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Magellan Midstream Partners (MMP) Q4 2018 Earnings Conference Call Transcript

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Magellan Midstream Partners (NYSE: MMP)
Q4 2018 Earnings Conference Call
Jan. 31, 2019 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Magellan Midstream Partners fourth-quarter 2018 earnings results conference call. [Operator instructions] As a reminder, this conference is being recorded today, Thursday, January 31, 2019. And now, it's my pleasure to turn the call over to Mike Mears, chief executive officer. Please go ahead, sir.

Mike Mears -- Chief Executive Officer

Great. Thank you. Good afternoon, and thank you for joining us today to discuss Magellan's fourth-quarter financial results and our outlook for 2019. 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 the factors that could impact the future performance of Magellan, but actual outcomes could be materially different. 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. Despite the volatility in the energy space over the last year, Magellan's business fundamentals have remained strong, and I'm pleased to report we generated record distributable cash flow for 2018. Further, we grew our annual cash distributions in line with our 8% goal, while maintaining distribution coverage at a solid 1.26 times for the year.

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You may have noticed in today's earnings that we have decided to discontinue the operation of our ammonia pipeline system later this year, and recognized an impairment associated with this decision in the fourth quarter. This system has been generating low operating margins for some time now. And with the prospect of declining anhydrous ammonia supply and continued high operating cost, future operation of the system was not likely to be profitable. I'll now turn the call over to our CFO Aaron Milford, to review Magellan's fourth-quarter financial results in more detail, then I'll be back to discuss our guidance for the new year, as well as the status for our larger expansion projects before opening the call to your questions.

Aaron Milford -- Chief Financial Officer

Thank you, Mike. During my comments today, I will be making references to certain non-GAAP financial metrics, including operating margin and distributable cash flow. We've included exhibits to our earnings release that reconcile these metrics to the nearest GAAP measure. Earlier this morning, we reported fourth-quarter net income of $314.1 million or $1.37 per unit on a diluted basis, which was higher than the $237.9 million or $1.04 per unit on a diluted basis reported for the fourth quarter of 2017.

Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit was $1.03. As discussed in the earnings release this morning and as Mike mentioned a moment ago, we have decided to begin the process of decommissioning our ammonia pipeline system, which resulted in a $49.1 million impairment charge in the fourth quarter. Adjusted further for this impairment charge, our diluted earnings would have been $1.24 per unit and in line with the guidance we had previously provided. Fourth-quarter distributable cash flow was $302.4 million compared to $308.3 million in the fourth quarter of 2017.

DCF in the quarter was negatively impacted by approximately $9 million related to ammonia decommissioning costs, as well as an additional $9 million related to our decision to write-off certain expenditures to date related to our previously announced Delaware Basin crude pipeline and a planned fractionator in Frost, Texas. For the year, 2018 was a very successful year. As Mike already mentioned, we set a record for distributable cash flow of $1.11 billion. Much of this outperformance was driven by higher crude oil pipeline volumes due to wide Permian to Houston market differentials, but our refined products segment, which still produces the majority of our distributable cash flow, also performed very well setting an annual volume record, while our marine segment was a steady contributor to our overall performance.

I will now move to a brief discussion of the fourth-quarter operating margin performance for each of our business segments. Our refined products segment generated $349.3 million of operating margin in the fourth quarter of 2018 compared to $216.2 million for the same period in 2017, an increase of $133.1 million. Much of this increase can be attributed to the favorable impact of unrealized mark-to-market gains recognized on exchange-traded futures contracts used to hedge our commodity-related activities. In periods when commodity product prices fall dramatically within a quarter, which is what we experienced during the fourth quarter of 2018, we typically see large mark-to-market gains related to our hedges, which we normalize out to only reflect realized activity in our calculations of distributable cash flow for a given period.

Transportation and terminal revenues increased $13.3 million compared to the fourth quarter of 2017 due to higher average tariff rates. In aggregate, volumes declined 2% compared to the fourth quarter of 2017, but it's important to put this in perspective. This overall decrease in volume is due to lower shipments on our South Texas system, which move at lower rates and is a supply driven portion of our system in the Houston area that has little relationship to how much volume we ultimately move on our higher-tariff, long-haul refined products pipeline systems. Within the core demand-driven portions of our system in Texas in the Midcontinent, volumes increased 2% compared to the fourth quarter of 2017, with gasoline being basically flat and distillate demand driving growth, especially in our West Texas markets.

Operating expenses were $17.7 million higher in the fourth quarter of 2018 compared to the 2017 quarter. Maintenance cost increased $12 million between periods due to the timing of work completed. We also wrote off $3 million of project cost related to the previously planned Frost fractionator, as I mentioned earlier. Finally, personnel costs were higher as well.

Commodity margin increased by $125.5 million compared to the fourth quarter of 2017, due to noncash unrealized gains related to our hedging program, as mentioned a moment ago. Our cash product margin for the quarter was higher than the 2017 quarter due to higher realized butane blending net margins. Butane blending volumes declined between periods due to refinery turnarounds during the quarter. Equity earnings from our Powder Springs joint venture increased compared to the 2017 period due to higher margins and volumes.

