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Magellan Midstream Partners LP (NYSE:MMP)
Q3 2019 Earnings Call
Oct 31, 2019, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Magellan Midstream Partners Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, October 31, 2019.

I would now like to turn the conference over to Mike Mears, Chief Executive Officer. Please go ahead.

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

Thank you. Good afternoon and thank you for joining us today to discuss Magellan's third quarter results. 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.

With the favorable financial results we reported this morning, Magellan continued its positive trend for 2019. Our third quarter earnings significantly exceeded our expectations for the quarter by $0.16 per unit or 15% allowing us to increase our guidance for the year once again.

I'll now turn the call over to our CFO, Jeff Holman to review our third quarter financial results in more detail. 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.

Jeff L. Holman -- Chief Financial Officer, Senior Vice President and Treasurer

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 have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning we reported third-quarter net income of $273 million or $1.19 per unit on a diluted basis compared to $594.5 million or $2.60 per diluted unit in the third quarter 2018.

Please recall the 2018 third quarter net income was elevated due to $353.8 million gain on our sale of a 20% interest in BridgeTex. Excluding that gain, third quarter 2018 earnings were $240.7 million or $1.05 per limited partner unit. Excluding the impact of mark-to-market activity, third quarter 2019 adjusted diluted earnings per unit was also $1.19, which exceeded our guidance for the quarter of the $1.03.

Distributable cash flow for the quarter was $306.8 million, $25 million higher than third quarter 2018, driven primarily by stronger results from our refined products business. I will now discuss the performance of each of our operating segments in turn, starting with our refined products segment.

Refined products generated $240.1 million of operating margin in the third quarter of 2019, an increase of $25.4 million over the 2018 period. Transportation and terminals revenue for the refined product segment increased $10.4 million driven primarily by higher volumes as well as slightly higher average rates. Volumes were favorable due to solid demand across our system, as well as higher shipments associated with the recent connection near El Paso and the start-up of our East Houston-to-Hearne pipeline project.

Rates in the current quarter were favorably impacted by the tariff increase of 4.3% we implemented in July of this year, partially offset by the impact of higher short-haul movements which caused our overall average rate to decrease. I might also note that these shorter haul movements, particularly on the more supply push South Texas portion of our system experienced more volatility both in product mix and overall demand than the rest of our refined product system.

The 2019 year-to-date throughput statistics in the financial schedules that accompanies our earnings release shows a decline -- which show a decline in gasoline volumes and increase in aviation volumes as compared to 2018 reflect the impact of these more volatile South Texas movements, as the demand for both gasoline and aviation fuel on our system excluding South Texas was essentially unchanged between periods.

Operating expenses for the refined products segment were slightly lower in the current period as lower integrity spending was mostly offset by higher property taxes. Product margin increased $13.4 million compared to third quarter of 2018, primarily due to higher non-cash gains on futures contracts we used to hedge future product sales as well as lower butane costs in the current period.

Moving now to our crude oil segment . Third quarter operating margin of $154.4 million was $0.5 million higher than third quarter 2018. Crude oil transportation and terminals revenue increased $5.8 million, largely as a result of new tanks at Cushing and Corpus Christi, as well as higher storage and dock fees associated with our Seabrook joint venture terminal following the addition of export capabilities at the terminal in August of 2018.

Our crude oil transportation volumes also increased in the current period with most of the increase resulting from significantly higher volumes on our Houston distribution system due in part to the previously mentioned higher Seabrook activity. As we have seen throughout 2019, the increase in Houston distribution volumes which move at lower rates than longer-haul Longhorn shipments was the primary driver of the decline in the average tariff rate we reported for our wholly owned crude oil assets.

Lower average tariffs earned on our Longhorn pipeline system, as a result of contract renewals in October of last year also contributed to the decrease in average rate between the periods. Volumes on Longhorn averaged a little over 280,000 barrels per day compared to 275,000 barrels per day in third quarter 2018, as we saw continued demand for spot shipments through August and volumes for July and August represented the two highest monthly volumes on record for Longhorn.

As anticipated, new capacity out of the basin came online during the quarter, narrowing the price differential between Midland and Houston in late August. However, Longhorn continued to operate at full capacity in September, due to incentive tariffs and our own marketing activities. Our profits from these marketing activities are reflected as crude commodity margin on our consolidated financials and the associated volumes are eliminated from the operating statistics quoted in the financial schedules that accompany our earnings release.

