Feb 5, 2015
Executives
Michael Mears - Chief Executive Officer Michael Osborne - Chief Financial Officer
Analysts
John Edwards - Credit Suisse Shneur Gershuni - UBS Jeremy Tonet - JPMorgan Sharon Lui - Wells Fargo Securities, LLC Brian Zarahn - Barclays Capital Steve Sherowski - Goldman Sachs Faisel Khan - Citigroup Abhi Sinha - Wunderlich Securities, Inc.
Operator
Good day, ladies and gentlemen and welcome to the Magellan Midstream Partners Fourth Quarter 2014 Earnings Results Conference Call. Today’s conference is being recorded.
I would now turn the conference over to Mr. Mike Mears.
Please go ahead, sir.
Michael Mears
Thank you. Good afternoon and thank you for joining us today to discuss Magellan's fourth quarter financial results and our outlook for 2015.
Before we get started, I'll remind you that management will be making forward-looking statements as defined by the SEC. Such statements are based on our current judgments regarding some of the factors that could impact the future performance of Magellan.
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. As announced this morning, we produced strong financial results during the fourth quarter of 2014, closing out a record year for Magellan.
We generated $880 million of DCF for the year, which allowed us to successfully reach our goal of increasing cash distributions to our investors by 20% for the year, while maintaining a very conservative coverage ratio of 1.5 times. You may recall that we have been preparing for a correction in the commodity environment by allowing our coverage to grow to a level higher than we believe necessary for our company in a long term basis.
As you know, we benefited from strong commodity margins in 2014 and intensely allowed our coverage to grow as we didn't think it's prudent to increase distributions to a level that may not be repeatable once the commodity environment return to a more normalized level. Instead, we used the excess cash to reinvest in our business to fund additional growth projects to benefit Magellan in the future.
This approach had served us well as we have now entered an environment of significantly lower commodity prices. We don't know exactly how long this price environment will remain, but I will address our views on the impact to Magellan's 2015 guidance shortly.
I'll now turn the call over to our CFO, Mike Osborne, to review Magellan’s fourth quarter financial results in more details. Then, I’ll be back to discuss our guidance for 2015 and the status of our expansion capital projects.
Michael Osborne
Thanks Mike. Before I begin, I want to mention I'll be commenting on the non-GAAP measure operating margin.
A reconciliation of operating margin to operating profit was included in our earnings release this morning. As noted in our earnings release, we reported net income of $252.1 million, or $1.10 per unit this quarter versus net income of $190 million, or $0.83 per unit in the fourth quarter of 2013.
Distributable cash flow for the quarter was $248 million compared to $236.6 million in the prior year period. Approximately $36.2 million of the increase in net income was attributable to commodity related adjustments.
Details of this commodity activity can be found on our distributable cash flow reconciliation to net income, which was attached to our earnings release. The remaining increase of $26 million is in large part due to our crude segment in which we had a quarterly record for operating margin.
I’ll go through the operating margin performance of each of our segment and then discuss variances in depreciation, G&A, interest and other expenses to come to an overall explanation of the variance in net income. On the refined products segment, operating margin during the quarter was $252 million compared to $209.2 million in 2013.
There were a couple of factors that drove the increase. First, transportation and terminaling margin increased $7.8 million to $159.5 million, which is a quarterly record.
Transportation and terminaling revenues increased $13.6 million and the associated expenses increased $5.7 million. Increased revenues were due to a number of factors, including slightly higher refined product pipeline volumes, additional fees for lease storage, increased throughput on our ammonia pipeline system and independent refined products terminals and the benefit of the Rocky Mountain pipeline acquired in 2013.
Higher operating expenses were attributable to costs associated with the Rocky Mountain pipeline acquisition, higher personnel cost and less favorable product overages, offset by lower asset integrity spending due to timing of project work. Commodity margin increased by $35 million.
Excluding the out-of-period mark-to-market gains and losses on our economic hedges and lower cost to market adjustments on our inventories, the commodity margin decreased approximately $10 million. This decrease was primarily due to lower butane blending sales volumes in the fourth quarter of 2014.