For our crude oil segment, current operating margin of $129.8 million was $12 million lower than the fourth quarter of 2017. Transportation and terminals revenue increased by $11.9 million due to fees earned from new storage and ancillary services associated with storage capacity, the Magellan leases from our joint venture, Seabrook Logistics, and uses to offer storage and throughput services to our customers. We also earned higher revenue from our condensate splitter in Corpus Christi. Revenue from crude oil pipeline movements was essentially flat compared to the 2017 quarter due to higher volumes being offset by lower average tariff rates.

Volumes were 25% higher compared to the 2017 quarter, with increased volumes on the Houston distribution system being the primary reason for the increase between periods. The spot shipments on Longhorn also increased. The average tariff rate declined due to a higher proportion of volumes on our Houston distribution system, which earn a considerably lower tariff rate compared to Longhorn, as well as lower average committed tariff rates on Longhorn, which became effective in the fourth quarter of 2018. Operating expenses were $25.3 million higher than the 2017 period.

This increase resulted from higher fees paid to Seabrook Logistics for storage and services, which Magellan utilized to then provide services to our customers. We also recognized $9 million of expenses related to the partial write-off of project cost for the Delaware crude oil pipeline project and the retirement of certain inactive tanks at our Cushing terminal. Environmental remediation accruals also increased between periods and product gains were less favorable. For the quarter, volumes on our Longhorn Pipeline averaged about 275,000 barrels per day.

While our equity earnings from our various crude oil joint ventures decreased $4.4 million compared to the fourth quarter of 2017, our joint ventures continue to perform well. The period-over-period decline results from a bit of an apples-to-oranges comparison to the fourth quarter of last year due to our sale of a portion of our interest in BridgeTex, which closed at the end of the third quarter of 2018. Absent this transaction, the fourth quarter of 2018 would have been higher than last year's quarter due to higher spot and committed volumes on both BridgeTex and Saddlehorn, as well as higher storage and ancillary revenues generated by Seabrook Logistics as a result of its most recent expansion and export capabilities coming on line in the third quarter of 2018. BridgeTex volumes averaged almost 415,000 barrels per day during the fourth quarter of 2018.

Saddlehorn Pipeline averaged nearly 100,000 barrels per day during the fourth quarter as a result of the scheduled step up in commitment levels, as well as additional volumes received through recent joint tariff arrangements put in place to originate volumes into Saddlehorn from the broader Rocky Mountain crude oil market. Moving now to the marine segment. The marine segment generated $30.7 million of operating margin in the fourth quarter of 2018, an increase of $4.6 million from the fourth quarter of 2017. Terminal revenue increased due to higher utilization compared to the 2017 quarter due to the 2017 period being negatively impacted by higher levels of out-of-service tank maintenance, in part due to damage from Hurricane Harvey.

Now moving to other net income variances to last year's quarter. Our G&A expenses were slightly higher as a result of higher personnel cost associated with higher headcount and incentive compensation. Depreciation, amortization and impairment expense increased as a result of new assets being placed into service, as well as the $49.1 million impairment charge related to our ammonia system mentioned earlier. Interest expense was $4 million lower than the fourth quarter of 2017 due to a lower average outstanding debt balance.

Our average interest rate of 4.8% was unchanged between periods. I will now move to a discussion regarding our balance sheet and liquidity position. Including the current portion of long-term debt, we had $4.3 billion of long-term debt outstanding as of December 31, 2018, and we had no outstanding commercial paper borrowings. Further, we had $218.3 million of unrestricted cash on hand at the end of the quarter.

Our leverage ratio was approximately 2.3 times debt-to-EBITDA as calculated according to our credit facility agreement. The current period leverage ratio was positively impacted by the BridgeTex transaction completed in the third quarter of 2018, as the proceeds were initially used to pay down debt, as well as the gain being included in EBITDA for compliance purposes. If you pro forma the impacts of this transaction, our leverage ratio would have been around 3 times. As we continue to fund our current expansion capital program, we expect this ratio to remain below our long-standing maximum target leverage ratio of 4 times.

Further, we don't expect to issue any equity for our current funding needs and plan to fund our needs by raising debt and using excess cash flow. Accordingly, we issued $500 million of 30-year bonds in early January. This issuance, along with cash on hand, will be used initially to redeem the $550 million of 6.55% notes that were coming due in July of 2019. We also continue to maintain a credit facility totaling $1 billion, which also backstops our commercial paper program.

I will now turn the call back over to Mike to discuss 2019 guidance, as well as our more significant growth projects currently under way.

Mike Mears -- Chief Executive Officer

Thank you, Aaron. Earlier today, we announced DCF guidance of $1.14 billion for 2019. Our plan is to increase annual distributions by 5% for 2019, which is consistent with our previous guidance. Healthy distribution coverage remains of primary importance to us, and we intend to maintain annual distribution coverage of at least 1.2 times for the foreseeable future.

As has become customary, we generally like to provide you with the key assumptions we use to build up our projections for the new year, so you have a better feel for how we see 2019 playing out. Starting with our refined products statement. We expect base refined products volume to remain relatively flat between years, especially in light of record shipments in 2018. With the benefit of growth projects, we expect total refined products pipeline shipments to increase by nearly 5% in 2019.

These growth projects include more short-haul movements from both the new connection at El Paso added in mid-2018, as well as volume move to our new Pasadena joint venture marine terminal that just became operational this month. And of course, our new East Houston-to-Hearne pipeline is expected to add volume once placed into service in mid-2019. The other key metric for our refined products pipeline system is the average tariff we collect. As you know, the current FERC indexation methodology is calculated as the change in the Producer Price Index plus 1.23%.

Based on the preliminary change in PPI for 2018, we expect the tariff increase to be about 4% for those markets that follow the index. While only roughly 40% of our refined product system is subject to indexation, we expect to increase tariffs in all of our refined products markets by the 4% FERC index on July 1, 2019. For modeling purposes, please keep in mind that our point to point pipeline movements have an impact on the average rates that you see in our operating statistics. Even though we intend to raise tariffs by 4% in mid-2019, our overall rate per barrel is expected to remain relatively flat between periods since a significant portion of the projected incremental throughput is anticipated to be from shorter-haul movements, as mentioned earlier, which move at a lower tariff rate.

The other key assumption that significantly impacts refined product segment is the commodity price environment, especially as it relates to our butane blending activities. We have about 0.5 of our expected 2019 butane blending sales volume hedged at this point, with virtually all of our spring blending margin locked in. We generally use the forward commodity price curve to forecast the expected margin for any unhedged volumes. We averaged blending margins of around $0.40 per gallon during 2018, and expect margins to be similar in 2019.

The 2019 margin estimate is based on hedges locked for approximately 0.5 of our expected volumes and an early January forward curve for the unhedged volume. Moving to our crude oil segment. We expect shipments on our Longhorn Pipeline to average 260,000 barrels a day in 2019, which is less from the 270,000 barrels a day moved in 2018. Much of the 2018 period benefited from spot barrels due to the favorable pricing differential between the Permian Basin and Houston.

While these differentials are currently still favorable, they can be unpredictable and they have started to shrink considerably of late. As a result, we have assumed that spot barrels move on Longhorn during the first quarter of 2019 only, with volumes moving closer to minimum commitments for the remainder of the year. In addition, the average tariff for Longhorn is expected to be lower than 2018 as well due to the new contracts that became effective during the fourth quarter of 2018. As a reminder, following the recent contract renewals, the new average committed rate for Longhorn is roughly $2 per barrel, with an average remaining contract life of five years.

For our Houston distribution system, we expect to see volumes decline consistent with our assumption that spot barrels will not move beyond the first quarter of 2019. Even though the Houston distribution system makes up more than 50% of the crude oil transportation volume we report, the average tariff on the Houston distribution system is significantly lower than Longhorn at about $0.20 per barrel, so variances in volume generally will not have a material impact to DCF. Combining these pieces, the overall crude oil tariff for our wholly owned pipelines is expected to decline about 5%, primarily due to a full year of the lower average Longhorn committed rates that became effective in the fourth quarter of 2018. Moving on to BridgeTex.

As you know, we have recently expanded the capacity to 440,000 barrels per day. However, we use an average run rate of 425,000 barrels per day for forecasting purposes due to throughput variations resulting from different product rates and routine line maintenance. Like Longhorn, we are forecasting in our base guidance that spot shipments on BridgeTex move during the first quarter only. As a result, our 2019 projections assume BridgeTex volume to average around 350,000 barrels a day in 2019.

For comparison, we moved 380,000 barrels a day in 2018, which benefited from spot shipments much of the year. The Saddlehorn Pipeline is expected to move about 110,000 barrels per day during 2019 based on 70,000 barrels a day of committed volumes, as well as incremental volumes from new joint tariffs we recently put into place with adjoining pipeline systems to access more barrels from the DJ and Powder River basins. We currently have 190,000 barrels per day of total capacity available on Saddlehorn, and may very well be in a position to use all of that space in the near future. As a result, we are currently considering a further expansion of the Saddlehorn Pipeline to add up to 100,000 barrels a day of additional space over the next year or 2.

Concerning maintenance capital, we spent nearly $90 million during 2018 and expect the number to be closer to $95 million in 2019. Although you only see a line item for the capital component of our integrity program, Magellan spends significant time and effort each year to ensure the safety and reliability of our assets. Considering both capital and expense, we expect to spend about $230 million on maintenance and integrity work in 2019. So those are the key building blocks used in our projections, resulting in DCF of approximately $1.14 billion in 2019.

With our stated goal of 5% annual distribution growth for 2019, we expect to generate a healthy coverage ratio of 1.2 times, with more than $200 million of excess cash flow generated to reinvest in the business this year. As mentioned earlier, our current DCF projections assumes spot shipments continue on the Longhorn and BridgeTex pipelines during the first quarter of 2019 only. If spot shipments were to continue throughout the year, our DCF could increase up to $1.2 billion for 2019. At this time, we do not intend to provide financial guidance beyond 2019.

