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Good day, and welcome to the Magellan Midstream Partners' Third Quarter 2018 Earnings Results Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the call over to Mike Mears, President and CEO. Please go ahead.
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 the factors that could impact the future performance of Magellan, but actual outcomes could be materially different. You should review the risks factors and other information discussed in our filings with the SEC and form your own opinions about Magellan's future performance.
Since our last earnings call a number of notable events have occurred for Magellan and most of those relate to Permian crude oil pipelines. First off, we closed on the sale of a 20% interest in BridgeTex at what we consider to be an attractive valuation. Magellan now owns 30% of BridgeTex and remains the pipeline operator...
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Yes, you have re-joined.
All right. Thank you.
It's important to highlight the BridgeTex continues to be a strategic asset for us. It is connected to the Magellan East Houston terminal, which is becoming a significant trading hub for the U.S. Gulf Coast as well as our Houston crude oil distribution system servicing Houston and Texas City refineries, as well as our Seabrook Logistics joint venture crude oil export terminal. BridgeTex will also play an important role in our other growth initiatives in Houston and beyond. We intend to reinvest the $575 million of proceeds from the sales transaction into additional attractive growth projects.
We also recently announced a new crude oil pipeline in conjunction with Energy Transfer, MPLX, and Delek to deliver crude oil from the Permian Basin to our terminal in East Houston and Energy Transfer's terminal in Nederland, Texas. We believe this pipeline, which is called the Permian Gulf Coast, or PGC, pipeline is attractive for the industry because it can essentially serve the entire Gulf Coast refining complex region from Texas to Louisiana as well as multiple crude oil export facilities. This project has sufficient commitments to move forward but it's currently in an open season to secure additional volume commitments to the pipe.
While the exact project scope will be determined once the open season ends, the pipeline is currently expected to be a 30-inch diameter pipeline with an in-service date of mid-2020. A 30-inch pipe once fully expanded, they can generally move up to a million barrels of product per day and would cost in the area of $2 billion. As currently contemplated, Magellan's share of the spend will be roughly $500 million, and we're still assessing additional infrastructure investments we'll need to make to our Houston distribution system and possibly additional export capabilities to handle the incremental volume expected to flow to the Houston area.
We've also tried to keep the market apprised of the status of our Longhorn recontracting process. As a reminder, the initial term of our Longhorn contract expired on September 30. Effective October 1, about 50% of the committed volume elected to extend their contract under expiring terms for an additional two years for an average rate of roughly $2.25 a barrel.
The remaining 50% of committed volume executed long-term contracts for an average life of eight years, with a lower incentive rate that averages approximately $1.75 per barrel. As a result, we expect an average committed rate of approximately $2 per barrel on Longhorn beginning in the fourth quarter of 2018 with an average contract life of five years.
We also announced another solid quarter of financial results this morning with higher contributions from each of our operating segments compared to the year-ago period.
I'll now turn over the call to our CFO, Aaron Milford to review our third quarter financial results in more detail. Then, I'll be back to discuss our guidance and the status of a few of our larger expansion projects and open the floor to your questions.
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, to reconcile these metrics to their nearest GAAP measure.
Earlier this morning, we reported third quarter net income of $594.5 million, or $2.60 per unit on a diluted basis, which was higher than the $198.5 million, or $0.87 per unit on a diluted basis reported for the third quarter of 2017. Excluding the impact of mark-to-market futures contract activity in the current quarter, adjusted diluted earnings per unit was $2.65.
And if you further remove the impact of the net gain recognized from the sale of our 20% interest in BridgeTex, diluted earnings per unit was $1.10, which exceeded the $1 guidance per diluted unit provided for the quarter back in August.
As consistent with our past practice, we've excluded the net gain from the BridgeTex transaction in our calculation of DCF as it is not related to the partnership's ongoing operations. With this adjustment, distributable cash flow of $281.8 million for the third quarter of 2018 was 20% higher than the $235.2 million reported in the third quarter of 2017.
I will now move to a brief discussion of the operating margin performance of each of our business segments. Our Refined Products segment generated $214.7 million of operating margin in the third quarter of 2018, compared to $173.8 million for the same period in 2017, an increase of $40.9 million.
