2018 Analyst Day New York City April 10, 2018 NYSE: MMP
Welcome and Agenda Paula Farrell Director, investor relations
Todays Agenda Key Industry Topics Mike Mears, CEO Refined Products, Marine Storage Jeff Selvidge, Sr. VP 15-minute break Crude Oil Robb Barnes, Sr. VP Finance Review Aaron Milford, CFO Potential Growth, Closing Remarks Mike…
Magellan Management Representatives Mike Mears Chairman, President and Chief Executive Officer Jeff Selvidge Robb Barnes Aaron Milford Michael Aaronson Sr. VP Commercial, Sr. VP Commercial, Chief Financial Sr. VP, Refined and…
Key Industry Topics Mike Mears Chairman, President and Chief Executive Officer
FERC Income Tax Allowance Policy Change On March 15, FERC changed its policy to no longer allow income taxes to be included in cost-of-service rates for interstate pipelines structured as partnerships Oil Pipeline Tariff Rate…
Competitive vs. Less Competitive Markets 60% of our refined products pipeline tariff revenue is generated from markets deemed workably competitive by the FERC or subject to state regulations The remaining 40% of our refined…
Annual FERC Index History FERC indexation methodology instituted in 1995; reviewed every 5 years Effective July 2016, FERC index formula = change in PPI + 1.23% Index is intended to allow pipelines to raise rates to recover actual…
Hypothetical 2020 Index Calculation Assumes 50/50 Debt / Equity capitalization with a 10% cost of equity and 5% cost of debt Assumes FERC does not adjust the base year for the tax policy change Assumes an increase in rate base for…
Hypothetical 2020 Index Calculation (contd) Assumes 50/50 Debt / Equity capitalization with a 10% cost of equity and 5% cost of debt Assumes FERC adjusts the base year for the tax policy change Assumes an increase in rate base for…
Index Calculation Considerations How will the FERC handle the change in policy during the next index evaluation in 2020 (to be effective 2021) In our view, FERC should return to actual cost data within the Form 6 that had been used…
Index Calculation Considerations (contd) If we assume simply for arguments sake that during the 5-year transition period the index methodology results in a 1.0% lower index than otherwise would have occurred and model these lost 5…
Page 700 Considerations Magellan has been consistently under-earning its ceiling rates as presented on our historical Page 700 contained in our annual FERC Form 6 filings After taking into account the new tax policy and an updated…
Magellans Preliminary 2017 Page 700 Data Line Beginning with the No. Description 2017 2016 2017 FERC Form 6, Interstate Cost of Service income tax allowance 1 Operating and Maintenance Expenses 305,827,730 289,598,892 has been…
Going Forward The new FERC tax policy ignores the fact that MLP investors will pay taxes on the income allocated to them, and it is our position that investors take this into account when they value MLP units We plan to continue to…
Corporate Structure At this time, we believe the best corporate structure for us to continue delivering value to our investors is as an MLP Hard to overcome value of tax deferral attributes of MLP structure Recent tax reform reduced…
Questions
Keys to Magellans Proven and Future Track Record Stability of underlying businesses Continuing to grow fee-based activities, managing for the long term through various business cycles Disciplined and opportunistic investments,…
Refined Products Jeff Selvidge Sr. Vice President, Commercial Refined Products and Marine Storage
Refined Products Profitability Almost 60% of Magellans 2017 operating margin was generated from the refined products segment Profits driven by pipeline volume, tariff and fee-based ancillary fees as well as commodity-related…
Refined Products Pipeline System Longest refined petroleum products pipeline system in the U.S. at 9,700 miles with 53 terminals and 44mm barrels of storage Demand-driven system with multiple supply options Access to nearly 50%…
Refined Products Pipeline: Deliveries by State Our refined products pipeline During 2017, we transported system continues to be a critical 40%+ of the gasoline / piece of the Central U.S. petroleum distillate consumed in 7 of…
Refined Products Pipeline Commitments Due to the demand-driven nature of our system and general stability of the refined products industry, shipments generally trend inline with demand in the markets served by our pipeline system…
Refined Products Pipeline Rates Our average refined products rate / bbl impacted by combination of the FERC index, market environment and distribution pattern of shipments As a reminder, 60% of refined products pipeline tariffs deemed…
Refined Products Pipeline Rates (contd) Plan to increase all rates by 4.4% index on July 1, 2018 Average tariff expected to remain relatively flat in 2018 due to increase in shorter- haul movements in South Texas and related to new…
Refined Products Pipeline Volumes Base volumes generally trend with overall demand for refined products in the markets served by our assets: 2017 volumes 8% higher than 16. Excluding first full-year benefit of Little Rock pipeline…
