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Magellan Midstream Partners LP  (NYSE:MMP)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Magellan Midstream Partners Third Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Mike Mears, President and CEO. Please go ahead.

Michael N. Mears -- Chairman, President and Chief Executive Officer

Good afternoon, and thank you for joining us today for Magellan's third quarter earnings call. Before we get started, I'll remind you that management will be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding the factors that could impact the future performance of Magellan, but actual outcomes could be materially different. 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.

Since our last earnings call, a number of notable events have occurred for Magellan and most of those relate to Permian crude oil pipelines. First off, we closed on the sale of a 20% interest in BridgeTex, at what we consider to be an attractive valuation. Magellan now owns 30% of BridgeTex and remains a pipeline operator --

Operator

Please standby, everyone. The conference will be under way again shortly again. Again, please standby.

Unidentified Speaker --

Yes, you have rejoined.

Michael N. Mears -- Chairman, President and Chief Executive Officer

All right, thank you. It's important to highlight that BridgeTex continues to be a strategic asset for us. It is connected to the Magellan East Houston Terminal, which is becoming a significant trading hub for the US Gulf Coast as well as our Houston crude oil distribution system, servicing Houston and Texas City refineries as well as our Seabrook Logistics joint venture crude oil export terminal. BridgeTex will also play an important role in our other growth initiatives in Houston and beyond. We intend to reinvest the $575 million of proceeds from the sales transaction into additional attractive growth projects.

We also recently announced a new crude oil pipeline in conjunction with Energy Transfer, MPLX and Delek to deliver crude oil from the Permian Basin through our terminal in East Houston and Energy Transfer's terminal in Nederland, Texas. We believe this pipeline, which is called the Permian Gulf Coast, or PGC pipeline is attractive to the industry, because it can essentially serve the entire Gulf Coast refining complex region, from Texas to Louisiana as well as multiple crude oil export facilities. This project has sufficient commitments to move forward, but is currently in an open season to secure additional volume commitments to the pipe.

While the exact project scope will be determined once the open season ends, the pipeline is currently expected to be at 30-inch diameter pipeline with an in-service date of mid-2020. A 30-inch pipe, once fully expanded [ph], can generally move up to 1 million barrels of product per day and would cost in the area of $2 billion. As currently contemplated, Magellan's share of the spend would be roughly $500 million and we're still assessing additional infrastructure investments we will need to make to our Houston distribution system and possibly additional export capabilities to handle the incremental volume expected to flow to the Houston area.

We've also tried to keep the market apprised of the status of our Longhorn recontracting process. As a reminder, the initial term of our Longhorn contracts expired on September 30. Effective October 1, about 50% of the committed volume elected to extend their contracts under expiring terms for an additional two years, for an average rate of roughly $2.25 a barrel. The remaining 50% of committed volume executed long-term contracts for an average life of eight years with a lower incentive rate that averages approximately $1.75 per barrel. As a result, we expect an average committed rate of approximately $2 per barrel on Longhorn beginning in the fourth quarter of 2018, with an average contract life of 5 years.

We also announced another solid quarter of financial results this morning with higher contributions from each of our operating segments compared to the year-ago period. I'll now turn over the call to our CFO, Aaron Milford to review our third quarter financial results in more detail. Then I'll be back to discuss our guidance and the status of a few of our larger expansion projects and open the floor to your questions.

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

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've included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measure.

Earlier this morning we reported third quarter net income of $594.5 million or $2.60 per unit on a diluted basis, which was higher than the $198.5 million or $0.87 per unit on a diluted basis reported for the third quarter of 2017. Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit was $2.65 and if you further remove the impact of the net gain recognized from the sale of our 20% interest in BridgeTex, diluted earnings per unit was $1.10, which exceeded the $1 guidance per diluted unit provided for the quarter back in August.

As consistent with our past practice, we have excluded the net gain from the BridgeTex transaction in our calculation of DCF, as it is not related to the partnership's ongoing operations. With this adjustment distributable cash flow of $281.8 million for the third quarter of 2018 was 20% higher than the $235.2 million reported in the third quarter of 2017.

