Magellan Midstream Partners, L.P. Prepared Remarks for 2Q18 Earnings Call Thurs., Aug. 2, 2018, 12:30pm CST

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1 1 P a g e Magellan Midstream Partners, L.P. Prepared Remarks for 2Q18 Earnings Call Thurs., Aug. 2, 2018, 12:30pm CST Mike Mears, CEO Hello and thank you for joining us today for Magellan s second quarter earnings call. Before we dive into the discussion, I ll remind you that management will be making forward-looking statements as defined by the Securities & Exchange Commission. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan. 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. With that out of the way, it s been a busy time at Magellan, with 2 significant expansion project announcements this week. Based on additional long-term commitments received from our recent supplemental open season, we are further expanding the western leg of our Texas refined products pipeline, taking the capacity from its current 100,000 barrels per day up to 175,000 barrels per day. We are gaining this additional space by increasing the pipeline diameter along a portion of the existing route and also building a new 140-mile, 20-inch pipeline from Hearne to Alexander, Texas. Our Texas refined products pipeline system has been oversubscribed for quite some time, and not only does the construction of this new pipe increase our capacity to West Texas, it also increases our capacity to the Dallas Ft. Worth market by up to 100k bpd. The project is now expected to cost $500 million and generate a 7 times EBITDA multiple on committed volumes to West Texas alone. Significant upside potential exists since not all of the West Texas capacity is contracted and all of the new incremental Dallas Ft. Worth capacity is available for contracting or spot movements. We are very excited about bringing this attractive project across the finish line.

2 2 P a g e We also announced another expansion of our Seabrook Logistics joint venture, which is Magellan s crude oil export terminal. We recently commenced export capabilities at Seabrook, supported by 2.4 million barrels of storage, an Aframax dock with 300,000 barrels per day of dock capacity and a new connection to Magellan s Houston crude oil distribution system, which are now in full operation. Yesterday, we announced plans to build an incremental 700,000 barrels of storage and a new Suezmax dock with 400,000 barrels per day of dock capacity. Our share of the capital will be $60 million with the new assets operational by late These additional assets will significantly increase the export capabilities of Seabrook and increase the attractiveness of Magellan s service offering to seamlessly deliver crude oil from the Permian Basin to the Gulf Coast waterway to meet our customers growing interest in crude exports. And of course, this morning, we announced another solid quarter of financial results and also increased DCF guidance for the year. So I ll hand over the call to our CFO Aaron Milford to review our 2 nd quarter financial results in more detail. Then I ll be back to discuss our outlook for the remainder of the year and the status of a few of our other expansion projects. Aaron Milford, CFO Thank you Mike. During my comments today I will be making references to certain non-gaap financial metrics including operating margin and distributable cash flow. We have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measure. Earlier this morning, we reported second quarter net income of $214.4 million, or 94 cents per unit on a diluted basis which was higher than the $210.4 million reported for the second quarter of Excluding the impact of mark to market futures contract activity in the current quarter, adjusted diluted earnings per unit of 1.05 exceeded our guidance of 95 cents provided back in May. Distributable cash flow of $266.6 million for the second quarter of 2018 was more than 6% higher than the $250.4 million reported in the second quarter of 2017.

