2015.3.31 10-Q Document
 
 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 March 31, 2015

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 April 29, 2015, was 35,456,862.
 


 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
March 31, 2015
 
December 31, 2014
Assets
 
 
 
Cash
$
37

 
$
42

Accounts and other receivables, less allowance for doubtful accounts of $2,260 and $1,620, respectively
94,506

 
134,173

Product exchange receivables
232

 
3,046

Inventories
68,564

 
88,718

Due from affiliates
12,269

 
14,512

Other current assets
6,709

 
6,772

Assets held for sale
700

 
40,488

Total current assets
183,017

 
287,751

 
 
 
 
Property, plant and equipment, at cost
1,361,491

 
1,343,674

Accumulated depreciation
(361,650
)
 
(345,397
)
Property, plant and equipment, net
999,841

 
998,277

 
 
 
 
Goodwill
23,802

 
23,802

Investment in unconsolidated entities
134,146

 
134,506

Note receivable - Martin Energy Trading LLC
15,000

 
15,000

Other assets, net
76,351

 
81,465

 
$
1,432,157

 
$
1,540,801

 
 
 
 
Liabilities and Partners’ Capital
 

 
 

Trade and other accounts payable
$
82,954

 
$
125,332

Product exchange payables
10,521

 
10,396

Due to affiliates
6,492

 
4,872

Income taxes payable
1,474

 
1,174

Other accrued liabilities
8,997

 
21,801

Total current liabilities
110,438

 
163,575

 
 
 
 
Long-term debt, net
849,367

 
888,887

Other long-term obligations
2,332

 
2,668

Total liabilities
962,137

 
1,055,130

 
 
 
 
Commitments and contingencies


 


Partners’ capital
470,020

 
485,671

 
$
1,432,157

 
$
1,540,801


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
 
March 31,
 
2015
 
2014
Revenues:
 
 
 
Terminalling and storage  *
$
33,797

 
$
31,801

Marine transportation  *
20,636

 
23,114

Natural gas services
16,487

 
—

Sulfur services
3,090

 
3,037

Product sales: *
 
 
 
Natural gas services
146,303

 
321,414

Sulfur services
50,047

 
51,170

Terminalling and storage
34,993

 
54,273

 
231,343

 
426,857

Total revenues
305,353

 
484,809

 
 
 
 
Costs and expenses:
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

Natural gas services *
137,707

 
309,419

Sulfur services *
36,023

 
37,853

Terminalling and storage *
30,082

 
48,029

 
203,812

 
395,301

Expenses:
 

 
 

Operating expenses  *
45,306

 
42,900

Selling, general and administrative  *
8,806

 
8,456

Depreciation and amortization
22,717

 
13,609

Total costs and expenses
280,641

 
460,266

Other operating loss
(10
)
 
(45
)
Operating income
24,702

 
24,498

 
 
 
 
Other income (expense):
 

 
 

Equity in earnings (loss) of unconsolidated entities
1,740

 
(296
)
Interest expense, net
(10,546
)
 
(11,451
)
Other, net
437

 
(67
)
Total other expense
(8,369
)
 
(11,814
)
 
 
 
 
Net income before taxes
16,333

 
12,684

Income tax expense
(300
)
 
(300
)
Income from continuing operations
16,033

 
12,384

Income (loss) from discontinued operations, net of income taxes
1,215

 
(589
)
Net income
17,248

 
11,795

Less general partner's interest in net income
(4,238
)
 
(236
)
Less income allocable to unvested restricted units
(67
)
 
(32
)
Limited partners' interest in net income
$
12,943

 
$
11,527

 
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
 
March 31,
 
2015
 
2014
Revenues:
 
 
 
Terminalling and storage
$
20,474

 
$
18,010

Marine transportation
6,745

 
5,849

Product Sales
1,589

 
1,892

Costs and expenses:
 
 
 
Cost of products sold: (excluding depreciation and amortization)
 
 
 
Natural gas services
6,918

 
8,453

Sulfur services
3,624

 
4,865

Terminalling and storage
5,402

 
9,844

Expenses:
 
 
 
Operating expenses
20,400

 
18,239

Selling, general and administrative
5,994

 
5,384


See accompanying notes to consolidated and condensed financial statements.


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


 
Three Months Ended
 
March 31,
 
2015
 
2014
Allocation of net income (loss) attributable to:
 
 
 
Limited partner interest:
 
 
 
 Continuing operations
$
12,031

 
$
12,103

 Discontinued operations
912

 
(576
)
 
$
12,943

 
$
11,527

General partner interest:
 
 
 
  Continuing operations
$
3,939

 
$
248

  Discontinued operations
299

 
(12
)
 
$
4,238

 
$
236

 
 
 
 
Net income (loss) per unit attributable to limited partners:
 
 
 
Basic:
 
 
 
Continuing operations
$
0.34

 
$
0.45

Discontinued operations
0.03

 
(0.02
)
 
$
0.37

 
$
0.43

 
 
 
 
Weighted average limited partner units - basic
35,317

 
26,572

 
 
 
 
Diluted:
 
 
 
Continuing operations
$
0.34

 
$
0.45

Discontinued operations
0.03

 
(0.02
)
 
$
0.37

 
$
0.43

 
 
 
 
Weighted average limited partner units - diluted
35,360

 
26,605






5
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, 2014
26,625,026

 
$
254,028

 
$
6,389

 
$
260,417

Net income
—

 
11,559

 
236

 
11,795

Issuance of common units
132,580

 
5,235

 
—

 
5,235

Issuance of restricted units
6,400

 
—

 
—

 
—

Forfeiture of restricted units
(2,750
)
 
—

 
—

 
—

General partner contribution
—

 
—

 
114

 
114

Cash distributions
—

 
(20,898
)
 
(472
)
 
(21,370
)
Unit-based compensation
—

 
179

 
—

 
179

Purchase of treasury units
(6,400
)
 
(277
)
 
—

 
(277
)
Balances - March 31, 2014
26,754,856

 
$
249,826

 
$
6,267

 
$
256,093

 
 
 
 
 
 
 
 
Balances - January 1, 2015
35,365,912

 
$
470,943

 
$
14,728

 
$
485,671

Net income
—

 
13,010

 
4,238

 
17,248

Issuance of common units
—

 
(145
)
 
—

 
(145
)
Issuance of restricted units
91,950

 
—

 
—

 
—

Forfeiture of restricted units
(1,000
)
 
—

 
—

 
—

General partner contribution
—

 
—

 
55

 
55

Cash distributions
—

 
(28,803
)
 
(4,405
)
 
(33,208
)
Unit-based compensation
—

 
399

 
—

 
399

Balances - March 31, 2015
35,456,862

 
$
455,404

 
$
14,616

 
$
470,020

 
See accompanying notes to consolidated and condensed financial statements.





