Magellan Midstream Partners, L.P. Price & Performance (MMP)

Hello, and thank you for joining us today to discuss Magellan's Q2 financial results. Before getting started, we must remind The 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 As disclosed in our press release this morning, Magellan delivered another solid quarter. Our second quarter results beat our expectations due to higher contributions from commodity related activities as well as a higher proportion of longer haul shipments and associated higher average tariffs on our refined product system. I will now turn the call over to our CFO, Jeff Holman, to review the highlights from our 2nd quarter earnings. Then I'll be back to discuss our expectations for the year and our pending merger with ONEOK before answering your questions.

Thanks, Erin. First, let me note that I'll be making references to certain non GAAP financial metrics, including distributable cash flow or DCF and free cash flow, and we've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning, we reported 2nd quarter net income of $239,000,000 compared to $354,000,000 in Q2 2022, which included a $162,000,000 gain from the sale of our independent terminals network. Excluding that prior period gain, The year over year increase was driven by higher profits from our commodity related activities as well as a larger contribution from our core fee based transportation and terminal Services. Adjusted earnings per unit for the quarter, which excludes the impact of commodity related Mark to market adjustments was $1.23 which as Aaron just mentioned exceeded our guidance of $1.10 DCF for the quarter increased to $312,000,000 up nearly $84,000,000 from last year, while free cash flow for Quarter was $271,000,000 resulting in free cash flow after distributions of $59,000,000 A detailed description of quarter over quarter variances is available in our earnings release. So as usual, I'll just speak to a few highlights. Starting with Refined Products, we reported 2nd quarter operating profit of $234,000,000 which was $67,000,000 higher than Q2 2022, primarily due to higher average transportation rates as well as higher product margin.

The higher average transportation rates for more long haul shipments, which move higher rates in part as a result of ongoing refinery disruptions. Product margin increased between periods primarily due to both higher gas liquids blending margins and sales volumes, as well as lower unrealized losses in the current period related to our hedging activities. Our realized blending margins doubled year over year to more than $0.80 per gallon versus closer to $0.40 per gallon in the prior year period. Turning to our crude oil business, 2nd quarter operating profit was $61,000,000 down $12,000,000 from the 2022 period, primarily due to lower revenues from our condensate splitter in part due to lower rates provided for in the splitter extension contract executed last year, as well as lower storage revenues in the current period. Otherwise, transportation revenue increased slightly due to additional volume moved. Longhorn volumes averaged a little over 245,000 barrels per day, up from just over 200,000 barrels today in the Q2 of 2022 due to higher third party volumes resulting from additional volume commitments. Volumes on our Houston distribution system increased versus the prior year period in part due to higher shipments from a new pipeline connection that was ramping up in 2022.

Since these shipments move at a lower rate than long haul volumes, this increased HDS activity resulted in a lower average rate for the segment overall. Crude oil product margin increased versus the prior year period due to higher contributions from our crude oil marketing activities as well as favorable mark to market adjustments on futures contracts in the current quarter. Moving on to our crude oil joint ventures. BridgeTex volumes were about 90,000 barrels per day in the Q2 of 2023, down from approximately 215,000 barrels per day in 2022 due to lower volumes from committed shippers. This volume decrease reflects the lower prevailing Midland differential And the highly competitive nature of the crude business in general and of the Permian Basin in particular, which we have noted for some time, while again emphasizing the importance of having take or pay commitments Saddlehorn volumes reached a new record of about 265,000 barrels per day compared to approximately 220,000 barrels per day the year before as a result of higher shipments for both committed and uncommitted shippers. Just briefly touching on expenses, G and A increased by approximately $18,000,000 between periods for our refined and crude segments combined due to higher incentive compensation costs and to approximately $10,000,000 of merger related costs incurred in the 2nd quarter.

In terms of liquidity, we continue to have a $1,000,000,000 credit facility available and at quarter end had no borrowings outstanding on our commercial paper program. As of June 30, the face value of our long term debt remained unchanged at $5,000,000,000 with the weighted average interest rate on that debt of about 4.4%. Lastly, our leverage ratio at the end of the quarter was 3.1 times for compliance purposes. And with that, I'll turn the call back over to Ed.