3 3 P a g e I will now move to a brief discussion of the operating margin performance for each of our business segments. Our refined products segment generated $191.4 million of operating margin in the second quarter of 2018 compared to $214.5 million for the same period in As we noted in our earnings release, this decline in operating margin between periods resulted from the impact of lower commodity margins including the impact of mark-to-market losses recognized in the current period. Our results from fee-based activities were essentially flat to the same period in 2017 with higher revenues being offset by higher expenses. Transportation and terminals revenues increased $13.2 million, or almost 5% compared to the 2017 quarter. We continue to see higher distillate volumes on our West Texas system and also continue to see volume growth broadly across our system with total refined product volumes 3% higher than the same period in Further, our average rate per barrel was slightly higher in the current period compared to last year. Operating expenses were $12.6 million higher in the current period compared to last year. This increase is attributable to higher personnel costs resulting from higher headcount and incentive compensation as well as higher asset integrity costs and environmental accruals. A portion of these increased expenses is simply the result of maintenance work timing. In addition, property taxes were higher than last year due to last year s quarter benefiting from a favorable tax adjustment. Product margin decreased by $23.1 million compared to the second quarter of 2017 as a result of lower butane blending volumes, higher average butane costs, as well as unrealized mark-to-market losses. Keeping in mind the seasonal nature of our blending activities where activity peaks during the first and fourth quarters of a calendar year, we still expect our blending activities to generate improving results as we move through the remainder of the year. For our Crude Oil Segment, current period operating margin of $152 million was $46.2 million higher than the second quarter of last year and a quarterly record for this segment. Transportation and Terminals revenue increased by approximately $29.5 million mostly due to full- quarter contributions from our Corpus Christi splitter which began operations in June of last year as well as higher average rates and volumes on our Longhorn pipeline. The higher average Longhorn rate is due to more spot shipments during the quarter, in response to market price differentials between the Permian and Houston markets being significantly higher than our spot tariff rate. Our average transportation rate for the crude segment overall was also higher compared to the second quarter of last year. This overall increase was also primarily driven by the higher spot rate earned on the Longhorn pipeline during the current quarter.

4 4 P a g e Segment operating expenses for the current period were essentially in line with the 2017 period. For the quarter, volumes on our Longhorn pipeline averaged over 270,000 barrels per day. As mentioned in our earnings release this morning, we now expect volumes on our Longhorn system to average 270,000 barrels per day for 2018 on an annualized basis which is 5,000 barrels per day higher than our previous annual guidance. Equity earnings from our various crude oil joint ventures increased $17.4 million compared to the second quarter of This increase is primarily attributable to higher volumes on the BridgeTex pipeline from new commitments which started in the first quarter of 2018 as well as increased spot shipments in response to higher basis differentials between the Permian basin and Houston. Volumes on the Saddlehorn pipeline were also higher as a result of the contractual step-up in committed volumes in September of BridgeTex volumes averaged approximately 390,000 barrels per day during the second quarter of 2018 compared to approximately 240,000 barrels per day in the second quarter of Also as mentioned in our earnings release this morning, we now expect BridgeTex to average about 370,000 barrels per day for 2018 on a full year basis which is 20,000 barrels per day higher than our previous annual guidance. Saddlehorn pipeline averaged approximately 65,000 barrels per day during the current quarter compared to approximately 40,000 barrels per day during the second quarter of Moving now to the marine segment, the marine segment generated $28.3 million of operating margin in the current quarter compared to $32.2 million in the second quarter of Terminalling revenues declined $3.6 million compared to the same period last year primarily due to lower utilization resulting from out of service maintenance activities, as well as delays in bringing a tank damaged by Hurricane Harvey back online. Operating expenses increased $2.3 million compared to the 2017 quarter due to lower product overages which act to reduce operating expenses, higher personnel costs as well as demolition costs incurred as part of our dock expansion project at our Galena Park facility. Now moving to other net income variances to last year s quarter; our G&A expenses were $9.9 million higher than the 2017 quarter as a result of higher personnel costs associated with higher incentive plan expenses due to our strong performance this year. Depreciation and amortization increased as a result of new assets placed into service and interest expense increased as a result of higher average debt outstanding compared to last year s quarter. I will now move to a discussion regarding our balance sheet and liquidity position. We had $4.7 billion of long-term debt outstanding as of June 30, 2018 which included $120 million of commercial paper borrowings; our average interest rate was approximately 4.8%, and our leverage ratio was approximately 3.4 times debt to EBITDA.

