Magellan Midstream Partners, LP (MMP) Q2 2021 Earnings Call Transcript

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Magellan Midstream Partners, LP (MMP)
Q2 2021 Earnings Call
Jul 29, 2021, 1:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and good afternoon, everyone, and welcome to the second quarter 2021 earnings call. [Operator Instructions] As a reminder, this call is being recorded Thursday, July 29, 2021. It is now my pleasure to turn the call over to Mike Mears, Chief Executive Officer. Please go ahead, sir.

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

All right. Well, hello, and thank you for joining us today for our second quarter earnings call. 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. I would like to start by reviewing our asset portfolio activities in the second quarter. Last month, we announced that we had entered into an agreement to sell our independent terminals network for $435 million.

We have not floated an EBITDA multiple related to this sale, but we do view the sales price to be attractive and exceeding the net present value of our future expectations for these assets. This transaction will close once regulatory approvals have been received, which we hope will be by the end of the year. As a reminder, the independent terminals sale is additive to the $270 million already received from the sale of a partial interest in our Pasadena marine terminal joint venture that we announced and closed during April. As discussed on the last earnings call, we were able to monetize a portion of our ownership position in the terminal at an attractive price while retaining a meaningful position in the strategic refined products export facility. In addition, we have the opportunity to participate in any potential expansions of the Pasadena facility in the future. So while Magellan has not historically been a seller of significant assets, we do regularly review our asset portfolio for opportunities to create value through capital rotation. With our strong balance sheet, we are in the fortunate position of only transacting if we deem it in the best long-term interest of our investors, which has been the case with both of these announced sales during the second quarter. Moving to our earnings that we announced this morning.

We are pleased that Magellan generated another quarter of strong financial results, exceeding our previous EPU guidance by a notable amount. The outperformance was driven by a few key items, which included higher refined product shipments in part from additional volumes on our recently expanded Texas pipeline segments, increased commodity prices have benefited both our fractionation activities and the value of our product overages and the timing of certain expenses with lower expenses incurred in the current period that we now expect to occur later this year. Our CFO, Jeff Holman, will now review a few highlights from our second quarter financial results, then I'll be back to discuss our outlook for the year before answering your questions.

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

Thanks, Mike. First, let me mention that, as usual, I'll be making references to certain non-GAAP financial metrics, including operating margin, distributable cash flow, or DCF, and free cash flow. And we have included exhibits to our earnings release that reconcile these metrics to their nearest GAAP measures. Earlier this morning, we reported second quarter net income of $280 million compared to $134 million in the second quarter of 2020. Adjusted earnings per unit for the quarter, which excludes the impact of commodity-related mark-to-market adjustments, was $1.38, which, as Mike pointed out, exceeded our guidance for the quarter of $1.15. DCF for the quarter of about $268 million was 28% higher than second quarter 2020, primarily due to improved refined products demand and commodity margins compared to the pandemic-driven lows of the prior year, partially offset by lower crude oil revenue following the expiration for several higher-priced contracts on Longhorn in late 2020. Free cash flow for the second quarter of 2021, which includes $270 million on proceeds from the sale of a partial interest in our Pasadena marine terminal joint venture, was [$506] million, resulting in free cash flow after distributions of $277 million. A detailed description of quarter-over-quarter grant is available in the earnings release we issued this morning. So as usual, I'll just touch on a few highlights and overall themes of our quarterly performance.

But first, let me note that as a result of the pending sale of our independent terminals, the results of operations from those assets, which were previously included within the results of our refined products segment, have now been reclassified as discontinued operations for all periods. So starting with our refined products segment. Second quarter operating margin of $267 million is approximately 63% higher than the 2020 period. Our refined products business naturally benefited from the recovery in travel, economic and drilling activity in 2021 as well as from an improved commodity price environment compared to the pandemic lows experienced during the second quarter of 2020. In addition, growing volumes from our recent Texas pipeline expansion projects contributed to the year-over-year increase.

