Magellan Midstream Partners L.P. (MMP), a master limited partnership (“MLP”), announced marginally weaker-than-expected third quarter 2010 results, pulled down by increase in costs.
The partnership reported earnings per unit (EPU) of 54 cents (excluding mark-to-market commodity-related pricing adjustments), a penny below the Zacks Consensus Estimate. However, compared to the third quarter of 2009, Magellan’s earnings per unit posted a 25.6% improvement (from 43 cents to 54 cents), reflecting strong transportation volumes.
Revenues came in at $406.2 million, up 69.4% year-over-year and also beat the Zacks Consensus Estimate of $363 million amid higher product sales.
Recently, Magellan raised its third quarter 2010 cash distribution by 1.7% sequentially and 4.9% year over year to 74.50 cents per unit (or $2.98 per unit annualized). The cash distribution is up 184% since its initial public offering (“IPO”) in the beginning of 2001. Magellan’s new distribution is payable on November 12 to unitholders of record as on November 5, 2010.
Segmental Performance
Petroleum Products Pipeline System: In the Petroleum Products Pipeline System, quarterly operating profits (before affiliate G&A and D&A expenses) were $110.7 million, up 16.7% year over year. The increase reflects higher transportation and terminals revenues, improved leased storage volumes, and incremental fees for terminal throughput, ethanol blending and additive injection. These factors were partly offset by increase in operating expenses.
Petroleum Products Terminals: In the Petroleum Products Terminals segment, operating margin was $29.5 million, up approximately 9.4% year over year. The positive comparison was on account of higher rates, contributions from the recently-acquired tankage at the partnership’s storage facilities, higher inland throughput volume, as well as higher ethanol and additive fees. These factors were partly offset by higher operating expenses.
Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating loss of $7.6 million, wider than the $3.4 million incurred in the third quarter of 2009. The segment results were adversely affected on account of downtime caused by pipeline maintenance work.
2010 Guidance
Management expects distributable cash flows of approximately $370 million (up $10 million from the previous guidance) for the full year and is targeting an annual distribution growth of 4%. Magellan guided towards fourth-quarter and full-year earnings per unit of 77 cents and $2.83 (up from the previous guidance of $2.73), respectively.
The partnership plans to spend approximately $565 million on growth projects in 2010, with expenditures of $125 million in 2011 required to complete these projects. Additionally, the partnership continues to look out for more than $500 million of potential growth projects in the earlier stages of development.
Our Recommendation
Magellan Midstream units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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