As a result of these marketing activities and incentive tariffs, we expect Longhorn to remain fully utilized for the remainder of 2019. And our forecasted throughput on the line for 2019 as a whole is approximately 274,000 barrels per day.

Operating expenses for the crude oil segment decreased $2.7 million due to lower environmental accruals and more favorable product overages which reduce operating expenses, partially offset by additional storage and dock fees paid to Seabrook. Crude oil and other operating expense was $3.6 million higher in the 2019 period, driven by the unrealized mark-to-market valuation of a basis derivative agreement with a joint venture co-owners affiliate as we discussed last quarter. Crude oil equity earnings decreased $3.4 million between periods, as lower BridgeTex equity earnings offset increases from our other crude oil joint ventures.

Saddlehorn equity earnings were higher, primarily as a result of new commitments received in connection with the recently announced expansion of the Saddlehorn Pipeline, as well as higher uncommitted volumes from incentive tariffs. Saddlehorn volumes averaged approximately 185,000 barrels per day in the quarter compared to approximately 75,000 barrels per day in third quarter of last year. And we now expect average volume on Saddlehorn for 2019 as a whole of approximately 155,000 barrels per day.

Seabrook equity earnings also increased driven by the higher volumes at Seabrook noted previously. These increases were more than offset by lower BridgeTex earnings. Higher average BridgeTex volumes of approximately 444,000 barrels per day compared to approximately 395,000 barrels per day in the same period last year were offset by our lower ownership interest in the 2019 period.

Consistent with our remarks regarding spot barrels on Longhorn, the narrowing differential between Midland and Houston has reduced demand for spot shipments on BridgeTex at our published spot tariffs. However, we are using new incentive tariffs to optimize throughput on the line with the rate BridgeTex earned on such movements driven primarily by the prevailing differential at the time. Based on utilization of these tools as well as commitments on the line, we currently project average 2019 volume for BridgeTex to be about 415,000 barrels per day.

Finally, to wrap up the discussion of our performance by segment, our Marine segment generated $32.4 million of operating margin in the current quarter, which is an increase of about $3.4 million over the 2018 period. Revenues were $2.1 million higher, primarily due to more tankage being available for contract storage due to the timing of maintenance work. These higher revenues were partially offset by higher property tax accruals in the current period as well as higher asset integrity spending. In addition, Marine segment other income was higher by $2.2 million dollars, as we recognized insurance proceeds on damage sustained from Hurricane Harvey.

Moving now to other variances to last year's quarter. Depreciation, amortization and impairment expense was basically unchanged between periods, while G&A expense increased $3.7 million in 2019, driven primarily by higher employee head count, due to the growth of our business.

Net interest expense was $4.2 million lower in the current quarter, primarily due to lower average debt outstanding and a slightly lower average interest rate. Our weighted average rate was approximately 4.6% during the third quarter and our average debt outstanding was $4.6 billion. As of September 30 long-term debt was $4.75 billion with $135 million of cash on hand. Gain on disposition of assets was $351.2 million lower in third quarter of 2019 as the 2018 period reflected the sale of a portion of our interest in BridgeTex as already mentioned.

Moving briefly to balance sheet metrics and liquidity, our leverage ratio for compliance purposes was approximately 2.8 times at the end of the quarter. We continue to expect to fund all of our current slate of growth projects with retained excess cash flow and debt while staying well within our long-standing four times leverage limit without any need to issue equity.

In terms of liquidity, we continue to maintain our multi-year credit facility with capacity of $1 billion as well as our $500 million , 364 day facility, both of which are currently undrawn.

I will now turn the call back over to Mike to discuss our guidance for the balance of the year as well as give an update on some of the growth projects we are working on .

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

Thank you, Jeff. As mentioned earlier, based on our strong third quarter results, we have increased our annual DCF guidance for 2019 by $40 million to $1.26 billion. The increased guidance includes our better than expected results in the third quarter as well as continued projected solid results for the remainder of the year.

As Jeff noted a few minutes ago, and consistent with our previous guidance, we expect demand for transportation at both spot tariff rates to decline significantly during the fourth quarter on the Longhorn and BridgeTex pipelines, as the basis differential between Midland and Houston has narrowed to a level well below the spot rates for both pipes. However, we do expect to move volume above the committed levels from both pipelines through our recent incentive tariff strategies and marketing initiatives to optimize utilization of these crude oil pipelines in a lower differential environment.