Total refined transportation volumes, including both our base business and our recently completed growth projects, were up more than 30% relative to the prior year period with significant increases in gasoline, diesel and jet fuel and on an absolute basis, represented a quarterly record for our system, underscoring the ongoing importance of our assets, the safe and reliable delivery of the essential fuels in the markets we serve. Product margins increased about $38 million compared to the second quarter of 2020 primarily due to more favorable mark-to-market adjustments compared to the 2020 period as well as higher gas liquids blending volumes as a result of improved blending opportunities. Turning to our crude oil business. Second quarter operating margin was approximately $106 million, down 17% from the second quarter of 2020 mainly due to lower average tariffs and lower average storage rates. Volumes on Longhorn averaged about 260,000 barrels per day compared to 270,000 barrels per day in the second quarter of 2020. As we've previously discussed, we had some Longhorn commitments expire in late 2020. While the resulting decrease in third-party shipments has been largely offset by volumes related to our affiliate marketing activities, the margin we realized on those activities is more reflective of the prevailing differential between the Permian Basin and Houston, which is currently well below the tariff we have been earning on the previous contracts.

As a result, our average realized rate per barrel has declined as we had anticipated when we initially provided guidance for the year. Volumes on our Houston distribution system increased versus the prior year period, primarily just due to higher year-over-year refinery utilization driven by demand recovery with this increase in volume offset by lower average rates. As a reminder, although we often see volatility in our HDS volumes between quarters, those volumes grew at significantly lower rates than longer-haul Longhorn shipments, which means that their impact on our reported volumes and average rate is much greater than their impact on our actual revenues. Storage revenues declined primarily due to the 2020 period benefiting from increased short-term storage utilization at higher rates as a result of the strong carry in the market at that time. Moving on to our joint ventures. BridgeTex volumes were approximately 315,000 barrels per day in the second quarter of '21 compared to nearly 355,000 barrels per day in 2020, primarily due to a decrease in uncommitted shipments in the current quarter. Saddlehorn volumes increased to approximately 220,000 barrels per day in second quarter '21 compared to just over 165,000 barrels per day in the 2020 period, primarily as a result of our recent pipeline expansion, which, as you'll recall, was supported by additional commitments from our shippers. So as you can tell from my remarks, we continue to enjoy the benefits of long-term commitments and credit-worthy counterparties on our crude oil pipelines with our customers continuing to meet their obligations. Just a few other quick notes on our year-over-year results. G&A expense increased between periods primarily as a result of higher incentive compensation costs, reflecting our strong results year-to-date.

Additionally, we had higher benefit costs in the current quarter primarily related to higher medical claims. Nonoperating and other expense was unfavorable due to amounts recognized in the second quarter '21 related to certain legal matters. While we're not in a position to discuss details of those matters at this time, I will note that these legal matters are relatively unusual for our business and not expected to be recurring, which is why we've recorded them below operating profit. Gain on disposition of assets was approximately $70 million, following the sale of a partial interest in our Pasadena marine terminal joint venture in second quarter 2021. Net interest expense decreased primarily due to the absence of debt repayment costs incurred in 2020 when we retired notes due in early 2021. As of June 30, the face value of our long-term debt outstanding was $5 billion with a weighted average interest rate on that debt of about 4.4%. Finally, as mentioned earlier, the results of our independent terminals are now reflected in discontinued operations due to the pending sale, which we expect to close sometime later this year or early next.

The income from those assets increased between periods partly due to improved volumes as compared to the pandemic-affected 2020 period. In addition, a significant portion of the operating margin from these assets is driven by commodity-sensitive activities that can be volatile from period to period. And the stronger commodity environment during 2021 favorably impacted the results from these assets in the form of higher liquids -- gas liquids blending process and more favorable product overages, which reduced operating expenses as well as favorable unrealized noncash mark-to-market adjustments. These assets, most of which are located along the Colonial Pipeline, also saw a net benefit from the temporary shutdown of Colonial during the second quarter. Of course, the income from discontinued operations line on our income statement does not reflect the maintenance capital associated with these assets. While we have not disclosed either an EBITDA or cash flow multiple for the sale of these assets, and indeed, have certain disclosure limitations in the sale agreement that limit just how much we can say about it, we remain very pleased with the value in terms of the transaction and believe it will result in increased value for our unitholders in the coming periods.

