Introduction

We own and control Magellan GP, LLC ("MMP GP"), which is the general partner of Magellan Midstream Partners, L.P. ("MMP"), a publicly traded limited partnership. MMP is principally engaged in the transportation, storage and distribution of refined petroleum products. Our operating cash flows are derived through our ownership interest in MMP's general partner, which owns the following:

• the general partner interest in MMP, which currently entitles us to receive approximately 2% of the cash distributed by MMP; and

• 100% of the incentive distribution rights in MMP, which entitles us to receive increasing percentages, up to a maximum of 48%, of any incremental cash distributed by MMP as certain target distribution levels are reached in excess of $0.289 per MMP unit in any quarter.

Since we own and control MMP GP, we reflect our ownership interest in MMP on a consolidated basis. The publicly held limited partner interests in MMP are allocated a portion of our net income as reflected in the allocation of net income section in our results of operations. We currently have no separate operating activities apart from those conducted by MMP, and our operating cash flows are derived solely from cash distributions from MMP.

Our consolidated financial statements are similar to MMP's. Accordingly, the following discussion of our financial position and results of operations primarily reflects the operating activities and results of operations of MMP. Please read this discussion and analysis in conjunction with: (i) our accompanying interim consolidated financial statements and related notes and
(ii) our consolidated financial statements, related notes and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Developments

Simplification Agreement. In March 2009, we and our general partner and MMP and its general partner entered into an Agreement Relating to Simplification of Capital Structure (the "Simplification Agreement"). Pursuant to the Simplification Agreement, if approval by both our and MMP's unitholders, MMP will amend and restate its existing partnership agreement to provide for the transformation of the incentive distribution rights and approximate 2% general partner interest owned by MMP GP, its general partner, into MMP common units and a non-economic general partner interest (the "transformation"). Once the transformation is complete, MMP GP, our wholly-owned subsidiary, will distribute the MMP common units it receives in the transformation to us (the "unit distribution"). Once the transformation and unit distribution are complete, pursuant to a Contribution and Assumption Agreement among us, Magellan Midstream Holdings GP, LLC (our general partner), MMP and MMP GP: (i) we will contribute 100% of our member interests in our general partner to; (ii) we will contribute 100% of the member interests in MMP's general partner to MMP; (iii) we will contribute to MMP all of our cash and assets, other than the MMP common units we receive in the unit distribution; and (iv) MMP will assume all of our liabilities (collectively, the "contributions"). Once the transformation, unit distribution and contributions are complete, pursuant to the Simplification Agreement, we will dissolve and wind-up and distribute the MMP common units we receive in the distribution to our unitholders (the "redistribution").

Pursuant to the Simplification Agreement, we will receive approximately 39.6 million MMP common units in the transformation and unit distribution and each of our unitholders will receive 0.6325 MMP common units in the redistribution for each of our common units. MMP unitholders will continue to own their existing MMP common units.

Currently, MMP is a consolidated subsidiary of ours. We control and operate MMP through our 100% ownership interest in its general partner. Assuming the simplification of the capital structure as described above is approved by both our and MMP's unitholders, our general partner and MMP's general partner will legally become wholly-owned subsidiaries of MMP and we will be dissolved. For accounting purposes, however, we will be considered the accounting acquirer of our non-controlling interest. Therefore, in accordance with Statement of Financial Accounting Standard ("SFAS") No. 160, Non-Controlling Interests in Consolidated Financial Statements, the changes in our ownership interest in MMP will be accounted for as an equity transaction and no gain or loss will be recognized as a result of the simplification of the capital structure.

MMP's general partner will continue to manage MMP after the simplification and its management team will continue in their respective roles. Additionally, the three independent members of our general partner's board of directors will join the board of directors of MMP's general partner following completion of the simplification. The other member of our general partner's board of directors, Patrick C. Eilers, also serves as an independent member of MMP's general partner's board of directors.