Thank you, Jeff. We continue to anticipate the transaction with ONEOK will close during the Q3 of this year and remain confident That the value created by this transaction for unitholders is superior to the value of our standalone alternative, including on an after tax basis. That said, based on our Q2 performance, we believe it's appropriate to update 2023 financial expectations, ignoring future Potential merger related costs from Magellan on a standalone basis. Our revised full year outlook highlights the quality of our assets And the ability of our businesses to continue to drive value through a stronger combined company once the pending merger with ONEOK is complete. We now expect to generate $1,260,000,000 of DCF for 2023 on a standalone basis, again, excluding merger related costs. This increase reflects better than expected performance during the Q2 and continued strong commodity margins expected for the remainder of the year. On the commodity front, we have hedged more than 3 quarters of our forecasted fall 2023 gas liquids blending activity at this point for an average margin of $0.60 per gallon. All in, our full year 2023 expectations currently include an average blending margin of $0.70 per gallon, which compares favorably to the $0.50 we generated last year and our 5 year average margin of $0.45 per gallon.

We have also made excellent progress hedging next spring with more than 70% of spring 2024 hedged at a $0.65 margin per gallon. We have also increased our refined products tariff rates Mid year excuse me, we also increased our refined product tariff rates consistent with our most recent guidance. The increase we increased the 30% of our markets that are subject to the FERC index by 13% and the remaining seventy of our markets by an average of 11%, which equates to an all in average refined products tariff increase of approximately 11.5% effective July 1. Turning back to our pending merger with ONEOK. We continue to be confident And the strength and durability of Magellan's business. And we further believe just as confidently that the value unitholders will receive through our combination with ONEOK It's full and fair and that it will be difficult to capture this value on our own. Prior to the announcement of the merger, We consistently and frequently shared our views that Magellan was undervalued and in response have repurchased 12% of our outstanding equity since 2020. The same analysis we used to conclude that repurchasing MMP equity created value for our unitholders also formed the basis for our conclusion that a merger with ONEOK delivers more present value that we could likely realize stand alone.

Magellan has always been focused on delivering superior value to unitholders. Tax considerations are very important to our unitholders and something we've spent a great deal of time considering, especially recently in connection with the pending transaction. What is clear to us is that the ONEOK transaction delivers more value to our unitholders, the Magellan stand alone, even on an after tax basis. Robert Whelans, a respected tax expert reached a similar conclusion. I would highly encourage you, if you haven't done so already, to visit maximizingvalueformmnpunitholders.com To read Mr. Willard Willard's work, along with other information about the pending merger and why we are confident the transaction is in the best interest of unitholders. We've had the opportunity to speak with many investors, analysts, employees and customers, and overall, the feedback has been positive. We are pleased to see that a lot of investors are coming to understand the rationale of the transaction as we have tried to clarify some of the initial confusion in the market around the tax impact. And as we and ONEOK progress our integration planning and communicate more detail on anticipated synergies, We are confident investors will become even more excited about the combination.

It's clear that the market is Starting to reflect some of the potential value of the combined company. While trading prices of our units and ONEOK shares will continue to move around, As recently as July 26, ONEOK shares closed at $67.60 per share. At that price, Magellan unitholders would have received a value of $70.08 per unit based on the terms of the transaction, Nearly a 27% premium to the market price of our units prior to announcing the merger. Operator, We are now ready to answer questions.

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

Hi. Thank you for taking my questions. Aaron, on the deal itself, so since the announcement came out and the materials that have been released since then, You face some public opposition from your holders. Can you speak to your view on this? And also just which inning are you in related to the education process for both your institutional and retail owners.

Well, as we continue to talk to investors, as I said in my prepared remarks, Overall, the reception has been positive. We're spending a lot of time communicating and clarifying frankly, a lot of misunderstandings around the tax impact of this transaction. And then as we go forward from here, we expect to be talking in more detail about the synergies from the transaction. And as we communicate that, people are beginning to understand our rationale. So the inning that we're in, to answer the second part of your And the inning that we're in is, I would say that we're in the 1st inning. We've got a full game ahead of us And we're prepared to see it through to the 9th inning. And we think we're going to be successful because the merits of the deal When accurately communicated, we think are very compelling.

Got it. And since you have the full game ahead of you, if it's not enough time from now until September 21st, What are the next steps? Would you just choose to adjourn and hold it on another date? If you can give us some color about what to expect that would be helpful.

Well, first of all, we have the shareholder meeting scheduled for September 21. We think that's plenty of time And that's where we're focused.

Okay. Thank you.