5 5 P a g e We continue to maintain a credit facility totaling $1.0 billion which also backstops our commercial paper program. We also continue to have a $750 million at-the-market equity program available, but did not issue any units under this program during the quarter and have not issued any units under this program since it has been in place. We continue to expect that we will be able to fund our current slate of growth projects without needing to access the equity markets, while also maintaining debt levels within our long-standing 4.0 times leverage ratio limit. I will now turn the call back over to Mike to discuss our updated guidance for the balance of the year as well as some of our significant growth projects underway. Mike Mears, CEO Thank you, Aaron. Based on our solid start to 2018 and our expectations for the remainder of the year, we have now increased our annual DCF guidance by $20 million to $1.1 billion for As a reminder to the group, this represents a total increase of $50 million from the initial guidance we provided at the beginning of the year. As we mentioned last quarter, a number of industry dynamics have moved in our favor since that initial guidance, such as the favorable pricing differential between the Permian Basin and Houston. Our 2018 guidance now assumes this favorable differential continues, resulting in spot shipments through the remainder of the year for both Longhorn and BridgeTex. Similar to last quarter, we still expect butane blending margins to be around 40 cents per gallon for the year, with around 80% of our fall blending hedged at this. We are also starting to lock in margins for 2019 as well, with 70% of our spring 19 expected blending activity hedged above a 50-cent margin per gallon. Concerning Longhorn, all existing customers have now either elected to extend their initial contracts for an additional 2 years under current terms or they have executed new long-term contracts with terms up to 10 years at lower incentive rates. As a reminder, the initial contracts expire on Sept. 30, and we remain in active discussions with those

6 6 P a g e shippers who have not yet executed long-term contracts. In fact, we currently have a process underway thru Aug. 15 for shippers to commit to long-term take-or-pay contracts, if so desired. Since some customers are still making their selection, we are hesitant to provide an average expected rate just yet until the current commitment process runs its course, but we should be in a position to address publicly in the near future. In saying that, all of these items have been factored into our latest DCF guidance and we remain comfortable and committed to our stated goal of increasing annual cash distributions by 8% for 2018 and by 5 to 8% for both 2019 and Moving to expansion capital, we continue to identify new opportunities for future growth and now have $2 billion of expansion projects currently underway. Based on the progress of these projects, we expect to spend approximately $900 million in both 2018 and 2019 and $200 million in 2020 to complete our current slate of construction projects. In addition to the West Texas refined pipeline expansion and enhanced export capabilities at Seabrook Logistics, these spending estimates also include a new $50 million project to construct an 8-mile, 20-inch diameter refined products pipeline between Galena Park and East Houston. This new pipe is fully supported by customer commitments and is expected to be operational in mid We continue to make great strides at our Pasadena joint venture marine terminal with the initial 1 million barrels of storage substantially complete. The facility is expected to begin service in Jan after the pipe connectivity and dock work are finished later this year. The additional 4 million barrels of storage that remains under construction is expected to come online by Jan. 2020, with substantially all steel already ordered from domestic mills and being delivered as needed to support ongoing construction. Activity related to our long-haul pipeline construction projects is in full swing as well. Pipe material has been received for our East Houston-to-Hearne refined products pipeline, with construction expected to commence next month for a mid-2019 service date. The steel for our Delaware Basin crude oil pipeline has been ordered and is

7 7 P a g e expected to arrive next quarter with a mid-2019 start-up also anticipated for this pipeline. We continue to assess the potential optimization of the Delaware Basin project and are considering a number of options to best utilize this future asset. We also continue to evaluate other potential expansion opportunities, still totaling well in excess of $500 million. Even though we ve already announced a few expansion phases to date, active discussions continue to further develop both our Pasadena and Seabrook Logistics joint ventures, even beyond yesterday s Seabrook announcement. Discussions also continue regarding new infrastructure investments in Texas for both crude oil and refined products service, including potential opportunities for additional pipeline, storage and export capabilities. There is some industry chatter about our participation in various potential projects, so as related to this we can confirm that we are in advanced discussions with multiple parties regarding potential projects, however we are not prepared at this time to discuss the details of these discussions. We remain committed to our disciplined model that focuses on projects that provide fee-based activities back-stopped by take-or-pay commitments, especially in light of the rapidly evolving landscape for new energy infrastructure. That concludes our prepared comments. We re now ready to open the call for your questions.