Magellan Midstream Reports Fourth-Quarter 2020 Financial Results
TULSA, Okla., Feb. 2, 2021 /PRNewswire/ -- Magellan Midstream Partners, L.P. (NYSE: MMP) today reported net income of $183.9 million for fourth quarter 2020 compared to $286.4 million for fourth quarter 2019. The decrease in fourth-quarter 2020 net income continued to be driven by reduced demand for refined products from the ongoing impact of COVID-19 and related restrictions, the negative impact of the lower commodity price environment on various aspects of the partnership's business as well as lower volumes and average rates on its crude oil pipelines.
Diluted net income per common unit was 82 cents in fourth quarter 2020 and $1.25 in fourth quarter 2019. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-generally accepted accounting principles (non-GAAP) financial measure, of 94 cents for fourth quarter 2020 was higher than the 80-cent guidance provided by management last fall, primarily due to incremental revenues from the partnership's refined products pipeline system as a result of higher-than-expected shipments and average tariff rates.
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, was $269.7 million for fourth quarter 2020 compared to $357.8 million for fourth quarter 2019.
"Despite the backdrop of the most challenging industry and economic conditions experienced in our 20-year history as a public company, Magellan produced solid financial results during 2020 while ensuring continuity of important fuel supply for our country. We also returned nearly $1.2 billion of value to our investors through payment of a consistent cash distribution and equity repurchases," said Michael Mears, chief executive officer. "Magellan's business fundamentals remain sound, and we stand ready to serve the nation as travel and economic activity progress with additional reopening efforts. Magellan enters the new year in a strong position with an investment-grade balance sheet and resilient business model to manage our company for the long term."
An analysis by segment comparing fourth quarter 2020 to fourth quarter 2019 is provided below based on operating margin, a non-GAAP financial measure that reflects operating profit before depreciation, amortization and impairment expense and general and administrative (G&A) expense:
Refined products. Refined products operating margin was $249.6 million, a decrease of $46.7 million. Transportation and terminals revenue decreased $18.9 million primarily due to continued lower demand associated with the ongoing impact from COVID-19 and related restrictions as well as reduced drilling activity in response to the lower commodity price environment during 2020. Revenues also decreased due to the sale of three marine terminals in first quarter 2020. These declines were partially offset by contributions from the recently-expanded West Texas pipeline segment that began operations in the third quarter of 2020 and higher tariff rates as a result of the 3.5% average increase that occurred on July 1, 2020.
Operating expenses decreased $11.3 million primarily due to lower throughput activity during the 2020 period, as well as the absence of costs associated with the assets sold in first quarter 2020. Earnings of non-controlled entities decreased slightly between periods as lower financial results from the partnership's Powder Springs Logistics joint venture offset additional contributions from new storage and dock assets placed into service in early 2020 at its Pasadena joint venture marine terminal.
Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) decreased $38.2 million between periods primarily due to lower sales volume and reduced margins on the partnership's gas liquids blending activities as a result of the overall lower commodity price environment.
Crude oil. Crude oil operating margin was $109.8 million, a decrease of $43.2 million. Transportation and terminals revenue decreased $27.1 million due to lower average tariff rates and less volume shipped. Average tariff rates decreased primarily as a result of the recent expiration of several higher-priced contracts on the partnership's Longhorn pipeline, as well as the recognition of deficiency revenue that had benefited the 2019 quarter. Transportation volumes also declined due to those recent Longhorn contract expirations, with much of this volume replaced by activities of Magellan's marketing affiliate. Lower tariff movements on the Houston distribution system due to a change in the way customers now contract for services at the partnership's Seabrook joint venture export facility were largely offset by incremental revenue from the related new terminal transfer fee.
Operating expenses increased $5.6 million due to the timing of planned integrity spending, and other operating expense was unfavorable due to insurance proceeds that positively impacted the 2019 period. Earnings of non-controlled entities declined $8.6 million between periods primarily due to a lower contribution from Saddlehorn following Magellan's sale of a 10% interest in Feb. 2020 and decreased uncommitted shipments on the BridgeTex pipeline.
Other items. G&A expense increased $9.3 million primarily due to severance associated with the partnership's recent early retirement program and higher incentive compensation accruals. Net interest expense increased $3.5 million mainly as a result of lower capitalized interest from less ongoing expansion capital spending. As of Dec. 31, 2020, Magellan had $5.0 billion of debt outstanding and $13 million of cash on hand, with no borrowings outstanding on its commercial paper program or revolving credit facility.