Refined Products Demand Expectations Longer term, we generally look to the EIAs refined products demand projections for the markets we serve, which are expected to remain relatively stable Gasoline: slight decline - fuel efficiency…
Sources of Fee-Based Refined Products Revenue Refined products pipeline tariff revenue was 750mm during 2017 and accounted for nearly 70% of transportation and terminals revenue for the refined products segment Remaining 30% is…
Future Growth: East Houston-to-Hearne Pipeline Constructing 135-mile, 20-inch refined petroleum products pipeline from East Houston to Hearne, Texas Enhancements to existing pipeline system, including 1mm bbls of refined products…
Expected Financial Results of East Houston-to-Hearne 425mm capital spending supported by long-term customer commitments Expected to generate an 8x EBITDA multiple, with upside potential 20% of total project cost committed at this…
Key Milestones for East Houston-to-Hearne Current status Pipeline field survey substantially complete, 25% of right-of-way acquired, pipe steel ordered Summer 2018 Pipeline and tank construction to begin Mid 2019 Expected…
Commodity-Related Activities Magellan is primarily a fee-based business, with 15% or less of our total future operating margin expected to come from commodity-related activities Vast majority of commodity margin related to butane…
Butane Blending Overview Butane is a common gasoline blending component Butane prices have historically been lower than gasoline prices Blending activities are focused on 2 areas: The fungible gasoline pool delivered into our…
Butane Blending Margins Butane blending margins significantly improved beginning mid-2011 due to increased gasoline prices and reduced cost of butane resulting from growing domestic supply With downturn in gasoline prices and strength…
Butane Blending Risk Mitigation Our realized margin will not precisely track spot margins throughout the year as it is affected by: Timing of butane purchasing activities and related futures contracts Pool costing of butane…
Butane Blending Expectations Our 2018 guidance assumed a net margin of 30 cents / gal based on our hedged position and forward curve entering the new year Together, these factors resulted in a historically low margin and compare to…
Fractionator Magellan owns 3 fractionators along our refined products pipeline system at Des Moines, El Paso and Odessa with nearly 10k bpd combined processing capacity used to help manage commingled product resulting from pipeline…
Flashback: 2016 Key Focus Areas - Refined Leverage existing assets to meet market demand and expand access to new markets Maintain market share while maximizing rates Increase storage capabilities to meet customer needs Maximize…
Accomplishments Toward 2016 Focus Areas Refined Leverage existing assets to meet market demand and expand access to new markets Commissioned Little Rock pipeline, including extension to access West Memphis Established connectivity…
Accomplishments Toward 2016 Focus Areas Refined Increase storage capabilities to meet customer needs Constructed nearly 3mm bbls of storage along our pipeline system for contract storage Maximize blending volumes and price,…
Current Key Focus Areas - Refined Maintain market share while maximizing rates Optimize existing assets in response to Midcontinent supply / demand shifts Capture opportunities to expand our pipeline capacity to better serve…
Questions
Marine Storage Jeff Selvidge Sr. Vice President, Commercial Refined Products and Marine Storage
Marine Storage Segment Map 5 storage facilities with 26mm barrels of aggregate storage and 1.4mm bpd of dock capacity Storage utilization rates historically greater than 90% Strong demand due to market structure, pricing volatility…
Marine Storage Profitability Approximately 8% of Magellans 2017 operating margin was generated from the marine storage segment Marine terminal profits primarily driven by amount of storage reserved, even if not used by customer…
Marine Storage Capacity Utilization Demand for marine storage remains strong, especially in the Gulf Coast, with average utilization 90%+ system-wide Timing of integrity work impacts utilization Both 2017 and 2018 negatively impacted…
Marine Storage Fee-Based Revenues Generate 85% of revenue from Contracts generally include annual committed storage rate escalations of 2-3%, with average Customers obligated to pay storage rates expected to increase regardless of…
Marine Storage Galena Park Largest and most complex of our facilities with 14mm bbls of aggregate storage and 550k bpd of dock capacity currently Primarily gasoline, diesel and blendstocks, with crude oil capabilities added in 2016…
Marine Storage Corpus Christi 2mm bbls of refined products storage and 100k bpd dock capacity via shared docks owned by the Port (an additional 1mm bbls of contract storage and our condensate splitter included in the crude oil…
