2012.9.30 10-Q

 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________________ 

FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2012 

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________
 
Commission File Number
000-50056
MARTIN MIDSTREAM PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
05-0527861
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
4200 Stone Road
Kilgore, Texas 75662
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (903) 983-6200

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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x
 
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer                    x
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company  o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o
 
No x
 
The number of the registrant’s Common Units outstanding at November 5, 2012, was 23,116,776.
 


 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

CERTIFICATIONS


1
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Dollars in thousands)
 
September 30, 2012
 
December 31, 2011
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash
$
27

 
$
266

Accounts and other receivables, less allowance for doubtful accounts of $3,264 and $3,021, respectively
121,020

 
126,461

Product exchange receivables
5,455

 
17,646

Inventories
116,260

 
77,677

Due from affiliates
21,139

 
5,968

Fair value of derivatives
—

 
622

Other current assets
1,511

 
1,978

Assets held for sale
—

 
212,787

Total current assets
265,412

 
443,405

 
 
 
 
Property, plant and equipment, at cost
695,662

 
632,728

Accumulated depreciation
(243,780
)
 
(215,272
)
Property, plant and equipment, net
451,882

 
417,456

 
 
 
 
Goodwill
8,337

 
8,337

Investment in unconsolidated entities
80,799

 
62,948

Debt issuance costs, net
10,924

 
13,330

Other assets, net
6,442

 
3,633

 
$
823,796

 
$
949,109

 
 
 
 
Liabilities and Partners’ Capital
 

 
 

Current installments of long-term debt and capital lease obligations
$
217

 
$
1,261

Trade and other accounts payable
104,779

 
125,970

Product exchange payables
27,908

 
37,313

Due to affiliates
4,669

 
18,485

Income taxes payable
7,174

 
893

Fair value of derivatives
—

 
362

Other accrued liabilities
11,764

 
11,022

Liabilities held for sale
—

 
501

Total current liabilities
156,511

 
195,807

 
 
 
 
Long-term debt and capital leases, less current maturities
255,966

 
458,941

Deferred income taxes
—

 
7,657

Other long-term obligations
1,069

 
1,088

Total liabilities
413,546

 
663,493

 
 
 
 
Partners’ capital
410,250

 
284,990

Accumulated other comprehensive income
—

 
626

Total partners’ capital
410,250

 
285,616

Commitments and contingencies


 


 
$
823,796

 
$
949,109


See accompanying notes to consolidated and condensed financial statements.

2
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per unit amounts)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Terminalling and storage  *
$
23,875

 
$
19,381

 
$
65,107

 
$
56,831

Marine transportation  *
22,102

 
20,773

 
63,678

 
57,548

Sulfur services
2,926

 
2,850

 
8,777

 
8,550

Product sales: *
 

 
 
 
 
 
 
Natural gas services
190,738

 
159,748

 
527,666

 
423,953

Sulfur services
57,670

 
67,319

 
193,464

 
198,310

Terminalling and storage
20,601

 
17,525

 
61,482

 
55,441

 
269,009

 
244,592

 
782,612

 
677,704

Total revenues
317,912

 
287,596

 
920,174

 
800,633

 
 
 


 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

 
 

 
 

Natural gas services *
185,686

 
156,236

 
515,928

 
414,162

Sulfur services *
47,272

 
59,808

 
149,582

 
164,142

Terminalling and storage
18,767

 
15,676

 
56,154

 
49,631

 
251,725

 
231,720

 
721,664

 
627,935

Expenses:
 

 
 

 
 

 
 

Operating expenses  *
36,655

 
34,354

 
108,109

 
100,676

Selling, general and administrative  *
4,680

 
5,538

 
13,687

 
13,015

Depreciation and amortization
9,966

 
10,025

 
29,457

 
29,523

Total costs and expenses
303,026

 
281,637

 
872,917

 
771,149

 
 
 
 
 
 
 
 
Other operating income (loss)
(5
)
 
1,720

 
368

 
1,818

Operating income
14,881

 
7,679

 
47,625

 
31,302

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Equity in earnings (loss) of unconsolidated entities
(169
)
 
(54
)
 
(532
)
 
100

Interest expense
(6,263
)
 
(4,297
)
 
(21,735
)
 
(17,102
)
Debt prepayment premium
—

 
—

 
(2,470
)
 
—

Other, net
587

 
24

 
732

 
125

Total other expense
(5,845
)
 
(4,327
)
 
(24,005
)
 
(16,877
)
 
 
 
 
 
 
 
 
Income from continuing operations before taxes
9,036

 
3,352

 
23,620

 
14,425

Income tax expense
(238
)
 
(218
)
 
(810
)
 
(662
)
Income from continuing operations
8,798

 
3,134

 
22,810

 
13,763

Income from discontinued operations, net of income taxes
63,603

 
2,265

 
67,312

 
7,728

Net income
$
72,401

 
$
5,399

 
$
90,122

 
$
21,491

 


3
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per unit amounts)



*Related Party Transactions Included Above
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Terminalling and storage
$
18,531

 
$
14,210

 
$
48,611

 
$
40,045

Marine transportation
3,979

 
6,352

 
13,282

 
19,223

Product Sales
1,636

 
1,628

 
5,783

 
7,197

Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

 
 

 
 

Natural gas services
6,761

 
9,257

 
18,783

 
13,679

Sulfur services
4,111

 
4,762

 
12,512

 
13,407

Expenses:
 

 
 

 
 

 
 

Operating expenses
14,100

 
16,905

 
42,308

 
42,170

Selling, general and administrative
2,764

 
2,373

 
8,258

 
6,344


4
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per unit amounts)



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Allocation of net income attributable to:
 
 
 
 
 
 
 
   Limited partner interest:
 
 
 
 
 
 
 
 Continuing operations
$
10,128

 
$
2,157

 
$
21,645

 
$
10,674

 Discontinued operations
60,825

 
1,617

 
63,874

 
5,994

 
70,953

 
3,774

 
85,519

 
16,668

   General partner interest:
 

 
 

 
 
 
 

  Continuing operations
(1,330
)
 
811

 
1,165

 
2,557

  Discontinued operations
2,778

 
537

 
3,438

 
1,435

 
1,448

 
1,348

 
4,603

 
3,992

Net income attributable to:
 

 
 

 
 
 
 

  Continuing operations
8,798

 
3,134

 
22,810

 
13,763

  Discontinued operations
63,603

 
2,265

 
67,312

 
7,728

 
$
72,401

 
$
5,399

 
$
90,122

 
$
21,491

Net income attributable to limited partners:
 
 
 
 
 
 
 
Basic:
 

 
 

 
 
 
 

Continuing operations
$
0.44

 
$
0.11

 
$
0.94

 
$
0.56

Discontinued operations
2.63

 
0.09

 
2.79

 
0.31

 
$
3.07

 
$
0.20

 
$
3.73

 
$
0.87

Weighted average limited partner units - basic
23,101

 
19,158

 
22,929

 
19,161

Diluted:
 

 
 

 
 
 
 

Continuing operations
$
0.44

 
$
0.11

 
$
0.94

 
$
0.56

Discontinued operations
2.63

 
0.09

 
2.79

 
0.31

 
$
3.07

 
$
0.20

 
$
3.73

 
$
0.87

Weighted average limited partner units - diluted
23,105

 
19,163

 
22,932

 
19,163


See accompanying notes to consolidated and condensed financial statements.