Annual results
For the year ended Dec. 31, 2020, net income was $817.0 million compared to $1,020.8 million in 2019. The annual decline was driven by decreased contributions from both segments. The refined products segment was negatively impacted by lower demand for refined products due to the ongoing impact of COVID-19 as well as reduced drilling activity in response to the lower commodity price environment and the sale of three marine terminals in early 2020. The crude oil segment generated lower financial results primarily due to less third-party spot shipments, which move at a higher rate than shipments made pursuant to long-term commitments, as a result of unfavorable differentials between the Permian Basin and Houston, as well as lower average tariffs on the Longhorn pipeline resulting from the 2020 expiration of a portion of historical contracts. Further, Magellan earned less from Saddlehorn due to the sale of a 10% interest in early 2020.
Full-year diluted net income per common unit was $3.62 in 2020 and $4.46 in 2019. Annual DCF was $1,044.5 million in 2020, or 1.13 times the amount needed to pay distributions related to 2020, compared to $l,297.5 million in 2019.
Financial guidance for 2021
Management currently expects the partnership to generate annual DCF of $1.02 billion for 2021. Guidance assumes that refined products demand will continue to increase during 2021 as vaccines become more readily available, travel and economic activity recover and drilling activity returns due to an improved demand and commodity price environment. Further, Magellan's refined products shipments are expected to benefit from commitments associated with recent expansion projects within the state of Texas, which should drive more volume to the partnership's pipeline system. As a result, current 2021 estimates assume total refined products shipments increase 13% compared to 2020 results, comprised of 16% higher gasoline, 8% higher distillate and 20% higher aviation fuel. For reference, total 2021 refined products shipments are expected to increase 3% versus 2019, which is more representative of historical demand, as improved gasoline volumes from expansion projects are partially offset by lower aviation fuel.
Guidance also assumes long-haul crude oil pipeline shipments generally in-line with customer commitments and lower profits from the partnership's gas liquids blending activities due to compressed margins between the price of gasoline and butane. Further, Magellan has made significant progress on its business optimization effort started more than a year ago, with 2021 guidance including an approximate $50 million benefit from identified efficiencies.
As previously announced, Magellan intends to maintain its quarterly cash distribution at the current level of $1.0275 per unit for the remainder of 2021. Based on the current distribution amount and number of units outstanding, distribution coverage for 2021 is expected to be 1.1 times the amount necessary to pay cash distributions for the year, generating excess cash of $100 million for 2021.
Management does not intend to provide specific financial guidance beyond 2021 at this time but expects annual DCF to improve over the next few years. Further, management continues to target distribution coverage of at least 1.2 times once refined products demand and commodity prices return to more historical levels.
Net income per common unit is estimated to be $3.55 for 2021, with first-quarter guidance of 75 cents. Guidance excludes future MTM adjustments on the partnership's commodity-related activities.
Management continues to expect the large majority of the partnership's operating margin will be generated by fee-based transportation and terminals services, with direct commodity-related activities contributing less than 15% of the partnership's operating margin.
Capital allocation
Magellan remains focused on delivering long-term value for its investors through a disciplined combination of quarterly cash distributions, equity repurchases and capital investments.
During fourth quarter 2020, the partnership repurchased nearly 0.6 million of its units for $25 million, resulting in a total of 5.6 million units repurchased during 2020 for $277 million under its $750 million repurchase program authorized through 2022. The timing, price and actual number of any additional unit repurchases will depend on a number of factors including expected expansion capital spending, excess cash available, balance sheet metrics, legal and regulatory requirements, market conditions and the trading price of the partnership's common units.
Magellan spent $355 million on expansion capital during 2020 and plans to spend approximately $75 million in 2021 to complete its identified slate of projects. The 2021 estimates now include high-returning projects to expand the truck loading capacity of the partnership's Cheyenne, Wyoming refined products terminal and enhanced connectivity to improve butane sourcing for its Houston-area gas liquids blending activities.
Corporate conversion analysis
To address recent questions and commentary by the investment community on the subject of a potential conversion from a publicly traded partnership to a corporation, management has posted highlights of its analysis and the reasoning behind its conclusions at www.magellanlp.com/investors/webcasts.aspx.
Based on this analysis, management has concluded a corporate conversion is not warranted at this time but will continue to monitor the relative valuations of midstream partnerships and corporations, potential developments in tax policy and investors' thoughts and preferences, while managing Magellan's business with a focus on long-term investor value.
