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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No.: 1-16335

Magellan Midstream Partners, L.P.

(Exact name of registrant as specified in its charter)

One Williams Center, P.O. Box 22186, Tulsa, Oklahoma 74121-2186

(Address of principal executive offices and zip code)

(918) 574-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x    No ¨

As of May 5, 2004, there were outstanding 23,130,541 common units and 4,259,771 subordinated units.

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per unit amounts)

(Unaudited)

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Magellan Midstream Partners, L.P. (the “Partnership”) is a Delaware master limited partnership. The Partnership was formed in August 2000 as Williams Energy Partners L.P., which was renamed Magellan Midstream Partners, L.P. effective September 1, 2003. Magellan GP, LLC (the “General Partner”), a Delaware limited liability company, serves as the Partnership’s general partner and owns a 2% general partner interest. The General Partner is a wholly-owned subsidiary of Magellan Midstream Holdings, L.P. (“MMH”), a Delaware limited partnership owned by Madison Dearborn Capital Partners IV, L.P. and Carlyle/Riverstone MLP Holdings, L.P. The General Partner has contracted with MMH to perform all management and operating functions required for the Partnership.

The Partnership operates and reports in three business segments: the petroleum products pipeline system, the petroleum products terminals and the ammonia pipeline system. Our reportable segments offer different products and services and are managed separately because each requires different business strategies.

In the opinion of management, the accompanying consolidated financial statements of Magellan Midstream Partners, L.P., which are unaudited except for the consolidated balance sheet as of December 31, 2003, which is derived from audited financial statements, include all normal and recurring adjustments necessary to present fairly the Partnership’s financial position as of March 31, 2004, the results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year ending December 31, 2004. Certain amounts in the financial statements for 2003 have been reclassified to conform to the current period’s presentation.

Pursuant to the rules and regulations of the Securities and Exchange Commission, the financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2003.

2. Derivative Financial Instruments

In February 2004, the Partnership entered into three separate interest rate swap agreements to hedge the Partnership’s exposure against interest rate increases for a portion of the debt the Partnership anticipates refinancing related to Magellan Pipeline Company LLC’s (“Magellan Pipeline”) Series A and Series B notes (see Note 11—Debt). The Partnership has accounted for these interest rate hedges as cash flow hedges. The notional amounts of the swaps total $150.0 million. Under the terms of the swap agreements, the Partnership will pay the equivalent of ten-year fixed interest rates and will receive the equivalent of ten-year LIBOR. The swaps will be required to be unwound shortly after October 2007. The 10-year period of the swap agreements is the assumed tenure of the replacement debt. The average fixed rate on the swap agreements is 5.9%.

The Partnership generally reports gains, losses and any ineffectiveness from interest rate derivatives in its results of operations in interest expense; however, in accordance with Financial Accounting Standards Board Statement No. 133, as amended, as of March 31, 2004 and for the three month period then ended, the $3.4 million unrealized loss on the interest rate swap agreements was recorded in accumulated other comprehensive loss and other deferred liabilities on the balance sheet. The swap agreements are effective and to the extent any portion of the swap agreements is ineffective it would be immaterial to the three month period ended March 31, 2004 and is expected to be immaterial for the 2004 year.

3. Acquisitions

During the first three months of 2004, the Partnership completed two acquisitions, which are described below. The petroleum products terminals acquisition was accounted for under the purchase method and the assets acquired and liabilities assumed were recorded at their estimated fair market values as of the acquisition date. The purchase price presented below includes certain accrued costs that will be adjusted when the final costs are known, which should be

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during the second quarter of 2004. The Osage Pipeline acquisition has been accounted for as an equity investment. The results of operations from the petroleum products terminals have been included with the petroleum products terminals segment results and the equity earnings from the Osage Pipeline acquisition have been included in the petroleum products pipeline system segment results since their respective acquisition dates.

