Nov 2, 2010
Executives
Don Wellendorf – President, CEO John Chandler – SVP, CFO Mike Mears – COO Paula K. Farrell – IR Director
Analysts
Michael Cerasoli – Goldman Sachs Darren Horowitz – Raymond James Jeremy Tonet - UBS Elvira Scotto – Credit Suisse Ross Payne – Wells Fargo Securities Sharon Lui – Wells Fargo Securities Barrett Blaschke – RBC Capital Markets Brian Zarahn – Barclays Capital
Operator
Good day, and welcome, everyone to the third quarter 2010 earnings results conference call for Magellan Midstream Partners. This call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Don Wellendorf.
Please go ahead, sir.
Don Wellendorf
Thank you. Good afternoon.
Welcome to our third quarter conference call. Here with me from the company are Mike Mears, our COO, John Chandler, our CFO, Paula Farrell, who is our Investor Relations and a number of other people.
During this call, Magellan management will make forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding some of the factors that could impact the future performance of Magellan.
You should form your own opinions about Magellan's future performance based on the risk factors and other information discussed in our filings with the SEC. With that out of the way, I want to begin with a few highlights about this quarter.
Magellan reported third quarter EPU of $0.51. If you eliminate from that number the impact of NYMEX mark-to-market adjustments and lower of cost of market adjustments associated with both butane blending and El Paso-related sales activities, the result is an EPU of $0.54.
That exceeds our $0.48 guidance we provided back in early August, that also assumes no NYMEX mark-to-market adjustments or [inaudible] cost of market adjustments. Factors that performed above our earlier expectations, include higher distillate volumes and rates on our refined product systems to better-than-expected performance by the BP crude system we just acquired, and by Longhorn, and higher inland terminal throughput and product gains.
Of course, as I just alluded to, on September 1, we closed our acquisition of 7.8 million barrels of crude storage in Cushing, Oklahoma and more than 100 miles of crude and refined products pipeline in the Houston area for $289 million plus approximately $55 million for tank-bottom inventory. This transaction makes Magellan one of the largest owners of crude storage in the Crushing hub, and significantly moves forward our strategy of turning out East Houston facility into a key distribution hub for crude oil in the Gulf Coast Area.
Our first month of ownership of these assets produced results above our acquisition economics, and customer interest in these assets is very strong; it’s the same phenomenon that we’ve seen with other assets we’ve acquired from Majors. Once the assets are in the hands of a service provider like us, a lot of people begin to express interest.
In late July, we announced our plans to build an addition of 1.5 million barrels of refined product storage at our Galena Park, Texas facility. We will jointly own 800,000 barrels of this new storage with a third-party on a 50/50 basis.
And the remaining 700,000 barrels will be 100% owned by Magellan. The new tanks are expected to be operational beginning in late 2012, with Magellan’s capital expenditures estimated to be around $65 million.
In early September, we announced plans to build in conjunction with a private investor group, additional 2.25 million barrels of crude storage in Cushing, supported by long-term customer contracts. Magellan’s capital cost for this project is $25 million and this brings our total new crude tank construction in Cushing’s to 4.25 million barrels.
The funding growth project and others, in mid-July we conducted a very successful sale of 5.8 million common units, providing net proceeds of $258 million. We followed that up with a very favorable price, $300 million public debt issuance in early August.
This leaves Magellan with probably the lowest overall cost of capital among our peers, a very strong balance sheet with a debt-to-EBITDA ratio of about 3.6 times, and at this point, we have no floating-rate debt at all. And then finally, on October 20, we announced that we are raising our distribution relative to the third quarter which leads 5% higher than the distribution paid relative to the third quarter of 2009, and this keeps us on track to meet our goal of increasing our 2010 annual distribution by 4%.
So all in all, it’s been another solid quarter for us. I’ll talk more about what we see for the rest of the year, and Mike will give you a Longhorn update in minutes.
But first, John is going to provide the details on MMPs third quarter compared to the same period in 2009. John.
John Chandler
Thanks, Don. Before I begin discussing specific business unit performance, I do want to mention that I will be commenting on the non-GAAP measure operating margin, which is simply operating profit before G&A expenses and depreciation.
A reconciliation of operating margin to operating profit was included in our earnings release this morning. Management believes that investors benefit from this information because it gets to the heart of evaluating the economic success of the partnership’s core operations.
As was noted in our press release this morning, we had higher net income, higher operating profit, and higher earnings per units this quarter as demand continues to rebound on a petroleum pipeline system, and as profit from our historical investments continue to materialize. Our operating profit was $82.3 million for the quarter versus 74.8 million for the 2009 period, while net income was 56.6 million for the current period versus 54.2 million for the 2009 period.
As usual, I’ll go to the operating margin performance for each of our business line, then discuss variances and depreciation, G&A, and interest to come to an overall explanation of the variances in net income. So, first let’s look at operating margin which is up 13.9 million operating results 12% versus the same period last year.
Our petroleum pipeline systems operating margin was up 15.9 million versus the same period last year, going from 94.8 million to 110.7 million this period. Approximately one half of this increase came from increased activity on Longhorn, and our new pipeline assets acquired from BP on September 1.
Looking at the details of that, our transportation and terminals revenues were 27.7 million more than the same period last year for the pipeline. Approximately 2/3 this increase came from increase tariff revenues, which were driven both by higher shipment volumes and additional revenues from the acquired BP pipeline systems.
Shipment volumes for the quarter were up 21.8 million barrels, or 29% higher than the third quarter of 2009. If you factor out the BP pipeline assets that were acquired on September 1, total volumes on our other assets actually increased by 11.3 million barrels or 15%.
Of this 11.3 million barrel increase, Longhorn contributed 2.3 million barrels as the system ramped up to approximately 30,000 barrels a day of third-party throughput during the quarter, and that is not including our buy-sell activity on the system, which if you include that activity, the throughput was a little over 40,000 barrels a day. Excluding Longhorn, the volume of the remainder of our system increased 9 million barrels with diesel fuel shipments increasing by approximately 6 million barrels or 25%, and gasoline shipment increasing 3 million barrels or 7%.
Those volume increases were the results of an improving economy, resulting in more demand for petroleum products as well as volume increases coming from the completion of our Motiva Connection project with this related volume [inaudible] starting in September. I know I’ve mentioned several numbers here, but the important point to pick up is that when you factor out Longhorn and the BP pipeline asset, we still had near-record shipment volumes for our remaining pipeline systems for the quarter.
Rates were really not a factor this quarter in our revenue variance. On the surface, the realized tariff rate of $1.16 per barrel shipped was down $0.09 a barrel versus the third quarter of 2009.
However, when you take out the BP pipeline asset, whose volumes move over short distances at very low rates, the average realized rate for our base pipeline system when excluding BP with $1.26 per barrel versus $1.25 last year. And although the preferred PPI adjustor required that we adjust our index market rates down by 1.3% on July 1, we actually increased an equal number of competitive market rates by 2%, thereby resulting in a small increase in our overall tariff rates realized this quarter.
The remaining 1/3 of our pipeline revenue increases came from transportation related revenue as a result of power system leased storage revenues, due to additional tankage being brought into service during the quarter, higher capacity lease revenues which are essentially rentals by shippers of small segment of the pipeline. These revenues increased due to higher rates in increased pipeline capacity being leased, higher additive revenue as a result of higher pipeline throughput, higher terminal fees, due to impart to increased activity at our East Houston terminal, and higher ethanol loading and unloading fees due in part to increased blending and a few new terminals now handling ethanol in our system.
Operating margin for commodity-related activities for our pipeline was down $6.2 million versus the third quarter of 2009, going from 15.4 million in income last year to 9.2 million in income this quarter. Approximately $13 million of this negative bearing was due to changes in mark-to-market activity for NYMEX hedges related to periods other than the third quarter of 2009 or 2010.
The third quarter 2009 results had mark-to-market gains for hedges related to future period while the third quarter of 2010 results had mark-to-market losses for hedges related to future periods. Now, offsetting this negative variance with a positive $8 million variance related to lower cost market adjustments.
This quarter benefited from increasing product prices that resulted in the reversal of a lower cost-to-market inventory write-down that occurred in the second quarter this year. This is compared to our lower cost of market write-down of inventory that occurred in the third quarter of 2009 due to falling prices last year.
Now, these out-of-period NYMEX and lower cost-to-market adjustments create a lot of noise, but if you take that noise out it reveals that we made more this quarter than the same period last year from our commodity-related activity that were settled during the quarter. This can be seen by combining our actual realized physical profits, the impact of the related realized NYMEX hedges, and eliminating any benefit or cost associated with lower cost or market adjustments that impact the third quarter activity.
Approximately 75% of the improved profits from our settled activities that are results of higher butane blending profits, largely due to incremental volumes with the remaining due to higher Longhorn buy-sell profits at the Phoenix and El Paso prices versus Gulf Coast prices have improved. In our distributable cash flow schedule attached to our earnings release, you will note we include a line in titled Commodity Related Adjustments.
This line, removes the out of period mark-to-market and lower cost-to-market noise. If you add this line to product sells revenues, less product purchase lines on our income statement, you will see a meaningful increase in distributable cash flow from the commodity-related activities.
Going to pipeline expenses, our petroleum pipeline expenses were 5.9 million more than the same period last year. The increase in expense was primarily due to higher power cost, as a result of increase throughput on the pipeline system, higher property taxes, mostly due to a favorable property tax adjustment that occurred in the 2009 period, and higher personnel cost, largely related to higher annual and long-term incentive compensation expenses due to our strong performance this year.
New expenses related to the BP pipeline assets were not a material part of the variants for the quarter due to the short period of ownership. Now going to our terminals, our operating margins for our petroleum terminals group was up by $2.5 million or 9% versus the second quarter last year with increases at both our storage and our inland terminals.
Our terminal revenues were $8.9 million more than the same period last year with about 70% of this increase coming from our storage terminals where we experienced increased revenues at all of our facilities, as well as new revenues from the recently-acquired storage that we acquired from BP in Cushing. Approximately 2/3 of the storage terminal revenue increases came from storage rate increases and increase and increased axillary fees, most specifically at our Galena Park and New Haven terminals where there have been many contracts coming up for renewal, allowing us to negotiate new and higher rates.
The remaining 1/3 of our storage revenue increases came from new tankage being put into service, and from acquired tankage. In fact during the quarter, we leased an incremental 2 million barrels of storage versus the third quarter of 2009; 1.7 million of which relates to the acquired BP Cushing storage, and another 3,000 in new tankage which relates to tanks that we acquired adjacent to our Marrero facility in October last year.
Our inland terminal revenues represented about 30% of the terminal revenue increase. Inland terminal revenues increased both as a result of incremental throughput and as a result of higher fees earned for ethanol blending.
Throughput increased this quarter by 1.9 million barrels, or 7% and was driven by higher gasoline and diesel throughput. Because of ethanol blending and the handling of some new grades of product at our terminals, we have picked up incremental throughput that was previously at competing terminals.
Our net product margin for our terminal segment was up about 400,000 more than the same period last year, and our terminal expenses were about 6.7 million more than the same period last year; largely due to higher pipeline integrity expense, higher tank maintenance expense, and to a lesser degree, higher environmental expenses and higher expenses related to acquired assets. The higher pipeline integrity expenses are related to DOT required testing on pipes tied our Galena Park terminal, which was planned and part of our integrity management program testing cycle.
The higher tank maintenance expense coincides with the fact that we’ve taken more tanks out of service this year for inspection, which was planned and is part of our API 653 inspection cycle, and the higher environmental expense relates to some remediation cost identified at Galena Park related to a historical contamination. Now, going to ammonia, our ammonia operations generated operating market that was 4.2 million less than the same quarter last year; going from a 3.4 million loss last year to a 7.6 million loss this quarter.
Transportation revenues for the pipeline were down 3.3 million from the same period last year as a result of shipment volumes decreasing 105,000 tons. During the second quarter of this year, we began hydro testing a significant section of the pipeline resulting in the line being down a majority of the third quarter.
This was included in our forecast as part of our increased integrity-testing program. This phase of testing has come to a close and a majority of the pipeline has been returned to service in the fourth quarter.
By the end of the year, we will have tested about 75% of the line and should complete our efforts next year. The additional testing plan for next year is not expected to substantially impact our customer’s ability to ship products such as what was seen this year.
Our expenses for ammonia were about 900,000 more than the same period last year, mostly due to an increase integrity spending. So therefore in summary, operating margins for the quarter increased 13.9 million going from 119.4 million last year to 133 million this year.
Stepping down a net income, our depreciation was up 2.8 million due to capital additions and acquisitions. G&A expenses were up 3.6 million as a result of higher equity-based incentive compensation approvals and higher bonus accruals due to our strong financial performance this year.
And interest expense net of interest to income and capitalized interest was 4.6 million higher, primarily as a result of $253 million of additional average borrowings outstanding for the quarter. And to a lesser degree, due to higher average rates, as a result of fixing 250 million in debt that had been previously been swapped to floating, which we did in the second quarter of this year.
We used the incremental net borrowings along with 258 million in net proceeds from our July equity offerings to pay for the BP asset acquisition and for about $250 million in additional organic capital investments and acquisitions that have been made over the last year. So therefore in total, MMPs net income increased 2.4 million, going from 54.2 for the third quarter of 2009 to 56.6 million in the third quarter of 2010.
I’ll now turn the call back over to Don to discuss our capital spending and earnings guidance for the remaining of the year. Don.
Don Wellendorf
Thanks John. Moving to maintenance capital expenditures, our spending during the third quarter was $12 million and we continue to project our full-year maintenance capital spending to be about $45 million.
For our growth capital estimate for this year, we’re sticking with the $565 million estimate that we gave at the end of the last quarter. That number covers acquisitions announced to date and organic projects currently underway.
Another 125 million of spending, primarily in 2011, will be needed to finish these projects. And our growth capital comments will not be complete without our routine notice that our potential to grow the company certainly doesn’t end after we finish the projects we are currently working on, even though the forecast we provide include only those projects.
It’s simply to inaccurate to try to predict future acquisitions, organic growth to the point where we would include them in our forecast. However, I can report that we continue to have an excess of $500 million of additional organic growth projects in earlier stages of analysis and we believe that we will be able to move forward on a number of these potential projects over time.
And of course, we remain in the hunt for acquisitions. As I mentioned earlier, we are armed with a very competitive cost to capital and ample balance sheet capacity.
Now, going to turn the call over to Mike for a minute so he can give you the latest information on Longhorn, Mike.
Mike Mears
Thanks, Don. Longhorn throughput increased significantly in the third quarter with the startup of deliveries in Northern Mexico, and other increased third-party shipments.
We’re now projecting Longhorn utilization to be about 30% for the full year of 2010, as volumes have been increasing as the year unfolds. We moved about 17,000 barrels a day in the second quarter, and in the third quarter we moved approximately 40,000 barrels a day.
Another good trend is the majority of the volumes moved in the third quarter were third-party volumes. Only about a third of the volumes removed under our own name.
For the rest of the year, we are projecting growth margins of about $0.02 a gallon, for volumes moved in our own name and sold in El Paso. These assumptions generate a negative distributable cash flow contribution for 2010 for Longhorn of $27 million, which is an improvement over the negative 35 million estimates we provided last quarter.
As we have mentioned before, there continues to be substantial interest in shipping refined products on Longhorn, and we are actively in discussion with additional potential shippers. Our open season to determine firm customer interest in transporting crude oil on Longhorn from West Texas to Houston expired in September.
Several shippers are interested in the project under different terms and conditions than those proposed in the open season, such as higher volumes and lower rates. We are in the process of modifying the scope of this project to connect Longhorn into the crude distribution system in the Houston area that we acquired from the BP, and to enhance crude oil origin capabilities at Crane, Texas.
With these modifications, the expanded project is now preliminarily expected to cost around $330 million and of course, we would still be expected to provide attractive returns. Obviously the capital number could and probably will continue to change somewhat as we refine the scope.
We continue to be very enthusiastic about this project in our negotiating with the interested shippers, and we expect to have a decision on this project the first quarter of 2011.
Don Wellendorf
Thanks, Mike. Let’s go on to our guidance for the fourth quarter and an update to our full-year 2010 guidance.
We’re now expecting our overall volumes, including the impact of the organic growth project, to be up about 6% for the year based on a strong diesel fuel at Marrero we are seeing. Our previous guidance was up 4%, these percentages are excluding the impact of Longhorn and the BP assets we just acquired.
You can get a feel for how our base business is performing. With respect to our view tank blending profitability in the fourth quarter, the correlation we have seen in the past between crude prices and the butane gasoline margin has not held up of late.
That’s not a big factor in our guidance for the fourth quarter as we currently have locked in a margin on a little over 80% of the volumes we expect to blend in the fourth quarter. We never lock in 100% of the volumes because the volumes are not perfectly predictable.
The per-gallon margin we expect for the fourth quarter is slightly less than the third quarter but the volume is much higher as the fourth quarter generally is the highest blending quarter of the year. I’ve already mentioned that we still expect maintenance capital spending for 2010 to be about 45 million.
So taking into consideration, all the assumptions just reviewed, we are increasing our estimated EPU for the full year to $2.83 which is $0.10 higher than our previously estimates. Our third quarter generated about $0.06 more than expected and we are assuming none of that reverses in the fourth quarter; plus, we are expecting a continuation of stronger diesel volumes for the rest of the year.
Those items plus a number of positives miscellaneous items will be partially offset by higher bonus accruals due to the higher expected profitability. Our guidance specifically for the fourth quarter is $0.77, and as usual, our guidance assumes no future changes in NYMEX mark-to-market adjustment for LCM adjustments.
We are also increasing our distributable cash flow estimate for the year by $10 million to 370 million, at which would be new record by a substantial amount. Finally, as I mentioned in my opening comments, we continue to target a 4% year-over-year distribution increase for 2010.
Now, for three quarters of distribution increases, achieving that goal looks quite promising. At that targeted distribution level, we would have substantial distribution coverage for the year.
Those are my prepared comments so operator, we’re ready to open the line for questions.
Operator
Thank you. (Operator Instructions).
We’ll go ahead and take our first question from Michael Cerasoli with Goldman Sachs
Michael Cerasoli – Goldman Sachs
Thanks. Good afternoon.
If terminal tariffs continue to come in better than expected and we were wondering about the path so far in the fourth quarter, any preliminary views you have on 2011 and how these rates have impacted asset prices in the third-party market?
Don Wellendorf
I’m sorry, I think you’ll have to repeat that question. I didn’t understand the very first part of it.
Michael Cerasoli – Goldman Sachs
Sure. You know, you had mentioned in your comments that terminals, you know, your terminaling rates have continued to come in better than expected.
We were just wondering how the trajectory in the fourth quarter, how it’s progressing, you know, any preliminary views you’re willing to share on 2011. And the separately, how these rates are impacting asset valuations in the third-party market in terms of acquisitions.
Don Wellendorf
Are you talking about the rates we charge for least storage in our rate terminals, or are you talking about pipeline tariffs?
Michael Cerasoli – Goldman Sachs
Oh, I’m sorry, yeah, no I’m talking about the terminals.
Don Wellendorf
Okay.
Michael Cerasoli – Goldman Sachs
The least, right?
Don Wellendorf
Primarily what’s happened over the course of the last couple of years is as we’ve rolled contracts into new terms, we’ve been able to recognize substantially higher rates and that’s been a product of strength in the market over the last few years, is rates have come up. So we project out our schedule for the next year or two with regards to contacts that we see rolling off in the next 18 to 24 months, and then make some assumptions as to what the market’s going to be at that point.
You know, many of those contract were entered into five years ago, or seven years ago and so rates have come up quite substantially since then. I think any effect of that though has already priced into assets in the market given, you know, where the market rates are today.
I think that’s already been priced in.
Michael Cerasoli – Goldman Sachs
Okay. And then just kind of switching gears onto the Longhorn, you had mentioned that utilization is increasing to some extent.
You know, can you talk about, you know, at what point you would decide just to keep it as a refined product, you know, just continue to transport refined product as opposed to converting it? You had mentioned that you’re now shipping, you know, only affirmatives on your own account and it seems to be progressing in the right direction.
So if you could just provide some more color on where the inflection point would be, that would be helpful.
John Chandler
Well, first of all to kind of cover what the statistics are, I mentioned that we moved about 40,000 barrels a day on Longhorn this last quarter. If we were to do the crude-oil conversion, we could continue to move about 65,000 barrels a day over five products to El Paso through our other product system that heads that direction.
So we could take all the existing business with some growth and still transport those into El Paso if we do the [inaudible] conversion. So that’s what our expectation is.
Now, obviously there is some point, some very large number of refined products on Longhorn and we would have to question that. We haven’t calculated that number, but it would be substantially above 65,000 barrels a day before we would consider that as the most likely alternative versus crude conversion.
Don Wellendorf
It’s a fairly dynamic calculation because as we get more people moving on Longhorn, it kind of change the bar that the crude reversal has to reach. So it’s kind of hard to give a specific answer on how much it would be.
Really, it depends on what our very current estimate of the future possibility of the line of refined products is.
Michael Cerasoli – Goldman Sachs
Okay. And my final question is, as far as the integration of the BP assets, can you tell us how much you’re actually shipping on the Texas, Houston Pipeline and how that compares versus the year-ago period and how much this pipeline can grow looking forward?
That’s all my questions. Thank you.
Mike Mears
It’s funny you should ask that because we were just discussing a few minutes ago whether or not we’d get – we knew somebody would probably ask that question. There’s only one shipper on those pipelines that we purchased from BP, and guess who that is.
And so we really felt like it wouldn’t be appropriate for us to release actual volumes because we’d be releasing actual volumes for BP. But I can say that, I mean, we did – we did say, I believe that this is the line – what the line’s capacity was when we announced the deal.
The refined product capacity was like 223,000 barrels and crude was like 9,000 barrels. And I think about all I can tell you relative to that is we’re moving more than we had estimated in our economics, but there’s still a great deal of capacity still available.
Operator
And we’ll take our next question from Darren Horowitz with Raymond James.
Darren Horowitz- Raymond James
Good afternoon, guys. A couple questions.
John, you covered this in your prepared commentary, but as you guys are looking at the outlook for your petroleum products pipeline throughput, you mentioned that obviously you’re expecting diesel and I guess to a lesser extent, gasoline volumes to stay strong through the fourth quarter. Can you just give us some color there as to your thoughts on sustainability of this trend maybe through early 2011?
John Chandler
Well, I mean, what we always say when we get questions like that is your guess, perhaps, is as good as ours. I mean, we like the trend we see.
Certainly there’s no question that diesel demand is improved in the middle part of the country, which we have always felt was kind of an indicator of the overall health of the economy. But you know, in all the numbers that we’ve played with so far for next year, we haven’t actually put together our plan or even, you know, gotten near a guidance for next year.
But you know, we’re not going to be building into our numbers any substantial increase in volumes.
Darren Horowitz- Raymond James
Okay.
Don Wellendorf
On the base.
John Chandler
On the base, yeah. We’ll be adding some volumes for growth projects, but in terms of our base business – and hopefully we’ll be pleasantly surprised.
Darren Horowitz- Raymond James
Sure. Switching gears a little bit over to the opportunities for increased ethanal blending, I know that their capabilities are somewhere between 75 and 80% of all the terminals that are out there, at least on your system.
Can you just give us some insight as to the pace of demand growth that would support incremental blending capabilities being added?
Mike Mears
Well, the terminals that we haven’t put in ethanal blending to date are typically low-volume terminals where it’s been difficult to justify the investment. And in almost all of those cases there’s offsite blending that’s taking place.
So we’ve chosen to not pursue those locations simply because we didn’t believe we could get return on our investment to put the blending in on one hand, while on the other hand, we feel comfortable we’re not losing market share because ethanal is available across the stress in many cases, the blend. So that’s the reason we haven’t expanded in those 15 to 20% of our terminals where we don’t have it.
We haven’t done a calculation as to what percentage we would need to get to in order for those to become economical. I think that the likelihood of getting beyond a 10% blend in the foreseeable future is unlikely and that’s probably why we haven’t done those calculations.
Even with the EPAs approval of 15% blends for 2007 an new cars earlier this month, or I should say last month, we don’t expect that to have any penetration in the marketplace for the foreseeable future.
Darren Horowitz- Raymond James
Okay. I appreciate the color, Mike.
And then the final question if I could, just as it relates to any additional opportunity that you guys might have either linking your East Houston Terminal assets or maybe even, you know, the opportunity to link up to a great extent over to Port Arthur, I know that you connected the East Houston terminal to the Explorer Pipeline and I’m just curious if there are any other kind of activity opportunities that you guys might have in that area?
Mike Mears
Well, you’re right. We did complete the connection for Explorer to all the Port Arthur refineries in East Houston last quarter.
This month we’re going to complete the connection of Longhorn into East Houston. So to the extent that Port Arthur Refineries have interest in shipping product on Longhorn, they will have access starting at the end of this month.
That’s a significant connectivity improvement that we’re going to complete here rather soon. There are a number of things we’re looking at in and around the Gulf Coast, specifically Houston Ship Channel, to improve our connectivity to the local refiners.
There’s probably two or three projects we’re looking at to make those improvements. So that’s a very active process for us.
Darren Horowitz- Raymond James
Okay. I appreciate the color.
Thanks, guys.
Operator
And we’ll go to our next question from Jeremy Tonet with UBS
Jeremy Tonet - UBS
Good afternoon. Congratulations on the quarter.
Mike Mears
Thank you.
Jeremy Tonet - UBS
I just had a question on the ammonia segment. It seemed that loss in the segment was larger than we had seen in any recent years.
I was just wondering if you could add a little bit more color as to what was the driver for being larger – so much larger this quarter? And also for the fourth quarter, would it look closer to the second quarter results or to the third quarter results, based on the continued testing?
Mike Mears
Well, the reason that the loss was so big in the third quarter is at the request of the shippers on the line, remember there’s only three shippers , they wanted us to get this integrity work done and so the line would be available for their use in the fourth quarter and next year. So we dramatically accelerated the pace at which we did that work and that’s why it basically shut the line down in the third quarter and that’s why the loss was bigger than you’ve seen in the past because the line, in fact, wasn’t even running.
That integrity work actually revealed a line in better shape than I think we had estimated , we didn’t believe it was in terrible shape, but we had some odd spots that some repair work would need to be done and it turned out to be better than that. So you know, we’re over 3/4s done with that work and we’re just going to be done – the future, the work is going to be done in the summer of next year during the period when volumes are generally very low.
It’s not expected to really affect shippers when the overall volume isn’t very much. So we think that in the fourth quarter you’ll see the pipeline turn back into a profitable state and then next year be more like historical levels.
Jeremy Tonet - UBS
Great. Thank you very much.
Operator
And our next question comes from Elvira Scotto with Credit Suisse
Elvira Scotto – Credit Suisse
Hi. Good afternoon.
On the – a quick follow up on the Longhorn expanded scope, would that still – if you went forward with that project, would that still be an 18-month construction timeline once the decision is made?
Mike Mears
Yes. That’s correct.
Elvira Scotto – Credit Suisse
Okay, great. And then a quick question on distribution growth.
In the press release it states that the cash flow growth from acquisitions, organic growth projects and solid fundamentals should support attractive distribution growth in 2011 and beyond. How should we think about what you mean by attractive?
Is it sort of that run rate of distribution growth that maybe you had, you know, from 2006 through 2008 before the crash, you know, in that 10ish% range?
Mike Mears
Well, Elvira, I think you would have to – you know that those words were chosen very carefully because I didn’t want to be more specific than that right now. You know, we’ll be giving guidance for next year at our next quarter conference call like we always do in January.
So you know, at this point I’ll just leave attractive to mean whatever it means in the eyes of the reader. But I think in my opinion, what we will be able to product next year, based on what I’ve seen so far, would be what I consider attractive.
How’s that for an answer?
Elvira Scotto – Credit Suisse
Okay, great. Just switching gears on – it sounds like some pretty positive comments on the BP assets that you acquired.
Given the interest that you’ve seen from some of the third parties, you think you could get to that 6 to 7 times EBITDA range on the acquisition sooner than the original sort of expectation which I think was about four to five year?
Mike Mears
Certainly, yeah. We said initially six to seven times in four to five years, right.
You know, the reason we didn’t give a lot of detail on BP this quarter because we’ve only run it for one month and I think one month results are kind of a – too little to declare that things are, you know, are forever going to be fantastic. So you know, we don’t want to make a big deal about it.
All we can tell you is, you know, the volumes, particularly the crude line volumes that we saw in the first month of operation that we owned it, were encouraging. And of course, as we’ve also – as I said, have a lot of people calling us.
I would say that’s substantially more robust than we had even hoped for in terms of ideas on how to use the assets that we bought.
Elvira Scotto – Credit Suisse
Okay. And then just my final question.
You know when you talk about the 500 million of potential growth projects that are not included in your 2010 and ’11 estimates, can you maybe talk a little bit more about what types of projects these may be? Do they lean more towards storage, more crude, just any commentary around that?
Mike Mears
Sure. Hold on a second.
I think I’ve actually got some detail on that. The way that the list stands right now, you know, it’s ever changing, projects will roll of and new projects roll on, some go into the active stage.
About 30% of the projects right now are crude projects. About a little over 50% of them are capacity expansions in our refined products assets.
We’ve got a little hump here on ethanal and biodiesel still. That’s kind of the breakdown.
Elvira Scotto – Credit Suisse
Okay, great. That’s helpful.
Thanks a lot.
Operator
And our next question comes from Ross Payne with Wells Fargo.
Ross Payne – Wells Fargo Securities
How you doing, guys.
John Chandler
Good.
Ross Payne – Wells Fargo Securities
Two quick things. First of all, if I could get a debt number for the third quarter, and also what your distribution coverage ratio was?
John Chandler
Yeah. The debt number, if you look – when you see our 10-Q, the debt number is 1 billion, 892 million, but that includes impaired value adjustments for hedges.
The actual face value of the debt outstanding at the end of the third quarter is 1 billion 850 million. And we have about 77 million in cash on the balance sheet.
Ross Payne – Wells Fargo Securities
And coverage ratio in the third quarter?
John Chandler
And the coverage ratio for the –well, I don’t know about the third quarter. The coverage ratio is a little over one times.
Ross Payne – Wells Fargo Securities
Great, John, thank you. I appreciate it.
Operator
And we’ll take our next question from Sharon Lui with Wells Fargo.
Sharon Lui – Wells Fargo Securities
Hi. Good afternoon.
I think you mentioned that the Longhorn conversion project, that the cost has been increased to about 330, it seems like it’s a pretty big jump from the original scope of 150. I’m just wondering if you could give a little bit more color on some of the modifications that you plan to make, and maybe even multiples that you’re thinking about.
John Chandler
Sure, we can address that. What’s happened here is when we went out to the open season, we had designed a scope based on kind of an expectation as what the volume interest would be for the project and as we went through the open season and began talking about the volumes that people were interested in shipping, it grew substantially higher than what we had originally expected.
So what that did is a couple things. One is that it necessitated additional pipelines in the Houston Area to be able to clear all the crude out of East Houston.
So one element that we’ve added to our scope is to build a line from East Houston down to the BP crude system that we’ve just purchased. So that was a substantial addition to the scope.
We’re also looking at additional – quite a bit of additional work at the origin to bring in the incremental volumes that people are interested in. We had made some initial assumptions as to where the crude was going to come from and how it would get into our system and again, once those volumes increased, then those initial assumptions weren’t adequate.
We determined we were going to have to add some additional capabilities, both pipes and tankage in order to accommodate the higher volumes. That’s why the number has gone up dramatically.
As far as the multiple, we would expect the same or better multiple on the higher capital investment than we did on the smaller scaled projects.
Sharon Lui – Wells Fargo Securities
Okay, great. That’s very helpful.
Thank you.
Operator
And our next question comes from Barrett Blaschke with RBC Capital Markets
Barrett Blaschke – RBC Capital Markets
Hey, guys. A couple of quick ones.
What the butane blending economics looking like? It seems like that just seems to steadily improve.
Is that still the case?
John Chandler
Well they’ve been very good. The returns that we’ve gotten on our butane blending investments has been better than we even thought they would be.
So – does that answer your question or –
Barrett Blaschke – RBC Capital Markets
No, that’s kind of – I just wanted to get a general direction. As far as the acquisition market at this point, you guys have been obviously relatively active lately.
Do you feel like that’s still something you can return to at this point, or have the multiples changed?
John Chandler
Well no, the multiples haven’t changed. I mean, we’re always out in the acquisition market looking for opportunities and as I think I mentioned in my prepared comments, it’s virtually impossible to predict what might happen there.
But you know, we’ve been pretty successful so far, you know, picking and choosing the right ones. You know, we don’t want to make an acquisition just to make an acquisition, we want it to be nicely accretive to our shareholders, have a good return.
You know, you have to wade through a whole bunch of them before you find one that you like. But we’re out there doing that and I haven’t seen that there’s any noticeable change in prices at this point.
Barrett Blaschke – RBC Capital Markets
Okay, thank you.
Operator
(Operator Instructions) And we’ll take our next question from Brian Zarahn with Barclays Capital
Brian Zarahn – Barclays Capital
Good afternoon.
John Chandler
Good afternoon.
Brian Zarahn – Barclays Capital
On the Longhorn Pipeline, the volumes were picking up. Do you have any expectations for utilization in 2011?
John Chandler
Well you know, we – we’re not ready to give guidance for our next year yet. Again, we can just say that the volumes have been improving and there’s a lot of customer interest still and we expect it to – that the pipeline is going to do substantially better next year than it did this year.
We know it will because we’ve got one hard-fast signed contract with a big customer.
Brian Zarahn – Barclays Capital
Do you think –
John Chandler
We’ll give you a lot more information on that in January.
Brian Zarahn – Barclays Capital
Okay. Just one more question on Longhorn.
Are you looking to sign a similar contract somewhere take-your-pick type of contract for additional capacity?
Mike Mears
We’re evaluating that. I mean, the folks we’re talking to with regards to additional shipper interest, that’s one of the things that’s being considered.
We haven’t made a decision on that yet, but it’s not – we’re open to that.
Brian Zarahn – Barclays Capital
Okay. And can you provide us – is there any update to your [inaudible] storage expansions, is construction on track to be completed next year?
Mike Mears
Yeah. The construction’s on track.
We plan to have the first tanks operational probably early second quarter and have all of them done by the end of the year.
Brian Zarahn – Barclays Capital
And finally, can you give us the availability on your revolver?
John Chandler
Yeah. We have no debt outstanding on the revolver.
I canned 77 million in cash at the end of the quarter.
Brian Zarahn – Barclays Capital
Thank you.
Operator
And at this time there are no other questions in queue.
John Chandler
Okay. Let’s go ahead and wrap it up then.
I just wanted to close by saying thanks for your ongoing support of Magellan. I do believe that the number of investors interested in the relatively low-risk profile with growth upside that is offered by Magellan is – those investor counts are growing substantially.
The future looks bright for us and I look forward to talking to you again at the end of the year.
Operator
And that does conclude today’s conference. We thank you for your participation.