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, which controls MMP, we reflect our ownership interest in MMP on a consolidated basis, which means that our financial results are combined with MMP GP's and MMP's financial results. The publicly held limited partner interests in MMP are reflected as non-controlling owners' interest in income of consolidated subsidiaries 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 do not differ materially from the results of operations of MMP. 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, 2007.

Recent Developments

Deterioration of credit, capital and commodity markets. Credit market conditions deteriorated rapidly during the third quarter and beginning of the fourth quarter of 2008. Several major banks and financial institutions failed or were forced to seek assistance through distressed sales or emergency government measures.

Cash generated from MMP's operations is our primary source of liquidity for funding debt service, maintenance capital expenditures and quarterly distributions. However, MMP relies on its revolving credit facility to provide additional liquidity for working capital needs and as an interim source of financing for capital expansion projects. MMP's revolving credit facility has total committed capacity of $550.0 million, and drawings on that facility at September 30, 2008 were $15.0 million, with an additional $3.3 million obligated for letters of credit. The facility is funded by a syndicate of 18 banks, with an average commitment of $30.6 million per bank. To date, all of the banks in the syndicate have continued to meet their commitments despite the recent market turmoil. If any banks in the syndicate were unable to perform on their commitments to fund the facility, MMP's liquidity could be impaired, which could reduce its ability to fund growth capital expenditures or finance its working capital needs. On October 9, 2008, MMP borrowed an additional $70.0 million under its revolving credit facility as a precautionary measure to support its short-term liquidity during the current market turmoil. All of the banks in the syndicate performed their obligation to fund this borrowing.

Current market conditions have also resulted in higher credit spreads on long-term borrowings and significantly reduced demand for new corporate debt issues. Equity prices, including our own unit price, have experienced abnormally high volatility during the current period. If these conditions persist, MMP's cost of capital could increase and our and MMP's ability to finance growth capital expenditures or acquisitions in a cost-effective manner could be reduced. The financial condition of some of MMP's customers and suppliers could also be impaired by current market conditions. MMP has experienced no material increase in customer bad debts or non-performance by suppliers and has taken additional measures to reduce its exposure to those events. Current market conditions increase the probability that it could experience losses from customer or supplier defaults.

In addition, should current credit and capital markets conditions result in a prolonged economic downturn in the United States, demand for the petroleum products MMP transports, stores and distributes could decrease, which could in turn result in lower demand for MMP's services and a reduction in MMP's revenues and cash flow.

MMP relies on insurers as protection against liability claims, property damage, environmental damage and various other risks. MMP's primary insurers maintain an
A.M. Best financial strength rating of A or better, which is considered excellent or superior, and have adjusted policyholder surplus of $1.0 billion or higher. Nevertheless, we continue to monitor this situation as insurers have been and are expected to continue to be impacted by the current credit and capital market environment.

Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of our affiliate's pension and other post-retirement benefit plans. We are closely monitoring the capital markets and, based on changes in these two critical assumptions as of October 31, 2008, we do not expect material changes in our pension costs for 2008 or in the contributions we expect to make to our affiliate's pension plans for the 2008 fiscal year. Contributions beyond 2008 are not currently determinable since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension trust assets.

Customer bankruptcy. SemGroup, L.P. and several of its subsidiaries (collectively, "SemGroup") filed for chapter 11 bankruptcy protection during July 2008. Amounts owed to MMP by SemGroup at the time of their bankruptcy filing were insignificant.

MMP had several commercial arrangements with SemGroup for the purchase and sale of petroleum products and natural gas liquids ("NGLs"), transportation of petroleum products and NGLs, lease storage and capacity leases for petroleum products and NGLs and leasing of terminal and tank facilities to or from SemGroup at the time of their bankruptcy. Under bankruptcy laws, SemGroup has the ability to cancel certain of the existing contracts it has with MMP but has not done so to date and remains current on the amounts owed to MMP. If they do so, MMP believes it will be able to replace those contracts with other counterparties on terms similar to those in its contracts with SemGroup. On July 31, 2008, MMP exercised its right to cancel forward petroleum product sales contracts with SemGroup pursuant to which it had agreed to sell petroleum products to SemGroup at various dates between August 2008 and April 2009. MMP has replaced these contracts with alternative hedges against changes in product prices.