Petroleum Products Terminals

On January 29, 2004, the Partnership acquired ownership in 14 petroleum products terminals located in the southeastern United States. The Partnership paid $24.8 million for these facilities, incurred $0.6 million of closing costs and assumed $3.8 million of environmental liabilities. The Partnership previously owned a 79% interest in eight of these terminals and purchased the remaining ownership interest from Murphy Oil USA, Inc. In addition, the acquisition included sole ownership of six terminals that were previously jointly owned by Murphy Oil USA, Inc. and Colonial Pipeline Company. The allocation of the purchase price to assets acquired and liabilities assumed was as follows (in thousands):

Osage Pipeline

On March 2, 2004, the Partnership acquired a 50% ownership in Osage Pipe Line Company, LLC (“OPL”), for $25.0 million from National Cooperative Refining Association (“NCRA”). OPL, which owns the Osage pipeline, is in the process of obtaining record title to the Osage pipeline assets. The 135-mile Osage pipeline transports crude oil from Cushing, Oklahoma to El Dorado, Kansas and has connections to the NCRA refinery in McPherson, Kansas and the Frontier refinery in El Dorado, Kansas. The remaining 50% interest in OPL is owned by NCRA. The Partnership’s investment in OPL includes an excess net investment amount of $22.0 million. Excess investment is the amount by which our investment balance exceeds our proportionate share of the net assets of the investment.

Pro Forma Information

The following summarized pro forma consolidated income statement information for the three months ended March 31, 2003 and 2004, assumes that all of the acquisitions discussed above had occurred as of January 1, 2003. We have prepared these pro forma financial results for comparative purposes only. These pro forma financial results may not be indicative of the results that would have occurred if we had completed these acquisitions as of the periods shown below or the results that will be attained in the future. The amounts presented below are in thousands, except for per unit amounts:

Pro forma adjustments, other than actual operating results, include: additional general and administrative expenses of $130 thousand for the 2003 quarter and $60 thousand for the 2004 quarter, excess equity investment amortization of $167 thousand for the 2003 quarter and $111 thousand for the 2004 quarter and the elimination of income taxes of $241 thousand for the 2003 quarter and $139 thousand for the 2004 quarter.

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4. Allocation of Net Income

The allocation of net income between the General Partner and limited partners is as follows (in thousands):

On June 17, 2003, The Williams Companies, Inc. (“Williams”) sold all the limited partner units it owned in the Partnership and its membership interests in the General Partner to MMH. The transition charges of $0.6 million incurred during the three months ended March 31, 2004 represent costs for transitioning the Partnership from Williams in excess of the amount contractually required to be paid by the Partnership. The Partnership has recorded these excess transition costs as a capital contribution. Charges in excess of the general and administrative expense cap were $1.1 million for the three months ended March 31, 2004. These amounts represent general and administrative expenses charged against Partnership income during the three months ended March 31, 2004 that will be reimbursed to the Partnership by the General Partner under the terms of the new omnibus agreement. Consequently, this amount has been charged directly against the General Partner’s allocation of net income. The Partnership records these reimbursements by the General Partner as a capital contribution.

5. Comprehensive Income

For the three months ended March 31, 2004 and 2003, the difference between the Partnership’s net income and comprehensive income was the unrealized loss on the interest rate swaps and the amortization of the loss on a cash flow hedge. For information relative to the interest rate swaps see Note 2 – Derivative Financial Instruments. During September 2002, in anticipation of a new debt placement to replace the short-term debt assumed to acquire Magellan Pipeline, the Partnership entered into an interest rate hedge. The effect of this interest rate hedge was to set the coupon rate on a portion of the fixed-rate debt prior to actual execution of the debt agreement. The loss on the hedge, approximately $1.0 million, was recorded in accumulated other comprehensive loss and is being amortized over the five-year life of the fixed-rate debt secured during October 2002. The Partnership’s total comprehensive income is as follows (in thousands):

6. Segment Disclosures

Management evaluates performance based upon segment operating margin, which includes revenues from affiliate and external customers, operating expenses, environmental expense, environmental reimbursements and product purchases.