Moving on to capital allocation, balance sheet metrics and liquidity. First, in terms of liquidity, we continue to have our $1 billion credit facility available to us through mid-2024 and had approximately $258 million of cash on hand at the end of the second quarter. Our leverage ratio at the end of the second quarter was approximately 3.3 times for compliance purposes or 3.6 times excluding the gain we realized on the sale of part of our interest in Pasadena. And finally, with respect to capital allocation, I'll reiterate that we remain focused on delivering long-term value for our investors through a disciplined combination of cash distributions, capital investments and equity repurchases. During the second quarter, we repurchased approximately 1.7 million units at an average purchase price of $47.77 for a total spend of approximately $82 million, bringing the cumulative amount of units we purchased since early 2020 to 7.3 million units for just under $360 million. Of course, as we are always careful to note, the timing, price and volume of the unit repurchases will depend on a number of factors, including expected expansion capital spending, free cash flow available, balance sheet metrics, legal and regulatory requirements as well as market conditions and the trading price of our equity.

And to that point, I'll further note that as a result of the negotiations surrounding our recent asset sales, there have been significant amounts of time in the two most recent quarters during which we've been in possession of material nonpublic information. And so we've been unable to conduct unit repurchases within the safe harbor rules governing our 10b-18 plan. But subject to all those aforementioned caveats, we continue to see unit repurchases as an important focus of our ongoing capital allocation efforts. So with that, I'll turn the call back over to Mike.

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

Thank you, Jeff. As part of this morning's earnings release, we also reiterated our expectation to generate annual DCF of $1.07 billion during 2021. This guidance assumes contributions from the independent terminals through the remainder of the year, given the uncertain timing of the sales transaction. While we outperformed our guidance for the second quarter, some of the favorable impacts we enjoyed during the quarter are expected to be offset by higher costs during the second half of the year, in part due to expenses that shifted from the second quarter to later in the year as well as by lower commodity margins compared to the margins we expected when we increased guidance in April. We've now hedged approximately 80% of our gas liquids blending for the fall season.

Blending margins compressed somewhat over the past few months, primarily due to higher costs for both butane and RINs, while future gasoline prices did not increase by a similar amount. As a result, we are now expecting an average margin closer to $0.35 per gallon for the year versus $0.40 previously announced. Additionally, we have also hedged about 80% of spring blending for next year as well at margins also around $0.35 per gallon. Turning to refined products demand. We expect refined product shipments to be in line with our previous estimates for the year, with total volumes still forecasted to be 13% higher than last year. By product, we expect total gasoline shipments to be 13% higher, distillate 10% higher and aviation fuel 25% higher than our 2020 volumes with overall current year refined product shipments still expected to be about 3% above the more normal demand year of 2019. Our estimates continue to project modest growth in demand associated with increased travel and economic activities as well as increased contributions from our recent Texas expansion projects, partially as a result of the customer recently completing a required connection that had encountered COVID-related delays.

We continue to see improvement in gasoline demand, especially during the peak summer vacation season. And we have also seen continued improvement in distillate and jet fuel demand. Our estimates expect the improved level of activity will remain with people returning back to work and school in our markets and no additional lockdowns related to virus variants or otherwise. On the subject of our refined products pipeline, I would like to briefly mention the midyear tariff changes that went into effect on July 1. As expected, we decreased the rates by approximately 0.6% in those markets subject to the FERC's index methodology, which historically have represented around 40% of our shipments. In the remainder of our markets, we increased the tariffs by an average of more than 4%, resulting in an overall average refined products midyear tariff increase of nearly 3%. I also want to mention that due to increased movements on our recently expanded Texas pipeline segment, which is not governed by the FERC, we expect the overall percentage of our shipments subject to indexation to decline through time with more volume being subject to market-based rate adjustments.

As Jeff mentioned earlier, we remain focused on delivering long-term value for our investors through a disciplined combination of cash distributions, equity repurchases and capital investments. Based on our $1.07 billion DCF estimate for 2021, we expect to generate distribution coverage of 1.17 times for the year, assuming the current quarterly payout and unit count. We intend to keep distributions flat this year with our forecasted DCF projected to exceed distribution payments by almost $160 million for the year. Concerning expansion capital, we expect to spend $75 million in 2021 and $15 million in 2022 to complete our current slate of construction projects. Although the numbers remain the same as last quarter, these estimates now include new projects to increase our biodiesel blending capabilities within the states of Kansas and Missouri. This additional project spending has been offset by lower costs associated with other projects that are nearing completion.