Earnings call details
Management will discuss fourth-quarter 2020 financial results, annual guidance for 2021 and the corporate conversion analysis during a conference call at 1:30 p.m. Eastern today. Participants are encouraged to listen to the call via the partnership's website at www.magellanlp.com/investors/webcasts.aspx. In addition, a limited number of phone lines will be available at (800) 952-3470, conference code 21988939.
A replay of the audio webcast will be available for at least 30 days 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, adjusted EBITDA, 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 depreciation, amortization and impairment expense and G&A expense. 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 revenue less cost of product sales, is used by management to evaluate the profitability of the partnership's commodity-related activities.
Adjusted EBITDA is an important measure utilized by management and the investment community to assess the financial results of a company.
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 performance measure as a basis for recommending to the board of directors the amount of cash distributions to be paid each period and for determining the payouts for the performance-based awards issued under the partnership's equity-based incentive plan.
Reconciliations of operating margin to operating profit and adjusted EBITDA and DCF to net income accompany this news release.
The partnership uses exchange-traded futures contracts to hedge against price changes of petroleum products associated with its commodity-related activities. Most of these futures contracts do not qualify for hedge accounting treatment. However, because these futures contracts are generally effective at hedging price changes, management believes the partnership's profitability should be evaluated excluding the unrealized gains and losses associated with petroleum products that will be sold in future periods. Further, because the financial guidance provided by management 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 refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation's refining capacity, and can store more than 100 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
Except for statements of historical fact, this news release constitutes forward-looking statements as defined by federal law. Forward-looking statements can be identified by words such as: plan, guides, assume, believe, estimate, expect, become, return, continue, future, target, remain, ready, resilient, intend, long-term, may, will, should and similar references to future periods. Although management believes such statements are based on reasonable assumptions, such statements necessarily involve known and unknown risks and uncertainties that may cause actual outcomes to 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: impacts from the COVID-19 pandemic; impacts of the oversupply of crude oil and petroleum products; claims for force majeure relief by its customers or vendors; changes in price or demand for refined petroleum products, crude oil and natural gas liquids, or for transportation, storage, blending or processing of those commodities through its facilities; changes in the partnership's tariff rates or other terms as required by state or federal regulatory authorities; shut-downs or cutbacks at refineries, of hydrocarbon production or at other businesses that use or supply the partnership's services; changes in the throughput or interruption in service on pipelines or other facilities owned and operated by third parties and connected to the partnership's terminals, pipelines or other facilities; the occurrence of operational hazards or unforeseen interruptions; the treatment of the partnership as a corporation for federal or state income tax purposes or the partnership becoming subject to significant forms of other taxation; changes in its capital needs, cash flows and availability of cash to fund unit repurchases or distributions; and failure of customers to meet or continue contractual obligations to the partnership. Additional factors that could lead to material changes in performance are described 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, 2019 and subsequent reports on Forms 8-K and 10-Q. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, especially under the headings "Risk Factors" and "Forward-Looking Statements." Forward-looking statements made by the partnership in this release are based only on information currently known, and the partnership undertakes no obligation to revise its forward-looking statements to reflect future events or circumstances.
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
Year Ended
December 31,
December 31,
---
2019 2020 2019 2020
---
Transportation and terminals revenue $
497,001 $
451,113 $
1,970,630 $
1,794,854
Product sales revenue 238,301 129,877 736,092 611,719
Affiliate management fee revenue 5,380 5,334 21,190 21,229
Total revenue 740,682 586,324 2,727,912 2,427,802
