TULSA, Okla. – Magellan Midstream Partners, L.P. (NYSE: MMP) today reported operating profit of $79.3 million for third quarter 2012 compared to $137.8 million for third quarter 2011. Both periods were significantly impacted by mark-to-market (MTM) adjustments for New York Mercantile Exchange (NYMEX) positions used to economically hedge the partnership’s commodity-related activities, with the 2011 period greatly benefitting from MTM gains and the 2012 period negatively impacted by significant MTM losses due to the increase in petroleum prices. Excluding MTM commodity-related pricing adjustments, operating profit from the partnership’s core fee-based transportation and terminals activities was $109.1 million for third quarter 2012 compared to $107.3 million for third quarter 2011, an increase of $1.8 million. 

Net income was $50.5 million for third quarter 2012 compared to $110.2 million for third quarter 2011. Excluding MTM commodity-related pricing adjustments, net income increased in the current quarter by $0.6 million. 

Operating profit excluding MTM commodity-related adjustments and net income excluding MTM commodity-related adjustments are non-generally accepted accounting principles (non-GAAP) financial measures. 

Diluted net income per limited partner unit was 22 cents in third quarter 2012 versus 49 cents in the corresponding 2011 period. Diluted net income per unit excluding MTM commodity-related pricing adjustments, a non-GAAP financial measure, of 35 cents for third quarter 2012 was less than the 38-cent guidance provided by management in early Aug. due to timing of product sales from the partnership’s blending activities that are now expected to occur in fourth quarter 2012. All net income per unit amounts reflect the partnership’s recent two-for-one split of its limited partner units. 

Distributable cash flow (DCF), a non-GAAP financial measure that represents the amount of cash generated during the period that is available to pay distributions, increased 7% to $100.7 million for third quarter 2012 from $94 million during third quarter 2011.  

“During third quarter 2012, Magellan’s core fee-based transportation and terminals assets generated improved financial results due to increased demand for our pipeline and storage services, and cutting through the implications of mark-to-market accounting on our commodity hedges, the cash impact of our commodity-related activities was comparable to the year-ago period,” said Michael Mears, chief executive officer. “Magellan’s assets continue to produce solid results, and we remain on track for a record year from both an operational and financial standpoint.” 

An analysis by segment comparing third quarter 2012 to third quarter 2011 is provided below based on operating margin, a non-GAAP financial measure that reflects operating profit before general and administrative (G&A) expense and depreciation and amortization: 

Petroleum pipeline system. Pipeline operating margin was $97.7 million, a decrease of $51.4 million that resulted exclusively from the timing of MTM adjustments for NYMEX positions used to economically hedge the partnership’s commodity-related activities. Transportation and terminals margin for this segment increased $8.6 million between periods. 

Transportation and terminals revenues increased between periods primarily due to a 19% increase in transportation volumes, driven by significantly increased crude oil and gasoline shipments. Crude volumes increased 53% resulting from deliveries to additional locations that are now connected to the partnership’s pipeline system and increased deliveries to existing customers. Gasoline shipments increased 28% primarily attributable to higher volumes on the partnership’s South Texas pipeline segments as well as higher consumer demand in the markets served by its pipeline system. The average tariff rate decreased slightly as the 8.6% rate increase implemented on July 1, 2012 was offset by more crude oil and South Texas gasoline movements, which ship at a lower rate than the partnership’s other pipeline shipments. 

Operating expenses increased between periods primarily due to additional asset integrity work, higher property taxes, more losses on various asset retirements and replacements and increased environmental remediation accruals for historical releases. These items were partially offset by higher product overages (which reduce operating expenses) in the current period.  

Product margin (defined as product sales revenues less product purchases) decreased $59.8 million between periods primarily due to timing of MTM adjustments for open NYMEX hedges. Significant MTM losses were recorded in the third quarter of 2012 due to an increasing commodity price environment compared to significant MTM gains in the third quarter of 2011, resulting in a $60.3 million unfavorable variance associated with the timing of MTM adjustments for NYMEX hedges and other inventory adjustments. Details of these items can be found on the Distributable Cash Flow Reconciliation to Net Income schedule that accompanies this news release. The partnership's actual cash product margin, which reflects only transactions that settled during the quarter, increased slightly between periods as higher blending profits offset lower fractionation and linefill management profits.  

Petroleum terminals. Terminals operating margin was $36.1 million, a decrease of $4.2 million. Revenues in the current period benefited primarily from recently-constructed crude oil storage in Cushing, Oklahoma and new refined products tanks and higher rates at the partnership’s marine terminals. Operating expenses increased due to more asset integrity work, higher personnel costs and an environmental accrual in the current period related to a historical acquisition. Product margin increased slightly due to the sale of additional product overages in the current period. 

Ammonia pipeline system. Ammonia operating margin was $4 million, an increase of $5.7 million. Revenues increased due to more volume transported at a higher average tariff during the 2012 period, and expenses decreased because of lower asset integrity costs now that the pipeline’s hydrostatic testing is complete.  

Other items. Depreciation and amortization increased due to recent expansion capital expenditures, and G&A expenses increased primarily due to enhanced payout expectations for annual bonus and equity-based incentive compensation programs due to the partnership’s better-than-expected financial results in 2012. Net interest expense also increased in the current quarter as a result of additional borrowings due to the partnership’s Aug. 2011 debt offering to fund capital spending and higher commitment fees on the partnership’s revolving credit facility. As of Sept. 30, 2012, the partnership had $2.1 billion of debt outstanding and $100 million of cash on hand.   

