Nov 2, 2016
Executives
Michael N. Mears - Magellan Midstream Partners LP Aaron L.
Milford - Magellan Midstream Partners LP
Analysts
Brian Zarahn - Mizuho Securities USA, Inc. Jeremy B.
Tonet - JPMorgan Securities LLC Shneur Z. Gershuni - UBS Securities LLC John Edwards - Credit Suisse Securities (USA) LLC (Broker) Lin Shen - HITE Hedge Asset Management LLC Poe Fratt - D.
A. Davidson & Co.
Sunil K. Sibal - Seaport Global Securities LLC Sharon Lui - Wells Fargo Securities LLC
Operator
Good day, and welcome to the Magellan Midstream Partners Third Quarter 2016 Earnings Results Conference Call. Today's conference is being recorded.
And, at this time, I would like to turn the conference over to Mr. Mike Mears, President and Chief Executive Officer.
Please go ahead, sir.
Michael N. Mears - Magellan Midstream Partners LP
All right, thank you. Well, good afternoon.
And thank you for joining us today for Magellan's third quarter earnings call. 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 generated third quarter financial results to beat our expectations for the quarter, mainly driven by higher than planned crude oil volumes on both the Longhorn and BridgeTex Pipeline as well as higher values for our pipeline product overages. Based on these improved results, we have increased our annual distributable cash flow guidance by $15 million to $925 million for the full year 2016.
I'll now turn the call over to our CFO, Aaron Milford, to review Magellan's third quarter financial results in more detail. Then I'll be back to discuss our outlook for the remainder of the year and review the status of a few of our larger construction projects before opening the call for your questions.
Aaron L. Milford - Magellan Midstream Partners LP
Thanks, Mike. Today, I'll be making references to certain non-GAAP financial metrics, including operating margin and distributable cash flow.
We've included exhibits to our earnings release to reconcile these metrics to their nearest GAAP measure. We reported third quarter net income of $194.6 million or $0.85 per unit earlier this morning, which is lower than the $251 million or $1.10 per unit reported for the third quarter of 2015.
Excluding the impact of mark-to-market NYMEX activity in the current quarter, adjusted earnings per unit of $0.91 exceeded our guidance of $0.80 provided back in August. Distributable cash flow increased to $243.9 million for the current quarter compared to $230 million reported for the third quarter of 2015.
In a moment, I will talk about each of our segment's performance for the quarter, but, in general, when unrealized losses related to our NYMEX activity used to hedge our commodity exposure are normalized, our business performed well in the quarter and we're beginning to see contributions from recently completed capital projects, including the Little Rock Pipeline and our Saddlehorn joint venture. I will now move on to discuss the operating margin performance of our refined products segment.
Our refined products segment generated $183.6 million of operating margin in the third quarter of 2016 compared to $241.6 million for the same period in 2015. This $58 million decrease is primarily the result of unrealized losses on our NYMEX positions being recognized in the current quarter, whereas the 2015 quarter benefited from significant unrealized gains.
I'll come back to product margins in a moment, but if one ignores product margins altogether and as shown on the exhibit to our press release, our base transportation and terminals margin increased $16 million in 2016 versus the 2015 period. Transportation and terminals revenue was $267.3 million for the quarter, which was $3.2 million higher than the comparable quarter in 2015.
This higher revenue is attributable to higher average tariff rates as a result of our July tariff increase, which averaged about 2% overall, with our indexed markets being adjusted down by 2% and our market-based rate locations being increased by 4%. Our total transportation volumes were down slightly compared to the 2015 quarter as a result of the 2015 quarter benefiting from some refinery disruptions.
This period-over-period decline was mostly offset by increased volumes in the current quarter from recently completed growth projects, including the Little Rock Pipeline project. As a side note, year-to-date volumes are up about 1% compared to 2015, with higher gasoline and other product volumes offsetting a decline in distillate volumes.
Product margin decreased by $74.4 million compared to the third quarter of 2015 as a result of unrealized losses related to our NYMEX hedging activity. The 2015 period benefited from approximately $57 million of unrealized gains, while the current period was impacted by about $17 million of unrealized losses.
This was simply due to the fact that in 2015 commodity prices were falling, thus making our hedges more valuable. While this year, commodity prices have generally been increasing, which results in losses for our hedges.
When we evaluate our cash margin, which takes into account when we physically sell product and normalizes for these unrealized gains and losses, the current quarter's product margin performance was basically unchanged from last year. While the product margins we have earned this year are below those earned last year, the lower current year margins have been offset to a large extent by slightly higher butane blending volumes and better performance from our transmix fractionation activities.
As we look forward, we have hedged virtually all of our expected butane blending volumes for the balance of this year and the spring of 2017. While margins remain lower than in the recent past and we expect to see some decline in 2017 compared to 2016, the margins we've been able to obtain remain consistent with our expectations.
Before leaving my discussion of commodity margins, I would like to touch on the subject of RINs. As the law is currently written, we are considered an obligated party under the Renewable Fuel Standard due to our butane blending activities.