Costs and expenses:
Operating 149,740 143,762 634,081 601,359
Cost of product sales 188,552 117,851 619,279 513,715
Depreciation, amortization and impairment 65,106 64,780 246,134 258,676
General and administrative 47,116 56,386 196,650 173,478
Total costs and expenses 450,514 382,779 1,696,144 1,547,228
Other operating income (expense) 1,437 (438) 2,975 101
Earnings of non-controlled entities 46,732 36,843 168,961 153,327
Operating profit 338,337 239,950 1,203,704 1,034,002
Interest expense 55,801 54,762 221,123 234,133
Interest capitalized (4,865) (819) (19,284) (11,270)
Interest income (639) (134) (3,285) (1,037)
Gain on disposition of assets - (28,966) (12,887)
Other (income) expense 2,608 1,456 11,830 5,164
Income before provision for income taxes 285,432 184,685 1,022,286 819,899
Provision for income taxes (1,013) 765 1,437 2,934
Net income $
286,445 $
183,920 $
1,020,849 $
816,965
Basic net income per common unit $
1.25 $
0.82 $
4.46 $
3.62
Diluted net income per common unit $
1.25 $
0.82 $
4.46 $
3.62
Weighted average number of common units outstanding used for 228,705 223,889 228,658 225,503
basic net income per unit calculation
Weighted average number of common units outstanding used for 229,358 224,000 228,842 225,531
diluted net income per unit calculation
MAGELLAN MIDSTREAM PARTNERS, L.P
OPERATING STATISTICS
Three Months Ended Year Ended
December 31, December 31,
---
2019 2020 2019 2020
---
Refined products:
Transportation revenue per barrel shipped $
1.664 $
1.724 $
1.616 $
1.675
Volume shipped (million barrels):
Gasoline 73.1 71.4 280.5 270.8
Distillates 45.8 47.9 184.6 175.5
Aviation fuel 11.3 4.8 41.1 21.6
Liquefied petroleum gases 0.8 0.4 9.7 0.9
Total volume shipped 131.0 124.5 515.9 468.8
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped $
0.898 $
0.714 $
0.939 $
1.028
Volume shipped (million barrels)(1) 78.1 62.0 317.2 229.9
Terminal average utilization (million barrels per month) 23.2 26.6 23.0 25.2
Select joint venture pipelines:
BridgeTex - volume shipped (million barrels)(2) 39.0 32.1 156.3 132.0
Saddlehorn - volume shipped (million barrels)(3) 16.7 15.1 56.1 61.6
(1) Volume shipped includes shipments
related to the partnership's
crude oil marketing activities.
Volume shipped in 2020 reflects a
change in the way the
partnership's customers contract
for its services pursuant to
which customers are able to
utilize crude oil storage
capacity at East Houston and dock
access at Seabrook. Subsequent
to this change, the services the
partnership provides no longer
include a transportation element.
Therefore, revenues related to
these services are reflected
entirely as terminalling revenues
and the related volumes are no
longer reflected in the
partnership's calculation of
transportation volumes.
(2) These volumes reflect the total
shipments for the BridgeTex
pipeline, which is owned 30% by
Magellan.
(3) These volumes reflect the total
shipments for the Saddlehorn
pipeline, which was owned 40% by
Magellan through January 31, 2020
and 30% thereafter.
MAGELLAN MIDSTREAM PARTNERS, L.P
OPERATING MARGIN RECONCILIATION TO OPERATING PROFIT
(Unaudited, in thousands)
Three Months Ended
Year Ended
December 31,
December 31,
---
2019 2020 2019 2020
---
Refined products:
Transportation and terminals revenue $
345,870 $
326,959 $
1,355,682 $
1,241,846
Affiliate management fee revenue 1,634 1,594 6,719 6,270
Other operating income (expense) 537 1,024 10,185 3,247
Earnings of non-controlled entities 7,925 6,609 8,070 32,555
Less: Operating expenses 108,873 97,577 471,743 425,443
Transportation and terminals margin 247,093 238,609 908,913 858,475
Product sales revenue 229,371 116,929 707,812 578,630
Less: Cost of product sales 180,216 105,978 591,228 471,292
Product margin 49,155 10,951 116,584 107,338
Operating margin $
296,248 $
249,560 $
1,025,497 $
965,813
Crude oil:
Transportation and terminals revenue $
152,713 $
125,623 $
620,365 $
559,570
Affiliate management fee revenue 3,746 3,740 14,471 14,959
Other operating income (expense) 900 (1,462) (7,210) (3,146)
Earnings of non-controlled entities 38,807 30,234 160,891 120,772
Less: Operating expenses 43,830 49,442 173,261 189,087
Transportation and terminals margin 152,336 108,693 615,256 503,068
Product sales revenue 8,930 12,948 28,280 33,089
Less: Cost of product sales 8,336 11,873 28,051 42,423
Product margin 594 1,075 229 (9,334)
Operating margin $
152,930 $
109,768 $
615,485 $
493,734
Segment operating margin $
449,178 $
359,328 $
1,640,982 $
1,459,547
Add: Allocated corporate depreciation costs 1,381 1,788 5,506 6,609
Total operating margin 450,559 361,116 1,646,488 1,466,156
Less:
Depreciation, amortization and impairment expense 65,106 64,780 246,134 258,676
General and administrative expense 47,116 56,386 196,650 173,478
Total operating profit $
338,337 $
239,950 $
1,203,704 $
1,034,002
Note: Amounts may not sum to
figures shown on the
consolidated statements of
income due to intersegment
eliminations and allocated
corporate depreciation costs.
