Edgar Filing: MARTIN MIDSTREAM PARTNERS LP

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 September 30, 2017



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", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes o		No x

The number of the registrant’s Common Units outstanding at October 25, 2017, was 38,446,612.



	Page

PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2
Consolidated and Condensed Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 (audited)	2
Consolidated and Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	3
Consolidated and Condensed Statements of Capital for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
Consolidated and Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	6
Notes to Consolidated and Condensed Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	51

Item 4. Controls and Procedures	52

PART II. OTHER INFORMATION	53

Item 1. Legal Proceedings	53

Item 1A. Risk Factors	53

Item 6. Exhibits	53

PART I – FINANCIAL INFORMATION



Item 1.	Financial Statements

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED BALANCE SHEETS

(Dollars in thousands)



	September 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
Assets
Cash	$	15		$	15
Accounts and other receivables, less allowance for doubtful accounts of $319 and $372, respectively	64,127			80,508
Product exchange receivables	34			207
Inventories	130,618			82,631
Due from affiliates	13,484			11,567
Fair value of derivatives	133			—
Other current assets	3,703			3,296
Assets held for sale	13,764			15,779
Total current assets	225,878			194,003

Property, plant and equipment, at cost	1,248,093			1,224,277
Accumulated depreciation	(408,426		)	(378,593		)
Property, plant and equipment, net	839,667			845,684

Goodwill	17,296			17,296
Investment in WTLPG	127,998			129,506
Note receivable - affiliate	—			15,000
Other assets, net	37,211			44,874
Total assets	$	1,248,050		$	1,246,363

Liabilities and Partners’ Capital
Trade and other accounts payable	$	72,019		$	70,249
Product exchange payables	9,270			7,360
Due to affiliates	3,305			8,474
Income taxes payable	450			870
Fair value of derivatives	—			3,904
Other accrued liabilities	25,710			26,717
Total current liabilities	110,754			117,574

Long-term debt, net	829,991			808,107
Other long-term obligations	8,425			8,676
Total liabilities	949,170			934,357

Commitments and contingencies (Note 17)
Partners’ capital	298,880			312,006
Total partners’ capital	298,880			312,006
Total liabilities and partners' capital	$	1,248,050		$	1,246,363

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars and units in thousands, except per unit amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Revenues:
Terminalling and storage *	$	25,752		$	30,770		$	75,105		$	93,565
Marine transportation *	11,407			13,846			36,661			44,531
Natural gas services*	14,253			14,618			43,756			46,118
Sulfur services	2,850			2,700			8,550			8,100
Product sales: *
Natural gas services	83,831			57,378			284,154			207,368
Sulfur services	24,174			26,396			95,728			105,459
Terminalling and storage	30,861			28,829			96,421			85,349
	138,866			112,603			476,303			398,176
Total revenues	193,128			174,537			640,375			590,490

Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services *	77,368			50,658			255,745			184,781
Sulfur services *	19,716			21,510			65,406			73,734
Terminalling and storage *	25,852			23,540			80,312			70,306
	122,936			95,708			401,463			328,821
Expenses:
Operating expenses *	45,072			39,488			114,564			121,542
Selling, general and administrative *	9,131			8,049			27,961			24,364
Loss on impairment of goodwill	—			—			—			4,145
Depreciation and amortization	20,286			22,129			65,948			66,266
Total costs and expenses	197,425			165,374			609,936			545,138

Other operating income (loss)	(187		)	13			(327		)	(1,582		)
Operating income (loss)	(4,484		)	9,176			30,112			43,770

Other income (expense):
Equity in earnings of WTLPG	789			1,120			2,547			3,602
Interest expense, net	(12,538		)	(11,779		)	(34,677		)	(34,046		)
Other, net	55			730			605			866
Total other expense	(11,694		)	(9,929		)	(31,525		)	(29,578		)