I will now move to a brief discussion of the operating margin performance of each of our business segments. Our refined products segment generated $214.7 million of operating margin in the third quarter of 2018 compared to $173.8 million for the same period in 2017, an increase of $40.9 million. Transportation and terminals revenues increased $11 million or almost 4% compared to the 2017 quarter. The increase was primarily related to continued higher distillate demand, especially in West Texas as well as higher average rates as a result of our July increase in tariff rates of 4.4%.

Operating expenses were $6.4 million lower in the current period compared to last year. This overall decrease was attributable to more favorable product overages, which act to reduce operating expenses, offset by higher asset integrity expenses and property tax expenses compared to the 2017 quarter. The property tax increase from last year was due to last year's quarter benefiting from a favorable tax adjustment. Product margin increased by $19.4 million compared to the third quarter of 2017, mainly due to lower non-cash mark-to-market losses related to our hedging activities.

Our cash product margin was slightly lower in the quarter compared to last year's quarter, primarily as a result of delayed butane blending sales volumes, which was mostly offset by better results from our fractionation activities. We also had higher equity earnings from our Powder Springs joint venture compared to last year. For our crude oil segment, current period operating margin of $153.9 million was $38.1 million higher than the third quarter of last year and represents another record for this segment. Transportation and terminals revenue increased by approximately $28.8 million due to higher spot volumes and higher average rate on Longhorn System in response to wider Permian Basin to Houston market differentials, as well as higher volumes on our Houston distribution system.

For the segment overall rate per barrel declined compared to last year. This decline, as we've discussed in the past, is related to increase in volumes on our Houston distribution system where tariffs are considerably lower than the tariffs on our Longhorn pipeline. The current quarter also benefited from higher contributions from our condensate splitter and revenues earned from new storage and ancillary services related to Seabrook Logistics. The second phase expansion of Seabrook Logistics came online during the quarter. You may recall, the second phase of expansion increased storage within the joint venture as well, as created a connection to our Houston distribution system in support of providing crude oil export capabilities to the market.

Magellan has leased crude oil storage capacity and contracted for throughput services from Seabrook Logistics, and we then reoffer these services to the market and receive storage revenue and fees for ancillary services from our customers. As a result we will recognize revenue related to what we receive from our customers and recognize operating expenses related to the fees we in turn pay to our Seabrook Logistics joint venture.

Moving now to operating expenses, our crude oil segment operating expenses increased $14 million mainly due to fees paid to our Seabrook Logistics joint venture for storage and throughput services, which I just discussed a moment ago, as well as higher environmental accruals and less favorable product overages. For the quarter volumes in our Longhorn pipeline averaged about 275,000 barrels per day. As mentioned in our earnings release this morning, we continue to expect volumes in our Longhorn system to average 270,000 barrels per day for 2018 on an annualized basis.

Equity earnings from our various crude oil joint ventures increased $18.2 million, compared to the third quarter of 2017. This increase is primarily attributable to higher volumes in 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 2017, and also September of 2018.

We also saw an increase in earnings from Seabrook Logistics associated with new storage, pipeline and export capabilities placed into service during the third quarter, as previously mentioned. BridgeTex's volumes averaged over 395,000 barrels per day during the third quarter of 2018 compared to approximately 280,000 barrels per day in the third quarter of 2017. Also as mentioned in our earnings release this morning, we continue to expect BridgeTex to average about 370,000 barrels per day for 2018 on a full year basis. Saddlehorn Pipeline averaged over 70,000 barrels per day during the current quarter compared to under 50,000 barrels per day during the third quarter of 2017.

Moving now to the Marine segment, the Marine segment generated $29 million of operating margin in the current quarter compared to $25.9 million in the third quarter of 2017. Terminal revenue increased $2 million compared to last year's quarter due to higher average storage rates due to contractual escalations and more ancillary revenue as a result of higher customer activity compared to the 2017 period, which was negatively impacted by Hurricane Harvey. Operating expenses were slightly lower compared to last year as the 2017 period was negatively impacted by higher environmental accruals and cleanup work associated with Harvey.

