May 5, 2015
Executives
Michael N. Mears - Chairman of Magellan GP LLC, Chief Executive Officer of Magellan GP LLC and President of Magellan GP LLC Michael P.
Osborne - Chief Financial Officer of Magellan GP LLC and Senior Vice President of Finance & Accounting - Magellan GP LLC
Analysts
Brian Joshua Zarahn - Barclays Capital, Research Division Cory J. Garcia - Raymond James & Associates, Inc., Research Division Steven C.
Sherowski - Goldman Sachs Group Inc., Research Division John D. Edwards - Crédit Suisse AG, Research Division Jeremy B.
Tonet - JP Morgan Chase & Co, Research Division Abhishek Sinha - Wunderlich Securities Inc., Research Division Faisel Khan - Citigroup Inc, Research Division Norman Kramer Brian Lasky - Morgan Stanley, Research Division
Operator
Good day, and welcome to the Magellan Midstream Partners First Quarter 2015 Earnings Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Mike Mears. Please go ahead, sir.
Michael N. Mears
All right. Thank you.
Good afternoon, and thank you for joining us today. 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.
We announced our first quarter financial results this morning that were slightly ahead of the guidance we provided a few months ago. With mark-to-market accounting, it can be difficult to assess the quarter.
However, looking to DCF, which minimizes any accounting noise, you can see that the quarter shaped up quite well, especially considering the uncertainties in the recent commodity environment and the fact that the first quarter of 2014 represented an all-time record for us. Demand for our fee-based transportation and terminal services remained strong, and we continue to experience solid demand this year with higher crude oil and refined products pipeline volumes and increased storage utilization.
Further, we have been pleased with the results so far of our BridgeTex pipeline, which became operational in late 2014. Anytime a significant new pipeline system is constructed, there can be operational issues to work out initially.
However, startup of this pipeline system has gone extremely well, and BridgeTex delivered nearly 170,000 barrels a day of crude oil to the Houston area during the first quarter of 2015, and we expect to average roughly 200,000 barrels per day during the year. I'll now turn the call over to our CFO, Mike Osborne, to review Magellan's first quarter financial results in more detail.
Then I'll be back to discuss our outlook for the rest of 2015 and the status of our expansion projects before opening the call to your questions.
Michael P. Osborne
Thank you, Mike. Before I begin, I want to mention I will be commenting on the non-GAAP measures, operating margin and distributable cash flow, both of which are described in our earnings release.
As noted in the release, we reported net income of $183.6 million or $0.81 per unit this quarter versus net income of $242.6 million or $1.07 per unit in the first quarter of 2014. Distributable cash flow for the quarter was $233.1 million compared to $253.2 million in the 2014 period.
Approximately $37.3 million of the decrease in net income was attributable to commodity-related adjustments. Details of this activity can be found in our distributable cash flow reconciliation to net income, which was attached to our earnings release.
The remaining decrease is largely due to lower realized product margins, lower refined products transportation and terminalling margin, offset by higher crude oil operating margins. These period to period changes, particularly the decline in commodity prices, are consistent with the guidance that we provided on our February 4 quarter call.
I'll go through the operating margin for each of our segments and then discuss variances in depreciation, G&A and interest to come to an overall explanation of the variance in net income. On the refined products segment, operating margin for the quarter was $183.4 million compared to $255 million in 2014.
Factors driving the period-over-period decrease included a decrease of $12.7 million in transportation and terminalling margin and a decrease of $58.9 million in commodity margin. On the refined products transportation and terminalling, revenues increased $6.6 million driven by both slightly higher volumes and rates.
Volumes shipped increased 1.5% driven by a 4% increase in gasoline volumes and a 1.5% decline in distillate shipments. Average rate per barrel shipped also increased 1% as the effect of the midyear 2014 tariff rate increase of 3.9% was partially offset by shorter haul shipments which moved at a lower rate.
Transportation and terminalling operating expenses increased $19.1 million, primarily due to less product overages which reduced operating expenses as well as higher asset integrity and property tax cost. Refined products commodity margin decreased by approximately $59 million from $96 million in 2014 to $37 million in 2015.
Excluding commodity adjustments of $37 million, which represents the effects of unrealized mark-to-market hedging activity and lower cost to market adjustments on the underlying inventory, the realized commodity margin decreased approximately $22 million from $91 million to $69 million. This decrease was driven by lower margins on the fractionation activities and lower butane blending realized margins, both due to lower commodity prices.
For our butane blending activities, while physical sales prices from gasoline declined significantly between the periods, our 2015 realized commodity margin did benefit significantly from the commodity hedging program as we'd hedged approximately 2/3 of our spring butane blending activity before the downturn in commodity prices. On the crude oil segment, operating margin increased to $84.7 million compared to $63.3 million in the 2014 period.