5
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
72,401

 
$
5,399

 
$
90,122

 
$
21,491

Other comprehensive income adjustments:
 

 
 

 
 

 
 

Changes in fair values of commodity cash flow hedges
—

 
1,295

 
126

 
1,231

Commodity cash flow hedging gains (losses) reclassified to earnings
(63
)
 
(538
)
 
(752
)
 
(1,291
)
Interest rate cash flow hedging gains reclassified to earnings
—

 
—

 
—

 
18

Other comprehensive income
(63
)
 
757

 
(626
)
 
(42
)
Comprehensive income
$
72,338

 
$
6,156

 
$
89,496

 
$
21,449


See accompanying notes to consolidated and condensed financial statements.

6
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL
(Unaudited)
(Dollars in thousands)


 
 
Partners’ Capital
 
 
 
Common Limited
 
Subordinated Limited
 
General Partner
 
Accumulated
Other
Comprehensive
Income
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Amount
 
(Loss)
 
Total
Balances - January 1, 2011
17,707,832

 
$
250,785

 
889,444

 
$
17,721

 
$
4,881

 
$
1,419

 
$
274,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
17,499

 
—

 
—

 
3,992

 
—

 
21,491

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognition of beneficial conversion feature
—

 
(831
)
 
—

 
831

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Follow-on public offering
1,874,500

 
70,330

 
—

 
—

 
—

 
—

 
70,330

 
 
 
 
 
 
 
 
 
 
 
 
 
 
General partner contribution
—

 
—

 
—

 
—

 
1,505

 
—

 
1,505

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash distributions
—

 
(43,321
)
 
—

 
—

 
(4,635
)
 
—

 
(47,956
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Excess purchase price over carrying value of acquired assets
—

 
(19,685
)
 
—

 
—

 
—

 
—

 
(19,685
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unit-based compensation
15,530

 
131

 
—

 
—

 
—

 
—

 
131

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury units
(14,850
)
 
(582
)
 
—

 
—

 
—

 
—

 
(582
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unit-based compensation grant forfeitures
(500
)
 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment in fair value of derivatives
—

 
—

 
—

 
—

 
—

 
(42
)
 
(42
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances - September 30, 2011
19,582,512

 
$
274,326

 
889,444

 
$
18,552

 
$
5,743

 
$
1,377

 
$
299,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances - January 1, 2012
20,471,776

 
$
279,562

 
—

 
$
—

 
$
5,428

 
$
626

 
$
285,616

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
—

 
85,519

 
—

 
—

 
4,603

 
—

 
90,122

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Follow-on public offering
2,645,000

 
91,361

 
—

 
—

 
—

 
—

 
91,361

 
 
 
 
 
 
 
 
 
 
 
 
 
 
General partner contribution
—

 
—

 
—

 
—

 
1,951

 
—

 
1,951

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash distributions
—

 
(52,880
)
 
—

 
—

 
(5,452
)
 
—

 
(58,332
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unit-based compensation
6,250

 
379

 
—

 
—

 
—

 
—

 
379

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchase of treasury units
(6,250
)
 
(221
)
 
—

 
—

 
—

 
—

 
(221
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustment in fair value of derivatives
—

 
—

 
—

 
—

 
—

 
(626
)
 
(626
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances - September 30, 2012
23,116,776

 
$
403,720

 
—

 
$
—

 
$
6,530

 
$
—

 
$
410,250

 
See accompanying notes to consolidated and condensed financial statements.

7
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)


 
Nine Months Ended
 
September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
90,122

 
$
21,491

Less:  Income from discontinued operations
(67,312
)
 
(7,728
)
Net income from continuing operations
22,810

 
13,763

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
29,457

 
29,523

Amortization of deferred debt issuance costs
2,611

 
3,071

Amortization of debt discount
504

 
262

Loss on sale of property, plant and equipment
7

 
405

Gain on sale of equity method investment
(486
)
 
—

Equity in earnings (loss) of unconsolidated entities
532

 
(100
)
Other
379

 
131

Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
 

 
 

Accounts and other receivables
(6,328
)
 
(4,788
)
Product exchange receivables
12,190

 
(16,552
)
Inventories
(38,583
)
 
(28,057
)
Due from affiliates
(27,795
)
 
221

Other current assets
431

 
1,874

Trade and other accounts payable
(8,533
)
 
11,733

Product exchange payables
(9,405
)
 
27,350

Due to affiliates
4,469

 
3,430

Income taxes payable
(96
)
 
(799
)
Other accrued liabilities
840

 
4,218

Change in other non-current assets and liabilities
(1,126
)
 
(123
)
Net cash provided by (used in) continuing operating activities
(18,122
)
 
45,562

Net cash provided by discontinued operating activities
120

 
12,272

Net cash provided by (used in) operating activities
(18,002
)
 
57,834

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(63,009
)
 
(48,769
)
Acquisitions
—

 
(16,815
)
Payments for plant turnaround costs
(2,578
)
 
(2,103
)
Proceeds from sale of property, plant and equipment
33

 
530

Proceeds from sale of equity method investment
531

 
—

Investment in unconsolidated subsidiaries
(775
)
 
(59,319
)
Return of investments from unconsolidated entities
5,133

 
383

Distributions from (contributions to) unconsolidated entities for operations
(22,786
)
 
(929
)
Net cash used in continuing investing activities
(83,451
)
 
(127,022
)
Net cash provided by (used in) discontinued investing activities
271,181

 
(8,253
)
Net cash provided by (used in) investing activities
187,730

 
(135,275
)
Cash flows from financing activities:
 

 
 

Payments of long-term debt
(547,000
)
 
(389,000
)
Payments of notes payable and capital lease obligations
(6,522
)
 
(831
)
Proceeds from long-term debt
349,000

 
456,000

Net proceeds from follow on offering
91,361

 
70,330

General partner contribution
1,951

 
1,505

Treasury units purchased
(221
)
 
(582
)
Payment of debt issuance costs
(204
)
 
(3,424
)
Excess purchase price over carrying value of acquired assets
—

 
(19,685
)
Cash distributions paid
(58,332
)
 
(47,956
)
Net cash provided by (used in) financing activities
(169,967
)
 
66,357

Net decrease in cash
(239
)
 
(11,084
)
Cash at beginning of period
266

 
11,380

Cash at end of period
$
27

 
$
296

See accompanying notes to consolidated and condensed financial statements.

