While it's not completely immune to the downturn in the energy market, Magellan Midstream Partners (MMP) was able to overcome its exposure to commodity prices to deliver record fourth-quarter distributable cash flow. That growth was primarily driven by new fee-based projects that went into service in 2015. Those projects, as well as additional fee-based ones under construction, are expected to drive future cash flow growth, enabling the company to continue to grow its distribution.

Magellan Midstream results: The raw numbers


Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Net Income

$207.1 million

$252.1 million


Distributable Cash Flow

$256.9 million

$248.1 million


DCF Per Unit




Data source: Magellan Midstream Partners, L.P.

What happened with Magellan Midstream this quarter? 
Hedging helped Magellan Midstream overcome its exposure to commodity prices:

  • Magellan's refined products segment operating margin was $203.8 million, which was $48.1 million below the year-ago period due to lower commodity prices. However, the company did see a $5.4 million increase in transportation and terminals revenue due to higher average tariffs, higher terminal revenue after the acquisition of the Atlanta terminal, and higher revenue from additional leased storage along its pipeline system.
  • The crude oil segment's operating margin jumped by $6.4 million to $94.2 million. This increase was fueled by the acquisition of the Houston crude oil pipeline, more shipments on its Longhorn pipeline system, and new leased storage contracts.
  • Marine storage operating margin slipped by $2.1 million to $29.2 million. This was primarily due to a one-time customer contract buyout that benefited the fourth quarter of 2014.
  • Magellan was able to overcome its segment level weakness primarily through commodity-related adjustments. In the fourth quarter, the company was able to capture a net $10.8 million gain, which more than reverses the net $22 million loss from these adjustments in the year-ago period. In addition, it recorded $7 million in cash distributions from non-controlled entities this quarter, reversing last year's $12.2 million loss in this category.
  • Those adjustments to cash flow enabled the company to generate distributable cash flow that was not only well in excess of net income but set a new quarterly record.

What management had to say 
CEO Michael Mears, commenting on the results, said that:

Despite the downturn in energy markets, Magellan generated record distributable cash flow for both the fourth quarter and the full-year 2015, driven by the benefit of recently completed expansion capital projects and continued strong demand for our fee-based refined products and crude oil pipeline and terminal services.

Magellan's underlying business is very strong, because the bulk of its income is derived from fee-based assets. Furthermore, it has been able to overcome its limited exposure to commodity prices by employing commodity hedges to smooth out cash flow. This combination provides a solid foundation for cash flow, which is poised to continue to grow because the company is currently constructing $800 million in fee-based expansion projects, many of which are expected to come on line by the end of this year. 

Looking forward 
With the bulk of its expansion projects nearing completion, Magellan Midstream remains confident in its ability to meet its goal to increase its 2016 cash distribution by 10%. It also expects to achieve that goal while maintaining a very solid 1.2 times distribution coverage ratio.

Beyond 2016, the company is targeting to grow its payout by at least 8% in 2017 while targeting a 1.2 times coverage ratio. That said, it could top its distribution growth expectations because it is evaluating more than $500 million in potential growth projects as well as acquisition opportunities that, if captured, could fuel even stronger distribution growth in 2017.