On the crude oil segment, operating margin increased to $88.8 million compared to $62.7 million in the 2013 period. Total revenues for the crude oil segment increased $22.1 million.
This increase was largely due to higher revenues on our long run pipeline, which averaged 250,000 barrels per day during the fourth quarter of 2014 compared to approximately 185,000 barrels per day in the prior year period. Segment revenues also benefited from the fourth quarter acquisition of the 40-mile pipeline in the Houston Gulf Coast area and also management fees on our affiliate indemnities.
Earnings from unconsolidated investment increased $14.1 million as BridgeTex was placed in service in late September. For DCF purposes, the operating results of BridgeTex will begin benefiting Magellan in 2015 due to the timing of cash distributions.
Operating expenses on the crude segment increased primarily due to higher power cost associated with the higher long run activity, higher personnel cost and lower product overages with offsets operating expenses. Operating margin on our Marine Terminal segment increased approximately $7.7 million.
Segment results reflect a benefit associated with a one-time contract buyout as well as higher storage fees due to higher renewal rates and lower operating expenses due to the timing of asset integrity spending. Stepping down from operating margin to net income, depreciation and related expenses increased $2.8 million due to higher property balances associated with capital expenditures.
G&A expenses increased $2.2 million primarily due to higher personnel costs. Net interest expense increased primarily due to lower capitalized interest related to the timing of computing capital projects, in particular our investment in BridgeTex.
And then other expenses reflect a non-cash charge for the change in the forward value of crude oil contracts that hedged tank bottom inventories which we’re required to carry under certain storage contracts and this unrealized expense will reverse over the life of the contract as the current value and forward value converge. We ended the quarter with $2.95 billion in debt, that's the face value, and it includes $2.65 billion of notes and $297 million of commercial paper at December 31.
Our debt-to-EBITDA, computed on a rolling 4 quarter basis, was 2.8:1 and our pro forma ratio which is the metric used in our credit agreement and considers contractual revenues for in-progress projects, was approximately 2.7:1. Now I'll turn it back over to Mike to discuss the outlook for 2015 and capital projects.
Michael Mears
Thanks, Mike. Now that we have closed our 2014, I would like to share with you our key assumptions that form the basis for the 2015 DCF guidance that we provided of $840 million.
One of the most significant assumptions we are making as part of our new guidance relates to the commodity price environment. We tend to be conservative with regards to our forecast and won’t base our guidance on commodity prices that are higher than the current forward market.
With this in mind, our guidance is based on an average crude oil price of approximately $50 per barrel for the year. Although the vast majority of Magellan’s operating margin comes from fee-based transportation and terminal services, we do have some impact from the current commodity environment.
The impact is most notable with regards to our butane blending activities, but it also impacts the value of the product overages on our refined products and crude oil pipelines. As a reminder, these product overages relate to receipt of a very small amount of barrels known as tender deduct in conjunction with each of our pipeline shipments, which is a common practice in the industry.
The tender deduct was meant to compensate the pipeline operator for any lost product during the shipment process due to metering inaccuracies [indiscernible] between batches, shrinkage and other events that result in volume reductions during the shipment process. To the extent we can manage our volume reductions below this tender deduct, our operating expenses are reduced by the value of the volume variance.
Between our commodity related activities and the value of these product overages, our guidance assumes these activities will generate about $100 million less DCF in 2015 than 2014, due to the price strip we’re using. Of note, we hedged about 40% of our expected 2015 butane blending sales, with healthy margins before the downturn in commodity prices.
The benefit of those hedges will be primarily realized during the early part of the year since we have locked in prices of about two thirds of our spring activity at that time. As the year moves along, we will begin hedging our fall blending activity.
For reference, our average blending margin was around $0.90 per gallon during 2014 and our guidance assumes an average closer to $0.60 per gallon for 2015. As mentioned previously, we have been preparing for a lower commodity environment and have not counted on the higher profits we have earned from these commodity-related activities can grow the cash distributions to our investors, instead using those higher cash flows to reinvest in the business with expansion projects.