Now moving to other net income variances to last year's quarter, our G&A expenses were approximately $10 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 and higher headcount as a result of growth. Depreciation and amortization increased as a result of new assets being placed into service and interest expense increased as a result of higher average debt outstanding compared to last year's quarter. Finally, the 2018 quarter benefited from the $353.8 million gain recognized in conjunction with the sale of a portion of our interest in BridgeTex as I highlighted earlier.

I'll now move to a discussion regarding our balance sheet and liquidity position. Including the current portion of long-term debt we had $4.3 billion of long-term debt outstanding as of September 30 2018, and we had no outstanding commercial paper borrowings. Further, we had $217 million of unrestricted cash on hand at the end of the quarter, which resulted in net long-term debt outstanding of approximately $4.1 billion.

Our average interest rate was approximately 4.6% and our leverage ratio was approximately 2.3 times debt-to-EBITDA as calculated according to our revolving credit facility agreement. The current period leverage ratio was positively impacted by the BridgeTex transaction as the proceeds were initially used to pay down debt as well as the gain being included in EBITDA for compliance purposes. As we continue to fund our current expense expansion capital program, we expect this ratio to naturally increase, to be more in line with historical levels, but below our long-standing maximum leverage, leverage ratio of four times.

Further given what we see right now, we don't expect to issue any equity for our funding needs. We continue to maintain a credit facility totaling $1 billion, which also backstops our commercial paper program, and 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.

I will now turn the call back over to Mike to briefly update guidance for the balance of the year as well as some of our significant growth projects under way.

Michael N. Mears -- Chairman, President and Chief Executive Officer

Thank you. Aaron. As you can see Magellan continues to generate solid financial results and our business fundamentals remain extremely strong. Based on our solid results so far and our expectations for the remainder of the year we have increased our annual DCF guidance by another $20 million to $1.12 billion for 2018. We remain committed to our stated goal of increasing annual cash distributions by approximately 8% for 2018 and by 5% to 8% for both 2019 and 2020 while maintaining distribution coverage of least 1.2 times.

Moving to expansion capital, we now have a record $2.5 billion of construction projects currently under way , including our share of the PTC pipeline that we discussed earlier. Based on the progress of these projects we now expect to spend approximately $800 million in 2018, $1.3 billion in 2019 and $400 million in 2020 to complete the current slate of construction projects. While spending can shift slightly between periods, we are pleased that our largest projects are on time and within budget. The final stages of construction activity are in progress for the initial phase of our Pasadena joint venture marine terminal. The first million barrels of storage associated with Phase 1 is substantially complete and pipeline and dock work are expected to wrap up by year-end in time for the facility to begin service in January of 2019.

Substantial progress has been made on the additional four million barrels of storage and supporting infrastructure that comprises phase two of the Pasadena terminal with an expected in-service date of January 2020. We continue to market this facility to other potential customers, as we have the space to build another 5 million barrels of storage in three additional box on the terminal's footprint.

Activity related to our long-haul pipeline construction project is in full swing as well. Construction is now under way for our East Houston to Hearne refined products pipeline and construction is expected to commence by year-end for our Delaware Basin crude oil pipeline. Both of these pipeline projects remain on target for a mid-2019 start-up. Pipe steel has been ordered for our West Texas refined products pipeline expansion, which is still expect to be in service by mid-2020.

While most of the market is focused on the crude oil growth story it is important to note that we have approximately $1 billion worth of refined products pipeline projects under way in the State of Texas at this time, supported by long-term customer commitments at attractive returns. In addition, these projects offer significant upside potential, especially freeing up more capacity for us to better serve the Dallas-Fort Worth market in the future.