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On June 17, 2003, Williams sold its interest in the Partnership to MMH. Prior to June 17, 2003, affiliate revenues from Williams were accounted for as if the sales were to unaffiliated third parties. The Partnership has had no affiliate revenues since Williams’ sale of its interest in the Partnership to MMH on June 17, 2003. Also, prior to June 17, 2003, affiliate general and administrative costs, other than equity-based incentive compensation, were based on the expense limitations provided for in the omnibus agreement and were allocated to the business segments based on their proportional percentage of revenues. After June 17, 2003, affiliate general and administrative costs have generally been charged to the Partnership and allocated to the business segments based on a three-factor formula which considers total salaries, property, plant and equipment and operating revenues less product purchases.

The Partnership’s reportable segments are strategic business units that offer different products and services. The segments are managed separately because each segment requires different marketing strategies and business knowledge.

The non-generally accepted accounting principle (“GAAP”) measure of operating margin (in the aggregate and by segment) is presented in the following tables. 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. Management believes that investors benefit from having access to the same financial measures they use to evaluate performance. Operating margin is an important performance measure of the economic resources of the Partnership’s core operations. This measure forms the basis of the Partnership’s internal financial reporting and is used by management in deciding how to allocate capital resources between segments. Operating profit, alternatively, includes expense items that management does not consider when evaluating the core profitability of an operation such as depreciation and general and administrative costs.

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7. Inventories

Inventories at December 31, 2003 and March 31, 2004 were as follows (in thousands):

8. Equity Investment

Effective March 2, 2004, the Partnership acquired a 50% ownership in OPL, which owns the Osage pipeline. The remaining 50% interest is owned by NCRA. The 135-mile Osage pipeline transports crude oil from Cushing, Oklahoma to El Dorado, Kansas and has connections to the NCRA refinery in McPherson, Kansas and the Frontier refinery in El Dorado, Kansas. The agreement between the Partnership and NCRA calls for equal sharing of net income of OPL.

The Partnership uses the equity method of accounting to account for this investment. Summarized financial information for OPL from the acquisition date (March 2, 2004) through March 31, 2004 is presented below (in thousands):

The condensed balance sheet for OPL as of March 31, 2004 is presented below (in thousands):

A summary of the Partnership’s equity investment in OPL is as follows (in thousands):

The Partnership’s investment in OPL includes an excess net investment amount of $22.0 million. Excess investment is the amount by which our investment balance exceeds our proportionate share of the net assets of the investment.

9. Related Party Transactions

Affiliate revenues historically represented revenues from Williams and its affiliates. The Partnership has had no affiliate revenues since Williams’ sale of its interest in the Partnership to MMH on June 17, 2003. The following paragraphs describe the affiliate relationships the Partnership had with Williams and its affiliates prior to June 17, 2003.

The Partnership had agreements with Williams Energy Marketing & Trading, LLC (“WEM&T”) which provided for: (i) the lease of a Carthage, Missouri propane storage cavern and (ii) access and utilization of storage on the Magellan Pipeline system. Magellan Pipeline had also entered into tank storage agreements with Williams Bio-Energy, LLC (“Williams Bio-Energy”) which was an affiliate entity until its sale by Williams in May 2003. The Partnership also had a lease storage contract with Williams Bio-Energy at its Galena Park, Texas marine terminal facility.

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The Partnership also had an agreement with WEM&T that provided for storage and other ancillary services at our marine terminal facilities. This agreement was cancelled during the first quarter of 2003 in exchange for a $3.0 million payment to us from WEM&T. Both WEM&T and Williams Refining & Marketing had agreements for the access and utilization of the inland terminals.

In addition, the Partnership had an agreement with Williams Petroleum Services, LLC to perform services related to petroleum products asset management activities for an annual fee in 2003 of approximately $4.0 million. In July 2003, the Partnership acquired from Williams and its affiliates the rights to these activities.