MMP does not expect its consolidated results of operations, cash flows or financial position to be materially negatively impacted by the SemGroup bankruptcy. However, bankruptcy proceedings are inherently unpredictable and decisions of the bankruptcy court that MMP cannot foresee at this time could result in a material adverse effect on its consolidated results of operations, cash flows or financial position.

NYMEX contracts. In August 2008, MMP entered into New York Mercantile Exchange ("NYMEX") commodity-based futures contracts to hedge its exposure to price fluctuations for refined petroleum products, primarily related to its blending activities. Although these NYMEX agreements represent a hedge against price changes for petroleum products MMP expects to sell in the future, they do not meet the requirements for hedge accounting treatment. As a result, MMP will recognize the change in fair value of these agreements at the end of each quarterly period, which could result in material gains or losses in its earnings. At September 30, 2008, MMP recognized unrealized gains of $12.2 million on its open NYMEX positions due to the recent decline in petroleum products prices. These NYMEX agreements have maturities from October 2008 through April 2009.

MMP expects to enter into NYMEX agreements to hedge against price changes for additional volumes of petroleum products related to its blending activities and for other commodity hedging activities. To the extent MMP uses NYMEX contracts, it could experience additional risks related to price basis differentials and margin calls. The change in fair value of these NYMEX agreements could result in material impacts to MMP's results of operations and cash flows in future periods.

Distribution. In October 2008, MMP GP's board of directors declared a quarterly distribution of $0.7025 per unit to be paid on November 14, 2008, to unitholders of record at the close of business on November 7, 2008. We will receive approximately $22.9 million of that distribution as a result of our ownership interest in MMP GP, which owns a general partner interest and the incentive distribution rights in MMP.

In October 2008, our general partner declared a quarterly distribution of $0.3540 per unit to be paid on November 14, 2008, to unitholders of record at the close of business on November 7, 2008. The total cash distributions to be paid are $22.2 million.

Overview of MMP

MMP's three operating segments include its:

• petroleum products pipeline system, which is primarily comprised of an 8,500-mile petroleum products pipeline system, including 48 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. As our financial statements consolidate the results of MMP, our financial statements are substantially similar to MMP's. The differences in our financial statements primarily include the following adjustments:

• Interest of non-controlling owners in MMP. Our consolidated balance sheet includes non-controlling owners' interest of consolidated subsidiaries that reflect the proportion of MMP owned by its partners other than us. Similarly, the ownership interests in MMP held by its partners other than us are reflected in our consolidated income statement as non-controlling owners' interest in income of consolidated subsidiaries. These balance sheet and income statement categories are not reflected on MMP's financial statements;

• 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. In addition to incorporating the assets and liabilities of MMP, 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;

• Non-cash interest income. During May 2004, we and MMP entered into an indemnification settlement with a former affiliate, which is discussed in more detail under Environmental below. We recorded a receivable from this former affiliate on our consolidated balance sheet in connection with this indemnification settlement at its discounted present value, and we recorded the accretion of the discount from May 2004 through June 2007 as interest income on our consolidated income statement. These items were not reflected on MMP's financial statements, except that MMP recorded a capital contribution from us when payments pursuant to the indemnification settlement were made to MMP by this former affiliate; 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 table 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 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 table 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.

Three Months Ended September 30, 2007 Compared to Three Months Ended
September 30, 2008



                                                 Three Months Ended                   Variance
                                                    September 30,              Favorable (Unfavorable)
                                                  2007          2008         $ Change           % Change
Financial Highlights ($ in millions, except
operating statistics)

Transportation and terminals revenues:
Petroleum products pipeline system             $    119.1      $ 125.8     $        6.7                  6
Petroleum products terminals                         32.7         34.4              1.7                  5
Ammonia pipeline system                               3.7          5.1              1.4                 38
Intersegment eliminations                            (0.8 )       (0.8 )             -                  -

Total transportation and terminals revenues         154.7        164.5              9.8                  6
Affiliate management fees                             0.2          0.1             (0.1 )              (50 )
Operating expenses:
Petroleum products pipeline system                   46.3         64.0            (17.7 )              (38 )
Petroleum products terminals                         13.4         14.4             (1.0 )               (7 )
Ammonia pipeline system                               6.0          4.7              1.3                 22
Intersegment eliminations                            (1.5 )       (1.4 )           (0.1 )               (7 )