We also continue to assess other potential expansion opportunities still totaling well in excess of $500 million. A few of the newer opportunities we are evaluating include additional pipeline takeaway capacity to transport crude oil from Cushing to our Houston system, and separately, a crude oil pipeline from Houston to Corpus Christi. We are also considering a potential crude oil export terminal on Harbor Island in Corpus Christi, capable of loading VLCCs. As has been the case for a while now we are not the only ones who are evaluating similar infrastructure projects to serve these areas and we expect each of the projects to be quite competitive. However, with the strategic assets we have in place currently, and our industry relationships, we think Magellan is competitively situated to meet these market needs.

I'll remind you that these larger scale opportunities can take considerable time before we know, if we truly have an actionable project on our hands. However, I can assure you the amount of future growth opportunities remains plentiful in our space and in the markets we serve, and really for all of our businesses. And I think Magellan has proven that patience and discipline win out over the long term to find strategic projects focused on fee-based activities and supported by customer commitments to provide the best returns for our investors.

And that includes [ph] our prepared comments, so I will now open it up for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question will come from Theresa Chen with Barclays.

Theresa Chen -- Barclays -- Analyst

Good afternoon. In terms of your projects under development, can you talk more about your potential participation in the VLCC capable crude oil export hub on Harbor Island? How big of an investment would this be for Magellan? What kind of timeframe do you think something like this could come into service? And would it utilize some of your existing assets in Corpus already? Any color would be great.

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, there's lot of questions there. And let me first start by saying that we are early in the initial development stages here. We have a parcel of land on Harbor Island that we are working with the owner to develop. We have not fully scoped the capital cost opportunity there, even though the land is large enough for a significant amount of storage and two VLCC berths. This is not land that we currently own on the ship channel, in Corpus Christi, even though that land can be used as a feeder into this terminal. We have been in the market talking to customers about this for quite some time and there is significant interest in this -- (Technical Difficulty).

Theresa Chen -- Barclays -- Analyst

Okay. So a follow-up question on the potential line from Houston to Corpus. So since there have been multiple large-scale pipelines announced bringing Permian barrels directly to Corpus and as well as Houston, can you just talk about the benefits you see in linking the two markets and if such projects can -- would increase utilization in your existing Houston assets?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, we would expect it to increase utilization of our existing assets, but there is multiple reasons that people are interested in this pipe. I mean there are customers that are interested in having access to Houston and Corpus, given the optionality that is afforded to them to serve the domestic demand for refined -- I mean for crude oil and the export markets. But there is also a significant number of barrels that -- potential barrels, particularly associated with our proposed Cushing to Houston Pipeline that are in Cushing that would want access to the Corpus market also. So there's multiple drivers behind the potential Houston to Corpus pipe.

Theresa Chen -- Barclays -- Analyst

Got it. And lastly on butane blending. Can you just give us an update on where you are in the hedging process for 2019 and maybe beyond and what kind of margin you're expecting to achieve at this point?

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

Yes, I can do that. We are -- first of all, for the fall of '18, we're about 90% hedged, first of all. For 2019, we have hedged about 90% of our spring projected volumes, which if you annualize that, is about 40% of our total 2019 blending volumes, and we're expecting those margins that we've hedged in place are at about $0.50 per barrel.

Theresa Chen -- Barclays -- Analyst

Thank you .

Operator

And next we will hear from Jeremy Tonet with JPMorgan.

Jeremy Tonet -- JPMorgan -- Analyst

Good afternoon. Just wanted --

Michael N. Mears -- Chairman, President and Chief Executive Officer

Hi, Jeremy.

Jeremy Tonet -- JPMorgan -- Analyst

Hi, want to continue with the Permian topic here. And with the Permian Gulf Coast pipe, just -- you gave an indication what the size could be there, but just if you could walk us through how you think about sizing the pipe in general, relative to the level of commitments you guys have gotten on that pipe? And also it seems like there's a lot of pipes coming online during 2020, and kind of could be competition for volumes at that point. So could you just kind of walk us through your thoughts there?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, to start with, as I mentioned, we have sufficient long-term commitments to underwrite a 30-inch pipeline, with -- and we're not going to talk about exactly the volume of commitments we have, but it can underwrite a 30-inch pipeline. Whether we upsize that is going to depend on what happens during the open season. We're in the open season process at the moment and there is significant interest in this pipeline. As you probably know the way these open seasons work is you typically don't know who is actually going to commit until the very end, until we're approaching the very end. So we should have some color on that in the next couple weeks. And if we have sufficient commitments -- incremental commitments, I should say, then we will consider upsizing the pipe.