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


 
Three Months Ended
 
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
17,248

 
$
11,795

Less: (Income) loss from discontinued operations
(1,215
)
 
589

Net income from continuing operations
16,033

 
12,384

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

 
 

Depreciation and amortization
22,717

 
13,609

Amortization of deferred debt issuance costs
868

 
810

Amortization of debt discount
—

 
77

Amortization of premium on notes payable
(82
)
 
—

Loss on sale of property, plant and equipment
12

 
45

Equity in (earnings) loss of unconsolidated entities
(1,740
)
 
296

Unit-based compensation
399

 
179

Return on investment
2,100

 
—

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

 
 

Accounts and other receivables
39,716

 
29,718

Product exchange receivables
2,814

 
1,826

Inventories
20,203

 
1,612

Due from affiliates
2,243

 
(4,349
)
Other current assets
184

 
(381
)
Trade and other accounts payable
(46,504
)
 
(18,098
)
Product exchange payables
125

 
7,909

Due to affiliates
1,620

 
448

Income taxes payable
300

 
300

Other accrued liabilities
(12,345
)
 
(4,677
)
Change in other non-current assets and liabilities
(339
)
 
(43
)
Net cash provided by continuing operating activities
48,324

 
41,665

Net cash used in discontinued operating activities
(1,580
)
 
(5,141
)
Net cash provided by operating activities
46,744

 
36,524

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(12,927
)
 
(16,642
)
Payments for plant turnaround costs
(1,468
)
 
(2,164
)
Proceeds from sale of property, plant and equipment
—

 
245

Proceeds from involuntary conversion of property, plant and equipment
—

 
2,475

Return of investments from unconsolidated entities
—

 
225

Contributions to unconsolidated entities
—

 
(1,195
)
Net cash used in continuing investing activities
(14,395
)
 
(17,056
)
Net cash provided by discontinued investing activities
41,250

 
—

Net cash provided by (used in) investing activities
26,855

 
(17,056
)
Cash flows from financing activities:
 

 
 

Payments of long-term debt
(72,000
)
 
(91,000
)
Proceeds from long-term debt
32,000

 
76,000

Proceeds from issuance of common units, net of issuance related costs
(145
)
 
5,235

General partner contribution
55

 
114

Purchase of treasury units
—

 
(277
)
Payment of debt issuance costs
(306
)
 
(341
)
Cash distributions paid
(33,208
)
 
(21,370
)
Net cash used in financing activities
(73,604
)
 
(31,639
)
Net decrease in cash
(5
)
 
(12,171
)
Cash at beginning of period
42

 
16,542

Cash at end of period
$
37

 
$
4,371

Non-cash additions to property, plant and equipment
$
4,901

 
$
4,833


See accompanying notes to consolidated and condensed financial statements.

7
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(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 of naphthenic crude oil, blending and packaging of finished lubricants; natural gas services, including liquids transportation and 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, 2014, filed with the Securities and Exchange Commission (the "SEC") on March 2, 2015, as amended by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2014 filed on March 5, 2015.

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.

(2)
New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, Interest-Imputation of Interest, which simplifies presentation of debt issuance costs. The amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Early application is permitted under the retrospective transition method. The Partnership has elected to adopt this guidance effective January 1, 2015. The standard only affects presentation on the Partnership's Consolidated and Condensed Balance Sheets and does not affect any of the Partnership's other financial statements. The amount of debt issuance costs, net of accumulated amortization, from the December 31, 2014 audited balance sheet that were reclassified and shown as a reduction of the related long-term debt balances is $13,118.

In May 2014, the FASB issued 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, 2018. 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

8
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



of discontinued operations. This update has been adopted prospectively for the Partnership's fiscal year beginning January 1, 2015. The adoption did not 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 interest in Cardinal Gas Storage Partners LLC ("Cardinal") for cash consideration of approximately $120,973, subject to certain post-closing adjustments. Prior to the acquisition, the Partnership owned an approximate 42.2% Category A membership interest 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 in the third quarter of 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
$
120,973

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

Total
$
208,586


Assets acquired and liabilities assumed were recorded in the Natural Gas Services segment at fair value in the following purchase price allocation which was finalized in the fourth quarter of 2014:
Restricted cash
$
17,566

Other current assets
9,385

Property, plant and equipment
390,895

Intangible and other assets
80,135

Project level finance debt
(282,087
)
Other current liabilities
(6,713
)
Other non-current liabilities
(595
)
   Total
$
208,586


Intangible assets consist of above-market gas storage customer contracts which are amortized based upon the terms of the individual contracts. At the acquisition date, 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 $16,487 and net income of $3,028 for the three months ended March 31, 2015.

Natural Gas Liquids ("NGL") Storage Assets

On May 31, 2014, the Partnership acquired certain NGL storage assets from a subsidiary of Martin Resource Management Corporation ("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:
Property, plant and equipment
$
2,453

Current liabilities
(13
)
 
$
2,440


9
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)




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 purchase price allocation. Atlas Holdings owned a 19.8% limited partnership interest and a 0.2% general partnership interest in West Texas LPG Pipeline L.P. ("WTLPG"). At the time of the purchase, WTLPG was operated by Chevron Pipe Line Company. The 80.0% interest was subsequently sold to ONEOK Partners, L.P. who assumed operational responsibility. 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 for the three months ended March 31, 2014 have been prepared as if the acquisition of Cardinal and WTLPG occurred at the beginning of fiscal 2014:
Revenue:
 
As reported
$
484,809

Pro forma
$
503,238

Net income from continuing operations attributable to limited partners:
 
As reported
$
12,103

Pro forma
$
2,882

Net loss from discontinued operations attributable to limited partners:
 
As reported
$
(576
)
Pro forma
$
(576
)
Net income from continuing operations per unit attributable to limited partners - basic:
 
As reported
$
0.45

Pro forma
$
0.11

Net loss from discontinued operations per unit attributable to limited partners - basic:
 
As reported
$
(0.02
)
Pro forma
$
(0.02
)
Net income from continuing operations per unit attributable to limited partners - diluted:
 
As reported
$
0.45

Pro forma
$
0.11

Net loss from discontinued operations per unit attributable to limited partners - diluted:
 
As reported
$
(0.02
)
Pro forma
$
(0.02
)


10
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



(4)
Discontinued operations and divestitures

Floating Storage Assets. On February 12, 2015, the Partnership sold all six of its 16,101 barrel liquefied petroleum gas ("LPG") pressure barges, collectively referred to as the "Floating Storage Assets." These assets were acquired on February 28, 2013. On December 19, 2014, the Partnership made the decision to dispose of the Floating Storage Assets. As a result, the Partnership classified the Floating Storage Assets as held for sale at December 31, 2014 and has presented the results of operations and cash flows of the Floating Storage Assets as discontinued operations for the three months ended March 31, 2015 and 2014. The Partnership has retrospectively adjusted its prior period consolidated financial statements to comparably classify the amounts related to the operations and cash flows of the Floating Storage Assets as discontinued operations. The Floating Storage Assets were presented as discontinued operations under the guidance prior to the Partnership's adoption of ASU 2014-08 related to discontinued operations. The adoption of the amended guidance was effective for the Partnership January 1, 2015.

The Floating Storage Assets’ operating results, which are included in income from discontinued operations, were as follows:
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
Total revenues from third parties1      
$
791

 
$
17,492

Total costs and expenses and other, net, excluding depreciation and amortization
1,038

 
17,698

Depreciation and amortization
—

 
383

Other operating income2
1,462

 
—

Income (loss) from discontinued operations before income taxes
1,215

 
(589
)
Income tax expense
—

 
—

Income (loss) from discontinued operations, net of income taxes
$
1,215

 
$
(589
)

1 Total revenues from third parties excludes intercompany revenues of $0 and $5,273 for the three months ended March 31, 2015 and 2014, respectively.

