Magellan Midstream Partners Announces Third-Quarter Financial Results

TULSA, Okla., Nov. 1 /PRNewswire-FirstCall/ -- Magellan Midstream Partners, L.P. today reported third-quarter 2006 operating profit of $44.4 million compared to $53.7 million for third quarter 2005. For the nine months ended Sept. 30, 2006, operating profit grew to $178.7 million from $159.1 million in the comparable 2005 period.

Net income was $30.6 million during third quarter 2006 versus $40.8 million in third quarter 2005. For the nine months ended Sept. 30, 2006, net income grew to $136.3 million from $121.8 million in the corresponding 2005 timeframe.

"The performance of Magellan's core operating assets continued to be excellent, setting record quarterly volumes for our petroleum products pipeline system and inland terminals," said Don Wellendorf, chief executive officer. "However, our strong operational performance was offset by the impact on product margins of the recent sharp downturn in petroleum prices. Even with the impact of declining product prices in the quarter, our cash-flow generation continues on a record-setting pace for the year 2006."

An analysis of variances by segment comparing third quarter 2006 to third quarter 2005 is provided below based on operating margin, a financial measure that reflects operating profit before affiliate general and administrative (G&A) expense and depreciation and amortization:

Petroleum products pipeline system. Pipeline operating margin was $54.1 million, a decline of $12.8 million due to lower product margins. The reduced product margin resulted from a significant drop in the price of petroleum products during Sept. 2006, which impacts inventory values related to a third- party supply agreement assumed by the partnership as part of an Oct. 2004 acquisition. The partnership values its cost of product sold utilizing a weighted average inventory price methodology, which can significantly reduce product margin in a rapidly declining price environment because the weighted average inventory cost of product sold is valued much higher than the corresponding product sales revenues, which are recorded at current lower market prices. Accounting rules require an adjustment of the carrying value of inventories to current market values if those values are lower, which further negatively impacted third-quarter 2006 results. For comparative purposes, the 2005 period experienced rapidly increasing product prices, an environment with the opposite impact on product margin as the product sales revenues are significantly higher than the weighted average inventory cost of the product sold.

Transportation revenues increased between periods primarily due to higher diesel fuel and gasoline shipments, which resulted in record quarterly volumes transported for this segment. The current quarter also benefited from higher fees for services such as additive injections and leased storage.

Operating expenses in this segment decreased between periods primarily due to the smaller impact from asset retirements and product losses during 2006. These reductions were partially offset by increased integrity spending and higher environmental expenses during the current period. The increased environmental costs principally were associated with a risk mitigation agreement entered in third quarter 2006, which transferred certain historical environmental risks to a third party to minimize the partnership's future financial exposure to potential cost increases related to remediation work at these sites.

Petroleum products terminals. Terminals operating margin was $22.3 million, an increase of $6.7 million. The 2006 period benefited from higher rates and from expansion projects completed over the past year at the partnership's marine terminals. The current period further benefited from record throughput and higher additive fees at the partnership's inland terminals, from incremental operating results from the Wilmington, Delaware marine facility which was acquired in Sept. 2005, and from higher product margins.

Ammonia pipeline system. Ammonia operating margin was a loss of $0.6 million, a decrease of $1.3 million. Higher expenses during the current period resulting from increased integrity spending primarily resulted in the unfavorable variance.

Depreciation and amortization increased between quarters primarily due to capital spending over the last year. G&A expense increased due to higher equity-based compensation expense related to a higher unit price and additional unit awards.

Net income per limited partner unit was 43 cents during third quarter 2006 compared to 56 cents during 2005. For the nine months ended Sept. 30, 2006, net income per limited partner unit was $1.60 compared to $1.58 for the corresponding 2005 period.

Management currently expects net income per limited partner unit for 2006 of approximately $2.20, which results in a fourth-quarter 2006 estimate of approximately 60 cents per unit. Management's goal for distribution growth in 2006 remains 8% to 10%.

In addition, the partnership continues to project that the large majority of its operating margin will be generated by its fee-based operations, with less than 10% expected to come from product-margin related activities on an annual basis beyond 2006. As previously noted, management does not develop distribution growth targets based on the expectation that the high petroleum pricing environment experienced during 2006 will continue in future years.