Total revenues for the segment increased $17.1 million to $89.6 million compared to $72.5 million in 2014. The 2 primary factors causing this increase were higher Longhorn volumes, which were approximately 250,000 barrels per day in 2015 compared to 200,000 barrels per day in 2014, and fees received from BridgeTex for capacity on our Houston distribution system under an arrangement that began in the fourth quarter of 2014.
The crude oil segment also benefited from increased earnings from our joint ventures, most notably BridgeTex. BridgeTex began operations in September 2014.
And in the first quarter of 2015, due to the timing of cash distributions from the JV, it began contributing to our distributable cash flow. BridgeTex averaged nearly 170,000 barrels per day in the first quarter as commitments on the pipeline began in March, and it's expected to average around 200,000 barrels per day for the full year.
The higher crude oil segment revenues and equity earnings were partially offset by higher power costs associated with the increased pipeline shipments and less favorable product overages, which offset operating expenses. The operating margin on our marine terminal segment decreased approximately $500,000 as the increased revenues due to increased utilization at Wilmington and Galena Park were offset by lower product margins due to the timing of product sales and higher operating costs associated with asset integrity spending and asset retirements.
Stepping down from operating margin to net income, our depreciation and related expenses increased $4.2 million due to higher property balances associated with capital expenditures and a write-off of miscellaneous assets. Our G&A expenses increased $600,000 due to higher personnel costs, and net interest expense increased $3.4 million due to lower capitalized interest relating to the timing of completing capital projects as well as higher average debt balances.
And that was offset by lower average interest rates as recent issuances and commercial paper replaced maturing debt that carried higher rates. We ended the quarter with $3.15 billion in debt.
That's the face value, and it includes an aggregate $500 million we issued in the first quarter of $250 million each of 10-year and 30-year notes. We had cash on hand at March 31 of $52.8 million and no outstanding borrowings on either commercial paper or our credit facility.
Our debt to EBITDA, computed on a rolling 4-quarter basis, was under 2.9 to 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 2.8 to 1.
Now I'll turn it back over to Mike to discuss our outlook for the remainder of 2015 and capital projects.
Michael N. Mears
Thanks, Mike. Now that we have a quarter financial results under our belt, we are increasing our full year DCF guidance for 2015 to $870 million.
Our outlook has improved for the year based on solid results generated during the first quarter and an improved overall commodity environment versus earlier this year. With regards to butane blending, our previous guidance assumes an average of $0.60 per gallon margin for the year based on margins already locked in as we enter 2015 and the forward curve for the remainder of the year.
We now expect average margins for the year closer to $0.70 per gallon based on a combination of the margins already realized in the first quarter, hedges put into place for the fall blending period and the latest forward curve for the remainder of the year. We have approximately 2/3 of our expected fall blending volumes hedged at this point.
By increasing our DCF guidance to $870 million, we now expect distribution coverage of approximately 1.3x, which results in excess cash of more than $180 million for the year. And we remain committed to our goal of increasing cash distributions by 15% for 2015 and at least 10% for 2016.
And as usual, we expect to use any excess cash that we generate to fund our expansion projects. Moving on to our growth projects.
We've announced a few updates to our Saddlehorn pipeline project since the last time we talked. As a reminder, Saddlehorn is our project to construct a 550-mile pipeline to deliver crude oil from the Niobrara-DJ Basin to Cushing.
We are very pleased to now be working with 2 strategic industry partners for this pipeline. We previously advised that Anadarko is a committed shipper on the pipeline and has now exercised their option to become a 20% equity owner in the project.
Further, Plains has joined the project as a 40% owner. Saddlehorn will be a 20-inch pipeline with a maximum ultimate capacity of 400,000 barrels per day.
However, the initial configuration of the pipeline will have a capacity of approximately 200,000 barrels per day when the pipeline becomes operational in mid-2016. Although we haven't disclosed the amount of commitments, we have indicated the minimum commitments result in a 10 to 11x EBITDA multiple based on a total project cost of $800 million to $850 million.
We are finalizing the project details to extend Saddlehorn from Platteville, Colorado to Carr, Colorado, and we hope to be able to provide more details on this in the near future. This extension will allow Saddlehorn to offer an origin at Carr with connections to existing Plains Pipeline systems as well as additional origins within the production areas in the DJ Basin.
Concerning our other large-scale projects, we continue to make significant progress on our Corpus Christi splitter. Now that the necessary air permits have been received, we have moved onto the actual construction phase for this project.