8
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




(1)
General

Martin Midstream Partners L.P. (the “Partnership”) is a publicly traded limited partnership with a diverse set of operations focused primarily in the United States Gulf Coast region. Its four primary business lines include: terminalling and storage services for petroleum products and by-products, natural gas services, sulfur and sulfur-based products processing, manufacturing, marketing and distribution, and marine transportation services for petroleum products and by-products.
 
The Partnership’s unaudited consolidated and condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and United States generally accepted accounting principles for interim financial reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by generally accepted accounting principles for annual audited financial statements of the type contained in the Partnership’s annual reports on Form 10-K. In the opinion of the management of the Partnership’s general partner, all adjustments and elimination of significant intercompany balances necessary for a fair presentation of the Partnership’s results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature. Results for such interim periods are not necessarily indicative of the results of operations for the full year. These financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2012. On August 21, 2012, Part II, Items 6, 7, and 8 of the Partnership's Form 10-K for the year ended December 31, 2011, filed with the SEC on March 5, 2012, was updated on Form 8-K to reflect the operations related to the sale of its East Texas and Northwest Louisiana natural gas gathering and processing assets as discontinued operations

As discussed in Note 4, on July 31, 2012, the Partnership completed the sale of its East Texas and Northwest Louisiana natural gas gathering and processing assets.  These assets, along with additional gathering and processing assets discussed in Note 4 are collectively referred to as the "Prism Assets".  The Partnership classified the Prism Assets, including related liabilities as held for sale at December 31, 2011, and has presented the results of operations and cash flows as discontinued operations for the periods ended September 30, 2012 and 2011, respectively. The Partnership has retrospectively adjusted its prior period consolidated financial statements to comparably classify the amounts related to the net assets and operations and cash flows of the Prism Assets as assets held for sale and discontinued operations, respectively.

(a)
Use of Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States.  Actual results could differ from those estimates.

(b)
Unit Grants

In May 2012, the Partnership issued 6,250 restricted common units to certain non-employee directors under its long-term incentive plan from 6,250 treasury units purchased by the Partnership in the open market for $221.  These units vest in 25% increments beginning in January 2013 and will be fully vested in January 2016.

In May 2011, the Partnership issued 6,250 restricted common units to certain non-employee directors under its long-term incentive plan from 5,750 treasury units purchased by the Partnership in the open market for $235 and 500 treasury units from forfeitures.  These units vest in 25% increments beginning in January 2012 and will be fully vested in January 2015.

In February 2011, the Partnership issued 9,100 restricted common units to certain Martin Resource Management employees under its long-term incentive plan from 9,100 treasury units purchased by the Partnership in the open market for $347.  On July 31, 2012, 6,850 of these units were fully vested to certain employees in connection with the sale of the Prism Assets. The remaining 2,250 units vest in 25% increments beginning in February 2012 and will be fully vested in February 2015.

The cost resulting from share-based payment transactions was $261 and $36 for the three months ended September 30, 2012 and 2011, respectively, and $379 and $131 for the nine months ended September 30, 2012 and 2011, respectively.

9
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




(c)
Incentive Distribution Rights

The Partnership’s general partner, Martin Midstream GP LLC, holds a 2% general partner interest and certain incentive distribution rights (“IDRs”) in the Partnership. IDRs are a separate class of non-voting limited partner interest that may be transferred or sold by the general partner under the terms of the partnership agreement of the Partnership (the “Partnership Agreement”), and represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution and any cumulative arrearages on common units once certain target distribution levels have been achieved. The Partnership is required to distribute all of its available cash from operating surplus, as defined in the Partnership Agreement. As discussed further in Note 16, on October 2, 2012, the Partnership Agreement was amended to provide that the General Partner shall not receive the next $18,000 in incentive distributions that it would otherwise be entitled to receive. Therefore, no incentive distributions were allocated to the general partner for the three months ended September 30, 2012, which would have been payable to the general partner on November 14, 2012.
 
The target distribution levels entitle the general partner to receive 2% of quarterly cash distributions up to $0.55 per unit, 15% of quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, 25% of quarterly cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit and 50% of quarterly cash distributions in excess of $0.75 per unit.
 
For the three months ended September 30, 2012 and 2011, the general partner received $0 and $1,265, respectively, in incentive distributions.  For the nine months ended September 30, 2012 and 2011, the general partner received $2,857 and $3,635, respectively, in incentive distributions.
 
(d)
Net Income per Unit

The Partnership follows the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260-10 related to earnings per share, which addresses the application of the two-class method in determining income per unit for master limited partnerships having multiple classes of securities that may participate in partnership distributions accounted for as equity distributions. Undistributed earnings are allocated to the general partner and limited partners utilizing the contractual terms of the Partnership Agreement. Distributions to the general partner pursuant to the IDRs are limited to available cash that will be distributed as defined in the Partnership Agreement. Accordingly, the Partnership does not allocate undistributed earnings to the general partner for the IDRs because the general partner's share of available cash is the maximum amount that the IDR would be contractually entitled to receive if all earnings for the period were distributed. When current period distributions are in excess of earnings, the excess distributions for the period are to be allocated to the general partner and limited partners based on their respective sharing of losses specified in the Partnership Agreement.

For purposes of computing diluted net income per unit, the Partnership uses the more dilutive of the two-class and if-converted methods. Under the if-converted method, the beneficial conversion feature is added back to net income available to common limited partners, the weighted-average number of subordinated units outstanding for the period is added to the weighted-average number of common units outstanding for purposes of computing basic net income per unit and the resulting amount is compared to the diluted net income per unit computed using the two-class method.