Based on the progress of expansion projects currently underway or in advanced stages of development, management currently expects expansion capital spending of approximately $140.0 million during 2006. An additional $115.0 million is expected to be spent during 2007 and 2008 to complete these projects. Both amounts are exclusive of potential future acquisitions and the development of additional expansion projects.

Consistent with past practice, management intends to provide 2007 guidance for net income per limited unit, capital spending and distribution growth targets in early 2007.

An analyst call with management regarding third-quarter 2006 financial results and 2006 outlook is scheduled today at 1:30 p.m. Eastern. To participate, dial (800) 406-5356 and provide code 7901645. Investors also may listen to the call via the partnership's web site at http://www.magellanlp.com/investors/calendar.asp .

Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on Nov. 8. To access the replay, dial (888) 203-1112 and provide code 7901645. The replay also will be available at http://www.magellanlp.com/ .

Management believes that investors benefit from having access to the same financial measures being utilized by the partnership. As a result, this news release and supporting schedules include the non-generally accepted accounting principles measures of operating margin and distributable cash flow, which are important performance measures used by management to evaluate the economic success of the partnership's operations. Operating margin reflects operating profit before G&A expense and depreciation and amortization, and distributable cash flow reflects the cash available to pay distributions. Reconciliations of operating margin to operating profit and distributable cash flow to net income accompany this release.

About Magellan Midstream Partners, L.P.

Magellan Midstream Partners, L.P. is a publicly traded partnership formed to own, operate and acquire a diversified portfolio of energy assets. The partnership primarily transports, stores and distributes refined petroleum products. More information is available at http://www.magellanlp.com/ .

Portions of this document may constitute forward-looking statements as defined by federal law. Although management believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Additional information about issues that could lead to material changes in performance is contained in the partnership's filings with the Securities and Exchange Commission.

Contact: Paula Farrell (918) 574-7650 paula.farrell@magellanlp.com MAGELLAN MIDSTREAM PARTNERS, L.P. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per unit amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2006 2005 2006 Transportation and terminals revenues $131,647 $144,702 $370,272 $413,448 Product sales revenues 182,129 171,762 457,089 493,464 Affiliate management fee revenue 167 173 501 518 Total revenues 313,943 316,637 827,862 907,430 Costs and expenses: Operating 63,379 62,529 159,434 168,220 Environmental 6,942 8,522 9,914 11,261 Product purchases 160,500 169,741 414,159 458,193 Depreciation and amortization 14,498 15,182 41,399 45,739 Affiliate general and administrative 15,784 17,042 46,044 47,806 Total costs and expenses 261,103 273,016 670,950 731,219 Equity earnings 909 814 2,231 2,479 Operating profit 53,749 44,435 159,143 178,690 Interest expense 13,846 14,359 39,508 43,116 Interest income (1,287) (482) (3,429) (1,729) Interest capitalized (299) (714) (679) (1,346) Debt placement fee amortization 731 679 2,194 2,034 Other (income) / expense --- --- (300) 339 Net income $40,758 $30,593 $121,849 $136,276 Allocation of net income: Limited partners' interest $37,143 $28,335 $105,157 $106,163 General partner's interest 3,615 2,258 16,692 30,113 Net income $40,758 $30,593 $121,849 $136,276 Basic net income per limited partner unit $0.56 $0.43 $1.58 $1.60 Weighted average number of limited partner units outstanding used for basic net income per unit calculation 66,361 66,361 66,361 66,361 Diluted net income per limited partner unit $0.56 $0.43 $1.58 $1.60 Weighted average number of limited partner units outstanding used for diluted net income per unit calculation 66,592 66,644 66,610 66,537 MAGELLAN MIDSTREAM PARTNERS, L.P. OPERATING STATISTICS Three Months Ended Nine Months Ended September 30, September 30, 2005 2006 2005 2006 Petroleum products pipeline system: Transportation revenue per barrel shipped (dollars per barrel) $1.053 $1.052 $1.035 $1.053 Transportation barrels shipped (million barrels) 79.4 84.5 222.0 231.4 Petroleum products terminals: Marine terminal average storage capacity utilized per month (million barrels) 18.6 18.8 18.5 18.9 Inland terminal throughput (million barrels) 28.6 31.7 83.6 89.7 Ammonia pipeline system: Volume shipped (thousand tons) 149 159 487 537 MAGELLAN MIDSTREAM PARTNERS, L.P. OPERATING MARGIN RECONCILIATION TO OPERATING PROFIT (Unaudited, in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2005 2006 2005 2006 Petroleum products pipeline system: Transportation and terminals revenues $103,307 $111,139 $286,406 $307,713 Less: Operating expenses 52,836 49,649 129,710 129,367 Environmental expenses 4,420 7,574 6,950 9,488 Transportation and terminals margin 46,051 53,916 149,746 168,858 Product sales revenues 180,165 166,452 449,124 478,841 Less: Product purchases 160,362 167,275 412,009 450,291 Product margin 19,803 (823) 37,115 28,550 Add: Affiliate management fee revenue 167 173 501 518 Equity earnings 909 814 2,231 2,479 Operating margin $66,930 $54,080 $189,593 $200,405 Petroleum products terminals: Transportation and terminals revenues $25,358 $30,900 $76,374 $96,642 Less: Operating expenses 9,838 11,289 28,659 35,963 Environmental expenses 1,620 (4) 1,710 122 Transportation and terminals margin 13,900 19,615 46,005 60,557 Product sales revenues 2,514 5,310 8,925 14,623 Less: Product purchases 816 2,595 3,491 8,288 Product margin 1,698 2,715 5,434 6,335 Operating margin $15,598 $22,330 $51,439 $66,892 Ammonia pipeline system: Transportation and terminals revenues $3,745 $3,517 $9,952 $11,666 Less: Operating expenses 2,197 3,211 5,611 7,745 Environmental expenses 902 952 1,254 1,651 Operating margin $646 $(646) $3,087 $2,270 Segment operating margin $83,174 $75,764 $244,119 $269,567 Add: Allocated corporate depreciation costs 857 895 2,467 2,668 Total operating margin 84,031 76,659 246,586 272,235 Less: Depreciation and amortization 14,498 15,182 41,399 45,739 Affiliate general and administrative 15,784 17,042 46,044 47,806 Total operating profit $53,749 $44,435 $159,143 $178,690