Jeremy Tonet -- JPMorgan -- Analyst

That's helpful, thanks. And then kind of taking the next steps there, between yearend '19 and '20, there's going to be a lot of Permian crude hitting the coast, and just wondering you talked about dock capacity expansions there? Do you see the export capacity coming online in time there or could there be kind of a glut in -- on the Gulf Coast granted there's a lot of refinery capacity, but you're still talking about introducing a lot of new volumes to the market. So just wondering how you see that playing out and kind of what are your thoughts, as far as expanding your dock capacity, you talked a bit about that before?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Right. So just specifically in the Houston area, we announced earlier this year that we're expanding Seabrook. We have another expansion opportunity for Seabrook that we expect to approve it here in the next couple of months and hopefully, we'll have an announcement on that. That further expansion will be done prior or consistent with the timeline that PGC would be starting up.

In addition to that, we are developing multiple other Houston area crude oil export opportunities, and I don't want to go into detail what those are. I can just say that there is multiple opportunities, are under development and we would intend for those opportunities to be available, consistent with the time PGC starts up also.

Jeremy Tonet -- JPMorgan -- Analyst

Great, thanks for that. And then finally just the '19 CapEx stepped up a bit there. Just wondering, if you could let us know like which projects it was specifically that led to that step-up there?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, the biggest step-up was our component of PGC, which was about $300 million. There are some other smaller projects -- I say smaller they are in the $20 million to $25 million phase, that we are looking at increasing, not looking at, we're actually developing in Cushing and in other areas in Oklahoma. But the biggest piece of that is PGC.

Jeremy Tonet -- JPMorgan -- Analyst

That's very helpful. That's it from me. Thanks.

Operator

And our next question will come from Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, good afternoon guys. Just wanted to go back to something that Theresa had mentioned, just along those three new projects to Houston to Corpus and then the export terminal. Is the right way to think about all those three really is -- as one major project? It just seems like you're creating this new artery from Cushing down to the export market in Corpus, or do you actually view them as discrete and in other words you'd FID them one at a time if you had to?

Michael N. Mears -- Chairman, President and Chief Executive Officer

I think they should viewed as discrete projects that would be FID'ed separately.

Spiro Dounis -- Credit Suisse -- Analyst

Okay. And then when you think about the equity funding, obviously, your current CapEx budget, I think you guys are self-funding, shouldn't be any issues around that, would seem like those three projects -- realize you are still scoping it out, but would seem to carry a pretty decent budget there. How do you think about funding that? Does that open the door to issuing equity at a point in time, or do you think you'd maybe go the JV route to help pave the way for that?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, let me first say that it's fairly common for long-haul crude oil pipelines, that they ultimately wind up in a JV. That's certainly an option here and we're talking to potential partners on those projects. None of that's been determined yet, but with regards to financing these projects, if they actually happen, we don't have a plan, yet until they actually happen but we've consistently said that we're not opposed to issuing equity if needed. At some point if our capital project gets large enough for high quality good returning projects that we're not opposed to issuing equity.

So that's always on the table. We don't have a plan right now to issue any equity for any of the projects that we're developing. But if incremental projects come across the goal line then we will consider at that time.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. Appreciate the color. Thanks everyone.