As a result, we are required to purchase RINs in order to satisfy a renewable fuel obligation. We have already acquired all of the RINs we will need for the balance of 2016 and almost all the RINs we expect to need for 2017.
So while higher RIN costs negatively impact our margins, we do not expect these higher costs to materially impact our margins over the next year or so. Moving now to our operating expenses for our refined product segment, third quarter 2016 operating expenses were $13.2 million lower than the third quarter of 2015.
These lower expenses were primarily driven by lower environmental remediation expenses, lower tank maintenance costs and higher operational product gains which reduce operating expenses. For our crude segment, operating margin of $98.7 million was $4.1 million higher than the third quarter of last year.
The primary driver behind this period-over-period change was $3.3 million of higher earnings from our joint ventures, including BridgeTex and Saddlehorn. BridgeTex's performance was particularly strong compared to last year due to higher volumes during the current quarter as a result of the competing pipeline having some operational issues that pushed more barrels on to this pipeline.
BridgeTex's volumes for the quarter were more than 220,000 barrels per day compared to 200,000 barrels per day in the year-ago period. For the fourth quarter and consistent with our previous guidance, we are anticipating volumes to be closer to the minimum commitment level of 210,000 barrels per day.
Also our Saddlehorn joint venture began operations in September of 2016 and began contributing to operating margin. Our shippers are moving volumes consistent with their minimum volume commitments, totaling 40,000 barrels per day for the first year of their commitment.
Moving now to discuss the balance of our crude segment. Transportation and terminals revenue of $100.1 million was down $1 million from last year, this decrease primarily resulted from lower transportation volumes offset somewhat by higher leased storage revenues from our East Houston terminal.
Longhorn volumes averaged about 235,000 barrels per day in the current quarter, which was higher than we had planned for back in August due to the fact that like BridgeTex, a competing pipeline had some issues that pushed some barrels on to Longhorn. Volumes were, nonetheless, still down compared to last year's volume of approximately 265,000 barrels per day.
You may recall that we mentioned in last quarter's call that we expected Longhorn volumes to decline in the current quarter as shippers utilized some transportation credit that they had built up and were going to expire in the quarter if they went unused. We expect our Longhorn volumes to average around 260,000 barrels per day for the fourth quarter and the full year, which is consistent with our original guidance.
Volumes in our Houston Distribution System were also down slightly compared to last year. Operating expenses for the crude oil segment were essentially unchanged from the year-ago period, with lower power costs as a result of lower volumes being offset by higher personnel costs related to our Corpus Christi splitter commissioning and start-up preparation.
We also recognized product margin in the crude segment of $0.6 million related to a crude inventory position. Lastly, our Marine segment's operating margin of $33.2 million was $1 million higher compared to last year's quarter.
Revenues were up approximately $1.1 million due to higher leased storage fees and product margin was $1.6 million higher than a year-ago period due to higher volumes of transmix sales. These positive variances were offset somewhat by $1.7 million of higher operating expenses resulting from higher maintenance expenses compared to last year's quarter.
Now, moving to other net income variances to last year's quarter, our G&A expenses decreased by $1.8 million due to lower bonus and benefit expenses. Depreciation and amortization expense increased $5 million compared to the 2015 period due to expansion capital projects placed into service and an asset impairment for an inactive pipeline terminal.
Net interest expense increased by $5.8 million due to a slightly higher weighted average interest rate of 4.9% and a higher average debt balance of $4 billion, being partially offset by higher capitalized interest related to project spending. Other income increased by $5 million due to a $3 million break-up fee received in conjunction with a potential acquisition that was not completed, and the $2 million non-cash gain recognized due to the change in value of a fair value hedge used to hedge the price exposure related to certain crude oil tank bottom.
I will now move to a discussion regarding our balance sheet and liquidity position. As of September 30, we had $4.1 billion of long-term debt outstanding, including $34.9 million of commercial paper.
We also had $291.1 million of cash on hand. On September 13, we issued $500 million or 4.25% notes due in 2046 to repay outstanding commercial paper borrowings, and $250 million of notes that came due in October of this year as well as to use for general corporate purposes.
Since the end of the quarter, we have repaid the October 2016 notes, which were classified as a current liability on the quarter end balance sheet. In October, we renewed our $250 million, 364-day credit facility.
We also have an additional $1 billion multi-year credit facility in place and we do not currently have any borrowings outstanding under either of these credit facilities or our commercial paper program. As of the end of the third quarter, our debt-to-EBITDA ratio was approximately 3.2 times on a pro forma basis and 3.4 times on a headline basis.
We continue to enjoy a strong balance sheet, healthy distribution coverage, and have ample liquidity. We also remain committed to the maximum leverage ratio of 4 times debt-to-EBITDA.
As mentioned in past calls, we expect our leverage ratio to continue to increase over time as we fund our organic growth opportunity. As our growth continues and as our leverage ratio increases, we are considering an at-the-market equity program as a tool to help effectively manage our leverage ratio and properly capitalize our growing business.
Our approach and philosophy for efficiently capitalizing our business is not changing. We've experienced tremendous growth over the last seven years and have not completed an equity offering since 2010.