    

10
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



The following is a reconciliation of net income from continuing operations and net income from discontinued operations allocated to the general partner and limited partners for purposes of calculating net income attributable to limited partners per unit:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Continuing operations:
 
 
 
 
 
 
 
Net income attributable to Martin Midstream Partners L.P.
$
8,798

 
$
3,134

 
$
22,810

 
$
13,763

Less general partner’s interest in net income:
 
 
 
 
 
 
 
Distributions payable on behalf of IDRs
(1,536
)
 
763

 
723

 
2,328

Distributions payable on behalf of general partner interest
(320
)
 
207

 
295

 
640

Distributions payable to the general partner interest in excess of earnings allocable to the general partner interest
526

 
(159
)
 
147

 
(411
)
Less beneficial conversion feature
—

 
166

 
—

 
532

Limited partners’ interest in net income
$
10,128

 
$
2,157

 
$
21,645

 
$
10,674

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Discontinued operations:
 
 
 
 
 
 
 
Net income attributable to Martin Midstream Partners L.P.
$
63,603

 
$
2,265

 
$
67,312

 
$
7,728

Less general partner’s interest in net income:
 
 
 
 
 
 
 
Distributions payable on behalf of IDRs
1,536

 
502

 
2,134

 
1,307

Distributions payable on behalf of general partner interest
709

 
138

 
872

 
360

Distributions payable to the general partner interest in excess of earnings allocable to the general partner interest
533

 
(103
)
 
432

 
(232
)
Less beneficial conversion feature
—

 
111

 
—

 
299

Limited partners’ interest in net income
$
60,825

 
$
1,617

 
$
63,874

 
$
5,994


The Partnership allocates the General Partner's share of earnings between continuing and discontinued operations as a proportion of net income from continuing and discontinued operations to total net income. The allocation is done at each period end on an annual basis, resulting in each quarter representing the difference between year to date of the current quarter and year to date as of the previous quarter.

The weighted average units outstanding for basic net income per unit were 23,101,233 and 22,929,172 for the three and nine months ended September 30, 2012, respectively, and 19,158,334 and 19,161,403 for the three and nine months ended September 30, 2011, respectively.  For diluted net income per unit, the weighted average units outstanding were increased by 3,596 and 3,164 for the three and nine months ended September 30, 2012, respectively, and 4,794 and 1,663 for the three and nine months ended September 30, 2011, respectively, due to the dilutive effect of restricted units granted under the Partnership’s long-term incentive plan.

(e)
Income Taxes

With respect to the Partnership’s taxable subsidiary, Woodlawn Pipeline Co., Inc. (“Woodlawn”), income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(2)
New Accounting Pronouncements

11
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




In September 2011, the FASB amended the provisions of ASC 350 related to testing goodwill for impairment.  This update simplifies the goodwill impairment assessment by allowing a company to first review qualitative factors to determine the likelihood of whether the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the company would not be required to perform the two-step goodwill impairment test for that reporting unit. This update is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  This amended guidance was adopted by the Partnership effective January 1, 2012.

In June 2011, the FASB amended the provisions of ASC 220 related to other comprehensive income. This newly issued guidance: (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this guidance do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. This guidance is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011.  This amended guidance was adopted by the Partnership effective January 1, 2012.  As this new guidance only requires enhanced disclosure, adoption did not impact the Partnership’s financial position or results of operations.

(3)
Acquisitions

Redbird Gas Storage

On May 31, 2011, the Partnership acquired all of the Class B equity interests in Redbird Gas Storage LLC (“Redbird”) for approximately $59,319.  This amount was recorded as an investment in an unconsolidated entity.  Redbird, a subsidiary of Martin Resource Management, is a natural gas storage joint venture formed to invest in Cardinal Gas Storage Partners, LLC (“Cardinal”).  Cardinal is a joint venture between Redbird and Energy Capital Partners that is focused on the development, construction, operation and management of natural gas storage facilities across North America.  Redbird owns an unconsolidated 40.95% interest in Cardinal.  Concurrent with the closing of this transaction, Cardinal acquired all of the outstanding equity interests in Monroe Gas Storage Company, LLC (“Monroe”) as well as an option on development rights to an adjacent depleted reservoir facility.  This acquisition was funded by borrowings under the Partnership’s revolving credit facility.  In addition to owning all of the Class B equity interests of Redbird, the Partnership also owns 10.74% of the Class A equity interests of Redbird at September 30, 2012.

Terminalling Facilities

On January 31, 2011, the Partnership acquired 13 shore-based marine terminalling facilities, one specialty terminalling facility and certain terminalling related assets from Martin Resource Management for $36,500.  These assets are located across the Louisiana Gulf Coast.  This acquisition was funded by borrowings under the Partnership’s revolving credit facility.

These terminalling assets were acquired by Martin Resource Management in its acquisition of L&L Holdings LLC (“L&L”) on January 31, 2011.  During the second quarter of 2011, Martin Resource Management finalized the purchase price allocation for the acquisition of L&L, including the final determination of the fair value of the terminalling assets acquired by the Partnership.  The Partnership recorded an adjustment in the amount of $19,685 to reduce property, plant and equipment and partners’ capital for the difference between the purchase price and the fair value of the terminalling assets acquired based on Martin Resource Management’s final purchase price allocation.

(4)
Discontinued operations and divestitures

On July 31, 2012, the Partnership completed the sale of its East Texas and Northwest Louisiana natural gas gathering and processing assets owned by Prism Gas Systems I, L.P. (“Prism Gas”), a wholly-owned subsidiary of the Partnership, and other natural gas gathering and processing assets also owned by the Partnership to a subsidiary of CenterPoint Energy Inc. (NYSE: CNP) (“CenterPoint”). The Partnership received net cash proceeds from the sale of $273,269.  The asset sale includes

12
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



the Partnership’s 50% operating interest in Waskom Gas Processing Company (“Waskom”).  A subsidiary of CenterPoint owned the other 50% percent interest.  

Additionally, on September 18, 2012, the Partnership completed the sale of its interest in Matagorda Offshore Gathering System (“Matagorda”) and Panther Interstate Pipeline Energy LLC (“PIPE”) to a private investor group for $1,530.  

The assets described above collectively are referred to herein as the Prism Assets.

The Partnership classified the results of operations of the Prism Assets which were previously presented as a component of the Natural Gas Services segment, as discontinued operations in the consolidated and condensed statements of operations for all periods presented. The assets and liabilities to be sold met the accounting criteria to be classified as held for sale and were aggregated and reported on separate lines in the consolidated and condensed balance sheet at December 31, 2011.

The assets and liabilities classified held for sale as of December 31, 2011 were as follows:
 
December 31, 2011
Assets
 
Inventories
$
486

Property, plant and equipment
78,324

Accumulated depreciation
(18,438
)
Goodwill
28,931

Investment in unconsolidated entities
107,549

Other assets, net
15,935

Assets held for sale
$
212,787

 
 
Liabilities
 

Other long-term obligations
501

Liabilities held for sale
$
501


The Prism Assets’ operating results, which are included within income from discontinued operations, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Total revenues from third parties1
$
9,269

 
$
28,714

 
$
66,842

 
$
90,917

Total costs and expenses, excluding depreciation and amortization
(9,296
)
 
(26,892
)
 
(64,556
)
 
(85,888
)
Depreciation and amortization
—

 
(1,375
)
 
(2,320
)
 
(4,128
)
Other operating income2
62,251

 
—

 
61,421

 
3

Equity in earnings of Waskom, Matagorda, and PIPE
377

 
1,839

 
4,611

 
6,854

Income from discontinued operations before income taxes
62,601

 
2,286

 
65,998

 
7,758

Income tax expense (benefit)
(1,002
)
 
21

 
(1,314
)
 
30

Income from discontinued operations, net of income taxes
$
63,603

 
$
2,265

 
$
67,312

 
$
7,728


1 Total revenues from third parties excludes intercompany revenues of $3,285, $17,741, $26,431, and $49,444 for the three months ended September 30, 2012 and 2011, and nine months ended September 30, 2012 and 2011, respectively.
 