2 Other operating income represents the gain on the disposition of the Floating Storage Assets.

(5)
Inventories

Components of inventories at March 31, 2015 and December 31, 2014 were as follows: 
 
March 31, 2015
 
December 31, 2014
Natural gas liquids
$
10,409

 
$
27,820

Sulfur
12,634

 
12,231

Sulfur based products
14,533

 
16,280

Lubricants
27,812

 
29,096

Other
3,176

 
3,291

 
$
68,564

 
$
88,718


(6)
Investments in Unconsolidated Entities and Joint Ventures

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


11
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



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. At the time of the purchase, WTLPG was operated by Chevron Pipe Line Company. The 80% interest was subsequently sold to ONEOK Partners, L.P. who assumed operational responsibility. 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. 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 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 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:
 
March 31, 2015
 
December 31, 2014
WTLPG
$
134,146

 
$
134,506

    Total investment in unconsolidated entities
$
134,146

 
$
134,506


 
 
Three Months Ended March 31,
 
2015
 
2014
Equity in earnings of WTLPG
$
1,740

 
$
—

Equity in loss of Cardinal
—

 
(851
)
Equity in earnings of MET
—

 
555

    Equity in earnings (loss) of unconsolidated entities
$
1,740

 
$
(296
)

Selected financial information for significant unconsolidated equity-method investees is as follows:
 
As of March 31,
 
Three Months Ended March 31,
 
Total
Assets
 
Members' Equity
 
Revenues
 
Net Income (Loss)
2015
 
 
 
 
 
 
 
WTLPG
$
831,502

 
$
823,397

 
$
22,154

 
$
8,703

 
As of December 31,
 
 

 
 

2014
 

 
 

 
 

 
 

WTLPG
$
827,697

 
$
818,546

 
$
—

 
$
—

Cardinal
$
—

 
$
—

 
$
18,429

 
$
(2,017
)

As of March 31, 2015 and December 31, 2014, the Partnership’s interest in cash of the unconsolidated equity-method investees was $1,867 and $10, respectively.


12
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



(7)
Derivative Instruments and Hedging Activities

The Partnership’s revenues and cost of products sold are materially impacted by changes in crude oil, natural gas and NGL prices. Additionally, the Partnership's results of operations are materially impacted by changes in 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 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 from time to time has 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 did not have any commodity derivative instruments outstanding during the three months ended March 31, 2015 or 2014.

(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 its fixed rate 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.

During the three months ended March 31, 2015, the Partnership entered into contracts which provided the option to enter into swap contracts to hedge the Partnership's exposure to changes in the fair value of its senior unsecured notes
("interest rate swaptions") through March 31, 2015. In connection with the interest rate swaption contracts, the Partnership received premiums of $625, which represented their fair value on the date the transactions were initiated and were initially recorded as derivative liabilities on the Partnership's Consolidated and Condensed Balance Sheet. Each of the interest rate swaptions was fully amortized as of March 31, 2015. Interest rate swaption contract premiums received are amortized over the period from initiation of the contract through their termination date. For the three months ended March 31, 2015, the Partnership recognized $625 of premium in "Interest expense, net" on the Partnership's Consolidated and Condensed Statement of Operations related to the interest rate swaption contracts.

For information regarding gains and losses on interest rate derivative instruments, see "Tabular Presentation of Gains and Losses on Derivative Instruments" below.

(c)    Tabular Presentation of Gains and Losses on Derivative Instruments

Effect of Derivative Instruments on the Consolidated and Condensed Statement of Operations
For the Three Months Ended March 31, 2015 and 2014
 
Location of Gain
Recognized in Income on
 Derivatives
Amount of Gain Recognized in
Income on Derivatives
 
 
2015
 
2014
Derivatives not designated as hedging instruments:
 
 
Interest rate swaption contracts
Interest expense
$
625

 
$
—

Total derivatives not designated as hedging instruments
$
625

 
$
—



13
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



(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 March 31, 2015 and December 31, 2014:
 
Fair Value Measurements at Reporting Date Using
 
 
 
Quoted Prices in
Active Markets for
Identical Assets
 
Significant Other
Observable Inputs
 
Significant
Unobservable
Inputs
Description
March 31, 2015
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Note receivable - Martin Energy Trading
$
15,854

 
$
—

 
$
—

 
$
15,854

Total assets
$
15,854

 
$
—

 
$
—

 
$
15,854

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

2021 Senior unsecured notes
$
401,783

 
$
—

 
$
401,783

 
$
—

Total liabilities
$
401,783

 
$
—

 
$
401,783

 
$
—

            
 
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, 2014
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
Note receivable - Martin Energy Trading
$
15,852

 
$
—

 
$
—

 
$
15,852

Total assets
$
15,852

 
$
—

 
$
—

 
$
15,852

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

2021 Senior unsecured notes
$
385,077

 
$
—

 
$
385,077

 
$
—

Total liabilities
$
385,077

 
$
—

 
$
385,077

 
$
—


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:

14
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)




•
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.

•
Note receivable and 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:
 
March 31, 2015
 
December 31, 2014
Customer contracts and relationships, net
$
66,669

 
$
72,171

Other intangible assets
2,113

 
2,215

Other
7,569

 
7,079

 
$
76,351

 
$
81,465

    
Components of "Other accrued liabilities" were as follows:
 
March 31, 2015
 
December 31, 2014
Accrued interest
$
3,721

 
$
10,996

Property and other taxes payable
3,523

 
7,524

Accrued payroll
1,607

 
3,125

Other
146

 
156

 
$
8,997

 
$
21,801


(10)
Long-Term Debt

At March 31, 2015 and December 31, 2014, long-term debt consisted of the following:
 
March 31,
2015
 
December 31,
2014
$900,000 Revolving credit facility at variable interest rate (2.93%1 weighted average at March 31, 2015), 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, net of unamortized debt issuance costs of $8,276 and $8,656, respectively
$
451,724

 
$
491,344

$400,000 Senior notes, 7.250% interest, net of unamortized debt issuance costs of $4,280 and $4,462, respectively, including unamortized premium of $1,923 and $2,005, respectively, issued $250,000 February 2013 and $150,000 April 2014, due February 2021, unsecured
397,643

 
397,543

Total long-term debt, net
849,367

 
888,887

Less current installments
—

 
—

Long-term debt, net of current installments
$
849,367

 
$
888,887


     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

15
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



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 March 31, 2015 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.

The Partnership paid cash interest in the amount of $18,089 and $11,689 for the three months ended March 31, 2015 and 2014, respectively.  Capitalized interest was $525 and $388 for the three months ended March 31, 2015 and 2014, respectively.