Given the mostly organic nature of our anticipated growth spending, we believe that an ATM program to be an effective tool for raising equity when and if needed. I will now turn the call back over to Mike to discuss our guidance for the remainder of 2016 as well as the status of our growth projects.
Michael N. Mears - Magellan Midstream Partners LP
Thanks, Aaron. As mentioned earlier, we have increased our 2016 DCF guidance by $15 million to $925 million based on our solid financial results during the third quarter and our outlook for the remainder of the year.
In addition, we remain committed to our goal of increasing cash distributions by 10% in 2016 and at least 8% in 2017, all while maintaining distribution coverage of 1.2 times. We're currently in the middle of Magellan's planning process for a three-year budget and expect to provide more details for 2017 guidance during our fourth quarter earnings call early next year.
Magellan achieved a number of important milestones in the third quarter of 2016. In addition to solid financial results, we also successfully started operations on two of our largest expansion projects.
Our Little Rock pipeline began operations in early July to deliver refined products from both the Gulf Coast and Mid-Continent refinery regions to the Little Rock market via our extensive pipeline network. Even though this new pipeline has just started operations, I'm happy to report that it is already exceeding our expectations.
In addition, the Platteville-to-Cushing segment of the Saddlehorn pipeline started up in September to deliver crude oil from the DJ Basin to the Cushing crude oil hub. For now, we expect Saddlehorn to move volume in line with the annual take-or-pay commitment levels of 40,000 barrels per day at least until the Carr lateral is operational in early 2017.
In addition, Saddlehorn conducted a successful open season last month and is now adding a new Wyoming origin to access incremental barrels beginning in early 2017. Construction is nearing completion for Corpus Christi condensate splitter.
The facility is mechanically complete and we are in the midst of commissioning the splitter over the coming weeks. Commercial operations are expected to begin late in the fourth quarter of 2016.
We are also making significant progress on our HoustonLink and Seabrook Logistics joint venture projects, with both expected to be operational during the first quarter of 2017. As a reminder, HoustonLink will enhance connectivity and strategic value for our Houston Distribution System, allowing us to be the last mile carrier to transport crude oil from the Marketlink pipeline to the refineries in Houston and Texas City area.
The first phase of our Seabrook Logistics joint venture will provide 700,000 barrels of crude oil storage to the Houston Gulf Coast region with pipeline connectivity to support crude oil imports. We remain optimistic that subsequent expansion phases at Seabrook will be approved in the near future, allowing the facility to be expanded into a large scale strategically situated crude oil export facility.
Our latest growth spending estimates are now $850 million in 2016, $300 million in 2017, and $250 million in 2018 to complete the construction projects currently underway. These spending estimates are $100 million higher than the last guidance we provided due to the launch of new projects, primarily related to the construction of 1.1 million barrels of storage along our refined products pipeline system, more than 300,000 barrels of new storage at our Galena Park marine terminal and the Wyoming origin point for the Saddlehorn pipeline.
Beyond these projects, Magellan continues to evaluate a wide range of additional investment opportunities. Some of these opportunities include further development of our new Pasadena, Texas terminal, expansion of our Seabrook Logistics joint venture, and potential development of a joint venture of refined products pipeline, originating from our Corpus Christi terminal.
We remain optimistic about each of these opportunities with active discussions progressing. These projects are large and complex and take time to negotiate.
We will keep you informed as these projects progress. In addition to these opportunities, Magellan is evaluating well in excess of $500 million of other potential organic growth opportunities with a blend of opportunities across our businesses.
And, of course, we remain active in evaluating potential acquisition. In the past, we've discussed our desire to extend our value chain to include gathering assets that could assist in directing barrels to our long-haul pipelines in the Permian Basin.
While a number of these assets have been on the market lately, we intend to stay patient waiting for the right assets at the right price to benefit Magellan's investors over the long term. That concludes our prepared remarks.
We'll now open the call for your questions.
Operator
We'll take our first question from Brian Zarahn from Mizuho. Please go ahead.
Your line is open.
Brian Zarahn - Mizuho Securities USA, Inc.
Good afternoon.
Michael N. Mears - Magellan Midstream Partners LP
Hi, Brian.
Brian Zarahn - Mizuho Securities USA, Inc.
In the third quarter, can you provide a little more color on the change in the average tariff on a sequential basis for the refined products and crude system? The products change is a bit higher than I thought and the crude tariff was a bit lower versus the second quarter of this year.
Michael N. Mears - Magellan Midstream Partners LP
Well, the primary change for the refined products tariff increase was the index and market-based rate increases we took July 1. That's essentially all of the increase with regards to the tariff rates with regards to refined products.
Could you repeat your question on the crude oil system?
Brian Zarahn - Mizuho Securities USA, Inc.
On the crude side, the tariff was lower, it was like maybe 10% versus the second quarter, the average tariff.
Aaron L. Milford - Magellan Midstream Partners LP
When you look at our crude average tariff, that's a tariff that we report that spans across all of our systems. So if you look at the mix of the transportation paths, Houston Distribution System obviously has a much lower tariff than Longhorn.