The Partnership also had affiliate agreements with WEM&T and Williams Refining & Marketing for the non-exclusive and non-transferable sub-license to use the ATLAS 2000 software system. The rights to this system were contributed to us on June 17, 2003.

The following table reflects affiliate revenues for the three months ended March 31, 2003 (in thousands):

Costs and expenses related to activities between the Partnership and Williams and its affiliates after June 17, 2003 have been accounted for as unaffiliated third-party transactions. Transactions between the Partnership and MMH and its affiliates were accounted for as affiliate transactions after June 17, 2003. The following table summarizes costs and expenses from various affiliate companies with the Partnership and are reflected in the cost and expenses in the accompanying consolidated statements of income (in thousands):

* Includes environmental costs and environmental reimbursements.

For the period January 1, 2003 through March 31, 2003, Williams allocated both direct and indirect general and administrative expenses to the Partnership’s general partner. Direct expenses allocated by Williams were primarily salaries and benefits of employees and officers associated with the business activities of the affiliate. Indirect expenses included legal, accounting, treasury, engineering, information technology and other corporate services. Williams allocated these expenses to the Partnership’s general partner based on the expense limitation provided for in an agreement between Williams, the Partnership’s general partner and the Partnership. The Partnership reimbursed its general partner and its affiliates for expenses charged to us by the General Partner on a monthly basis.

As a result of the sale of Williams’ ownership interests in the Partnership, the Partnership entered into a new services agreement with MMH pursuant to which MMH agreed to perform specified services required for our operations. Consequently, the Partnership’s operations and general and administrative functions are now provided by MMH. The Partnership’s reimbursement of general and administrative costs is subject to the limitations as defined in the new omnibus agreement.

Williams and certain of its affiliates and MMH have indemnified us against certain environmental costs. Receivables from Williams or its affiliates associated with these environmental costs were $7.8 million and $29.1 million at December 31, 2003 and March 31, 2004, respectively, and are included with accounts receivable amounts presented in the consolidated balance sheets. Receivables from MMH were $19.0 million and $16.4 million at December 31, 2003 and March 31, 2004, respectively, and are included with the affiliate accounts receivable in the consolidated balance sheets.

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10. Employee Benefit Plans

On January 1, 2004, MMH assumed sponsorship of the Magellan Pension Plan for PACE Employees (“Union Pension Plan”) for hourly employees. In addition, MMH began sponsorship of a pension plan for non-union employees and a post-retirement benefit plan for selected employees effective January 1, 2004. The following table presents the Partnership’s recognition of net periodic benefit costs related to these plans during the three months ended March 31, 2004 (in thousands).

The Partnership anticipates contributing a total of $2.0 million to satisfy minimum funding requirements for pension benefits for the 2004 year. Through March 31, 2004, a total of $0.3 million had been contributed.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was enacted on December 8, 2003. The effect of the Act has not been reflected in the net post-retirement benefit cost disclosed above. Authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Partnership to change previously reported information. The effect of the Act on the overall costs to the Partnership is not expected to be material.

11. Debt

Debt for the Partnership at December 31, 2003 and March 31, 2004 was as follows (in thousands):

Magellan term loan and revolving credit facility

In August 2003, the Partnership entered into a credit agreement with a syndicate of banks. This facility is comprised of a $90.0 million term loan and an $85.0 million revolving credit facility of which $10.0 million is available for letters of credit. The term loan bears interest at the Eurodollar rate plus a margin of 2.0%. Indebtedness under the revolving credit facility bears interest at the Eurodollar rate plus a margin of 1.8%. The interest rate on amounts borrowed under these facilities at March 31, 2004 was 3.1%. The Partnership also incurs a commitment fee on the un-drawn portion of the revolving credit facility. The facility provides for the establishment of up to $100.0 million in additional term loans, which would bear interest at a rate agreed to at the time of borrowing. The Partnership incurred debt placement fees of $2.6 million associated with this credit facility, which are being amortized over the life of the credit facility.