We also continue to assess additional attractive expansion opportunities to expand our service offering and generate incremental value for our investors, and we remain optimistic that additional projects with attractive returns will come to fruition, although most likely smaller scale than they have been in the past. Like always, we remain committed to Magellan's long-standing capital discipline and balance sheet strength. We expect to generate free cash flow after planned distributions and expansion capital expenditures of more than $350 million for the year. Further, the closing of the independent terminal sale add another $435 million to the free cash flow pool, all of which will be available for use consistent with our capital allocation priorities. Our capital allocation priorities for free cash flow after planned distributions remain great growth capital investments with attractive returns and equity repurchases. Special distributions continue to be an option, but they are not currently our preferred path. That concludes our prepared remarks. And operator, we will now turn it over to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Spiro Dounis with Credit Suisse.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, afternoon everybody. Mike, first question just on asset sales and state of play of that market today. It's been another fairly active year for you again and realize it's hard to predict what M&A looks like going forward. But just curious, is this a trend you think can continue at this pace? Or are you finding as you sort of prune these assets down little by little that remaining portfolio starts to look maybe a little too core for you to part ways with? And does it sort of lean you into maybe doing more of these joint ventures or optimizations that others have done as well? And if you could, just maybe opine on interest levels and M&A right now as we stand in the year versus earlier this year. Is it getting stronger, weaker, about the same?

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

Well, let me address your first question. I mean, we have been active in asset sales much more active than we've been historically. And that's been a process that we've routinely been engaged in is determining whether we have assets that are more likely to be more valuable to somebody else than we think their present value is to us. As we look forward, I don't want to comment specifically on anything we might do. But if you look at the assets we have sold, they've either been partial interest in joint ventures where we've retained an ownership or in the case of the marine terminals and the Southeast terminals that for reasons that are probably obvious, they're not really connected as part of a network on our refined product system or our crude oil system. So those are assets that are much easier to sell and not have any lingering negative impact on the remainder of the company. And you're right. I mean, if you look at the suite of our remaining portfolio, the number of assets that fall into that category are smaller than before we sold these assets.

Now that doesn't mean that we don't consider and evaluate, or we'll continue to consider and evaluate assets. But we're not in the business of selling everything we own either. So we'll make -- we make those decisions from a strategic standpoint also, not just the absolute amount we can get from a transaction, but also what potential consequences they would have for the rest of the remaining system. So I'll just leave it at that. And I think your second question was with regards to whether there's been an uptick in M&A. And I think the -- I mean, the short answer, at least from our view, is it's still relatively slow. Obviously, we've been active in selling assets. But as far as assets that are in the market that we're interested in, we haven't been very active. And I would anticipate going forward that it's going to remain that way, unless there's something that's very attractive to us and we think we can get at a reasonable price.

Spiro Dounis -- Credit Suisse -- Analyst

Got it. Very helpful. Second question, just on MLP and [Indecipherable] and some of the uncertainty around that. I guess to the extent MLPs could eventually be taxed at C-corps. Just curious from your perspective, is that an automatic trigger for you to convert to a C-corp? Are there other considerations to keep in mind?

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

Well, if -- clearly, if the MLP structure is no longer allowed, then yes, we will most likely convert. There's really no reason to remain a partnership without the tax advantages associated with it.

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

Yes. The one caveat being that in some permutations proposals, there's been discussion of transition periods that could be in the original back in the '80s legislation, I think it was a 10-year kind of transition period. So it's a long transition period. There'll still be decisions about timing and what makes the most sense, but that will just be based on, obviously, facts and circumstances of the rules around that, how people are looking through to the ultimate situation versus we see value and continuing to avoid double taxation for a number of years, etc. So that's the only nuance probably that we would have to work around.

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

Yes. And as you think about where we stand on that, I think three months ago, it looked like it was more likely than not we were going to have a requirement in new legislation to eliminate the structure. As we sit here today, it appears maybe it's a little less likely that it's going to happen. It's still a risk factor that's going to overhang the industry until there's some certainty. And as I said, I mean, it seems from week-to-week or month-to-month, the likelihood that something's going to change moves around quite a bit. So it's kind of difficult to make any kind of long-term planning with regards to that. But we think, at least at this point in time, it looks like perhaps that legislation is not going to require. It looks like that's died down a little bit. But as everyone knows, I mean, things can change quickly in Washington, but that's what it looks like at the moment.