Transportation and terminals revenues increased $11 million, or almost 4%, compared to the 2017 quarter. The increase was primarily related to continued higher distillate demand, especially in West Texas, as well as higher average rates as a result of our July increase in tariff rates of 4.4%.
Operating expenses were $6.4 million lower in the current period, compared to last year. This overall decrease is attributable to more favorable product overages, which act to reduce operating expenses, offset by higher asset integrity expenses and property tax expenses, compared to the 2017 quarter. The property tax increase from last year was due to last year's quarter benefiting from a favorable tax adjustment.
Product margin increased by $19.4 million compared to the third quarter of 2017 mainly due to lower non-cash mark-to-market losses related to our hedging activities. Our cash product margin was slightly lower in the quarter compared to last year's quarter, primarily as a result of delayed butane blending sales volumes, which was mostly offset by better results from our fractionation activities. We also had higher equity earnings from our Powder Springs joint venture compared to last year.
For our crude oil segment, current-period operating margin of $153.9 million was $38.1 million higher than the third quarter of last year and represents another record for this segment. Transportation and terminals revenue increased by approximately $28.8 million due to higher spot volumes and higher average rate on Longhorn system in response to wider Permian Basin to Houston market differentials as well as higher volumes in our Houston distribution system.
For the segment overall, rate per barrel declined compared to last year. This decline, as we've discussed in the past, is related to increasing volumes in our Houston distribution system where tariffs are considerably lower than the tariffs on our Longhorn pipeline. The current quarter also benefited from higher contributions from our condensate splitter and revenues earned from new storage and ancillary services related to Seabrook Logistics.
The second phase expansion of Seabrook Logistics came online during the quarter. You may recall this second phase of expansion increased storage within the joint venture, as well as created a connection to our Houston distribution system in support of providing crude oil export capabilities to the market. Magellan has leased crude oil storage capacity and contracted for throughput services from Seabrook Logistics. And we then re-offer these services to the market and receive storage revenue and fees for ancillary services from our customers. As a result, we will recognize revenue related to what we receive from our customers and recognize operating expenses related to the fees we in turn pay to our Seabrook Logistics joint venture.
Moving now to operating expenses, our crude oil segment operating expenses increased $14 million, mainly due to fees paid to our Seabrook Logistics joint venture for storage and throughput services, which I just discussed a moment ago, as well as higher environmental accruals and less favorable product overages.
For the quarter, volumes in our Longhorn pipeline averaged about 275,000 barrels per day. As mentioned in our earnings release this morning, we continue to expect volumes on our Longhorn system to average 270,000 barrels per day for 2018 on an annualized basis.
Equity earnings from our various crude oil joint ventures increased $18.2 million, compared to the third quarter of 2017. This increase is primarily attributable to higher volumes in the BridgeTex Pipeline from new commitments, which started in the first quarter of 2018, as well as increased spot shipments in response to higher basis differentials between the Permian Basin and Houston.
Volumes in the Saddlehorn Pipeline were also higher as a result of the contractual step-up and committed volumes in September of 2017 and also September of 2018. We also saw an increase in earnings from Seabrook Logistics associated with new storage, pipeline, and export capabilities placed into service during the third quarter as previously mentioned.
BridgeTex's volumes averaged over 395,000 barrels per day during the third quarter of 2018, compared to approximately 280,000 barrels per day in the third quarter of 2017. Also as mentioned in our earnings release this morning, we continue to expect BridgeTex to average about 370,000 barrels per day for 2018 on a full-year basis.
Saddlehorn Pipeline averaged over 70,000 barrels per day during the quarter, compared to under 50,000 barrels per day during the third quarter of 2017.
Moving now to the Marine segment. The Marine segment generated $29 million of operating margin in the current quarter, compared to $25.9 million in the third quarter of 2017. Terminal revenue increased $2 million, compared to last year's quarter due to higher average storage rates due to contractual escalations and more ancillary revenue as a result in higher customer activity compared to the 2017 period, which was negatively impacted by Hurricane Harvey. Operating expenses were slightly lower compared to last year as the 2017 period was negatively impacted by higher environmental accruals and clean-up work associated with Harvey.