2 The Partnership recognized a gain on the sale of its Prism Gas Business of $62,251 and $61,411 in income from discontinued operations for the three and nine months ended September 30, 2012 and 2011, respectively.

(5)
Inventories

13
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




Components of inventories at September 30, 2012 and December 31, 2011 were as follows: 
 
September 30, 2012
 
December 31, 2011
Natural gas liquids
$
64,783

 
$
25,178

Sulfur
26,460

 
24,335

Sulfur based products
14,115

 
14,857

Lubricants
8,471

 
11,012

Other
2,431

 
2,295

 
$
116,260

 
$
77,677


(6)
Investments in Unconsolidated Entities and Joint Ventures

As discussed in detail in Note 4, the Partnership sold its 50% interests in Waskom, Matagorda, and PIPE. The equity in earnings associated with these investments during the periods owned is recorded in income from discontinued operations for the three and nine months ended September 30, 2012 and 2011.

The Partnership and Martin Resource Management formed Redbird, a natural gas storage joint venture formed to invest in Cardinal.  The Partnership owns 10.74% of the Class A equity interests and all the Class B equity interests in Redbird.  Redbird owns an unconsolidated 40.95% interest in Cardinal.   Redbird utilized the investments by the Partnership to invest in Cardinal to fund projects for natural gas storage facilities.

During the second quarter of 2012, the Partnership acquired an unconsolidated 50% interest in Caliber Gathering System, LLC (“Caliber”) and Pecos Valley Producer Services LLC (“Pecos Valley”). The Partnership sold its interest in Pecos Valley during the third quarter of 2012 for $531, resulting in a gain of $486 recorded in Other, Net in the Partnership's consolidated and condensed statement of operations for the three and nine months ended September 30, 2012.

These investments are accounted for by the equity method.

The following tables summarize the components of the investment in unconsolidated entities on the Partnership’s consolidated and condensed balance sheets and the components of equity in earnings of unconsolidated entities included in the Partnership’s consolidated and condensed statements of operations:
 
September 30, 2012
 
December 31, 2011
Investment in Waskom1
$
—

 
$
102,896

Investment in PIPE1
—

 
1,291

Investment in Matagorda1
—

 
3,362

   Investment in unconsolidated entities classified as assets held for sale
—

 
107,549

Investment in Redbird
80,168

 
62,948

Investment in Caliber
631

 
—

   Investment in unconsolidated entities
80,799

 
62,948

    Total Investment in unconsolidated entities
$
80,799

 
$
170,497


1 As of December 31, 2011, the financial information for Waskom, Matagorda, and PIPE is included in the consolidated and condensed balance sheet as assets held for sale.

14
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Equity in earnings of Waskom1
$
287

 
$
1,767

 
$
4,172

 
$
6,779

Equity in earnings of PIPE1
10

 
(15
)
 
(60
)
 
(45
)
Equity in earnings of Matagorda1
80

 
87

 
499

 
120

    Equity in earnings of discontinued operations
377

 
1,839

 
4,611

 
6,854

Equity in earnings of Redbird
(103
)
 
(54
)
 
(433
)
 
100

Equity in earnings of Caliber
(98
)
 
—

 
(119
)
 
—

Equity in earnings of Pecos Valley
32

 
—

 
20

 
—

    Equity in earnings of unconsolidated entities
(169
)
 
(54
)
 
(532
)
 
100

    Total equity in earnings of unconsolidated entities
$
208

 
$
1,785

 
$
4,079

 
$
6,954


¹ For all periods presented, the financial information for Waskom, Matagorda, and PIPE is included in the consolidated and condensed statement of operations and cash flows as discontinued operations.

Selected financial information for significant unconsolidated equity-method investees is as follows:
 
As of September 30
 
Three Months Ended
September 30
 
Nine Months Ended
September 30
 
Total
Assets
 
Partner’s
Capital
 
Revenues1
 
Net Income1
 
Revenues1
 
Net
Income1
2012
 
 
 
 
 
 
 
 
 
 
 
Waskom
$
—

 
$
—

 
$
8,171

 
$
668

 
$
66,662

 
$
8,986

 
As of December 31
 
 

 
 

 
 

 
 

2011
 

 
 

 
 

 
 

 
 

 
 

Waskom
$
146,655

 
$
126,863

 
$
29,508

 
$
3,808

 
$
95,086

 
$
14,382


¹ Revenues and Net Income for Waskom include financial information only for the periods owned. Three months ended September 30, 2012 only includes financial information for the one month ended July 31, 2012. Nine months ended September 30, 2012 only includes financial information for the seven months ended July 31, 2012.
    
As of September 30, 2012 and December 31, 2011 the amount of the Partnership’s consolidated retained earnings that represents undistributed earnings related to the unconsolidated equity-method investees is $0 and $47,152, respectively.  There are no material restrictions to transfer funds in the form of dividends, loans or advances related to the equity-method investees.

As of September 30, 2012 and December 31, 2011, the Partnership’s interest in cash of the unconsolidated equity-method investees was $502 and $565, respectively.

(7)
Derivative Instruments and Hedging Activities

The Partnership’s results of operations are materially impacted by changes in crude oil, natural gas and NGL prices and interest rates. In an effort to manage its exposure to these risks, the Partnership periodically enters into various derivative instruments, including commodity and interest rate hedges. The Partnership is required to recognize all derivative instruments as either assets or liabilities at fair value on the Partnership’s Consolidated Balance Sheets and to recognize certain changes in the fair value of derivative instruments on the Partnership’s Consolidated Statements of Operations.

The Partnership performs, at least quarterly, a retrospective assessment of the effectiveness of its outstanding hedge contracts, including assessing the possibility of counterparty default. If the Partnership determines that a derivative is no longer expected to be highly effective, the Partnership discontinues hedge accounting prospectively and recognizes subsequent changes in the fair value of the hedge in earnings.

15
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. If a derivative qualifies for hedge accounting, changes in the fair value can be offset against the change in the fair value of the hedged item through earnings or recognized in accumulated other comprehensive income (“AOCI”) until such time as the hedged item is recognized in earnings. The Partnership is exposed to the risk that periodic changes in the fair value of derivatives qualifying for hedge accounting will not be effective, as defined, or that derivatives will no longer qualify for hedge accounting. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to earnings. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last period is recorded to earnings; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, then would be reclassified to earnings or if it is determined that continued reporting of losses in AOCI would lead to recognizing a net loss on the combination of the hedging instrument and the hedge transaction in future periods, then the losses would be immediately reclassified to earnings.  If a forecasted hedge transaction is no longer probable of occurring, any gain or loss in AOCI is reclassified to earnings.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period during which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.