For our commodity activities, our outlook is very similar to where we stood last quarter. We still expect average net butane blending margins of roughly $0.55 per gallon for 2019 with about 90% of our fourth quarter activity hedged. Looking ahead to next year, we've locked in approximately three quarter of our spring 2020 margin with hedges of around $0.60 per gallon.

Last week we raised our quarterly distribution to a $1.02 [Phonetic] per unit, which is consistent with our plan to increase our annual distributions by 5% for 2019. With our updated 2019 annual DCF guidance of $1.26 billion, we now expect the 2019 full year coverage ratio of 1.35 times, which results in more than $300 million of excess cash flow for the year.

One of our objectives is to maintain a coverage ratio that insures rateability and safety of our quarterly cash distribution, especially as we enter a period of increased competitive pressure for long-haul crude oil pipelines in the Permian Basin.

Moving on to expansion capital. We continue to make progress on our significant construction projects. Most notably, we began commercial operations for our new East Houston-to-Hearne pipeline during mid-September. Magellan's refined products pipeline system in Texas has been constrained for quite some time and this project is step one for us to increase our capacity to meet demand for gasoline and diesel fuel in the Texas and Mid-Continent markets served by our system.

The next step of this strategy is expansion of our West Texas Pipeline system for which we are making excellent progress as well. The vast majority of write-away has been obtained and construction remains in high gear, with the mid-2020 start up still expected. The second phase of our new Pasadena joint venture marine terminal is nearing completion with the next 4 million barrels of storage and supporting dock and pipeline infrastructure expected to be in service during December.

Upon completion, we will have one-half of this facility built out and remainder discussions with industry players to seek additional commitments to further build out this site. Progress continues for additional storage and export capabilities at Seabrook which are expected to come online in early 2020. And we announced this more this morning, Seabrook's plan to build another 750,000 barrels of crude oil storage for an early 2021 start-up.

And of course, Saddlehorn announced plans to move forward with its full 100,000 barrel per day expansion since our last call, which is supported by long-term take-or-pay commitments. As a reminder, the expansion will cost a little over $100 million in total to Saddlehorn and will be achieved by adding incremental pumping and storage capabilities. The new capacity of 290,000 barrels per day is expected to be available in late 2020. Based on the progress of expansion projects under way, we now expect to spend $1 billion in 2019 and $400 million in 2020 to complete our current slate of construction projects. The 2020 spending estimate has increased by $250 million from the last estimates we provided. About $100 million of that increase simply relates to timing for spending previously expected to occur in late 2019 that shifted to the new year with remainder due to new projects that were recently launched .

We've already talked about the Seabrook and Saddlehorn expansions and we have also added a number of other attractive projects. A few of the new projects include additional long-term contracted crude oil storage in the Permian Basin and pipeline enhancements to accommodate new commitments in connections to our West Texas refined products pipeline. Beyond these capital projects, we remain focused on identifying additional opportunities for future growth with well in excess of $500 million of potential organic growth projects still under review.

Some examples of projects under development include significant supply optimization projects to our crude oil pipelines and a potential further expansion of our West Texas refined products pipeline with an additional open season to commence soon. As you've come to expect from Magellan, capital discipline remains a top priority for our company and is a critical attribute, especially in light of the current competitive marketplace. I also wanted to provide a brief update on the status of the Voyager project. After the close of our open season in August, it became apparent to us that we would only be successful with this project, if we could develop a more capital-efficient solution than what was originally proposed.

We have been actively working on this over the past few months with multiple parties and we have made significant progress. The project as currently designed will require a fraction of the capital that was originally contemplated and includes multiple value-adding components that have been negotiated with certain counterparties. But we still can't guarantee that the project will reach FID. We are significantly more optimistic that we will be successful with these new developments.

That now concludes our prepared remarks. Operator, we can open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Jeremy Tonet with JP Morgan. You may proceed with your question.

Jeremy Tonet -- JP Morgan -- Analyst

Good afternoon.

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

Hi, Jeremy.