MAGELLAN MIDSTREAM PARTNERS, L.P
RECONCILIATION OF NET INCOME AND NET INCOME PER COMMON UNIT
EXCLUDING COMMODITY-RELATED ADJUSTMENTS TO GAAP MEASURES
(Unaudited, in thousands except per unit amounts)
Three Months Ended
December 31, 2020
Net Income Basic Net Diluted Net
Income Per Income Per
Common Unit Common Unit
As reported $
183,920 $
0.82 $
0.82
Commodity-related adjustments associated with future 27,024
transactions(1)
Excluding commodity-related adjustments $
210,944 $
0.94 $
0.94
Weighted average number of common units outstanding used for 223,889
basic net income per unit calculation
Weighted average number of common units outstanding used for 224,000
diluted net income per unit calculation
(1) Includes the partnership's net share of
commodity-related adjustments for its non-
controlled entities. Please see
Distributable Cash Flow ("DCF")
Reconciliation to Net Income for further
descriptions of commodity-related
adjustments.
MAGELLAN MIDSTREAM PARTNERS, L.P
DISTRIBUTABLE CASH FLOW RECONCILIATION TO NET INCOME
(Unaudited, in thousands)
Three Months Ended
Year Ended
December 31,
December 31, 2021
Guidance
---
2019 2020 2019 2020
Net income $
286,445 $
183,920 $
1,020,849 $
816,965 $
793,000
Interest expense, net 50,297 53,809 198,554 221,826 226,000
Depreciation, amortization and impairment(1) 63,979 61,178 240,874 254,586 243,000
Equity-based incentive compensation(2) 1,434 6,405 14,247 (2,715) 12,000
Gain on disposition of assets(3) - (16,280) (10,511)
Commodity-related adjustments:
Derivative (gains) losses recognized in the period associated 16,022 25,541 29,690 29,275
with future transactions(4)
Derivative gains (losses) recognized in previous periods (1) (4,992) 71,214 (20,900)
associated with transactions completed in the period(4)
Inventory valuation adjustments(5) (3,054) (3,704) (12,681) 5,836
Total commodity-related adjustments 12,967 16,845 88,223 14,211 (18,000)
Distributions from operations of non-controlled entities in excess 18,719 18,112 34,641 54,273 72,000
of (less than) earnings
Adjusted EBITDA 433,841 340,269 1,581,108 1,348,635 1,328,000
Interest expense, net, excluding debt issuance cost amortization(6) (49,442) (53,054) (186,942) (205,446) (223,000)
Maintenance capital(7) (26,566) (17,558) (96,702) (98,718) (85,000)
Distributable cash flow $
357,833 $
269,657 $
1,297,464 $
1,044,471 $
1,020,000
(1) Depreciation, amortization and
impairment expense is excluded
from DCF to the extent it
represents a non-cash expense.
(2) Because the partnership intends to
satisfy vesting of unit awards
under its equity-based long-term
incentive compensation plan with
the issuance of common units,
expenses related to this plan
generally are deemed non-cash and
excluded for DCF purposes. The
amounts above have been reduced by
cash payments associated with the
plan, which are primarily related
to tax withholdings.
(3) Gains on disposition of assets are
excluded from DCF to the extent
they are not related to the
partnership's ongoing operations.
(4) Certain derivatives have not been
designated as hedges for
accounting purposes and the mark-
to-market changes of these
derivatives are recognized
currently in net income. The
partnership excludes the net
impact of these derivatives from
its determination of DCF until the
transactions are settled and,
where applicable, the related
products are sold. In the period
in which these transactions are
settled and any related products
are sold, the net impact of the
derivatives is included in DCF.
(5) The partnership adjusts DCF for
lower of average cost or net
realizable value adjustments
related to inventory and firm
purchase commitments as well as
market valuation of short
positions recognized each period
as these are non-cash items. In
subsequent periods when the
partnership physically sells or
purchases the related products, it
adjusts DCF for the valuation
adjustments previously recognized.
(6) Interest expense includes debt
prepayment costs of $8.3 million
in the year ended December 31,
2019 and $12.9 million in the year
ended December 31, 2020, which are
excluded from DCF as they are
financing activities and not
related to the partnership's
ongoing operations.
(7) Maintenance capital expenditures
maintain existing assets of the
partnership and do not generate
incremental DCF (i.e. incremental
returns to the unitholders). For
this reason, the partnership
deducts maintenance capital
expenditures to determine DCF.
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SOURCE Magellan Midstream Partners, L.P.