The terms of the Simplification Agreement were unanimously approved by the conflicts committee of the board of directors of our general partner and MMP's general partner. Each conflicts committee is comprised solely of independent directors and was previously delegated authority by the board of directors to negotiate and authorize the terms of the simplification.

The simplification is expected to be consummated in the third quarter of 2009, subject to customary closing conditions and majority approval of our and MMP's unitholders.

We and MMP have filed a joint proxy statement/prospectus and other documents with the Securities and Exchange Commission ("SEC") in relation to the simplification. Investors and security holders are urged to read these documents carefully because they contain important information regarding us, MMP and the simplification. A definitive joint proxy statement/prospectus has been sent to our and MMP's unitholders seeking their approvals as contemplated by the Simplification Agreement. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus and other documents containing information about us and MMP at the SEC's website at www.sec.gov. The meeting date for consideration of the Simplification Agreement is September 25, 2009. Unitholders of record on July 27, 2009 are eligible to vote on this matter. Copies of the joint proxy statement/prospectus and the SEC filings incorporated by reference in the joint proxy statement/prospectus may also be obtained free of charge by contacting our investor relations at (918) 574-7650, or by accessing www.magellanlp.com or www.mgglp.com.

We, MMP and the officers and directors of the general partner of each partnership may be deemed to be participants in the solicitation of proxies from their security holders. Information about these persons can be found in the annual report and proxy statement for each partnership as filed with the SEC, and additional information about such persons may be obtained from the joint proxy statement/prospectus.

This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

Longhorn Pipeline Acquisition.On July 29, 2009, MMP acquired substantially all of the assets of Longhorn Partners Pipeline, L.P. ("Longhorn") for $250.0 million plus the fair market value of the line fill of $86.1 million. The assets of Longhorn include an approximate 700-mile common carrier pipeline system that transports refined petroleum products from Houston to El Paso, Texas, a terminal in El Paso, Texas comprised of a 5-bay truck loading rack and over 900,000 barrels of storage. The El Paso, Texas terminal serves local petroleum products demand and distributes product to connecting third-party pipelines for ultimate delivery to markets in Arizona and New Mexico.

MMP Debt Issuance. In June 2009, MMP issued $300.0 million of 6.55% notes due 2019. See Liquidity and Capital Resources below for further discussion of this matter.

Cash distribution. During July 2009, the board of directors of our general partner declared a quarterly cash distribution of $0.359 per unit for the period of April 1 through June 30, 2009. This quarterly cash distribution will be paid on August 14, 2009 to unitholders of record on August 7, 2009.

Overview of MMP

MMP's three operating segments include its:

• petroleum products pipeline system, which is primarily comprised of an approximately 8,700-mile petroleum products pipeline system, including 49 terminals;

• petroleum products terminals, which principally includes seven marine terminal facilities and 27 inland terminals; and

• ammonia pipeline system, representing an 1,100-mile ammonia pipeline and six associated terminals.

Results of Operations

The results of our operations discussed below principally reflect the activities of MMP. Because our financial statements consolidate the results of MMP, our financial statements are similar to MMP's. The differences in our financial statements primarily include the following adjustments:

• Fair value adjustments to MMP's assets and liabilities. Our June 2003 acquisition of interests in MMP was recorded as a purchase business combination. As a result, our consolidated financial statements reflect adjustments to the historical cost reflected on MMP's balance sheet for the fair value of our proportionate share of MMP's assets and liabilities at the time of our acquisition. These fair value adjustments further result in certain differences between our income statement and MMP's income statement, as the depreciation, amortization, accretion or write-off of certain assets and liabilities is based on different values;

• Our capital structure. The partners' capital on our balance sheet represents our partners' capital as opposed to the capital reflected on MMP's balance sheet, which reflects the ownership interests of all of its partners, including its owners other than us. Additionally, our consolidated balance sheet includes, within owners' equity, non-controlling owners' interest in consolidated subsidiaries that reflect the proportion of MMP owned by its partners other than us. This balance sheet category is not reflected on MMP's balance sheet; and

• Our G&A expenses. We incur general and administrative ("G&A") expenses that are independent from MMP's operations and are not reflected on MMP's consolidated financial statements.

