Net income grew to $56.6 million for third quarter 2010 compared to $54.2 million for third quarter 2009, and net income per limited partner unit increased to 51 cents in third quarter 2010 versus 43 cents in the corresponding 2009 period. Excluding mark-to-market (MTM) commodity-related pricing adjustments, net income per unit for the current quarter was 54 cents, exceeding the 48-cent guidance provided by management in early Aug.
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, increased to $85.8 million for third quarter 2010 compared to $69.6 million during third quarter 2009.
“Recent acquisitions and strengthening of refined petroleum products demand in the markets we serve produced record throughput on our petroleum pipeline system during the quarter,” said Don Wellendorf, chief executive officer. “Customer interest in the Texas pipeline system and crude oil storage assets we acquired from BP in Sept. 2010 is strong. Cash flow growth we expect as a result of acquisitions, organic growth projects and solid base business fundamentals should support attractive distribution growth for Magellan in 2011 and beyond.”
An analysis by segment comparing third quarter 2010 to third quarter 2009 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:
Petroleum pipeline system. Pipeline operating margin was $110.7 million, an increase of $15.9 million. Transportation and terminals revenues increased between periods primarily due to record transportation volumes, which increased 29%, driven by improved demand for gasoline and diesel fuel and by contributions from recent acquisitions. Excluding the Texas pipelines acquired from BP in Sept. 2010 and the partnership’s Houston-to-El Paso pipeline acquired in July 2009, transportation volumes on the partnership’s pipeline system reached a near-record level, increasing 12% from the third quarter 2009 primarily due to 25% higher diesel fuel volumes and 7% higher gasoline volumes compared to the year-ago period. Third-quarter 2010 revenues also improved due to higher storage and pipeline capacity leases and incremental fees for terminal throughput, ethanol blending and additive injection. Transportation revenue per barrel shipped declined between periods because the tariffs related to the Texas pipelines acquired from BP in Sept. 2010 are significantly lower than the partnership’s remaining pipeline system due to the short distance of the pipeline movements between Houston and Texas City, Texas.
Operating expenses increased between periods primarily due to higher power costs resulting from increased shipments, higher property taxes due to a favorable 2009 adjustment and higher personnel costs.
Product margin (defined as product sales revenues less product purchases) declined between periods primarily due to timing of MTM adjustments for New York Mercantile Exchange (NYMEX) positions used to economically hedge the partnership’s commodity-related activities. In third quarter 2010, the partnership recognized $8.3 million for unrealized losses on open NYMEX positions due to the increasing petroleum products pricing environment in the current period compared to unrealized gains of $5.4 million in third quarter 2009. Lower-of-cost-or-market inventory adjustments associated with the partnership’s Houston-to-El Paso linefill resulted in a favorable variance of $8.1 million for third quarter 2010. The partnership’s actual cash product margin reflecting only transactions that settled by the end of the quarter increased between periods primarily due to higher petroleum products blending sales volumes and improved results from the partnership’s Houston-to-El Paso commodity sales activities.
Petroleum terminals. Terminals operating margin was $29.5 million, an increase of $2.5 million. The current period benefited from higher rates and from recently-acquired tankage at the partnership’s storage facilities, including the recent acquisition of a crude oil terminal in Cushing, Oklahoma from BP. Higher ethanol and additive fees and increased throughput volumes at the partnership’s inland terminals also contributed to the improvement over last year’s third quarter. Operating expenses increased primarily due to additional maintenance projects, remediation costs and expenses related to recent acquisitions.