The revolving credit facility terminates on August 6, 2007, and the term loan terminates on August 6, 2008. Scheduled prepayments equal to 1.0% of the initial term loan balance are due on August 6th of each year until maturity. As of March 31, 2004, the $90.0 million term loan was outstanding with $0.7 million of the $85.0 million revolving credit facility being used for letters of credit, and the balance available for future borrowings. The Partnership’s equity interests in Magellan OLP, L.P. and Magellan GP, Inc., including their subsidiaries, secure obligations under the facility. Magellan OLP, L.P., a Delaware limited partnership, owns the entities which hold the Partnership’s petroleum products terminals, ammonia pipeline system and equity investment in the Osage pipeline. Magellan GP, Inc., a Delaware corporation, is the general partner of Magellan OLP, L.P. Those entities are also guarantors of the Partnership’s obligations under the facility. Magellan Pipeline is a separate operating subsidiary of

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the Partnership and is not a guarantor under this facility. The weighted-average interest rate for this facility for the three months ended March 31, 2004 was 3.2%.

Under the terms of the above-named facility, a change in control results in an event of default, in which case the maturity date of the obligations under the facility may be accelerated. For this facility, a change of control is defined in a variety of ways, each of which involve the current owners of MMH no longer maintaining majority control of the management of MMH, the Partnership or the General Partner. This facility contains various operational and financial covenants. The Partnership is in compliance with all of these covenants.

Magellan Pipeline Senior Secured Notes

During October 2002, Magellan Pipeline entered into a private placement debt agreement with a group of financial institutions for $200.0 million aggregate principal amount of Floating Rate Series A Senior Secured Notes and up to $340.0 million aggregate principal amount of Fixed Rate Series B Senior Secured Notes. Both notes are secured with the Partnership’s membership interest in and assets of Magellan Pipeline. The maturity date of both notes is October 7, 2007; however, the Partnership will be required on each of October 7, 2005 and October 7, 2006, to repay 5.0% of the then outstanding principal amount of the Senior Secured Notes. At March 31, 2004, $480.0 million was outstanding under these notes, with $178.0 million borrowed under the Series A notes and $302.0 million borrowed under the Series B notes.

The Series A notes bear interest at a rate equal to the six-month Eurodollar rate plus 4.3%, which was 5.4% at March 31, 2004. The weighted average interest rate of the Series B notes is a fixed rate of 7.8%. The Partnership incurred debt placement fees associated with these notes of $10.8 million which are being amortized over the life of the notes. Payment of interest and repayment of the principal is guaranteed by the Partnership. Monthly deposits in the amount of interest due the lenders are made to a cash escrow account from which interest payments on the Magellan Pipeline notes are made semi-annually. These deposits are reflected as restricted cash on the Partnership’s consolidated balance sheets and were $8.2 million and $16.5 million at December 31, 2003 and March 31, 2004, respectively.

The note purchase agreement requires the Partnership and Magellan Pipeline to maintain specified ratios of: (i) consolidated debt to EBITDA of no greater than 4.50 to 1.00, and (ii) consolidated EBITDA to interest expense of at least 2.50 to 1.00.

In addition, the note purchase agreement contains additional covenants that limit Magellan Pipeline’s ability to, among other things:

12. Commitments and Contingencies

Williams and certain of its affiliates have indemnified the Partnership for covered environmental losses related to assets operated by the Partnership at the time of its initial public offering date (February 9, 2001) that become known by August 9, 2004 and that exceed amounts recovered or recoverable under the Partnership’s contractual indemnities from third persons or under any applicable insurance policies. We refer to this indemnity in the table below as the “IPO Indemnity”. However, Williams’ obligations under this indemnity are limited to $13.3 million, which represents the $15.0 million indemnity provided under the old omnibus agreement less amounts paid by Williams prior to June 17, 2003 under that agreement. Covered environmental losses are those non-contingent terminal and ammonia system environmental losses, costs, damages and expenses suffered or incurred by the Partnership arising from correction of violations or performance of remediation required by environmental laws in effect at February 9, 2001, due to events and conditions associated with the operation of the assets and occurring before February 9, 2001.