Operator

And next we will hear from Dennis Coleman with Bank of America.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Yeah, thanks, thanks for taking my questions. Spiro sort of hit a lot of what I was interested in, in terms of the discreteness of the projects, but I wonder, is it -- are these projects, I mean obviously there's plenty of light crude making it to Corpus from the Permian. Would this -- should we think about this more as targeted for heavier crudes and perhaps Canadian crudes and the like?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, I mean, that's certainly an opportunity, but I wouldn't characterize it is as that's what it's targeted to do. I mean there is significant light crude. I mean if you just look at Cushing today there's significant light crude that's coming into the Gulf Coast area and there's projected significant increases in light crude coming into Cushing that are not Permian based, that ultimately would like to find a home for exports. So that is an opportunity also. I think one other element that's driving a lot of interest here is just quality control around light crude coming down to the Gulf. So not any one of those things is the primary driver, but all of those are opportunities.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. And then maybe just a little bit more on the VLCC terminal, so I think the issue with ports has been the depth of the draft for these VLCCs, I guess you're saying that these would be able to load to full capacity at this location. I don't know the specifics of the location.

Michael N. Mears -- Chairman, President and Chief Executive Officer

That's the long-term plan, it may get there in stages, but that's the long-term plan.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Okay. Okay. And then one just last detailed one for me. In terms of -- and Aaron maybe this is for you the guidance for Longhorn and BridgeTex volumes through the end of '18, I guess that's just because you just gave 2018 guidance, you're not implying anything about your view on the volumes into 2019.

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

That's correct, that's correct.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

All right. So if market conditions continue, we should expect that to continue, or might reasonably expect that to continue as well?

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

It's been clear to the extent differentials stay wide it drives along [ph] those price. So and consistent with past practice, we will give 2019 guidance in our fourth quarter call in either late January, early February whenever we get it scheduled. But I mean, as a rule of thumb, if the differential is higher than our spot tariff, it's highly likely that our pipelines will be full.

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Understood. And I just wanted to make sure I was understanding it since you said specifically for the remainder of 2018. So thanks very much.

Operator

And our next question will come from Shneur Gershuni with UBS.

Shneur Gershuni -- UBS -- Analyst

Good afternoon guys. Most of my questions have been asked and answered, but I was wondering if we can dive in a little bit on one of the proposed projects that you're looking at connecting Corpus to -- sorry, connecting Houston to Corpus. Are you talking about building a brand new pipeline or is this something where you're talking to Kinder about reversing KMCC and Double Eagle, just trying to understand if like we're putting new capital in the ground or we're trying to repurpose capital in a more efficient way.

Michael N. Mears -- Chairman, President and Chief Executive Officer

This is a brand new pipeline.

Shneur Gershuni -- UBS -- Analyst

Okay. And would that not be something to consider as well also?

Michael N. Mears -- Chairman, President and Chief Executive Officer

To reverse KMCC and Double Eagle?

Shneur Gershuni -- UBS -- Analyst

Yeah.

Michael N. Mears -- Chairman, President and Chief Executive Officer

I'd rather not speculate that on the call. I haven't really given that much thought, and so I really am not prepared to address that as a possibility. That's not our primary path.

Shneur Gershuni -- UBS -- Analyst

Got it, OK. And then the other thing on the port side, it seems everyone is targeting VLCC capabilities these days. But when I sort of add up all the announcement, it sort of seems like we're going to be able to move more crude out of the US than we actually produce. I mean, where do you think we end up on VLCC ports, given how big those vessels are and so forth?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, I would predict that not every single project that's been announced will actually proceed. I would expect that projects would proceed that get commitments sufficient to make them economical. And as you said, if you add up all of them, there's probably not enough crude oil there to do that. So it's really going to be a matter of who can secure the commitments to support their infrastructure.

And as I said during my prepared comments, it's very competitive. We think we're in a very strong position to get those commitments. We've got significant interest to-date. But we'll see how it plays out.

Shneur Gershuni -- UBS -- Analyst

Is there a type of infrastructure, I mean obviously the pipeline itself, that's necessary. But do you need, like a lot of surge storage capacity, I mean you're talking about filling a very large vessel, more than what pipelines move in a day. Can you sort of talk about what would be the key advantages that we should be thinking about who wins the VLCC game?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, there's a lot of elements to that, who's going to win the game. I mean, you do need significant storage near the dock in order to load a VLCC. But there's a lot of people that can do that, and it's really, I think going to come down to who can do it the cheapest, who has supporting infrastructure and supply to the facility to make it work, and who has the customer relationships to secure the contracts in that. I think that at the end of the day is going to determine who gets who gets the commitments.