(a)
Commodity Derivative Instruments

The Partnership is exposed to market risks associated with commodity prices and from time to time uses derivatives to manage the risk of commodity price fluctuation. The Partnership has established a hedging policy and monitors and manages the commodity market risk associated with its commodity risk exposure.  These hedging arrangements are in the form of swaps for crude oil, natural gas and natural gasoline. In addition, the Partnership is focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction.

Due to the sale of the Prism Assets completed on July 31, 2012, as of September 30, 2012, the Partnership has terminated and settled all of its commodity derivative instruments.  For the three and nine months ended September 30, 2012, changes in the fair value of the Partnership’s derivative contracts were recorded in both earnings and in AOCI as a component of partners’ capital.

(b)
Impact of Commodity Cash Flow Hedges

Crude Oil.  For the three months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts decreased and increased crude revenue (included in income from discontinued operations) by $36 and $361, respectively.  For the nine months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts increased crude revenue (included in income from discontinued operations) by $496 and $658, respectively.

Natural Gas.  For the three months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts increased gas revenue (included in income from discontinued operations) by $77 and $72, respectively.  For the nine months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts increased gas revenue (included in income from discontinued operations) by $813 and $215, respectively.  

Natural Gas Liquids.  For the three months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts increased liquids revenue (included in income from discontinued operations) by $5 and $236, respectively.  For the nine months ended September 30, 2012 and 2011, net gains and losses on swap hedge contracts increased liquids revenue (included in income from discontinued operations) by $1,066 and $458, respectively. 
 
For information regarding fair value amounts and gains and losses on commodity derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note.
 

16
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



(c)
Impact of Interest Rate Derivative Instruments

The Partnership is exposed to market risks associated with interest rates. The Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate debt credit facility and its’ senior notes. All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. If a derivative qualifies for hedge accounting, changes in the fair value can be offset against the change in the fair value of the hedged item through earnings or recognized in AOCI until such time as the hedged item is recognized in earnings.
 
In August 2011, the Partnership terminated all of its existing interest swap agreements with an aggregate notional amount of $100,000, which it had entered to hedge its exposure to changes in the fair value of Senior Notes as described in Note 11.  These interest rate swap contracts were not designated as fair value hedges and therefore, did not receive hedge accounting but were marked to market through earnings.  Termination fees of $2,800 were received on the early extinguishment of the interest rate swap agreements in August 2011.
 
The Partnership was not a party to interest rate derivatives during the nine months ended September 30, 2012.  The Partnership recognized decreases in interest expense of $3,244 and $5,779 for the three and nine months ended September 30, 2011, respectively, related to the difference between the fixed rate and the floating rate of interest on the interest rate swap and net cash settlement of interest rate swaps and hedges.

For information regarding fair value amounts and gains and losses on interest rate derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” below.

(d)
Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items

The following table summarizes the fair values and classification of the Partnership’s derivative instruments in its Consolidated Balance Sheet:
 
Fair Values of Derivative Instruments in the Consolidated Balance Sheet
 
Derivative Assets
Derivative Liabilities
 
 
Fair Values
 
Fair Values
 
 
Balance Sheet
Location
September 30, 2012
 
December 31, 2011
 
Balance Sheet
Location
September 30, 2012
 
December 31, 2011
Derivatives designated as hedging instruments:
 
Current:
 
 
 
 
Current:
 
Commodity contracts
Fair value of derivatives
$
—

 
$
622

Fair value of derivatives
$
—

 
$
245

Total derivatives designated as hedging instruments
 
$
—

 
$
622

 
$
—

 
$
245

Derivatives not designated as hedging instruments:
Current:
 

 
 

Current:
 
 
 

Commodity contracts
Fair value of derivatives
$
—

 
$
—

Fair value of derivatives
$
—

 
$
117

Total derivatives not designated as hedging instruments
 
$
—

 
$
—

 
$
—

 
$
117


17
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



 
Effect of Derivative Instruments on the Consolidated Statement of Operations
For the Three Months Ended September 30, 2012 and 2011
 
Effective Portion
Ineffective Portion and Amount
 Excluded from Effectiveness Testing
 
 
 
 
Amount of Gain or
(Loss) Recognized in
OCI on Derivatives
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income
 
 
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income
Location of Gain or
(Loss) Recognized
in Income
on
Derivatives
 
 
Amount of Gain or
(Loss) Recognized in
Income on
Derivatives
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Derivatives designated as hedging instruments:
 
 
 
 
 
Commodity contracts
$
—

 
$
1,295

Income from discontinued operations
$
63

 
$
500

Income from discontinued operations
$
—

 
$
38

Total derivatives designated as hedging instruments
$
—

 
$
1,295

 
$
63

 
$
500

 
$
—

 
$
38


 
Location of Gain or (Loss)
Recognized in Income on
 Derivatives
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
 
 
2012
 
2011
Derivatives not designated as hedging instruments:
 
 
Interest rate contracts
Interest expense
$
—

 
$
3,244

Commodity contracts
Income from discontinued operations
(18
)
 
131

Total derivatives not designated as hedging instruments
$
(18
)
 
$
3,375



18
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



Effect of Derivative Instruments on the Consolidated Statement of Operations
For the Nine Months Ended September 30, 2012 and 2011
 
Effective Portion
 
Ineffective Portion and Amount
 Excluded from Effectiveness Testing
 
Amount of Gain or
(Loss) Recognized in
OCI on Derivatives
 
Location of Gain or (Loss)
Reclassified from Accumulated OCI into Income
 
Amount of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
 
Location of Gain or (Loss) Recognized in
Income on Derivatives
 
Amount of Gain or
(Loss) Recognized
in Income on
Derivatives
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
Derivatives designated as hedging instruments
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

Interest rate contracts
$
—

 
$
—

 
Interest expense
 
$
—

 
$
(18
)
 
Interest expense
 
$
—

 
$
—

Commodity contracts
126

 
1,231

 
Income from discontinued operations
 
748

 
1,264

 
Income from discontinued operations
 
4

 
$
27

Total derivatives designated as hedging instruments
$
126

 
$
1,231

 
 
 
$
748

 
$
1,246

 
 
 
$
4

 
$
27


 
Location of Gain or (Loss)
Recognized in Income on
 Derivatives
 
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
 
 
 
2012
 
2011
Derivatives not designated as hedging instruments
 
 
 
Interest rate contracts
Interest Expense
 
$
—

 
$
5,797

Commodity contracts
Income from discontinued operations
 
1,623

 
41

Total derivatives not designated as hedging instruments
 
$
1,623

 
$
5,838


No amounts are expected to be reclassified into earnings for the subsequent 12-month period for commodity cash flow hedges.