Total operating expenses                             64.2         81.7            (17.5 )              (27 )

Product margin:
Product sales                                       167.3        127.6            (39.7 )              (24 )
Product purchases                                   153.9         89.5             64.4                 42

Product margin                                       13.4         38.1             24.7                184
Equity earnings                                       1.0          1.7              0.7                (70 )

Operating margin                                    105.1        122.7             17.6                 17
Depreciation and amortization expense                19.7         21.5             (1.8 )               (9 )
Affiliate G&A expense                                17.8         17.8               -                  -

Operating profit                                     67.6         83.4             15.8                 23

Interest expense (net of interest income and
interest capitalized)                                11.9         13.3             (1.4 )              (12 )
Non-controlling owners' interest in income
of consolidated subsidiaries                         41.8         51.7             (9.9 )              (24 )
Debt placement fee amortization                       0.2          0.2               -                  -

Income before provision (benefit) for income
taxes                                                13.7         18.2              4.5                 33
Provision (benefit) for income taxes                 (0.4 )        0.5             (0.9 )             (225 )

Net income                                     $     14.1      $  17.7     $        3.6                 26

Operating Statistics:

Petroleum products pipeline system:
Transportation revenue per barrel shipped      $    1.164      $ 1.266
Volume shipped (million barrels)                     78.6         74.4
Petroleum products terminals:
Marine terminal average storage utilized
(million barrels per month)                          21.8         23.9
Inland terminal throughput (million barrels)         30.9         26.2
Ammonia pipeline system:
Volume shipped (thousand tons)                        133          177

Transportation and terminals revenues increased by $9.8 million resulting from higher revenues for each of MMP's business segments as described below:

• an increase in petroleum products pipeline system revenues of $6.7 million. Transportation revenues increased as a result of higher average tariffs due in part to MMP's mid-year 2008 tariff escalation, partially offset by lower transportation volumes due primarily to shipment disruptions in third quarter 2008 attributable to Hurricane Ike. In addition, MMP earned more ancillary fees for leased storage and ethanol and additive blending services.

• an increase in ammonia pipeline system revenues of $1.4 million due to higher average tariffs as a result of MMP's new tariff agreements and additional shipments resulting from favorable weather and market conditions.

Operating expenses increased by $17.5 million due to higher expenses at MMP's petroleum products pipeline system and petroleum products terminals segments, partially offset by lower costs at MMP's ammonia pipeline system, as described below:

• an increase in petroleum products pipeline system expenses of $17.7 million primarily due to the timing of system integrity spending. The higher system integrity spending was due to accelerating work that was originally planned to occur in fourth quarter 2008, as well as some work scheduled for 2009, to balance integrity work and resources across all of MMP's assets. Also contributing to the increase in operating expenses were higher environmental expenses due to increased accruals for several historical releases and less favorable product overages (which reduce operating expenses) in the third quarter of 2008;

• an increase in petroleum products terminals expenses of $1.0 million primarily related to higher maintenance costs as well as higher casualty loss accruals, partially offset by lower property tax assessments; and

• a decrease in ammonia pipeline system expenses of $1.3 million primarily due to the timing of system integrity costs, partially offset by higher environmental costs. Environmental expenses were higher due to increased accruals for several historical releases.

Product sales revenues in the current period primarily resulted from MMP's petroleum products blending operation, terminal product gains and transmix fractionation. Product margin resulting from product sales and purchases increased by $24.7 million primarily due to higher margins on MMP's petroleum products blending operations, attributable mainly to higher product prices and a $12.2 million unrealized gain related to NYMEX contracts. While these NYMEX contracts represent economic hedges against price changes on product sales MMP expects to make in future periods, they do not qualify for hedge accounting treatment; therefore, the change in fair value of these agreements was reflected in the current period product margin.

Operating margin increased $17.6 million primarily due to a higher gross margin from product sales in 2008 and higher revenues from each of MMP's segments, partially offset by higher operating expenses for MMP's petroleum products pipeline system.

