us well for the future.

And with that operator, I will now open at all open the call for questions.

Thank you if you relate to register a question. Please press the one followed by the four on your telephone.

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And our first question comes from the line of Theresa Chen with Barclays. Please proceed.

Hello, and congratulations Mike on your retirement and congratulations also to Aaron I'm going to evolve.

Thank you Theresa.

Sure.

Wanted to.

Ask ask first on the refined products segment.

So Mike just summing all of the puts and takes.

All your commentary about the many variables related to the <unk>.

Net net 2022 relative to 2021 volume up 4% tariffs flat for the transportation portion correct.

That's correct.

Okay, and then for the.

The butane blending business and so you have hedged.

All spring at 40 cents and it looks like you expect it all to also be similar to the average for the year. It's 40.

Wondering.

Why that may be given that the foreign curve.

To indicate a little bit more favorable spot margins from here.

Well the curves are moving all the time as you would expect so we've taken a point in time.

And the forward curves net the cost of returns, which we have to acquire.

Is is roughly 40 right now.

Okay.

Just lastly in terms of getting the proceeds for that.

The sale of the South East terminals.

And is there an expectation that the buyer may have to do something but what are the gating factors at this point I'm going to close by mid year or do you expect that this could be kicked down a lot.

Further.

Well I don't really want to comment on what the expectations are from the FTC, because that's really a process between the buyer and the FTC.

But we firmly believe that the that we're going to close and we think it's highly likely we're going to close within the timeframe, we have within our guidance.

But thats, probably all I can really say about the process at this point.

Got it thank you.

And our next question comes from the line of Keith Stanley with Wolfe Research. Please proceed.

Hi, good afternoon.

Okay could I could I start just on the.

The buybacks and capital allocation. So how how do you think about repurchases in the first half of the year, assuming you close the terminal sale mid year, you'll you'll have some excess free cash flow, but you know a big chunk of cash coming mid year would you be willing to use short term borrowings in the first half of the year to to repurchase equity.

Just given your.

Pretty decently below the leverage target or.

Or is that not something you'd be interested in.

Okay.

This is Jeff we would be open to that in theory always comes down.

Specific so if you look at the times, we bought back end has not always been with current free cash flow and the real regulator will be leverage.

So we will have one eye on leverage and we will have an eye on the proceeds and the timing there.

There's other factors too we will be looking at whats kind of investment opportunities we see.

Wanting to pay attention to how we are trading as well obviously.

Dislocation of the price.

Might be incentivized to feel a bit more aggressive on repurchases.

On the Comverse in between as well so in theory, yes in practice I think youll see us be pretty measured as we have been in the past.

Got it.

Mike Thanks for all the detailed drivers for 2022 that was very helpful. I, just I just want to clarify so in.

The release it was noted that butane blending profits are expected to be higher year over year. In 2022, I think the margins you gave were pretty similar though so is it fair to say that it's a pretty small driver and then similar question for the storage side of things should we think of that as a pretty small over.

Raul.

Driver in that case, a negative driver for 2022.

Well on the storage side.

We are in a soft market at the moment.

And as we've talked about before.

The.

Many of our storage contracts are relatively short term, one or two years and so we have frequent rotation.

Rotation of those contracts.

Yeah.

And so in the current environment with its strong backwardation in the market.

Challenging market to re contract storage. So we expect that to be soft this year versus last year and as we mentioned in our comments. It also.

If you look at 'twenty one it was.

<unk>.

Early in the year from.

Short term contracts, we put in place during the pandemic, which were pretty high.

Rate contract. So we expect this year to be soft in that regard, we don't expect it to persist long term the market goes through cycles and at some point, we will be back in a.

Contango market and we expect there would be recovery there, but in 2022, we do expect some softness there.

With regards to butane blending.

I think year over year, we are expecting increase.

Even though the margins are relatively the same.

Protecting growth in blending volume.

Is going to drive that higher.

Got it thank you very much.

And our next question comes from the line of <unk> Satish with Wells Fargo. Please proceed.

Thanks, Mike Congrats on your retirement and Aaron Congrats on the new role I just have.

Two questions I guess first you noted that you signed a new third party contracts on longhorn. So just curious if you could talk about the contracting environment for the Permian for Permian crude and whether you see any green shoots forming are you talking to any other customers or do you think this was kind of a one off contract.

The contracting environment in the Permian is extremely tight.

Quite honestly shippers don't have a huge incentive to make commitments.

Spot rates are as low as they are.

And the long term picture doesn't look like those those differentials will will grow too.

Grow significantly over the next year or two.

In this case.

Even though we have signed the contract on.

Longhorn at what I would.

Characterizes marginal profitability.

Those barrels ultimately get into our distribution system, where there is some value to us there and I think with regards to prospective shippers the access we have to multiple.

Demand points.

Along our distribution system.

Attracts customers.

And so that was one of the drivers behind their willingness to sign a contract and our willingness again.

Sure.

We look at we look at the entire pie when we're signing a contract it's not just what we make on Walmart. It's also what we make once a barrel gets to Houston. So all of that factors into our decision to contract, but I would not consider that necessarily as something you would expect to be.

Continuing at least for the next year or two to sign incremental contracts, which doesn't mean that our marketing affiliate isn't opportunistically taken.

<unk> advantage.

Shipper interest in getting from the Permian to Houston and into our distribution system that will continue.

And I'm wondering if you could talk about the FERC decision to lower the PPI gesture from.

$700 to negative 21, and just whether you think that has broader implications in terms of the FERC, maybe taking less friendly approach to oil and gas pipelines.

I mean, it's made up a majority of Democratic Commissioners now so.

Curious for your views on that and whether you think there's any political motives behind the adjustments.

I don't I don't think it's an indicator that there is that theres, a developing bias against the pipelines if youll recall.

When.

The initial decision was made a little over a year ago. The chairman issued a very strongly worded descent.

Hence the decision so.

Yes, we knew as an industry that the risk on rehearing existed.

Once a Democratic Commission was in place.

I would move more in the direction of the commissioners view.

Than what the original order was and Thats, what happened I don't see that as a big shift.

In focus by the Commission.

The argument that.

The commission overturned.

On rehearing to lower the rate our arguments that have strong arguments on both side its really I don't believe a bias decision.

So.

I'll stop there I don't think there is a political motivation behind it.

Got it thank you.

And our next question comes from the line of Spirit <unk> with Credit Suisse. Please proceed.

Thanks, Operator afternoon, guys, Congrats again to Mike and Aaron.

Wanted to go back to the guidance if I could quickly.

I think a lot of the context was helpful in sort of bridging between full year 'twenty, one and 2022, I guess, where I'm still struggling on.

Bridging everything is when I look at your performance in the back half of 2021, specifically right. So no impact there and I annualize that.

And then of course back out 35 million.

Okay.

I still have a delta of about $65 million between what that implies between that number in your guidance and of course, you called out I think the contract renewals on storage as kind of a big item, but to me it still seem like too big of a delta to sort of bridge that gap. So curious if you look at it from a back half performance of 2021 perspective, Mike.

Can you help me sort of bridge that number a little bit better.

I'll try I don't know exactly how you came up with the $65 million, but let me let me just comment on a couple of things we've talked about.

The asset sales, which is roughly $35 million we've talked about.

The winter storm effects, which is about $25 million, we really didn't talk about the lower saddle horn tariffs in detail, but with when we re contracted saddle horn.

We agreed to incremental rate reductions.

In exchange for volume over time.

And for long term contracts and so.

There's a little bit of a reduction in 'twenty two.

That rate reduction, which is about $10 million probably year over year. When we when we talk about the refined products volumes.

There's a number of elements we didn't go through those in great detail, that's dropping the average rate back down to basically equal with 'twenty, one and that's a significant move but there was there were some specific reasons and one is one we mentioned is that there is.

A slightly higher proportion of lower short haul volumes, there, but I'd also mentioned.

We mentioned in the comments last year, we benefited from some long haul movements from Houston up into the mid continent.

Due to some refinery issues in the mid continent that we aren't expecting to repeat.

And I think.

Materially we recognized deficiency revenue last year, which affected rate per barrel, that's not going to recur or I should say, we don't expect it to recur in 'twenty two that's in the neighborhood of $20 million all of that we didn't spell out specifically it is embedded in that.

The assumption that our average rate per barrel is going to be even last year. So those positives for 'twenty, one versus 'twenty, two or what's bringing it down we're not it's not that we view as anything negative happening in 'twenty two associated with rate per barrel is really just offset a positive.

That we had in 'twenty one.

And.

All of that being said that should get us closer I guess $365 million number I didn't add all that up in my head but.

Sure.

Those are probably the things that you're missing in your calculation. This is Jeff I might just add too I mean, I think we haven't done the exercise you talked about part of it because we wouldn't consider it really totally evaluated theres enough seasonality in the business. If you look at the.

Four quarters over the last year the volumes are much stronger in the last six months than they were in the first six months and some of that is going to recur. So I would caution against trying to annualize that the back half of last year just on its own.

Okay. No. That's helpful. I think all of those items together, probably probably bridge that gap. So I appreciate the color there guys.

Second one just a really quick one here it sounds like your expectation for buybacks is to utilize most or all of that $575 million or so of free cash flow.

Throughout the year.

And I guess, just curious what what are some of the items that could come up that maybe changed that view or change that allocation is there a potential for M&A, even on sort of a smaller scale bolt on basis to move in there just curious what other factors youre looking at potentially.

Well certainly the opportunity for capital investment is.

Something that we are actively.

I'm looking for.

Finding projects that have attractive returns is challenging but we're looking at is probably less focused on M&A, even though I would never rule that out it's probably more more focused on.

Internal development.

To the extent that an opportunity were to arise that has an attractive return it would impact that and then again all the other caveat to Jeff mentioned the price of the equity.

Yeah.

Those sorts of things will factor into that also and.

Sure.

So it's.

It's not really more complicated than that.

Yes.

No no worries keep it simple alright thats perfect. Thanks, Mike, we'll see you guys at the analyst day.

Yeah.

And our next question comes the line of Jeremy Tonet J P. Morgan. Please proceed.

Hi, good afternoon.

Good afternoon.

Congratulations Mike on a successful career, we'll Miss you and Aaron best to walk or taken the reins here.

Just wanted to kind of start off one question here really in a few different facets to it I guess.

The Permian growth is in the upswing again.

I'm just wondering if you could walk us through the different permutations of how this impacts Magellan.

Increased drilling demand from diesel more oil logistics, whether conversion of pipelines.

Makes sense or just trying to think through the different impacts as well as maybe a more favorable environment. When you look too.

Our role of those contracts.

Okay, well, that's a broad question, let me try to break it down into its pieces I mean first and foremost I mean, we do see.

The most material benefit to us from increased drilling in the Permian is as diesel demand on our refined product system and so certainly the extent that that grows.

We have a direct benefit through throughput on our west Texas system.

On the crude oil side.

Because there's such significant overcapacity today, the production is going to have to grow quite a bit before youre going to see any material change in the differential.

From Midland to Houston, and willingness for for shippers to make any kind of commitment.

At firm right. So obviously, we haven't built any of that into 'twenty. Two plan. When we look out long term when you get out to 'twenty four 'twenty five I think the prospects are that are start to improve but again trying to forecast what the world looks like three or four years from now it's difficult to do.

But.

There is potentially some benefit out there that capacity does start to tighten.

And if that happens then we would expect margins to widen.

And shippers to perhaps be more interested in making some level of commitment all of that is somewhat speculative as I said three or four years out.

So we'll have to see how that goes as far as repurposing pipes.

I'm sure everybody, who has a Permian pipe is evaluating that to the extent that someone does that doesn't have to be us it could be anyone it's going to benefit everyone else.

I don't have any insight as to what other folks are doing I can tell you that we continue to actively look at repurposing.

And as.

As I said in the last call Theres nothing actionable to talk about today, there may not be anything to actual to talk about for some time, but I can tell you that there is a lot of activity taking place.

Within the company to try to put a project together to do that and I would say that the probability of that is not zero.

That there is some real opportunity here, but there is some real challenges to get it done, but we're focused on that so.

I mean is stay tuned.

How that develops.

Got it very helpful. There and one last one if I could just with regards to the Cushing storage market I Wonder if you could provide a bit more color there the current environment, how thats I guess.

Impacting your business.

Well I mean, it's not impacting us to a large extent right now because we've got significant contracts.

I don't have on the tip of my fingers the percentage of Cushing storage, that's contracted but most of it is contracted.

And so we're not seeing any significant issue right now at Cushing.

And the life of those contracts has a number of years left so.

It really depends on what the market looks like when they expire which is an eminent.

Got it I actually have one last one just sorry to touch on quick I think there was some issue. Some some things report out there with regards to union issues with other energy companies and kind of impacted there.

Is that impacting maybe inflation you talked a lot about inflation before but just wondering specifically on the labor side.

Does anything to note there.

Well there is nothing to note I mean, we've we've.

Implemented our salary increases this year, we do have a union.

And that Union contract is up for renewal.

And.

We expect we're going to have an outcome that all everyone will be happy with that.

Those negotiations really haven't started yet and as you may know that the way. This works is there is a pattern negotiation that happens first that's happening now and we're all waiting for that to end before we start on negotiations believes spec.

That we're going to wind up the place where everybody's happy at the end of that.

Got it I'll leave it there thank you very much.

And the next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.

Guys. Thanks for taking my questions.

Just curious if so.

You're expecting in kind of true free cash flow of about 575% and 22% and a large chunk of that comes from the asset sale just.

Just curious on the debt side, what happens in 'twenty. Two do you use any of that $5 75 million to pay down debt.

Or is that $5 75 available for either growth capex or or unit buybacks or other forms of capital allocation and how do you think in the year or kind of how you're thinking about debt to EBITDA at the end of the year as we enter 2003.

Yes.

We're not.

Okay.

Project can really to use those proceeds for any specified purpose other than generally R. R.

Our expectation would be to use free cash flow to repurchase.

Units.

But that will depend on all of those factors as we talked about so depending on how those play out and what are the growth projects show up.

On the off chance as Mike mentioned, the M&A shut up.

Obviously, we could use it for any of those purposes, and it's fungible, if none of those show up and we don't undertake repurchase activity, we could repurchase units excuse me, we could pay down debt, but that's not our first plan, it's kind of a last option for us just so if we don't like any of the other options in front of us.

So we don't project increasing debt during the year based on what we see today.

For sure and if we used all the proceeds for repurchases that would end up pretty much.

Where it is now.

And so you can calculate the leverage ratio of <unk>.

Projections.

I don't have that number right in front of me right. This minute, but that's the way we would be thinking about that Michael got it okay.

And you made a little bit of a comment about M&A and over the last couple of years last two to three three to four years, you've done a host or a number of kind of a small asset sales.

Is there anything when you look at the portfolio, where you would look at it and say Hey, you know what I could actually like these types of assets not specific ones, but types of assets I'd much rather be a buyer of at this point in time like things that when you look at the markets might look attractive in the M&A.

Market today versus maybe where they were three or four years ago.

Okay.

Well.

Certainly the market is probably more attractive than it was three or four years ago, but that's not saying much three or four years ago was astronomically high.

We need.

Okay.

It's.

Specific to answer your question, specifically theres not a set of assets out there right now that we're targeting to say we have to go by we like.

The kind of assets, we already have refined products assets.

And.

A couple of years ago, there were some of those in the market, but we felt that they were still too high.

Which is why we were.

The seller rather than a buyer.

We will continue to watch that and if those assets come back to the market and the prices are.

More reasonable then we might we might get into it we're not looking to really diversify outside of what we do right. Now we don't really feel like this is the time for us to make big bets on.

Things outside of our space, especially.

Since we have what we believe to be an attractive opportunity to buy back our equity.

All of that is a point in time decision.

You never know what opportunities might fall in our lap next week and we will evaluate it but right now we're not we're not actively pursuing.

Anything transformational.

Out there.

Got it. Thank you Mike Thanks, guys much appreciate it.

Yes.

And our next question comes from the line of James Carreker with U S Capital Advisors. Please proceed.

Cool.

Hi, Thanks, and congrats again to Mike and Eric.

I had one clarifying question, Mike you talked about it in the press release.

About $100 million of growth Capex and then the the.

The official guidance in the financial schedule had a number in there for 15. So I'm just wondering if you know what maybe the differences there.

Yes, Thats just generic assumption about what we think will actually get done.

We put only what we've committed it would be that lower 50 number and we also have got to be kind of under under billing what we actually expect that happens during the year. There's a number of projects. We are evaluating various stages of development that can toggle into being committed relatively soon as we kind of handicap a pub.

Abilities, we come up with in the area of another 50, or so and so we kind of looked at about 100 number so that's.

That's the vision.

Okay, I thought that might be the case just wanted to clarify.

Yeah.

And then I guess.

Big picture question, and I know, we've gotten away from talking about.

Growth versus normal in X X growth projects, but when you look at the 2022.

<unk> product outlook.

I guess taking into account.

Gross projects that you've put into place like how.

How normal does that feel relative to say 2019 levels because that feels like we fully caught up do you think there is.

Still some parts of the economy holding back when you look at that 22 number.

Well I don't have the numbers in front of me, but I think just directionally on gasoline, we aren't quite that 2019 numbers.

Uh huh.

Diesel fuel is strong and probably above 2019 numbers.

And jet fuel, obviously still not back to 2019.

But I don't have any kind of percentages on my fingertips here to give you on that and when I say gasoline is not there I'm not talking about a big Miss I'm talking about.

It's it's.

It's not above where we were in 2019 and I think.

And again and I have talked about this before it really gets into.

<unk>.

The geography.

<unk> said in the rural markets, it's there.

The cities.

It hasn't quite gotten back there I mean, you still have businesses.

That don't have people back to work.

Which is surprising to us, but it's true and so I think there is still a little bit of a lag there and there are some minor things.

Mike said on our system that are specific I think overall for the markets. We serve gasoline we projected to be pretty much back to those 19 levels.

There are some ins and outs just based on things going with our system contract roll offs in small places here and there that can affect volumes.

So overall.

It's only aviation that continues to lag by the end of next this year.

Okay. That's all helpful color.

Maybe one more in.

One question is when you guys put the west Texas expansion into service you noted up.

<unk> multiple with potentially significant additional upside I assume that that's probably not in your guidance for 'twenty two.

But I guess what would it take to.

<unk> some of that significant upside that you laid out when you. When you went forward with that project.

Well, we do have some growth in our west Texas volumes in our guidance.

But.

Beyond that and we haven't put it in our guidance.

We have a number of initiatives underway.

West, Texas attractive initiatives.

That potentially can bring material new volumes too.

Our assets can.

I'm not going to go into the details of those but I can tell you is across the breadth of the markets, we serve and we say west Texas, but.

We sail along all the time that it's not just west Texas that this pipeline serves its markets in Mexico, Arizona, New Mexico are all connected to our system.

So there is opportunities really across.

That spectrum that we're pursuing and.

Again.

We havent built those opportunities into our guidance some of those opportunities are probably more than.

2022 type horizon, there beyond that but I think it's safe to say there is material upside with regards to our west Texas assets that that we're looking at that we haven't built into 2022.

I might just also point back to my earlier answer around drilling.

Well because drilling exceeds our expectations without any of those other initiatives Mike's talking about we can see further upside from that from that expansion project.

And just to clarify these initiatives would.

You'll be able to do.

Do them without having to repurpose any pipes and these are just with <unk>.

Existing space on existing assets.

Well some of it is but.

There are what I'd call, a homerun scenario that would require repurposing assets.

And we're actively working on those also.

But even absent that like I said, there is there is opportunities for growth.

Okay.

Thanks, a lot and congrats again.

Thank you.

And our next question comes from the line of Timm Schneider with Citi. Please proceed.

Hey, good afternoon.

Quick question on the butane blending can you remind us what are you most exposed to or the rent side is that the $4 six or a combination of those.

Yeah.

Controlling composite when we look at it we estimate the percentages that are in the new RV.

And we as we hedge we look at that as totality to make sure that we're.

Were getting each of the specific types of Rins that we need so we're exposed to essentially all of them at different points in time, So that's a composite basket for us.

Got it.

In your assumptions right now are you guys just using the forward curves for that or do you have your own kind of views on what.

What that pricing is going to look like through 2022.

Yes, we are looking at the forward curves and paying attention to what's happening in the market.

We have I would say our own opinions about maybe directionally, where that is for the most part its forward curves.

And the other point to point out is that we've already got a significant amount of 2022 rent obligations hedged I think its around 70% of what we view our obligation for 2022 to be so we do have some more.

<unk> hedged, but we've got a lot of the.

Taken care of already.

Got it and then that's all inclusive of the I think you said it was <unk> 40 cents.

40% margin was that right.

That's a net margin. So that's the gross margin lesser operating expenses less the cost of brands on a per gallon basis net 40.

Okay, but that's the that includes to 70% hedged.

Yes.

Okay got it so sorry, I was just trying to reconcile that.

Yeah go ahead.

That's it.

Okay.

Yeah Alright.

Yes, that's great. That's all I had thank you.

Okay.

Operator, we probably have time for one more question.

I, there's no more questions I'll.

Turn the call back over to Mr. Mayer. Please go ahead alright.

Alright, well. Thank you well we appreciate your continued interest in Magellan.

And we hope to see many of you at our analyst Day next month and until then have a good day.

Thank you that does conclude our call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day.

Okay.

[music].

Okay.

Yes.

Okay.

Hum.

[music].

Greetings and welcome to the Magellan fourth quarter 'twenty, one earnings call. During the presentation, all participants will be in a listen only mode.

The words, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.

At any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Wednesday February 2nd 2022.

I would now like turn the conference over to Mike Mears Chief Executive Officer. Please go ahead.

Well good afternoon, and thank you for joining us today to discuss magellan's fourth quarter financial results and our guidance for the new year.

Before we get started I'll 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.

Magellan finished 2021 with another strong quarter generating financial and operational results that exceeded our expectations and solidified 2020 , one as a year of robust demand recovery for our services.

Our CFO , Jeff Holman will now review, our fourth quarter financial results in General then I'll be back to discuss our guidance before answering your questions.

Thanks, Matt.

Earlier. This morning, we reported fourth quarter net income of $244 million.

Compared to $184 million reported order 2020.

Adjusted earnings per unit for the quarter, which excludes the impact of commodity related mark to market adjustments was $1 24.

Which as Mike pointed out exceeded our guidance for the quarter of $1 10.

DCF for the quarter, a $297 million was 10% higher in the fourth quarter of 2020, and similarly to last quarter. The primary driver of that increase was additional contributions.

From our refined products segment.

Free cash flow for the quarter was $291 million, resulting in free cash flow after distributions of $70 million.

Full year 2021 Bcf was 111 8 billion.

Approximately 7% higher than in 2020, resulting in a distribution coverage ratio for 2021 at one four times.

DCF per unit in 2021 was $5 14.

About 10% higher.

Then in 2020.

This per unit perspective reflects the significant impact of our buyback program and underscores our ability to deliver per unit growth in excess of the topline DCF growth that our business experiences.

I should note that the DCF per unit calculation I. Just mentioned is based on the weighted average number of units outstanding on the record dates related to the period.

Full year free cash flow for 2021 was $1 6 billion.

Results in free cash flow after distributions of about $410 million for the year.

A detailed description of quarter over quarter variances is available in the earnings release, we issued this morning, so as usual I'll just touch on a few of the highlights of the fourth quarter results.

Starting with our refined products segment operating margin of $303 million for the quarter was approximately 27% higher than the 2020 period.

Our refined products business continued to benefit from a recovery in travel economic and drilling activity in 2021 compared to the pandemic driven reductions experienced in 2020.

As well as from the final revenue commitment ramp on our Texas expansion projects.

Overall refined transportation volumes were up 14% relative to the prior year period with significant increases in all products and on an absolute basis volumes once again set a new quarterly record.

Reflecting the sharp rebound in travel aviation fuel once again, an 80% plus increase versus the prior year period.

As usual I'll note the context, the aviation fuel typically constitutes less than 10% of our overall volumes.

Prime products revenues also benefited from the 3% overall average tariff increase that went into effect on July one 2001.

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 our remaining rates.

I imagine most of you are probably aware FERC recently revisited the index calculation with the result, we will be reducing our index rates by about 1% effective March 2022, which.

Which Mike will discuss further in a few moments as part of our guidance discussion.

Product margin was favorable compared to the fourth quarter of 2020, primarily due to the higher due to higher gas liquids blending margins and volumes as a result of a better commodity environment and improved blending opportunities.

In addition, we had lower unrealized losses in the current period related to our hedging activities.

One more on volumes of 250000 barrels per day were in line with the prior year, while the story on Longhorn for most of 2021, then the contract explorations on the pipeline in late 2020, the fourth quarter with a full year past that step change, resulting in a pretty consistent performance on a line between the 2021 and 2020 period.

<unk>.

Volumes on our Houston distribution system decreased versus the prior year period and were lower than we had expected primarily due to the delay in the startup of the new connecting pipeline, which we now believe we will begin deliveries to us in early 2022.

Just as a reminder, although we often see volatility in our Houston distribution system volumes for two 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 than their impact on our actual revenues.

Due to a proportionately lower volume of those short haul Houston distribution movements at lower rates.

Similar to last quarter, we also saw reduced storage revenues due to lower utilization and rates following recent contract explorations.

Recall that we entered numerous short term contracts during the early period of the pandemic and the market was in steep contango storage in general is a very high demand.

As a short term contracts have rolled off and the market has been pretty backward dated we've seen lower rates for our storage services.

Moving onto our joint ventures rich tax volumes were approximately 300000 barrels per day in the fourth quarter of 'twenty, one compared to nearly 250000 barrels per day in 2020.

Partially due just to the timing of when our committed shippers have elected to move volume under their commitments as well as due to the exploration of a few smaller commitments earlier in the year.

Saddle Horn volumes increased to 235000 barrels per day compared to about 165000 barrels per day of the year before.

Primarily as a result of new commitments in 2021 associated with the pipeline expansion.

Additionally, our next bond maturity isn't until 2025.

Face value of our long term debt as of the end of 2021 was $5 1 million.

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

Excluding that gain leverage would have been a little over three six times and.

And it is really that metric excluding the gain on sale that we're looking to as we manage leverage including of course, the impact on leverage of our unit repurchase program.

And that brings us to the last time I'll touch on today, which is capital allocation.

During the fourth quarter, we repurchased nearly $1 1 million units at an average purchase price of $47 29.

For a total spend of $50 million, bringing the cumulative amount of units were purchased during 2021 to $10 9 million units for $523 million.

Since we began our buyback program in 2020, Magellan has repurchased $800 million.

Lots of units under our $1 5 billion repurchase program.

The unit repurchases made over the past two years decreased our units outstanding by about 7%, thereby of course, increasing our DCF per unit by a similar amount. In addition, contributing to better distribution coverage going forward.

Of course, if we are always careful to note.

<unk> 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.

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

Thank you Jeff.

Turning to our outlook for the new year. This morning, we announced DCF guidance of $1 70.

<unk> 75 billion for 2022.

We recognize this guidance is a bit lower than the street was expecting the considering that there is about $35 million of assumed reduced earnings associated with recently completed and pending asset sales, we have essentially forecast the remainder of our business to generate results very similar to our 21 actuals, while we expect continued growth in <unk>.

Client products demand and healthy mid year tariff increases this year. We further expect these positives to be offset by a few unfavorable items, including reduced revenues for both refined products and crude oil storage, which is a theme. We've mentioned to you the last few quarters as well as the $25 million overall favorable impact.

From the 2021 winter storms that we do not expect to recur in the new year.

As usual I'd like to spend the next few minutes walking you through the key assumptions, we have used to develop our 'twenty two projections, which.

Which we hope will help you better understand how we're thinking about the new year.

Starting with our refined products segment, which comprises about 70% of our operating margin.

We assume the refined products pipeline shipments continued to increase during 2022 due to a combination of improved overall demand as the economy drilling in travel in general continue to recover as well as the full year benefit of our Texas expansion projects.

<unk>.

Now that the committed volumes have ramped up to their full commitment level.

As a result, we expect refined product shipments to increase by 4% compared to 2021 results driven by a 4% higher gasoline, 2% higher distillate and 15% higher aviation fuel demand for.

For sensitivity purposes, we ballpark estimate that every 1% change in total refined products transportation volumes represents about $10 million of Bcf on an annual basis.

In addition to volume the average tariff rate for our refined products pipeline system is an important component to model this segment, especially in the current inflationary environment.

Our current plan assumes that we will increase our refined products rates by an average of approximately 6% on July one.

There are multiple components in the calculation of this average so I'll briefly go through them.

As Jeff mentioned, the FERC recently changed this methodology for the industry's index rates for a bit of background. The index calculation Hasnt based on the change in the producer price index, plus 0.7% to 8% with that adjustment going into effect on July one 2021, resulting in a 0.6.

Percent decline in our index markets last year.

Just a few weeks ago the FERC adjusted the methodology to now be based on the change in producer price index minus 0.21%. So essentially 1% below the initial approach. This change will become effective on March FERC. So.

So we will lower our index rates by 1% next month, then follow the typical July 1st cycle after that.

Through the year 2025, using this new formula.

In case of interest we estimated a negative 1% change in the.

Index currently results in about $3 million annually to Magellan.

The remaining 70% of our refined markets are either intrastate movements or markets that have been deemed to be work complete competitive by the FERC.

As a result, they are not subject to the index methodology and what generally adjust these rates each year as competitive forces allow.

We have been increasing our competitive 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.

For instance, as we've already mentioned the index declined by 0.6% last year, which given the recent FERC index change discussed will now be at a one 6% decline comparatively we increase our competitive market rates by more than 4% on average last year.

While we will continue to analyze our rates on a market by market basis to ensure we remain competitive our guidance assumes that we increase the rates for the 70% of our market based tariffs by approximately 5% on July one.

During these factors, we expect our overall average rate per barrel shipped to remain relatively flat to 'twenty. One results, even though we intend to raise refined products tariffs by an average of 6% in mid 2022.

Also for our refined products segment, the commodity price environment is important as it directly impacts our gas liquids blending profits.

We have a hedge we have hedged essentially all of our spring blending margin at this point at a 40% margin, which equates to about 50% of our total expected blending sales volume for the year.

Slightly lower than the 45 average margin over the last five years.

Following our typical approach we would expect to begin hedging blending activity for the fall of 'twenty two in the next few months once the markets become more liquid for the fall season.

But as we've discussed in the past the profitability of these marketing activities closely reflects the prevailing Permian to Houston differential, which currently remains very low.

Our other wholly owned crude oil pipeline into Houston distribution system, which as Jeff pointed out can fluctuate between periods. We have recently connected our Houston Houston distribution system to new long haul pipelines moving crude oil to the Houston area should we expect volume on the HTS or the distribution systems to rebuy.

<unk> by more than 50% during 'twenty two as more barrels utilize our extensive system to connect to all the refineries in the Houston, Texas City area.

As a reminder rates charged on the Houston distribution system are significantly lower than.

Then longhorn due to the short distance moved which impacts the overall average crude oil rate per barrel that we reported in our financials with the expected volumes in 'twenty two our average crude oil rate per barrel ship should be closer to 60.

Per barrel this year versus 80 per barrel and 21, reflecting the incremental portion of shorter haul movements.

With an average remaining life of four years with the current low differential between the Permian and Houston spot shipments generally remain uneconomical. So we expect shipments basically in line with the commitment levels.

For saddled worn and we expect to move about 230000 barrels per day during 'twenty, two which is in line with current contracted levels.

Based on the final step up of commitments under the new contract for the recent expansion of the line.

<unk> has commitments for 80% of the pipeline to 290000 barrel per day capacity with an average remaining life of five years.

On the expense side, we've discussed in the past that Magellan kicked off the initiative a few years ago to identify cost savings and efficiency opportunities throughout the organization.

By about 2% and 22.

Yes.

Concerning maintenance capital, we expect to spend around $80 million during 'twenty, two which is very similar to last year's actuals and.

In summary, all of these key assumptions buildup to our DCF guidance of 1.0 75 billion for 2022.

Based on projects already committed we expect to spend approximately $50 million and 22 on expansion capital.

Following a successful open season. These estimates now include a 5000 barrel per day expansion of our refined product system from Kansas to Colorado that should be operational by late 2022. In addition, the previously announced expansion of our new Mexico refined products pipeline is nearing completion and expect to be operational in the AP.

All of this year.

These projects are fully underwritten by commitment from strong counterparties and demonstrate the flexibility of our network to step up to film market supply gaps that may arise.

As you know the environment for large scale capital investments has been challenging over the last few years.

However, we expect to add more growth projects throughout the year, although most likely smaller scale like these recent pipeline expansions as a result, we still expect our expansion capital spending to be close to $100 million for 2022 additional projects are approved as the year progresses.

Bottom line is we remain patient and committed to our disciplined investment approach and continue to look for opportunities to invest in attractive low risk projects.

Or exceed our six to eight times EBITDA multiple threshold.

Before we open the phone lines I would like to briefly comment on announcement last week that I'll be retiring from Magellan on April 30.

I've spent my entire career with the company it couldnt be more proud of the organization. We have created over the last 20 years.

My role as CEO for the last 11 years has been rewarding and I sincerely appreciate the support I received from the Investor and analyst community.

<unk> truly believe Magellan has a best in class company in the energy space from almost every perspective.

<unk> financial performance dedication operational safety and.

Company culture.

We have been intentional to build the company on these strong principles from the very beginning to ensure our long term success.

Aaron Milford, who is here with us today will be my successor, as President and CEO and I and our board of directors have complete confidence in his abilities to lead Magellan into the future.

The investment community community should be familiar with Aaron as he served as CFO prior to taking on his current.

Responsibilities.

Elements in a strong financial position with a resilient business model and experienced management team that prepares us well for the future.

And with that operator, I will now open at all open the call for questions.

Thank you if you relates to register a question. Please press the one followed by the four on your telephone Youll hear with retail prompt to acknowledge your request. If your question has been answered and you would like to try registration. Please press. The one followed by the three again to register for a question. Please press <unk>.

The one followed by the four.

And our first question comes from the line of Theresa Chen with Barclays. Please proceed.

Hello, and congratulations Mike on your retirement and congratulations also to Aaron I'm going to evolve.

Thank you Theresa.

Sure I wanted to ask.

Ask first on refined products segment.

So Mike just summing all of the puts and takes.

All your commentary about the many variables related to <unk>.

Net net 2022 relative to 2021 volumes up 4% tariffs flat for the transportation portion correct.

That's correct.

Okay and then for.

The butane blending business.

And so you have hedged at all.

Spring at 40 cents and it looks like you expect it all to also be similar since the average for the year at 40.

Wondering.

Why that may be given that the foreign curve.

Indicate a little bit more favorable spot margins from here.

Well the curves are moving all the time as you would expect so we've taken a point in time.

And the forward curves net the cost of returns, which we have to acquire.

Is is roughly 40 right now.

Okay and just.

Lastly in terms of getting the proceeds for.

The sale of the southeast terminals.

And is there an expectation that the buyer or may have to do something but what are the gating factors at this point I'm going to close by mid year or do you expect that this could be kicked down.

Further.

Well I don't really want to comment on what the expectations are from the FTC, because that's really a process between the buyer and the FTC.

But we firmly believe that the that we're going to close and we think it's highly likely we're going to close within the timeframe, we have within our guidance.

But thats, probably all I can really say about the process at this point.

Got it thank you.

And our next question comes from the line of Keith Stanley with Wolfe Research. Please proceed.

Hi, good afternoon.

Two that could ice could I start just on the.

The buybacks and capital allocation so how.

How do you think about repurchases in the first half of the year, assuming you close the terminal sale mid year.

We'll have some excess free cash flow, but a big chunk of cash coming mid year would you be willing to use short term borrowings in the first half of the year to to repurchase equity just given your.

Pretty decently below the leverage target.

Or is that not something you'd be interested in.

Okay.

This is Jeff we would be open to that in theory always comes down to the specifics. So if you look at the times. We bought back end has not always been with current free cash flow and the regulator will be leverage.

And so we will have one eye on leverage and we will have an eye on the proceeds and the timing there.

There's other factors too will be looking at whats kind of investment opportunities, we see and we'll be wanting to pay attention to how we are trading as well obviously, if there's a dislocation in the price.

Might be incentivized to feel a bit more aggressive on repurchases.

On the Comverse in between as well so in theory, yes in practice I think youll see us be fairly measured as we have been in the past.

Got it.

Then.

Mike Thanks for all the detailed drivers for 2022 that was very helpful. I, just I just want to clarify so in.

Raul.

Driver in that case, a negative driver for 2022.

Well on the storage side.

We are in a soft market at the moment.

And as we've talked about before.

The.

Many of our storage contracts are relatively short term, one or two years and so we have.

Frequent rotation of those contracts.

And so in the current environment with a strong backwardation in the market.

Challenging market to re contract storage. So we expect that to be soft this year versus last year and as we mentioned in our comments. It also.

If you look at 'twenty, one it was <unk>.

<unk>.

Early in the year from.

Short term contracts, we put in place during the pandemic, which were pretty high.

Rate contracts. So we expect this year to be soft in that regard, we don't expect it to persist long term the market goes through cycles and at some point, we will be back in a contango market and we expect there would be recovery there, but in 2022, we do expect some softness there.

With regards to butane blending.

I think year over year, we are expecting increase.

Even though the margins are relatively the same.

We are projecting growth in lending volume.

We're going to drive that higher.

Got it thank you very much.

And our next question comes from the line of <unk> <unk> with Wells Fargo. Please proceed.

Thanks, Mike Congrats on your retirement and Aaron Congrats on the new role I just have.

Two questions I guess first you noted that you signed a new third party contracts on longhorn. So just curious if you could talk about the contracting environment for the permit for Permian crude and whether you see any green shoots forming are you talking to any other customers or do you think this was kind of a one off contract.

The contracting environment in the Permian is extremely tight.

Quite honestly shippers don't have a huge incentive to make commitments when spot rates are as low as they are.

The long term picture doesn't look like those those differentials will will grow too.

Grow significantly over the next year or two.

In this case.

Even though we have signed the contract on.

Longhorn at what I would.

Characterizes marginal profitability.

Those barrels ultimately get into our distribution system, where there is some value to us there and I think with regards to prospective shippers the access we have to multiple.

Demand points.

Long our distribution system.

Attracts customers.

So that was one of the drivers behind their willingness to sign a contract and our willingness again.

Continuing at least for the next year or two to sign incremental contracts, which doesn't mean that our marketing affiliate isn't opportunistically taken.

Advantage.

Shipper interest and getting for.

The Permian to Houston and into our distribution system that will continue.

Okay.

And I'm wondering if you could talk about the FERC decision to lower the PPI adjuster from seven.

708 to negative <unk> one.

Just whether you think that has broader implications in terms of the FERC may be taking less friendly approach to oil and gas pipelines.

I mean, it's made up a majority of Democratic Commissioners now so.

Curious for your views on that and whether you think there's any political motives behind the adjustment.

I don't I don't think its an indicator that there is that theres, a developing bias against the pipelines if youll recall.

When.

The initial decision was made a little over a year ago. The chairman issued a very strongly worded descent.

Hence the decision so.

Yes, we knew as an industry that the risk on rehearing existed that.

Once a Democratic Commission was in place.

I would move more in the direction of the commissioners view.

Than what the original order was and Thats what happened I.

I don't see that as a big shift.

<unk> focus by the commission.

The argument.

That.

The commission overturned.

On rehearing to lower the rate our arguments that have strong arguments on both side, it's really I don't believe a bias decision.

So.

I'll stop there I don't think there is a political motivation behind it.

Got it thank you.

Okay.

Yeah.

And our next question comes from the line of Spirit <unk> with Credit Suisse. Please proceed.

Thanks, Operator afternoon, guys, Congrats again to Mike and Aaron.

Wanted to go back to the guidance if I could quickly.

I think a lot of the contact was helpful and sort of bridging between full year 'twenty, one and 2022, I guess, where I'm still struggling on.

Bridging everything is when I look at your performance in the back half of 2021, specifically right. So no impact there and I annualize that.

And I of course back out 35 million.

Yes.

Can you help me sort of bridge that number a little bit better.

I'll try I don't know exactly how you came up with your $65 million, but let me let me just comment on a couple of things we've talked about.

The asset sales, which is roughly $35 million we've talked about.

The winter storm effects, which is about $25 million, we really didn't talk about the lower saddle horn tariffs in detail, but with when we re contracted saddle horn.

<unk> agreed to incremental rate reductions.

In exchange for volume over time.

And for long term contracts and so.

There is a little bit of a reduction in 'twenty two.

That rate reduction, which is about $10 million probably year over year.

When we talk about the refined products volumes.

There's a number of elements we didn't go through those in great detail. This dropping the average rate back down to basically equal with 'twenty, one and that's a significant move but there was there were some specific reasons and one is one we mentioned is that there is.

A slightly higher proportion of lower short haul volumes, there, but I'd also mentioned in it.

We mentioned in the comments last year, we benefited from some long haul movements from Houston up into the mid continent.

Due to some refinery issues in the mid continent that we aren't expecting to repeat.

And I think materially we've recognized deficiency revenue last year, which affected rate per barrel, that's not going to recur or I should say, we don't expect it to recur in 'twenty two that's in the neighborhood of $20 million all of that we didn't spell out specifically it's embed.

Good in that.

I mean that we had in 'twenty one.

And.

<unk>.

All of that being said that should get us closer I guess $365 million number I didn't add all that up in my head but.

Those are probably the things that you're missing in your calculation. This is Jeff I might just add too I mean, I think we are.

Done the exercise you talked about part of it because we wouldn't consider it really totally about a way to do it there is less seasonality in the business. If you look at the.

Four quarters over the last year the volumes are much stronger in the last six months than they were in the first six months and some of that is going to occur. So I would caution against trying to annualize that the back half of last year just on its own.

Okay.

That's helpful. I think all of those items together, probably probably bridge that gap. So I appreciate the color there guys.

Second one is just a really quick one here it sounds like your expectation for buybacks is to utilize most or all of that $575 million or so of free cash flow.

Throughout the year.

Well certainly the opportunity for capital investment.

Yes.

Something that we are actively.

Looking for.

Finding project.

Attractive returns is challenging but we're looking at is probably less focused on M&A, even though I would never rule that out it's probably more more focused on.

Internal development, so to the extent that an opportunity were to arise that has an attractive return it would impact that and then again all the other caveat to Jeff mentioned the price of the equity.

Yeah.

Those sorts of things will factor into that also and.

Sure.

So.

It's not really more complicated than that.

Yes.

No worries keep it simple alright thats perfect. Thanks, Mike, we'll see you guys at the analyst day.

Okay.

And our next question comes the line of Jeremy Tonet J P. Morgan. Please proceed.

Hi, good afternoon.

Good afternoon.

Congratulations Mike on a successful career, we'll Miss you and Aaron best to walk or taken the reins here.

Just wanted to kind of start off one question here really a few different facets to it I guess.

The Permian growth is on the upswing again.

I'm just wondering if you could walk us through the different permutations of how this impacts Magellan.

Increased drilling demand from diesel more oil logistics, whether conversion of pipelines.

Makes sense or just trying to think through the different impacts as well as maybe a more favorable environment. When you look too.

Roll those contracts.

Okay, well, that's a broad question, let me try to break it down into its pieces I mean first and foremost I mean, we do see.

The most material benefit to us from increased drilling in the Permian as diesel demand on our refined product system and so certainly the extent that that grows.

We have a direct benefit through throughput on our west Texas system.

On the crude oil side.

Because there's such significant overcapacity today, the production is going to have to grow quite a bit before youre going to see any material change in the differential.

From Midland to Houston, and willingness for shippers to make any kind of commitment.

But.

There is potentially some benefit out there that capacity does start to tighten.

And if that happens then we would expect margins to widen.

And shippers to perhaps be more interested in making some level of commitment all of that is somewhat speculative as I said three or four years out.

So we'll have to see how that goes as far as repurposing pipes.

Yes.

I'm sure everybody, who as a Permian pipe is evaluating that.

To the extent that someone does that doesn't have to be us it could be anyone it's going to benefit everyone else.

I don't have any insight as to whether the folks who are doing I can tell you that we continue to actively look at repurposing.

And.

As I've said in the last call Theres nothing actionable to talk about today, there may not be anything to actual to talk about for some time, but I can tell you that there is a lot of activity taking place.

Within the company to try to put a project together to do that and I would say that the probability of that is not zero.

That there is some real opportunity here, but there is some real challenges to get it done, but we're focused on that so.

I mean, just stay tuned on how that develops.

Got it very helpful. There and one last one if I could just with regards to the Cushing storage market wondering if you could provide a bit more color there the current environment, how that's impacting.

Impacting your business.

Well I mean, it's not impacting us.

Large extent right now because we've got significant contracts.

I don't have on the tip of my fingers the percentage of Cushing storage.

Contracted but most of it is contracted.

And so we're not seeing any significant issue right now at Cushing.

And the life of those contracts has a number of years left so.

It really depends on what the market looks like when they expire which is an eminent.

That impact and maybe inflation you talked a lot about inflation before but just wondering specifically on the labor side.

Does anything to note there.

Well there is nothing to note.

We've.

Implemented our salary increases this year, we do have a union.

And that Union contract is up for renewal.

And.

We expect we're going to have an outcome that all everyone will be happy with that.

That we're going to wind up the place where everybody's happy at the end of that.

Got it I'll leave it there thank you very much.

And the next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed.

Guys. Thanks for taking my questions.

Just curious if so.

You are expecting in kind of true free cash flow of about $5, 75% and 22% and a large chunk of that comes from the asset sale. Just curious on the debt side what happens in 'twenty. Two do you use any of that $5 75 million to pay down debt.

Or is that $5 75 available for either growth capex or unit buybacks or other forms of capital allocation and how do you think in the year or kind of how you're thinking about debt to EBITDA at the <unk>.

End of the year as we enter 2003.

Yes.

We're not.

Okay.

Project can relate to use those proceeds for any specified purpose other than generally R.

Our expectation would be to use free cash flow to repurchase.

Units.

But that will depend on all of those factors as we talked about so depending on how those play out and what are the growth projects show up.

On the off chance as Mike mentioned, the M&A shut up.

Obviously, we could use it for any of those purposes, and it's fungible, if none of those show up and we don't undertake repurchase activity, we could repurchase units excuse me, we could pay down debt, but that's not our first plan is kind of a last option for us just so if we don't like any of the other options in front of us.

So we don't project increasing debt during the year based on what we see today.

For sure and if we used all the proceeds for repurchases that would end up pretty much.

Where it is now let's.

And so you can calculate the leverage ratio from sort of projections.

I don't have that number right in front of me right. This minute, but that's the way we would be thinking about that Michael.