(8)
Fair Value Measurements

The Partnership provides disclosures pursuant to certain provisions of ASC 820, which provides a framework for measuring fair value and expanded disclosures about fair value measurements.  ASC 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value of each asset and liability carried at fair value into one of the following categories:
 
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.

The Partnership’s derivative instruments, which consist of commodity and interest rate swaps, are required to be measured at fair value on a recurring basis. The fair value of the Partnership’s derivative instruments is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets, which is considered Level 2. Refer to Note 7 for further information on the Partnership’s derivative instruments and hedging activities.

19
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)




The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at December 31, 2011:
 
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices
in
Active Markets
for
Identical Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
December 31, 2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Natural gas derivatives
$
622

 
$
—

 
$
622

 
$
—

Total assets
$
622

 
$
—

 
$
622

 
$
—

Liabilities
 

 
 

 
 

 
 

Crude oil derivatives
245

 
—

 
245

 
—

Natural gas liquids derivatives
117

 
—

 
117

 
—

Total liabilities
$
362

 
$
—

 
$
362

 
$
—


ASC 825-10-65, related to disclosures about fair value of financial instruments, requires that the Partnership disclose estimated fair values for its financial instruments.  Fair value estimates are set forth below for the Partnership’s financial instruments.  The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

•
Accounts and other receivables, trade and other accounts payable, other accrued liabilities, income taxes payable and due from/to affiliates — the carrying amounts approximate fair value due to the short maturity and highly liquid nature of these instruments.

•
Long-term debt including current installments — the carrying amount of the revolving credit facility approximates fair value due to the debt having a variable interest rate.

The estimated fair value of the Senior Notes was approximately $189,557 as of September 30, 2012 based on quoted market prices of similar debt at September 30, 2012, which is deemed a Level 2 measurement.

(9)
Related Party Transactions

As of September 30, 2012, Martin Resource Management owns 6,593,267 of the Partnership’s common units representing approximately 28.5% of the Partnership’s outstanding limited partnership units.  The Partnership’s general partner is a wholly-owned subsidiary of Martin Resource Management.  The Partnership’s general partner owns a 2.0% general partner interest in the Partnership and the Partnership’s incentive distribution rights.  The Partnership’s general partner’s ability, as general partner, to manage and operate the Partnership, and Martin Resource Management’s ownership as of September 30, 2012, of approximately 28.5% of the Partnership’s outstanding limited partnership units, effectively gives Martin Resource Management the ability to veto some of the Partnership’s actions and to control the Partnership’s management.
 
The following is a description of the Partnership’s material related party transactions:
 
Omnibus Agreement
 
               Omnibus Agreement.   The Partnership and its general partner are parties to an omnibus agreement dated November 1, 2002, with Martin Resource Management that governs, among other things, potential competition and indemnification obligations among the parties to the agreement, related party transactions, the provision of general administration and support services by Martin Resource Management and the Partnership’s use of certain of Martin Resource Management’s trade names and trademarks. The omnibus agreement was amended on November 24, 2009, to include processing crude oil into finished

20
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



products including naphthenic lubricants, distillates, asphalt and other intermediate cuts. The omnibus agreement was amended further on October 2, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management. See Note 16.   

Non-Competition Provisions. Martin Resource Management has agreed for so long as it controls the general partner of the Partnership, not to engage in the business of:

•
providing terminalling, refining, processing, distribution and midstream logistical services for hydrocarbon products and by-products;

•
providing marine and other transportation of hydrocarbon products and by-products; and

•
manufacturing and marketing fertilizers and related sulfur-based products.

This restriction does not apply to:

•
the ownership and/or operation on the Partnership’s behalf of any asset or group of assets owned by it or its affiliates;

•
any business operated by Martin Resource Management, including the following:

◦
providing land transportation of various liquids;

◦
distributing fuel oil, sulfuric acid, marine fuel and other liquids;

◦
providing marine bunkering and other shore-based marine services in Alabama, Florida, Louisiana, Mississippi and Texas;

◦
operating a small crude oil gathering business in Stephens, Arkansas;

◦
operating an underground NGL storage facility in Arcadia, Louisiana;

◦
building and marketing sulfur processing equipment; and

◦
developing an underground natural gas storage facility in Arcadia, Louisiana.

•
any business that Martin Resource Management acquires or constructs that has a fair market value of less than $5,000;

•
any business that Martin Resource Management acquires or constructs that has a fair market value of $5,000 or more if the Partnership has been offered the opportunity to purchase the business for fair market value and the Partnership declines to do so with the concurrence of the conflicts committee; and

•
any business that Martin Resource Management acquires or constructs where a portion of such business includes a restricted business and the fair market value of the restricted business is $5,000 or more and represents less than 20% of the aggregate value of the entire business to be acquired or constructed; provided that, following completion of the acquisition or construction, the Partnership will be provided the opportunity to purchase the restricted business.
    
Services.  Under the omnibus agreement, Martin Resource Management provides the Partnership with corporate staff, support services, and administrative services necessary to operate the Partnership’s business. The omnibus agreement requires the Partnership to reimburse Martin Resource Management for all direct expenses it incurs or payments it makes on the Partnership’s behalf or in connection with the operation of the Partnership’s business. There is no monetary limitation on the amount the Partnership is required to reimburse Martin Resource Management for direct expenses.  In addition to the direct expenses, under the omnibus agreement, the Partnership is required to reimburse Martin Resource Management for indirect general and administrative and corporate overhead expenses.


21
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



Effective October 1, 2011, through September 30, 2012, the Conflicts Committee of the board of directors of the general partner of the Partnership (the “Conflicts Committee”) approved an annual reimbursement amount for indirect expenses of $6,582.  The Partnership reimbursed Martin Resource Management for $1,646 and $4,937 of indirect expenses for the three and nine months ended September 30, 2012, respectively.  The Partnership reimbursed Martin Resource Management $1,042 and $3,126 of indirect expenses for the three and nine months ended September 30, 2011, respectively.  The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.

These indirect expenses are intended to cover the centralized corporate functions Martin Resource Management provides for the Partnership, such as accounting, treasury, clerical billing, information technology, administration of insurance, general office expenses and employee benefit plans and other general corporate overhead functions the Partnership shares with Martin Resource Management retained businesses. The provisions of the omnibus agreement regarding Martin Resource Management’s services will terminate if Martin Resource Management ceases to control the general partner of the Partnership.

Related  Party Transactions. The omnibus agreement prohibits the Partnership from entering into any material agreement with Martin Resource Management without the prior approval of the conflicts committee of the general partner’s board of directors. For purposes of the omnibus agreement, the term material agreements means any agreement between the Partnership and Martin Resource Management that requires aggregate annual payments in excess of then-applicable agreed upon reimbursable amount of indirect general and administrative expenses. Please read “Services” above.