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

Interest expense, net of interest capitalized and interest income, increased $1.4 million. MMP's average debt outstanding, excluding fair value adjustments for interest rate hedges, increased to $1.0 billion for third quarter 2008 from $883.2 million for third quarter 2007 principally due to MMP's borrowings for expansion capital expenditures. The weighted-average interest rate on MMP's borrowings, after giving effect to the impact of associated fair value hedges, decreased to 5.9% in the 2008 quarter from 6.1% in the 2007 quarter.

Non-controlling owners' interest in income of consolidated subsidiaries increased $9.9 million due primarily to higher MMP net income.

Provision for income taxes was $0.6 million in third-quarter 2008 compared to a $0.5 million benefit in third-quarter 2007. MMP reduced its income tax accrual in third-quarter 2007 following an evaluation of its partnership-level tax rate, which is based on the financial results of MMP's assets apportioned to the state of Texas.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2008

                                                 Nine Months Ended                   Variance
                                                   September 30,              Favorable (Unfavorable)
                                                  2007         2008         $ Change           % Change
Financial Highlights ($ in millions, except
operating statistics)

Transportation and terminals revenues:
Petroleum products pipeline system             $    341.3     $ 353.7     $       12.4                  4
Petroleum products terminals                         96.5       104.0              7.5                  8
Ammonia pipeline system                              13.1        16.5              3.4                 26
Intersegment eliminations                            (2.5 )      (2.3 )            0.2                  8

Total transportation and terminals revenues         448.4       471.9             23.5                  5
Affiliate management fees                             0.5         0.5               -                  -
Operating expenses:
Petroleum products pipeline system                  131.3       145.9            (14.6 )              (11 )
Petroleum products terminals                         40.5        42.6             (2.1 )               (5 )
Ammonia pipeline system                              17.5         9.8              7.7                 44
Intersegment eliminations                            (4.4 )      (4.4 )             -                  -

Total operating expenses                            184.9       193.9             (9.0 )               (5 )

Product margin:
Product sales                                       493.9       439.6            (54.3 )              (11 )
Product purchases                                   444.5       342.4            102.1                 23

Product margin                                       49.4        97.2             47.8                 97
Gain on assignment of supply agreement                 -         26.5             26.5                n/a
Equity earnings                                       2.9         3.5              0.6                 21

Operating margin                                    316.3       405.7             89.4                 28
Depreciation and amortization expense                58.5        63.8             (5.3 )               (9 )
Affiliate G&A expense                                54.4        55.1             (0.7 )               (1 )

Operating profit                                    203.4       286.8             83.4                 41

Interest expense (net of interest income and
interest capitalized)                                35.7        36.0             (0.3 )               (1 )
Non-controlling owners' interest in income
of consolidated subsidiaries                        122.0       182.8            (60.8 )              (50 )
Debt placement fee amortization                       1.4         0.5              0.9                 64
Debt prepayment premium                               2.0          -               2.0                100
Other (income) expense                                0.7        (0.2 )            0.9                129

Income before provision for income taxes             41.6        67.7             26.1                 63
Provision for income taxes                            1.1         1.5             (0.4 )              (36 )

Net income                                     $     40.5     $  66.2     $       25.7                 63

Operating Statistics:

Petroleum products pipeline system:
Transportation revenue per barrel shipped      $    1.154     $ 1.197
Volume shipped (million barrels)                    226.8       220.6
Petroleum products terminals:
Marine terminal average storage utilized
(million barrels per month)                          21.6        23.2
Inland terminal throughput (million barrels)         88.4        81.6
Ammonia pipeline system:
Volume shipped (thousand tons)                        533         624

Transportation and terminals revenues increased by $23.5 million resulting from higher revenues for each of MMP's business segments as described below:

• an increase in petroleum products pipeline system revenues of $12.4 million. Transportation revenues increased as a result of higher average tariffs due in part to MMP's mid-year 2007 and 2008 tariff escalations, partially offset by lower transportation volumes due primarily to shipment disruptions in third quarter 2008 attributable to Hurricane Ike and weak demand for petroleum products as a result of higher product prices. MMP also earned more ancillary revenues related to leased storage, ethanol blending services, capacity leases and facility rentals;

. . .