Ethanol Transportation Distribution New York Energy Forum Mike

Ethanol Transportation & Distribution New York Energy Forum Mike Mears Senior Vice President mike. mears@magellanlp. com 918 574 7400 1

Presentation Outline ü Introducing Magellan Midstream Partners (formerly Williams Energy Partners / Williams Pipeline) ü Our experience with the distribution of ethanol ü The prospect of transporting ethanol and ethanol blends via pipeline üCommercial opportunities üTechnical Challenges ü Industry research üCongressional action 2

Magellan’s Structure A Publicly Traded Partnership Magellan Midstream Holdings, L. P. (NYSE: MGG) Magellan Midstream Partners, L. P. (NYSE: MMP) Petroleum Products Pipeline System Marine and Inland Terminals 3 Ammonia Pipeline System

Magellan’s Asset Portfolio ü Petroleum products pipeline system ü Longest contiguous pipeline in U. S. (8, 500 miles) ü Access to greater than 40% of refinery capacity in continental United States ü Total of 81 petroleum product terminals in 22 states ü 45 terminals connected to Magellan Pipeline, 27 mm barrels storage ü Marine terminals ü 7 locations with 22 million barrels storage ü Inland terminals ü 29 locations with 6 million barrels storage; connected to 3 rd party pipelines ü Ammonia pipeline system (1, 100 miles) 4

Magellan Pipeline – Refined Products Significant Market Presence Oklahoma, Missouri, North Dakota, Kansas, Nebraska, Iowa, Minnesota and South Dakota 5

Pipeline Fundamentals ü Pipelines are the most cost efficient and safest method of transporting liquid fuels ü Tariff from Houston to Kansas City about 6 cents per gallon (about 750 miles) ü Common Carrier vs. Proprietary Pipeline ü Product batching…gasoline / diesel / jet fuel ü Boutique fuels require incremental infrastructure and creates capacity limitations due to scheduling inefficiencies üToday, ethanol is transported via truck, rail, barge and ship. Blending takes place at terminals 6

Ethanol Blending at Terminals ü We have ethanol blending at 35 terminals today (and planning for more) ü Ratio Blending ü Gasoline and ethanol blended proportionally as the blended fuel enters the truck ü Sequential Blending ü Ethanol enters the truck first followed by gasoline ü Ratio & Sequential systems promote quality blends ü Total ethanol blending infrastructure costs $2 to $3 million per terminal ü Railcar offloading infrastructure substantially higher 7

Ethanol & Pipelines ü As domestic and international ethanol production continues to increase, the economic viability of domestic pipeline shipments increase as well ü The potential introduction of ethanol into the pipeline system brings challenges and opportunities ü Commercial opportunities include the potential shipment of 10% ethanol blends as well as fuel grade ethanol ü The challenge is related to the potential incompatibility of fuel grade ethanol with the existing pipeline infrastructure ü Existing dedicated neat ethanol systems have experienced pipeline failures ü Urgent need to study the viability of transporting low level ethanol blends (10%) via our existing pipeline system (Industry has no operating experience) 8

Technical Issues ü Technical factors regarding transportation of ethanol by pipeline ü Moisture ü Materials compatibility üStress Corrosion Cracking (SCC) ü SCC is the formation of brittle cracks in a material that occurs as a result of corrosion processes and stress ü SCC historically found in pipelines and tanks that are in dedicated ethanol service ü Cracks develop around welds with high stress or tight bends ü Historical data suggests SCC appears at distribution terminals (not ethanol plants) 9

SCC Example – Magellan’s Omaha Terminal Leak Photo 10

Ethanol Transportation via a Dedicated Pipeline ü Other important factors ü Economics ü A pipeline from the Midwest to the east could be a multi-billion dollar project ü Transportation rates for a Midwest to East / West Coast pipeline would be competitive with rail transportation rates. A 12” line could move up to 100, 000 barrels per day (4. 2 million gallons per day) ü Commercial Viability ü Ability to secure long-term shipper commitments 11

Ethanol Pipeline via a Dedicated Pipeline Ethanol Production ü Logistics ü Individual production facilities are small relative to volumes necessary to support a pipeline ü Average ethanol plant produces 3, 417 barrels per day* ü Aggregation facility of up to 100, 000 barrels per day (supply from 30 average size ethanol plants) ü Distribution terminals at the terminus of the pipeline ü Regulatory Authority ü Which federal agency will have oversight authority over ethanol pipelines? *123 ethanol plants with 6. 444 billion gallons of capacity Renewable Fuels Association 7/23/07 12

Study Underway ü Association of Oil Pipelines (AOPL) and the API working with the Pipeline Research Council International (PRCI) ü Multiple research projects underway to resolve the technical issues associated with pipelining ethanol ü Short term (6 to 12 months) - what level of ethanol blends are compatible with existing pipeline systems with little or no modification ü Long term (36 to 48 months) – • identify the environmental factors that produce SCC in ethanol pipelines and terminals • SCC susceptibility in existing batched pipeline systems • Design requirements for new, dedicated ethanol pipelines 13

Congressional Action ü House and Senate Energy bills and the House Farm bill includes a provision which provide funds to study the feasibility of an ethanol pipeline ü The Senate Finance Committee passed its Energy Tax title which include a provision to allow the transportation of ethanol and biodiesel blends as “qualifying income” for publicly traded partnerships ü Important to maintain partnership status 14

Takeaways ü Pipelines remain the most reliable, safe and economic mode to transport large volumes of liquid energy ü Because of the increasing domestic and international ethanol production base, pipelines may provide an economic method of transportation for ethanol ü SCC challenges must be resolved ü Magellan is actively involved with other pipeline industry leaders in finding technical solutions ü AOPL and API members are funding research to address SCC ü Congress may provide funding for additional study ü Transportation of ethanol blends via pipeline may be feasible in the short term ü Would eliminate the need for costly rail offloading infrastructure at terminals 15

Magellan Midstream Partners, L. P. (NYSE: MMP) www. magellanlp. com Magellan Midstream Holdings, L. P. (NYSE: MGG) www. mgglp. com 16