Financial guidance for 2012 

Management is raising its 2012 DCF guidance by $5 million to approximately $525 million and remains committed to its goal of increasing cash distributions by 18% for 2012 and an additional 10% for 2013. Including actual results through Sept. 30, 2012, net income per limited partner unit is estimated to be $1.93 for 2012, resulting in fourth-quarter guidance of 68 cents. Guidance excludes future NYMEX MTM adjustments on the partnership’s commodity-related activities.  

Expansion capital spending expectations 

Management continues to pursue expansion opportunities, including organic growth construction projects and acquisitions. Based on the progress of expansion projects already underway, the partnership currently plans to spend approximately $450 million during 2012 with an additional $280 million of spending in 2013 to complete these projects. 

The partnership completed construction of 1.2 million barrels of new refined products storage at its Galena Park, Texas marine terminal during late Oct., a portion of which is jointly owned with a third party. Construction of an additional 0.6 million barrels of storage at Galena Park is expected to come online during early 2013. 

Magellan’s Crane-to-Houston pipeline project remains on schedule to begin transporting crude oil at partial capacity in early 2013, increasing to its full 225,000 barrel-per-day capacity during mid-2013. The Double Eagle joint venture is also proceeding and expected to be partially operational in early 2013, with full operation expected in mid-2013. 

Magellan and Occidental Petroleum remain in advanced discussions regarding the potential BridgeTex pipeline. As currently contemplated, Magellan would own 50% of the joint project, with its share of the project cost expected to be approximately $600 million. A final decision will be made on the BridgeTex pipeline pending completion of definitive agreements, and the related spending has been excluded from the partnership’s estimates at this time, accordingly. 

In addition, the partnership continues to evaluate more than $500 million of other potential growth projects in earlier stages of development, which also have been excluded from its spending estimates.  

Earnings call details 

An analyst call with management regarding third-quarter results and outlook for the remainder of 2012 is scheduled today at 1:30 p.m. Eastern. To participate, dial (888) 329-8893 and provide code 6471308. Investors also may listen to the call via the partnership’s website at www.magellanlp.com/webcasts.aspx. 

Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on

Nov. 6. To access the replay, dial (888) 203-1112 and provide code 6471308. The replay also will be available at www.magellanlp.com. 

Non-GAAP financial measures 

Management believes that investors benefit from having access to the same financial measures utilized by the partnership. As a result, this news release and supporting schedules include the non-GAAP financial measures of operating margin, product margin, DCF and net income per unit excluding MTM commodity-related pricing adjustments, which are important performance measures used by management. 

Operating margin reflects operating profit before G&A expense and depreciation and amortization. This measure forms the basis of the partnership’s internal financial reporting and is used by management to evaluate the economic performance of the partnership’s operations. 

Product margin, which is calculated as product sales revenues less product purchases, is used by management to evaluate the profitability of the partnership’s commodity-related activities. 

DCF is important in determining the amount of cash generated from the partnership’s operations that is available for distribution to its unitholders. Management uses this measure as a basis for recommending to the board of directors the amount of cash distributions to be paid each period. 

Reconciliations of operating margin to operating profit and DCF to net income accompany this news release. 

The partnership uses NYMEX futures contracts to hedge against price changes of petroleum products associated with its commodity-related activities. Most of these NYMEX contracts do not qualify for hedge accounting treatment. However, because these NYMEX contracts are generally effective at hedging price changes, management believes the partnership’s profitability should be evaluated excluding the MTM gains and losses associated with these NYMEX contracts. Because the third-quarter 2011 financial results were significantly impacted by MTM gains and third-quarter 2012 results were significantly impacted by MTM losses, management believes a comparison of the partnership’s operating results between periods adjusted for these MTM gains / losses is appropriate in evaluating the partnership’s financial results for the current period. A reconciliation of actual results to those excluding these adjustments is provided for comparability. Further, because the financial guidance provided by management generally excludes future MTM commodity-related pricing adjustments, a reconciliation of actual results to those excluding these adjustments is provided for comparability to previous financial guidance. 

Because the non-GAAP measures presented in this news release include adjustments specific to the partnership, they may not be comparable to similarly-titled measures of other companies. 

About Magellan Midstream Partners, L.P. 

Magellan Midstream Partners, L.P. (NYSE: MMP) is a publicly traded partnership that primarily transports, stores and distributes petroleum products. The partnership owns the longest refined petroleum products pipeline system in the country, with access to more than 40% of the nation’s refining capacity, and can store 80 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. More information is available at www.magellanlp.com. 

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Forward-Looking Statement Disclaimer 

Portions of this document 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. Among the key risk factors that may have a direct impact on the partnership’s results of operations and financial condition are: (1) its ability to identify growth projects or to complete identified projects on time and at expected costs; (2) price fluctuations and changes in demand for refined petroleum products, crude oil and natural gas liquids, or changes in demand for transportation or storage of those commodities through its existing or planned facilities; (3) changes in the partnership’s tariff rates imposed by the Federal Energy Regulatory Commission, the United States Surface Transportation Board or state regulatory agencies; (4) shut-downs or cutbacks at major refineries, petrochemical plants, ammonia production facilities or other businesses that use or supply the partnership’s services; (5) changes in the throughput or interruption in service on petroleum pipelines owned and operated by third parties and connected to the partnership’s petroleum terminals or petroleum pipeline system; (6) the occurrence of an operational hazard or unforeseen interruption for which the partnership is not adequately insured; (7) the treatment of the partnership as a corporation for federal or state income tax purposes or if the partnership becomes subject to significant forms of other taxation; (8) an increase in the competition the partnership’s operations encounter; (9) disruption in the debt and equity markets that negatively impacts the partnership’s ability to finance its capital spending; and (10) failure of customers to meet or continue contractual obligations to the partnership. 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, including the partnership’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2011 and subsequent reports on Forms 8-K and 10-Q. The partnership undertakes no obligation to revise its forward-looking statements to reflect events or circumstances occurring after today's date.