Magellan Midstream Announces Record Quarterly Financial Results, Increases 2012 Distributable Cash Flow Guidance

TULSA, Okla., Aug. 1, 2012 /PRNewswire/ -- Magellan Midstream Partners, L.P. (NYSE: MMP) today reported record operating profit of $167.3 million for second quarter 2012 compared to $128.7 million for second quarter 2011, and net income was a record $137.8 million for second quarter 2012 compared to $103 million for second quarter 2011.

Diluted net income per limited partner unit was also a quarterly record of $1.22 in second quarter 2012 versus 91 cents in the corresponding 2011 period. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-generally accepted accounting principles (non-GAAP) financial measure, was $1.01 for second quarter 2012, exceeding the 83-cent guidance provided by management in early May by 22% due to improved gasoline and crude oil transportation volumes and higher commodity sales.

Distributable cash flow (DCF), a non-GAAP financial measure that represents the amount of cash generated during the period that is available to pay distributions, increased 14% to a quarterly record of $134 million for second quarter 2012 compared to $117.6 million during second quarter 2011.

"We are pleased to report record quarterly results for Magellan for the second quarter of 2012, driven by improved results from each of our operating segments due to increased demand and higher rates for our services and additional profits from our commodity-related activities," said Michael Mears, chief executive officer. "Magellan remains on track for a record year in 2012 due to our business model of providing essential transportation and storage services for refined petroleum products and crude oil. Our stable base operations, significant growth projects and disciplined management philosophy give us confidence in Magellan's future."

An analysis by segment comparing second quarter 2012 to second quarter 2011 is provided below based on operating margin, a non-GAAP financial measure that reflects operating profit before general and administrative (G&A) expense and depreciation and amortization:

Petroleum pipeline system. Pipeline operating margin was $176.3 million, an increase of $29.9 million and a quarterly record for this segment. Transportation and terminals revenues increased between periods primarily due to 10% more volume transported, driven primarily by increased gasoline and crude oil shipments, and a higher average tariff that resulted in part from the partnership's mid-2011 tariff increase. Revenues also benefited from higher demand for leased pipeline capacity, storage leases and additive services. Operating expenses increased between periods primarily due to lower product overages (which reduce operating expenses) and higher asset integrity costs in the current period, partially offset by expenses in the 2011 period that did not recur in the current year for the impairment of a system terminal we closed and an accrual for potential air emission fees.

Product margin (defined as product sales revenues less product purchases) increased $16.9 million between periods, including an $11.5 million favorable variance associated with the timing of MTM adjustments for New York Mercantile Exchange (NYMEX) positions used to economically hedge the partnership's commodity-related activities and other inventory adjustments. Details of these items can be found on the Distributable Cash Flow Reconciliation to Net Income schedule that accompanies this news release. The partnership's actual cash product margin, which reflects only transactions that settled during the quarter, increased between periods primarily due to higher petroleum products blending profits as a result of selling more product in the second quarter of 2012.

Petroleum terminals. Terminals operating margin was $42.7 million, an increase of $7.3 million. Revenues in the current period benefited primarily from recently-constructed crude oil storage in Cushing, Oklahoma and new refined products tanks and higher rates at the partnership's marine terminals. Operating expenses decreased due to an accrual in the 2011 period for potential air emission fees partially offset by higher asset integrity costs in the current period. Product margin declined due to the sale of less product overages at lower prices in the current period.

Ammonia pipeline system. Ammonia operating margin was $4.5 million, an increase of $2.5 million. Revenues increased due to slightly more volume transported at a higher average tariff during the 2012 period, and expenses decreased because of lower asset integrity costs now that the pipeline's hydrostatic testing procedures are complete.

Other items. Depreciation and amortization increased due to recent expansion capital expenditures, and net interest expense increased in the current quarter as a result of additional borrowings over the last year to fund capital spending. As of June 30, 2012, the partnership had $2.1 billion of debt outstanding and more than $230 million of cash on hand.

Expansion capital spending expectations
Management continues to pursue expansion opportunities, including organic growth construction projects and acquisitions. Based on the progress of expansion projects already underway, the partnership plans to spend approximately $500 million during 2012 with an additional $200 million of spending in 2013 to complete these projects.

The partnership is making substantial progress on its tank construction projects and expects to complete 1.5 million barrels of new refined products storage, primarily at its Galena Park, Texas marine terminal, by the end of 2012, with another 0.6 million barrels expected to come online during early 2013. Further, Magellan's Crane-to-Houston crude project is still expected to begin transporting crude oil at partial capacity by early 2013, ramping to its full 225,000 barrel-per-day capacity by mid-2013. The Double Eagle joint venture is also proceeding and expected to be partially operational in early 2013, with full operation in mid-2013.