Now moving to other net income variances to last year's quarter. Our G&A expenses were approximately $10 million higher than the 2017 quarter as a result of higher personnel costs associated with higher incentive plan expenses due to our strong performance this year and higher head count as a result of growth.
Depreciation and amortization increased as a result of new assets being placed into service and interest expense increased as a result of higher average debt outstanding, compared to last year's quarter. Finally, the 2018 quarter benefited from the $353.8 million gain recognized in conjunction with the sale of a portion of our interest in BridgeTex as I highlighted earlier.
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 September 30, 2018 and we had no outstanding commercial paper borrowings.
Further, we had $217 million of unrestricted cash on hand at the end of the quarter, which resulted in net long-term debt outstanding of approximately $4.1 billion. Our average interest rate was approximately 4.6% and our leverage ratio was approximately 2.3 times debt-to-EBITDA as calculated according to our revolving credit facility agreement.
The current period leverage ratio was positively impacted by the BridgeTex transaction as the proceeds were initially used to pay down debt, as well as the gain being included in EBITDA for compliance purposes. As we continue to fund our current expansion capital program, we expect this ratio to naturally increase, to be more in line with historical levels, but below our longstanding maximum leverage ratio of 4 times.
Further, given what we see right now, we don't expect to issue any equity for our funding needs. We continue to maintain a credit facility totaling $1 billion, which also backstops our commercial paper program. And we also continue to have a $750 million at the market equity program available, but did not issue any units under this program during the quarter and have not issued any units under this program since it has been in place.
I will now turn the call back over to Mike to briefly update guidance for the balance of the year, as well as some of our significant growth projects underway.
Thank you, Aaron. As you can see Magellan continues to generate solid financial results and our business fundamentals remain extremely strong. Based on our solid results so far and our expectations for the remainder of the year, we have increased our annual DCF guidance by another $20 million to $1.12 billion for 2018. We remain committed to our stated goal of increasing annual cash distributions by approximately 8% for 2018 and by 5% to 8% for both 2019 and 2020, while maintaining distribution coverage of at least 1.2 times.
Moving to expansion capital, we now have a record $2.5 billion of construction projects currently underway including our share of the PGC pipeline that we discussed earlier. Based on the progress of these projects, we now expect to spend approximately $800 million in 2018, $1.3 billion in 2019, and $400 million in 2020 to complete the current slate of construction projects. While spending can shift slightly between periods, we're pleased that our largest projects are on time and within budget.
The final stages of construction activity are in progress for the initial phase of our Pasadena joint venture marine terminal. The first million barrels of storage associated with Phase 1 is substantially complete, and pipeline and dock work are expected to wrap up by year-end and time for the facility to begin service in January of 2019.
Substantial progress has been made on the additional 4 million barrels of storage in supporting infrastructure that comprises Phase 2 of the Pasadena terminal with an expected in-service state of January 2020. We continue to market this facility to other potential customers as we have the space to build another 5 million barrels of storage in three additional docks on the terminal's footprint.
Activity related to our long-haul pipeline construction project is in full swing as well. Construction is now underway for our East Houston-to-Hearne refined products pipeline and construction is expected to commence by year-end for our Delaware Basin crude oil pipeline. Both of these pipeline projects remain on target for mid-2019 start-up. Pipe steel has been ordered for our West Texas refined products pipeline expansion, which is still expected to be in service by mid-2020.
While most of the market is focused on the crude oil growth story, it is important to note that we have approximately $1 billion worth of refined products pipeline projects underway in the state of Texas at this time, supported by long-term customer commitments at attractive returns.
In addition, these projects offer significant upside potential, especially freeing up more capacity for us to better serve the Dallas-Fort Worth market in the future. We also continue to assess other potential expansion opportunities, still totaling well in excess of $500 million.
A few of the newer opportunities we are evaluating include additional pipeline takeaway capacity to transport crude oil from Cushing to our Houston system, and separately, a crude oil pipeline from Houston to Corpus Christi. We are also considering a potential crude oil export terminal on Harbor Island in Corpus Christi, capable of loading VLCCs.