Shneur Gershuni -- UBS -- Analyst

Okay, fair enough. And one final question. A bunch of years ago, there was this whole trend about building splitters and kind of some got built. You obviously have one. Some did not. With crude gravity going up the way it is, is that something that potentially can be on the horizon next that we -- some way [ph] these splitters get built .

Michael N. Mears -- Chairman, President and Chief Executive Officer

It certainly is possible to be on the horizon. I mean, to be candid with you, I don't. The chatter for additional splitters is not very high right now. We think we're in a very good position to build another one. We've built our splitter in Corpus Christi specifically such that we can add another one relatively easily but we're not actively working on that at the moment.

Shneur Gershuni -- UBS -- Analyst

All right. Fair enough. Thank you very much. Appreciate the color.

Michael N. Mears -- Chairman, President and Chief Executive Officer

Sure.

Operator

And next we will hear from Mirek Zak with Citi.

Mirek Zak -- Citi -- Analyst

Hi, good afternoon, everyone. Just a quick one from me. Do you have an assessment as to about how much capital would be necessary to expand your Houston distribution system to support the incoming crude volumes, whether that's significant at all and if so, would that be tied into sort of a higher rate, on your overall distribution system?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, to answer your second question, we're not anticipating raising the rate on our distribution system associated with the pipeline. With regards -- if you mean tariff. I mean throughput rate, absolutely, we're looking to increase the throughput. We are still scoping that out and trying to optimize existing assets the best that we can. The number is probably going to be in the range of $50 million to $150 million. And we are diligently looking for opportunities to be at the lower end of that range, but we haven't fully scoped that yet.

Mirek Zak -- Citi -- Analyst

Okay. And just to follow-up, if you do move -- and end up moving forward with a VLCC export project here, how does that position your Seabrook JV and your overall portfolio? And how you think about that?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, we think Seabrook's still very well positioned. I mean, Seabrook is in a good location and has access to significant incoming supply, and even though it can only load Aframax and Suezmax ships, there is still a significant demand for transport by those vessels. Not every single barrel that's going to leave the US is going to move on a VLCC.

Mirek Zak -- Citi -- Analyst

Okay, great, thank you very much.

Operator

And our next question will come from Jerren Holder with Goldman Sachs.

Jerren Holder -- Goldman Sachs -- Analyst

Thanks, good afternoon. Just wanted to ask on the refined products transportation revenue per barrel number there. It looks like it was a little bit higher than the 4% increase that I think you guys were guiding. Just kind of wondering what factors are driving that number a little bit higher?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, as always, when you just look at the overall rate per barrel, there's a lot of things that go into that. Specifically to your question, there is two things. One is we saw slightly higher volumes on our central system and West Texas systems, which have higher rates per barrel, and we saw slightly lower volumes on our South Texas refined products system, which has very low rate per barrel. So those were the primary reasons why.

Jerren Holder -- Goldman Sachs -- Analyst

As we kind of look at your initial, I guess 2018 guidance, I think the number was just below 150, seems like you guys are tracking ahead of that. Just based on what you're seeing, should we be assuming a higher number there?

Michael N. Mears -- Chairman, President and Chief Executive Officer

On rate per barrel?

Jerren Holder -- Goldman Sachs -- Analyst

Yeah, on rate per barrel.

Michael N. Mears -- Chairman, President and Chief Executive Officer

I quite honestly can't tell you what the rate per barrel in the forecast for the fourth quarter is. I don't see any reason for it not to be consistent with what we saw in the third quarter.

Jerren Holder -- Goldman Sachs -- Analyst

Okay, that's fair. Thank you.

Operator

And we will now hear from Sharon Lui with Wells Fargo.