Jeremy Tonet -- JP Morgan -- Analyst

Hi. The topic of buybacks, it has been really picking up in the marketplace recently. And while many MLPs are not really in a position where they could act on that, it seems like Magellan is uniquely positioned where this is -- you have a lot more flexibility to actually employ buybacks in a meaningful way in the near term. And so I was just wondering if you could update us as far as your capital allocation plus fee and how you think about that.

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

Well, we evaluate our use of excess cash frequently. And I think I've said before publicly, that we're not opposed to buying back equity. We, as we sit here today, don't have a plan to do that. But as we go forward, we're going to continue to evaluate that. I mean if you look at our excess cash for this year and kind of pairing up with what our capital forecast are for next year, they're fairly well balanced. So at least in this environment if unless something changed, I mean we would be essentially leveraging to a higher level in order to buyback equity.

I'm not going to say we would never do that. That's probably not the most likely thing we would do, but I think the point for you to take away from this is, that's under frequent evaluation here and we're not opposed to buying back equity, but at this point in time, we don't have any plans to do it.

Jeremy Tonet -- JP Morgan -- Analyst

Maybe just kind of building on that point. I guess, I mean MMP's leverage fall is much lower than most peers out there and it seems like asset sales is something that was under consideration at points in the past. So I'm wondering how those two items play into it. And also at the same time if you're targeting 6 to 8 times on growth projects, i'm wondering how you think about that relative to, if you view the MMP unit price as undervalued by a certain amount, and you can get a very big uptick as far as capturing that intrinsic value gap right off the bat, does that factor into your calculations as well, when you think about buybacks?

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

Well, obviously, we haven't authorized a program to do buybacks. If we had one, we would evaluate what we thought the intrinsic value of our equity was. I'm not going to comment on whether or not what that value is, i'll let the experts handle that. But with regards to your first part of the question, with regards to selling assets, we've mentioned before and it's still true today that we frequently look at our portfolio of assets and make assessments as to whether components or individual assets might make sense or might have more value to other parties than to us.

And so it would not be unusual for us to test the market if we've determined that assets fall into that category. We don't typically talk about that openly unless there is an actionable transaction, part of the reason we don't do that is because if we do choose to test the market, we're doing it from a position of strength. In other words, we don't need to sell assets, we don't have a problem to fix, it really would be a process to assess if a counter -- a potential counterparty can put more value on it than we think we can.

And so if we were to conduct the process there is a significant probability that we would not transact at the end, if we don't get numbers we like, and so that's why we don't like to talk about those in advance. I can tell you, if we do reach an agreement to sell something ,obviously we would let you know. And then there would be a discussion on the use of proceeds and we would just have to discuss that on a case-by-case basis.

Jeremy Tonet -- JP Morgan -- Analyst

That's very helpful. I'll stop there. Thanks.

Operator

Our next question comes from Tristan Richardson with SunTrust. You may proceed with your question.

Tristan Richardson -- SunTrust -- Analyst

Hey, good afternoon guys. Just curious, your comments on advancing discussions on Voyager and taking on a different form potentially, you noted several value enhancing components. Could you give us a sense of what would enhance value to your current Voyager project. And then also just to clarify, your 2020 outlook does not include any capital associated with this potential project. Is that right?

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

That's correct. And let me -- that's correct. And the second part of your question, our 2020 capital outlook doesn't include anything for Voyager. I'm hesitant to really get into the details of what those items are that we are incorporating into the Voyager project. And if the project advances, I think there'll be more clarity on that. But as you know, it's a very, very competitive market right now. So I'd rather not talk about those items.

I will say that in the course of pursuing a more capital-efficient solution probably, well, not probably, the biggest factor that's made this project now competitive is the dramatic reduction in capital that needs to be spent to make this happen, which as you might assume involves using substantial amount of pipe that's already in the ground. That's the primary factor that's going to make this competitive. The other elements are very important. But, we're not prepared to talk about those right now.

Tristan Richardson -- SunTrust -- Analyst

Great, helpful. And then you talked about project opportunities you're evaluating around supply optimizations for your crude business, should we think about that as activities closer to the wellhead or gathering infrastructure, curious what those projects could look like.

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

Yeah. Again, I don't want to get into too specific of what we're talking about there, again just given the competitive nature of the market right now. But, you're right, it's all up -- it's all upstream, our current origins and by definition that puts us closer to the wellhead, but I don't want to elaborate that on there further but what we're talking about specifically is our projects that will, if successful, lower the cost of supply into our pipelines and improve the security of supply into our pipelines.