So as that mix of total volume changes, the average tariff can change as well. So when you look at the third quarter, it's just changing of the mix of transportation services provided.
Brian Zarahn - Mizuho Securities USA, Inc.
I guess on the crude side it's more short-haul barrels bringing the tariff down. On the refined products side...
Aaron L. Milford - Magellan Midstream Partners LP
Essentially.
Brian Zarahn - Mizuho Securities USA, Inc.
Yes.
Aaron L. Milford - Magellan Midstream Partners LP
Essentially, yes. Essentially, yes.
Brian Zarahn - Mizuho Securities USA, Inc.
Okay. And on the refined products side, I thought the tariff, the FERC escalator declined July 1 of this year.
Michael N. Mears - Magellan Midstream Partners LP
That is true. But you need to remember that two-thirds of our markets are market-based and not subject to the index.
And in those markets, we raised our rates by about 4%.
Brian Zarahn - Mizuho Securities USA, Inc.
Okay. So it's the market-based rates, and maybe some mix as well on your refined products side.
Michael N. Mears - Magellan Midstream Partners LP
Yeah.
Brian Zarahn - Mizuho Securities USA, Inc.
Okay. And then turning to the Permian, I know you gave your outlook for your pipes for the remainder of the year.
But I guess looking ahead, we appreciate your commentary on where you think your assessment of overall trends in the Permian and how that could impact your system on the crude side.
Michael N. Mears - Magellan Midstream Partners LP
Well, our expectations for the rest of the year I think we've stated. Longhorn, we're going to be at roughly 260,000 barrels a day, which is close to being operationally full.
And BridgeTex we expect to be at 210,000 barrels a day, which is at the MVC level. So those are our expectations for the rest the year.
If you look broader than that or longer than that, obviously at least for the period of time we have contracts on Longhorn, we expect Longhorn to be full, which is another couple years. On BridgeTex, we are actively marketing the space.
And just to reiterate, on BridgeTex, we have approximately 100,000 barrels of available space on BridgeTex above the MVC level. So we are actively marketing that space as we speak.
With regards to what the prognosis is going to be over the longer term, the next, say, three to four years, it seems like data points on that are constantly changing. I think I was accused in the last call of being too bearish on expectations for crude oil growth in the Basin.
I think that's probably just a product of our cautious and conservative viewpoint and preparing for that possibility. Clearly, production forecasts for the Basin continue to get stronger.
I think I've seen some projections that even with the new Enterprise line coming into service in 2018 that shortly after that we'll be short of capacity out of the Permian. That would be a great position for Magellan to be in, if that were to happen.
I think we probably still think that's pretty aggressive. And we're still active on implementing tools that will allow us to make our pipelines more competitive in the market.
A lot of those projections were coming out when crude oil was in the low to mid-$50s just a few weeks ago and now it's down in the $45. And so those projections can change from time-to-time, so we're going to continue to plan to make our pipelines as competitive as possible.
Brian Zarahn - Mizuho Securities USA, Inc.
Thank you, Mike.
Operator
And we'll take our next question from Jeremy Tonet from JPMorgan. Please go ahead.
Jeremy B. Tonet - JPMorgan Securities LLC
Good afternoon.
Michael N. Mears - Magellan Midstream Partners LP
Good afternoon.
Jeremy B. Tonet - JPMorgan Securities LLC
Just wanted to follow-up on the Permian conversation a bit because we've actually been hearing during this earnings season that certain producers there have been facing takeaway constraints. And it seems like there's urgency, at least for some of them, for more takeaway.
And just wondering what ability you might have to upsize Longhorn or BridgeTex via through pumping? Or are there any quicker solutions should the market require something like that sooner than maybe people expect.
Michael N. Mears - Magellan Midstream Partners LP
Well, I'm not sure who you're hearing is having takeaway issues. The answer to your first question directly, Longhorn really doesn't have any practical expansion capability.
We've stated this before. I mean its hydraulic capacity is about 290,000 barrels a day.
We don't plan for that much day-to-day because you do need sometime for downtime and maintenance and that sort of things, but it's hydraulically full. BridgeTex has, as I just said, about 100,000 barrels a day of available capacity a day without us needing to do essentially anything to accomplish that.
So, on a run rate basis, take-away capacity from the basin is not an issue. Now, there have been some recent issues with some other pipeline, short-term issues with some other pipelines that had some maintenance issues that may have had some short-term constraints on capacity and there may be some constraints in specific areas of the basin with regards to gathering system.
But at this point in time, assuming all of the pipelines are running, there shouldn't be any takeaway capacity away from the basin constraint.
Jeremy B. Tonet - JPMorgan Securities LLC
Okay. Thanks for your thoughts there.
And just turning to M&A for kind of gathering systems, the Permian there, it seems like there is a lot of competition. I'm just wondering if you could expand a bit more on what you're seeing out there as far as the bid-ask spread?
And maybe synergies that you guys could bring to the equation that could help you be more successful in the process (26:54).
Michael N. Mears - Magellan Midstream Partners LP
Well, you're right. I mean, we're I think probably early in the process of a number of gathering systems coming to the market.
We've seen one. We've seen the Vitol asset transact.
There's a number of other systems that are either in the market or planning to come to market. And at least from the initial indications, it's a very competitive market.
Our position hasn't changed. We're very interested in acquiring a gathering system.
As we've said before and I think, I mean we'll continue to demonstrate this as we're going to be disciplined in our approach and if the value reach to the point where we think we can't justify it, we won't participate. And so, it is competitive.
I will tell that we're doing other things to make sure we enhance the competitiveness of our long-haul pipes. Acquiring a gathering system is one potential tool, but there's other things we're doing.
I mean we are expanding our Gulf Coast presence, such that using Longhorn and BridgeTex to access our Houston Area Distribution System and potentially marine export facilities will be attractive to shippers. We are making investments, as we speak, on both Longhorn and BridgeTex to be able to batch condensate as a separate grade.
And I would also mention, we're evaluating, forming a marketing arm to give us another tool in the market. And when I say that, I mean, I want to be clear what I'm talking about here is to create an entity that can provide a service to producers that may not want to ship the barrels in their own name.
And many of our peers have such a service. We've been evaluating.
We haven't made any decisions on it yet whether we want to offer the same service and to give us another tool to have the ability to direct physical barrels to our pipeline. And just to further clarify, if we did something like this, it would be clearly just a service to transport barrels from the wellhead to our Longhorn pipes.
I'm not talking about a bulk trading business or anything like that, but more of a pure marketing business.
Jeremy B. Tonet - JPMorgan Securities LLC
That's it for me. Thank you very much.
Michael N. Mears - Magellan Midstream Partners LP
All right. Thanks.
Operator
And we'll take our next question from Shneur Gershuni from UBS. Please go ahead.
Shneur Z. Gershuni - UBS Securities LLC
Hi. Good afternoon, guys.
Michael N. Mears - Magellan Midstream Partners LP
Hi.
Shneur Z. Gershuni - UBS Securities LLC
Let's just say I'm in the camp of the bullish Permian forecast. What I think about your system in sort of the upside potential, let's maybe talk about BridgeTex here because I think that's where you've got kind of the capacity.
But let's say you've got a scenario where volumes are well in excess or volumes available to shipper in excess of your MVCs. The capacity that you just talked about where you would potentially look to remarket that and so forth, would the tariff be consistent with the tariff that you currently have right now, would it be higher, is there a sliding scale, is there any reason for us to – any limiting factors I guess on what the tariff could be, if let's say basis was $5 or $10 or something like that and it look like that was going to be the case for a couple of years.
I was just wondering if you can sort of walk through the mechanics and where to temper some of the enthusiasm if we thought basis was going to blow-out?
Michael N. Mears - Magellan Midstream Partners LP
Well, there are constraints on regulated pipeline just to what you can charge, that would be your first constraint. Actually I should say your first constraint is what the market will bear.
I mean as you look at the market right now, the differentials don't support shipping any barrels at spot. And so, you're assuming a situation where that changes and things get better in the production, is up closer to the capacity levels of pipe.
I think really the practical limits there are regulatory, with regards to – and competition, but you are going to have a regulatory cap on every regulated pipeline, I can't tell you what that number is, every case is going to be unique. But it's unlikely if the margin, if the basis blows out to $10 that you can charge a $9 tariff, if that's your question.
Shneur Z. Gershuni - UBS Securities LLC
Right. No, I assume there was going to be some limit.
So, I think I was wondering if you would sort of – there would be some sort of a cap and I'm not sure if you can disclose that, let's say, up to 90% capacity utilization and above 90% would you be uncapped to do whatever you want, just sort of wondering if you can sort of give us a little color that way?
Michael N. Mears - Magellan Midstream Partners LP
Well – and there's a lot of details behind that question. It doesn't work that way.
You essentially – unless you have contracts that you entered into through an open season, you have to charge the same rates for everybody, whether it's the first 90% or the last 10%. I mean the only other nuance there is the ability to argue for market-based rates, in which case you do have a lot more flexibility with your rate, we don't have that on our pipes today, that doesn't mean we couldn't argue for that in the future.
I mean I think one could argue that take-away capacity out of the Permian Basin's pretty competitive and you might be able to make it a case that you should be entitled to market-based rate. But that's not the case today.
So, I can't really give you a precise answer to a number. I mean every case is going to be specific to that pipe.
And with regards to the Longhorn and BridgeTex, I can't even give you that number because we haven't run the regulatory numbers to determine what we think the highest rate we could get under a regulatory limit would be.
Shneur Z. Gershuni - UBS Securities LLC
So two quick clarifications. So, mechanically, if you wanted to switch to market-based rates, I mean would you have to file with FERC?
I mean what would be the process on that?
Michael N. Mears - Magellan Midstream Partners LP
Well, for an interstate pipeline, yes, you would have to make a filing with FERC and demonstrate, and it's a fairly well defined process. It's been done a number of times.
And you'd have to have the FERC determine that it's competitive and you're entitled to market-based rates. For an intrastate pipeline, it's less clear; the Railroad Commission really doesn't have any clear rules as to whether a pipeline would be allowed market-based rates or not.