The splitter remains on schedule for startup during the second half of 2016. The initial project is expected to be a 50,000-barrel a day splitter, but we remain in discussions with industry participants to determine if sufficient interests exist to add a second unit for an incremental 50,000 barrels a day of capacity.
For our Little Rock pipeline project, we are in the final stages of right-of-way and permitting work. With construction expected to commence over the next 2 months, we are targeting a mid-2016 startup date to begin delivering refined products in the Little Rock market via our pipeline system.
And we are just now starting to take crude oil deliveries at our new Barnhart origin to the Longhorn Pipeline System. As you may recall, our Longhorn pipeline is fully committed, but this new origin provides our customers added flexibility to originate barrels in a more cost effective manner into the system for crude oil production areas east of Crane.
We have also launched a number of new projects that will add to Magellan's growth profile going forward. For instance, we're building 1.4 million barrels of crude oil storage at our East Houston terminal to help meet growing demand for crude oil in the Gulf Coast region.
We are also expanding our Rocky Mountain refined products pipeline system that we acquired back in 2013 and connecting it to our Kansas to Denver refined products pipeline. Demand for this system has been strong, and connecting these pipeline systems together will provide our customers with more supply optionality to serve the Front Range area.
Each of these projects are expected to generate EBITDA multiples in the 6 to 8x range. In addition, we acquired a refined products terminal in Atlanta market on May 1 for $55 million.
Atlanta is an attractive market for us, and its location complements our existing Southeast terminals business, which has seen sizable volume growth over the last few years. With regards to expansion capital spending projections, for projects currently under construction and the recent terminal acquisition, we expect to spend $800 million during 2015, with an additional spending of $400 million in 2016 to complete the construction projects.
And as usual, with our strong balance sheet, we do not anticipate the need for any equity issuances in the foreseeable future to fund these projects. We also continue to assess more opportunities for growth, with potential projects that total well in excess of $500 million.
One example of the types of potential projects we are considering is an expansion of the BridgeTex pipeline to approximately 370,000 barrels per day and increasing the number of crude oil grades that can be transported. And as I have mentioned previously, we are focused on improving and increasing our marine capabilities in the Gulf Coast, and we have a number of potential projects under active development in this area.
We also recently announced the joint development agreement with TransCanada to build a new 24-inch pipeline from TransCanada's Marketlink pipeline to our East Houston facility. This project will provide direct access for crude oil transported from Cushing through TransCanada's Marketlink pipeline into our Houston and Texas City crude oil distribution system.
Our portion of the project will be approximately $50 million. And since it is still being finalized, it is not yet in our expansion capital spending projections.
We also remain quite active analyzing acquisition opportunities, but we will stay committed and disciplined and pursue acquisitions at prices that will benefit our investors in the long term. That concludes our prepared remarks.
So operator, we can now turn it over for questions.
Operator
[Operator Instructions] We'll take our first question from Brian Zarahn with Barclays.
Brian Joshua Zarahn - Barclays Capital, Research Division
On BridgeTex, you mentioned you expect volumes of about 200,000 barrels a day. With the contracted capacity of 80%, how should we think about the minimum volume commitments?
Any kind of -- any type of difference to what the actual volumes are when those cash flows would kick in?
Michael N. Mears
Well, we are -- first of all, that's an average for the year. And in the first quarter, we averaged 170,000.
So the average for the rest of the year will be higher than 200,000 to balance out the 200,000. We view that as a conservative projection.
We believe that there's some chance that we may have shippers that will be paying deficiencies during the early parts of the year. And so we factored that into our guidance.
So I guess that's all I have to say on that.
Brian Joshua Zarahn - Barclays Capital, Research Division
And then on the potential expansion of BridgeTex, is that complicated at all by the announcement of a competing large pipeline out of the Permian?
Michael N. Mears
Well, I don't know I'd say it's complicated. It obviously -- that's a factor that goes into consideration as we're evaluating it.
It's a factor that goes into the discussions we're having with customers. But the expansion of the system is a relatively low-cost expansion.
So we believe we can offer a pretty competitive service offering to the expanded capacity.
Brian Joshua Zarahn - Barclays Capital, Research Division
Just, I guess, from an industry's perspective, because you've got 2 pipes in the Permian, were you surprised at all by the announcement of such a large project, given where commodity prices are?
Michael N. Mears
Well, I've said this before with regards to our projects. When you're building a pipeline, you're looking at what the market is going to look like the next 15 to 20 years, not what it's looking like right now.
There's various projections as to what's going to happen with crude oil production out of the Permian over the long term. And there are -- some of those projections would indicate that another pipeline is needed.