Spiro Dounis -- Credit Suisse -- Analyst

Got it! Understood. I appreciate all the [Indecipherable] Thanks again guys.

Operator

Our next question is from Theresa Chen with Barclays.

Theresa Chen -- Barclays -- Analyst

Good afternoon. Thanks for taking my questions. First, Mike, I'd like to touch on the guidance reiterated, just in light of the beat this quarter and keeping it flat for that year. And I appreciate all the color around it. Just delving into this a little bit more related to the cost increases that -- or costs that were artificially suppressed this quarter moved after second half. How much was that? And what is that related to versus the lower expectations for butane blending in the fall now that you've hedged the bulk of it? And is there any other moving parts around full year guidance?

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

Well, let me kind of simplify it because there's obviously a lot of moving parts. Let me just talk about the material ones. I mean, first of all, I think there was some speculation that perhaps we have reduced significantly our refined product demand forecast for the remainder of the year. That hasn't happened. I can tell you we've tweaked it a little bit, our internal forecast. We've lowered gasoline a little bit. We've increased diesel. The net of those is a slight reduction, but it's not a material contributor to the change in our forecast. So for the most part, our second half volume forecast is very close to what it was back when we visited with you in our last earnings call. The big changes that are reduced in the second half to offset the overperformance in the second quarter is number one, the commodity margins, which are lower than what we had anticipated. As you know, as we mentioned in the call last time, we had not fully hedged the spring. And unfortunately, as time went forward, the margins compressed. And when we did reach the point of locking in the remainder of the volume, those margins came down. So that is one of the significant changes in the second half of the year.

The other is, as you mentioned, it's the cost, the timing of the cost. And I don't have the precise numbers here in front of me. I can tell you, one of the big items is on maintenance capital that just through the timing, not in any intentional way, but just through the timing of how these projects unfold, we significantly underspent our expectations for maintenance capital in the second quarter and the first quarter, quite frankly. And we're anticipating that we're still going to spend the same amount of maintenance capital by the end of the year as we originally planned. And so that has a negative effect on the second half of the year. So those are the two primary elements. Again, there's noise around a lot of different individual line items, but those are the big items right there.

Theresa Chen -- Barclays -- Analyst

And I guess switching gears to your pending sale, the independent terminals along the Southeast. How is the FTC process going there? And do you expect a second request related to this?

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

Well, we have not yet received a second request, and it's really hard for us to predict whether we will or not. The process is going well. I mean, we don't have any -- there hasn't been anything that's been raised from the FTC that's caused us any concern on this. But whether we get a second request and how long the process is going to take, we really don't have anything to comment on that at this point. We think we're going to have a successful approval at the end of the day. I think to us, it's more a question of when rather than if. But sometimes these processes go quick. Sometimes they don't. We don't know which one of them is going to be on this one yet.

Theresa Chen -- Barclays -- Analyst

Great. And lastly, I appreciate all the details you gave on the rates and the natural inflation exposure that many of your assets have. And as we look to 2022, given the current inflationary environment, can you just give us a sense of what your expectations are for total tariffs and fees increases midyear next year, given that we have a lot of the data as is? And can you remind us how much of your assets are subject to caps and collars versus those that are not?

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

Well, I can tell you that on -- so the index is going to be formula-driven. And I don't have what PPI is year-to-date, but it's very strong. And so we would expect that our index rates are going to be -- have a significant increase next year driven by the index and driven by PPI. What we do in the market-based rate locations, we haven't done that analysis. We typically wait until the spring and do a competitive analysis around our terminals to make a determination as to what those rate increases will be. I don't know what that will show yet. Obviously, in a high inflation market, we would probably be more inclined to increase those rates more than we would in a low inflation market. But I don't have numbers for that yet, and I won't have numbers.

We won't have a sense of that until we get into next year and start doing our planning for the tariff increases, which typically takes place in late spring. And as far as the percentage of our volumes that are subject or our revenue that's subject to index, I mean, right now, it's around 40%. But as I mentioned, as time goes on, we expect that percentage to decrease. And it's not because we're losing volumes in that market, it's because we're increasing volumes in markets that are not subject to the index, particularly in Texas, which are intrastate rates. And so as those volumes grow, then the percentage of our transportation revenue that's subject to the index will decline over time.