In addition, Williams and certain of its affiliates have indemnified the Partnership for right-of-way defects or failures in the ammonia pipeline easements for 15 years after February 9, 2001. Williams and certain of its affiliates have also indemnified the Partnership for right-of-way defects or failures associated with the marine facilities at Galena Park and Corpus Christi, Texas and Marrero, Louisiana for 15 years after February 9, 2001.

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In conjunction with the acquisition of Magellan Pipeline in April 2002, Williams agreed to indemnify the Partnership for any breaches of representations or warranties, environmental liabilities and failures to comply with environmental laws as described below that result in losses and damages up to $110.0 million after the payment of an applicable $2.0 million deductible. With respect to any amount exceeding $110.0 million, Williams will be responsible for one-half of that amount up to $140.0 million. Williams’ liability under this indemnity is capped at $125.0 million. We refer to this indemnity in the table below as the “Magellan Pipeline Indemnity”. This indemnification obligation survived for one year, except for those obligations relating to employees, title, taxes and environmental. Obligations relating to employees and employee benefits will survive for the applicable statute of limitations and those obligations relating to real property, including asset titles, will survive for ten years after April 11, 2002, the date the Partnership acquired Magellan Pipeline. This indemnity also provides that the Partnership will be indemnified for an unlimited amount of losses and damages related to tax liabilities. In addition, any losses and damages related to environmental liabilities caused by events that occurred prior to the acquisition and for which claims are made within six years of the Partnership’s acquisition of Magellan Pipeline will be subject to a $2.0 million deductible, which was met during 2002. Covered environmental losses include those losses arising from the correction of violations of, or performance of remediation required by, environmental laws in effect at April 11, 2002.

In addition to these two agreements, the purchase and sale agreement (“June 2003 PSA”) entered into in connection with MMH’s acquisition of Williams’ partnership interest provides the Partnership with two additional indemnities related to environmental liabilities, which we cumulatively refer to as the “Acquisition Indemnity” in the table below.

First, MMH (the buyer under the June 2003 PSA) assumed Williams’ obligations to indemnify the Partnership for $21.9 million of known environmental liabilities, of which $19.0 million was associated with known liabilities at Magellan Pipeline facilities, $2.7 million was associated with known liabilities at the Partnership’s petroleum products terminal facilities and $0.2 million was associated with known liabilities on the ammonia pipeline system.

Second, in the June 2003 PSA, Williams agreed to indemnify the Partnership for certain environmental liabilities arising prior to June 17, 2003 related to all of the Partnership’s facilities to the extent not already indemnified under Williams’ two preexisting indemnification obligations described above. This additional indemnification includes those liabilities related to the Partnership’s petroleum products terminals and the ammonia pipeline system arising after the initial public offering (February 9, 2001) through June 17, 2003 and those liabilities related to Magellan Pipeline arising after the Partnership’s acquisition of it on April 11, 2002 through June 17, 2003. This indemnification covers environmental as well as other liabilities and is capped at $175.0 million.

The Partnership has collected $5.5 million from MMH and $14.7 million from Williams associated with their indemnification obligations scheduled above.

Estimated liabilities for environmental costs were $26.8 million and $50.7 million at December 31, 2003 and March 31, 2004, respectively. These estimates, provided on an undiscounted basis, were determined based primarily on data provided by internal environmental personnel. These liabilities have been classified as current or non-current based on management’s estimates regarding the timing of actual payments. Management estimates that expenditures associated with these environmental remediation liabilities will be paid over the next ten years. As part of its negotiations with Williams for the June 2003 acquisition of the Partnership, MMH assumed Williams’ obligations for $21.9 million of environmental liabilities and the Partnership recorded a receivable from MMH for this amount. To the extent the environmental and other Williams indemnity claims against MMH are less than $21.9 million and to the extent no other indemnity obligations exist with Williams, MMH will pay to Williams the remaining difference between $21.9 million and the indemnity claims paid by MMH. Receivables from Williams or its affiliates associated with indemnified environmental costs were $7.8 million and $29.1 million at December 31, 2003 and March 31, 2004, respectively. Environmental receivables from insurance carriers were $3.1 million and $7.2 million at December 31, 2003 and March 31, 2004, respectively. Environmental receivables from MMH at

