Source: Magella Midstream Partners
Magellan Midstream Partners, L.P. reports a net income of $251.0 million for third quarter 2015, an increase of $52.4 million, or 26% higher than the $198.6 million generated in third quarter 2014.
Distributable cash flow (DCF), a non-generally accepted accounting principles (non-GAAP) financial measure that represents the amount of cash generated during the period that is available to pay distributions, was $230.0 million for third quarter 2015 compared to $183.4 million for third quarter 2014, representing a 25% increase.
Diluted net income per limited partner unit was $1.10 in third quarter 2015 and 87 cents in third quarter 2014. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-GAAP financial measure, of 86 cents for third quarter 2015 was significantly higher than the 68-cent guidance provided by management in Aug. 2015 primarily due to stronger-than-expected refined products pipeline shipments during the quarter.
"Magellan generated exceptional results during the third quarter due to record refined products pipeline volumes and continued strong demand for our crude oil transportation and marine storage services," said Michael Mears, chief executive officer. "Despite the current challenges facing the energy industry, Magellan's fundamentals have remained strong, our disciplined, predominantly fee-based business model continues to perform well and our solid investment-grade balance sheet provides financial strength for the future."
An analysis by segment comparing third quarter 2015 to third quarter 2014 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:
Refined products
Refined products operating margin was $241.6 million, an increase of $41.1 million. Transportation and terminals revenue increased $21.8 million between periods primarily due to higher average tariffs from the partnership's 4.6% tariff increase on July 1, 2015 and record refined products shipments. Overall refined pipeline volumes grew 3% due to record gasoline shipments, driven by lower commodity prices that increased demand for gasoline system-wide and regional refinery issues that resulted in more volume diverted to Magellan's system, partially offset by lower distillate shipments due to reduced demand from drilling activities in areas served by the partnership's assets.
Operating expenses increased $3.4 million due to higher asset integrity spending based on timing of maintenance work and additional personnel costs, partially offset by more favorable product overages (which reduce operating expenses).
Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) increased $22.7 million between periods primarily due to a $14.2 million favorable variance associated with 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 cash product margin, which reflects only transactions that settled during the quarter, increased between periods primarily due to improved margins and higher sales volume for the partnership's fractionation activities.
Crude oil
Crude oil operating margin was $94.7 million, an increase of $24.4 million. Transportation and terminals revenue increased $17.2 million primarily due to contributions from the 40-mile Houston crude oil pipeline that Magellan acquired in Nov. 2014 and leases to BridgeTex pipeline, more shipments on the partnership's Longhorn and Houston distribution systems and new leased storage contracts. Earnings of non-controlled entities increased $13.9 million due to the late 2014 start-up of the BridgeTex pipeline, which is owned 50% by Magellan and averaged 200,000 barrels per day (bpd) during third quarter 2015. Operating expenses increased $5.1 million between periods due to less favorable product overages (which reduce operating expenses) as a result of lower commodity prices in the current year and higher personnel costs.
Marine storage. Marine storage operating margin was $32.2 million, an increase of $4.6 million. Revenue increased slightly due to higher ancillary revenues, such as throughput fees, from increased customer activity, and operating expenses were lower based on timing of asset integrity work.
Other items. Depreciation and amortization increased primarily due to recent expansion capital expenditures, and G&A expense was higher primarily due to more employees in the current period. Other expense increased $1.7 million related to a non-cash MTM adjustment for hedged crude oil tank bottom inventory owned by the partnership.
Net interest expense increased due to less interest capitalized for construction projects in the current period and additional borrowings to finance expansion capital spending. As of Sept. 30, 2015, the partnership had $3.4 billion of debt outstanding, including $227.0 million outstanding under its commercial paper program, and $9.0 million of cash on hand.
Expansion capital projects
Magellan continues to pursue expansion opportunities, including organic growth construction projects and acquisitions. Based on the progress of expansion projects already underway, the partnership is increasing its expansion capital spending by $200 million to approximately $1.6 billion, with $850 million of that spending in 2015, $700 million in 2016 and another $50 million thereafter to complete its current slate of construction projects. The higher estimates include the recently-announced dock build and crude oil connectivity at the partnership's Galena Park, Texas marine terminal, various refined products pipeline expansions to handle additional mid-continent refinery production and a number of new smaller projects.
Magellan is making significant progress on its current expansion projects, with construction underway on all of the partnership's largest projects. Pipeline installation began in early Oct. for the Platteville-to-Cushing segment of the Saddlehorn pipeline, which is expected to be operational during mid-2016. The Carr-to-Platteville segment of the Saddlehorn pipeline is still expected to be operational by the end of 2016, with right-of-way acquisition currently in progress. The Little Rock pipeline is on-schedule for a mid-2016 start-up, with pipeline installation beginning during the third quarter. Further, construction continues for Magellan's 50,000-bpd condensate splitter in Corpus Christi, Texas, which is expected to be operational during the second half of 2016.
Magellan's recently reactivated 135-mile pipeline from Healdton, Oklahoma is now operational to deliver up to 35,000 bpd of condensate to Cushing, Oklahoma. If warranted by customer demand, the system could be increased to 60,000 bpd.
Magellan continues to evaluate well in excess of $500 million of potential growth projects in earlier stages of development as well as additional acquisition opportunities, both of which have been excluded from the partnership's spending estimates. For instance, Magellan continues to assess customer interest for additional storage and dock capabilities on its recently-acquired 100-acre tract of land in Corpus Christi, which is capable of accommodating up to four private ship docks and more than five million barrels of storage. Multiple additional projects are also being evaluated to increase Magellan's Gulf Coast marine capabilities.
Financial guidance for 2015
Management is raising its 2015 DCF guidance by $40 million to $920 million, resulting in 1.35 times the amount needed to pay expected cash distributions for 2015. Management also remains committed to its goal of increasing annual cash distributions by 15% for 2015 and at least 10% for 2016. Guidance for 2017 distribution growth will be provided in early 2016.
Including actual results so far this year, net income per limited partner unit is estimated to be $3.53 for 2015, which results in fourth-quarter guidance of 84 cents. Guidance excludes future MTM adjustments on the partnership's commodity-related activities.