(11)
Partners' Capital

As of March 31, 2015, Partners’ capital consisted of 35,456,862 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. Martin Midstream GP LLC ("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

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 proceeds of $0 and $5,654 during the three months ended March 31, 2015 and 2014, respectively. The Partnership paid $145 and $331 in equity issuance related costs for the three months ended March 31, 2015 and 2014, respectively. Under the the program, the Partnership issued 0 and 132,580 common units during the three months ended March 31, 2015 and 2014, respectively. Common units issued were at market prices prevailing at the time of the sale. Under the program, the Partnership also received capital contributions from the general partner of $0 and $114 during the three months ended March 31, 2015 and 2014, respectively, to maintain its 2% 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

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 would forego the next $18,000 in incentive distributions that it would otherwise be entitled to receive. Additionally, on May 5, 2014, the owner of our general partner agreed to forego an additional $3,000 in incentive distributions. As of March 31, 2015, all incentive distributions the general partner agreed to forego were satisfied. The general partner received $3,738 in incentive distributions during the three months ended March 31, 2015. No incentive distributions were paid to the general partner during the three months ended March 31, 2014.
 
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.
 

16
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



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 March 31,
Continuing operations:
2015
 
2014
Net income attributable to Martin Midstream Partners L.P.
$
16,033

 
$
12,384

Less general partner’s interest in net income:
 
 
 
Distributions payable on behalf of IDRs
3,619

 
—

Distributions payable on behalf of general partner interest
620

 
496

General partner interest in undistributed earnings
(299
)
 
(249
)
Less income allocable to unvested restricted units
62

 
34

Limited partners’ interest in net income
$
12,031

 
$
12,103



17
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



 
Three Months Ended March 31,
Discontinued operations:
2015
 
2014
Net income attributable to Martin Midstream Partners L.P.
$
1,215

 
$
(589
)
Less general partner’s interest in net income:
 
 
 
Distributions payable on behalf of IDRs
274

 
—

Distributions payable on behalf of general partner interest
47

 
(24
)
General partner interest in undistributed earnings
(23
)
 
13

Less income allocable to unvested restricted units
5

 
(2
)
Limited partners’ interest in net income
$
912

 
$
(576
)

The weighted average units outstanding for basic net income per unit were 35,317,197 and 26,571,666 for the three months ended March 31, 2015 and 2014, 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. For diluted net income per unit, the weighted average units outstanding were increased by 42,892 and 33,301 for the three months ended March 31, 2015 and 2014, respectively, due to the dilutive effect of restricted units granted under the Partnership’s long-term incentive plan.

(12)
Related Party Transactions

As of March 31, 2015, 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% 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 March 31, 2015, 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.

18
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)




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 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;

◦
providing crude oil marketing and transportation from the well head to the end market;

◦
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; 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, 2015, through December 31, 2015, the Conflicts Committee approved an annual reimbursement amount for indirect expenses of $13,679.  The Partnership reimbursed Martin Resource Management for $3,420 and $3,190 of

19
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



indirect expenses for the three months ended March 31, 2015 and 2014, 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 Omnibus Agreement, the term "material agreements" means any agreement between the Partnership and Martin Resource Management that requires aggregate annual payments in excess of the 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 the Partnership and its 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, indemnification obligations will be shared in proportion to each party’s allocable share of such joint negligence or misconduct.


20
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



Marine Agreements

Marine Transportation Agreement. The Partnership is a party to a marine transportation agreement effective January 1, 2006, as amended, 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.

Terminal Services Agreements

Diesel Fuel Terminal Services Agreement.  Effective January 1, 2015, the Partnership entered into a new terminalling services agreement under which the Partnership provides terminal services to Martin Resource Management for marine fuel distribution. This agreement replaced the prior agreement that was in place concerning the same services which was dated October 27, 2004 and consolidated it with the (i) terminalling services agreement entered into in connection with the acquisition of Talen's Marine & Fuel, LLC ("Talen's") and (ii) terminalling services agreement entered into in connection with the acquisition of L&L Holdings LLC ("L&L") into a single agreement. The minimum throughput requirements of the three superseded agreements were aggregated in the new agreement. 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.

Other Agreements

 Cross Tolling Agreement. The Partnership is a party to an amended and restated tolling agreement with Cross Oil Refining and Marketing, Inc. ("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.


21
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(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 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 captions of the consolidated and condensed financial statements 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:
 
Three Months Ended March 31,
 
2015
 
2014
Revenues:
 
 
 
Terminalling and storage
$
20,474

 
$
18,010

Marine transportation
6,745

 
5,849

Product sales:
 
 
 
Natural gas services
14

 
829

Sulfur services
1,074

 
955

Terminalling and storage
501

 
108

 
1,589

 
1,892

 
$
28,808

 
$
25,751


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
$
6,918

 
$
8,453

Sulfur services
3,624

 
4,865

Terminalling and storage
5,402

 
9,844

 
$
15,944

 
$
23,162


The impact of related party operating expenses is reflected in the consolidated and condensed financial statements as follows:
Operating Expenses:
 
 
 
Marine transportation
$
8,560

 
$
9,664

Natural gas services
2,163

 
606

Sulfur services
1,663

 
1,486

Terminalling and storage
8,014

 
6,483

 
$
20,400

 
$
18,239



22
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



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

 
$
8

Natural gas services
1,163

 
958

Sulfur services
796

 
843

Terminalling and storage
607

 
385

Indirect overhead allocation, net of reimbursement
3,420

 
3,190

 
$
5,994

 
$
5,384


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 LLC" on the Partnership's Consolidated and Condensed Balance Sheet. Interest income for the three months ended March 31, 2015 was $555 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 $300 were recorded in income tax expense for the three months ended March 31, 2015 and 2014, 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, 2014, filed with the SEC on March 2, 2015, as amended, by Amendment No. 1 on Form 10-K/A filed on March 5, 2015. The Partnership evaluates the performance of its reportable segments based on operating income. There is no allocation of administrative expenses or interest expense.    


23
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



Three Months Ended March 31, 2015
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues after Eliminations
 
Depreciation and Amortization
 
Operating Income (Loss) after Eliminations
 
Capital Expenditures
Terminalling and storage
$
70,034

 
$
(1,244
)
 
$
68,790

 
$
9,789

 
$
7,687

 
$
8,206

Natural gas services
162,790

 
—

 
162,790

 
8,402

 
8,887

 
8,715

Sulfur services
53,137

 
—

 
53,137

 
2,126

 
8,122

 
214

Marine transportation
21,946

 
(1,310
)
 
20,636

 
2,400

 
4,816

 
694

Indirect selling, general and administrative
—

 
—

 
—

 
—

 
(4,810
)
 
—

Total
$
307,907

 
$
(2,554
)
 
$
305,353

 
$
22,717

 
$
24,702

 
$
17,829

Three Months Ended March 31, 2014
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues after Eliminations
 
Depreciation and Amortization
 
Operating Income (Loss) after Eliminations
 
Capital Expenditures
Terminalling and storage
$
87,297

 
$
(1,223
)
 
$
86,074

 
$
8,975

 
$
8,311

 
$
15,600

Natural gas services
321,414

 
—

 
321,414

 
121

 
10,054

 
500

Sulfur services
54,207

 
—

 
54,207

 
1,983

 
8,068

 
1,447

Marine transportation
24,114

 
(1,000
)
 
23,114

 
2,530

 
2,962

 
3,928

Indirect selling, general and administrative
—

 
—

 
—

 
—

 
(4,897
)
 
—

Total
$
487,032

 
$
(2,223
)
 
$
484,809

 
$
13,609

 
$
24,498

 
$
21,475


The Partnership's assets by reportable segment as of March 31, 2015 and December 31, 2014, are as follows:
 
March 31, 2015
 
December 31, 2014
Total assets:
 
 
 
Terminalling and storage
$
441,127

 
$
446,313

Natural gas services
696,154

 
795,462

Sulfur services
147,960

 
145,852

Marine transportation
146,916

 
153,174

Total assets
$
1,432,157

 
$
1,540,801


(15)
Unit Based Awards

The Partnership recognizes compensation cost related to unit-based awards to employees in its consolidated financial statements in accordance with certain provisions of ASC 718. The Partnership recognizes compensation costs related to unit-based awards to directors under certain provisions of ASC 505-50-55 related to equity-based payments to non-employees. Amounts recognized in selling, general, and administrative expense in the consolidated and condensed financial statements with respect to these plans are as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Employees
$
311

 
$
122

Non-employee directors
88

 
57

   Total unit-based compensation expense
$
399

 
$
179



24
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



Long-Term Incentive Plans
    
      The Partnership's general partner has a long term incentive plan for employees and directors of the general partner and its affiliates who perform services for the Partnership.
  
The plan consists of two components, restricted units and unit options. The plan currently permits the grant of awards covering an aggregate of 725,000 common units, 241,667 of which may be awarded in the form of restricted units and 483,333 of which may be awarded in the form of unit options. The plan is administered by the compensation committee of the general partner’s board of directors (the "Compensation Committee").
  
Restricted Units.  A restricted unit is a unit that is granted to grantees with certain vesting restrictions. Once these restrictions lapse, the grantee is entitled to full ownership of the unit without restrictions. In addition, the restricted units will vest upon a change of control of the Partnership, the general partner or Martin Resource Management or if the general partner ceases to be an affiliate of Martin Resource Management. The Partnership intends the issuance of the common units upon vesting of the restricted units under the plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of the common units. Therefore, plan participants will not pay any consideration for the common units they receive, and the Partnership will receive no remuneration for the units. The restricted units issued to directors generally vest in equal annual installments over a four-year period. Restricted units issued to employees generally cliff vest after three years of service.
  
 The restricted units are valued at their fair value at the date of grant which is equal to the market value of common units on such date. A summary of the restricted unit activity for the three months ended March 31, 2015 is provided below:
 
Number of Units
 
Weighted Average Grant-Date Fair Value Per Unit
Non-vested, beginning of period
63,824

 
$
31.98

   Granted
91,950

 
$
29.04

   Vested
(3,550
)
 
$
35.99

   Forfeited
(1,000
)
 
$
31.06

Non-Vested, end of period
151,224

 
$
30.11

 
 
 
 
Aggregate intrinsic value, end of period
$
5,288

 
 
  
A summary of the restricted units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested (market value at date of grant) during the three months ended March 31, 2015 and 2014 is provided below:
 
Three Months Ended March 31,
 
2015
 
2014
Aggregate intrinsic value of units vested
$
110

 
$
249

Fair value of units vested
$
113

 
$
247


As of March 31, 2015, there was $3,116 of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 2.12 years.

In conjunction with restricted unit issuances during the three months ended March 31, 2015, the Partnership received $55 in capital contributions from its general partner to maintain its 2% general partnership interest in the Partnership.

Unit Options.  The plan currently permits the grant of options covering common units. As of March 31, 2015, the Partnership has not granted any common unit options to directors or employees of the Partnership's general partner, or its

25
MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2015
(Unaudited)



affiliates. In the future, the Compensation Committee may determine to make grants under the plan to employees and directors containing such terms as the Compensation Committee shall determine. Unit options will have an exercise price that, in the discretion of the Compensation Committee, may not be less than the fair market value of the units on the date of grant. In addition, the unit options will become exercisable upon a change in control of the Partnership's general partner, Martin Resource Management or if the general partner ceases to be an affiliate of Martin Resource Management or upon the achievement of specified financial objectives.

(16)
Condensed Consolidating Financial Information

Martin Operating Partnership L.P. (the "Operating Partnership"), the Partnership’s wholly-owned subsidiary, has issued in the past, and may issue in the future, unconditional guarantees of senior or subordinated debt securities of the Partnership in the event that the Partnership issues such securities from time to time. The guarantees that have been issued are full, irrevocable and unconditional. In addition, the Operating Partnership may also issue senior or subordinated debt securities which, if issued, will be fully, irrevocably and unconditionally guaranteed by the Partnership. Substantially all of the Partnership's operating subsidiaries are subsidiary guarantors of its outstanding senior unsecured notes.
    
(17)
Commitments and Contingencies

From time to time, the Partnership is subject to various claims and legal actions arising in the ordinary course of business.  In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Partnership.
    
Pursuant to a Purchase Price Reimbursement agreement between the Partnership and Martin Resource Management related to the Partnership’s acquisition of the Redbird Gas Storage LLC ("Redbird") Class A interests on October 2, 2012, beginning in the second quarter of 2015, Martin Resource Management will reimburse the Partnership $750 each quarter for four consecutive quarters as a reduction in the purchase price of the Redbird Class A interests.  These payments are a result of Cardinal not achieving certain financial targets set forth in the Purchase Price Reimbursement Agreement.  These payments are considered a reduction excess of the purchase price over the carrying value of the assets transferred to the Partnership from Martin Resource Management and will be recorded as an adjustment to "Partners' capital" in each quarter the payments are made. The agreement further provides for purchase price reimbursements of up to $4,500 in 2016 in the event certain financial conditions are not met. Currently, the Partnership has made no determination if certain conditions are expected to be met in 2016.

(18)
Subsequent Events

Quarterly Distribution. On April 23, 2015, the Partnership declared a quarterly cash distribution of $0.8125 per common unit for the first quarter of 2015, or $3.25 per common unit on an annualized basis, which will be paid on May 15, 2015 to unitholders of record as of May 8, 2015. Additionally, the Partnership expects to pay a distribution to its general partner in the amount of $4,560. Of this amount, $667 is related to the base general partner distribution and $3,893 represents incentive distribution rights paid to the general partner.

    


26


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

References in this quarterly report on Form 10-Q to "Martin Resource Management" refers to Martin Resource Management Corporation and its subsidiaries, unless the context otherwise requires. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and the notes thereto included elsewhere in this quarterly report.

Forward-Looking Statements

This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements included in this quarterly report that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including "forecast," "may," "believe," "will," "expect," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other "forward-looking" information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements.

These forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (the "SEC") on March 2, 2015, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2014 filed on March 5, 2015, and in this report.

Overview
 
We are a publicly traded limited partnership with a diverse set of operations focused primarily in the United States ("U.S.") Gulf Coast region. Our four primary business lines include:

•
Terminalling and storage services for petroleum products and by-products including the refining of naphthenic crude oil, blending and packaging of finished lubricants;

•
Natural gas liquids transportation and distribution services and natural gas storage;

•
Sulfur and sulfur-based products gathering, processing, marketing, manufacturing and distribution; and

•
Marine transportation services for petroleum products and by-products.

The petroleum products and by-products we collect, transport, store and market are produced primarily by major and independent oil and gas companies who often turn to third parties, such as us, for the transportation and disposition of these products. In addition to these major and independent oil and gas companies, our primary customers include independent refiners, large chemical companies, fertilizer manufacturers and other wholesale purchasers of these products. We operate primarily in the U.S. Gulf Coast region. This region is a major hub for petroleum refining, natural gas gathering and processing, and support services for the exploration and production industry.

We were formed in 2002 by Martin Resource Management, a privately-held company whose initial predecessor was incorporated in 1951 as a supplier of products and services to drilling rig contractors. Since then, Martin Resource Management has expanded its operations through acquisitions and internal expansion initiatives as its management identified and capitalized on the needs of producers and purchasers of petroleum products and by-products and other bulk liquids. Martin Resource Management is an important supplier and customer of ours. As of March 31, 2015, Martin Resource Management owned 17.7% of our total outstanding common limited partner units. Furthermore, Martin Resource Management

27

controls Martin Midstream GP LLC ("MMGP"), our general partner, by virtue of its 51% voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights. Martin Resource Management directs our business operations through its ownership interests in and control of our general partner.

We entered into an omnibus agreement dated November 1, 2002, with Martin Resource Management (the "Omnibus Agreement") 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 our use of certain of Martin Resource Management’s trade names and trademarks. Under the terms of the Omnibus Agreement, the employees of Martin Resource Management are responsible for conducting our business and operating our assets.

Martin Resource Management has operated our business since 2002.  Martin Resource Management began operating our natural gas services business in the 1950s and our sulfur business in the 1960s. It began our marine transportation business in the late 1980s. It entered into our fertilizer and terminalling and storage businesses in the early 1990s. In recent years, Martin Resource Management has increased the size of our asset base through expansions and strategic acquisitions.

Recent Developments

We believe one of the rationales driving investment in master limited partnerships, including us, is the opportunity for distribution growth offered by the partnerships. Such distribution growth is a function of having access to liquidity in the financial markets used for incremental capital investment (development projects and acquisitions) to grow distributable cash flow.
 
We continually adjust our business strategy to focus on maximizing liquidity, maintaining a stable asset base which generates fee based revenues not sensitive to commodity prices, and improving profitability by increasing asset utilization and controlling costs. Over the past year, we have had access to the capital markets and have appropriate levels of liquidity and operating cash flows to adequately fund our growth.

Disposition of Floating Storage Assets. On February 12, 2015, we sold six liquefied petroleum gas pressure barges (collectively referred to as the "Floating Storage Assets") for $41.3 million. These assets were primarily operated under the floating storage component of our NGL distribution business. The proceeds from the disposition were used to reduce outstanding indebtedness under our revolving credit facility.    

Public Offering. On September 29, 2014, we 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 $122.2 million.  Our general partner contributed $2.6 million in cash to us in conjunction with the issuance in order to maintain its 2.0% general partner interest in us.  All of the net proceeds were used to reduce outstanding indebtedness under our revolving credit facility.

Cardinal Gas Storage. On August 29, 2014, Redbird Gas Storage LLC ("Redbird"), a wholly owned subsidiary of the Partnership, completed the previously announced purchase of all of the outstanding membership interests of Cardinal Gas Storage Partners LLC ("Cardinal") from Energy Capital Partners I, LP, Energy Capital Partners I-A, LP, Energy Capital Partners I-B IP, LP and Energy Capital Partners I (Cardinal IP), LP (together, "ECP") for cash of approximately $121.0 million. Prior to the acquisition, we owned an approximate 42.2% interest in the Category A membership interests in Cardinal. As a result of the acquisition, Redbird owns 100% of the outstanding membership interests in Cardinal. Concurrent with the closing of the transaction, we retired all of the project level financing of various Cardinal subsidiaries. This transaction and repayment of the project financings was funded with borrowings under our revolving credit facility. On October 27, 2014, Cardinal merged with and into Redbird, and Redbird subsequently changed its name to Cardinal.
    
Private Placement of Common Units. On August 29, 2014, we closed a private equity sale with Martin Resource Management, under which Martin Resource Management invested $45.0 million in cash in exchange for 1,171,265 common units (per unit value is in dollars, not thousands). The pricing of $38.42 per common unit was based on the 10-day weighted average price of our common units for the 10 trading days ending August 8, 2014. In connection with the issuance of these common units, our general partner contributed $0.9 million in order to maintain its 2.0% general partner interest in us. All of the net proceeds were used to reduce outstanding indebtedness under our revolving credit facility.


28

Subsequent Events

Quarterly Distribution.  On April 23, 2015, we declared a quarterly cash distribution of $0.8125 per common unit for the first quarter of 2015, or $3.25 per common unit on an annualized basis, which will be paid on May 15, 2015 to unitholders of record as of May 8, 2015. Additionally, we expect to pay a distribution to our general partner in the amount of $4.6 million. Of this amount, $0.7 million is related to the base general partner distribution and $3.9 million represents incentive distribution rights paid to our general partner.

Critical Accounting Policies and Estimates    

Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated and condensed financial statements included elsewhere herein. We prepared these financial statements in conformity with United States generally accepted accounting principles ("U.S. GAAP" or "GAAP"). The preparation of these financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Our results may differ from these estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Changes in these estimates could materially affect our financial position, results of operations or cash flows. You should also read Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements included within our Annual Report on Form 10-K for the year ended December 31, 2014. The following table evaluates the potential impact of estimates utilized during the periods ended March 31, 2015 and 2014:

Description
 
Judgments and Uncertainties
 
Effect if Actual Results Differ from Estimates and Assumptions
Allowance for Doubtful Accounts
We evaluate our allowance for doubtful accounts on an ongoing basis and record adjustments when, in management's judgment, circumstances warrant. Reserves are recorded to reduce receivables to the amount ultimately expected to be collected.
 
We evaluate the collectability of our accounts receivable based on factors such as the customer's ability to pay, the age of the receivable and our historical collection experience. A deterioration in any of these factors could result in an increase in the allowance for doubtful accounts balance.
 
If actual collection results are not consistent with our judgments, we may experience an increase in uncollectible receivables. A 10% increase in our allowance for doubtful accounts would result in a decrease in net income of approximately $0.2 million.
Depreciation
Depreciation expense is computed using the straight-line method over the useful life of the assets.
 
Determination of depreciation expense requires judgment regarding estimated useful lives and salvage values of property, plant and equipment. As circumstances warrant, estimates are reviewed to determine if any changes in the underlying assumptions are needed.
 
The lives of our fixed assets range from 3 - 50 years. If the depreciable lives of our assets were decreased by 10%, we estimate that annual depreciation expense would increase approximately $7.2 million, resulting in a corresponding reduction in net income.
Impairment of Long-Lived Assets
We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of the assets may not be recoverable. These evaluations are based on undiscounted cash flow projections over the remaining useful life of the asset. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows. Any impairment loss is measured as the excess of the asset's carrying value over its fair value.
 