Marine Storage Other Locations Marrero, LA 3mm bbls of storage and 275k bpd dock capacity Primarily fuel oils; customers addressing IMO 2020 regulations but dont expect material impact to MMP Additional room to construct 1mm bbls of…
Marine Storage Revenue Contribution 2017 Revenue by Terminal Corpus Christi 9% Galena Park 57% New Haven 12% Wilmington 10% Marrero 12% 2017 Revenue by Product Blendstock 42% Fuel Oil 16% Refined Products Heating…
Marine Storage Contract Maturity Schedule Expect overall utilization to remain high due to continued strong demand for export capabilities, particularly in the Gulf Coast area Average remaining contract life of approx. 2 years…
Future Growth: Pasadena Marine Terminal JV 50/50 joint venture with Valero Energy to construct new marine terminal on 200 acres in Pasadena, TX Phase 1: 1mm bbls of storage and a Panamax-capable dock; expect to be operational in…
Expected Financial Results of Pasadena JV 410mm for MMPs share of capital spending for initial 2 phases Fully supported by long-term customer contracts, generating a 9x EBITDA multiple 50% of total project cost committed at this…
Key Milestones for Pasadena JV Phase 1 Current status 5 of 11 tanks complete, pipeline and dock construction underway Mid 2018 All 1mm bbls of storage constructed Late 2018 Pipelines and dock / dredging complete Jan. 2019 Expected…
Flashback: 2016 Key Focus Areas - Marine Create solutions to satisfy increasing demand for marine storage and import / export capabilities Enhance connectivity Maximize utilization and pricing for existing facilities 58 NYSE:…
Accomplishments Toward 2016 Focus Areas - Marine Create solutions to satisfy increasing demand for marine storage and import / export capabilities Construction of new Galena Park dock Addition of 0.4mm bbls of new storage at Galena…
Current Key Focus Areas - Marine Increase export capacity from PADD 3 Integrate crude optionality for marine facilities, especially along the Gulf Coast Fully develop Pasadena marine terminal and maximize integration with existing…
Crude Oil Segment Map 2,200 miles of crude oil pipelines, substantially backed by long-term throughput commitments 28mm barrels of total crude oil storage, including 18mm barrels used for contract storage One of the largest storage…
Crude Oil Profitability Approximately 33% of Magellans 2017 operating margin was generated from the crude oil segment Profits significantly driven by take-or-pay commitments for crude oil pipelines and storage 2018 & volumes in…
Sources of Fee-Based Crude Oil Revenue Pipeline tariff revenue accounted for 55% of transportation and terminals revenue for the crude oil segment during 2017 Reminder: Joint venture contributions, including BridgeTex and Saddlehorn,…
Longhorn Pipeline 275k bpd pipeline providing important take-away capacity from the Permian Basin Handles WTI, WTS and condensate Primarily receives product through strategic interconnects with Medallion, Noble, Oryx and Plains…
Longhorn Volume and Rates Expect 18 shipments to be similar to historical levels at 260k bpd Leave 10% of capacity available for spot shipments each month No spot shipments assumed in 18 guidance Current 5-year contracts expire…
Delaware Basin Crude Oil Pipeline Update In Sept. 2017, Magellan announced plans to construct a 60-mile crude oil and condensate pipeline between Wink and Crane, Texas with a capacity up to 600k bpd Currently evaluating optimization…
Houston Crude Oil Connectivity Magellan continues to make strategic investments to build out its comprehensive crude oil / condensate distribution system in Houston HoustonLink JV with TransCanada improves connectivity,…
Wholly-Owned Crude Oil Pipeline Volume and Rates Crude oil shipments from our wholly-owned pipes expected to increase by 10% in 2018, primarily due to more volume moving on the Houston distribution system as a result of higher…
BridgeTex Pipeline 50/50 joint venture with Plains 300k bpd pipeline initially, expanded to 400k bpd in mid-2017; further expanding to 440k bpd by early 19 Handles WTI, WTS, Eaglebine and condensate Primarily receives product…
BridgeTex Volume and Rates Expect 18 shipments to be 315k bpd, or slightly higher than committed levels, at average rate of 2.35 / bbl BridgeTex 1: 70% of initial 300k bpd pipeline capacity committed under long- term, take-or-pay…
Crude Oil Differential Pricing differential between the Permian Basin and Houston drives demand for spot shipments on Longhorn and BridgeTex pipelines Although differential was favorable for spot shipments in late 2017, no spot…
Seabrook Logistics = Crude Export Solution 50/50 joint venture with LBC Tank Terminals with 400k bpd dock capacity Phase 1: Operational April 17, including 700k bbls of crude oil storage to handle crude oil imports under a long-term…
Double Eagle Joint Venture JV with Kinder Morgan to transport condensate from the Eagle Ford 200-mile, 100k bpd pipeline, expandable to 150k bpd Batched system capable of transporting distinct condensate qualities to final…