Shneur Z. Gershuni - UBS Securities LLC
Okay. And one last question then.
In the past, if I remember correctly, on Longhorn I think you were getting $4 in spot when you were doing about 220,000 barrels per day (34:30) on the committed tariff. How does that work against the comments that you just made about, was that kind of the limited at that point in time?
I think that was a year or two years ago that you were able to pull that off? And just trying to figure if that's kind of a good way to think about where that un-contracted capacity could be limited to and so forth.
Michael N. Mears - Magellan Midstream Partners LP
When we first established the spot rate of Longhorn, it was really driven by competitive and market conditions at that time. It wasn't driven by a regulatory cap.
Obviously, market conditions have changed since we started Longhorn up. And the spot rate is at a level where nothing ships on spot, which is probably true for most of the long-haul pipes with probably the exception of basin out of the Permian because you've got excess capacity and you've got differentials that don't support paying spot tariffs out of the basin.
Shneur Z. Gershuni - UBS Securities LLC
Okay. I really, really appreciate the color.
I think it's very helpful to help frame where the upside could be if it was to come to fruition. Thank you.
Michael N. Mears - Magellan Midstream Partners LP
Sure, sure.
Operator
And we'll take our next question from John Edwards of Credit Suisse. Please go ahead.
John Edwards - Credit Suisse Securities (USA) LLC (Broker)
Yeah. Good afternoon, everybody.
Thanks for taking my questions. Just kind of coming – Permian is a hot topic these days, but just, Mike, in your view, how much take-away capacity surplus do you think exists today and there's obviously varying views on when you're going to need more.
How are you guys thinking about that against kind of the likely volumetric ramp-up scenario that you think is most likely?
Michael N. Mears - Magellan Midstream Partners LP
Well, I think, I mean it's hard for me to know precisely how much excess capacity any of our peers have. I would guess that it's in the neighborhood – excess capacity today, it's in the neighborhood of 250,000 barrels, 300,000 barrels.
I know we've got 100,000 barrels on BridgeTex, so that's assuming that you've got 150,000 barrels or 200,000 barrels spread out among other pipes. Please take that as an estimate because I don't know how much excess capacity they have right now.
But moving to your second part of the question, once Enterprise builds their pipe, I think the question was, if I'm rephrasing it perhaps is, at what point do we reach full capacity even with the Enterprise line in place? And then what would we do about that if that were the case?
And I think it's safe to say, we're still of the viewpoint that it's going to be more than two years or three years before we fill up all of the available pipe capacity. And so if you're talking about a three-year plus or four-year timeframe, it's way too early to be planning for that, primarily because you're not going to get the customer support you would hope to build a new pipe.
That being said, we're certainly interested in providing infrastructure solutions when they're needed. And if we're in that situation, then we're going to be very interested in providing more capacity out of the Permian.
But, at least in our view, it's too early to be planning for that or working on that.
John Edwards - Credit Suisse Securities (USA) LLC (Broker)
Okay. That's helpful.
Just let me try to frame it a little differently. So on another call, another company management team indicated there was around 600,000 barrels a day to 700,000 barrels a day of gathering systems that were being built, were underway and would likely be completed somewhere around the 2018 timeframe.
And so that's why I was just trying to connect the dots there. That sounds like an awfully big number to us, clearly.
And if you think there's maybe 300,000 barrels a day excess, does it stand to reason here that you're going to maybe exceed that 300,000 barrels a day quicker, obviously, I guess it depends ultimately where all that volume can go in a variety of directions and so on. So any other thoughts you have in that context?
Michael N. Mears - Magellan Midstream Partners LP
Well, I guess my first reaction is if you have 300,000 barrels a day available today and you have Enterprise building their line at, say, 300,000 barrels a day, that's expandable I think to 450,000 barrels a day, if I remember correctly, but even before an expansion, two years from now including the excess capacity today, you're going to have the ability to take...
John Edwards - Credit Suisse Securities (USA) LLC (Broker)
600,000 barrels a day to 700,000 barrels a day, yeah.
Michael N. Mears - Magellan Midstream Partners LP
... 600,000 barrels a day to 700,000 barrels a day away.
The second thing is, and I don't know if that's right or not, but let's assume it is that there's 600,000 barrels a day of gathering system capacity being built, I think that it's too big of a leap to assume that all of that's going to be full two years from now. They may be building that much capacity for the long-term...
John Edwards - Credit Suisse Securities (USA) LLC (Broker)
Yeah.
Michael N. Mears - Magellan Midstream Partners LP
...but they expect that it's all going to be full in the short term I think is an aggressive assumption.
John Edwards - Credit Suisse Securities (USA) LLC (Broker)
All right. That's actually very helpful.
Okay. That's it for me.
Thank you so much.
Operator
We'll take our next question from Lin Shen from HITE. Please go ahead.
Lin Shen - HITE Hedge Asset Management LLC
Good afternoon. Thank you very much for taking the question.
Mike, I heard you said that in Permian the market is very competitive there. And you are disciplined, so if the valuation is too high, you can just walk away.
So other than that, K-1 (41:08) MLP (41:10) treating now is now really up from the beginning of this year. And I think the Magellan is one of their MLP has a lowest cost of capital among their MLP universe.
Can you talk a little bit about what do you thought about maybe M&A at enterprise level. Do you see there's more opportunity given where their MLP is treating them?
Michael N. Mears - Magellan Midstream Partners LP
Well, you would think so, but that's not been the experience in the market. Let me just make a couple points.
First of all, we do have a low cost of capital. We are interested in acquisitions.
However, we don't intend to use our low cost of capital as the primary tool to win bids. We still evaluate assets on what they're worth relative to the risk associated with the business, and we bid accordingly.
And we don't stretch beyond that simply because we can with a low cost of capital. We'll make that point, first of all.
Second of all, in our experience over the last six months or nine months on assets that we've been interested in is that there's an abundance of capital available in the market to pay premium valuations. So even though many of our MLP peers may have a higher cost of capital than us, that's not translating into lower bid values for assets in the marketplace.
Lin Shen - HITE Hedge Asset Management LLC
Great. And recently we also read the news and heard that there are a lot of challenges for building new pipelines both crude and the natural gas.
And it seems a lot of protests and also highlight in newsreels (43:08). So do you think that it would be more challenging for their pipeline business?
If so, how should we think about their ongoing U.S. strategy for like new pipeline strategy?
Michael N. Mears - Magellan Midstream Partners LP
Well, there's no doubt it's going to be more challenging to build pipelines in the future than it has been. I think that's safe to stay and no one would dispute that, but there's a lot of variables that go into that, not the least of which is what administration we're going to have in the future can lead to the drastically different outcome with regards to the ability to build pipelines efficiently.
I'd also say, even in this environment, and there's a lot of headline issues out there with regards to pipeline opposition, but it's not been universal, doesn't mean it can't become more universal. But we've recently completed a number of long-haul pipes ourselves and I wouldn't characterize them as easy, but we certainly have not run into the kind of opposition that some of our peers unfortunately are running into.
And so it's kind of hit and miss. And one of the problems for the industry is the unpredictability of that, and if you're going to initiate a new interstate pipeline, are you going to be the target of the opposition or not.
I think that's probably almost impossible to predict. So taking that back to your question, does that change our interest in building pipes?
The answer is no. It does refocus our efforts upfront to make sure that all parties are educated and informed before we start building anything new, which we've done historically.
We continue to do that and strengthen that, but it certainly shines a spotlight on how important that is. But we're not at a point where we don't think new pipelines can be built at all in this environment.
Lin Shen - HITE Hedge Asset Management LLC
Great. Thank you very much.
Michael N. Mears - Magellan Midstream Partners LP
Sure.
Operator
And we'll take our next question from Poe Fratt of D. A.
Davidson. Please go ahead.
Poe Fratt - D. A. Davidson & Co.
Hi. Good morning.
I'm not sure if I heard it, but can you give us some more color on the breakup fee that you got for the quarter?
Michael N. Mears - Magellan Midstream Partners LP
Yeah, I can just tell you, I mean we had a purchase agreement for a particular asset and I can't tell you what it is. But we had a breakup fee, $3 million breakup fee, if we weren't able to close it due to other parties' contractual rights and that's what happened.
Poe Fratt - D. A. Davidson & Co.
Contractual rights meaning somebody might've had a right of refusal on that Mike or...?
Michael N. Mears - Magellan Midstream Partners LP
That's a form of a contractual right, yes.
Poe Fratt - D. A. Davidson & Co.
Got you. And then can you just put some more color on how much you spent on RIN credits this year, and how much do you expect to spend next year?
Aaron L. Milford - Magellan Midstream Partners LP
It's close to $15 million this year. We expect that to go up a little bit next year, but it's not going to be drastically different, it may be something closer to $20 million next year.
Poe Fratt - D. A. Davidson & Co.
And then I think you said that your butane blending margins that you locked in are a little bit lower than previous year. Can you give us sort of a level that you're talking about as far as what you've locked in for the rest of this year and then next year?
Aaron L. Milford - Magellan Midstream Partners LP
Yes, if you look at this year at our average margin, they've been around $0.50. If you look back to their peak, just to kind of put all this in perspective, in 2014 they were close to $1.
And so, we've been dropping from $0.90 or $1 in 2014, they had average of $0.75 in 2015, and now we're at about $0.50 in 2016. And because of our hedging, the margins we've realized sort of lag that a little bit as the market falls because of hedges and the timing of those that we sort of lag the path.
If you look at 2017, if you go look at the current spot market that's out there right now, I want to say that we're around $0.40 so far in 2017. The good news is there will be a floor at some point we believe.
Michael N. Mears - Magellan Midstream Partners LP
Right. And I'd also emphasize and remind you that all of that has been included in our long-term forecasting.
So, even a year ago, when we were giving guidance and with regards to our distribution growth targets, we were assuming that those margins would drop to those levels.
Poe Fratt - D. A. Davidson & Co.
Got you. And then you added $100 million to CapEx, $50 million in 2017, $50 million in 2018, and you highlighted three projects, would you be willing to give additional color on how those three projects breakdown as far as that $100 million of increase?
Michael N. Mears - Magellan Midstream Partners LP
Well, by far the biggest portions of that are the storage projects along our products pipeline system in Galena Park, that's the vast majority of it.
Poe Fratt - D. A. Davidson & Co.
Yeah. I was assuming the origin would be about $10 million or so, but thanks for your help.
Operator
We'll take our next question from Sunil Sibal from Seaport Global. Please go ahead.
Sunil K. Sibal - Seaport Global Securities LLC
Hi. Good afternoon, guys, and congrats on a good quarter.
Most of my questions have...
Michael N. Mears - Magellan Midstream Partners LP
Thank you.
Sunil K. Sibal - Seaport Global Securities LLC
Yeah, most of my questions have been hit but I just had one clarification with regard to your discussions on marketing for the capacity on BridgeTex. Would you say that the customer interest has kind of changed significantly over the last two months to three months in terms of taking up that capacity and also is there a minimum duration of contracts that you're offering for that capacity?
Michael N. Mears - Magellan Midstream Partners LP
Well, the situation is a little different for existing pipelines and when you building a new pipeline. I mean the capacity is there today and shippers are able to use it without signing any contracts.
So that's kind of the starting point. Now the spot tariff on the line is higher than can be supported by the current differentials, as that changes, as the differentials improve, shippers can utilize space without contracts.
So, when we talk about marketing, we're trying to find mechanisms perhaps and send people to do it before they would otherwise and potentially make commitments, but it's much more difficult to get someone to sign a contract on an existing line with existing space. So, that's not likely going to be the first choice, it's more going to be just attracting business to that space from competing pipelines right now.
Sunil K. Sibal - Seaport Global Securities LLC
Okay, got it. Thank guys.
That's all I had.
Operator
And we'll take our next question from Sharon Lui from Wells Fargo. Please go ahead.
Sharon Lui - Wells Fargo Securities LLC
Hi. Good afternoon.
Michael N. Mears - Magellan Midstream Partners LP
Hi, Sharon.
Sharon Lui - Wells Fargo Securities LLC
You guys have mentioned that there were some recent terminalling deals in the Corpus Christi and the international market. Just wondering if you had interest in these assets and was it I guess just a multiple paid?
Michael N. Mears - Magellan Midstream Partners LP
We did look at those assets and we weren't at a competitive level on valuation. I don't know what else to add to it than that.
Sharon Lui - Wells Fargo Securities LLC
Okay. But you were looking at, I guess, M&A opportunities internationally as well?
Michael N. Mears - Magellan Midstream Partners LP
We did, but not seriously. I mean, to be honest, we haven't placed a priority on international expansion.
I mean, we continued to believe we've got strong organic growth domestically and we have not placed a strategic objective to get into the international business. So it's safe to say, we weren't aggressively pursuing the international transaction that just happened.
Sharon Lui - Wells Fargo Securities LLC
Okay. Fair enough.
And then, if you can provide a little bit more color on the performance of Little Rock since it was placed in service and the potential to exceed guidance?
Michael N. Mears - Magellan Midstream Partners LP
Well, as I said in my notes, I mean, it's exceeding our initial expectations and our initial expectations were the initial MVCs. And just, I think I've said publicly, the capacity of that pipe is 75,000 barrels a day.
Our minimum volume commitments are little less than half the capacity of the pipe. So we're seeing better than that out of the gate.
We're optimistic that that will stay that way or improve. I think I also mentioned in the last call that we are working on making a connection to a third-party pipeline to extend service to Memphis.
That agreement has been signed and we are now doing the work to put that into service. And I'm trying to remember late 2017 – I'm looking around the room for guidance here, I think it's late 2017 is when we expect to have that in service, so we'll have a new market in Memphis that we can reach that line also.
Sharon Lui - Wells Fargo Securities LLC
And I guess just the last question. Any potential for Magellan to use its assets to meet, I guess, the supply shortfall from the Colonial Pipeline outages?
Was there any impact, I guess, from the first outage on your numbers?
Michael N. Mears - Magellan Midstream Partners LP
Well, there was, not in a positive way, but we have terminals in the Southeast that are on the Colonial System that obviously had supply issues during their outage. It wasn't significant.
I mean, for the quarter, it was less than the $1 million of impact. If the system is up this weekend, like they're projecting, I think the impact this time will not be significant.
But with regards to our pipeline, I wish we could, but we don't have any pipelines that go that direction. So there's no benefit there for us, unfortunately.
Sharon Lui - Wells Fargo Securities LLC
Thank you.
Michael N. Mears - Magellan Midstream Partners LP
Sure.
Operator
And it appears we have no further questions at this time. I'll turn it back over to Mr.
Mike Mears for any additional or closing remarks.
Michael N. Mears - Magellan Midstream Partners LP
All right. Well, thank you very much for your time today and we thank all of you for your continued support and interest in the company.
Have a good afternoon.
Operator
This does conclude today's program. Thank you for your participation.
And you may disconnect at any time.