As has been the case for a while now, we are not the only ones who are evaluating similar infrastructure projects to serve these areas and we expect each of the projects to be quite competitive. However, with the strategic assets we have in place currently and our industry relationships, we think Magellan is competitively situated to meet these market needs.
I will remind you that these larger-scale opportunities can take considerable time before we know if we truly have an actionable project on our hands. However, I can assure you the amount of future growth opportunities remains plentiful in our space and in the markets we serve and really for all of our businesses. And I think, Magellan has proven that patience and discipline went out over the long-term to find strategic projects focused on fee-based activities and supported by customer commitments to provide the best returns for our investors.
And that includes our prepared comments, so I will now open it up for questions.
Thank you. And our first question will come from Theresa Chen with Barclays.
Good afternoon. In terms of your projects under development, can you talk more about your potential participation in the VLCC-capable crude oil export hub on Harbor Island? How big of an investment would this be for Magellan? What kind of timeframe do you think something like this could come into service? And would it utilize some of your existing assets in Corpus already? Any color would be great.
Well, there's lot of questions there. And let me first start by saying that we are early in the initial development stages here. We have a parcel of land on Harbor Island that we are working with the owner to develop. We have not fully scoped the capital cost opportunity there even though the land is large enough for a significant amount of storage and two VLCC berths (20:58).
This is not the land that we currently own on the Ship Channel in Corpus Christi, even though that land can be used as a feeder into this terminal. We have been in the market talking to customers about this for quite some time, and there is significant interest in this facility. There's also significant interest in a potential line from Houston to Corpus to supply the facility. That's really all we're prepared to talk about at this point since it is so early in the process. So I'll leave it at that.
Okay. So follow-up question on the potential line from Houston to Corpus. So since there have been multiple large scale pipelines announced bring Permian barrels directly to Corpus as well as Houston, can you just talk about the benefits you see in linking the two markets, and if such projects would increase utilization in your existing Houston assets?
Well, we wouldn't expect it to increase utilization in our existing assets but there's multiple reasons that people are interested in this pipe. I mean there are customers that are interested in having access to Houston and Corpus, given the optionality that is afforded them to serve the domestic demand for refined – I mean for crude oil and the export markets.
But there's also a significant number of potential barrels, particularly associated with our proposed Cushing to Houston pipeline that are in Cushing that would want access to the Corpus market also. So there's multiple drivers behind a potential Houston and Corpus pipe.
Got it. And lastly on butane blending, can you just give us an update on where you are in the hedging process for 2019 and maybe beyond? And what kind of margin you're expecting to achieve at this point?
Yes I can do that. We are – well, first of all, for the fall of 2018, we're about 90% hedged for fall. For 2019, we have hedged about 90% of our spring projected volumes, which if you annualize that, is about 40% of our total 2019 blending volumes. And we're expecting – those margins that we've hedged in place are at about $0.50 per barrel.
Thank you.
And next, we will hear from Jeremy Tonet with JPMorgan.
Good afternoon. Just wanted to...
Hi, Jeremy.
Hi. Wanted to continue with the Permian topic here. And with the Permian Gulf Coast pipe, you gave an indication of what the size could be there. But just if you could walk us through how you think about sizing the pipe in general relative to the level of commitments you guys have gotten on that pipe. And also it seems like there's a lot of pipes coming online during 2020, and kind of could be competition for volumes at that point. So could you just kind of walk us through your thoughts there?
Well, to start with, as I mentioned, we have sufficient long-term commitments to underwrite a 30-inch pipeline and we're not going to talk about exactly the volume of commitments we have, but it can underwrite a 30-inch pipeline. Whether we upsize that is going to depend on what happens during the open season.
We're in the open season process at the moment and there is significant interest in this pipeline. As you probably know the way these open seasons work is you typically don't know who is actually going to commit until the very end. And so we're approaching the very end so we should have some color on that in the next couple weeks. And if we have sufficient commitments – incremental commitments, I should say, then we'll consider upsizing the pipe.