Theresa Chen -- Barclays -- Analyst

Thank you.

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

Alright, thank you.

Operator

And our next question is from Shneur Gershuni with UBS.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Hi good afternoon everyone. Mike, I was wondering if I can just go back to the conclusion of your prepared remarks. I just wanted to make sure I heard everything correctly. It sounded like a special distribution is something of a lower priority from a capital return perspective. And so if I understand correctly, it sounds like high-return brownfield capex opportunities is probably priority #1. But otherwise, opportunistic buybacks to help improve your payout ratios and improve your coverage ratio is kind of the preferred avenue of incremental returns of capital? Just kind of wanted to understand that at this point.

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

I think you framed it exactly right. I want to make clear that we're not saying we'll never do a special distribution. But when we look at the playing field right now, it's low on our priority list. And we're not planning on one at the current moment. So you're correct. High-return capital investments and equity repurchases are our top priority right now.

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Okay, perfect. And then second, I just kind of wanted to revisit the PPI question that Theresa just asked. When I sort of think about your business, I would imagine that this PPI stock impacts the overall cost of your business this year into next year and so forth. When I sort of think of your base cost structure versus your revenue structure, is it fair to conclude, even though not all of your revenue is tied to the regulated index that the revenue increase driven by PPI would be greater than anything that would happen on the cost side in terms of running your business?

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

I think that that's generally true. I mean, if you look at -- or I should qualify that by saying to date, that's been true. I mean, our largest cost on our pipeline systems are typically people and power. And we haven't seen cost increases on those two line items consistent with what PPI has been year-to-date. Now again, that could change going forward. But that's where we are currently. We are seeing cost increases particularly on maintenance projects and capital purchases, increases in steel costs and those sorts of things. So as we replace pipe, replace valves, do those sorts of things, we have seen significant cost increases. But we haven't seen it on our two biggest pieces. Now again, that's as of today. We'll have to see how that plays out going forward. But I think that's that on that one. Does that answer your question?

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Yes. No, it definitely does. I have a few more, but I'll go back into queue and respect the two questions.

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

Okay.

Operator

And our next question is from Jeremy Tonet with JPMorgan.

Joseph Robert Martoglio -- JPMorgan Chase & Co -- Analyst

This is Joe on for Jeremy. Wanted to start kind of digging in more on the capital allocation and, I guess, buyback specifically. You've talked about kind of like more regulatory certainty needed there, but also kind of completed $80 million or so in buybacks during the quarter. Kind of can that pace continue without more regulatory uncertainty? Or was that kind of like considering the asset sales also? And how are you kind of thinking about that in general?

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

Well, I don't want to comment specifically on the pace of the buybacks. But I will say, regulatory uncertainty has been an element in deciding when we execute and when we don't. And it will continue to be that way. I think at this moment, we think the regulatory uncertainty has died down a little bit. It's not gone away completely. If the proposed legislation in Washington continues on the course where it is right now where it doesn't look like this is going to happen, I mean, there's going to be a required conversion to a C-corp, then that puts us in a more comfortable position with regards to our equity pace. If that changes, that can affect that.

Joseph Robert Martoglio -- JPMorgan Chase & Co -- Analyst

Okay. That makes sense. That's helpful. And then also wanted to ask quickly on kind of the legal expense for the quarter. Do you mind expanding on what that was related to? And should we expect any continuing elevated legal costs? Or is that more onetime?

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

Well, what I will say, I don't want to talk about the specific cases involved. But there were multiple legal items that were all netted to the number you saw in the financial statements. It wasn't just one issue, and we expect those to be onetime deals. These are not recurring items. These are onetime resolution of lawsuits or other legal disputes that were resolved in the second quarter.

Joseph Robert Martoglio -- JPMorgan Chase & Co -- Analyst

Okay, thank you very much. Ill stop there.

Operator

Our next question is from Tristan Richardson with Truist.

Tristan James Richardson -- Truist Securities, Inc -- Analyst

Hi, good afternoon guys. Just a quick question on the rationalizing capacity in the crude world. I think you've noted that the contract portfolios and timing of expirations are always going to be a limiting factor. Can you talk about any progress on that front, either with peers or customers? But then also, I think you guys have talked in the past about looking at optimization opportunities that are outside the scope of doing something with a peer. Can you give us a sense of what that could look like?