License Provisions. Under the omnibus agreement, Martin Resource Management has granted the Partnership a nontransferable, nonexclusive, royalty-free right and license to use certain of its trade names and marks, as well as the trade names and marks used by some of its affiliates.

Amendment and Termination. The omnibus agreement may be amended by written agreement of the parties; provided, however, that it may not be amended without the approval of the conflicts committee of the Partnership’s general partner if such amendment would adversely affect the unitholders. The omnibus agreement was first amended on November 24, 2009, to permit the Partnership to provide refining services to Martin Resource Management.  The omnibus agreement was amended further on October 2, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management.  See Note 16. Such amendments were approved by the conflicts committee of the Partnership’s general partner.  The omnibus agreement, other than the indemnification provisions and the provisions limiting the amount for which the Partnership will reimburse Martin Resource Management for general and administrative services performed on its behalf, will terminate if the Partnership is no longer an affiliate of Martin Resource Management.

Motor Carrier Agreement

Motor Carrier Agreement.  The Partnership is a party to a motor carrier agreement effective January 1, 2006, with Martin Transport, Inc., a wholly owned subsidiary of Martin Resource Management through which Martin Resource Management operates its land transportation operations.  This agreement replaced a prior agreement effective November 1, 2002, between the Partnership and Martin Transport, Inc. for land transportation services.  Under the agreement, Martin Transport, Inc. agreed to ship our NGL shipments as well as other liquid products.

Term and Pricing. This agreement was amended in November 2006, January 2007, April 2007 and January 2008 to add additional point-to-point rates and to modify certain fuel and insurance surcharges being charged to the Partnership.  The agreement has an initial term that expired in December 2007 but automatically renews for consecutive one year periods unless either party terminates the agreement by giving written notice to the other party at least 30 days prior to the expiration of the then-applicable term.  The Partnership has the right to terminate this agreement at any time by providing 90 days prior notice.  Under this agreement, Martin Transport, Inc. transports the Partnership’s NGL shipments as well as other liquid products. These rates are subject to any adjustment which are mutually agreed or in accordance with a price index. Additionally, during the term of the agreement, shipping charges are also subject to fuel surcharges determined on a weekly basis in accordance with the U.S. Department of Energy’s national diesel price list.

Marine Agreements

Marine Transportation Agreement. The Partnership is a party to a marine transportation agreement effective January 1, 2006, which was amended January 1, 2007, under which the Partnership provides marine transportation services to Martin

22
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



Resource Management on a spot-contract basis at applicable market rates. This agreement replaced a prior agreement effective November 1, 2002 between the Partnership and Martin Resource Management covering marine transportation services which expired November 2005.  Effective each January 1, this agreement automatically renews for consecutive one year periods unless either party terminates the agreement by giving written notice to the other party at least 60 days prior to the expiration of the then applicable term. The fees the Partnership charges Martin Resource Management are based on applicable market rates.

Cross Marine Charter Agreements. Cross Oil & Refining Marketing, Inc. (“Cross”) entered into two marine charter agreements with the Partnership effective March 1, 2012.  These agreements have an initial term of five years and continue indefinitely thereafter subject to cancellation after the initial term by either party upon a 30 day written notice of cancellation. The charter hire payable under these agreements will be adjusted annually to reflect the percentage change in the Consumer Price Index.

Marine Fuel.  The Partnership is a party to an agreement with Martin Resource Management under which Martin Resource Management provides the Partnership with marine fuel from its locations in the Gulf of Mexico at a fixed rate over the Platt’s U.S. Gulf Coast Index for #2 Fuel Oil.  Under this agreement, the Partnership agreed to purchase all of its marine fuel requirements that occur in the areas serviced by Martin Resource Management.

Terminal Services Agreements

Diesel Fuel Terminal Services Agreement.  The Partnership is a party to an agreement under which the Partnership provides terminal services to Martin Resource Management. This agreement was amended and restated as of October 27, 2004, and was set to expire in December 2006, but automatically renewed and will continue to automatically renew on a month-to-month basis until either party terminates the agreement by giving 60 days written notice.  The per gallon throughput fee the Partnership charges under this agreement may be adjusted annually based on a price index.

Miscellaneous Terminal Services Agreements.  The Partnership is currently party to several terminal services agreements and from time to time the Partnership may enter into other terminal service agreements for the purpose of providing terminal services to related parties. Individually, each of these agreements is immaterial but when considered in the aggregate they could be deemed material. These agreements are throughput based with a minimum volume commitment. Generally, the fees due under these agreements are adjusted annually based on a price index.

Other Agreements

 Cross Tolling Agreement. The Partnership is a party to an agreement under which it processes crude oil into finished products, including naphthenic lubricants, distillates, asphalt and other intermediate cuts for Cross.  The Tolling Agreement has a 22 year term which expires November 25, 2031.   Under this Tolling Agreement, Martin Resource Management agreed to process a minimum of 6,500 barrels per day of crude oil at the facility at a fixed price per barrel.  Any additional barrels are processed at a modified price per barrel.  In addition, Martin Resource Management agreed to pay a monthly reservation fee and a periodic fuel surcharge fee based on certain parameters specified in the Tolling Agreement.  All of these fees (other than the fuel surcharge) are subject to escalation annually based upon the greater of 3% or the increase in the Consumer Price Index for a specified annual period.  In addition, every three years, the parties can negotiate an upward or downward adjustment in the fees subject to their mutual agreement.

Sulfuric Acid Sales Agency Agreement. The Partnership is party to an agreement under which Martin Resource Management purchases and markets the sulfuric acid produced by the Partnership’s sulfuric acid production plant at Plainview, Texas, that is not consumed by the Partnership’s internal operations.  This agreement, which was amended and restated in July 2011, will remain in place until the Partnership terminates it by providing 180 days’ written notice.  Under this agreement, the Partnership sells all of its excess sulfuric acid to Martin Resource Management.  Martin Resource Management then markets such acid to third-parties and the Partnership shares in the profit of Martin Resource Management’s sales of the excess acid to such third parties.

Other Miscellaneous Agreements. From time to time the Partnership enters into other miscellaneous agreements with Martin Resource Management for the provision of other services or the purchase of other goods.


23
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2012
(Unaudited)



The tables below summarize the related party transactions that are included in the related financial statement captions on the face of the Partnership’s Consolidated Statements of Operations. The revenues, costs and expenses reflected in these tables are tabulations of the related party transactions that are recorded in the corresponding caption of the consolidated financial statement and do not reflect a statement of profits and losses for related party transactions.

The impact of related party revenues from sales of products and services is reflected in the consolidated financial statement as follows: