2014.9.30 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, 2014

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                   x
Accelerated filer  o
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 October 29, 2014, was 35,349,699.
 



 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Dollars in thousands)
 
September 30, 2014
 
December 31, 2013
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash
$
3,006

 
$
16,542

Accounts and other receivables, less allowance for doubtful accounts of $1,608 and $2,492, respectively
132,839

 
163,855

Product exchange receivables
6,351

 
2,727

Inventories
120,369

 
94,902

Due from affiliates
14,581

 
12,099

Fair value of derivatives
879

 

Other current assets
10,256

 
7,353

Assets held for sale
700

 

Total current assets
288,981

 
297,478

 
 
 
 
Property, plant and equipment, at cost
1,359,620

 
929,183

Accumulated depreciation
(334,150
)
 
(304,808
)
Property, plant and equipment, net
1,025,470

 
624,375

 
 
 
 
Goodwill
23,802

 
23,802

Investment in unconsolidated entities
135,219

 
128,662

Debt issuance costs, net
13,833

 
15,659

Note receivable - Martin Energy Trading LLC
15,000

 

Other assets, net
86,431

 
7,943

 
$
1,588,736

 
$
1,097,919

 
 
 
 
Liabilities and Partners’ Capital
 

 
 

Trade and other accounts payable
$
120,037

 
$
142,951

Product exchange payables
18,860

 
9,595

Due to affiliates
11,713

 
2,596

Income taxes payable
1,002

 
1,204

Fair value of derivatives
542

 

Other accrued liabilities
13,041

 
20,242

Total current liabilities
165,195

 
176,588

 
 
 
 
Long-term debt
910,077

 
658,695

Other long-term obligations
3,174

 
2,219

Total liabilities
1,078,446

 
837,502

 
 
 
 
Commitments and contingencies


 


Partners’ capital
510,290

 
260,417

 
$
1,588,736

 
$
1,097,919


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,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Terminalling and storage  *
$
31,880

 
$
28,956

 
$
97,848

 
$
85,267

Marine transportation  *
24,282

 
24,217

 
69,845

 
74,694

Natural gas services
5,764

 

 
5,764

 

Sulfur services
3,037

 
3,001

 
9,112

 
9,003

Product sales: *
 
 
 
 
 
 
 
Natural gas services
230,294

 
204,296

 
812,232

 
650,605

Sulfur services
46,993

 
39,096

 
157,706

 
164,375

Terminalling and storage
47,735

 
60,050

 
153,451

 
167,546

 
325,022

 
303,442

 
1,123,389

 
982,526

Total revenues
389,985

 
359,616

 
1,305,958

 
1,151,490

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

 
 

 
 

Natural gas services *
218,356

 
196,308

 
777,676

 
626,609

Sulfur services *
38,841

 
33,994

 
122,009

 
131,577

Terminalling and storage *
42,239

 
52,718

 
137,074

 
146,806

 
299,436

 
283,020

 
1,036,759

 
904,992

Expenses:
 

 
 

 
 

 
 

Operating expenses  *
48,391

 
43,444

 
140,543

 
129,839

Selling, general and administrative  *
10,302

 
7,211

 
27,653

 
20,624

Depreciation and amortization
16,743

 
13,698

 
45,329

 
37,944

Total costs and expenses
374,872

 
347,373

 
1,250,284

 
1,093,399

 
 
 
 
 
 
 
 
Impairment of long-lived assets
(3,445
)
 

 
(3,445
)
 

Other operating income
347

 

 
401

 
796

Operating income
12,015

 
12,243

 
52,630

 
58,887

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Equity in earnings (loss) of unconsolidated entities
2,655

 
(577
)
 
4,297

 
(878
)
Interest expense, net
(11,459
)
 
(11,060
)
 
(34,351
)
 
(31,058
)
Debt prepayment premium

 

 
(7,767
)
 

Reduction in carrying value of investment in Cardinal due to the purchase of the controlling interest
(30,102
)
 

 
(30,102
)
 

Other, net
286

 
(111
)
 
169

 
(134
)
Total other expense
(38,620
)
 
(11,748
)
 
(67,754
)
 
(32,070
)
 
 
 
 
 
 
 
 
Net income (loss) before taxes
(26,605
)
 
495

 
(15,124
)
 
26,817

Income tax expense
(300
)
 
(303
)
 
(954
)
 
(910
)
Net income (loss)
(26,905
)
 
192

 
(16,078
)
 
25,907

Less general partner's interest in net (income) loss
539

 
(4
)
 
322

 
(518
)
Less (income) loss allocable to unvested restricted units
62

 
(1
)
 
33

 
(67
)
Limited partners' interest in net income (loss)
$
(26,304
)
 
$
187

 
$
(15,723
)
 
$
25,322

 
 
 
 
 
 
 
 
Net income (loss) per unit attributable to limited partners - basic
$
(0.82
)
 
$
0.01

 
$
(0.54
)
 
$
0.95

Weighted average limited partner units - basic
32,243

 
26,552

 
29,271

 
26,561

 
 
 
 
 
 
 
 
Net income (loss) per unit attributable to limited partners - diluted
$
(0.82
)
 
$
0.01

 
$
(0.54
)
 
$
0.95

Weighted average limited partner units - diluted
32,243

 
26,579

 
29,271

 
26,581

 
See accompanying notes to consolidated and condensed financial statements.

*Related Party Transactions Shown Below

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,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Terminalling and storage
$
19,045

 
$
18,044

 
$
55,798

 
$
52,857

Marine transportation
6,076

 
5,943

 
18,340

 
18,828

Product Sales
883

 
964

 
6,484

 
4,012

Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

 
 

 
 

Natural gas services
9,908

 
7,799

 
29,169

 
23,391

Sulfur services
4,491

 
4,539

 
13,808

 
13,514

Terminalling and storage
9,174

 
13,488

 
25,571

 
39,638

Expenses:
 

 
 

 
 

 
 

Operating expenses
21,013

 
17,902

 
58,500

 
53,410

Selling, general and administrative
7,230

 
4,356

 
18,103

 
12,944


See accompanying notes to consolidated and condensed financial statements.







4

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



 
Partners’ Capital
 
 
 
Common Limited
 
General Partner Amount
 
 
 
Units
 
Amount
 
 
Total
Balances - January 1, 2013
26,566,776

 
$
349,490

 
$
8,472

 
$
357,962

Net income

 
25,389

 
518

 
25,907

Issuance of restricted units
63,750

 

 

 

Forfeiture of restricted units
(250
)
 

 

 

General partner contribution

 

 
37

 
37

Cash distributions

 
(61,902
)
 
(1,384
)
 
(63,286
)
Excess purchase price over carrying value of acquired assets

 
(301
)
 

 
(301
)
Unit-based compensation

 
737

 

 
737

Purchase of treasury units
(6,000
)
 
(250
)
 

 
(250
)
Balances - September 30, 2013
26,624,276

 
$
313,163

 
$
7,643

 
$
320,806

 
 
 
 
 
 
 
 
Balances - January 1, 2014
26,625,026

 
$
254,028

 
$
6,389

 
$
260,417

Net loss

 
(15,756
)
 
(322
)
 
(16,078
)
Issuance of common units
8,727,673

 
331,571

 

 
331,571

Issuance of restricted units
6,900

 

 

 

Forfeiture of restricted units
(3,500
)
 

 

 

General partner contribution

 

 
6,995

 
6,995

Cash distributions

 
(66,473
)
 
(1,506
)
 
(67,979
)
Unit-based compensation

 
589

 

 
589

Excess purchase price over carrying value of acquired assets

 
(4,948
)
 

 
(4,948
)
Purchase of treasury units
(6,400
)
 
(277
)
 

 
(277
)
Balances - September 30, 2014
35,349,699

 
$
498,734

 
$
11,556

 
$
510,290

 
See accompanying notes to consolidated and condensed financial statements.





5

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


 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(16,078
)
 
$
25,907

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation and amortization
45,329

 
37,944

Amortization of deferred debt issuance costs
5,415

 
2,890

Amortization of debt discount
1,305

 
230

Amortization of premium on notes payable
(164
)
 

Gain on sale of property, plant and equipment
(54
)
 
(796
)
Impairment of long-lived assets
3,445

 

Equity in (earnings) loss of unconsolidated entities
(4,297
)
 
878

Reduction in carrying value of investment in Cardinal due to purchase of the controlling interest
30,102

 

Non-cash mark-to-market on derivatives
489

 

Unit-based compensation
589

 
737

Preferred dividends on MET investment
1,498

 
1,171

Return on investment
600

 

Other

 
7

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

 
 

Accounts and other receivables
32,443

 
43,043

Product exchange receivables
(3,624
)
 
(219
)
Inventories
(25,223
)
 
(8,362
)
Due from affiliates
(2,482
)
 
(5,188
)
Other current assets
1,219

 
(6,358
)
Trade and other accounts payable
(29,600
)
 
(29,641
)
Product exchange payables
9,265

 
936

Due to affiliates
9,117

 
(525
)
Income taxes payable
(202
)
 
(440
)
Other accrued liabilities
(7,214
)
 
8,842

Change in other non-current assets and liabilities
1,123

 
(210
)
Net cash provided by continuing operating activities
53,001

 
70,846

Net cash used in discontinued operating activities

 
(8,678
)
Net cash provided by operating activities
53,001

 
62,168

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(58,522
)
 
(68,591
)
Acquisitions, less cash acquired
(100,046
)
 
(73,921
)
Payments for plant turnaround costs
(4,000
)
 

Proceeds from sale of property, plant and equipment
702

 
4,719

Proceeds from involuntary conversion of property, plant and equipment
2,475

 

Investment in unconsolidated entities
(134,413
)
 

Return of investments from unconsolidated entities
726

 
1,551

Contributions to unconsolidated entities
(3,386
)
 
(30,877
)
Net cash used in investing activities
(296,464
)
 
(167,119
)
Cash flows from financing activities:
 

 
 

Payments of long-term debt
(1,458,096
)
 
(518,000
)
Payments of notes payable and capital lease obligations

 
(251
)
Proceeds from long-term debt
1,426,250

 
691,000

Net proceeds from issuance of common units
331,571

 

General partner contribution
6,995

 
37

Purchase of treasury units
(277
)
 
(250
)
Payment of debt issuance costs
(3,589
)
 
(9,115
)
Excess purchase price over carrying value of acquired assets
(4,948
)
 
(301
)
Cash distributions paid
(67,979
)
 
(63,286
)
Net cash provided by financing activities
229,927

 
99,834

Net decrease in cash
(13,536
)
 
(5,117
)
Cash at beginning of period
16,542

 
5,162

Cash at end of period
$
3,006

 
$
45

Non-cash additions to property, plant and equipment
$
4,208

 
$

See accompanying notes to consolidated and condensed financial statements.

6

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(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 (“U.S.”) Gulf Coast region. Its four primary business lines include:  terminalling and storage services for petroleum products and by-products including the refining, blending and packaging of finished lubricants; natural gas services, including liquids distribution services and natural gas storage; 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 (“U.S. GAAP”) for interim financial reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by U.S. GAAP 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 financial position, results of operations, 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, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2014, as amended by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014.

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 and condensed financial statements in conformity with U.S. GAAP.  Actual results could differ from those estimates.

Prior to August 30, 2013, Martin Resource Management owned 100% of the Partnership's general partner. On August 30, 2013, Martin Resource Management completed the sale of a 49% non-controlling voting interest (50% economic interest) in MMGP Holdings, LLC (“Holdings”), the newly-formed sole member of Martin Midstream GP LLC (“MMGP”), the general partner of the Partnership, to certain affiliated investment funds managed by Alinda Capital Partners (“Alinda”). Upon closing the transaction, Alinda appointed two representatives to serve as directors of the general partner. On October 29, 2014, Alinda appointed their third of three total representatives to serve as directors of the Partnership's general partner.

(2)
New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Partnership on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Partnership is evaluating the effect that ASU 2014-09 will have on its consolidated and condensed financial statements and related disclosures. The Partnership has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2014, the FASB issued No. ASU 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU changes the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business or a major equity method investment. Additionally, the update requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. This update is effective prospectively for the Partnership's fiscal year beginning January 1, 2015

7

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



and early adoption is permitted. The standard primarily involves presentation and disclosure and therefore is not expected to have a material impact on the Partnership's financial condition, results of operations or cash flows.
        
(3)
Acquisitions
 
Cardinal Gas Storage Partners LLC
On August 29, 2014, the Partnership acquired from Energy Capital Partners (“ECP”) all of ECP’s approximate 57.8% Category A membership interests in Cardinal Gas Storage Partners LLC (“Cardinal”) for cash consideration of approximately $120.0 million, subject to certain post-closing adjustments. Prior to the acquisition, the Partnership owned an approximate 42.2% interest in the Category A membership interests in Cardinal. Based on the application of purchase accounting, the Partnership reduced the carrying value of its existing investment in Cardinal at the acquisition date by $30,102, which was recognized in the Partnership's Consolidated and Condensed Statements of Operations for the three and nine months ended September 30, 2014. Concurrent with the closing of the transaction, the Partnership retired all of the project level financing of various Cardinal subsidiaries. The Partnership funded the acquisition and repayment of the project financings with borrowings under its revolving credit facility and the use of restricted cash acquired.
The total purchase price is as follows:
Cash payment for 57.8% interest in Cardinal
$
119,973

Fair value of the Partnership's previously owned 42.2% interest in Cardinal
87,613

Total
$
207,586


Assets acquired and liabilities assumed were recorded in the Natural Gas Services segment at fair value in the following preliminary purchase price allocation:
Restricted cash
$
19,216

Other current assets
9,418

Property, plant and equipment
390,352

Intangible and other assets
77,995

Project level finance debt
(282,086
)
Other current liabilities
(6,714
)
Other non-current liabilities
(595
)
   Total
$
207,586


The Partnerships expects to complete the final purchase price allocation by December 31, 2014.
 
Intangible assets consist of above-market gas storage customer contracts which are amortized based upon the terms of the individual contracts. The weighted average life of these contracts, based upon contracted volumes, is 5.1 years.

The Partnership’s results of operations from the Cardinal acquisition include revenues of $5,764 and net income of $340 for the three and nine months ended September 30, 2014. In the third quarter, the Partnership recorded a $30,102 non-recurring, non-cash charge to its net income reflecting the reduction in the Partnership's carrying value of its investment in Cardinal as a result of the Cardinal acquisition.

Natural Gas Liquids ("NGL") Storage Assets

On May 31, 2014, the Partnership acquired certain NGL storage assets from a subsidiary of Martin Resource Management for $7,388. This acquisition is considered a transfer of net assets between entities under common control. The acquisition of these assets was recorded at the historical carrying value of the assets at the acquisition date. The Partnership recorded the purchase in the following allocation:

8

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



Property, plant and equipment
$
2,453

Current liabilities
(13
)
 
$
2,440


The excess of the purchase price over the carrying value of the assets of $4,948 was recorded as an adjustment to "Partners' capital." This transaction was funded with borrowings under the Partnership's revolving credit facility. As no individual line item of the historical financial statements of the assets was in excess of 3% of the Partnership's relative financial statement captions, the Partnership elected not to retrospectively recast the historical financial information of these assets.

West Texas LPG Pipeline Limited Partnership

On May 14, 2014, the Partnership acquired from a subsidiary of Atlas Pipeline Partners L.P. ("Atlas"), all of the outstanding membership interests in Atlas Pipeline NGL Holdings, LLC and Atlas Pipeline NGL Holdings II, LLC (collectively, "Atlas Holdings") for cash of approximately $134,400. The purchase price was subsequently reduced $501 due to a post-closing working capital adjustment. This transaction was recorded in "Investments in unconsolidated entities" in the Partnership's Consolidated and Condensed Balance Sheet through a preliminary purchase price allocation. The final allocation is expected to be completed by December 31, 2014. Atlas Holdings owned a 19.8% limited partnership interest and a 0.2% general partnership interest in West Texas LPG Pipeline L.P. ("WTLPG"). WTLPG is operated by Chevron Pipe Line Company, which owns the remaining 80.0% interest. WTLPG owns an approximate 2,300 mile common-carrier pipeline system that transports NGLs from New Mexico and Texas to Mont Belvieu, Texas for fractionation. This acquisition will enable the Partnership to participate in the transportation of the growing NGL production of West Texas and other basins along the WTLPG pipeline route. This acquisition of the WTLPG business complements the Partnership's existing East Texas NGL pipeline that delivers Y-grade NGLs from East Texas production areas into Beaumont, Texas on a smaller scale. This transaction was funded with borrowings under the Partnership's revolving credit facility.

Pro Forma Financial Information for Cardinal and WTLPG
    
The following pro forma consolidated results of operations have been prepared as if the acquisition of Cardinal and WTLPG occurred at the beginning of fiscal 2013:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
As reported
$
389,985

 
$
359,616

 
$
1,305,958

 
$
1,151,490

Pro forma
$
401,130

 
$
376,957

 
$
1,352,446

 
$
1,187,626

Net income (loss) attributable to limited partners:
 
 
 
 
 
 
 
As reported
$
(26,304
)
 
$
187

 
$
(15,723
)
 
$
25,322

Pro forma
$
136

 
$
(9,782
)
 
$
(5,784
)
 
$
455

Net income (loss) per unit attributable to limited partners - basic
 
 
 
 
 
 
 
As reported
$
(0.82
)
 
$
0.01

 
$
(0.54
)
 
$
0.95

Pro forma
$

 
$
(0.37
)
 
$
(0.20
)
 
$
0.02

Net income (loss) per unit attributable to limited partners - diluted
 
 
 
 
 
 
 
As reported
$
(0.82
)
 
$
0.01

 
$
(0.54
)
 
$
0.95

Pro forma
$

 
$
(0.37
)
 
$
(0.20
)
 
$
0.02


Marine Transportation Equipment Purchase

On September 30, 2013, the Partnership acquired two previously leased inland tank barges from Martin Resource Management for $7,100. This acquisition is considered a transfer of net assets between entities under common control. The acquisition of these assets was recorded at the historical carrying value of the assets at the acquisition date. The Partnership recorded $6,799 to property, plant and equipment in the Marine Transportation segment and the excess of the purchase price

9

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



over the carrying value of the assets of $301 was recorded as an adjustment to "Partners' capital". This transaction was funded with borrowings under the Partnership's revolving credit facility.

Sulfur Production Facility

On August 5, 2013, the Partnership acquired a plant nutrient sulfur production facility in Cactus, Texas (“Cactus”) for $4,118. The transaction was accounted for under the acquisition method of accounting in accordance with ASC 805 relating to business combinations. This transaction was funded by borrowings under the Partnership's revolving credit facility. Assets acquired and liabilities assumed were recorded in the Sulfur Services segment at fair value as follows:
    
Inventory
$
162

Property, plant and equipment
4,000

Current liabilities
(44
)
Total
$
4,118


The Partnership's results of operations from these assets included revenues of $590 and net income of $87 for the three months ended September 30, 2014 and revenues of $1,736 and net income of $321 for the nine months ended September 30, 2014. The Partnership's results of operations from these assets included revenues of $104 and a net loss of $80 for both the three and nine months ended September 30, 2013.

NL Grease, LLC

On June 13, 2013, the Partnership acquired certain assets of NL Grease, LLC (“NLG”) for $12,148. NLG is a Kansas City, Missouri based grease manufacturer that specializes in private-label packaging of commercial and industrial greases. The transaction was accounted for under the acquisition method of accounting in accordance with ASC 805 relating to business combinations. This transaction was funded by borrowings under the Partnership's revolving credit facility. The assets acquired by the Partnership were recorded in the Terminalling and Storage segment at fair value of $12,148 in the following purchase price allocation:
Inventory and other current assets
$
1,513

Property, plant and equipment
6,136

Other assets
5,113

Other accrued liabilities
(168
)
Other long-term obligations
(446
)
Total
$
12,148


The purchase price allocation resulted in the recognition of $5,113 in definite-lived intangible assets with no residual value, including $2,418 of technology, $2,218 attributable to a customer list, and $477 attributable to a non-compete agreement. The amounts assigned to technology, the customer list, and the non-compete agreement are amortized over the estimated useful life of ten years, three years, and five years, respectively. The weighted average life over which these acquired intangibles will be amortized is approximately six years.

The Partnership completed the purchase price allocation during the third quarter of 2013, which resulted in an adjustment to working capital from the preliminary purchase price allocation in the amount of $55.