To the extent that prices improve from the levels we have assumed, there is upside potential to the DCF guidance provided of approximately $2 million for each $1 change in the price of crude oil. Moving on to our fee-based activities, we expect crude oil shipments to increase approximately 10% primarily driven by an increase in the volume flowing on our Longhorn pipeline.
During 2014, we averaged 235,000 barrels per day on this pipeline system and expect to average closer to 260,000 barrels per day during 2015, partly due to additional operational storages expected to come online midyear that will help facilitate more volume through the system. We expect our refined products pipeline volumes to grow by about 3% during 2015, primarily based on government projections in the markets we serve and input from our customers.
Magellan experienced strong refined products pipeline volume growth during 2014 of 9% all in, or 4% excluding recent acquisitions. We expect to build from that higher level into 2015.
For pipeline rate, we again expect to increase our refined products in crude oil pipeline terrace by the current FERC indexation methodology, which is based on the change in the producer price index plus a 2.65% added. Based on preliminary PPI estimates for 2014, we have assumed a tariff increase of 4.6% on July 1, 2015.
You may recall that we increased our terrace by 3.9% in mid-2014 as well. As an aside, this will be the fifth and final year for the tariff adjustment be based on the change in PPI plus 2.65% index.
Over the next year, the industrial providing actual historical cost data for crude oil and refined products pipelines on a consolidated basis to the FERC, as part of the process to determine what the appropriate index should be for the next five year period. Another item that impacts average rates on our crude oil pipelines is our assumption about spot shipments for Longhorn.
As a reminder, the entire capacity on this pipeline is fully committed with an average share of about $2 per barrel. We leave 10% of the capacity available for spot shippers, but that capacity will be filled with committed shippers if no customers nominate to ship on a spot basis.
During 2014, we benefited from spot shipments that comprise about 9% of the pipeline movement. The current pricing environment does not appear to be conducive for spot shipments.
So we have assumed no spot shipments in 2015 as part of our guidance, which for modeling purpose will lower the average rate per barrel for the crude segment slightly. As you know, the BridgeTex pipeline is now operational and expected to generate DCF for Magellan beginning in 2015.
We averaged nearly 200,000 barrel per day during the fourth quarter of 2014, which was our first full quarter of operations. Our guidance assumes that we ship similar levels during 2015.
As a reminder, we count distributable cash flow from our joint ventures when the cash distributions are actually received from the JV. Because BridgeTex became operational late in 2014, the first cash distribution payment to the BridgeTex partners will be in 2015 and we will further benefit from the 40 mile Houston pipeline that Magellan acquired in November 2014.
We have a guaranteed revenue stream for this pipeline due to a long-term capacity at least with BridgeTex for used by its shippers. One housekeeping item relates to interest expense.
You will see there is significant amount of interest expense was capitalized during 2014 primarily due to our BridgeTex construction projects. Now that this asset is operational, our net interest expense impacting DCF will increase accordingly since those costs will be expensed instead of capitalized as part of the project cost.
With regards to maintenance capital, we expect our spending to be approximately $85 million in 2015 compared to the $78 million we spent in 2014. The increase is primarily associated with the acquisitions we made in late 2013 and organic growth in our asset base.
For modeling purposes, we would recommend the use this higher run rate going forward for our current asset base. Assuming [indiscernible] of these key assumptions, we expect to generate DCF of approximately $840 million in 2015.
These assumptions provide us confidence in our annual distribution growth target of 15% for 2015, while leaving us with a 1.2 times coverage ratio and more than $150 million of excess cash flow for the year. Our hope is that a number of these assumptions may prove to be conservative as the year goes along.
However, we believe our investors appreciate and expect Magellan to maintain our consistent conservative nature. The bottom line message is during the current commodity environment we believe our company is financially strong and is well prepared to continue to perform well during the current challenging environment.