Net income (loss) before taxes	(16,178		)	(753		)	(1,413		)	14,192
Income tax expense	(108		)	(180		)	(301		)	(422		)
Net income (loss)	(16,286		)	(933		)	(1,714		)	13,770
Less general partner's interest in net income (loss)	325			18			34			(8,062		)
Less (income) loss allocable to unvested restricted units	38			3			—			(36		)
Limited partners' interest in net income (loss)	$	(15,923	)	$	(912	)	$	(1,680	)	$	5,672

Net income (loss) per unit attributable to limited partners - basic	$	(0.42	)	$	(0.03	)	$	(0.04	)	$	0.16
Net income (loss) per unit attributable to limited partners - diluted	$	(0.42	)	$	(0.03	)	$	(0.04	)	$	0.16
Weighted average limited partner units - basic	38,357			35,346			38,016			35,358
Weighted average limited partner units - diluted	38,357			35,346			38,016			35,381

See accompanying notes to consolidated and condensed financial statements.

*Related Party Transactions Shown Below

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars and units in thousands, except per unit amounts)

*Related Party Transactions Included Above



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Revenues:*
Terminalling and storage	$	21,910	$	20,649	$	61,945	$	62,197
Marine transportation	4,098		4,861		12,610		17,308
Natural gas services	4		132		122		574
Product Sales	828		723		2,982		2,391
Costs and expenses:*
Cost of products sold: (excluding depreciation and amortization)
Natural gas services	3,033		2,946		14,836		10,829
Sulfur services	3,555		3,678		10,997		11,300
Terminalling and storage	4,817		3,766		14,003		11,232
Expenses:
Operating expenses	15,858		17,810		48,686		53,255
Selling, general and administrative	6,495		5,748		20,563		18,091

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL

(Unaudited)

(Dollars in thousands)



	Partners’ Capital
	Common Limited					General Partner Amount
	Units		Amount			General Partner Amount			Total
Balances - January 1, 2016	35,456,612		$	380,845		$	13,034		$	393,879
Net income	—		5,708			8,062			13,770
Issuance of common units, net	—		(28		)	—			(28		)
Issuance of restricted units	13,800		—			—			—
Forfeiture of restricted units	(500	)	—			—			—
Cash distributions	—		(86,410		)	(13,680		)	(100,090		)
Reimbursement of excess purchase price over carrying value of acquired assets	—		3,000			—			3,000
Unit-based compensation	—		712			—			712
Purchase of treasury units	(15,200	)	(330		)	—			(330		)
Balances - September 30, 2016	35,454,712		$	303,497		$	7,416		$	310,913

Balances - January 1, 2017	35,452,062		$	304,594		$	7,412		$	312,006
Net loss	—		(1,680		)	(34		)	(1,714		)
Issuance of common units, net of issuance related costs	2,990,000		51,061			—			51,061
Issuance of restricted units	12,000		—			—			—
Forfeiture of restricted units	(5,750	)	—			—			—
General partner contribution	—		—			1,098			1,098
Cash distributions	—		(56,177		)	(1,146		)	(57,323		)
Unit-based compensation	—		518			—			518
Excess purchase price over carrying value of acquired assets	—		(7,887		)	—			(7,887		)
Reimbursement of excess purchase price over carrying value of acquired assets	—		1,125			—			1,125
Purchase of treasury units	(200	)	(4		)	—			(4		)
Balances - September 30, 2017	38,448,112		$	291,550		$	7,330		$	298,880

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)



	Nine Months Ended
	September 30,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	(1,714	)	$	13,770
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	65,948			66,266
Amortization of deferred debt issuance costs	2,170			2,965
Amortization of premium on notes payable	(230		)	(230		)
Loss on sale of property, plant and equipment	327			1,582
Loss on impairment of goodwill	—			4,145
Equity in earnings of WTLPG	(2,547		)	(3,602		)
Derivative (income) loss	2,392			(1,867		)
Net cash (paid) received for commodity derivatives	(6,429		)	1,666
Net cash received for interest rate derivatives	—			160
Net premiums received on derivatives that settled during the year on interest rate swaption contracts	—			630
Unit-based compensation	518			712
Cash distributions from WTLPG	4,200			6,100
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables	16,381			28,028
Product exchange receivables	173			891
Inventories	(48,022		)	(31,606		)
Due from affiliates	(1,917		)	1,932
Other current assets	(411		)	(4,693		)
Trade and other accounts payable	2,222			(15,782		)
Product exchange payables	1,910			(2,544		)
Due to affiliates	(5,169		)	(1,859		)
Income taxes payable	(420		)	(435		)
Other accrued liabilities	(3,766		)	(3,729		)
Change in other non-current assets and liabilities	1,941			(765		)
Net cash provided by operating activities	27,557			61,735