The Partnership's results of operations from the NLG acquisition included revenues of $3,150 and net income of $124 for the three months ended September 30, 2014 and revenues of $4,101 and net income of $166 for the three months ended September 30, 2013. Results of operations included revenues of $10,914 and net income of $254 for the nine months ended September 30, 2014 and revenues of $4,622 and net income of $10 for the nine months ended September 30, 2013.


10

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



NGL Marine Equipment Purchase

On February 28, 2013, the Partnership purchased from affiliates of Florida Marine Transporters, Inc. six liquefied petroleum gas pressure barges and two commercial push boats for approximately $50,801, of which the commercial push boats totaling $8,201 were allocated to property, plant and equipment in the Partnership's Marine Transportation segment and the six pressure barges totaling $42,600 were allocated to property, plant and equipment in the Partnership's Natural Gas Services segment. This transaction was funded with borrowings under the Partnership's revolving credit facility.    

(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 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 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.  

Cash flows resulting from balances existing at December 31, 2012 were reported in the Consolidated and Condensed Statements of Cash Flows as discontinued operations for the nine months ended September 30, 2013.

(5)
Inventories

Components of inventories at September 30, 2014 and December 31, 2013 were as follows: 
 
September 30, 2014
 
December 31, 2013
Natural gas liquids
$
59,494

 
$
31,859

Sulfur
9,887

 
8,912

Sulfur based products
14,819

 
17,584

Lubricants
32,830

 
33,847

Other
3,339

 
2,700

 
$
120,369

 
$
94,902


(6)
Investments in Unconsolidated Entities and Joint Ventures

On August 29, 2014, the Partnership acquired ECP’s approximate 57.8% Category A interest in Cardinal. Prior to the acquisition, the Partnership owned an approximate 42.2% Category A interest in Cardinal which was accounted for by the equity method. See Note 3 for discussion of the acquisition of the remaining interests.

On May 14, 2014, the Partnership acquired from a subsidiary of Atlas, all of the outstanding membership interests in Atlas Holdings for cash of approximately $134,400 at closing. The purchase price was subsequently reduced $501 due to a post-closing working capital adjustment. Atlas Holdings owned a 19.8% limited partnership interest and a 0.2% general partnership interest in WTLPG. WTLPG is operated by Chevron Pipe Line Company, which owns the remaining 80.0% interest. WTLPG owns an approximate 2,300 mile common-carrier pipeline system that transports NGLs from New Mexico and Texas to Mont Belvieu, Texas for fractionation. At the acquisition date, the carrying value of the 20% interest in WTLPG exceeded the Partnership’s share of the underlying net assets of WTLPG by approximately $96,000. The Partnership’s preliminary analysis determined that approximately $48,000 of the difference is attributable to property plant and equipment and the remaining $48,000 to equity method goodwill. The Partnership expects to complete its final analysis by December 31, 2014. The excess attributable to property, plant and equipment will be amortized over approximately 35 years. Such amortization amounted to $343 and $514 for the three and nine months ended September 30, 2014, respectively. The Partnership recognizes its 20% interest in WTLPG as "Investment in unconsolidated entities" on its Consolidated and Condensed Balance Sheets. The Partnership accounts for its ownership interest in WTLPG under the equity method of

11

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



accounting, with recognition of its ownership interest in the income of WTLPG as "Equity in earnings of unconsolidated entities" on its Consolidated and Condensed Statements of Operations.
    
During the fourth quarter of 2013, the Partnership sold its unconsolidated 50% interest in Caliber Gathering, LLC (“Caliber”). As a result, there is no equity in earnings (loss) in the 2014 period.

During March 2013, the Partnership acquired 100% of the preferred interests in Martin Energy Trading LLC (“MET”), a subsidiary of Martin Resource Management, for $15,000. On August 31, 2014, MET converted its preferred equity to subordinated debt. The resulting $15,000 note receivable from MET bears an annual interest rate of 15% and matures August 31, 2026. MET may prepay any or all of the note balance on or after September 1, 2016. See Note 12.

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, 2014
 
December 31, 2013
WTLPG
$
135,219

 
$

Cardinal

 
113,662

MET

 
15,000

    Total investment in unconsolidated entities
$
135,219

 
$
128,662


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Equity in earnings of WTLPG
$
1,138

 
$

 
$
1,907

 
$

Equity in earnings (loss) of Cardinal
1,135

 
(984
)
 
892

 
(1,561
)
Equity in earnings of MET
382

 
577

 
1,498

 
1,171

Equity in loss of Caliber

 
(170
)
 

 
(488
)
    Equity in earnings of unconsolidated entities
$
2,655

 
$
(577
)
 
$
4,297

 
$
(878
)

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
 
Members' Equity
 
Revenues
 
Net Income (Loss)
 
Revenues
 
Net Income (Loss)
2014
 
 
 
 
 
 
 
 
 
 
 
WTLPG
$
212,483

 
$
192,097

 
$
23,884

 
$
7,403

 
$
71,798

 
$
28,004

 
As of December 31,
 
 

 
 

 
 

 
 

2013
 

 
 

 
 

 
 

 
 

 
 

Cardinal
$
661,816

 
$
346,584

 
$
17,341

 
$
(2,300
)
 
$
36,136

 
$
(2,241
)

As of September 30, 2014 and December 31, 2013, the Partnership’s interest in cash of the unconsolidated equity-method investees was $55 and $3,703, 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

12

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



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 and Condensed Balance Sheets and to recognize certain changes in the fair value of derivative instruments on the Partnership’s Consolidated and Condensed Statements of Operations.

(a)    Commodity Derivative Instruments

The Partnership has from time to time used derivatives to manage the risk of commodity price fluctuation. Commodity risk is the adverse effect on the value of a liability or future purchase that results from a change in commodity price.  The Partnership has established a hedging policy and monitors and manages the commodity market risk associated with potential commodity risk exposure.  In addition, the Partnership has focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction.     

The Partnership is exposed to commodity risk associated with the future purchase of natural gas.  The Partnership utilizes derivatives to manage exposure associated with commodity price risk by entering into call options to place a limit on the commodity price of the future purchase of base gas.  All derivatives and hedging instruments are included on the balance sheet as an asset or liability measured at fair value and changes in fair value are recognized currently in earnings.

As of September 30, 2014, the Partnership had a notional quantity of 3,631,740 MMBtu of natural gas call options with a strike price of $4.50 per MMBtu.  These options manage the purchase of base gas at Monroe Gas Storage Company, LLC for the portion of base gas that is currently leased with Credit Suisse and scheduled to be returned in January and February 2015.  The options settle in two increments of 2,345,498 MMBtu and 1,286,242 MMBtu on January 31, 2015 and February 28, 2015, respectively. 

For information regarding fair value amounts and gains and losses on natural gas call options, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments” below.

(b)    Interest Rate Derivative Instruments

The Partnership is exposed to market risks associated with interest rates. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate credit facility and it's senior unsecured 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.

