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Pipeline operator Magellan Midstream Partners, L.P. ((MMP - Analyst Report) announced earnings per unit (EPU) of 94 cents (excluding mark-to-market commodity-related pricing adjustments), a penny behind the Zacks Consensus Estimate of 95 cents and also below the year-ago adjusted profit of $1.01, owing to weaker demands for gasoline in the quarter.

However, total revenue of $493.5 million was up 11.4% year over year and was also above the Zacks Consensus Estimate of $490.0 million, aided by good performance from its crude oil pipelines and storage infrastructure.

Quarterly Distribution

Recently, Magellan raised its quarterly cash distribution by 3.0% sequentially and 9.0% year over year to 84 cents per unit ($3.36 per unit annualized). The partnership’s new distribution is payable on May 15 to unitholders of record as of May 8, 2012.

Segmental Performance

Petroleum Products Pipeline System: In the Petroleum Products Pipeline System, quarterly operating margins (before affiliate G&A and D&A expenses) were $125.4 million, down 0.8% year over year as improved revenues were more than offset by elevated expenses. Moreover, its higher volumes of crude oil were more than mitigated by weak gasoline demand.

Petroleum Terminals: In the Petroleum Terminals segment, operating margin was a record $48.0 million, up 20.4% year over year. The improvement were attributable to the recently-constructed crude oil storage facilities, new refined product tanks, inflated rates from its marine terminals and decreasing operating expenses, partly offset by a decline in product margin owing to less overseas sales.

Ammonia Pipeline System: The partnership’s Ammonia Pipeline System reported an operating margin of $3.9 million, higher than the $3.7 million earned in the first quarter of 2011. The result was positively impacted by a decrease in operating expenses, partly offset by declining revenues.

2012 Guidance

Management has raised their distributable cash flow guidance by $10 million to $490 million for the full year and is targeting annual distribution growth of 9%.

The partnership plans to spend approximately $500 million on expansion projects in 2012, with expenditures of $180 million thereafter to complete these projects. Additionally, the partnership is on the look out for more than $500 million worth potential growth projects in the earlier stages of development.

Our Recommendation

Magellan Midstream units currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

Magellan Midstream Partnersowns a high-quality and diverse portfolio of midstream assets that generate stable and recurring revenues by way of long-term fee-based contracts. The partnership – with more than $500 million of potential projects under development – has attractive growth potential, and maintains a sound liquidity position.

The partnership is also susceptible to lower-than-expected demand for refined products, commodity price fluctuations and cost overruns on expansion projects.

Magellan Midstream competes in the ‘Oil/Gas Production Pipeline MLP’ industry with firms like Plains All American Pipeline, L.P. (PAA - Analyst Report), Inergy Midstream LLC , PAA Natural Gas Storage, L.P. , etc.

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