Cash flows from investing activities:
Payments for property, plant and equipment	(30,014		)	(31,884		)
Acquisitions	(19,533		)	—
Acquisition of intangible assets	—			(2,150		)
Payments for plant turnaround costs	(1,583		)	(1,614		)
Proceeds from sale of property, plant and equipment	1,604			2,174
Proceeds from involuntary conversion of property, plant and equipment	—			23,400
Proceeds from repayment of Note receivable - affiliate	15,000			—
Contributions to WTLPG	(145		)	—
Other	(900		)	—
Net cash used in investing activities	(35,571		)	(10,074		)

Cash flows from financing activities:
Payments of long-term debt	(242,000		)	(219,700		)
Proceeds from long-term debt	262,000			270,700
Proceeds from issuance of common units, net of issuance related costs	51,061			(28		)
General partner contribution	1,098			—
Purchase of treasury units	(4		)	(330		)
Payment of debt issuance costs	(56		)	(5,234		)
Excess purchase price over carrying value of acquired assets	(7,887		)	—
Reimbursement of excess purchase price over carrying value of acquired assets	1,125			3,000
Cash distributions paid	(57,323		)	(100,090		)
Net cash provided by (used in) financing activities	8,014			(51,682		)

Net increase (decrease) in cash	—			(21		)
Cash at beginning of period	15			31
Cash at end of period	$	15		$	10
Non-cash additions to property, plant and equipment	$	1,367		$	1,068

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(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: natural gas services, including liquids transportation and distribution services and natural gas storage; terminalling and storage services for petroleum products and by-products including the refining of naphthenic crude oil, blending and packaging of finished lubricants; 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 U.S. 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, 2016, filed with the Securities and Exchange Commission (the "SEC") on February 15, 2017, as amended by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2016 filed on March 31, 2017.

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 January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04 “Intangibles-Goodwill and other: Simplifying the test for goodwill impairment.” This ASU removes the second step of the two-step test currently required under the current guidance. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Partnership elected to early adopt this amended guidance effective January 1, 2017. The Partnership expects that adoption of this standard will change its approach for testing goodwill for impairment if a triggering event is identified; however, this standard requires prospective application and therefore will only impact periods subsequent to adoption.

In August 2016, the Financial Accounting Standards Board FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted. The Partnership does not anticipate that ASU 2016-15 will have a material effect on its consolidated and condensed financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption of this standard is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Partnership is evaluating the effect that ASU 2016-02 will have on its consolidated and condensed financial statements and related disclosures.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

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 currently determining the overall impacts that ASU 2014-09 will have on its contract portfolio and consolidated financial statements, and is in the process of evaluating its new controls and processes designed to comply with ASU 2014-09 throughout 2017 to permit adoption by January 1, 2018. The Partnership's approach includes performing a detailed review of key contracts representative of its different businesses and comparing historical accounting policies and practices to the new standard. The Partnership expects to complete implementation of the new revenue recognition standard by the end of 2017. Based on the analysis completed to date, the Partnership does not believe the standard will significantly impact the amount or timing of revenues recognized under the vast majority of the Partnership's revenue contracts. The Partnership currently intends on adopting the new standard utilizing the cumulative effect method which will result in the cumulative effect of the adoption being recorded as of January 1, 2018.