As of September 30, 2014, we had a combined notional principal amount of $250,000 of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with a portion of the Partnership's 2021 senior unsecured notes from fixed rates to variable rates based on an interest rate of LIBOR plus a spread. Each of the Partnership's swap agreements have a termination date that corresponds to the maturity date of the 2021 senior unsecured notes. As of September 30, 2014, the maximum length of time over which the Partnership has hedged a portion of its exposure to the variability in the value of this debt due to interest rate risk is through February of 2021.

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

(c)    Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments

The following table summarizes the fair values and classification of the Partnership’s derivative instruments in its Consolidated and Condensed Balance Sheet:

13

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



 
Fair Values of Derivative Instruments in the Consolidated Balance Sheet
 
Derivative Assets
Derivative Liabilities
 
 
Fair Values
 
Fair Values
 
 Balance Sheet Location
September 30, 2014
 
December 31, 2013
 Balance Sheet Location
September 30, 2014
 
December 31, 2013
Derivatives not designated as hedging instruments:
Current:
 
 
 
 
 
 
 
Commodity contracts
Fair value of derivatives
$
830

 
$

Fair value of derivatives
$

 
$

Interest rate contracts
Fair value of derivatives
49

 

Fair value of derivatives
542

 

Total derivatives not designated as hedging instruments
 
$
879

 
$

 
$
542

 
$


Effect of Derivative Instruments on the Consolidated and Condensed Statement of Operations
For the Three Months Ended September 30, 2014 and 2013
 
Location of Gain
Recognized in Income on
 Derivatives
Amount of Gain Recognized in
Income on Derivatives
 
 
2014
 
2013
Derivatives not designated as hedging instruments:
 
 
Commodity contracts
Other income
$
21

 
$

Interest rate contracts
Interest expense
63

 

Total derivatives not designated as hedging instruments
$
84

 
$


Effect of Derivative Instruments on the Consolidated and Condensed Statement of Operations
For the Nine Months Ended September 30, 2014 and 2013
 
Location of Gain
Recognized in Income on
 Derivatives
Amount of Gain Recognized in
Income on Derivatives
 
 
2014
 
2013
Derivatives not designated as hedging instruments:
 
 
Commodity contracts
Other income
$
21

 
$

Interest rate contracts
Interest expense
(2,864
)
 

Total derivatives not designated as hedging instruments
$
(2,843
)
 
$


On April 1, 2014, the Partnership entered into two fixed-to-variable interest rate swap agreements with an aggregate notional amount of $100,000 each to hedge its exposure to changes in the fair value of its senior unsecured notes.  On May 14, the Partnership terminated these swaps and received a termination benefit of $2,380 upon cancellation of these swap agreements. Additionally, subsequent to the termination on May 14, 2014, the Partnership entered into two fixed-to-variable interest rate swap agreements on May 14, 2014 with an aggregate notional amount of $100,000 each to hedge its exposure to changes in the fair value of its senior unsecured notes. In August 2014, the Partnership received a scheduled swap settlement related to these agreements totaling $976. "This amount was recorded in Interest expense, net" for the three and nine months ended September 30, 2014.


14

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



On September 18, 2014, the Partnership entered into a fixed-to-variable interest rate swap agreement, with an aggregate notional amount of $50,000, to hedge its exposure to changes in the fair value of its senior unsecured notes.

On October 9, 2014, the Partnership terminated each of its three outstanding swaps, receiving a termination benefit of $2,125, which will be recorded in the Partnership's Consolidated Statement of Operations in the fourth quarter of 2014.

Subsequent to the termination on October 9, 2014, the Partnership entered into two fixed-to-variable interest rate swap agreements, each with an aggregate notional amount of $50,000 to hedge its exposure to changes in the fair value of its senior unsecured notes. On October 14, 2014, the Partnership terminated each of these two swaps, receiving a termination benefit of $500, which will be recorded in the Partnership's Consolidated Statement of Operations in the fourth quarter of 2014.

Subsequent to the termination on October 14, 2014, the Partnership entered into two fixed-to-variable interest rate swap agreements, each with an aggregate notional amount of $50,000 to hedge its exposure to changes in the fair value of its senior unsecured notes. On October 14, 2014, the Partnership terminated each of these two swaps, receiving a termination benefit of $710, which will be recorded in the Partnership's Consolidated Statement of Operations in the fourth quarter of 2014.

(8)
Fair Value Measurements

The Partnership follows the provisions of ASC 820 related to fair value measurements and disclosures, which established a framework for measuring fair value and expanded disclosures about fair value measurements. The adoption of this guidance had no impact on the Partnership’s financial position or results of operations.

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 following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 at September 30, 2014 and December 31, 2013:
 
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
Description
September 30, 2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate contracts
$
49

 
$

 
$
49

 
$

Commodity contracts
830

 

 
830

 

Note receivable - Martin Energy Trading
15,748

 

 

 
15,748

Total assets
$
16,627

 
$

 
$
879

 
$
15,748

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

2021 Senior unsecured notes
$
420,874

 
$

 
$
420,874

 
$

Interest rate contracts
542

 

 
542

 

Total liabilities
$
421,416

 
$

 
$
421,416

 
$

            

15

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



 
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, 2013
 
(Level 1)
 
(Level 2)
 
(Level 3)
Liabilities
 

 
 

 
 

 
 

2018 Senior unsecured notes
$
185,816

 
$

 
$
185,816

 
$

2021 Senior unsecured notes
258,004

 

 
258,004

 

Total liabilities
$
443,820

 
$

 
$
443,820

 
$


FASB ASC 825-10-65, 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, accrued interest 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, and as such these have been excluded from the table above.

Long-term debt including current portion: The carrying amount of the revolving credit facility approximates fair value due to the debt having a variable interest rate and is in Level 2.  The estimated fair value of the senior unsecured notes is based on market prices of similar debt. The estimated fair value of the note receivable from Martin Energy Trading was determined by calculating the net present value of the interest payments over the life of the note. The note is considered Level 3 due to the lack of observable inputs for similar transactions between related parties.

(9)
Supplemental Balance Sheet Information

Components of "Other assets, net" were as follows:
 
September 30, 2014
 
December 31, 2013
Customer contracts and relationships
$
77,234

 
$

Other intangible assets
2,317

 
2,696

Other
6,880

 
5,247

 
$
86,431

 
$
7,943

    
Components of "Other accrued liabilities" were as follows:
 
September 30, 2014
 
December 31, 2013
Accrued interest
$
3,700

 
$
11,038

Property and other taxes payable
7,478

 
6,785

Accrued payroll
1,693

 
2,186

Other
170

 
233

 
$
13,041

 
$
20,242


(10)
Long-Term Debt

At September 30, 2014 and December 31, 2013, long-term debt consisted of the following:

16

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



 
September 30,
2014
 
December 31,
2013
$900,0003 Revolving credit facility at variable interest rate (2.92%1 weighted average at September 30, 2014), due March 2018 secured by substantially all of the Partnership’s assets, including, without limitation, inventory, accounts receivable, vessels, equipment, fixed assets and the interests in the Partnership’s operating subsidiaries and equity method investees
$
508,000