However, we can reiterate our intention to target distribution coverage of at least 1.2 times for the foreseeable future. With regards to expansion capital, we spent nearly $640 million on organic growth construction projects during 2018. Based on the progress of expansion projects currently under way, we expect to spend $1.3 billion in 2019, with an additional $400 million in 2020 to complete the projects now in progress. Specific to the Pasadena refined products terminal, we placed the initial 1 million barrels of storage and related docks into service earlier this month.

We continue to make significant progress on the next phase of Pasadena, which is comprised of 4 million barrels of storage, with an additional dock expected to come online by the end of 2019. Discussions with a number of industry participants continue for additional infrastructure needs of this new facility, and we remain optimistic about future expansions in Pasadena. Significant progress continues on $1 billion of construction projects for new refined products pipelines in the State of Texas. Construction is under way for our East Houston-to-Hearne pipeline that is expected to be operational in mid-2019.

Significant activity is also under way for our West Texas refined products pipeline expansion with right-of-way work in pipe steel production in process. Construction is expected to commence in mid-2019, with the West Texas expansion targeted to be operational in mid-2020. As Aaron mentioned, in an effort to be more capital efficient, we are no longer pursuing our Delaware Basin crude oil pipeline from Wink to Crane on a stand-alone basis and are actively evaluating a lower-cost solution that will meet the needs of our shippers. The PGC joint venture pipelines deliver crude oil from the Permian Basin to the Gulf Coast region continues to advance with additional interest from new potential shippers.

Concurrently, discussions are continuing with Exxon and Plains to assess the potential of a project combination. We also continue to evaluate other potential expansion opportunities still totaling well in excess of $500 million with future projects under consideration in each of our business lines. Among many other possibilities, potential projects under development include expansion of the Saddlehorn Pipeline system, as I mentioned earlier, as well as a crude oil pipeline from Cushing to Houston. The open season for this proposed Voyager pipeline was just extended to the end of March.

Significant interest has been expressed from potential shippers, especially those planning to reach Voyager from connecting carriers. However, as is often the case, they need additional time to finalize their commitments across multiple pipelines. We remain optimistic about these opportunities, as well as a host of other projects that are in earlier phases of analysis. While the projects we assess come in all shapes and sizes, we remain committed to our capital discipline and continue to target an EBITDA multiple of 6 times to 8 times for new investments.

That now concludes our prepared remarks. So operator, we're now ready to turn the call over for questions. 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from the line of Spiro Dounis with Credit Suisse. Please go ahead.

Spiro Dounis -- Credit Suisse -- Analyst

Hey, good afternoon. Just want to start off on CAPEX, specifically on 2020 and how to think about backfilling that. And so when we think about it, when do you think we'd expect to see some of that $500 million or access of $500 million convert into 2020 CAPEX? Could you just give us a sense of what are some of the gating issues preventing some of these larger projects from being included?

Mike Mears -- Chief Executive Officer

Well, I think the simple answer is all of those potential projects are in various states of negotiation to secure contracts. So without going through the list of potential projects in detail, I'd say there are some projects that are closer to being initiated and rolling into that capital pool and there are some that are further away. So I don't really have a breakdown on the timing. I would expect as the years goes on, you'll be seeing us increase expansion capital forecast for 2020, but I don't have a schedule of exactly when that's going to happen.

Spiro Dounis -- Credit Suisse -- Analyst

OK. No worries. And just with respect to the distribution growth around 5%. I think, like you said, consistent with what you said in the past, but maybe at the lower end of that 5% to 8% range.

So just curious what's sort of driving you there? Is that a function of funding all this growth, like you said? Or is that also related to kind of what's going on in the market and maybe growth not being rewarded the way it used to?

Mike Mears -- Chief Executive Officer

Well, I think there's a little bit of all of that in there. I mean, if you go through our assumptions for 2019, we have taken a fairly conservative approach in our view with regards to guidance. Most notably, making -- building into our guidance no spot movements on our crude oil pipes after the first quarter. Consistent -- we felt consistent with that, we should probably be at the lower range of our distribution growth.

And there's some element of not getting paid for that that came into that decision, but there's more of an element of that continuing to strengthen our balance sheet and keep higher levels of coverage.

Spiro Dounis -- Credit Suisse -- Analyst

Appreciate the color. Thanks everyone.

Operator

And our next question is from Gabe Moreen with Mizuho. Please go ahead.

Gabe Moreen -- Mizuho Securities -- Analyst

Hey, good afternoon everyone. Mike, can you talk a little bit about, I think, walking a little bit away from the 2020 guide of 5% to 8% DCF growth that you gave back in November. Is it really just Permian spreads coming in a bit more and the dynamic getting a bit more competitive a bit sooner? Or are there any factors there that -- other factors beyond, I guess, crude oil prices and commodity prices also coming in since now that you reported in November?

Mike Mears -- Chief Executive Officer

We spent a lot of time internally as to whether we should give 2020 guidance or not. And under -- primarily under the concern that the market might take it as a negative, we're not intending for it to be a negative. There is simply so many variables that -- for 2020 that are very hard to predict that we felt that it wasn't prudent for us to throw guidance out there. Those variables include -- I mean, a major component of those variables is what the Permian spread is going to be after many of these new build pipes come into service later this year.

That's just one variable. And you also have a wide range of commodity forecasts that are out in the market, which directly affects our blending margins. And we also have another round of Longhorn recontracting that's going to occur at the end of 2020. So there's enough variables there that we didn't feel was prudent for us to lock in or reaffirm 2020 guidance.

But I don't want that to mean that there's not reasonable assumptions within those variables that provide for very healthy growth in 2020. It's just we don't feel at this point that -- to get comfortable giving guidance to that.

Gabe Moreen -- Mizuho Securities -- Analyst

Thanks, Mike. And then maybe if I can ask another two short ones. One is on the Plains joint venture pipeline and partnering with your project, should we read anything to their announcement earlier this week about FID-ing it? Or is it just negotiations continue and hopefully something gets announced there in terms of combining the projects?

Mike Mears -- Chief Executive Officer

Well, I don't want to comment on reading anything of their FID. I mean, I think their FID stands on itself. What I can say, and unfortunately I can't say much about this other than to affirm that we are continuing discussions with them and they are proceeding, but that's really all I can say at this point.

Gabe Moreen -- Mizuho Securities -- Analyst

OK. And last one from me is just on the ammonia pipeline. Any thoughts to -- or feasibility to repurposing that pipe in any shape or fashion?

Mike Mears -- Chief Executive Officer

We have looked at repurposing the ammonia system numerous times over the years. And the fundamental problem with the ammonia system is the maintenance capital expense, the forecasted forward maintenance capital expense on that pipe really make it uneconomic to put it into any service. And so, no, there's really no option to do that.

Gabe Moreen -- Mizuho Securities -- Analyst

Got it. Thank you.

Operator

And the next question is from Keith Stanley with Wolfe Research. Please go ahead.

Keith Stanley -- Wolfe Research -- Analyst

Hi, good afternoon. Just looking at the 2019 DCF guidance, it's more like 3% growth year over year. Can you just talk about some of the drivers versus when you were previously talking to 5% to 8% growth year over year in 2019, that's changed?

Mike Mears -- Chief Executive Officer

Well, we've had -- a couple of things have changed. I think we had been up until recently making the assumption that spot volumes on our long-haul crude oil pipes would continue beyond the first quarter. Given the volatility in the market we've seen recently, we've changed that assumption. And so clearly, if you add a quarter or two to our numbers, we will be probably in the previous guidance we've given, and there's still a reasonable chance that will happen.

But again, given our conservative nature, we've not put that in our current guidance. I think the other thing I'd highlight too is just from a simple math standpoint that when we gave that guidance, we exceeded our expectations for 2018. And so if you're looking at a year-over-year improvement, you're starting with the base higher than what we had -- what we were anticipating when we gave that guidance. I think the other component too here I think that we should highlight is that between the guidance we gave back in November versus today, we've had a significant decline in commodity prices, which impacts our blending business.

So I think it's those things that are really the primary components of the change.

Keith Stanley -- Wolfe Research -- Analyst

OK. And on the ammonia business, can you say how much EBITDA and DCF is contributed, I guess, in 2018 or is expected to contribute in 2019? Is it anything material at all that's in your numbers from that business?

Mike Mears -- Chief Executive Officer

It's not material. I can tell you -- I looked at the last three-year average and it was less. I mean, the operate -- the DCF impact of the ammonia system over the last three years was less than $3 million a year.

Keith Stanley -- Wolfe Research -- Analyst

Got it.

Operator

And the next question is from Theresa Chen with Barclays. Please go ahead.

Theresa Chen -- Barclays Investment Bank -- Analyst

Hi. Wanted to follow up on your crude project activity in the Permian. So in regards to the cancellation of the Wink to Crane project as a stand-alone entity, does this mean that it could potentially become part of the PGC project? And at this point, what do you think the probability is that that Longhorn line moved forward?

Mike Mears -- Chief Executive Officer

With regards to Wink to Crane, we are still actively looking at a capital investment in capacity between Wink to Crane, but it would not be as a stand-alone pipeline and that's probably all I can say about that at this moment. And it would be a much, much lower capital investment, and it would be a much more efficient way for us to source barrels into Longhorn for our customers. So that's actively being developed. Does that answer the question?

Theresa Chen -- Barclays Investment Bank -- Analyst

And the probability that the PGC project moved forward at this point?

Mike Mears -- Chief Executive Officer

We're actively progressing with PGC, and continuing the process of acquiring right away and pursuing the project on a stand-alone basis. It's -- we are still very interested in combining the project with Exxon and Plains, and so that is moderating that process a little bit, but we are still proceeding full steam ahead.

Theresa Chen -- Barclays Investment Bank -- Analyst

Do have a time line of when those discussions can be concluded, the combination of the two projects?

Mike Mears -- Chief Executive Officer

It's bad business to try to forecast timing on negotiations. I can tell you that speaking for PGC, we would want to complete these as fast as we can and we're operating under that scenario. But I can't really give you a prediction as to when that's going to be concluded.

Theresa Chen -- Barclays Investment Bank -- Analyst

OK. Just looking at the reiteration of your CAPEX for 2019 and 2020, it looks like you're portion for that project is still included, is that the case?

Mike Mears -- Chief Executive Officer

That's correct.