The partnership continues to evaluate more than $500 million of potential growth projects in earlier stages of development, which have been excluded from these spending estimates. In addition, management and Occidental Petroleum continue to jointly assess the potential BridgeTex pipeline, which also has been excluded from the spending estimates.

Financial guidance for 2012
Management is raising its 2012 DCF guidance by $30 million to approximately $520 million and recently announced its intention to increase annual distributions by 18% for 2012, or double its previous 9% growth target, with the goal of raising distributions an additional 10% for 2013. Net income per limited partner unit is estimated to be $3.90 for 2012, with third-quarter guidance of 76 cents. Guidance excludes future NYMEX MTM adjustments on the partnership's commodity-related activities.

Earnings call details
An analyst call with management regarding second-quarter results and outlook for the remainder of 2012 is scheduled today at 1:30 p.m. Eastern. To participate, dial (800) 946-0720 and provide code 7860410. Investors also may listen to the call via the partnership's website at www.magellanlp.com/webcasts.aspx.

Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on Aug. 7. To access the replay, dial (888) 203-1112 and provide code 7860410. The replay also will be available at www.magellanlp.com.

Non-GAAP financial measures
Management believes that investors benefit from having access to the same financial measures utilized by the partnership. As a result, this news release and supporting schedules include the non-GAAP financial measures of operating margin, product margin, DCF and net income per unit excluding MTM commodity-related pricing adjustments, which are important performance measures used by management.

Operating margin reflects operating profit before G&A expense and depreciation and amortization. This measure forms the basis of the partnership's internal financial reporting and is used by management to evaluate the economic performance of the partnership's operations.

Product margin, which is calculated as product sales revenues less product purchases, is used by management to evaluate the profitability of the partnership's commodity-related activities.

DCF is important in determining the amount of cash generated from the partnership's operations that is available for distribution to its unitholders. Management uses this measure as a basis for recommending to the board of directors the amount of cash distributions to be paid each period.

Reconciliations of operating margin to operating profit and DCF to net income accompany this news release.

The partnership uses NYMEX futures contracts to hedge against price changes of petroleum products associated with its commodity-related activities. Most of these NYMEX contracts do not qualify for hedge accounting treatment. However, because these NYMEX contracts are generally effective at hedging price changes, management believes the partnership's profitability should be evaluated excluding the unrealized NYMEX gains and losses associated with petroleum products that will be sold in future periods. Further, because the financial guidance provided by management generally excludes future MTM commodity-related pricing adjustments, a reconciliation of actual results to those excluding these adjustments is provided for comparability to previous financial guidance.

Because the non-GAAP measures presented in this news release include adjustments specific to the partnership, they may not be comparable to similarly-titled measures of other companies.

About Magellan Midstream Partners, L.P.
Magellan Midstream Partners, L.P. (NYSE: MMP) is a publicly traded partnership that primarily transports, stores and distributes petroleum products. The partnership owns the longest refined petroleum products pipeline system in the country, with access to more than 40% of the nation's refining capacity, and can store 80 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. More information is available at www.magellanlp.com.

Forward-Looking Statement Disclaimer
Portions of this document constitute forward-looking statements as defined by federal law. Although management believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Among the key risk factors that may have a direct impact on the partnership's results of operations and financial condition are: (1) its ability to identify growth projects or to complete identified projects on time and at expected costs; (2) price fluctuations and changes in demand for refined petroleum products, crude oil and natural gas liquids, or changes in demand for transportation or storage of those commodities through its existing or planned facilities; (3) changes in the partnership's tariff rates imposed by the Federal Energy Regulatory Commission, the United States Surface Transportation Board or state regulatory agencies; (4) shut-downs or cutbacks at major refineries, petrochemical plants, ammonia production facilities or other businesses that use or supply the partnership's services; (5) changes in the throughput or interruption in service on petroleum pipelines owned and operated by third parties and connected to the partnership's petroleum terminals or petroleum pipeline system; (6) the occurrence of an operational hazard or unforeseen interruption for which the partnership is not adequately insured; (7) the treatment of the partnership as a corporation for federal or state income tax purposes or if the partnership becomes subject to significant forms of other taxation; (8) an increase in the competition the partnership's operations encounter; (9) disruption in the debt and equity markets that negatively impacts the partnership's ability to finance its capital spending; and (10) failure of customers to meet or continue contractual obligations to the partnership. Additional information about issues that could lead to material changes in performance is contained in the partnership's filings with the Securities and Exchange Commission, including the partnership's Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2011 and subsequent reports on Forms 8-K. The partnership undertakes no obligation to revise its forward-looking statements to reflect events or circumstances occurring after today's date.

Contact:

 Paula Farrell


(918) 574-7650


paula.farrell@magellanlp.com



MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per unit amounts)

(Unaudited)



Three Months Ended


Six Months Ended


June 30,


June 30,


2011


2012


2011


2012

Transportation and terminals revenues

$

223,192



$

248,761



$

428,600



$

466,315


Product sales revenues

159,943



200,568



397,239



476,298


Affiliate management fee revenue

192



198



385



397


Total revenues

383,327



449,527



826,224



943,010


Costs and expenses:








Operating

81,323



82,326



143,684



150,778


Product purchases

118,836



144,498



330,066



393,110


Depreciation and 
       amortization

30,664



31,486



60,027



62,996


General and 
       administrative

25,281



25,414



49,871



49,158


Total costs and 
            expenses

256,104



283,724



583,648



656,042


Equity earnings

1,443



1,478



2,810



3,126


Operating profit

128,666



167,281



245,386



290,094


Interest expense

25,988



29,118



52,474



58,241


Interest income

(1)



(29)



(11)



(64)


Interest capitalized

(1,190)



(1,028)



(1,861)



(1,892)


Debt placement fee amortization expense

385



518



770



1,037


Income before provision for income taxes

103,484



138,702



194,014



232,772


Provision for income taxes

485



881



950



1,427


Net income

$

102,999



$

137,821



$

193,064



$

231,345










Allocation of net income (loss):








Non-controlling 
       owners' interest

$



$



$

(63)



$


Limited partners' 
       interest

102,999



137,821



193,127



231,345


Net income

$

102,999



$

137,821



$

193,064



$

231,345










Basic and diluted net income per limited partner unit

$

0.91



$

1.22



$

1.71



$

2.04










Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation

112,847



113,214



112,804



113,153










 

MAGELLAN MIDSTREAM PARTNERS, L.P.

OPERATING STATISTICS



Three Months Ended


Six Months Ended


June 30,


June 30,


2011


2012


2011


2012

Petroleum pipeline system:








Transportation revenue per barrel shipped

$

1.097



$

1.126



$

1.071



$

1.094










Volume shipped (million barrels):








Refined products:








Gasoline

52.3



56.1



104.7



102.0


Distillates

32.9



33.6



62.5



63.4


Aviation fuel

7.7



5.2



12.8



10.8


Liquefied petroleum gases

2.2



3.7



3.1



4.7


Crude oil

10.2



17.2



17.2



32.1


Total volume shipped

105.3



115.8



200.3



213.0










Petroleum terminals:








Storage terminal average utilization (million barrels per month)

31.1



34.8



30.5



34.8


Inland terminal throughput (million barrels)

29.3



29.9



56.9



58.0










Ammonia pipeline system:








Volume shipped (thousand tons)

191



193



412



382










 

MAGELLAN MIDSTREAM PARTNERS, L.P.

OPERATING MARGIN RECONCILIATION TO OPERATING PROFIT

(Unaudited, in thousands)



Three Months Ended


Six Months Ended


June 30,


June 30,


2011


2012


2011


2012

Petroleum pipeline system:








Transportation and terminals revenues

$

161,168



$

178,757



$

305,230



$

327,487


Less: Operating expenses

51,737



56,377



89,447



102,931


Transportation and 
       terminals margin

109,431



122,380



215,783



224,556










Product sales revenues

152,891



193,040



379,879



459,297


Less: Product purchases

117,540



140,810



326,013



385,691


Product margin

35,351



52,230



53,866



73,606


Add:  Affiliate management
fee revenue

192



198



385



397


Equity earnings

1,443



1,494



2,810



3,163


Operating 
            margin

$

146,417



$

176,302



$

272,844



$

301,722










Petroleum terminals:








Transportation and terminals revenues

$

56,969



$

64,053



$

112,190



$

127,233


Less: Operating expenses

26,627



24,440



48,623



44,622


Transportation and
       terminals margin

30,342



39,613



63,567



82,611










Product sales revenues

7,140



7,699



17,558



17,464


Less: Product purchases

2,084



4,567



5,858



9,295


Product margin

5,056



3,132



11,700



8,169


Equity earnings



(16)





(37)


Operating
            margin

$

35,398



$

42,729



$

75,267



$

90,743










Ammonia pipeline system:








Transportation and terminals revenues

$

5,755



$

6,659



$

12,787



$

13,008


Less: Operating expenses

3,726



2,179



7,057



4,629


Operating 
            margin

$

2,029



$

4,480



$

5,730



$

8,379










Segment operating margin

$

183,844



$

223,511



$

353,841



$

400,844


Add: Allocated corporate depreciation costs

767



670



1,443



1,404


Total operating margin

184,611



224,181



355,284



402,248


Less:








Depreciation and 
       amortization

expense

30,664



31,486



60,027



62,996


General and 
       administrative 
       expense

25,281



25,414



49,871



49,158


Total operating profit

$

128,666



$

167,281



$

245,386



$

290,094










Note: Amounts may not sum to figures shown on the consolidated statement of income due to intersegment eliminations and allocated corporate depreciation costs.

 

MAGELLAN MIDSTREAM PARTNERS, L.P.

RECONCILIATION OF NET INCOME AND NET INCOME PER LIMITED PARTNER UNIT

EXCLUDING MARK-TO-MARKET COMMODITY-RELATED PRICING ADJUSTMENTS

TO GAAP MEASURE

(Unaudited, in thousands except per unit amounts)



Three Months Ended


June 30, 2012


Net Income


Basic and Diluted
Net Income Per Limited Partner
Unit

As reported

$

137,821



$

1.22


Deduct: Unrealized derivative gains associated with future physical product transactions

(27,511)



(0.24)


Add: Lower-of-cost-or-market inventory adjustments

4,106



0.03


Excluding commodity-related adjustments

$

114,416



$

1.01






Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation

113,214








 

MAGELLAN MIDSTREAM PARTNERS, L.P.

DISTRIBUTABLE CASH FLOW RECONCILIATION TO NET INCOME

(Unaudited, in thousands)



Three Months Ended


Six Months Ended




June 30,


June 30,


2012


2011


2012


2011


2012


Guidance











Net income

$

102,999



$

137,821



$

193,064



$

231,345



$

441,000


Interest expense, net

24,797



28,061



50,602



56,285



110,000


Depreciation and amortization (1)

31,049



32,004



60,797



64,033



130,000


Equity-based incentive  compensation (2)

5,260



4,165



1,600



(5,991)



4,000


Asset retirements and impairments

5,276



1,952



7,106



7,359



10,000


Commodity-related adjustments:










Derivative losses/(gains) 
      recognized in the period 
      associated with future 
      product transactions (3)

(226)



(27,511)



8,765



(17,908)




Derivative losses 
      recognized in previous 
      periods associated 
      with product sales 
      completed in the period (4)

(17,381)



(10,886)



(12,007)



(4,164)




Lower-of-cost-or-market 
      adjustments



4,106





3,089




Houston-to-El Paso 
      cost of sales adjustments (5)

1,929



7,082



(3,915)



8,121




Total commodity-related 
            adjustments

(15,678)



(27,209)



(7,157)



(10,862)




Other

(601)



9



(739)



529




Adjusted EBITDA

153,102



176,803



305,273



342,698



695,000












Interest expense, net

(24,797)



(28,061)



(50,602)



(56,285)



(110,000)


Maintenance capital

(10,720)



(14,752)



(19,370)



(26,710)



(65,000)


Distributable cash flow

$

117,585



$

133,990



$

235,301



$

259,703



$

520,000












Distributable cash flow per limited partner unit

$

1.04



$

1.18



$

2.09



$

2.30



$

4.60












Weighted average number of limited partner units paid distributions

112,737



113,100



112,737



113,100



113,100














(1)

Depreciation and amortization includes debt placement fee amortization.


















(2)

Because the partnership intends to satisfy vesting of units under its equity-based incentive compensation program with the issuance of limited partner units, expenses related to this program generally are deemed non-cash and added back for distributable cash flow purposes. Total equity-based incentive compensation expense for the six months ended June 30, 2011 and 2012 was $9.0 million and $7.0 million, respectively. However, the figures above include an adjustment for minimum statutory tax withholdings paid by the partnership in 2011 and 2012 of $7.4 million and $13.0 million, respectively, for equity-based incentive compensation units that vested on the previous year end, which reduce distributable cash flow.


















(3)

Certain derivatives the partnership uses as economic hedges have not been designated as hedges for accounting purposes and the mark-to-market changes of these derivatives are recognized currently in earnings. These amounts represent the gains or losses from economic hedges in the partnership's earnings for the period associated with products that had not yet been physically sold as of the period end date.


















(4)

When the partnership physically sells products that it has economically hedged (but were not designated as hedges for accounting purposes), it includes in its distributable cash flow calculations the full amount of the change in fair value of the associated derivative agreement.


















(5)

Cost of goods sold adjustment related to commodity activities for the partnership's Houston-to-El Paso pipeline to more closely resemble current market prices for distributable cash flow purposes rather than average inventory costing as used to determine the partnership's results of operations.



SOURCE Magellan Midstream Partners, L.P.



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