And so I guess it doesn't surprise me that someone's taking the position to proceed with one if they're taking a long-term view of the basin.
Brian Joshua Zarahn - Barclays Capital, Research Division
And then switching to Saddlehorn. Given Anadarko now has a stake in the project, just directionally, how do you feel about the returns potentially improving above the commitments -- current commitments?
Michael N. Mears
We've said before and we continue to say that we're optimistic that we can do better than a 10 to 11 multiple. Again, those are the minimum commitments.
And certainly having a large producer in the basin as an equity owner is a positive, directionally. But there's also a number of other positives that we're working on to secure additional volumes on the system.
And again, we're optimistic that we can improve on that EBITDA multiple.
Brian Joshua Zarahn - Barclays Capital, Research Division
Last one from me, on the potential TransCanada project. The capital cost is small, but what's the -- how do you think about the potential volume impact on your Houston, Texas City system?
Michael N. Mears
Well, the potential is significant. I mean, obviously, there will be a significant amount of volume moving on the TransCanada system.
Today, if you look at our distribution system in Houston and Texas City, we really don't have -- that was kind of one hole we had in the system was a good connection with -- to a pipeline coming down from Cushing that would give us access to Cushing barrels and Canadian barrels coming to Cushing. So this solves that issue.
And so I think it puts us in a very strong position to increase the volumes on our distribution system.
Operator
And from Raymond James, we have Cory Garcia.
Cory J. Garcia - Raymond James & Associates, Inc., Research Division
Just to kind of venture back to BridgeTex, noticed a slight decline in volumes this quarter sequentially. And wondering about -- we've been hearing about sort of congestion in the Permian market still.
Wondering if that had maybe some of impact to volumes? Or if it was more just related to shippers trying to sort of take advantage of the crude market structure and contango storage opportunities?
Michael N. Mears
Well, if you're talking about the actual performance in the first quarter, it wasn't related to really any congestion in the market. There were -- or congestion or restrictions in getting physical barrels to Colorado City.
The pipelines are in place to do that. If you recall, early in the quarter, there were a number of weather issues that impacted production out in the basin.
There were some power issues out there. And in addition to that, our minimum commitments on BridgeTex did not start until March 1.
And so those didn't kick in until the last month of the quarter. So that's really what, in total, contributed to the 170,000 barrel a day number that we reported.
Our expectations for the remainder of the year, again, are significantly higher than that, such that it will average out to 200,000 a day for the year.
Cory J. Garcia - Raymond James & Associates, Inc., Research Division
Yes, perfect. Now it definitely seemed transitory given your guidance.
Just wanted to kind of fine-tune on where that was. And kind of switching focus to the marine business.
Any color on sort of the contract renewal trends you're seeing? It definitely feels like it's a target for some organic growth opportunities.
So any updates on that front?
Michael N. Mears
Well, I can tell you on the refined products side of the market, demand for storage remains strong. A recontracting is strong.
And we continue to look for expansion opportunities with regards to refined products, not only tankage but dock capacity. And on the crude oil side, it's the same situation.
We mentioned we're building more storage at East Houston as we speak. We also have recently leased a number of tanks that were previously in operational storage.
So we're really optimizing the opportunity with regards to crude oil. That being said, we still have a strong need and a strong desire from our customer base to provide more marine access for crude oil than what we currently have.
And so that continues to be a primary focus of our development efforts. And as I mentioned in my comments, we've got a number of things underway on that.
Hopefully, sometime in the near future, we'll have something to talk about with regards to that.
Operator
And we'll take Steve Sherowski with Goldman Sachs.
Steven C. Sherowski - Goldman Sachs Group Inc., Research Division
Just on your guidance increase, you mentioned that it was largely driven by an improved commodity price environment. I'm just wondering, does that $30 million, is that just solely based on the butane blending business?
Or does it also incorporate spot volumes on your crude pipelines?
Michael N. Mears
Well, I'd say -- I mean, the majority of that increase is due to commodity price improvement. And it's not just our butane blending, it's also our product overages.
There was a material impact in our previous guidance with regards to the reduced value of our product overages. So there was an impact there.
Those are the 2 primary drivers. But that being said, we do have an improved outlook on -- to the assumptions we've made on the throughput on our crude pipes.
Steven C. Sherowski - Goldman Sachs Group Inc., Research Division
Got you. Okay.
And just on the M&A front, I mean, I recognize that this transaction was relatively small, but it is 2 quarters in a row where you have announced acquisitions. Are you seeing any compression in the bid-ask spread or any change in the M&A environment that's noteworthy?
Michael N. Mears
No, not really. The acquisition we made was somewhat a limited auction.