 
$
235,000

$200,0002 Senior notes, 8.875% interest, net of unamortized discount of $0 and $1,305, respectively, issued March 2010 and due April 2018, unsecured

 
173,695

$400,000 Senior notes, 7.250% interest, including unamortized premium of $2,086 and $0, respectively, issued $250,000 February 2013 and $150,000 April 2014, due February 2021, unsecured2
402,077

 
250,000

Total long-term debt
910,077

 
658,695

Less current installments

 

Long-term debt, net of current installments
$
910,077

 
$
658,695


     1 Interest rate fluctuates based on the LIBOR rate plus an applicable margin set on the date of each advance. The margin above LIBOR is set every three months. Indebtedness under the credit facility bears interest at LIBOR plus an applicable margin or the base prime rate plus an applicable margin. The applicable margin for revolving loans that are LIBOR loans ranges from 1.75% to 2.75% and the applicable margin for revolving loans that are base prime rate loans ranges from 0.75% to 1.75%.  The applicable margin for existing LIBOR borrowings at September 30, 2014 is 2.75%. The credit facility contains various covenants which limit the Partnership’s ability to make certain investments and acquisitions; enter into certain agreements; incur indebtedness; sell assets; and make certain amendments to the Partnership's omnibus agreement with Martin Resource Management (the "Omnibus Agreement"). The Partnership is permitted to make quarterly distributions so long as no event of default exists.

2 Pursuant to the Indenture under which the Senior Notes due in 2018 were issued, the Partnership had the option to redeem up to 35% of the aggregate principal amount at a redemption price of 108.875% of the principal amount, plus accrued and unpaid interest with the proceeds of certain equity offerings.  On April 1, 2014, the Partnership redeemed the remaining $175,000 of the 8.875% senior unsecured notes due in 2018 from all holders.  On April 1, 2014, the Partnership completed a private placement add-on of $150,000 in aggregate principal amount of 7.250% senior unsecured notes due February 2021 to qualified institutional buyers under Rule 144A.  The Partnership filed with the SEC a registration statement to exchange these notes for substantially identical notes that are registered under the Securities Act and commenced an exchange offer on April 28, 2014. The exchange offer was completed during the second quarter of 2014. In conjunction with this redemption, the Partnership incurred a debt prepayment premium of $7,767, recorded on the Partnership's Consolidated and Condensed Statement of Operations for the nine months ended September 30, 2014. Also in conjunction with the redemption, the Partnership expensed $2,643 and $1,228 of unamortized debt issuance costs and unamortized discount on notes payable, respectively, which is included in "Interest expense" on the Partnership's Consolidated and Condensed Statement of Operations for the nine months ended September 30, 2014.

3 On June 27, 2014, the Partnership increased the maximum amount of borrowings and letters of credit available under the Partnership's revolving credit facility from $637,500 to $900,000.

The Partnership paid cash interest in the amount of $17,346 and $11,289 for the three months ended September 30, 2014 and 2013, respectively.  The Partnership paid cash interest in the amount of $35,770 and $22,897 for the nine months ended September 30, 2014 and 2013, respectively.  Capitalized interest was $234 and $326 for the three months ended September 30, 2014 and 2013, respectively. Capitalized interest was $957 and $744 for the nine months ended September 30, 2014 and 2013, respectively.


17

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



(11)
Partners' Capital

As of September 30, 2014, partners’ capital consisted of 35,349,699 common limited partner units, representing a 98% partnership interest and a 2% general partner interest. Martin Resource Management, through subsidiaries, owned 6,264,532 of the Partnership's common limited partnership units representing approximately 17.7% of the Partnership's outstanding common limited partnership units. MMGP, the Partnership's general partner, owns the 2% general partnership interest. Martin Resource Management controls the Partnership's general partner, by virtue of its 51% voting interest in Holdings, the sole member of the Partnership's general partner.

The partnership agreement of the Partnership (the “Partnership Agreement”) contains specific provisions for the allocation of net income and losses to each of the partners for purposes of maintaining their respective partner capital accounts.

Issuance of Common Units

On September 29, 2014, the Partnership completed a public offering of 3,450,000 common units at a price of $36.91 per common unit, before the payment of underwriters' discounts, commissions and offering expenses (per unit value is in dollars, not thousands). Total proceeds from the sale of the 3,450,000 common units, net of underwriters' discounts, commissions and offering expenses were $122,587. The Partnership's general partner contributed $2,599 in cash to the Partnership in conjunction with the issuance in order to maintain its 2% general partner interest in the Partnership. All of the net proceeds were used to pay down outstanding amounts under the Partnership's revolving credit facility.

On August 29, 2014, the Partnership closed a private equity sale with Martin Resource Management, under which Martin Resource Management invested $45,000 in cash in exchange for 1,171,265 common units. The pricing of $38.42 per common unit was based on the 10-day weighted average price of the Partnership's common units for the 10 trading days ending August 8, 2014. In connection with the issuance of these common units, the Partnership's general partner contributed $918 in order to maintain its 2% general partner interest in the Partnership. The proceeds from the common unit issuances were used to pay down outstanding amounts under the Partnership's revolving credit facility.

On May 12, 2014, the Partnership completed a public offering of 3,600,000 common units at a price of $41.51 per common unit, before the payment of underwriters' discounts, commissions and offering expenses (per unit value is in dollars, not thousands).  Total proceeds from the sale of the 3,600,000 common units, net of underwriters' discounts, commissions and offering expenses were $143,431.  The Partnership's general partner contributed $3,049 in cash to the Partnership in conjunction with the issuance in order to maintain its 2% general partner interest in the Partnership.  All of the net proceeds were used to pay down outstanding amounts under the Partnership's revolving credit facility.

In March 2014, the Partnership entered into an equity distribution agreement with multiple underwriters (the “Sales Agents”) for the ongoing distribution of the Partnership's common units. Pursuant to this program, the Partnership offered and sold common unit equity through the Sales Agents for net proceeds of $3,467 and $20,551 during the three and nine months ended September 30, 2014, respectively. The Partnership paid $71 and $332 in compensation to the Sales Agents for the three and nine months ended September 30, 2014, respectively. Under the the program, the Partnership issued 89,252 and 506,408 common units during the three and nine months ended September 30, 2014, respectively. Common units issued were at market prices prevailing at the time of the sale. The Partnership also received capital contributions from the general partner of $72 and $428 during the three and nine months ended September 30, 2014, respectively, to maintain its 2.0% general partner interest in the Partnership. The net proceeds from the common unit issuances were used to pay down outstanding amounts under the Partnership's revolving credit facility.

Incentive Distribution Rights

The Partnership’s general partner, MMGP, 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, 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. On October 2, 2012, the Partnership Agreement was amended to provide that the general partner shall forego the next $18,000 in incentive distributions that it would otherwise be entitled to receive.

18

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



Additionally, on May 5, 2014, the owner of our general partner agreed to forego an additional $3,000 in incentive distributions. No incentive distributions were allocated to the general partner from July 1, 2012 through September 30, 2014. As of September 30, 2014, the amount of incentive distributions the general partner has foregone is $16,963, resulting in an amount remaining of $4,037.
 