Tristan Richardson -- SunTrust -- Analyst

Understood. And then just last one from me, just kind of curious about, you talked about marketing efforts to facilitate interstate[Phonetic] shipments, should we think about that as your basis derivative agreement or just kind of help us understand that a little better.

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

That's one tool. We've got others that are -- that we're using but that is one of them.

Tristan Richardson -- SunTrust -- Analyst

Okay, thank you guys very much.

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

Sure.

Operator

Our next question comes from Keith Stanley with Wolfe Research. You may proceed with your question.

Keith Stanley -- Wolfe Research -- Analyst

Hi, good afternoon. One follow-up on Voyager, just a clarification. When you say you're looking at a more capital-efficient project, can I clarify, is it still for a new pipeline whether repurposed or a greenfield or could it possibly involve partnering with entities that have already announced pipeline projects?

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

That's a loaded question. I -- it -- the nature of the project's the same, it's going to provide service from Cushing to Houston. And it does involve working with partners. But, I don't think I'm going to go any further than that.

Keith Stanley -- Wolfe Research -- Analyst

Okay. So, separate question, you mentioned potentially doing an open season soon for another refined products expansion project. Can you give any more color there or just what this might entail in terms of, I mean it's just the size of this project that you could look at potentially similar to East Houston-to-Hearne and the West Texas expansion or are we looking at something smaller?

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

It's smaller than that. It's still a material project, but it's smaller than that.

Keith Stanley -- Wolfe Research -- Analyst

Got it. Thank you.

Operator

Our next question comes from Shneur Gershuni with UBS. You may proceed with your question.

Shneur Gershuni -- UBS -- Analyst

Hi, good afternoon, everyone. I thought maybe i'd shift us away from talking about the capex project that you don't want to talk about. I was wondering if you can talk about DRA a little bit enterprise [Phonetic] you sort of mentioned about the high cost that it takes to run DRA and I'm kind of wondering how much DRA have you used to enhance your system over the last couple of years. And what's the volumetric change that, that would occur if you weren't going to use it and what would be the offset from an opex perspective?

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

Well, we use a substantial amount of DRA as I would suspect almost everyone does that has a full pipeline. The -- and the incremental cost as you increase the capacity of your pipes moves up significantly with the use of DRA. So, I guess, -- and typically, I don't want to talk about capacity increases on our pipe specifically, but it's not unusual or out of the ordinary to get 20% to 30% plus kind of capacity increases through a pipe with the use of DRA. So -- and maybe I can give you another number just to put in context, the total amount of our DRA spend across our entire pipeline system to this just wouldn't be crude oil pipes, it's going to be on refined products pipe too, is about $20 million year-to-date.

So that put maybe gives you a little context there. The flip side of that is, if you have a competitive environment, say, in the crude oil space where the throughput on your pipe declines, or the first barrels that you're not moving are your highest cost barrels, so the cost of operating the remaining barrels on your pipe drop dramatically also. So, you do get some margin improvement on existing barrels if you reduce the number of barrels you're moving on your pipe if you have to use less DRA and that sort of thing.

But if you -- if the market's there to keep your pipe full, at least up till now, I mean we've had the economics to maximize this DRA.

Shneur Gershuni -- UBS -- Analyst

I mean, is DRA kind of like a peaking capacity on pipelines essentially? And so there is a lot of concern about over build-out of the Permian, but there's also been a lot of use of DRA across the system, I mean, is it something as you sort of think about the basin holistically that 500,000 maybe even 1 million barrels of capacity can be -- can quickly come offline because of DRA and it sort of will keep spreads more normalized?

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

Well, first of all, I don't know what everyone else is doing, obviously but if everybody in the basin stopped using DRA, then yes. The total take away capacity would drop and I'm not in a position to quantify it, but 20% to 30% is probably not unreasonable if everybody is using it and I can't tell you whether everybody is using it or not, but that -- every pipeline though still has an incentive to use it.

I mean if they can capture the incremental barrels at a margin that is higher than their variable costs, they still have an incentive to use it. So -- but I don't think it's a situation where everybody's, because it's overbuilt, everybody is just going to cut back on their DRA usage in order to match the takeaway capacity of the production, it's still a very competitive environment, people are going to be trying to secure those incremental barrels that will require a DRA if they can get them.