I'd say we were in a unique situation to be able to acquire that for a reasonable price. And actually, if you look back at a number of the acquisitions we've made over the past few years, that's what we're most successful, it's where we're in a unique position to be an acquirer and be able to do that at an attractive price.
We don't win very many outright auctions because the market in an outright auction is still very pricey.
Operator
Next, we have John Edwards with Crédit Suisse.
John D. Edwards - Crédit Suisse AG, Research Division
I'm just curious on the -- on what you had to give up for Saddlehorn? Having Plains and APC coming up, you gave a little bit of share on that.
And I'm just wondering what -- in effect, what you got back for that? If you can talk about that at all.
Michael N. Mears
Well -- I mean, I would -- I mean, as far as what we gave up, I mean, it's really just an equity interest in the pipe. I mean, everyone is participating in the pipeline on an equal basis.
So there aren't favorable terms for anybody.
John D. Edwards - Crédit Suisse AG, Research Division
No, I mean, what you got back for -- in effect, giving -- allowing -- in effect, having a lower participation in the project.
Michael N. Mears
The way I -- I mean, what we got back was really just risk mitigation. It's a very competitive market out of the Niobrara.
You should know there's another pipeline being built out of the Niobrara. And we felt that partnering with strategic partners, large producers in the basin, playing certainly as a strong strategic partner that can bring a -- their marketing presence to the table, and also, they've got existing assets up there.
As I mentioned, we're looking to extend this lineup to Carr to connect to some existing Plains assets. So it's really just kind of an overall risk mitigation strategy to make the overall project more competitive in the market.
John D. Edwards - Crédit Suisse AG, Research Division
Okay. Did you -- were you able -- I mean, is there also the potential by having -- bringing the partners that perhaps there's additional leverage for expansion opportunities from it?
Is that -- was that part of the thought process?
Michael N. Mears
Absolutely. As I said, this extension from Platteville to Carr is something that probably would be less likely if Plains wasn't a partner in this project.
But it leverages nicely with existing Plains assets. And so, yes, that's one complement of it.
John D. Edwards - Crédit Suisse AG, Research Division
Okay. All right, that's helpful.
And then I'm just curious, on the press release, you kind of have the same narrative about your backlogs in excess of $500 million. If you could just give us any feel for -- given the commodity price environment we're in, from the last quarter, is it higher, lower, about the same?
Michael N. Mears
I'd say it's about the same. As you noticed, we've increased our actual spending number quite a bit from the first quarter.
But that being said, I mean, the backlog is still approximately the same.
John D. Edwards - Crédit Suisse AG, Research Division
All right. And then I'm just curious, your thoughts about -- I mean, given your size relative to your backlog and just given future -- kind of a future growth trajectory longer-term, what's your thoughts regarding, say, more of a larger scale-type acquisition, not necessarily transformative but something larger scale that might -- say, might increase the longer-term growth trajectory or the line of sight?
At least for those of us that -- we can't see into your specific backlog inventory, maybe you can just talk a little bit about that.
Michael N. Mears
Yes, just first on -- for your first comment, I mean, we're very aware that our disclosure on our backlog is probably less detailed than some of our peers. We do that on purpose just because that number can bump -- jump around quite a bit.
And we don't want to spend a lot of time talking about the size of the backlog. What I would point you to is that we haven't changed that guidance for many years now, and yet we've been able to perform and continue to bring projects across the goal line that are material enough to continue to grow the company substantially.
And I think that's exactly the situation we're in right now. To your second question, with regards to what we consider a transformative acquisition, the answer is: We consider everything.
We've -- we actively look at small acquisitions, and we actively look at large merger opportunities. Doesn't mean that we'll actually execute on any of them, but it's not something that we ignore.
I mean, we evaluate those opportunities on a real-time basis.
Operator
Next, we have Jeremy Tonet with JPMorgan.
Jeremy B. Tonet - JP Morgan Chase & Co, Research Division
Most of my questions have been covered. Just have one last one.
On the crude oil segment, it looks like the wholly owned assets, the volumes might have ticked down a little bit 1Q '15 versus 4Q '14. Just wondering if there was anything driving that.
Michael N. Mears
Hold on a second here. You're looking at -- well, our volumes shipped on our wholly-owned assets went up quarter-over-quarter.
Jeremy B. Tonet - JP Morgan Chase & Co, Research Division
Okay. I thought I saw $50 million this quarter and $52.8 million last quarter, unless I'm...
Michael N. Mears
No, the number was 40 -- that's versus first quarter of last year. I'm sorry.
The biggest portion of that is on our distribution system. We've just got normal fluctuations of volumes on the distribution system in the Houston area.