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.
 
Distributions of Available Cash

The Partnership distributes all of its available cash (as defined in the Partnership Agreement) within 45 days after the end of each quarter to unitholders of record and to the general partner. Available cash is generally defined as all cash and cash equivalents of the Partnership on hand at the end of each quarter less the amount of cash reserves its general partner determines in its reasonable discretion is necessary or appropriate to: (i) provide for the proper conduct of the Partnership’s business; (ii) comply with applicable law, any debt instruments or other agreements; or (iii) provide funds for distributions to unitholders and the general partner for any one or more of the next four quarters, plus all cash on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.

Net Income per Unit

The Partnership follows the provisions of the FASB 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 general partner 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. Additionally, as required under FASB ASC 260-10-45-61A, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities, as defined in FASB ASC 260-10-20, for earnings per unit calculations.

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 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. The following is a reconciliation of net income 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,
 
2014
 
2013
 
2014
 
2013
Net income (loss) attributable to Martin Midstream Partners L.P.
$
(26,905
)
 
$
192

 
$
(16,078
)
 
$
25,907

Less general partner’s interest in net income:
 
 
 
 
 
 
 
Distributions payable on behalf of general partner interest
552

 
467

 
1,506

 
1,384

Distributions payable to the general partner interest in excess of earnings allocable to the general partner interest
(1,091
)
 
(463
)
 
(1,828
)
 
(866
)
Less income (loss) allocable to unvested restricted units
(62
)
 
1

 
(33
)
 
67

Limited partners’ interest in net income (loss)
$
(26,304
)
 
$
187

 
$
(15,723
)
 
$
25,322



19

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



The weighted average units outstanding for basic net income per unit were 32,242,571 and 29,271,205 for the three and nine months ended September 30, 2014, respectively, and 26,552,028 and 26,561,406 for the three and nine months ended September 30, 2013, respectively.  All outstanding units were included in the computation of diluted earnings per unit and weighted based on the number of days such units were outstanding during the period presented. All common unit equivalents were antidilutive for the three and nine months ended September 30, 2014 because the limited partners were allocated a net loss in these periods. For diluted net income per unit, the weighted average units outstanding were increased by 26,632 and 19,757 for the three and nine months ended September 30, 2013, respectively, due to the dilutive effect of restricted units granted under the Partnership’s long-term incentive plan.

(12)
Related Party Transactions

As of September 30, 2014, Martin Resource Management owned 6,264,532 of the Partnership’s common units representing approximately 17.7% of the Partnership’s outstanding limited partnership units.  Martin Resource Management controls the Partnership's general partner by virtue of its 51% voting interest in Holdings, the sole member of the Partnership's general partner. The Partnership’s general partner, MMGP, owns a 2.0% general partner interest in the Partnership and the Partnership’s IDRs.  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, 2014, of approximately 17.7% 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 agreements and transactions:
 
Omnibus Agreement
 
      Omnibus Agreement.  The Partnership and its general partner are parties to the 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 Martin Resource Management trade names and trademarks. The Omnibus Agreement was amended on November 25, 2009, to include processing crude oil into finished products including naphthenic lubricants, distillates, asphalt and other intermediate cuts. The Omnibus Agreement was amended further on October 1, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management.

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 and storage services for petroleum products and by-products including the refining, blending and packaging of finished lubricants;

providing marine transportation of petroleum products and by-products;

distributing NGLs; and

manufacturing and selling sulfur-based fertilizer products and other sulfur-related 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;


20

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



operating a crude oil gathering business in Stephens, Arkansas;

providing crude oil gathering, refining, and marketing services of base oils, asphalt, and distillate products in Smackover, Arkansas;

operating an environmental consulting company;

operating an engineering services company;

supplying employees and services for the operation of the Partnership's business;

operating a natural gas optimization business;

operating, for its account and the Partnership's account, the docks, roads, loading and unloading facilities and other common use facilities or access routes at the Partnership's Stanolind terminal; and

operating, solely for the Partnership's account, the asphalt facilities in Omaha, Nebraska, Port Neches, Texas and South Houston, Texas.

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 of the board of directors of the general partner of the Partnership (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.

Effective January 1, 2014, through December 31, 2014, the Conflicts Committee approved an annual reimbursement amount for indirect expenses of $12,535.  The Partnership reimbursed Martin Resource Management for $3,134 and $2,655 of indirect expenses for the three months ended September 30, 2014 and 2013, respectively.  The Partnership reimbursed Martin Resource Management for $9,401 and $7,966 of indirect expenses for the nine months ended September 30, 2014 and 2013, 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, engineering, legal, 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. For purposes of the

21

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



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 if such amendment would adversely affect the unitholders. The Omnibus Agreement was first amended on November 25, 2009, to permit the Partnership to provide refining services to Martin Resource Management.  The Omnibus Agreement was amended further on October 1, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management.  Such amendments were approved by the Conflicts Committee.  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 as amended, with Martin Transport, Inc., a wholly owned subsidiary of Martin Resource Management through which Martin Transport, Inc. operates its land transportation operations. Under the agreement, Martin Transport, Inc. agreed to transport the Partnership's NGLs as well as other liquid products.

Term and Pricing. 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. These rates are subject to any adjustments which are mutually agreed upon 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.

Indemnification.  Martin Transport, Inc. has indemnified the Partnership against all claims arising out of the negligence or willful misconduct of Martin Transport, Inc. and its officers, employees, agents, representatives and subcontractors. The Partnership indemnified Martin Transport, Inc. against all claims arising out of the negligence or willful misconduct of us and our officers, employees, agents, representatives and subcontractors. In the event a claim is the result of the joint negligence or misconduct of Martin Transport, Inc. and the Partnership, our indemnification obligations will be shared in proportion to each party’s allocable share of such joint negligence or misconduct.

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 Resource Management on a spot-contract basis at applicable market rates.  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.

Marine Fuel.  The Partnership is a party to an agreement with Martin Resource Management dated November 1, 2002 under which Martin Resource Management provides the Partnership with marine fuel from its locations in the Gulf of Mexico at a fixed rate in excess of 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.


22

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



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 a 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.

Talen's Agreements. In connection with the Talen's Marine & Fuel LLC ("Talens") acquisition, three new agreements were executed, all with effective dates of December 31, 2012. Under the terms of these contracts, Talen's provides terminal services to Martin Resource Management. The terminal services agreements both have five-year terms and provide a per gallon throughput rate, which may be adjusted annually based on a price index.

Other Agreements

 Cross Tolling Agreement. The Partnership is a party to an amended and restated tolling agreement with Cross, dated October 28, 2014, under which the Partnership processes crude oil into finished products, including naphthenic lubricants, distillates, asphalt and other intermediate cuts for Cross.  The tolling agreement expires November 25, 2031.  Under this tolling agreement, Cross 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, Cross 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, on the third, sixth and ninth anniversaries of the agreement, 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 a second amended and restated sulfuric acid sales agency agreement dated August 5, 2013, 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, as amended, 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.