Our next question is from Spiro Dounis with Citi. Please go ahead.

Thanks, operator. Afternoon, team. 1st question maybe just to hit on the commodity activities, pretty strong this quarter, a bit counter seasonal. So just curious If you guys can maybe walk through that a little bit further, just seems like maybe you're doing something differently there to sort of squeeze out those extra margins. And I guess as you look forward, it sounds like you feel pretty good about the ratability of that. So once again, maybe just more detail on how that's working?

Yes. So let's break it apart into its 2 pieces and talk first about the margin. We've just had a very favorable Set up when you look at our gasoline liquids blending margin in the sense that we've had relatively strong gasoline prices and we've had And NGL market that has been a little weaker than what you might think and that drives a wider margin available for us. So the margins have just been better. The basis differential, you may recall in the past we talked about basis being a bit of a headwind for us. And so far this year, it's been less of a head And then we had anticipated coming in. So we're looking at just wider margins gross margins in the first place and then we're also not feeling quite the headwinds on the basis differential that we otherwise expected. That's the margin picture. And we see that remaining fairly consistent for the rest of the year based on what See at the moment, the other part to the overall performance is just volume. We're just doing as a company a better job at Capturing all the opportunities that are available to us. And part of that process in terms of again just being better at it.

So it's a volume story as well. Volumes are higher, margins wider and the outperformance is a result of both.

Our next question is from the line of Jeremy Tonet with JPMorgan. Please go ahead.

Hi, good afternoon.

Good afternoon.

Just wanted to talk about the business a little bit, if I could. Just curious With regards to fundamental trends as far as product demand trends have been materializing, in your markets across your footprint, How has that materialized versus the expectations so far? And I guess on a go forward look, how do you see things kind of normalizing there?

So we're going to have a very stable and healthy business. When you look at The Q2 of this year, gasoline was down, distillate was up. It's not unusual for us to see some swings And the commodities were actually moving, but we expect demand to stay relatively stable, And in some areas, we're growing, especially as we are able to extend our system. We have our pipeline system Expansion in West Texas coming online fully in the beginning of 2024. So as we think about those opportunities to And our markets that will provide some growth to us, but the fundamentals we think are fairly stable, which means we'll have a Slowly growing volume trend, we think, over the immediate period. So we think that sets up very well and just highlights The consistency of our business going forward. We also outperformed in the quarter, As Jeff and I mentioned, due to longer haul movements on our pipeline. So it's that's been a real bright spot for us. Those longer hauls Primarily driven when there are refinery disruptions and as refinery disruptions happen since we're connected to Almost 50% of the refining capacity in the U. S, just because the refinery may be suffering some short term Headwinds, the demand is still there and it has to be served.

And we tend to move barrels into those markets to fill those holes When refineries are down, so that allows us to see longer haul volumes. Now it's a little unpredictable When those longer haul volumes may show up, but they do. And so when you look at a very stable business, Slight growth through the extension combined with just the optionality of our system, we're going to have a really stable High performing business and when you look at the combined company, you fast forward to the pro form a company and you think about the strength of our business inside that combined company and the strength of ONEOK's business and you put those together, We think it's going to be a really compelling pro form a company.

Got it. That's very helpful there. And just Want to touch on exports, if I could, particularly, I guess, Permian crude oil exports between Corpus and Houston, how you see that dynamic playing out over time. And any thoughts I guess on LPG exports as well to the extent you're able to comment on that?

Yes. I don't have any comments on the LPG side, but on petroleum products generally, we expect exports To continue to grow from the United States, whether that's refined products or components or crude oil, we just see world demand Pulling those resources into that market, it needs them. On crude specifically, Corpus is still The predominant export port out of the United States due to its proximity to the Permian and lower Cost logistics generally to get into that market as well as the terminal infrastructure that's there. We talked in the past about through time, Corpus, we expect to fill up from a pipeline capacity into that market. We don't know yet to the extent that capacity will It will expand some we expect. But as Corpus fills and as Houston's capabilities continue to evolve, We'll start seeing more barrels start heading towards Houston through time in order to meet that, again, growing export demand worldwide.

Got it. That's helpful. Thanks. And just one last one on the deal, if I could ask, I I think in response to earlier questions, you said it, I think, in the early innings here, maybe the first inning. Just wondering from the out As far as this process is concerned, how can we see, I guess, things are progressing as far as As far as getting the vote out there, getting people to show up and how things are progressing towards a successful deal, What can we see from the outside? When do we know we're at the 7th inning stretch?

