Magellan Midstream Partners Worth Exploring

1. The Petroleum Products Pipeline segment produced 78% of operating income in the third quarter of 2008. Assets here include a 8,500 mile petroleum pipeline stretching from Texas through the upper Midwest, covering thirteen states. Products shipped are mostly gasoline, diesel fuel and heating oil. Earnings in this segment are primarily driven by tariffs based on the volume shipped, and are regulated by the Federal Energy Regulatory Commission (FERC). The company is usually allowed to raise rates based on The Producer Price Index for Finished Goods plus a margin.
   
   
2. The Marine and Inland Terminal business provided 20% of operating earnings in the third quarter of 2008, and the company owns seven marine terminals with a storage capacity of 25 million barrels, and 27 inland terminals with 5 million barrels of storage. Earnings here are based on the amount of product stored, and at the end of 2007, Magellan had 95% of its capacity under contracts with a term longer than a year.
   
   
3. The Ammonia Pipeline segment is the company's smallest segment. It consists of an 1,100 mile ammonia pipeline. This unit only provided 2% of operating earnings in the third quarter of 2008.

A MLP has several characteristics that distinguish it from a corporation. Holders own units, not shares, and the company is a pass-through entity so it doesn't pay any corporate-level taxes. (learn more about these types of partnerships in Discover Master Limited Partnerships.)

Ownership Structure
Magellan Midstream Partners is 98% owned by the public and 2% owned by a related entity called Magellan Midstream Holdings (NYSE:MGG). Magellan Midstream Holdings itself is owned 86% by the public and the balance is owned by several private equity firms.

Important Stats
Financially, the company is stronger than some of its peers. It maintains distribution coverage ratio of 1.2 times, which is defined as cash available for distribution divided by distributions paid. Its debt-to-EBITDA ratio on a trailing 12-month basis was less than 2.5 in mid-2008. Rivals Enterprise Products Partners (NYSE:EPD) had a debt-to-EBITDA of 4.1, while Oneok Partners (NYSE:OKS) had a debt-to-EBITDA ratio of 3.5. (To learn how to add these ratios to your toolbox, read our Financial Ratio Tutorial.)

Magellan has increased dividends for 30 consecutive quarters, which equates to a 14% compound annual growth rate. Its dividend yield is 10%.

Risks
Magellan does have some exposure to the ethanol industry, which has seen its fortunes wither away with the fall in oil prices. Forty-five of its terminals are configured to handle ethanol, although other refined petroleum products can be handled here in case ethanol production falls.

End Product
Magellan Midstream Partners provides storage terminal and transportation services mainly in petroleum, but is also exposed to ethanol and ammonia. It has had an increasing dividend since its IPO in the beginning of 2001. This master limited partnership has lower leverage than its peers, a high dividend, and its regulated pipeline business will help protect earnings during a recession.