Shneur Gershuni -- UBS -- Analyst

Okay that makes sense. And maybe shifting gears a little bit here. I was just wondering if you can sort of talk about refined product flows in general as kind of how you see it across your system. Are you seeing more wanting to hit the waterborne market or do you think that we're kind of in the same holding pattern is kind of where we have been, if there have been any shifts. I mean obviously you're building your export facilities as well too. Just wondering if you're kind of seeing the demand pick up for refined products at the water?

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

We haven't seen, I mean, in the last three to six months, we haven't seen a big step up in in interest for incremental refined products assets on the water. There's still parties very interested but -- and that's what we're seeing, I mean other people are building their own facilities. So I don't think that I wouldn't expect the demand for refined products to go to the water is declining.

I can tell you on the throughput on our legacy pipeline systems our Texas systems, our Mid-Continent system, refined product demand is very stable. In fact, if you just look at total -- if you take out all the growth projects from our results, and you take out the South Texas volumes which are again not necessarily ratable because they're a push from a refinery rather than demand driven.

If I take those out, year-to-date on total refined products, I mean, we are essentially flat year-to-date. Third quarter we were up by 1%. So it's very stable, our refined product demand in the -- in our pipeline systems, so, I hope that answers your question, right?

Shneur Gershuni -- UBS -- Analyst

No, no, it definitely does. And one final question. There were media reports about four or five months ago that you potentially evaluating selling some assets. Has that process concluded, still ongoing or is it just kind of a constant review that you, I think, you said to somebody else's prior question?

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

Well, as I said earlier, we don't really comment on any processes we may or may not be running, so I'm going to defer on that question, but I will tell you that we actively evaluate and again it's a conscious decision on our part not to talk about processes because it may unnecessarily set expectations in the market's mind as to what we're going to do when we really approach a process if we conduct one, as testing the market with no urgency to actually transact if we don't like the outcome, so apologize for not answering your question directly, but that's where we're at.

Shneur Gershuni -- UBS -- Analyst

Okay, perfect. I appreciate the color. Thank you, guys.

Operator

Our next question comes from Praneeth Satish with Wells Fargo. You may proceed with your question.

Praneeth Satish -- Wells Fargo Securities -- Analyst

Hi, good afternoon. I was just wondering if you could talk more about your crude marketing operations. I guess, how big do you envision this to become as we go out in time and then should we assume the marketing profits are all spread-based or is there like a baseline level of profitability that we should consider as well?

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

Well, generally speaking, the marketing margins are going to be differential based. I mean that's, so they can fluctuate. As far as how big this business can get, let me start by answering this that marketing on our own pipelines is not what we prefer to do, we would rather contract the space long term and we are still diligently attempting to do that, but in the absence of being able to secure contracts, we will market on the pipe. So, given that, I mean our goal is not to make the marketing business a large business. It could get large if we're unsuccessful in securing contracts, but that's not our goal.

Praneeth Satish -- Wells Fargo Securities -- Analyst

Got it. And then just on the new redesign Voyager project, if it advances, should we assume that the return is better than your typical 6 to 8 times EBITDA target because it sounds like you've got some -- there is some brownfield component to it or does it fall within the 6 to 8 times range?

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

If we advance, it's likely going to fall in the 6 to 8 times range, hopefully at the low end of that, but more importantly, it would be contracted at that return.

Praneeth Satish -- Wells Fargo Securities -- Analyst

Okay, got it. Thank you.

Operator

Our next question comes from Derek Walker with Bank of America. You may proceed with your question.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Good afternoon. Mike, just a follow-up on some of the refined products dynamics. I think that during your formal remarks, you mentioned some of the short-haul volatility and I think you referenced gasoline and aviation, but can you just provide some color on sort of those dynamics and sort of how you see that playing out either to rest of this year and into 2020?

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

Well, I think the volatility we're talking about or have been talking about is on a small section of our pipe and that's what we call the South Texas pipes, which for more clarity is the pipes that run from Texas City up to the Houston Ship Channel essentially. So those pipes are sourced by the refiners in Texas City and the product mix that they choose to ship on the pipe remembering that they've got options to take product out on the water and other options that can be very variable where in one month they can choose to ship a significant amount of gasoline and less jet fuel in the next month, they can do the opposite.