Sharon Lui -- Wells Fargo -- Analyst

Hi, good afternoon.

Michael N. Mears -- Chairman, President and Chief Executive Officer

Hi, Sharon.

Sharon Lui -- Wells Fargo -- Analyst

For the PTC pipeline, what's the potential return based on the commitments that you have today?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, I would put it in our historical expectations of the six to eight times multiple.

Sharon Lui -- Wells Fargo -- Analyst

And that's just based on the commitments?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Correct.

Sharon Lui -- Wells Fargo -- Analyst

Okay. And I guess who is actually serving as the operator of the pipe and who is taking the lead on construction and has all the materials been secured?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, Energy Transfer is the construction manager and the operator of the pipe, and no, not all the materials have been secured yet. We just announced this a couple months ago. We are well in the design phase, but we haven't secured all materials yet.

Sharon Lui -- Wells Fargo -- Analyst

Okay. And I guess for your Cushing to Houston pipeline project, can you maybe talk about the potential size of that pipe and the timing?

Michael N. Mears -- Chairman, President and Chief Executive Officer

Well, right now, based on the expressed interest, we would imagine the pipe to be in the 24-inch range. We -- the timing, it's possible that we would launch an open season on this project in the near future and the timing would be driven after that by the commitments we secure. I can tell you, again with as any project in development, we have significant expressed interest to-date. We have potential JV partners at this point and we're putting all of that together and once we get that nailed down, we will likely go out for an open season.

Sharon Lui -- Wells Fargo -- Analyst

Great, thank you.

Operator

(Operator Instructions) We will now hear from James Carreker with U.S. Capital Advisors.

James Carreker -- U.S. Capital Advisors -- Analyst

Hi, thanks for taking my call. There was a recent announcement about a similar VLCC loading project in Harbor Island between the ports, and I believe (inaudible) -- I assume this project you're talking about is completely separate from that?

Michael N. Mears -- Chairman, President and Chief Executive Officer

That's correct.

James Carreker -- U.S. Capital Advisors -- Analyst

Thanks. And then going back to the crude oil segment, there was a big step up in expenses, as you had talked about. Can you quantify maybe how much of that was the payments to Seabrook Logistics and how much was more kind of the one-time environmental accruals, et cetera? Or are you -- what would be a good run rate going forward?

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

Yes, so Seabrook Logistics was about $4 million of that increase. And then, if you look at the environmental that was about $3.1 million.

James Carreker -- U.S. Capital Advisors -- Analyst

Okay. So I mean it sounds like then the OpEx will run higher than the Q2 level, but come down a little bit from the Q3 level as we move forward?

Michael N. Mears -- Chairman, President and Chief Executive Officer

I would say, yes. That's a reasonable expectation.

James Carreker -- U.S. Capital Advisors -- Analyst

That's all I had. Thank you.

Operator

And with no further questions, I'd like to turn the call back over to management for any additional or closing remarks.

James Carreker -- U.S. Capital Advisors -- Analyst

Well, thank you for your time today. We're in the final stretch of the year and we're pleased with our results to-date and we look forward to a successful fourth quarter. I want to thank everyone for their interest in Magellan. Have a good afternoon.

Operator

And once again that does conclude our call for today. Thank you for your participation. You may now disconnect.

Duration: 45 minutes

Call participants:

Michael N. Mears -- Chairman, President and Chief Executive Officer

Unidentified Speaker --

Aaron L. Milford -- Senior Vice President and Chief Financial Officer

Theresa Chen -- Barclays -- Analyst

Jeremy Tonet -- JPMorgan -- Analyst

Spiro Dounis -- Credit Suisse -- Analyst

Dennis Coleman -- Bank of America Merrill Lynch -- Analyst

Shneur Gershuni -- UBS -- Analyst

Mirek Zak -- Citi -- Analyst

Jerren Holder -- Goldman Sachs -- Analyst

Sharon Lui -- Wells Fargo -- Analyst

James Carreker -- U.S. Capital Advisors -- Analyst

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