That's helpful, thanks. And then kind of taking the next step there, between year-end 2019 and 2020 there's going to be a lot of Permian crude hitting the coast. And just wondering, you've talked about dock capacity expansions there. Do you see the export capacity coming online in time there, or could there be kind of a glut on the Gulf Coast, granted there's a lot of refinery capacity, but you're still talking about introducing a lot of new volumes to the market? So just wondering how you see that playing out and kind of your thoughts as far as expanding your dock capacity, you talked a bit about that before?
Right. So just specifically in the Houston area, we announced earlier this year that we're expanding Seabrook. We have another expansion opportunity for Seabrook that we expect to improve here in the next couple of months and hopefully we'll have an announcement on that. That further expansion will be done prior or consistent with the time line that PGC would be starting up.
In addition to that, we are developing multiple other Houston area crude oil export opportunities. And I don't want to go into detail of what those are. I can just say that there's multiple opportunities are under development. And we would intend for those opportunities to be available, consistent with the time PGC starts up also.
Great. Thanks for that. And then, finally just the 2019 CapEx stepped-up a bit there. Just wondering if you could let us know, like, which projects it was specifically that led to that step-up there?
Well, the biggest step-up was our component of PGC, which was about $300 million. There's some other smaller projects, I'd say smaller, they're in the $20 million to $25 million phase, if you're looking at in Cushing – not looking at, we're actually developing in Cushing. And in other areas in Oklahoma. But the biggest piece of that is PGC.
That's very helpful. That's it for me. Thanks.
And our next question will come from Spiro Dounis with Credit Suisse.
Hey. Good afternoon, guys. I just wanted to go back to something that Theresa had mentioned, just along those three new projects to Houston to Corpus, and then the export terminal. Is the right way to think about all those three really as one major project? It just seems like you're creating this new artery from Cushing down to the export market in Corpus, or do you actually view them as discrete and in other words, you'd FID them one at a time, if you have to?
I think they should be viewed as discrete projects that would be FID-ed (28:12) separately.
Okay. And then, when you think about the equity funding, obviously your current CapEx budget, I think you guys are self-funding, shouldn't be any issues around that. Would seem like those three projects – you realize you're still scoping it out, but would seem to carry a pretty decent budget there. How do you think about funding that? Does that open the door to issuing equity at a point in time, or do you think you'd maybe go the JV route to help pave the way for that?
Well, let me first say that it's fairly common for long-haul crude oil pipelines that they ultimately wind up in a JV. That's certainly an option here, and we're talking to potential partners on those projects. None of that has been determined yet. But with regards to financing these projects, if they actually happen, we don't have a plan yet until it actually happens, but we've consistently said that we're not opposed to issuing equity if needed.
At some point, if our capital project gets large enough for high quality, good returning projects that we're not opposed to issuing equity. So that's always on the table. We don't have a plan right now to issue any new equity for any of the projects that we're developing. But if incremental projects come across the goal line, then we will consider it at that time.
Got it. Appreciate the color. Thanks, everyone.
And next, we will hear from Dennis Coleman with Bank of America.
Thanks for taking my questions. Spiro sort of hit a lot of what I was interested in in terms of the discreteness of the projects. But I wonder is it – are these projects – I mean obviously, there's plenty of light crude making it to Corpus from the Permian. Would this – should we think about this more as targeted for heavier crudes and perhaps Canadian crudes and the like?
Well, I mean that's certainly an opportunity, but I wouldn't characterize it as that's what it's targeted to do. I mean there's significant light crude. I mean if you just look at Cushing today, there's significant light crude that's coming into the Gulf Coast area and there's projected significant increases in light crude coming into Cushing that are not Permian-based, that ultimately would like to find a home for export. So that is an opportunity also.
I think one other element that's driving a lot of interest here is just quality control around light crude coming down to the Gulf. So not any one of those things is the primary driver, but all of those are opportunities.
Okay. And then maybe just a little bit more on the VLCC terminal. So I think the issue with ports has been the depth of the draft for these VLCCs. I guess you're saying that these would be able to load to full capacity at this location. I don't know the specifics of the location.