And that's the -- I'm also getting a note here that Marathon was on turnaround during part of the quarter. And so that would drive fewer barrels through the distribution system.
Jeremy B. Tonet - JP Morgan Chase & Co, Research Division
Got you. Okay.
Just on temporary items. That's helpful.
Operator
[Operator Instructions] We'll take our next question from Abhi Sinha with Wunderlich Securities.
Abhishek Sinha - Wunderlich Securities Inc., Research Division
Just one quick one for me. So can you just talk about the supply and takeaway capacity dynamics in the Niobrara?
I mean, we have another pipeline, like you said, from a competitor of similar-sized pipeline. So do you think there's a need or room for 2 pipelines?
I mean, how should we think about the capacity utilization if both pipeline come online?
Michael N. Mears
Well, I mean, to answer that, you really -- again, you have to look at the forward crude oil projections out of the basin. And I think I've mentioned this previously on a previous call that the projections for crude oil in the Niobrara from known reputable firms that are in the business of projecting crude oil production have significantly different numbers.
For instance, if you go out 5 years from now, I've seen projections -- recent projections that range from 400,000 barrels a day of production up to 600,000 barrels a day of production. Clearly, if you're at the lower end of that range, the basin probably doesn't need 2 pipelines.
If you're at the higher end of that range, then 2 pipelines is appropriate. So that's probably the best answer I can give you.
It's not out of the question that 2 pipelines are -- can serve the basin. But we've got some concerns on the higher end of that, and that's why we focused on securing the 2 largest producers in the basin to support our project.
We're hopeful that the higher end of those projections are accurate and our multiple will drop down dramatically. But that's all I've got to say to answer that.
Abhishek Sinha - Wunderlich Securities Inc., Research Division
So for this multiple 10 to 11x, I mean, what kind of position you have baked in, maybe like 400,000, 450,000? Or is it higher than that?
I mean, can you give some idea on that?
Michael N. Mears
Well, that's independent of what the actual production is. That's based on just the specific volume commitments we have for our projects that generates the 10 to 11.
And those commitment levels are well below the production forecast for the basin. So there's a lot of upside on top of that.
Operator
From Citigroup, we have Faisel Khan.
Faisel Khan - Citigroup Inc, Research Division
It's Faisal from Citi. Just a few questions.
First, just if you could clarify something for me on the hedges -- or the hedge sort of impact? It looks like looking at adjusted EBITDA, there was a $27 million sort of add-back.
And then if I go further into the press release, there was sort of a reconciliation for GAAP results, and there was a -- it looks like a $466,000 sort of lower cost to market adjustment. If you could help me reconcile those 2 numbers, just so I understand what's going on.
Michael P. Osborne
This is Mike Osborne. I'm looking at the DCF reconciliation.
There may have been a very small LCM this period. I think that's the $400,000.
But I think the biggest piece of the difference in hedges is you've got to pull in the LCM from the fourth quarter that we took as a reduction to DCF and adjusted EBITDA this period. So we've got those -- we don't apply hedge accounting.
So the mark-to-market would have come through a lot of the contracts in the fourth quarter. The underlying inventory had an LCM on it because you don't apply those hedged prices.
But for DCF purposes, we bring those in, in the period they're realized.
Faisel Khan - Citigroup Inc, Research Division
Okay. So the $29 million in the adjustment, that's how you get to that number?
Michael P. Osborne
Yes, that's right. That's, in effect, the turnaround of most of the LCM from last year on all that inventory held at year-end that's been sold.
Faisel Khan - Citigroup Inc, Research Division
Okay. Okay.
Got you. Inventory was all sold in the fourth quarter and not the first quarter?
Michael P. Osborne
No, it's inventory that we held in the year-end. So we've taken an adjustment on that inventory because the cost of it, exclusive of the hedges, which hedged the margin on it, exclusive of that we have to account for just the market price.
We had a write-down in the fourth quarter on the inventory we held, and then we sold it in the first quarter. So we just tried to true that up per DCF.
Faisel Khan - Citigroup Inc, Research Division
Yes. Okay, that makes sense.
Okay. And then just on the refined product OpEx in the quarter, it looks like it jumped up year-over-year and sequentially.
Just wondering what's driving that -- the operating expenses in the refined product system going from $51 million last year to $70.3 million in the quarter.
Michael P. Osborne
Yes. The largest piece of that, of course, there is some asset integrity spending, but the largest piece of that is just the value of the product overages, lower product overages given the lower commodity prices.
Michael N. Mears
And the way that works, that shows up in expense. And so when we have product overages on the pipeline, which is -- which obviously have value, that reduces our expense number.
That's where it's accounted for. And so if the value of that -- of those product overages goes down, then obviously, it's not affecting the expenses much as it did in the previous quarter.
So that's why the expense number jumps up is because the effect of the product overages has been lessened due to lower prices.
Faisel Khan - Citigroup Inc, Research Division
Okay. I get it.
It's almost like -- it's almost kind of like a revenue last year, but this year, it's -- this year, you're not seeing that overage, and therefore, this is more of a sustainable operating expense number that we should look at for the quarter.
Michael N. Mears
Well, we are seeing the overages, it's just the value of those overages is less. So if the price of the commodity has come back up, then those -- then that overage number will also come back up.
Faisel Khan - Citigroup Inc, Research Division
But all else being equal, the operating expense number we're seeing in the fourth quarter of $70 million, that would be a sustainable number going forward?
Michael N. Mears
Well, I don't know that I can say that. I mean, obviously, because you have product overages embedded in operating expenses, it's going to fluctuate -- those expenses are going to fluctuate with actual commodity prices.
So I can't tell you that it's going to be a run rate.
Faisel Khan - Citigroup Inc, Research Division
Yes. Okay.
Fair enough. It's just kind of interesting to see it in the expense side rather than a cost of goods, a revenue item.
But I hear you. Okay.
On the refined product volume growth, year-over-year, the 109 million barrels shipped versus 103.8 million, I just want to make sure, is that organic growth year-over-year? Or are you seeing -- or is there different connections or different markets you accessed during the course of the year that caused those volumes to go up year-over-year?
I just wanted to get a sense for the sort of health of the refined product markets to your system.
Michael N. Mears
Well, I would say, with regards to -- if we're comparing quarter-over-quarter, then most of that growth is inherent growth in the business. I mean, we've done some projects to capture some incremental growth, but those haven't been significant if you're just comparing quarter-over-quarter.
We had a big step-up in the fourth quarter of 2013 when we acquired the assets from Plains. But the benefit of those would have been fully realized in the first quarter of 2014.
So if you're doing a quarter-over-quarter comparison, that growth is just market growth for the most part.
Faisel Khan - Citigroup Inc, Research Division
Okay. And then to the extent that we see sort of refineries sort of go through a little bit of capacity creep here over the next year or so as some companies add some topping capacity and some companies sort of reinvest in their facilities to add a little more clean product yield to their plants, yes, I guess, how -- across your system, I mean, is there -- without spending any capital, is there ability to sort of absorb some of those volumes?
And would you have to make incremental capital investments to accommodate that?
Michael N. Mears
Well, it depends on where the demand is. If the demand is growing in the Mid-Continent region where the majority of our assets are, then we don't have to spend any capital, really, to capture that.
If the demand is in new markets, then we may have to spend some capital. We have recently, I should say, in the last 2 years, spent capital to be able to reverse our systems into Texas.
So as the -- as refiners continue to see refinery creep, if that demand growth is in the Texas markets, we can access those markets with no capital spending. However, there's other markets.
For example, our Little Rock project is really designed specifically to address these issues, Mid-Continent refineries that continue to grow given the advantage crude position they're in. And also seasonally want to run their refineries at high utilization has incented us to find new markets for those refineries.
And the Little Rock project is a perfect example of that. So that's an example where we're spending capital to access a new market.
So it's a combination of all those.
Faisel Khan - Citigroup Inc, Research Division
Okay. So if utilization is up and there's a little bit of capacity creep, therefore, supply is growing.
If demand isn't growing in the markets that you guys have access to, then you have to spend capital to move those barrels further south. I think that's what I'm getting out of your comments.
Is that a fair sort of conclusion?
Michael N. Mears
That's fair even though, I will say, that once we have the Little Rock pipeline in place and given that we've already spent the capital to reverse our systems into Texas, we will have considerable excess capacity to serve those markets. So we could see considerable incremental growth in refinery output in the Mid-Continent, and we'd have a place to put it without spending significantly more capital beyond that.
Faisel Khan - Citigroup Inc, Research Division
Okay. And how much volume can you move south right now from sort of PADD II?
What's the capability right now that you guys have to move products south?
Michael N. Mears
Well, the physical capability we have is roughly 50,000 to 70,000 barrels a day. And I can tell you that the vast majority of the time, we move none.
And so that's an opportunity that's available on the margin as refiners continue to creep. Once we complete the Little Rock pipeline, it's going to have a capacity of 75,000 barrels a day in the Little Rock market.
We're not projecting initially that it's going to move anywhere near that. But it has the capability to do that.
Operator
And we'll take our next question from Norman Kramer with Kramer Investments.
Norman Kramer
Can you update us on your thinking about how the rate environment for the refined products system might be going forward? There were some comments you made last quarter that there might be a new type of -- if I understood this correctly, a new type of determination on rates.
Is there anything new on that or anything you might speak to?
Michael N. Mears
Well, I can speak to it. There's nothing new yet.
I mean, we are literally entering into the period of time where the FERC does their 5-year review on the index. They have not yet -- and just as a reminder, the previous 5-year index, this is the last year.
July 1 of this year is the last year that we will apply the old index. And we're going to raise our tariff roughly 4.6% based on the old index.
And so then this fall, the FERC is going to be conducting their 5-year review of the index. Since that hasn't started yet, it's really impossible to predict what the outcome is going to be.
The industry, obviously, is going to focus on not changing the methodology substantially and relying on historical data, which has been the precedent in the past. But we really can't answer that question with any certainty until we get into the process.
Norman Kramer
Okay. And second question.
In terms of acquisitions you might look at or might consider, do you have more of a focus on the transportation of oil side of your business, which is a new and growing part? Or are there also possibly refined products pipeline pieces or on hold that are possible acquisitions for you?
Michael N. Mears
Well, we don't exclude one or the other. I mean, if you look at the 2 acquisitions we've done just from the past couple of years, they've been refined products acquisitions, one we just completed a few days ago for a terminal in Atlanta and then the Plains Pipeline -- refined products pipelines in the Rockies and Mexico.
Those brought -- obviously, we just closed on one, but the refined products pipelines we closed on 1.5 years ago are doing extremely well. We're very happy with those acquisitions.
And so we don't exclude refined products simply because they're refined products. So both of those classes of assets are the things that we are familiar with and we're comfortable with.
And so we evaluate those on an equal basis, I mean, and expect similar level of returns from both of them.
Norman Kramer
Okay. And just one last question.
Can you share with us the multiple on the Atlanta terminal acquisition?
Michael N. Mears
It's approximately a 10x multiple, based on current level of business.
Operator
And from Morgan Stanley, we have Brian Lasky.
Brian Lasky - Morgan Stanley, Research Division
Just a few quick cleanup questions. First, I was just wondering, the timing on the BridgeTex expansion, when do you think you'd have something on that?
Michael N. Mears
We're in discussions with folks right now, so we don't really have a timing. With regards to actually execution on it, once we decide to proceed actually expanding the capacity of the pipe itself is the easy part of it.
The more difficult part is adding tankage for additional grades -- I shouldn't say it's difficult, it's just the time-consuming part to advance the project. But we're in discussions on that now.
And just the nature of discussions, it's hard to give a prediction as to when we'll get something across the goal line.
Brian Lasky - Morgan Stanley, Research Division
Got it. I'm just curious kind of in relation to that.
I mean, presumably, this is a pretty cost-effective expansion for you guys. So why do you think producers would sign up for greenfield project if BridgeTex is, in fact -- if you guys are going to move forward with that project, how do you guys kind of think about the competitive dynamics there?
And how -- what are you guys seeing on the ground?
Michael N. Mears
Well, I'll tell you it's a very competitive market. I mean, beyond that, I don't want to speculate as to why producers would sign up for a new greenfield project.
I'll just say it's very competitive.
Brian Lasky - Morgan Stanley, Research Division
Got it. That's fair enough.
And then just -- I think you guys mentioned in passing before, but I just wanted to cover it. Did you guys pick up any spot volumes in the quarter?
And kind of what's assumed in your guidance the balance of the year?
Michael N. Mears
Yes, we haven't seen a lot of spot volumes on Longhorn or BridgeTex so far this year. And our guidance for the year assumes no spot volumes.
Brian Lasky - Morgan Stanley, Research Division
Got it. That makes sense.
And then just your systemwide kind of refined products volumes, what are you guys seeing real-time there? And what's kind of -- how are you guys thinking about that through the duration of the year?
Should we kind of expect the recent trends to continue? Or is there any other dynamics at play right now?
Michael N. Mears
Well, we've got a vast refined products systems, so there's always positives and negatives. If you look at our statistics, overall, refined product throughput through the system quarter-over-quarter was about a 1.5% increase.
That's fairly consistent with what we've assumed going forward with regards to our guidance.
Operator
And at this time, there are no further questions in our queue. I would like to turn the call back over to Mike Mears for any closing and additional remarks.
Michael N. Mears
All right. Well, I want to thank everyone for their time today.
We appreciate your interest in Magellan, and have a good afternoon. Thank you.
Operator
Ladies and gentlemen, that does conclude today's presentation. We appreciate everyone's participation.