So there is considerable volatility and unpredictability on that product mix and for that matter, there can be unpredictability on what the actual volume will be. If there happens to be an opportunity to put more on the water, they might do that but less on the pipe. So, that's where the volatility is. It affects our numbers because it's typically high volume, it's low rate, but it's high volume. So from a financial perspective, it's not a big number, but from a volume perspective, it can skew our rate per barrel and that's why we call it out.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Thanks, Mike. Appreciate that, then maybe just one clarification. Can you talk a little bit more about the incentive rate that you have kind of baked in. I think you referenced to a 274 number for Longhorn for if you think it was the average for the year and 415 for BridgeTex, does that assume any contribution in 4Q from the incentive rates?.

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

Yes.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Can you give -- can you maybe just elaborate a little bit more on that, or is that sort of -- I assume it's less than what you have been seeing.

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

Well, as we sit here today, we expect Longhorn to be essentially full on volume through the end of the year. BridgeTex, it's uncertain. I mean there is a chance it could be full, but December is still a long ways away. And as you know, I mean, in this environment, you really don't know what's going to happen with uncommitted space on a pipeline till you have nominations which don't happen until the middle of the month, so predicting that is tougher. So, that's about as much color as I can put on it.

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks, Mike. Appreciate it. That's it from me.

Operator

Our next question comes from Chris Sighinolfi with Jefferies. You may proceed with your question.

Chris Sighinolfi -- Jefferies -- Analyst

Hi, Mike. How are you?

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

Good.

Chris Sighinolfi -- Jefferies -- Analyst

Thanks for the discussion this afternoon. I just have two questions. First, to follow-up, I guess on the marketing side of the business. Just a clarification question for me. Is that solely -- I know you've talked about this at the MAIC [Phonetic] conference as an opportunity for you, maybe to buttress some of the decline that happens with the narrowing of spreads, but I'm curious, there's other pipelines that competitors are going to drive into their own systems in Houston. There's also pipes that are destined for other locations. I'm just wondering if there is any element of this, which is to ensure that your Houston network remains full or is that not a concern?

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

Well, to the extent that we move barrels through our Houston network that originate on Longhorn and BridgeTex, which we do, but that's part of the -- that's part of the value proposition. If we can go out and secure barrels through our marketing arm to move barrels on the pipe, then they would also move through our distribution system. So, yeah, that's part of it. You're not -- I mean the distribution system is a lot of other barrels too which are from other pipes, but with regards to the volumes off the Longhorn and BridgeTex, absolutely.

Chris Sighinolfi -- Jefferies -- Analyst

Okay. I suspect, I just want to clarify. And then I guess separately, you mentioned several times in your prepared remarks just the increased competitive nature of the markets in which you operate and we've seen very strong performance from butane blending and the introduction of marketing margin perhaps and then I think it still remains somewhat uncertain as to what the FERC index rate review process will yield next year, but I guess when we roll that all together and think about a 1.2 or better coverage that you consistently note in the releases coming off of 1.35 for this year, Should we think -- I mean, I'm not trying to pin you into a distribution growth rate or anything like that, but as we think about it, should we just think about maybe those factors lead into a biased higher number initially in terms of maybe what the distribution growth might yield?

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

Well, I mean, to be clear, we haven't announced and for that matter, we haven't even determined internally what are our guidance is going to be for next year. But, -- so, I don't -- I'm not -- I can't answer the question as to whether you should buy set up or not. I will tell you that when we look at the crude oil space in particular, it's no surprise to anyone. The next year and probably for the next couple of years, it's going to be highly competitive which will create volatility in earnings and that will be factored into our distribution analysis, as we lead up to guidance.

Chris Sighinolfi -- Jefferies -- Analyst

Okay. Thanks a lot. I appreciate it.

Operator

Mr. Mears, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or your closing remarks.

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

Well, thank you for your time today. Thank you for your interest in Magellan and have a happy Halloween.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

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

Jeff L. Holman -- Chief Financial Officer, Senior Vice President and Treasurer

Jeremy Tonet -- JP Morgan -- Analyst

Tristan Richardson -- SunTrust -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

Shneur Gershuni -- UBS -- Analyst

Praneeth Satish -- Wells Fargo Securities -- Analyst

Derek Walker -- Bank of America Merrill Lynch -- Analyst

Chris Sighinolfi -- Jefferies -- Analyst

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