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 and Condensed 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 and condensed 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 and condensed financial statements as follows:

23

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Terminalling and storage
$
19,045

 
$
18,044

 
$
55,798

 
$
52,857

Marine transportation
6,076

 
5,943

 
18,340

 
18,828

Product sales:
 
 
 
 
 
 
 
Natural gas services

 

 
3,046

 
9

Sulfur services
708

 
809

 
2,931

 
3,460

Terminalling and storage
175

 
155

 
507

 
543

 
883

 
964

 
6,484

 
4,012

 
$
26,004

 
$
24,951

 
$
80,622

 
$
75,697


The impact of related party cost of products sold is reflected in the consolidated and condensed financial statements as follows:
Cost of products sold:
 
 
 
 
 
 
 
Natural gas services
$
9,908

 
$
7,799

 
$
29,169

 
$
23,391

Sulfur services
4,491

 
4,539

 
13,808

 
13,514

Terminalling and storage
9,174

 
13,488

 
25,571

 
39,638

 
$
23,573

 
$
25,826

 
$
68,548

 
$
76,543


The impact of related party operating expenses is reflected in the consolidated and condensed financial statements as follows:
Operating Expenses:
 
 
 
 
 
 
 
Marine transportation
$
10,198

 
$
9,697

 
$
28,685

 
$
29,260

Natural gas services
1,510

 
542

 
2,914

 
1,496

Sulfur services
2,121

 
2,115

 
5,641

 
6,405

Terminalling and storage
7,184

 
5,548

 
21,260

 
16,249

 
$
21,013

 
$
17,902

 
$
58,500

 
$
53,410


The impact of related party selling, general and administrative expenses is reflected in the consolidated and condensed financial statements as follows:
Selling, general and administrative:
 
 
 
 
 
 
 
Marine transportation
$
8

 
$
15

 
$
23

 
$
45

Natural gas services
2,647

 
635

 
4,751

 
1,623

Sulfur services
840

 
748

 
2,503

 
2,360

Terminalling and storage
317

 
291

 
1,045

 
935

Indirect overhead allocation, net of reimbursement
3,418

 
2,667

 
9,781

 
7,981

 
$
7,230

 
$
4,356

 
$
18,103

 
$
12,944


Other Related Party Transactions

As discussed in Note 6, during March 2013, the Partnership acquired 100% of the preferred interests in MET, a subsidiary of Martin Resource Management, for $15,000. On August 31, 2014, MET converted its preferred equity to subordinated debt. The resulting $15,000 note receivable from MET bears an annual interest rate of 15% and matures August 31, 2026. MET may prepay any or all of the note balance on or after September 1, 2016. The note is recorded in "Note receivable - Martin Energy Trading" on the Partnership's Consolidated and Condensed Balance Sheet. Interest income for the

24

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



three and nine months ended September 30, 2014 was $185 and is included in "Interest expense, net" in the Consolidated and Condensed Statements of Operations.

(13)
Income Taxes

The operations of the Partnership are generally not subject to income taxes because its income is taxed directly to its partners.
    
The Partnership is subject to the Texas margin tax which is included in income tax expense on the Consolidated and Condensed Statements of Operations. The Texas margin tax restructured the state business tax by replacing the taxable capital and earned surplus components of the existing franchise tax with a new “taxable margin” component. Since the tax base on the Texas margin tax is derived from an income-based measure, the margin tax is construed as an income tax and, therefore, the recognition of deferred taxes applies to the margin tax. The impact on deferred taxes as a result of this provision is immaterial.  State income taxes attributable to the Texas margin tax of $300 and $303 were recorded in income tax expense for the three months ended September 30, 2014 and 2013, respectively. State income taxes attributable to the Texas margin tax of $954 and $910 were recorded in income tax expense for the nine months ended September 30, 2014 and 2013, respectively.

(14)
Business Segments

The Partnership has four reportable segments: terminalling and storage, natural gas services, sulfur services and marine transportation. The Partnership’s reportable segments are strategic business units that offer different products and services. The operating income of these segments is reviewed by the chief operating decision maker to assess performance and make business decisions.

The accounting policies of the operating segments are the same as those described in Note 2 in the Partnership’s annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014. The Partnership evaluates the performance of its reportable segments based on operating income. There is no allocation of administrative expenses or interest expense.    
 
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues after Eliminations
 
Depreciation and Amortization
 
Operating Income (Loss) after Eliminations
 
Capital Expenditures
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Terminalling and storage
$
80,948

 
$
(1,333
)
 
$
79,615

 
$
9,512

 
$
5,920

 
$
9,735

Natural gas services
236,058

 

 
236,058

 
2,684

 
7,484

 
4,611

Sulfur services
50,030

 

 
50,030

 
2,078

 
1,635

 
694

Marine transportation
25,859

 
(1,577
)
 
24,282

 
2,469

 
1,455

 
2,245

Indirect selling, general and administrative

 

 

 

 
(4,479
)
 

Total
$
392,895

 
$
(2,910
)
 
$
389,985

 
$
16,743

 
$
12,015

 
$
17,285


25

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2014
(Unaudited)



 
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues after Eliminations
 
Depreciation and Amortization
 
Operating Income (Loss) after Eliminations
 
Capital Expenditures
Three Months Ended September 30, 2013
 

 
 

 
 

 
 

 
 

 
 

Terminalling and storage
$
90,205

 
$
(1,199
)
 
$
89,006

 
$
8,532

 
$
7,350

 
$
33,563

Natural gas services
204,926

 

 
204,926

 
598

 
5,466

 
2,398

Sulfur services
42,097

 

 
42,097

 
2,024

 
(527
)
 
2,068

Marine transportation
24,751

 
(1,164
)
 
23,587

 
2,544

 
3,733

 
1,943

Indirect selling, general and administrative

 

 

 

 
(3,779
)
 

Total
$
361,979

 
$
(2,363
)
 
$
359,616

 
$
13,698

 
$
12,243

 
$
39,972

Nine Months Ended September 30, 2014
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues after Eliminations
 
Depreciation and Amortization
 
Operating Income (Loss) after Eliminations
 
Capital Expenditures
Terminalling and storage
$
255,162

 
$
(3,863
)
 
$
251,299

 
$
27,902

 
$
22,596

 
$
39,131

Natural gas services
818,361

 

 
818,361

 
3,863

 
22,764

 
5,185

Sulfur services
166,818

 

 
166,818

 
6,092

 
17,589

 
3,775

Marine transportation
73,255

 
(3,775
)
 
69,480

 
7,472

 
3,895

 
10,431

Indirect selling, general and administrative

 

 

 

 
(14,214
)
 

Total
$
1,313,596

 
$
(7,638
)
 
$
1,305,958

 
$
45,329

 
$
52,630

 
$
58,522

Nine Months Ended September 30, 2013
Operating Revenues
 
Intersegment Revenues Eliminations