Theresa Chen -- Barclays Investment Bank -- Analyst

OK. And then on BridgeTex, can you just remind us how much spot capacity is available, I guess, like here post the final expansion taking you to 425,000?

Mike Mears -- Chief Executive Officer

I'm not sure I have that number off the top of my head. Hold on, I've got some folks here doing the math for me. About 115,000 barrels a day.

Theresa Chen -- Barclays Investment Bank -- Analyst

OK. And then what is the throughput on the system so far this quarter?

Mike Mears -- Chief Executive Officer

What's the throughput on BridgeTex this quarter?

Theresa Chen -- Barclays Investment Bank -- Analyst

Exactly, yes.

Mike Mears -- Chief Executive Officer

Are you talking about in the first quarter or for the fourth quarter of last year?

Theresa Chen -- Barclays Investment Bank -- Analyst

The first 31 days of 2019.

Mike Mears -- Chief Executive Officer

Well, I'm not prepared to give you that number at this point.

Theresa Chen -- Barclays Investment Bank -- Analyst

OK. No worries. Do you have your cash product margin for fourth-quarter '18 in the refined products segment?

Mike Mears -- Chief Executive Officer

The cash margin for the refined products segment?

Theresa Chen -- Barclays Investment Bank -- Analyst

The product margin related to the butane blending.

Mike Mears -- Chief Executive Officer

Oh, you mean for blending.

Theresa Chen -- Barclays Investment Bank -- Analyst

Yes.

Mike Mears -- Chief Executive Officer

For the year, it was around $0.40 a gallon. For the fourth quarter, it was around $0.55 a gallon.

Theresa Chen -- Barclays Investment Bank -- Analyst

Thank you very much.

Operator

And our next question is from Jeremy Tonet with J.P. Morgan. Please go ahead.

Jeremy Tonet -- J.P. Morgan -- Analyst

Hi. Good afternoon. Just want to come back to the 1.2 times coverage that you guys have been referencing before here. Is that just a number where there's enough retained DCF in that kind of future equity need for a year if you're spending $400 million to $500 million a year? Or is this -- how else is it also, I guess, the distribution growth plan if you're having your CAPEX year, if you're spending a lot in the near term, could it tick up after? Or you'll just kind of manage to a steady growth rate? Just wondering if you could kind of help us think through the process there.

Aaron Milford -- Chief Financial Officer

So when we think about our coverage ratio, we're trying to make sure that is that a level that we're properly funding our CAPEX. And then it also reflects to some extent how we see where we are in a particular business cycle. You may recall many years ago when we had very high commodity margins, we actually allowed our coverage ratio to tick up to almost 1.5x for a while. So it's a combination of our spending needs, along with where we are in a particular business cycle that helps us set for any short-term period of time what our coverage ratio targets would be.

We feel long term, at least for the foreseeable future, at least 1.2 times is a good place for us to be, but it could be higher than that during periods of time.

Jeremy Tonet -- J.P. Morgan -- Analyst

That's helpful. Thanks. And I think in the past, you guys have discussed a possible pipe connectivity between Houston and Corpus. Any updated thoughts that you could provide there?

Mike Mears -- Chief Executive Officer

I don't have an update. I can tell you we're still working on it, but I don't have an update.

Jeremy Tonet -- J.P. Morgan -- Analyst

Gotcha. One last one for me, I guess. Just wondering, you talked about the Analyst Day a bit, and if you had any updated thoughts with regards to the possibility of converting to a C-Corp? If you kind of see limitations in the MLP space, it seems you kind of hit up against index maxes there and if that plays into your thought process?

Aaron Milford -- Chief Financial Officer

We keep the idea of converting to a C-Corp on -- under evaluation all the time. In our -- from our perspective, just making sure we're doing our jobs appropriately, that's something we need to keep our eye on, so we do. The reality of it is given we don't need to raise any equity, we could fund our growth with excess cash flow and raising debt. We feel like we have a -- what I would consider a really powerful option here.

And when you combine that option with the data that we see, which is arguably not very conclusive that if you were to convert to a C-Corp that you necessarily see a valuation benefit from that. And if you take that uncertainty, that's a real motivator of converting is trying to get additional demand for your units and increase the price for that with a broader investor base. We see -- we understand that, but we have to lay that against the fact that when we convert, for us it would -- it's -- not for us, but for everybody, it's permanent. You don't get to rewind the clock.

So when you're looking at having to make a very permanent and impactful decision over the long term and juxtapose that with the uncertainty of whether you would benefit from it, to us that means you need to be cautious and patient, which is the stance that we're taking.

Jeremy Tonet -- J.P. Morgan -- Analyst

That's very helpful. Thank you for your thoughts.

Operator

And the next question is from Jerren Holder with Goldman Sachs. Please go ahead

Jerren Holder -- Goldman Sachs -- Analyst

Thanks. Good afternoon. Maybe starting with the Delaware Basin project that you guys canceled. I noticed CAPEX guidance didn't necessarily change.

Was there something else added to the backlog? Or how should we think about what was factored in for guidance for CAPEX there?

Mike Mears -- Chief Executive Officer

Well, I mean, our actual total capital spending did change. What's misleading is, if you look at our guidance for '19 and '20, it's consistent with what we were previously guiding. But if you look at '18, we significantly underspent our guidance for '18. So that's really where you see the variance.

Jerren Holder -- Goldman Sachs -- Analyst

Got it. And then what -- at what point in time do you think a buyback program -- units buyback program can make sense for Magellan?

Mike Mears -- Chief Executive Officer

Well, we -- a buyback program is something that we all consider. Now we're not positioned to do that today. We think that we've got better uses of our capital at this point to deploy on the growth projects we have in front of us. So we're not planning on a buyback.

If we reach a point in time where, I guess, one of two things, we either build more excess cash and we have a valuation on our equity that we think that's a good use of the cash to buy back our units, then we would consider at that time, but we don't -- we would consider it at that time, but we're not in that environment at this point.

Jerren Holder -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

And the next question is from Dennis Coleman with Merrill Lynch. Please go ahead.

Dennis Coleman -- Merrill Lynch -- Analyst

Yes. Hi, good afternoon everyone. Wonder if I might just try one on PCG again. In terms of the discussions between you and the Plains, Exxon group, can you talk about what's being negotiated? Obviously, it has to be a win-win for both and what they came out with seemed to identify a certain path.

I mean, is it right away or where the terminals or where the pipeline might go, volumes? Anything you might be able to talk about there would be helpful.

Mike Mears -- Chief Executive Officer

Well, as much as I'd like to, I can't unfortunately. I mean, all I can do is, is tell you that we are in discussions. But you -- hopefully, you can appreciate, there is multiple parties sitting around the table in these discussions and confidentiality is important to a lot of those parties, including ourselves. And so that's all I can say at this point.

Dennis Coleman -- Merrill Lynch -- Analyst

OK, OK. I thought I'd give it a shot there. I guess, maybe just on the Voyager announcement and the extension of the open season, how should we interpret the extension out to the late March date?

Mike Mears -- Chief Executive Officer

I think you should that -- interpret that as the normal course of events. It's a very competitive market and parties that are interested or considering commitments often times ask for more time and that's how you should interpret it. I will -- the caveat I'll add to that though is that until we have commitments, we don't have a project. And so -- but we wouldn't be extending it if we didn't think that there was a significant likelihood that we can get those commitments.

Dennis Coleman -- Merrill Lynch -- Analyst

OK. And then one just a little bit more detailed, if I can. On the adjustments to DCF that you talked about, the $9 million for ammonia and $9 million for the other projects, just where exactly is that coming through the income statement? Is that in the DD&A line? It looks like that's probably where it is.

Aaron Milford -- Chief Financial Officer

Well, where you will see the adjustments, so if you talk about the ammonia, the $9 million is a subset of the $49.1 million total impairment charge. So that's where you'll see it on the income statement. And then likewise the -- and then on this other $9 million, where you'll see those coming through are in the operating expenses of the particular segment. For instance, for the fractionator, you'll see that coming through the refined products operating expenses.

And then for the Wink to Crane, you'll see that coming through the crude oil segment operating expenses.

Dennis Coleman -- Merrill Lynch -- Analyst

OK. Thank you.

Operator

And the next question is from Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni -- UBS -- Analyst

Good afternoon, guys Sorry to beat on the whole PGC pipeline again, but I do have slightly different questions. In the past, you've talked about having enough commitments to move forward. Are you able to give us some color around the credit quality of the customers that have committed? And are they binding or are they still evaluating other projects?

Mike Mears -- Chief Executive Officer

They are binding commitments. And they -- and the credit -- I mean, there's a range of credit there, but generally, it's strong credit.

Shneur Gershuni -- UBS -- Analyst

OK. Because you had said something in -- I believe, in your prepared remarks about how customers are evaluating other projects as well, too. Did I mishear that or was that correct?

Mike Mears -- Chief Executive Officer

What I said -- and I think you did mishear that, I said we are talking to incremental potential shippers on PGC in addition to the commitments we already have.

Shneur Gershuni -- UBS -- Analyst

OK, got it. OK. So the ones that you have in place right now are strong credit quality customers?

Mike Mears -- Chief Executive Officer

Yes.

Shneur Gershuni -- UBS -- Analyst

OK. Great. With respect to the shutdown of the ammonia pipeline, I believe you had said to a previous question that it was less than $3 million a year in DCF, but you'd also mentioned in one of your other responses that part of the issue with repurposing it -- I believe it was to Gabe's question, is you mentioned that -- and it was really about the maintenance CAPEX was so high on it. Can you give us some color on the maintenance CAPEX for this pipeline -- for the ammonia pipeline? And does that impact your expectations for maintenance CAPEX on a go-forward basis?

Mike Mears -- Chief Executive Officer

Well, let me see how to parse through your question there. The -- it is true that the maintenance capital and expense cap -- expense costs are significantly higher on the ammonia system than really any other pipe we've got, and a lot of that's forward forecasting. So when we looked at -- so another way of saying that, our historical costs have been high, but our future costs are expected to be even higher than that. So we -- so back to your question on exactly how much maintenance capital was, I think we spent -- I'm trying to look at some notes here.

Our total cost -- I'm sorry, I don't have all that information right in front of me, so I'm trying to find it. Our total asset integrity, our expense costs and our capital costs on average, historically, is probably in the -- I'm just ballparking an average here, I'd say, $10 million a year range on the system. And when I look out to 2020 and beyond, that number was forecast to go up significantly.

Shneur Gershuni -- UBS -- Analyst

OK, that makes sense. One final question...

Mike Mears -- Chief Executive Officer

Sorry. Just I was going to say sorry for bouncing around on you like that, but I was trying to find all that information.

Shneur Gershuni -- UBS -- Analyst

I totally appreciate it. And just a couple more clarifications. With respect to Saddlehorn, you talked about potentially 100,000 of expansion. Would that be 100% on Saddlehorn or would that be in combination with Grand Mesa or that's owned by NGL?

Mike Mears -- Chief Executive Officer

It'd be 100% on Saddlehorn.

Shneur Gershuni -- UBS -- Analyst

OK. And so it's 100% your capacity?

Mike Mears -- Chief Executive Officer

Correct.

Shneur Gershuni -- UBS -- Analyst

Got it. And then just to clarify the results that you actually reported today. The adjusted EBITDA number that was in the press release, did that include the, what we'll call, onetime or lumpy items with the write-offs in it and so the number was actually higher on a clean basis? Or was the adjusted EBITDA number the clean number?

Aaron Milford -- Chief Financial Officer

The adjusted EBITDA number includes the write-offs we talked about today. The only thing that it doesn't show up in there is the gain on BridgeTex, which we exclude for DCF purposes, but the other write-off items we talked about is in that number.

Shneur Gershuni -- UBS -- Analyst

So a clean number would in fact be higher then?

Aaron Milford -- Chief Financial Officer

Yes.

Shneur Gershuni -- UBS -- Analyst

All right. Perfect. All right, guys, really appreciate the help and have a great day.

Operator

And the next question is from Elvira Scotto with RBC Capital Markets. Please go ahead.

Elvira Scotto -- RBC Capital Markets -- Analyst

Hey, good afternoon everyone. Just a couple of clarification questions. So with the write-offs that you discussed today, all else equal, OPEX for crude oil and refined products should actually be lower kind of going forward for modeling purposes, is that correct?

Aaron Milford -- Chief Financial Officer

Yes.

Elvira Scotto -- RBC Capital Markets -- Analyst

OK. Great. And then, again, I just wanted to clarify that last question. The adjusted EBITDA number of $374 million, you're saying does -- it includes $49 million of impairment or have you excluded that?

Aaron Milford -- Chief Financial Officer

Let me try and be clear. That number does not include the $49.1 million. It does include $9 million of that $49.1 million related to ammonia. It also -- yes, I apologize if I wasn't clear.

It also includes the amount we wrote off related to Frost, and it also includes the amount we wrote off related to the Cushing tanks and then also the Wink to Crane line. So the only thing that's not reflected in there is essentially the noncash portion balance of the ammonia write-off.

Elvira Scotto -- RBC Capital Markets -- Analyst

Got it. That's super helpful. And then as you think about the Voyager pipeline and how competitive that building pipe from Cushing down to the Gulf Coast, is there any opportunity from Voyager to combine with any of the competing pipelines similar to the discussions that you're having on PCG?

Mike Mears -- Chief Executive Officer

I'd say, our mentality and our focus here at Magellan is always to be capital efficient when an opportunity to be capital efficient is available. So if that is available, we would be open to considering it.

Elvira Scotto -- RBC Capital Markets -- Analyst

Great. And then just the last one from me is, do you have any updates -- in the past, you talked about potential export facility capable of loading VLCCs at Harbor Island, Corpus Christi. Do you have any update, are you still looking at that project? Any update there would be helpful.

Mike Mears -- Chief Executive Officer

Yes. Really, all I can say at this point is we are looking at that. We're also looking at other options. It's a very dynamic environment.

We're look -- and we're looking at a number of things, but we don't have any updates on any of them at this point.

Elvira Scotto -- RBC Capital Markets -- Analyst

OK, great. Thanks. That's all for me. Thank you.

Operator

And gentlemen, those are all the questions we have for today. I will now turn over back to you for any closing remarks.

Mike Mears -- Chief Executive Officer

All right. Well, thank you for your time today, and thank you for your interest in Magellan. Hope you have a good afternoon.

Operator

[Operator signoff]

Duration: 56 minutes

Call Participants:

Mike Mears -- Chief Executive Officer

Aaron Milford -- Chief Financial Officer

Spiro Dounis -- Credit Suisse -- Analyst

Gabe Moreen -- Mizuho Securities -- Analyst

Keith Stanley -- Wolfe Research -- Analyst

Theresa Chen -- Barclays Investment Bank -- Analyst

Jeremy Tonet -- J.P. Morgan -- Analyst

Jerren Holder -- Goldman Sachs -- Analyst

Dennis Coleman -- Merrill Lynch -- Analyst

Shneur Gershuni -- UBS -- Analyst

Elvira Scotto -- RBC Capital Markets -- Analyst

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