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

Well, to the -- your first point, I don't have an update to give you. I can tell you we are actively and continue to actively look at opportunities. But I'm not in a position to give you an update on any developments there. As far as other optimization opportunities, and we've executed on a number of things to improve our cost profile. With regards -- if your discussion is specifically with regards to optimization around assets, again, I don't really have an update to give you. There's some things we're doing that are going to lower our costs, but they're probably not material things that are worth talking about at this point. So I guess the takeaway you should have here is this isn't something we have evaluated and put on a shelf. It's a very active process for us. And we do believe asset rationalization, especially in the Permian, would be a good thing if all of the relevant parties can find a way to create incremental value through such an action. And we'll continue to evaluate and pursue it.

Tristan James Richardson -- Truist Securities, Inc -- Analyst

Appreciate it, Mike. And just a quick follow-up. I think in the past, you've been asked about opportunities on the renewable fuel side. And I think you've talked about that there might be potential initiatives out there to pull that blending activity backward into the value chain so that, that would be more of an opportunity for Magellan. Just curious, is that something you guys continue to look at? Or are there potential updates there or maybe some case studies that we should think about?

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

Well, we're very active in that regard. I mentioned in our notes that we are adding biodiesel blending at some facilities in Kansas and Missouri. But we're doing a number of other things. We have started test movements of biodiesel blends in the pipelines that have been successful. We've got a number of areas that we're targeting to start doing particularly biodiesel blending at hub locations and then transporting it by pipe. I would caution you that it's probably going to be more of a gradual process rather than a systemwide process all at once. I would also tell you that it's -- in an ideal situation, it's going to be something that we can do with very low capital. So we're not going to be adding, hopefully, a lot of capital cost to do this. But it's evolving, and we're very positive on it. And we think we're on a path to be able to talk about it more in the future. But we are moving the ball on it.

Tristan James Richardson -- Truist Securities, Inc -- Analyst

Appreciate it. Thanks Mike.

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

Sure.

Operator

And our next question is from Keith Stanley with Wolfe Research.

Keith Stanley -- Wolfe Research -- Analyst

Hi good afternoon. I -- first, I just wanted to ask on refined products volumes. So you're sticking with the guidance for the year to be 3% above 2019 or normal levels. When I look at the first half of the year, you're already up 3% versus the first half of 2019. So this is probably overly simplified, but wouldn't that imply you're not really assuming any incremental recovery in volumes in the second half in the guidance and kind of assuming the same level of recovery in the second half of the year to be 3% above 2019 that you already saw in the first half of the year?

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

Yes. If you look at our volume forecast for the second half of the year, they're fairly consistent with what we actually saw in the second quarter. So on an absolute basis -- and it's different by products. But on an absolute basis, we're not expecting a tremendous volume growth from the second quarter of this year that just saw some tremendous growth. If you're comparing that to future -- I mean, past periods, you're still going to have in each of those quarters a growth percentage because those previous quarters were depressed. But just comparing what we're expecting for the third and fourth quarter versus the second quarter of this year, it's relatively flat. But again, that's still -- when we do the math, works out to about a 3% growth over 2019.

Keith Stanley -- Wolfe Research -- Analyst

Okay. That makes sense. Second question, I just wanted to clarify. I think you said 80% of spring blending is now hedged as well. If I'm not mistaken, it might be a little earlier than you typically do it. So just any thoughts on, I guess, why you decided to lock in more of the spring blending at an earlier point?

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

Well, I don't know that it's materially earlier than when we would have done it previously. When we -- as you might expect, knowing when the precise time to hedge and lock in a forward margin, there's some science behind it, and there's some art behind it. And these markets have been very volatile, as you can imagine, with butane prices and gasoline prices not necessarily moving in tandem and RIN prices being extraordinarily volatile. And so I really don't have another answer for you other than taking all those things into consideration, we felt it was appropriate to lock in the margins. And as with any hedging program, you can second-guess it after the fact. You're always subject to that. Whether you don't hedge and you made the wrong decision or you do hedge and you make the wrong decision, you have to make a decision. And when we looked at everything going forward into the spring, we just made the decision to lock that in. So I don't have any more detail on it than that.

Keith Stanley -- Wolfe Research -- Analyst

No, that makes sense. It's certainly been volatile. Thank you very much.

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

Sure.

Operator

And our next question is from Gabe Moreen with Mizuho.

Gabriel Philip Moreen -- Mizuho Securities USA LLC -- Analyst

Hey good afternoon, maybe if I could just follow up on Keith's question just in terms of -- can you just put into context sort of the RINs expense for this year relative to historical levels? And also whether you've hedged any of that exposure, I guess, for '22 at this point?

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

I don't have the number on what our actual expense is in front of me. It's -- I'm being told that the average is about $0.13 a gallon is what our cost is. But I don't know on an absolute basis what that works out to. We don't typically hedge the RIN independent of locking in the margin. So typically, what we do when we lock in the gasoline to butane margin, we also buy the RIN associated with that. So we're not exposed, at least on our hedged production, to the RIN price. But we typically don't hedge RINs beyond that on a speculative basis.

Gabriel Philip Moreen -- Mizuho Securities USA LLC -- Analyst

Got it. And then maybe if I can ask, there's obviously been a lot of media reports about smaller markets running out of various refined products due to a lack of truckers and whatnot. I'm just wondering to what extent that may or may not be impacting any of your markets? And I guess whether there's any opportunity for some smaller projects to come out of that?

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

Well, we have -- we've seen some stress on supply is in the Rockies, in the Front Range, Denver Front range. And part of that is just due to the rapid recovery in demand. Part of that is due to the conversion of the Cheyenne refinery that's taken supply out of the market. We have already initiated some projects to get more supply out there. We're evaluating additional projects to get more supply out there. We think we're going to have a few of them. They are going to -- that we're going to be able to execute on. These aren't transformational projects. They're maybe adding 5,000 barrels a day and that kind of range to the market, but they're highly -- but they're relatively low capital, and they're high-return projects for us. So we're looking at that. We're also looking at some rail capability to rail more barrels into the market into some of our facilities. So there are opportunities there. They're not quick fix kind of opportunities. They do require time and capital investment. But we do anticipate we're going to have more throughput in some high-return projects to supply more barrels to the front range.

Gabriel Philip Moreen -- Mizuho Securities USA LLC -- Analyst

Got it. Thanks Mike.

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

Sure.

Operator

And next question is from Michael Lapides, Goldman Sachs.

Michael Jay Lapides -- Goldman Sachs Group, Inc -- Analyst

Hey guys, thanks for taking my question. Just a quick one here. On the growth capex outlook for next year, that's a pretty small number. Is that a placeholder at this time of the year, meaning a little more than halfway through '21? Or is that a hey, we've gone to our customers. We've kind of talked it through, and there really an awful lot they need from us from an infrastructure standpoint, and it kind of is what it is? And is it too early to even have a view on kind of what that could be for 2023? Or are you getting indications now already for 18, 20 months out?

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

Good question. I mean, first of all, the $15 million number, just to be clear on what that is, that is on projects that have already been approved and are under construction. And so that $15 million is just what's rolling over in the next years to finish those projects. We do anticipate we're going to have incremental projects approved before the end of this year and into early next year so that, that number will come up. I think to be realistic, it's hard to see based on what we have in front of us that, that number for a full year for 2022 would be above $100 million. But we could get up -- if a lot of these projects we're working on actually happen, we could get up close to that number for the year. And it's too early for us to forecast anything for '23.

Michael Jay Lapides -- Goldman Sachs Group, Inc -- Analyst

Got it. Thanks Mike. Much appreciated.

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

Sure.

Operator

And Mr. Mears, I'll turn the call back over to you.

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

All right. Well, thank you, everyone, for your time today and your interest in Magellan, and we will talk to you soon.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

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

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

Spiro Dounis -- Credit Suisse -- Analyst

Theresa Chen -- Barclays -- Analyst

Shneur Z. Gershuni -- UBS Investment Bank -- Analyst

Joseph Robert Martoglio -- JPMorgan Chase & Co -- Analyst

Tristan James Richardson -- Truist Securities, Inc -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

Gabriel Philip Moreen -- Mizuho Securities USA LLC -- Analyst

Michael Jay Lapides -- Goldman Sachs Group, Inc -- Analyst

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