We believe that investors benefit from having access to the same financial measures being utilized by management. Operating margin, which is presented in the tables below, is an important measure used by MMP's management to evaluate the economic performance of MMP's core operations. This measure forms the basis of MMP's internal financial reporting and is used by its management in deciding how to allocate capital resources between segments. Operating margin is not a generally accepted accounting principles ("GAAP") measure, but the components of operating margin are computed by using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the tables below. Operating profit includes expense items, such as depreciation and amortization and affiliate G&A costs, which management does not consider when evaluating the core profitability of an operation. Additionally, product margin, which MMP management primarily uses to evaluate the profitability of its petroleum products blending and fractionation activities, is provided in the tables below. Product margin is a non-GAAP measure; however, its components, product sales and product purchases, are determined in accordance with GAAP.

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2009



                                                Three Months Ended                   Variance
                                                     June 30,                 Favorable (Unfavorable)
                                                2008           2009         $ Change          % Change
Financial Highlights ($ in millions, except
operating statistics)

Transportation and terminals revenues:
Petroleum products pipeline system            $   121.4       $ 122.0      $      0.6                 -
Petroleum products terminals                       36.0          40.7             4.7                 13
Ammonia pipeline system                             6.0           5.3            (0.7 )              (12 )
Intersegment eliminations                          (0.8 )        (1.3 )          (0.5 )              (63 )

Total transportation and terminals revenues       162.6         166.7             4.1                  3
Affiliate management fee revenue                    0.2           0.2              -                  -
Operating expenses:
Petroleum products pipeline system                 39.8          44.4            (4.6 )              (12 )
Petroleum products terminals                       15.7          15.1             0.6                  4
Ammonia pipeline system                             2.8           3.2            (0.4 )              (14 )
Intersegment eliminations                          (1.5 )        (1.8 )           0.3                 20

Total operating expenses                           56.8          60.9            (4.1 )               (7 )

Product margin:
Product sales revenues                            110.3          41.3           (69.0 )              (63 )
Product purchases                                  75.3          41.0            34.3                 46

Product margin                                     35.0           0.3           (34.7 )              (99 )
Equity earnings                                     1.4           0.9            (0.5 )              (36 )

Operating margin                                  142.4         107.2           (35.2 )              (25 )
Depreciation and amortization expense              21.3          23.1            (1.8 )               (8 )
G&A expense                                        19.0          20.2            (1.2 )               (6 )

Operating profit                                  102.1          63.9           (38.2 )              (37 )
Interest expense (net of interest income
and interest capitalized)                          11.4          14.7            (3.3 )              (29 )
Debt placement fee amortization expense             0.1           0.2            (0.1 )             (100 )
Other income                                       (0.3 )        (0.5 )           0.2                 67

Income before provision for income taxes           90.9          49.5           (41.4 )              (46 )
Provision for income taxes                          0.5           0.4             0.1                 20

Net income                                    $    90.4       $  49.1      $    (41.3 )              (46 )

Operating Statistics

Petroleum products pipeline system:
Transportation revenue per barrel shipped     $   1.169       $ 1.202
Volume shipped (million barrels)                   77.3          73.9
Petroleum products terminals:
Marine terminal average storage utilized
(million barrels per month)                        22.8          26.2
Inland terminal throughput (million
barrels)                                           28.3          27.9
Ammonia pipeline system:
Volume shipped (thousand tons)                      227           171

Transportation and terminals revenues increased by $4.1 million as shown below:

• an increase in petroleum products pipeline system revenues of $0.6 million primarily attributable to higher revenues related to leased storage, partially offset by lower transportation revenues. The higher leased storage revenues resulted from new storage capacity. The lower transportation revenues resulted from a decrease in distillate shipments reflecting weak trucking and rail demand, partially offset by an increase in gasoline shipments reflecting an overall increase in consumer demand for gasoline;

• a decrease in ammonia pipeline system revenues of $0.7 million due to lower shipments resulting primarily from an increase in system maintenance and testing, which negatively impacted volumes for the quarter, and unfavorable weather conditions.

Operating expenses increased by $4.1 million as shown below:

• an increase in petroleum products pipeline system expenses of $4.6 million due primarily to a $12.1 million reduction to MMP's operating expenses in second quarter 2008 due to the favorable settlement of a civil penalty related to historical product releases. Otherwise, current period costs were $8.0 million favorable due to more favorable product overages, lower maintenance spending resulting from less testing and rehabilitation work being performed, and favorable power costs as a result of lower prices for natural gas and electricity in the current quarter;

• a decrease in petroleum products terminals expenses of $0.6 million primarily related to lower maintenance integrity costs;

• an increase in ammonia pipeline system expenses of $0.4 million primarily due to an increase in system maintenance and testing.

Product sales revenues primarily resulted from MMP's petroleum products blending activities, terminal product gains and transmix fractionation. Product margin decreased $34.7 million primarily because of the timing differences of when profits on product sales are recognized under forward sales contracts, which MMP was using in second quarter 2008, versus under New York Mercantile Exchange ("NYMEX") contracts, which MMP has been predominately using to hedge price changes for future product sales since third quarter 2008. MMP applied normal sales accounting to the forward sales contracts it entered into; therefore, all of the profit on product sales under these agreements was recognized in the second quarter of 2008 when the physical delivery of the product occurred. Because the NYMEX contracts MMP has been using do not qualify for hedge accounting, MMP marks these contracts to market at the end of each accounting period. NYMEX losses in the current quarter totaled $19.9 million, which contributed to the $34.7 million decrease in product margin for the period. However, $15.7 million of the current quarter NYMEX losses were associated with commodity related activities that will occur in future periods. In addition, MMP recognized $3.5 million of profits from NYMEX contracts in prior periods associated with commodity related activities that occurred this quarter. These two NYMEX events combined accounted for $19.2 million of the $34.7 million decrease in product margin for the period. Lower product prices in 2009 compared to 2008 account for most of the remaining variance.

Depreciation and amortization increased by $1.8 million principally related to expansion capital projects placed into service over the past year.

Affiliate G&A expense increased by $1.2 million due primarily to higher personnel costs, additional costs associated with potential growth projects and higher equity-based incentive compensation expense. The increase in equity-based incentive compensation expense was principally due to the expense associated with the final tranche of the MMP unit awards issued in 2007 being recognized over a shorter period.

Interest expense, net of interest income and interest capitalized, increased $3.3 million. MMP's average debt outstanding, excluding fair value adjustments for interest rate hedges, increased to $1,178.8 million for the 2009 period from $945.1 million for the 2008 period principally due to borrowings for expansion capital expenditures. The weighted-average interest rate on MMP's borrowings decreased to 5.3% in second quarter 2009 from 5.4% in second quarter 2008.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2009



                                                  Six Months Ended                  Variance
                                                      June 30,               Favorable (Unfavorable)
                                                  2008         2009         $ Change          % Change
Financial Highlights ($ in millions, except
operating statistics)

Transportation and terminals revenues:
Petroleum products pipeline system              $  227.9      $ 236.9      $       9.0               4
Petroleum products terminals                        69.6         78.9              9.3              13
Ammonia pipeline system                             11.4          8.5             (2.9 )           (25 )
Intersegment eliminations                           (1.5 )       (2.6 )           (1.1 )           (73 )

Total transportation and terminals revenues        307.4        321.7             14.3               5
Affiliate management fee revenue                     0.4          0.4               -               -
Operating expenses:
Petroleum products pipeline system                  81.9         88.1             (6.2 )            (8 )
Petroleum products terminals                        28.2         30.4             (2.2 )            (8 )
Ammonia pipeline system                              5.1          6.3             (1.2 )           (24 )
Intersegment eliminations                           (3.0 )       (3.5 )            0.5              17

Total operating expenses                           112.2        121.3             (9.1 )            (8 )

Product margin:
Product sales revenues                             312.0         99.0           (213.0 )           (68 )
Product purchases                                  252.9         93.6            159.3              63

Product margin                                      59.1          5.4            (53.7 )           (91 )
Gain on assignment of supply agreement              26.5           -             (26.5 )          (100 )
Equity earnings                                      1.8          1.4             (0.4 )           (22 )

Operating margin                                   283.0        207.6            (75.4 )           (27 )
Depreciation and amortization expense               42.3         46.3             (4.0 )            (9 )
G&A expense                                         37.3         41.3             (4.0 )           (11 )

Operating profit                                   203.4        120.0            (83.4 )           (41 )
Interest expense (net of interest income and
interest capitalized)                               22.7         29.1             (6.4 )           (28 )
Debt placement fee amortization expense              0.3          0.4             (0.1 )           (33 )
Other income                                        (0.3 )       (0.6 )            0.3             100

Income before provision for income taxes           180.7         91.1            (89.6 )           (50 )
Provision for income taxes                           1.0          0.8              0.2              20

Net income                                      $  179.7      $  90.3      $     (89.4 )           (50 )

Operating Statistics

Petroleum products pipeline system:
Transportation revenue per barrel shipped       $  1.161      $ 1.174
Volume shipped (million barrels)                   146.2        145.6
Petroleum products terminals:
Marine terminal average storage utilized
(million barrels per month)                         22.8         25.6
Inland terminal throughput (million barrels)        55.4         53.9
Ammonia pipeline system:
Volume shipped (thousand tons)                       447          295

Transportation and terminals revenues increased $14.3 million as shown below:

• an increase in petroleum products pipeline system revenues of $9.0 million primarily attributable to higher revenues related to leased storage, ethanol blending and higher transportation revenues. The higher leased storage revenues resulted from new storage capacity. Transportation revenues increased as a result of higher average tariffs due in part to our mid-year tariff escalations. Transportation volumes were down slightly between periods as an increase in gasoline shipments was offset by lower diesel and aviation fuel shipments;

• a decrease in ammonia pipeline system revenues of $2.9 million due to lower shipments primarily resulting from operational issues at two of MMP's customers' plants during first quarter 2009, increased system maintenance and testing during second quarter 2009 and unfavorable spring 2009 weather conditions, which slowed demand for ammonia, partially offset by higher average tariffs.

Operating expenses increased by $9.1 million as shown below:

• an increase in petroleum products pipeline system expenses of $6.2 million due primarily to a $12.1 million reduction to operating expenses in 2008 resulting from the favorable settlement of a civil penalty related to historical product releases. Otherwise, current period costs were $6.3 million favorable due to lower power costs resulting from lower prices for natural gas and electricity, more favorable product overages and lower environmental expenses, partially offset by higher maintenance spending resulting from more testing and rehabilitation work being performed and higher personnel costs;

• an increase in petroleum products terminals expenses of $2.2 million due primarily to gains recognized in 2008 from insurance proceeds received for hurricane damages sustained during 2005. Additionally, higher personnel costs contributed to the increase; and

• an increase in ammonia pipeline system expenses of $1.2 million primarily due to an increase in system maintenance and testing and higher environmental costs in 2009 resulting from increases in several environmental accruals related to historical product releases.

Product sales revenues primarily resulted from MMP's petroleum products blending activities, terminal product gains and transmix fractionation. Product margin decreased $53.7 million primarily because of the timing differences of when profits on product sales are recognized under forward sales contracts, which MMP . . .