Saddlehorn Pipeline Joint venture to deliver crude oil and condensate from DJ Basin and potentially broader Rocky Mtn region to Cushing 600-mile pipeline with initial capacity of 190k bpd, expandable to 300k bpd Ownership…
Significant Contribution from Joint Ventures While Magellan generally prefers to own 100% of its assets, joint ventures can make sense in certain strategic situations Our business has grown significantly through the addition of joint…
East Houston Crude Oil Storage Currently 5mm barrels of contract storage at East Houston, with another 1.5mm barrels under construction and expected to be operational by mid-2018 Magellans East Houston terminal has become an…
Cushing Crude Oil Storage With 12mm barrels of total storage, Magellan is one of the largest owners of crude oil storage in Cushing Profit driven by storage utilized 11mm bbls used for contract storage with average remaining life of…
Cushing Will Remain an Important Crude Oil Hub Provides traders flexibility to deliver crude oil to the highest margin market at a given time Low storage costs relative to Gulf Coast Continued need for strategically-placed blending…
Crude Oil Storage Utilization and Rates Magellan also owns 1mm barrels of crude oil and condensate storage at our Corpus Christi terminal used for contract storage Demand for crude oil storage at all locations remains solid, with 3mm…
Corpus Christi Condensate Splitter Magellan began commercial operation in June 2017 for newly-constructed 50k bpd condensate splitter at our Corpus Christi terminal Fee-based project, fully committed with long-term, take-or-pay…
Flashback: 2016 Key Focus Areas Crude Oil Extend pipeline systems deeper into the basins to help secure barrels for our long-haul pipelines Enhance import / export marine capabilities Increase storage capacity to meet customer…
Accomplishments Toward 2016 Focus Areas - Crude Extend pipeline systems deeper into the basins to help secure barrels for our long-haul pipelines Added gathering capabilities for Saddlehorn, including Cheyenne extension Commenced…
Current Key Focus Areas - Crude Oil Maximize available space and re-contracting of long-haul pipelines and storage Extend pipeline systems deeper into the basins to help secure barrels for our long-haul pipelines Further enhance…
Overview Our financial strategy has not varied through time, and we remain committed to a strong balance sheet with an emphasis on flexibility We continue to believe that we can fund our existing slate of projects without needing to…
Consistently Strong Financial Performance Magellan generated record DCF in 2017 Fundamentals for our business continue to be positive across all of our segments Expect 2018 to be another record year for DCF 2018 in millions 2015…
Limited Direct Commodity Exposure Our exposure to variability in our commodity related activities has declined over the last several years Growth in fee-based business generally Lower butane blending margins compared to the highs of…
Continue to Target Healthy Coverage Coverage has been strong despite 350 1.6 x historical 5-year distribution growth 300 1.5 x CAGR of nearly 14% 250 1.4 x Targeting 1.2x coverage over per Unit millions 200 1.3 x…
Distribution Growth Trend Proven history of distribution growth Targeting 8% annual distribution growth for 2018 with 1.2x coverage Going forward, plan to manage distribution growth in-line with DCF growth projections of 5%-8% per…
Steady Distribution Growth Amid Volatility Distributions of MLPs that make up AMZI have diverged in recent years, but Magellans distribution growth has remained steady 150% 100% MMP 50% 0% 1Q13 1Q14 1Q15 1Q16…
Limited Equity Issuance Contributes to Growth Magellan has limited its dependence on public equity markets Despite 5.4 bn of expansion capital spending over last 10 years, Magellan has issued only 260mm of equity (about 5% of total…
Credit Profile Remains Strong Long-standing target maximum leverage ratio of 4x Consistent with rating agencies expectations at current ratings Leverage will increase moderately to 3.8x in 2018 as organic growth projects financed…
Low Fixed Rates on Lengthening Debt Portfolio in millions Average maturity of debt has extended to 15 years Amount Coupon Effective Rate* Despite long-dated portfolio, average coupon remains 2018 250 6.4% 5.3% 2019 550 6.6%…
Capacity to Confidently Fund Growth 1 billion available on CP program or revolver in millions Hypothetical 165 million in projected 2018 Deal Flow 9x Proforma excess cash flow for 2018 Guidance Multiple 2018 Debt-to-EBITDA ratio…
Attractive Cost of Capital Still believe yield + growth provides best estimate of equity cost of capital Estimating Equity Cost of Capital Distribution Growth Equity Cost Yield Short-term Long-term of Capital* 6.0% 5-8% 3-5%…
Conservative Financial Profile Summary Our financial policy provides stability, supports growth and ensures flexibility as we seek to increase the value of our company A key differentiator for Magellan is our approach to financing…
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