Our impairment analyses require management to use judgment in estimating future cash flows and useful lives, as well as assessing the probability of different outcomes.
 
Applying this impairment review methodology, we recorded no impairment charges during the three months ended March 31, 2015 and 2014. If actual events are not consistent with our estimates and assumptions change due to new information, we may incur an impairment charge.
Impairment of Goodwill

29

Goodwill is subject to a fair-value based impairment test on an annual basis, or more frequently if events or changes in circumstances indicate that the fair value of any of our reporting units is less than its carrying amount.
 
We determine fair value using accepted valuation techniques, including discounted cash flow, the guideline public company method and the guideline transaction method. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates. We conduct impairment testing using present economic conditions, as well as future expectations.
 
We completed the most recent annual review of goodwill as of August 31, 2014 and determined that there was no impairment. Additionally, management is aware of no change in circumstances which indicate a need for an interim impairment evaluation.
Purchase Price Allocations
We allocate the purchase price of an acquired business to its identifiable assets (including identifiable intangible assets) and liabilities based on their fair values at the date of acquisition. Any excess of purchase price in excess of amounts allocated to identifiable assets and liabilities is recorded as goodwill. As additional information becomes available, we may adjust the preliminary allocation for a period of up to one year.
 
The determination of fair values of acquired assets and liabilities requires a significant level of management judgment. Fair values are estimated using various methods as deemed appropriate. For significant transactions, third party assessments may be engaged to assist in the valuation process.
 
If subsequent factors indicate that estimates and assumptions used to allocate costs to acquired assets and liabilities differ from actual results, the allocation between goodwill, other intangible assets and fixed assets could significantly differ. Any such differences could impact future earnings through depreciation and amortization expense. Additionally, if estimated results supporting the valuation of goodwill or other intangible assets are not achieved, impairments could result.
Asset Retirement Obligations
Asset retirement obligations ("AROs") associated with a contractual or regulatory remediation requirement are recorded at fair value in the period in which the obligation can be reasonably estimated and depreciated over the life of the related asset or contractual term. The liability is determined using a credit-adjusted risk-free interest rate and is accreted over time until the obligation is settled.
 
Determining the fair value of AROs requires management judgment to evaluate required remediation activities, estimate the cost of those activities and determine the appropriate interest rate.
 
If actual results differ from judgments and assumptions used in valuing an ARO, we may experience significant changes in ARO balances. The establishment of an ARO has no initial impact on earnings.
Environmental Liabilities
We estimate environmental liabilities using both internal and external resources. Activities include feasibility studies and other evaluations management considers appropriate. Environmental liabilities are recorded in the period in which the obligation can be reasonably estimated.
 
Estimating environmental liabilities requires significant management judgment as well as possible use of third party specialists knowledgeable in such matters.
 
Environmental liabilities have not adversely affected our results of operations or financial condition in the past, and we do not anticipate that they will in the future.

Our Relationship with Martin Resource Management
 
Martin Resource Management is engaged in the following principal business activities:
 
•
providing land transportation of various liquids using a fleet of trucks and road vehicles and road trailers;

•
distributing fuel oil, asphalt, sulfuric acid, marine fuel and other liquids;

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

•
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;

30

•
providing crude oil marketing and transportation from the well head to the end market;

•
operating an environmental consulting company;

•
operating an engineering services company;

•
supplying employees and services for the operation of our business;

•
operating a natural gas optimization business;

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

•
operating, solely for our account, the asphalt facilities in Omaha, Nebraska, Port Neches, Texas and South Houston, Texas.

We are and will continue to be closely affiliated with Martin Resource Management as a result of the following relationships.

Ownership

Martin Resource Management owns approximately 17.7% of the outstanding limited partner units. In addition, Martin Resource Management controls MMGP, our general partner, by virtue of its 51% voting interest in Holdings, the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights.

Management

Martin Resource Management directs our business operations through its ownership interests in and control of our general partner. We benefit from our relationship with Martin Resource Management through access to a significant pool of management expertise and established relationships throughout the energy industry. We do not have employees. Martin Resource Management employees are responsible for conducting our business and operating our assets on our behalf.

Related Party Agreements

The Omnibus Agreement requires us to reimburse Martin Resource Management for all direct expenses it incurs or payments it makes on our behalf or in connection with the operation of our business.  We reimbursed Martin Resource Management for $38.9 million of direct costs and expenses for the three months ended March 31, 2015 compared to $43.6 million for the three months ended March 31, 2014. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management for direct expenses.

In addition to the direct expenses, under the Omnibus Agreement, we are required to reimburse Martin Resource Management for indirect general and administrative and corporate overhead expenses.  For the three months ended March 31, 2015 and 2014, the conflicts committee of our general partner ("Conflicts Committee") approved reimbursement amounts of $3.4 million and $3.2 million, respectively, reflecting our allocable share of such expenses. The Conflicts Committee of our general partner's board of directors will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.  These indirect expenses covered the centralized corporate functions Martin Resource Management provides for us, 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 we share with Martin Resource Management’s retained businesses.  The Omnibus Agreement also contains significant non-compete provisions and indemnity obligations.  Martin Resource Management also licenses certain of its trademarks and trade names to us under the Omnibus Agreement.

The agreements include, but are not limited to, motor carrier agreements, marine transportation agreements, terminal services agreements, a tolling agreement, a sulfuric acid agreement, and various other miscellaneous agreements. Pursuant to the terms of the Omnibus Agreement, we are prohibited from entering into certain material agreements with Martin Resource Management without the approval of the Conflicts Committee of our general partner’s board of directors.

For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions, and

31

Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015, as amended by Amendment No. 1 on Form 10-K/A filed on March 5, 2015.

Commercial

We have been and anticipate that we will continue to be both a significant customer and supplier of products and services offered by Martin Resource Management. Our motor carrier agreement with Martin Resource Management provides us with access to Martin Resource Management’s fleet of road vehicles and road trailers to provide land transportation in the areas served by Martin Resource Management. Our ability to utilize Martin Resource Management’s land transportation operations is currently a key component of our integrated distribution network.

In the aggregate, the impact of related party transactions included in cost of products sold accounted for approximately 8% and 6% of our total cost of products sold during the three months ended March 31, 2015 and 2014, respectively. We also purchase marine fuel from Martin Resource Management, which we account for as an operating expense.

Correspondingly, Martin Resource Management is one of our significant customers. Our sales to Martin Resource Management accounted for approximately 9% and 5% of our total revenues for the three months ended March 31, 2015 and 2014, respectively.  We have entered into certain agreements with Martin Resource Management pursuant to which we provide terminalling and storage and marine transportation services to its subsidiary, Martin Energy Services, LLC ("MES"), and MES provides terminal services to us to handle lubricants, greases and drilling fluids.  Additionally, we have entered into a long-term, fee for services-based tolling agreement with Martin Resource Management where Martin Resource Management agrees to pay us for the processing of its crude oil into finished products, including naphthenic lubricants, distillates, asphalt and other intermediate cuts.

For a more comprehensive discussion concerning the agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions, and Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 2, 2015, as amended by Amendment No. 1 on Form 10-K/A filed on March 5, 2015.