Well, I think that's a good question. And so if we're in the 1st inning, we have a game plan to reach our investors, make sure we're Communicating the merits of this transaction, and we're going to execute that game plan. And my expectation is that game plan is going to take The first inning all the way to the 9th inning. And we're not going to let up on that game plan. We've got the website set up where investors that have questions can go get answers. We have outreach plans. We're talking to investors that call us. So we're talking to everyone All the time between now and we get to our special meeting date. So when I say we're in the first inning, that's the In this metaphor, the game that we're in, we're in the 1st inning, we're getting started, we're going to execute our game plan, we're going to execute it all the way to the end of the game. And then We're confident if we do that, the merits of this transaction will be well understood and we'll be successful in getting our vote. But when will we know we get to the 7th inning stretch?

I'm not sure I'm worried about the 7th inning stretch. I'm worried about getting to the end of the Metaphorical game here.

Got it. I think I've played out this metaphor enough. Thank you very much for all the information. Very helpful.

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

Hi, thank you. Just one question for me. I wanted to follow-up on the longer haul movements in Some of the refinery disruption impacts. So the average refined products pipeline tariff was very high for the quarter, even putting the Normal increase aside, it just seemed meaningful, the impact of some of those longer haul movements. But any other comment you can make on that and Yes. So if you think of the Q2 and you isolate it, We estimate that long haul movements positively impacted that quarter or the Q2 by about $20,000,000 to your point. It was significant. Now you also have to consider the refinery disruption environment in the Q2. You had Several refineries down in Texas in particular, that you wouldn't normally expect to have sort of Those refineries down at the same time in the manner that they were for as long as they were down. So I think it's a bit of a unique Event in Q2 that we have to be careful not to extrapolate to essentially every quarter from here on out. But for the Q2, it was significant, As I said, dollars 20,000,000 and they are difficult to predict. I mean, that's the nature of them.

What we know is to the extent they occur, we generally benefit from them. Thank you. That's helpful.

Our next question is a follow-up from Spiro Dounis. Please go ahead.

Hey, Steve. Sorry, back again. Just had one more follow-up related to the deal. 2 part question on it though. 1, I guess, curious on the customer side of things. We've got a sense now where your investors' heads are at or going, but Curious what the customer activity has been in the last few months? And then number 2, this one may be tougher to answer, but as you think about the sort of units held on swap, Curious, have you been able to garner any sort of consensus on what the broker voting policy is there?

So let's take your first question first, which is the reaction from our customers. What I have been hearing is a positive reaction, But it's also important to keep in mind that we value customer service and that hasn't changed. So All throughout this pending merger, our customers, we've been working really hard to make sure they don't feel any difference in how we treat them And what they expect from us. So from that perspective, our customers are still getting the same service they've always gotten and we expect them to continue to get it. So The fact that there has been a positive reaction to the deal overall and that our customers are happy, That's because we're continuing to make sure we do what we need to do, make sure they stay happy. So on that front, there's not really a lot of news there, quite frankly. To your question on the swap, so those that hold units via swap, There are some brokers that essentially can facilitate those units being voted Based on the wishes of the holder, there are others that don't. Where people are, I don't have all I don't know exactly I'll break that down for you in terms of what percentage can or can't, but we do know there are swap counterparties that will allow those that hold our units on swap to make their interest known and vote accordingly.

So it's a bit of a mixed bag. So we think total swap ownership, just to put it in perspective, is probably under 10%, give or take. So does that answer your question? Yes.

No, no, it does. I appreciate you taking a stab at it. I knew was a tough one, Aaron. So, always appreciate the color guys. I'll leave it there. Thank you.

Yes. And just to follow-up on that, Spiro. There have been folks we know On SWAP that have been moving their positions to make sure they can vote. We think that's positive. So I'd be remiss not mentioning that as well.

Helpful. Thanks again, guys.

Mr. Milford, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thank you for your time today. We remain confident in the strength of Magellan's business and look forward to becoming a valuable contributor to a larger, We're a diversified company following investor approval of our pending merger with ONEOK, and we look forward to continuing our discussions with investors in the coming weeks. We appreciate your continued support and encourage all investors to vote for Magellan's pending merger with ONEOK ahead of our special meeting on September 21st. And have a good day.

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines.