Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Magellan Midstream Partners LP  (NYSE:MMP)
Q1 2019 Earnings Call
May. 01, 2019, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the first quarter Magellan Midstream Partners earnings call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, May 1, 2019.

It's my pleasure now to turn the conference over to Mike Mears, CEO. Please go ahead, sir

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

Good afternoon, and thank you for joining us today to discuss Magellan's first quarter financial results. Before we get started, I'll remind you that management will be making forward-looking statements as defined by the Securities and Exchange Commission. 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.

We reported first quarter earnings before market today and kicked off 2019 with solid financial results. At first glance, it may appear that our results were in line with our $0.90 EPU guidance for the quarter. However, after normalizing for mark-to-market commodity adjustments and gains on asset sales, we exceeded our guidance by over 6% on an apples-to-apples basis, primarily due to a more favorable commodity price environment. Further, we expect our business to benefit from the more favorable commodity market and higher crude oil pipeline volumes than originally expected for the year.

I'll now turn the call over to Aaron Milford to review Magellan's first quarter financial results in more detail, including more specifics about the gain on asset sales. Then I'll be back to discuss our latest outlook for 2019 and the status of our larger expansion projects before opening the call to your questions.

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

Thank you, Mike. During today's comments, 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 first quarter net income of $207.7 million or $0.91 per unit on a diluted basis, which was slightly lower than the $210.9 million or $0.92 per diluted unit reported for the first quarter of 2018. Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit was $1.06. If you further reduce, the suggested earnings downward by $0.10 per unit for the $28.1 million of gains related to asset sales recognized in the first quarter of 2019, this further adjusted earnings per unit of $0.96, exceeded our guidance of $0.90 per unit as calculated on a similar basis. Distributable cash flow of $318 million for the first quarter of 2019 was considerably higher than the $258.9 million reported in the first quarter of 2018 and represents a quarterly record.

Before I move on to discussing our segment performance for the quarter, I would like to discuss the nature and DCF treatment for the $21.8 million of asset gains recognized during the first quarter of this year. Our general approach to gains or losses on dispositions of assets as well as impairments is to exclude them from the DCF unless they both relate to our ongoing business activities and are not noncash in nature. You'll notice in the DCF schedule attached to this morning's earnings release, we have excluded from DCF $11 million of the total gain of $21.8 million reported on the income statement. This excluded amount is related to additional gain recognized in the current quarter associated with the sale of a portion of our interest in BridgeTex, which occurred in the third quarter 2018. This additional gain relates to the settlement of an indemnity obligation we provided to the buyer of our interest. With the settlement of this obligation in the first quarter of this year, we essentially recognized the portion of the original gain that had been deferred pending the outcome of this obligation. The exclusion of this current period gain from DCF is consistent with our prior treatment of the original gain reported last year.

The remaining $10.8 million of the gains recognized in the current quarter was included in DCF. This gain is a result of the sale of certain assets related to the discontinued Delaware Basin crude pipeline project. You may recall that in the fourth quarter of 2018, we recognized an approximately $6 million write-off related to the project development activities we had incurred for this project, the negative impact of which was included in DCF for that period. By including the $10.8 million gain on the sale of the rated assets in this quarter's DCF, we are simply treating the gains and losses related to project development activities consistently, as we consider these types of activities to be part of ongoing business. These details are all highlighted in our press release and financial schedules, but I wanted to spend a bit of time discussing them to hopefully avoid any potential confusion.

I'll now move on to discuss our segment performance for the quarter, starting with our refined products segment. Our refined products segment generated $171.9 million of operating margin in the first quarter of 2019 compared to $211.4 million for the same period in 2018. As we noted in our earnings release, this decline in operating margin between periods primarily resulted from the impact of mark-to-market evaluations of our exchange traded futures contracts used to hedge our commodity exposure. Our fee-based transportation and terminaling activities generated higher financial results in the first quarter of 2019 compared to last year's quarter.

Transportation and terminals revenue increased $6.6 million, driven by higher average tariff rates. Average tariff rates increased in the first quarter of 2018 as a result of the mid-year tariff increase of 4.4% in July of last year as well as lower volumes on our South Texas system. Volumes on our South Texas system move at much lower rates than our core refined products system. This lower volume contribution from our South Texas system causes our average tariff rate per barrel to increase overall. In aggregate, our refined products volumes decreased about 2% from the first quarter of 2018, but almost all of this decrease was related to our South Texas system, which is more of a supply push system.

Within our core demand pool markets, volumes were essentially flat between periods with a higher distillate volumes, offsetting a slight decline in gasoline and other refined product volumes. Operating expenses declined $4.4 million between periods due to the 2018 quarter being elevated by a pension valuation correction. Further, integrity spending was lower between periods due to the timing of completing work, which was mostly offset by lower operational product gains. Product margin decreased by $47.4 million compared to the first quarter of 2018 as a result of mark-to-market impacts on the current period. Our cash margins for the current quarter increased between periods. As Michael discuss in a few moments, we expect these stronger margins to persist for the balance of the year as gasoline prices are generally trending higher and butane costs are trending lower.

For our crude oil segment, operating margin of $140.2 million was $12.5 million higher than the first quarter of last year. Transportation and terminals revenue increased by approximately $21.4 million due to higher fees associated with growing volumes at the Seabrook joint venture marine terminal, higher contributions from the Corpus Christi splitter and higher volumes on over crude oil pipeline systems. When you look at our statistics, you will note a significant decline in the average crude oil tariff rate reported for our wholly owned assets. As we've talked about in the past, this decline in average tariff rate results from an increasing volume contribution from our Houston distribution system, which earns tariffs of around $0.20 per barrel compared to the much higher long-haul tariff earned on Longhorn.

Additionally, lower average tariffs earned on our Longhorn Pipeline System resulting from contract renewals, which became effective in October of last year, also negatively impacted our average rate compared to the first quarter of 2018. So overall, our total revenue increased as a result of higher volumes, especially for our Houston distribution system. Increasing volumes on the Houston distribution system were driven by higher volumes received from Longhorn and BridgeTex pipelines as well as other sources. Further, as Seabrook volumes increased, as we saw on the first quarter of this year, overall demand for transportation on the Houston distribution system also increases. For the quarter, volumes on our Longhorn Pipeline averaged approximately 275,000 barrels per day compared to 265,000 barrels per day in the first quarter of 2018.

You may recall that our initial 2019 guidance anticipated that Longhorn would average about 260,000 barrels per day for the year. You also may recall that we did not forecast that we would move spot volumes beyond the first quarter of this year. We now expect the market differential between Midland and Houston to remain at levels above our sport tariffs through the second quarter. As a result, we currently expect Longhorn to average about 265,000 barrels per day on an annualized basis assuming no spot shipments for the second half of the year. Segment operating expenses increased $10.2 million as a result of higher fees paid to our Seabrook joint venture related to increased activity as well as higher planned maintenance expenses related to the Corpus Christi splitter.

Equity earnings from our various joint ventures increased slightly between periods. We recognized higher earnings from our Seabrook and Saddlehorn joint ventures, which were offset by lower earnings from our BridgeTex joint venture, primarily as a result of our lower ownership interest. Volumes in the Saddlehorn Pipeline were higher as a result of the contractual step-up in committed volumes to approximately 70,000 barrels per day in September of 2018 and higher uncommitted volumes as well for the new joint tariff arrangement.

BridgeTex volumes averaged almost 420,000 barrels per day during the first quarter of 2019 compared to approximately 315,000 barrels per day in the first quarter of 2018. Saddlehorn volumes averaged approximately 100,000 barrels per day during the current quarter compared to approximately 65,000 barrels per day during the first quarter of 2018. Similar to my discussion around Longhorn, we expect spot volumes to continue on BridgeTex through the second quarter. As a result, we now expect BridgeTex to average about 365,000 barrels per day on an annualized basis assuming no spot shipments for the second half of the year. This is 15,000 barrels per day higher than the 350,000 barrels per day assumed for the year in our original guidance provided back in February.

For both Longhorn and BridgeTex, the strength of the market differentials between West Texas and Houston during the second quarter and beyond will continue to be a key driver of the financial performance of these systems in 2019. For Saddlehorn, first quarter volume of about 100,000 barrels per day was ahead of our expectations for the quarter. And given increasing demand for uncommitted capacity, we expect our annual average volume to be about 135,000 barrels per day compared to our initial guidance of 110,000 barrels per day.

Finishing up my discussion of our segment performance, our Marine segment generated $38.5 million of operating margin in the current quarter, which is an $8.5 million increase from the 2018 quarter and a quarterly record for this segment. Revenues were higher as we had fewer tanks out for maintenance. Operating expenses were also lower as a result of reduced maintenance cost. You'll also note that we recognized as other income insurance proceeds received in the current period related to impacts from Hurricane Harvey. Also note that while our MVP terminal joint venture in Pasadena came online during the first quarter, it did not and was not expected to have a significant contribution in the first quarter simply due to timing of start-up activities.

Now moving to other net income variances to last year's quarter. Depreciation, amortization and impairment expense increased $10 million compared to the first quarter of 2018. Of this amount, about $7 million is related to higher noncash depreciation and amortization expense and $3 million is related to the writedown of project development cost, which negatively impact DCF. G&A was essentially flat between periods. Interest expense was $3.6 million higher, primarily due to $8.3 million of additional cost related to the early retirement of our July 2019 notes. This increase was offset by borrowing -- by lower borrowing cost from a lower average long-term debt balance and lower weighted average interest rate. Our weighted average interest rate was approximately 4.7% during the first quarter, and our average outstanding debt balance was $4.5 billion .

Long-term debt, including $69 million of commercial paper outstanding, at March 31 was $4.3 billion , and we had about $13 million of cash on hand. Other expense declined $6.7 million between period as a result of the 2018 period, including higher pension expense as a result of a pension valuation correction. Moving briefly to balance sheet metrics and liquidity. Our leverage ratio for compliance purposes was approximately 2.4x at the end of the quarter. However, this ratio is impacted by the gain from the BridgeTex transaction, which occurred in the third quarter of 2018. Ignoring this gain, our leverage ratio would be approximately 3x. We continue to maintain a credit facility totaling $1 billion , which also backstops our commercial paper program. We also continue to expect that we'll be able to fund our current slate of growth projects with excess cash and debt without exceeding our long-standing maximum leverage ratio target of 4x and do not anticipate a need to issue equity.

I'll 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 growth projects under way.

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

Thank you, Aaron. As the investment community may be aware, Aaron has been promoted to the newly created position of Chief Operating Officer for Magellan, effective today. So today's earnings call essentially wraps up his responsibilities as CFO. He's done an exceptional job in this role, and I'm confident Aaron will continue to add tremendous value in his new COO capacity as well. Replacing Aaron as CFO is Jeff Holman, who many of you may already know as he too has been a key contributor to Magellan, serving as our treasurer for a number of years.

Based on our results during the first quarter in a more favorable overall commodity pricing environment, we have increased our annual DCF guidance for 2019 by $40 million to $1.18 billion . As Aaron already mentioned, our initial guidance for the year had assumes spot shipments on the Longhorn and BridgeTex pipelines during the first quarter only. While we try to take a conservative approach to estimating near-term volumes for guidance, the outlook for the basis differential between Midland and Houston has widened, and our forecast now assumes that uncommitted volumes will continue through the second quarter.

As a reminder, we estimate that the benefit from these uncommitted volumes is about $20 million per quarter based on the uncommitted spot rates for both Longhorn and BridgeTex. The improved commodity environment is also expected to benefit our butane blending activities. During 2018, our average margin for butane blending was about $0.40 per gallon. Earlier this year, we had indicated that based on hedges put in place for the early part of 2019 in the forward curve at that time for the remainder of the year, we expected similar levels for 2019. Since the beginning of the year, the gasoline-to-butane price differential has increased, and we now expect the margins to be closer to $0.50 for the full year, with about 40% of the blending volumes currently hedged for the second half of 2019. With our new DCF guidance of $1.18 billion for 2019 and our stated goal of increasing annual distributions by 5% this year, we expect to generate a healthy coverage ratio of 1.27x, with approximately $250 million of excess cash flow generated to reinvest in our business.

With regards to expansion capital, we continue to make excellent progress on our construction projects, with 2 of our largest projects on target to become operational this year. Last quarter, we discussed that the first phase of our joint venture marine terminal at Pasadena began service during January, with 1 million barrels of storage. Phase 2, which represents another 4 million barrels of storage, is progressing as well. The tanks are now built with construction of the related pipe and dock infrastructure still in progress. We expect the second phase of Pasadena to become operational by the end of 2019, and we continue to seek additional customer commitments for potential future build-outs.

Moving to our refined products pipeline projects in Texas, construction is well under way for our new East Houston-to-Hearne pipeline. Based on the current schedule, we expect to begin operations on this pipe in late August. Significant activity is also under way for our West Texas refined products pipeline expansion. Pipe production is nearing completion, and we expect to begin construction activities later this month, with the entire West Texas expansion still on target for mid-2020 operational day.

We have recently had 2 positive developments with regards to over West Texas expansion. First, we have received sufficient commitments to build a new refined products terminal in Midland, which is also expected to be in service in mid-2020. And secondly, we have received a new significant market share commitment to West Texas. While this new market share agreement is not necessarily represent a firm take-or-pay commitment, it does demonstrate the potential for the meaningful upside we expect from this attractive project. Based on the progress of expansion projects under way, we currently expect to spend $1.1 billion in 2019, with an additional $150 million in 2020 to complete these projects.

As you may be aware, our expansion capital spending estimates no longer include the PGC joint venture pipeline out of the Permian. We made a public statement in late March indicating that due to the competitive and dynamic environment within the Permian, we believe it is unlikely that the stand-alone project initially announced 8 months ago will proceed. While this development is unfortunate, we continue to firmly believe the capital discipline is the foundation of Magellan's long-term success.

Some investors have expressed concern as to what new projects will fuel Magellan's next wave of growth beyond 2020. I can assure you that we remain very active evaluating other potential expansion opportunities, still totaling well an excess of $500 million to cover a variety of refined projects, marine and crude oil infrastructure opportunities. Our project backlog contains many smaller scale, high-return projects, but we are also evaluating a number of large-scale opportunities that hopefully we can discuss over the next few months.

Regarding the proposed Voyager pipeline project, we recently extended the open season to the end of May. In addition to providing potential customers more time to finalize their interest, a potential Midland origin is now -- is also now under evaluation for the Voyager project based on industry feedback that origin flexibility from both Cushing and Midland is desired for ultimate delivery to the Houston Gulf Coast. While we cannot say for certain, which projects will comprise our longer-term future growth spending at this exact moment, we remain optimistic about the number of opportunities under construction at this time. And of course, we continue to target returns generating our standard 6x to 8x EBITDA multiple for new investments.

And that concludes our prepared remarks. So operator, we can now turn it over for questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question is from Jeremy Tonet, JPMorgan. Please go ahead.

Jeremy Bryan Tonet -- JP Morgan -- Analyst

Good afternoon. I was hoping that we could expand a little bit more as far as the Permian outlook as far as a new takeaway project is concerned with. PGC kind of not going to proceed in its initial form. Is there another project that you see kind of coming into its place? Or do you see kind of Voyager stepping in there? Or any other thoughts you could provide as far as what that could look like in the future?

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

Well, the alternative project we're developing right now is Voyager. And the difference between Voyager and the PGC project, as it was contemplated, was the multiple origin concept. What we've heard, we've heard significant feedback from that market as we've been marketing our Cushing to Houston line that a Midland option or origin option would be attractive. And what we're hopeful for and we're fairly optimistic is the combined interest between Cushing and Midland will lead to sufficient commitments to proceed, which is now that we were able to obtain from PGC just out of Midland only.

Jeremy Bryan Tonet -- JP Morgan -- Analyst

And there seems to be kind of a competitor developing a project that seems maybe somewhat similar. Is there room for kind of a joint venture with Voyage here? Or is this something that you contemplate will be Magellan own if it comes to fruition?

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

Well, I mean, we're more than happy to do it alone, if we can achieve the commitments. But I've said this before and I think our past practice has indicated, we're very interested in capital-efficient solutions. We are not interested in an end state where pipeline capacity either from Cushing or out of the basin is overbuilt. So if there is a JV, joint venture opportunity that makes sense, we'll entertain that.

Jeremy Bryan Tonet -- JP Morgan -- Analyst

That's helpful. And just a last one on the Permian here. It seems like with the pipes coming online over the balance of this year and into next year, there's going to be significantly debottlenecking and seems that the spreads have really come in there and it will be a lot of pipeline competition. In that type of scenario, would you guys look to kind of lower your tariffs to compete to get volumes there or kind of stick with what you have? Or what would you -- how would you describe your strategy in that environment?

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

Well, we're not going to sit on our hands in a competitive environment. And so lowering our tariffs is one option. Marketing barrels through our pipeline is another option. We've got a handful of things we're looking at, but we intend to compete even if the margins decline.

Jeremy Bryan Tonet -- JP Morgan -- Analyst

Great. I'll stop there. Thanks for taking my questions.

Operator

And the next question is from Spiro Dounis with Credit Suisse. Please go ahead.

Spiro Michael Dounis -- Credit Suisse -- Analyst

Good afternoon everyone. Just I'm going to start off on CapEx first, specifically around the backlog of over $500 million worth of projects. I guess, as we think about that and backfilling 2020, how much of that $500 million would you describe as maybe near term that could start to fill '20 and maybe how much is long-term oriented?

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

Well, the first part of your question's relatively easy to answer because we know what projects are close to the finish line. And without giving you specific number, there's a meaningful amount of capital. It's not the full $500 million, but there's a meaningful amount of capital that we feel pretty confident over the next 6-plus months or so that we ought to be able to commit to and add to the backlog. Some of the larger projects we're looking at, we're in active discussions and negotiations. And it's very hard to tell. Just from a lot of experience developing projects, we could reach agreements on some of those projects in the next month or 2 or we could never reach agreement on it or it may take 1.5 years. So it's really hard to say, but there's some very interesting large scale projects we're looking at. Unfortunately, I can't talk about any of them right now, but we're very optimistic about them.

Spiro Michael Dounis -- Credit Suisse -- Analyst

Got it. And second one, it's a 2-part one really around, I guess, CapEx inflationary concerns. I think, one of your peers said and mentioned yesterday on building a pipeline out of the Permian saw those costs go up pretty substantially. And I think the pressure was coming around labor and land acquisition cost. And so, I guess, number one, curious if you're seeing the same pressures? And what that means for future project returns as you go out to build these pipelines? And as it relates to your own current budget, it was a bit surprise that you're able to, I guess, add some projects to the CapEx front, but at the same time keep that budget the same. Just curious if you're able to find savings in the current budget?

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

Well, we can't say that we really saw material savings in the current budget other than the projects we've discontinued obviously. But no, it's true. I mean, if you look at our large-scale expansion projects between the Pasadena build-out or Houston-to-Hearne pipeline, our West Texas expansion, which is a little earlier in the curve, all of those projects are on budget today. And so we feel like we're managing our costs. Of course, it's a 2-part process that you're -- what you estimate upfront and then it's executing on the estimate. And we feel pretty good with our process so far on all of our large-scale projects. And so as we look at projects going forward, obviously, the requirement is to be as accurate as possible on the upfront estimate. And we think we've got a pretty good track record of that, and we'll continue to execute on that.

Spiro Michael Dounis -- Credit Suisse -- Analyst

I appreciate the color. Thanks guys.

Operator

And the next question is from Keith Stanley, Wolfe Research. Please go ahead.

Keith T. Stanley -- Wolfe Research -- Analyst

Hi, good afternoon. Following up on Voyager, how larger capacity would the portion of the pipeline with the Midland origin have for that project?

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

Well, currently, we're contemplating a 20-inch pipe. So the maximum capacity if you have it fully powered up on a 20-inch pipe could be in the 450,000-barrel a day range.

Keith T. Stanley -- Wolfe Research -- Analyst

Okay. And then, separately, I'm not sure if I heard this right. You mentioned a market share agreement for the West Texas pipeline. Can you just give some more details on how that would work and how contracted that project is now?

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

Well, a market share agreement is typically an agreement you would enter into with a party that commits all or a portion of their market share in a particular market to your pipeline. So the variable there is what their market share is. There's no obligation on their part to have any market share if they determine that they don't want to market or not consume product in that market. So that's how it works. And I can't give any more details on the counterparty, but we feel pretty good that this counterparty is going to be moving barrels under that agreement long term.

Keith T. Stanley -- Wolfe Research -- Analyst

Okay. And just updates, I guess, what you're thinking as far as percentage of the pipeline that's contracted now in your view and returns on that project?

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

I don't have the specific numbers here percentage-wise on the contracted amount. I hate to throw a quote out there. It's highly contracted. It's a very high percentage of the capacity that's contracted. And somewhere probably in the 70% to 80% range. And if that contracted level was a 7x EBITDA multiple, so these types of things would be incremental to that and improving that multiple.

Keith T. Stanley -- Wolfe Research -- Analyst

Okay, thank you.

Operator

And the next question is from Justin Jenkins, Raymond James. Please go ahead.

Justin Scott Jenkins -- Raymond James -- Analyst

Great, thanks. Good afternoon, everybody. I guess, I want to start on Saddlehorn. Mike, Aaron, you mentioned that the market environment seems to be improving there. And in the release you mentioned a potential capacity expansion. Can you walk us through the time table that, that could unfold and maybe what that looks like?

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

Well, clearly, the market conditions are very favorable for Saddlehorn right now. And one of the primary reasons for that is the access we have on Saddlehorn to Wyoming production. I can tell you we're in negotiations with counterparties regarding support for the expansion. And as I stated in the earlier question, I mean, those negotiations are under way. We think we're very optimistic we're going to get them concluded, but the timing of that, again, is hard to predict. I think in a best case scenario, we could have something put together on that in the next couple of months, but that may be optimistic, but we think the market dynamics out there are very supportive of an expansion of Saddlehorn. It's the lowest cost incremental capacity out of the DJ and the Powder River Basin. So we've got significant interest in it.

Justin Scott Jenkins -- Raymond James -- Analyst

And presumably that would be mostly horsepower expansion?

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

Yes. It would be all horsepower expansion.

Justin Scott Jenkins -- Raymond James -- Analyst

Okay. Second question is on East Houston-to-Hearne. Is the August start-up, is that the original contemplated date for start-up is the first part. And then maybe how should we think about the ramp-up of the cash flow that comes from that project here?

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

The -- that original start date may have slipped a month or so. It's not significant from when we originally contracted, which if all it does slip 1 month over a 2-year time schedule, then we'll probably be OK with that. But the contracts for -- the contracts supporting that project start-up as soon as we're ready to go, those contracts kick in. And so we would expect to see volume ramp pretty significant step function with not a lot of ramp once that pipe's put into service.

Justin Scott Jenkins -- Raymond James -- Analyst

Perfect. Thanks, guys.

Operator

And our next question is from Theresa Chen with Barclays. Please go ahead.

Theresa Chen -- Barclays Bank -- Analyst

Hi. First, I want to say congratulations to Aaron and Jeff on your new roles. In terms of the build-out of your infrastructure, a few months ago, Mike, you had mentioned wanting to expand your footprint in the Corpus area both on the water and perhaps taking additional connectivity there. What's your updated view on that?

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

We're still interested in that, and we're still working in number of angles to make that happen. Unfortunately, there are none of them I can talk about yet, but we're still very actively interested in Corpus Christi.

Theresa Chen -- Barclays Bank -- Analyst

And as nearly 2 million barrels of incremental pipe capacity come online headed toward that area from now until the end of the year, there's been a lot of discussion about dock capacity constraints in the interim because not all of them will be online by then. If barrels get backed out, have you factored in any sort of incremental volumes on Double Eagle through KMCC that could be beneficial to your earnings?

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

We have not built any of that into our guidance. There's certainly some potential for that, but we haven't built any of that into our guidance.

Theresa Chen -- Barclays Bank -- Analyst

Got it. And in terms of your assumptions for the spot shipments on your Permian pipes, do you have any visibility into what extent your customers may have locked in their pricing on the forward curves and thus you might have confidence or visibility that the barrel will move during the second quarter and maybe beyond regardless of spot differentials? Or is your current estimate assumption just that the spot dip will remain wide through second quarter?

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

Our current assumption is based on the expectation that the spot dip will stay wide through the second quarter. And that's not really driven by visibility as to what hedging programs or methods that our shippers may have used to lock barrels in. It's more of a product that where the current differential is and the expectation the public statements by the new builds that they're not going to be up and running until the third quarter.

Theresa Chen -- Barclays Bank -- Analyst

Got it. And lastly, in relation to your comments about getting sufficient commitments for the new refined products terminal in West Texas, was that included in the $500 million of original CapEx for the pipe expansion there?

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

No. It's an entirely brand-new project. We justified the expansion to Odessa. And after we did that, we had parties come to us and ask and have strong interest in a Midland terminal. Our pipeline to Odessa runs right through Midland, and we actually last year had purchased for a different purpose a parcel of land in Midland where the pipeline runs through. So we are well-situated to do it, and so we received those incremental commitments to build the terminal in Midland after we justify the pipeline.

Theresa Chen -- Barclays Bank -- Analyst

Got it. And do you have an estimate of how much the terminal is going to cost?

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

It's roughly $30 million.

Theresa Chen -- Barclays Bank -- Analyst

Thank you very much.

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

Welcome.

Operator

(Operator Instructions) The next question is from Mirek Zak with Citigroup. Please go ahead.

Mirek Zak -- Citigroup -- Analyst

Hi, good afternoon . Just a quick follow-up on the 20-inch pipe to -- Midland origin Voyager, would this be all new line if you went in on this on your own? Or do you have any existing underutilized line in the area that could be repurposed to help keep the cost down?

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

Well, we're still evaluating that option. We have as part of our West Texas refined products expansion, we are looping substantial portions of our existing refined products line to Midland. So we're evaluating using those idle pieces as part of Voyager. We haven't made any final decisions on that, but we're evaluating that versus a new build. Interestingly, we've discovered additional opportunities with some of those idle pieces of pipes that we're exploring also. So there's going to be some incremental project development coming out of the looping the West Texas and one of them may be to support Voyager.

Mirek Zak -- Citigroup -- Analyst

Okay. Got it. And on the potential acquisition front, can you comment more around the latest types of assets you're looking into? And whether or not Permian asset valuations are driving the potential opportunities you're focusing on to be more outside the basin rather than within, maybe more seeing opportunities complement through your downstream or assets in regions in less competitive regions than the Permian that may show a few more attractive valuations to you?

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

What I can say is that you're right at least there hadn't been a lot of transactions in the Permian in the last few months, but our sense is that the valuations have not dropped. And so to be candidate, I mean, we aren't building any growth expectations in from M&A. I mean, we continue to look at assets both in the Permian and in other basins. But our optimism that those prices at least in the near term are going to drop to the levels we think are acceptable is not very high, but we continue to look.

Mirek Zak -- Citigroup -- Analyst

Okay, thank you very much. That's all from me.

Operator

And your question is from Chris Sighinolfi with Jefferies. Please go ahead.

Christopher Paul Sighinolfi -- Jefferies -- Analyst

Hi, Mike. Thanks for taking my questions. Lots have been asked about the growth strategy. I appreciate all the color there. I was hoping to ask couple of questions just related to things you referenced in the results. I think maybe both are for Aaron. Just first, the delta in depreciation between what's on the income statement and what's in the DCF block, it indicates that a bit of the income statement DD&A maybe is cash based, just would like some clarification on what that is sort of why it occurred and what the approach is.

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

Sure. So in my comments, there's a portion. So if you look at our DD&A line, it also includes impairments. The majority of the line item will certainly be the typical noncash DD&A that everyone is used to seeing. But there will be from time to time if we have some cost, primarily for business development activities or whatever that don't come to fruition in the project or there's a cash cost to writing down an asset, it will also show up in that line. So it is a small cash-related component that the difference between within the DCF and the income statement relates to that cash component. I tried to highlight in my comments that this quarter, it's about $3 million in total. So you're hitting in on the right thing, and that's indeed what the difference is.

Christopher Paul Sighinolfi -- Jefferies -- Analyst

Okay. So is that something -- and I apologize, Aaron, I did join the call a touch late. So if I missed that and it's repetitive, I do apologize for that. But...

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

No, that's all right.

Christopher Paul Sighinolfi -- Jefferies -- Analyst

But is it something that you expect? The nature of what occurred in 1Q, is that something that you forecast reoccurring elsewhere this year? Or is it just an outsized event in the first quarter and otherwise we're sort of back to normal?

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

I think this was a unique event related to a specific project we were working on. I mean, typically, it's going to be something that is so minimal you're really not going to notice it. But our treatment of it and where those things will show up will be the same. So it will be the same line item that would reflect that sort of there could be a cash component. But the driver of it in this quarter, we don't expect to continue.

Christopher Paul Sighinolfi -- Jefferies -- Analyst

Okay. Understood. And my fear is you addressed this as well, but with regard to the recurring asset sale gain that you included in DCF, it sounds like it's tethered to the project. You describe as continued or ongoing in nature. I was just wondering for my own purposes some additional clarity on what exactly that is?

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

It's a good question. So in our mind, when we look at the process of developing projects, there are costs related to doing that, and that's going to be something we're doing on an ongoing basis developing projects. It's a significant part of what we do and how we've grown organically. Sometimes, you're going to have some project expenses, as in this quarter, and the project doesn't move forward and you've got to recognize an expense. Occasionally, I would say, you're going to see maybe the opposite of that occur where we develop a project, we have some assets there that are worth more to someone else than what we paid for them. And if we can sort of unwind that and do that efficiently that's what we do, and that's what happened here.

So if you look at the total picture on the Delaware Pipeline in particular, when we decided not to move forward with that, there were certain costs that had no future value at the time we made that decision. So we took a writedown in the fourth quarter of around $6 million related to that. While there's still some assets sitting there that had some value and all we did was extended into the first quarter when we sort of wind everything up, sold those assets to someone else that could use them. And that resulted in this gain. So if you look across the quarters and put them together, it pretty well evens out. But when we describe it at being from an ongoing nature what we're trying to communicate is, we're going to continue to develop projects.

Most of the time they move forward, but sometimes, they won't. And if they don't, it will impact DCF. And if you find a way to optimize the situation, that will benefit DCF as well. And just for completeness, it's very different in our mind than, for instance, when we sold our interest in BridgeTex. We don't expect to be a net seller of our businesses and assets. That's not saying we won't do it if it makes sense, but it's not part of the ongoing part of what we're trying to do, hence why we did not include any of that in DCF. So that's the logic behind why. In one instance, we put it in DCF related to the Delaware Basin and crude oil activities and we didn't put it in DCF as it related to our sale of BridgeTex.

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

Yes, and maybe just to answer your specific question a little clear too, I think that the likelihood that we're going to sell a development project for a gain in the future is probably not real likely. That's not common. And we certainly don't start development projects with the intent of selling them before they're done for a gain. So we wouldn't anticipate that to be a regular occurrence.

Christopher Paul Sighinolfi -- Jefferies -- Analyst

Yes. I think it was the uncommon nature of it that prompted the question, but that's precisely that the color I was looking for. So thank you, and Aaron, good luck in the new role. Thanks, guys.

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

Thank you.

Operator

And gentlemen, those are all the questions we have. Mr. Mears, I will turn the call back over to you for closing remarks.

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

All right. Well, thank you, everyone, for your time today, and we appreciate your continued support of Magellan. Have a good afternoon.

Operator

And ladies and gentlemen, that concludes our call for today. We thank you for your participation. Everyone, have a great rest of your day, and you may disconnect your line.

Duration: 48 minutes

Call participants:

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

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

Jeremy Bryan Tonet -- JP Morgan -- Analyst

Spiro Michael Dounis -- Credit Suisse -- Analyst

Keith T. Stanley -- Wolfe Research -- Analyst

Justin Scott Jenkins -- Raymond James -- Analyst

Theresa Chen -- Barclays Bank -- Analyst

Mirek Zak -- Citigroup -- Analyst

Christopher Paul Sighinolfi -- Jefferies -- Analyst

More MMP analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.