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December 31, 2003 and March 31, 2004 were $19.0 million and $16.4 million, respectively. The Partnership invoices MMH, Williams and its affiliates or other third-party entities for its environmental indemnities as remediation work is performed.

In conjunction with the 1999 acquisition of the Gulf Coast marine terminals from Amerada Hess Corporation (“Hess”), Hess represented that it had disclosed to the Partnership all suits, actions, claims, arbitrations, administrative, governmental investigation or other legal proceedings pending or threatened, against or related to the assets acquired by the Partnership, which arise under environmental law. In the event that any pre-acquisition releases of hazardous substances at the Partnership’s Corpus Christi and Galena Park, Texas and Marrero, Louisiana marine terminal facilities were unknown at closing but subsequently identified by the Partnership prior to July 30, 2004, the Partnership will be liable for the first $2.5 million of environmental liabilities, Hess will be liable for the next $12.5 million of losses and the Partnership will assume responsibility for any losses in excess of $15.0 million subject to Williams’ indemnities to the Partnership. Also, Hess agreed to indemnify the Partnership through July 30, 2014 against all known and required environmental remediation costs at the Corpus Christi and Galena Park, Texas marine terminal facilities from any matters related to pre-acquisition actions. Hess has indemnified the Partnership for a variety of pre-acquisition fines and claims that may be imposed or asserted against the Partnership under certain environmental laws.

During 2001, the Environmental Protection Agency (“EPA”), pursuant to Section 311(b) of the Clean Water Act (the “Act”), preliminarily determined that Williams may have systemic problems with petroleum discharges from pipeline operations. That inquiry primarily focused on Magellan Pipeline. The response to the EPA’s information request was submitted during November 2001. In March 2004, the Partnership received the EPA’s reply, which indicated that the EPA intends to fine the Partnership for as much as $22.0 million for violations under Section 308 of the Act associated with spills identified in the EPA’s reply that occurred from March 1999 through January 2004. The EPA further indicated that some of those spills may have also violated the Spill Prevention Control and Countermeasure requirements of Section 311(j) of Act and that additional penalties may be assessed. In addition, we may incur additional costs associated with these spills if the EPA were to successfully seek and obtain injunctive relief. The Partnership is in the process of evaluating the EPA’s assertions and anticipates negotiating a final settlement with the EPA during the next twelve months. The Partnership has evaluated this issue and has accrued an amount based on our best estimates that is less than $22.0 million. The Partnership does not believe that the final settlement will materially impact our results of operations, balance sheet or cash flows because the Partnership believes that substantially all of these claims the EPA has asserted are covered by Williams’ indemnifications to the Partnership.

During the fourth quarter of 2003, the Partnership experienced a line break and product spill on its petroleum products pipeline near Shawnee, Kansas. As of March 31, 2004, the Partnership has estimated that the total costs associated with this spill will be $8.9 million. The liability at March 31, 2004 was $4.0 million. The Partnership has recognized a receivable from its insurance carrier of $7.2 million as of March 31, 2004 associated with this incident.

The Partnership is party to various other claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the ultimate resolution of all claims, legal actions and complaints after consideration of amounts accrued, insurance coverage or other indemnification arrangements will not have a material adverse effect upon the Partnership’s future financial position, results of operations or cash flows.

13. Long-Term Incentive Plan

In February 2001, the General Partner adopted the Williams Energy Partners’ Long-Term Incentive Plan, which was amended and restated on February 3, 2003, on July 22, 2003, and on February 3, 2004, for employees who perform services for the Partnership and directors of the General Partner. The Long-Term Incentive Plan consists of two components: phantom units and unit options. The Long-Term Incentive Plan permits the grant of awards covering an aggregate of 700,000 common units. The Compensation Committee of the General Partner’s Board of Directors administers the Long-Term Incentive Plan.