Note: Amounts may not sum to figures shown on the consolidated statement of income due to intersegment eliminations and allocated corporate depreciation costs.

MAGELLAN MIDSTREAM PARTNERS, L.P. ALLOCATION OF NET INCOME (In thousands, unless otherwise noted) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2005 2006 2005 2006 Net income $40,758 $30,593 $121,849 $136,276 Direct charges to the general partner: Reimbursable general and administrative costs 1,049 (31) 2,693 934 Previously indemnified environmental charges 6,055 8,323 6,692 8,381 Total direct charges to general partner 7,104 8,292 9,385 9,315 Income before direct charges to general partner 47,862 38,885 131,234 145,591 General partner's share of income 22.40% 27.13% 19.87% 27.08% General partner's allocated share of net income before direct charges 10,719 10,550 26,077 39,428 Direct charges to general partner 7,104 8,292 9,385 9,315 Net income allocated to general partner $3,615 $2,258 $16,692 $30,113 Net income $40,758 $30,593 $121,849 $136,276 Less: net income allocated to general partner 3,615 2,258 16,692 30,113 Net income allocated to limited partners $37,143 $28,335 $105,157 $106,163 MAGELLAN MIDSTREAM PARTNERS, L.P. DISTRIBUTABLE CASH FLOW (Unaudited, in millions) Three Months Ended Nine Months Ended September 30, September 30, 2005 2006 2005 2006 Net income $40.7 $30.6 $121.8 $136.3 Add: Depreciation and amortization (A) 15.2 15.9 43.6 47.8 Equity-based incentive compensation 2.7 4.4 7.1 8.2 Direct charges to general partner 7.1 8.3 9.4 9.3 Asset retirements and impairments 6.5 1.4 8.1 6.0 Less: Maintenance capital (net of indemnified spending) 6.6 6.8 14.1 17.5 Other 1.4 1.5 4.1 3.7 Distributable cash flow (B) $64.2 $52.3 $171.8 $186.4 (A) Depreciation and amortization includes debt placement fee amortization. (B) Distributable cash flow does not include fluctuations related to working capital or spending for which the partnership has received, or expects to receive, reimbursement through third party indemnifications.