Approval and Review of Related Party Transactions

If we contemplate entering into a transaction, other than a routine or in the ordinary course of business transaction, in which a related person will have a direct or indirect material interest, the proposed transaction is submitted for consideration to the board of directors of our general partner or to our management, as appropriate. If the board of directors of our general partner is involved in the approval process, it determines whether to refer the matter to the Conflicts Committee of our general partner's board of directors, as constituted under our limited partnership agreement. If a matter is referred to the Conflicts Committee, it obtains information regarding the proposed transaction from management and determines whether to engage independent legal counsel or an independent financial advisor to advise the members of the committee regarding the transaction.  If the Conflicts Committee retains such counsel or financial advisor, it considers such advice and, in the case of a financial advisor, such advisor’s opinion as to whether the transaction is fair and reasonable to us and to our unitholders.

How We Evaluate Our Operations

Our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with U.S. GAAP to analyze our performance. These include: (1) net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), (2) adjusted EBITDA and (3) distributable cash flow. Our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow, and as key components of our internal financial reporting. We believe investors benefit from having access to the same financial measures that our management uses.

EBITDA and Adjusted EBITDA. Certain items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing an entity's financial performance, such as cost of capital and historical costs of depreciable assets. We have included information concerning EBITDA and adjusted EBITDA because they provide investors and management with additional information to better understand the following: financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other similarly situated entities; and the viability of acquisitions and capital expenditure projects. Our method of computing adjusted EBITDA may not be the same method used to compute similar measures reported by other entities. The economic substance behind our use of adjusted EBITDA is to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and make distributions to our unit holders.

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Distributable Cash Flow. Distributable cash flow is a significant performance measure used by our management and by external users of our financial statements, such as investors, commercial banks and research analysts, to compare basic cash flows generated by us to the cash distributions we expect to pay our unitholders. Distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit of such an entity is generally determined by the unit's yield, which in turn is based on the amount of cash distributions the entity pays to a unitholder.

EBITDA, adjusted EBITDA and distributable cash flow should not be considered alternatives to, or more meaningful than, net income, cash flows from operating activities, or any other measure presented in accordance with U.S. GAAP. Our method of computing these measures may not be the same method used to compute similar measures reported by other entities.

Non-GAAP Financial Measures

The following table reconciles the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the three and three months ended March 31, 2015 and 2014.

Reconciliation of EBITDA, Adjusted EBITDA, and Distributable Cash Flow
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in thousands)
Net income
$
17,248

 
$
11,795

Less: (Income) loss from discontinued operations, net of income taxes
(1,215
)
 
589

Income from continuing operations
16,033

 
12,384

Adjustments:
 
 
 
Interest expense
10,546

 
11,451

Income tax expense
300

 
300

Depreciation and amortization
22,717

 
13,609

EBITDA
49,596

 
37,744

Adjustments:
 
 
 
Equity in (earnings) loss of unconsolidated entities
(1,740
)
 
296

Loss on sale of property, plant and equipment
12

 
45

Distributions from unconsolidated entities
2,100

 
780

Unit-based compensation
399

 
179

Adjusted EBITDA
50,367

 
39,044

Adjustments:
 
 
 
Interest expense
(10,546
)
 
(11,451
)
Income tax expense
(300
)
 
(300
)
Amortization of debt discount
—

 
77

Amortization of debt premium
(82
)
 
—

Amortization of deferred debt issuance costs
868

 
810

Payments for plant turnaround costs
(1,468
)
 
(2,164
)
Maintenance capital expenditures
(1,758
)
 
(4,338
)
Distributable Cash Flow
$
37,081

 
$
21,678



33

Results of Operations

The results of operations for the three months ended March 31, 2015 and 2014 have been derived from our consolidated and condensed financial statements.

We evaluate segment performance on the basis of operating income, which is derived by subtracting cost of products sold, operating expenses, selling, general and administrative expenses, and depreciation and amortization expense from revenues.  The following table sets forth our operating revenues and operating income by segment for the three and three months ended March 31, 2015 and 2014.  The results of operations for these interim periods are not necessarily indicative of the results of operations which might be expected for the entire year.

Our consolidated and condensed results of operations are presented on a comparative basis below.  There are certain items of income and expense which we do not allocate on a segment basis.  These items, including equity in earnings (loss) of unconsolidated entities, interest expense, and indirect selling, general and administrative expenses, are discussed following the comparative discussion of our results within each segment.

Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
 
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues
 after Eliminations
 
Operating Income (Loss)
 
Operating Income Intersegment Eliminations
 
Operating
Income (Loss)
 after
Eliminations
Three Months Ended March 31, 2015
(in thousands)
Terminalling and storage
$
70,034

 
$
(1,244
)
 
$
68,790

 
$
7,852

 
$
(165
)
 
$
7,687

Natural gas services
162,790

 
—

 
162,790

 
8,427

 
460

 
8,887

Sulfur services
53,137

 
—

 
53,137

 
9,553

 
(1,431
)
 
8,122

Marine transportation
21,946

 
(1,310
)
 
20,636

 
3,680

 
1,136

 
4,816

Indirect selling, general and administrative
—

 
—

 
—

 
(4,810
)
 
—

 
(4,810
)
Total
$
307,907

 
$
(2,554
)
 
$
305,353

 
$
24,702

 
$
—

 
$
24,702


 
Operating Revenues
 
Intersegment Revenues Eliminations
 
Operating Revenues
 after Eliminations
 
Operating Income (Loss)
 
Operating Income Intersegment Eliminations
 
Operating
Income (Loss)
 after
Eliminations
Three Months Ended March 31, 2014
 

 
 

 
 

 
 

 
 

 
 

Terminalling and storage
$
87,297

 
$
(1,223
)
 
$
86,074

 
$
9,033

 
$
(722
)
 
$
8,311

Natural gas services
321,414

 
—

 
321,414

 
9,227

 
827

 
10,054

Sulfur services
54,207

 
—

 
54,207

 
9,189

 
(1,121
)
 
8,068

Marine transportation
24,114

 
(1,000
)
 
23,114

 
1,946

 
1,016

 
2,962

Indirect selling, general and administrative
—

 
—

 
—

 
(4,897
)
 
—

 
(4,897
)
Total
$
487,032

 
$
(2,223
)
 
$
484,809

 
$
24,498

 
$
—

 
$
24,498

 

34

Terminalling and Storage Segment

Comparative Results of Operations for the Three Months Ended March 31, 2015 and 2014
 
Three Months Ended March 31,
 
Variance
 
Percent Change
 
2015
 
2014
 
 
 
(In thousands, except BBL per day)
 
 
Revenues:
 
 
 
 
 
 
 
Services
$
35,041

 
$
33,024

 
$
2,017

 
6%
Products
34,993

 
54,273

 
(19,280
)
 
(36)%
Total revenues
70,034

 
87,297

 
(17,263
)
 
(20)%
 
 
 
 
 
 
 
 
Cost of products sold
31,161

 
48,525

 
(17,364
)
 
(36)%
Operating expenses
20,353

 
19,752

 
601

 
3%
Selling, general and administrative expenses
873

 
967

 
(94
)
 
(10)%
Depreciation and amortization
9,789

 
8,975

 
814

 
9%
 
7,858