Got it okay and.

Made a little bit of a comment about M&A and over the last couple of years last two to three three to four years.

We've done a host or a number of kind of a small asset sales.

Today versus maybe where they were three or four years ago.

Okay.

Well.

Certainly the market is probably more attractive than it was three or four years ago, but that's not saying much three or four years ago was astronomically high.

We.

Okay.

Spar.

Specific to answer your question specifically there is not a set of assets out there right now that we're targeting to say we have to go by we like.

The kind of assets, we already have refined products assets.

And.

A couple of years ago, there were some of those in the market, but we felt that they were still too high.

Which is why we were.

The seller rather than a buyer.

We will continue to watch that and if those assets come back to the market.

The prices are.

More reasonable that we might we might get into it we're not looking to really diversify outside of what we do right. Now we don't really feel like this is the time for us to make big bets on.

Things outside of our space, especially.

Since we have what we believe to be an attractive opportunity to buy back our equity.

All of that is a point in time decision they make.

You never know what opportunity might fall in our lap next week and we will evaluate it but right now we're not we're not actively pursuing.

Anything transformational.

<unk>.

Out there.

Got it. Thank you Mike Thanks, guys much appreciate it.

Yes.

And our next question comes from the line of James Carreker with U S Capital Advisors. Please proceed.

Cool.

Hi, Thanks, and congrats again to Mike and Aaron.

I had one clarifying question, Mike you talked about it in the press release.

About $100 million of growth Capex and then the.

The official guidance in the financial schedule had a number in there for <unk>. So just wondering if you know what maybe the difference is there.

Yes, Thats just generic assumption about what we think it will actually get done.

We put only what we've committed it would be that lower 50 number and we also think that would be kind of under under billing what we actually expect that happens during the year. There's a number of projects. We are evaluating their various stages of development that can toggle into being committed relatively soon as we kind of handicap it probably.

Abilities, we come up with in the area of another 50, or so and so we kind of looked at about 100 number.

Yes.

The business.

Okay, I thought that might be the case just wanted to clarify.

And then I guess kind of Big picture question, and I know, we've gotten away from talking about.

Growth versus normal in X X growth projects, but when you look at the 2022.

Refined product outlook, I guess taking into account.

Gross projects that you've put into place like how.

How normal does that feel relative to say 2019 levels because that feels like we fully caught up do you think there is.

Still some parts of the economy holding back when you look at that 22 number.

Well I don't have the numbers in front of me, but I think just directionally on gasoline, we aren't quite that 2019 numbers.

Diesel fuel is strong and probably above 2019 numbers.

And jet fuel, obviously still not back to 2019, but.

But I don't have any kind of percentages on my fingertips here to give you on that and when I say gasoline is not there I'm not talking about a big Miss I'm talking about.

It's it's.

It's not above where we were in 2019 and I think.

And again and I've talked about this before it really gets into.

Yes.

The geography.

Set in our rural markets, it's there.

The cities.

It hasn't quite gotten back there I mean, you still have businesses.

But don't have people back to work.

Which is surprising to us, but it's true and so I think there is still a little bit of a lag there and there are some minor things like Mike said on our system that are specific I think overall for the markets. We serve gasoline we project can be pretty much back to those 19 levels.

There are some ins and outs just based on things going on with our system contract roll offs in small places here and there that can affect volumes etcetera. So overall really it's only aviation that continues to lag by the end of this year.

Okay. That's all helpful color if I could.

Maybe one more in.

One question.

When you guys put the west Texas expansion into service you noted a <unk>.

<unk> multiple with potentially significant additional upside I assume that that's probably not in your guidance for 'twenty two.

But I guess what would it take to.

Achieved some of that significant upside that you laid out when you. When you went forward with that project.

Well, we do have some growth in our west Texas volumes in our guidance.

But.

Beyond that and we haven't put it in our guidance.

We have a number of initiatives underway.

West, Texas attractive initiatives.

That potentially can bring material new volumes too.

To our assets and.

I'm not going to go into the details of those but I can tell you is across the breadth of the markets, we serve and we say west Texas, but.

We sale all the time that it's not just west Texas that this pipeline serves its markets in Mexico, Arizona, New Mexico are all connected to our system.

So theres opportunities really across.

That spectrum that we're pursuing and.

Again.

We havent built those opportunities into our guidance some of those opportunities are probably more than that.

2022 type horizon, there beyond that but.

I think it's safe to say there is material upside with regards to our west Texas assets that that we're looking at that we haven't built into 2022.

I might just also point back to my earlier answer around drilling as well because drilling exceeds our expectations without any of those other initiatives Mike's talking about we can see further upside from that from that expansion project.

And just to clarify these initiatives with you.

You'll be able to.

Do them without having to repurpose any pipes. These are just with <unk>.

Existing space on existing assets.

Well some of it is but.

There are what I'd call home run scenarios that would require repurposing assets.

And we're actively working on those also.

But even absent that like I said, there is there is opportunities for growth.

Okay.

Thanks, a lot and congrats again.

Thank you.

And our next question comes from the line of Timm Schneider with Citi. Please proceed.

Hey, good afternoon, just a quick question on the butane blending can you remind us what are you most exposed to or the rent side is that the $4 six or a combination of those.

Okay.

Controlling composite when we look at it we estimate the percentages that are in the new RV.

We as we hedge we look at that as totality to make sure that.

Were getting each of the specific types of Rins that we need so we're exposed to essentially all of them at different points in time, So that's a composite basket for us.

Got it.

In your assumptions right now are you guys just using the forward curve for that or do you have your own kind of views on what what that rig pricing, it's going to look like through 2022.

Yes, we are looking at the forward curves and paying attention to what's happening in the market.

We have I would say our own opinions about maybe directionally, where that is but for the most part its forward curves.

And the other point to point out is that.

We've already got a significant amount of 2022 rent obligations hedged I think its around 70% of what we view our obligation for 2022 to be so we do have some more to.

<unk> hedged, but we've got a lot of that.

Taken care of already.

Got it and then Thats all inclusive of the I think you said it was <unk> 40 cents.

40% margin was that right.

That's a net margin. So that's the gross margin lesser operating expenses less the cost of brands on a per gallon basis net 40.

Okay, but that's the that includes to 70% hedged.

Yes.

Okay got it so sorry, I was just trying to reconcile that.

Yeah go ahead.

That's it.

Okay.

Yeah Alright.

Yes, that's great. That's all I had thank you.

Okay.

Operator, we probably have time for one more question.

Yeah.

Hi, This is no more questions I'll.

Turn the call back over to you Mr. Mayer. Please go ahead alright.

Alright, well. Thank you well we appreciate your continued interest in Magellan.

We hope to see many of you at our analyst day next month and until then have a good day.

Thank you that does conclude our call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day.

Q4 2021 Magellan Midstream Partners LP Earnings Call

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