And while we do not plan to provide DCF guidance for periods beyond 2015, we have announced our goal to grow distributions by at least 10% in 2016, clearly we don’t know exactly what the commodity environment will look like in 2016 at this point. But with our current asset base and a number of growth projects coming online beginning in 2016, we feel confident in our ability to continue our trend of double-digit distribution growth into 2016.
Concerning expansion capital, we spent a record $703 million on organic growth construction projects during 2014, with the bulk of the spending for construction of the BridgeTex pipeline and expansion of the Longhorn system. We also spent another $75 million to acquire a 40 mile crude oil pipeline in the Houston area.
This acquisition was a strategic fit for us as it provides another new secured revenue stream that also increases our operational flexibility with other pipes we own in the Houston area. Based on the projects we currently have under construction, we expect to spend $650 million during 2015, with an additional $100 million in 2016 to complete the projects now in process.
Most of the spending relates to our Little Rock pipeline and Corpus Christi condensate splitter projects. We are making good progress in both of these projects, which we expect to become operational during 2016.
In fact, we are within a few months beginning construction for each project now that the upfront permitting and right of way work is almost complete. We expect the Little Rock pipeline to be operational in early 2016 with the condensate splitter operational during the second half of 2016.
Our project spending also includes two new smaller projects that have been recently added, including construction of crude oil tank at our East Houston terminal and various expansions in hours southeast terminals. In addition, we have entered into a 50-50 joint venture to construct and operate a butane blending facility on the Colonial system.
We expect to invest approximately $32 million on this JV and expect to earn a low single digit multiple once fully operational in 2017. Our spending estimates do not yet include cost related to the Saddlehorn pipeline.
Our open season continues for this pipeline to deliver crude oil from the Niobrara production area in Colorado to our storage facilities in Cushing. As we have previously announced, we have commitments from Anadarko and Noble, and Anadarko has the option to join as an equity owner.
We have proceeded at a pace to maintain our project at start-up date of the second quarter of 2016 with the permitting process and right of way and land acquisition well underway. We recently mentioned that we are in advanced discussions with another potential strategic partner, possible equity ownership in this project as well.
Unfortunately, we don’t have more to share on those discussions at this time. We currently expect the Saddlehorn pipeline to cost approximately $1 billion and will include our share of the cost and we will include our share of the cost in future spending estimates once we have more clarity on the ownership structure.
Regardless of the eventual equity ownership, Magellan will be the construction manager and operator of the Saddlehorn pipeline. And as we have stated in the past, with Magellan’s solid balance sheet and lower leverage ratio, we do not anticipate any need to issue equity in the foreseeable future in order to finance the projects we have announced.
We also continue to evaluate well in excess of $500 million of other potential organic growth opportunities. We continue to see a large number of potential opportunities for additional infrastructure projects such as storage and pipeline connectivity projects and even in the current environment the majority of these potential projects are in the crude oil space.
And as always, we remain active in the acquisition arena and are looking for the right assets at a reasonable price that fit nicely with Magellan’s fee-based business model. We remain optimistic that the current environment may provide opportunities for us to acquire more attractive assets, but we intend to maintain our disciplined approach in the – to a question prices.
That concludes our prepared comments, so we will now open it up for questions.
Operator
[Operator Instructions] We’ll hear first from John Edwards with Credit Suisse.
John Edwards
Congratulations on another good quarter and another good year. Just to clarify a couple of things, so when you say no need to issue equity, does that include Saddlehorn or exclude Saddlehorn?
In other words, once you finalize Saddlehorn, do you anticipate some needs for equity?
Michael Mears
No, that includes Saddlehorn.
John Edwards
Okay. And then, on your backlog you indicate it's over $500 million, that's been your stated number for many quarters now.
I'm just curious, given the commodity price environment, what change have you seen to that amount in over $500 million range? And then the other, what kind of changes to mix are you seeing?
Michael Mears
I would say we really haven’t seen a significant change in the overall level of projects we are looking at. I think there is a likelihood that some of those projects may take a little longer to develop.
But the list hasn’t shrunk considerably. And the mix of projects hasn’t changed dramatically.
We’ve continued to focus on fee-based crude oil storage and pipeline and marine access type projects and those continue to be the majority of what we’re seeing.
John Edwards
Okay. That's helpful.
In terms of your outlook, you are indicating about 1.2 times coverage this year. For 2016 and beyond, do you still want to be around 1.2 times?
I think in the past you've indicated your willingness to narrow that a little bit. Maybe if you could remind us of your...
Michael Mears
I think what we have said in the past and it’s still true is that we would be comfortable with the 1.1 times coverage. I am not providing that as a target for 2016, but we kind of see that as a floor that we would feel comfortable with.
And since we’re giving DCF guidance for 2016, I guess all you can reduce from that is that with the 10% coverage we’ll still be above 1.1, but that’s not a target, that’s a floor.
John Edwards
Okay, that's helpful. And then on BridgeTex, you're running around 200,000 barrels a day.
Now you're expecting that to run about that level for 2015. Are you expecting that to ramp up further going beyond this next year?
Michael Mears
Well, it certainly has the possibility to do that for the purposes of our guidance, and again we’re conservative with regards to our guidance. We have not assumed that.
It’s going to be driven by what the differentials are obviously between Midland and the Gulf and LLS. And if we look at the state of affairs right now, it would suggest that 200,000 barrels a day is probably a good assumption.
If those differentials were to change, then there is upside to that. But that’s not what we have included in our guidance.
John Edwards
Okay, that's great. That's all I had.
Thank you so much.
Operator
Shneur Gershuni with UBS has the next question.
Shneur Gershuni
Just to clarify one of John's questions, with a $500 million backlog, are you effectively saying that in the current crude oil price environment all of those are potentials that could actually go with $50 or are you depending on something a little bit higher to make some of them go?
Michael Mears
There is certainly a class of projects that probably are not viable in $50 environment. So when I talk about some of those projects being potentially delayed, they would be related to a higher price environment.
Clearly, if we are in a $50 price environment for an extended period of time, the likelihood of getting some of those projects across the goal line might diminish. But at this point in time, the market interest and our interest in continuing to develop the opportunity hasn’t been extinguished.
That’s the way to frame it.
Shneur Gershuni
So following on that and I know that you've got a 10% targeted growth rate for 2016 – when we think about 2017; when we think about the puts and takes, how to maintain a 10% growth rate where you're not coverage harvesting – how dependent are you on that $500 million backlog coming to fruition, as well as Saddlehorn coming to fruition?
Michael Mears
I don’t want to comment too much on 2017 guidance, I will tell you that if you look at 2016, we have a couple of pretty sizable growth projects that come online during the year, which will have incremental benefit obviously into 2017. Saddlehorn is one of those projects that would come online, expected to come online in the middle of 2016, which would have an incremental benefit in 2017.
So we’ve got substantial runway for growth into 2017 even without any incremental project announcements. Probably the most I can tell you on that.
Shneur Gershuni
Okay. You had mentioned before that you are in the fifth year of the FERC tariff structure with the 2.65% plus PPI.
Is there any reason to think that this wouldn't be continued at the 2.65% level or has there been enough pipe put in place that maybe it comes down? Just wondering if you could opine on that a little bit?
Michael Mears
That’s a work in progress and that number, it can’t be determined until the fifth year of data is submitted. This process is dependent on actual cost data from FERC Form 6s from the pipeline industry.
In the 2014 Form 6 data is the last data point to complete the analysis and that won’t be – those won’t be filed here for another month or so. And so we really don’t have a comment on what that’s going to be, I mean it’s really data driven and until we have all the data, we can’t really give a best guess on that.
Shneur Gershuni
Fair enough. And finally on the M&A side, you had mentioned that there is some interest, is there any areas in particular that you are interested in?
Are you thinking of diversifying at all, or staying in your knitting? I was wondering if you could expand on your thoughts on M&A.
And do you really see some real opportunities now that we have seen some dislocation in equity prices?
Michael Mears
There may be some opportunities out there. If you look, I mean, from our perspective, we prefer to continue to stay focused on primarily fee-based businesses, that’s probably a primary goal.
Secondary goal would be to stay within the fairway of what we know and what we do well, which would be refined products or the crude oil space, but we don’t exclude good business opportunities that are along the lines of diversification. We don’t have diversification as a primary goal, but we don’t exclude it as long as it’s within our risk reward profile at the corporate level, which again is primarily fee-based business.
Shneur Gershuni
Okay, great. Thank you very much, guys.
Operator
Moving on to Jeremy Tonet with JPMorgan.
Jeremy Tonet
Coming at the M&A topic from maybe just a slightly different angle, I’m wondering in this current environment where commodity prices are a bit lower and maybe some projects are deferred, does that let the margin increase your appetite for getting transactions done?
Michael Mears
I wouldn’t say the increases are appetite, I mean there is trade-offs obviously in this environment. There are projects that I think the risk profile has increased because you are in a lower price commodity environment and the length of that downturn is hard to predict.
And so it increases the risk profile. So even though that may be opportunities out there and that may be acquisitions that are attractive because of the low equity value, it’s also has an associated increase in risk depending on what your long-term view on commodity prices are.
So that’s a trade-off there. It’s not a situation where equity values drop and the equity values drop for a reason.
And so that is associated with the risk profile. So there is a risk reward analysis there that takes place on evaluating any potential acquisition targets.
Jeremy Tonet
Right. That makes sense, thank you.
And then changing over to Saddlehorn, it seems like there's multiple horses in the race for this type of a takeaway solution. I'm just wondering how you guys go about making sure protecting your rates of return on that type of project and making sure there is never any winner's remorse or anything like that.
Michael Mears
Well, first of all, the way you do that is your secured commitment and we have commitments from Anadarko and Noble, which are the two largest producers in the basin. I’ve said before and I will reiterate that the level of commitments we have on Saddlehorn do not generate the EBITDA multiples that we have experienced on our other projects, namely BridgeTex and Longhorn.
It’s a higher multiple project just the committed levels we have. So our efforts on extending the open season and more particularly to be talking at this point with a potential strategic equity partner are really aimed at lowering the risk profile associated with the project and improving our competitive position versus the other – against the competition out of the basin.
Jeremy Tonet
That make sense. Thanks for the color.
Operator
We’ll now hear from Sharon Lui with Wells Fargo Securities.
Sharon Lui
I guess just clarifying a question to clarifying your comments, for Saddlehorn, even if there is not another equity partner, do you still full comfortable with the multiple or the return based on the level of commitments that go forward?
Michael Mears
That’s true at this point. We’ve been proceeding, as I mentioned in my comments, we have been proceeding on a pace to meet our start-up for second quarter 2016 and our discussions at this point with an equity partner really to reduce the risk and improve the competitiveness of the project.
Sharon Lui
But are you still aiming to have at least a 50% equity stake in this project, or be the majority owner?
Michael Mears
At this point in time, there is a chance based on the discussions that we would be less than a 50% equity owner. That’s all part of the negotiation at this point.
Sharon Lui
Okay. And then looking at your guidance for refined product pipeline volumes, just wondering if you could provide some color on that 3% growth rate, I know that the volumes have been a lot stronger this year with and without acquisitions.
Michael Mears
The bulk of that projection is done at the macro level. We don’t propose to be better predictors of overall refined product demand than the experts who spend a lot of time on it.
So we take the government projections as kind of the base and the government projections particularly for diesel fuel shows strong growth for next year, we don’t see anything in our markets that would indicate any differently. We supplement that with specific location feedback we’re getting from customers to come up with that number.
Sharon Lui
Okay. And in terms of the pipeline tariff increase, is the expectation that you would be able to apply this across all your markets?
Michael Mears
That’s correct. As you know, we’ve got index markets and we have competitive markets and at this point in time we are assuming that we will raise our competitive market by the same rate as the index market which have the 4.6%.
Sharon Lui
Great. Thank you.
Operator
Brian Zarahn with Barclays Capital has the next question.
Brian Zarahn
In the fourth quarter, can you give some color on the crude oil pipeline tariff in terms of its variance from the third quarter – down by $0.18 per barrel?
Michael Mears
Let us get back to you on that, I don’t have that information right here in front of me. So I will have to get back to you on that.
Brian Zarahn
I will return to everyone's favorite topic of Saddlehorn. I guess, given the price environment we're in, is there any potential change in the size, the capacity of the pipe, and potential costs?
Michael Mears
Those topics are under discussion, at this point in time it’s unlikely that will change the size of the pipe. And there are some possibilities that might be changed, but at this point that is unlikely.
Brian Zarahn
And then looking at your storage business, given the high level of inventories in the US, any potential tailwinds from contract renewals this year?
Michael Osborne
Speaking to this year, on the crude oil space, we don’t have any contract renewals on crude oil this year. So if we move over to the refined products, we’ve got a number of contract renewals in our Marine facilities and we’ve got contract renewals along the pipeline system.
We don’t have any concerns at all based on the state and the strength of the refined products storage market on those renewals.
Brian Zarahn
Is there sort of a blended rate of increase you're expecting on the renewals, a percentage basis, 3%, 4%, 5%?
Michael Mears
I’d say it’s probably more in the range of 2% is what we have assumed for growth in the rate on the renewals.
Brian Zarahn
And then lastly, I appreciate the color on the margin exposed businesses. You mentioned $100 million variance, 2015 versus 2014.
How should we think about the impact of butane blending versus product overages?
Michael Mears
Both of those contributed significantly to that reduction, I think it’s probably about two thirds blending and one third product overages that contributed to that. And in the statistics I quoted on the sensitivity, every $1 increase in crude oil price translates to about $2 million increase in DCF.
That’s for everything, that’s for overages, that’s for blending, that’s for everything combined.
Brian Zarahn
Thanks, Mike.
Operator
We’ll now hear from Steve Sherowski with Goldman Sachs.
Steve Sherowski
Just a quick follow-up question on Saddlehorn. When you were talking about the potential returns based on current commitments, how should we think about that?
Should we think about that at the higher end of the 6 to 8 times range you've typically targeted or is it above that?
Michael Mears
It’s above that. What I will say is clearly Saddlehorn is a project that has commitments that are above the eight times multiple.
With the commitment to our idle level that it’s accretive to us and so that probably frames the boundaries there. But I would also say that it’s very sensitive, the returns improve quickly with incremental volumes.
Steve Sherowski
Thanks, understood. On the storage renewals topic, what's the average duration of your current crude storage contract?
Michael Mears
For about two years.
Steve Sherowski
And one final question, on the 10% distribution growth guidance for 2016, what sort of crude price do you assume – and apologies if you said this earlier and I missed it.
Michael Mears
Well, we haven’t said that for 2016. Our assumptions again were based on the curve about 10 days ago or so when we did our – finalized our plan and it’s roughly $60 crude program.
Steve Sherowski
Roughly $60, great. That's it for me.
Operator
We’ll move on to Faisel Khan with Citigroup.
Faisel Khan
I just want to make sure I get the guidance numbers right. You did $880 million in DCF in 2014.
You're guiding to $840 million. You're talking about $100 million decrease from lower commodity prices which, basically, if you look at the delta you are adding about $60 million in DCF from growth projects and volume growth and the increase in the tariff on your product pipeline system.
Is that the right way to think about it? Because $60 million would seem a little bit low, given the projects that have come online last year and some of the capital spending you have this year, and given the tariff increase and the volumes.
Michael Mears
You’re thinking about it exactly right. With regard to that $60 million, you have to take into account our interest expenses has jumped up quite a bit, now that we are not capitalizing interest on BridgeTex, our maintenance capital has bumped up a little bit and we’ve also made some conservative assumptions with regards to some of our crude oil pipes, for instance in 2014 we had 9% of our shipments as spot shipments, which are considerably higher tariff than the committed volumes.
And in 2015, we are assuming zero spot shipments. And again that conservative assumption that can’t get any lower than zero.
So those are probably some of the factors as to why you might be modeling it of what might appear to be too low.
Faisel Khan
What did the spot shipments generate in terms of DCF last year?
Michael Mears
I’m being told that’s about $14 million is what that was last year.
Faisel Khan
Okay. Understood.
And then just on the blending – under blending economics and some of the sensitivity you laid out there, is the blending as simple as if the crude price goes down, then the blending economics go down? Or is there also a discussion that has to be had in terms of what's the spread between butane and gasoline, and how does that difference manifest itself over the course of the year?
Michael Mears
The margin is the margin between butane and gasoline, we use the price of crude as a proxy for that. If you look historically, there’s been a loose correlation between the absolute price of crude and the margin between butane and gasoline, it’s not a perfect correlation, but it’s directionally correct.
But the precise – if you want to do a more precise calculation, is it butane versus gasoline. I’ll warn you, you can’t just look at the current curves and say go out to October and compare the October butane price versus October gasoline price on the futures market, because that’s a timing element there.
We typically buy the butane in the late spring when it’s at its cheapest and then hedge the gasoline market forward. And so those are the differentials that are most relevant as we get to the point that we would lock in margins for the fall this year.
Faisel Khan
Does the contango in the curve sort of help you then, because gasoline is being sold on a forward basis, and you're buying butane on a spot basis?
Michael Mears
Absolutely.
Faisel Khan
Okay. Is that baked into your guidance?
Michael Mears
It is.
Faisel Khan
Okay; fair enough. I appreciate the time.
Thank you.
Operator
[Operator Instructions] We’ll take a follow up from John Edwards with Credit Suisse.
John Edwards
Just a follow up to Sharon's question on Saddlehorn, is there a minimum stake in Saddlehorn that you're requiring yourselves to take?
Michael Mears
If we are requiring?
John Edwards
That you want?
Michael Mears
The primary goal here is to optimize the balance between equity ownership in minimizing the risk and improving competitiveness of the pipe. So that’s the balance.
At this point in time, based on the current state of negotiations, minimum equity ownership we would have would be 40%.
John Edwards
That's helpful. That's exactly what I'm looking for.
Thank you.
Operator
We’ll now hear from Abhi Sinha with Wunderlich Securities.
Abhi Sinha
Just a quick one, and apologies if this is been answered. I'm trying to understand the $300 million extra for the CapEx, $200 million for 2015 and $100 million for 2016.
You said probably most of that is going to go towards Little Rock and the condensate splitter. So I'm trying to understand what are the major changes you have and what confidence drove that?
And what was not that factored last time versus what we have this time that we are seeing that is driving the $300 million change?
Michael Mears
I think some of that is – most of that are new projects and we haven’t mentioned all of the new projects. I gave a short list of two or three of them, but there is a number of much smaller projects that have been added that are of such a size that we would talk about them individually.
And then also we under-spent what we thought we were going to spend in 2014, so part of it is just a carry forward from 2014 into 2015
Abhi Sinha
Understood. And can you comment on the FERC margin?
You said that, that’s going to be lower of course in 2015 versus what you had in 2014. I'm trying to get some kind of quantification.
Can you go into the percentage and what do you expect, how much lower could that be or?
Michael Mears
You mean on an absolute margin basis? I don’t have those numbers here in front of me.
We will have to get back to you on that. I mean, the total as we’ve talked about for the commodity business in total including product overages is about $100 million and we said about two thirds of that is commodity related, so $65 million to $70 million is what we are projecting as a reduced commodity income from blending alone.
What that translates to in an actual margin per gallon, I don’t have that in front of me. We will have to get back to you.
Abhi Sinha
That's pretty much I had. Thank you very much.
Operator
Mr. Mears, there are no further questions, I’ll turn the conference back to you for closing or additional remarks.
Michael Mears
Alright. Well, I thank everyone for their time today, thank you for calling in and your interest at Magellan.
We are pleased with our results for 2014 and we are looking forward to a strong 2015. Thank you and we will talk to you next time.
Operator
And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.