That's the long-term plan. It may get there in stages, but that's the long-term plan.
Okay. Okay. And then one – just last detail one for me. In terms of – and, Aaron, maybe this is for you – that the guidance for Longhorn and BridgeTex volumes through the end of 2018, I guess that's just because you just give 2018 guidance. You're not implying anything about your view on the volumes into 2019?
That's correct. That's correct.
All right. So if the market conditions continue, we should expect that to continue or might reasonably expect that to continue as well?
It's been clear. To the extent differentials stay wide, it drives on to those pipes, so.
Yeah. And consistent with past practice, we will give 2019 guidance in our fourth quarter call in either late January or early February, whenever we get the schedules. But I mean, as a rule of thumb, if the differential is higher than our spot tariff, it's highly likely that our pipelines will be full.
Understood. And I just want to make sure I was understanding it since you said specifically for the remainder of 2018. So, thanks very much.
And our next question will come from Shneur Gershuni with UBS.
Good afternoon, guys. Most of my questions have been asked and answered, but I was wondering if we can dive in a little bit on one of the proposed projects that you're looking at, connecting Houston to Corpus. Are you talking about building a brand new pipeline? Or is this something where you're talking to Kinder about reversing KMCC and Double Eagle? Just trying to understand if we're like putting new capital in the ground or we're trying to repurpose capital in a more efficient way?
This is a brand new pipeline.
Okay. And would that not be something to consider as well also?
To reverse KMCC and Double Eagle?
Yeah.
I'd rather not speculate that on the call. I haven't really given that much of thought. And so, I really am not prepared to address that as a possibility. That's not our primary path.
Got it. Okay. And then the other thing on the port side, it seems everyone is targeting VLCC capabilities these days. But when I sort of add up all the announcement, it sort of seems like we're going to be able to move more crude out of the U.S. than we actually produce. I mean where do you think we end up on VLCC ports given how big those vessels are and so forth?
Well, I would predict that not every single project that's been announced will actually proceed. I would expect that projects would proceed that get a commitment sufficient to make them economical. And as you said, if you add up all of them, there's probably not enough crude oil there to do that.
So, it's really going to be a matter of who can secure the commitments to support their infrastructure. And as I said during my prepared comments, it's very competitive. We think we're in a very strong position to get those commitments; we've got significant interest to-date. But we'll see how it plays out.
Is there a type of infrastructure? I mean obviously the pipeline itself that's necessary, but do you need a lot of surge storage capacity? I mean, you're talking about filling a very large vessel more than what pipelines move in a day. Can you sort of talk about what would be the key advantages that we should be thinking about who wins the VLCC game?
Well, there's a lot of elements to that, who's going to win the game. I mean you do need significant storage near the dock in order to load VLCC. But there's a lot of people that can do that. And it's really, I think, going to come down to who can do it the cheapest, who has supporting infrastructure and supply to the facility to make it work, and who has the customer relationships to secure the contracts. I think that at the end of the day is going to determine who gets the commitments.
Okay. Fair enough. And one final question, a bunch of years ago there was this whole trend about building splitters and then kind of some got built, you obviously have one, some did not. With crude gravity going up the way it is, is that something that potentially can be on the horizon next that we – a wave of splitters get built?
It certainly is possible to be on the horizon. I mean to be candid with you, I don't – the chatter for additional splitters is not very high right now. We think we're in a very good position to build another one. We've built our splitter in Corpus Christi, specifically such that we could add another one relatively easily. But we're not actively working on that at the moment.
All right. Fair enough. Thank you very much. Appreciate the color.
Sure.
And next, we will hear from Mirek Zak with Citi.
Hi, good afternoon, everyone. Just a quick one for me. Do you have an assessment as to about how much capital would be necessary to expand your Houston distribution system to support the incoming crude volumes, whether that's significant at all? And if so, would that be tied into sort of a higher rate on your overall distribution system?
Well, to answer your second question, we're not anticipating raising the rate on our distribution system associated with the pipeline. With regards – if you mean tariff, I mean throughput rate, absolutely. We're looking to increase the throughput. We're still scoping that out and trying to optimize existing assets to the best that we can. The number's probably going to be in the range of $50 million to $150 million and we're diligently looking for opportunities to be at the lower end of that range, but we haven't fully scoped that yet.
Okay. And just to follow up. If you do end up moving forward with a VLCC export project here, how does that position your Seabrook JV in your overall portfolio, and how you think about that?
Well, we think Seabrook is still very well-positioned. I mean, Seabrook is in a good location and it has access to significant incoming supply. And even though it can only load Aframax and Suezmax ships, there's still a significant demand for transport by those vessels. Not every single barrel that's going to leave the U.S. is going to move on a VLCC.
Okay. Great. Thank you very much.
Sure.
And our next question will come from Jerren Holder with Goldman Sachs.
Thanks. Good afternoon. Just wanted to ask on the refined products transportation revenue per barrel number there, looks like it was a little bit higher than the 4% increase that I think you guys were guiding. Just kind of wondering what factors are driving that number a little bit higher?
Well, as always when you just look at the overall rate per barrel, there's a lot of things that go into that. Specifically, to your question, there is two things. One is, we saw a slightly higher volumes on our Central system and West Texas systems, which have higher rates per barrel. And we saw a slightly lower volumes on our South Texas refined product system, which has very low rate per barrel. So those were the primary reasons why.
And as we kind of look at your initial, I guess 2018 guidance, I think the number is just below 150 (40:46), it seems like you guys are tracking ahead of that. Just based on what you're seeing should we be assuming a higher number there?
On rate per barrel?
Yeah. On rate per barrel?
I quite honestly can't tell you what the rate per barrel in the in the forecast for the fourth quarter is. I don't see any reason for it not to be consistent with what we saw in the third quarter.
Okay. That's fair. Thank you.
And we will now hear from Sharon Lui with Wells Fargo.
Hi, good afternoon.
Hi, Sharon.
For the PGC pipeline, what's the potential return based on the commitments that you have to-date?
Well, I would put it in our historical expectations of the 6 to 8 times multiple.
And that's just based on the commitments?
Correct.
Okay. And I guess, who is actually serving as the operator of the pipe and who's taking the lead on construction and has all the materials been secured?
Well, Energy Transfer is the construction manager and the operator of the pipe. And no, not all the materials have been secured yet. We just announced this a couple of months ago, we are well in the design phase but we haven't secured all the materials yet.
Okay. And I guess for your Cushing to Houston pipeline project, can you maybe talk about the potential size of that pipe and the timing?
Well, right now based on the expressed interest, we would imagine the pipe to be in the 24-inch range. We – the timing – it's possible that we would launch an open season on this project in the near future. And the timing would be driven after that by the commitments we secure. I can tell you, again, as any project in development, we have significant expressed interest to-date. We have potential JV partners at this point and we're putting all of that together. And once we get that nailed down, we'll likely go out for an open season.
Great. Thank you.
We will now hear from James Carreker with U.S. Capital Advisors.
Hi. Thanks for taking my call. There was a recent announcement about a similar VLCC loading project on Harbor Island between the ports. And I believe Carlyle – I assume this project you're talking about is completely separate from that?
That's correct.
Thanks. And then going back to the crude oil segment, there was a big step-up in expenses as you had talked about. Can you quantify maybe how much of that was the payments to Seabrook Logistics? And how much was more kind of the onetime environmental accruals et cetera?
(44:31)
.... what would be a good run rate going forward?
Yeah. So Seabrook Logistics was about $4 million of that increase. And then if you look at the environmental that was about $3.1 million.
Okay. So I mean it sounds like then the OpEx will run higher than the Q2 level, but come down a little bit from the Q3 level as we move forward.
I would say, yes. That's a reasonable expectation.
That's all I had. Thank you.
And with no further questions, I'd like to turn the call back over to management for any additional or closing remarks.
Well, thank you for your time today. We're in the final stretch of the year and we're pleased with our results to date and we look forward to a successful fourth quarter. I want to thank, everyone, for their interest in Magellan. Have a good afternoon.
And once again, this does conclude our call for today. Thank you for your participation. You may now disconnect.