In April 2001, the General Partner granted 64,200 phantom units pursuant to the Long-Term Incentive Plan. With the change in control of the General Partner, which occurred on June 17, 2003, these awards vested at their maximum award level, resulting in 128,400 unit awards. The Partnership recognized compensation expense associated with these awards of $0.8 million during the three months ended March 31, 2003.

During 2002, the General Partner granted 22,650 phantom units pursuant to the Long-Term Incentive Plan. With the change in control of the General Partner, which occurred on June 17, 2003, these awards vested at their

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maximum award level, resulting in 45,300 unit awards. The Partnership recognized compensation expense associated with these awards of $0.1 million during the three months ended March 31, 2003.

In February 2003, the General Partner granted 52,825 phantom units pursuant to the Long-Term Incentive Plan. The actual number of units that will be awarded under this grant are based on certain performance metrics, which were determined by the Partnership at the end of 2003 and a personal performance component that will be determined at the end of 2005, with vesting to occur at that time. Because 3,080 unit grants vested early (see discussion below), the remaining number of phantom units that could be awarded, excluding the personal performance component, will range from zero units up to a total of 99,490 units. These units are subject to forfeiture if employment is terminated prior to the vesting date. These awards do not have an early vesting feature, except for: (i) the death or disability of a participant, or (ii) a change in control of the Partnership’s general partner where the participant is terminated for reasons other than cause within the two years following the change in control of the General Partner, in which case the awards will vest and payout immediately at the highest performance level under the Plan. Subsequent to the change in control of the General Partner on June 17, 2003, certain awards under this grant vested at their maximum award level (two times the original grant), resulting in a cash payout associated with 6,160 unit awards. Until the payout of these awards, the Partnership was expensing compensation costs associated with the non-vested portion of these awards assuming 52,825 units would vest. Subsequent to the vesting and payout of 6,160 awards previously mentioned, the Partnership began accruing compensation expense assuming 49,745 units would vest; however, during 2003, the Partnership increased the associated accrual to an expected payout of 95,271 units. Accordingly, the Partnership recorded incentive compensation expense of $0.1 million and $0.6 million associated with these phantom awards during the three months ended March 31, 2003 and 2004, respectively. The value of the 95,271 phantom unit awards on March 31, 2004 was $5.2 million.

Following the change in control of the Partnership in June 2003 from Williams to MMH, the board of directors of the General Partner made the following grants to certain employees who became dedicated to providing services to the Partnership:

In February 2004, the General Partner granted 79,512 phantom units pursuant to the Long-Term Incentive Plan. The actual number of units that will be awarded under this grant are based on the attainment of short-term and long-term performance metrics. The awards are also subject to a personal performance component with vesting to occur at the end of 2006. The number of phantom units that could ultimately be issued under this award range from zero units up to a total of 159,024 units. These units are subject to forfeiture if employment is terminated prior to the vesting date. These awards do not have an early vesting feature, except for: (i) the death or disability of a participant, or (ii) a change in control of the Partnership’s general partner where the participant is terminated for reasons other than cause within the two years following the change in control of the General Partner, in which case the awards will vest and payout immediately at the highest performance level under the Plan. The Partnership began recognizing compensation expense in the first quarter of 2004 as though 79,512 units will vest and accordingly recognized $0.4

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million of compensation expense during the three months ended March 31, 2004. The value of the 79,512 unit awards on March 31, 2004 was $4.4 million.

A summary of the Partnership’s equity-based incentive compensation costs associated with phantom unit awards for the three months ended March 31, 2003 and 2004 is listed below (in thousands). To date, the General Partner has not made any unit option awards.

14. Distributions

Distributions paid by the Partnership during 2003 and 2004 are as follows (in thousands, except per unit amounts):