(3)	Acquisitions

Acquisition of Terminalling Assets. On February 22, 2017, the Partnership acquired 100% of the membership interests of MEH South Texas Terminals LLC (“MEH”), a subsidiary of Martin Resource Management, for a purchase price of $27,420 (the “Hondo Acquisition”), which was was funded with borrowings under the Partnership's revolving credit facility. At the date of acquisition, MEH was in the process of constructing an asphalt terminal facility in Hondo, Texas (the "Hondo Terminal”), which will serve the asphalt market in San Antonio, Texas and surrounding areas. The Partnership will spend $8,580 to finalize construction of the Hondo Terminal, which has been substantially completed as of September 30, 2017. Martin Resource Management is obligated to pay the Partnership the amount required to complete the construction of the Hondo Terminal in excess of $8,580, if any. 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 excess of the purchase price over the carrying value of the assets of $7,887 was recorded as an adjustment to "Partners' capital."



Purchase price	$	27,420
Historical carrying value of assets allocated to "Property, plant and equipment"	19,533
Excess purchase price over carrying value of acquired assets	$	7,887

As no individual line item of the historical financial statements of the acquired assets was in excess of 3% of the Partnership's relative consolidated financial statement captions, the Partnership elected not to retrospectively recast the historical financial information to include these assets.


(4)	Divestitures and discontinued operations

Long-Lived Assets Held for Sale

In the fourth quarter of 2016, the Partnership identified certain assets that were no longer deemed core to the operations of the Partnership in the Smackover refinery and Martin Lubricants divisions of the Terminalling and Storage segment as well as the inland and offshore divisions of the Marine Transportation segment. At September 30, 2017 and December 31, 2016, the assets met the criteria to be classified as held for sale in accordance with ASC 360-10 and are presented at the lower of the assets' carrying amount or fair value less cost to sell by segment in current assets as follows:



	September 30, 2017		December 31, 2016

Terminalling and storage	$	10,537	$	10,852
Marine transportation	3,227		4,927
Assets held for sale	$	13,764	$	15,779

The non-core assets discussed above did not qualify for discontinued operations presentation under the guidance of ASC 205-20.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

Divestitures

Divestiture of Terminalling Assets. On December 21, 2016, the Partnership sold its 900,000 barrel crude oil storage terminal, refined product barge terminal, certain pipelines and related easements as well as dockage and trans-loading assets located in Corpus Christi, Texas (collectively the "CCCT Assets") to NuStar Logistics, L.P. (“NuStar”) for gross consideration of $107,000 plus the reimbursement of certain capital expenditures and prepaid items of $2,057. The Partnership received net proceeds of approximately $93,347 after transaction fees and expenses as well as the application of certain net cash payments previously received by the Partnership in conjunction with its mandated relocation of certain dockage assets to the purchase price in the amount of $13,400. Proceeds from the sale were used to reduce outstanding borrowings under the Partnership's revolving credit facility. The Partnership recorded a gain from the divestiture of $37,345, which was included in "Other operating income, net" on the Partnership's Consolidated Statements of Operations for the year ended December 31, 2016. Net income attributable to the CCCT Assets included in the Partnership's Consolidated Statements of Operations was $779 and $4,294 for the three and nine months ended September 30, 2016, respectively.

The divestiture of the CCCT Assets did not qualify for discontinued operations presentation under the guidance of ASC 205-20.


(5)	Inventories

Components of inventories at September 30, 2017 and December 31, 2016 were as follows:



	September 30, 2017		December 31, 2016
Natural gas liquids	$	85,574	$	33,656
Sulfur	7,796		8,521
Sulfur based products	13,668		19,107
Lubricants	20,879		18,276
Other	2,701		3,071
	$	130,618	$	82,631


(6)	Investment in West Texas LPG Pipeline L.P.

The Partnership owns a 19.8% limited partnership and 0.2% general partnership interest in West Texas LPG Pipeline L.P. ("WTLPG"). A wholly-owned subsidiary of ONEOK, Inc. is the operator of the assets. WTLPG owns an approximate 2,300 mile common-carrier pipeline system that primarily transports NGLs from New Mexico and Texas to Mont Belvieu, Texas for fractionation. The Partnership recognizes its 20% interest in WTLPG as "Investment in WTLPG" on its Consolidated and Condensed Balance Sheets. The Partnership accounts for its ownership interest in WTLPG under the equity method of accounting.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

Selected financial information for WTLPG is as follows:



	As of September 30,						Three Months Ended September 30,				Nine Months Ended September 30,
	Total Assets		Long-Term Debt		Members' Equity		Revenues		Net Income		Revenues		Net Income
2017
WTLPG	$	807,176	$	—	$	784,440	$	22,009	$	3,945	$	63,148	$	12,734
	As of December 31,
2016
WTLPG	$	812,464	$	—	$	790,406	$	21,849	$	5,515	$	66,870	$	18,240

As of September 30, 2017 and December 31, 2016, the Partnership’s interest in cash of WTLPG was $620 and $631, respectively.


(7)	Derivative Instruments and Hedging Activities

The Partnership’s revenues and cost of products sold are materially impacted by changes in 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. 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. All of the Partnership's derivatives are non-hedge derivatives and therefore all changes in fair values are recognized as gains and losses in the earnings of the periods in which they occur.

(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 has entered into hedging transactions as of September 30, 2017 to protect a portion of its commodity price risk exposure. These hedging arrangements are in the form of swaps for NGLs. The Partnership has instruments totaling a gross notional quantity of 128,000 barrels settling during the period from October 1, 2017 through December 29, 2017. At December 31, 2016, the Partnership had instruments totaling a gross notional quantity of 2,589 barrels settling during the period from January 1, 2017 through June 30, 2017. These instruments settle against the applicable pricing source for each grade and location. Martin Energy Trading LLC ("MET"), an affiliate of Martin Resource Management, serves as the counterparty for all positions outstanding at September 30, 2017.

(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. At September 30, 2017, the Partnership did not have any outstanding interest rate derivative instruments.

During the nine months ended September 30, 2016, the Partnership entered into contracts which provided the counterparty 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 September 30, 2016. In connection with the interest rate swaption

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

contracts, the Partnership received premiums of $630, 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 Sheets, during the nine months ended September 30, 2016. Each of the interest rate swaptions were fully amortized as of September 30, 2016. Interest rate swaption contract premiums received are amortized over the period from initiation of the contract through their termination date. For the nine months ended September 30, 2016, the Partnership recognized $630 of premiums in "Interest expense, net" on the Partnership's Consolidated and Condensed Statements of Operations related to the interest rate swaption contracts.

On January 7, 2016, the Partnership terminated a fixed-to-variable interest rate swap position with a notional principal amount of $50,000, resulting in a benefit of $366, which was recorded in "Interest expense, net" on the Partnership's Consolidated and Condensed Statement of Operations.

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

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



	Fair Values of Derivative Instruments in the Consolidated Balance Sheets
	Derivative Assets					Derivative Liabilities
		Fair Values					Fair Values
	Balance Sheet Location	September 30, 2017		December 31, 2016		Balance Sheet Location	September 30, 2017		December 31, 2016
Derivatives not designated as hedging instruments:	Current:
Commodity contracts	Fair value of derivatives	$	133	$	—	Fair value of derivatives	$	—	$	3,904
Total derivatives not designated as hedging instruments		$	133	$	—		$	—	$	3,904

Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations

For the Three Months Ended September 30, 2017 and 2016



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		2017		2016
Derivatives not designated as hedging instruments:
Commodity contracts	Cost of products sold	$	—	$	742
Total effect of derivatives not designated as hedging instruments		$	—	$	742

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations

For the Nine Months Ended September 30, 2017 and 2016



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		2017			2016
Derivatives not designated as hedging instruments:
Interest rate swaption contracts	Interest expense	$	—		$	630
Interest rate contracts	Interest expense	—			366
Commodity contracts	Cost of products sold	(2,392		)	871
Total effect of derivatives not designated as hedging instruments		$	(2,392	)	$	1,867


(8)	Fair Value Measurements

The Partnership uses a valuation framework based upon inputs that market participants use in pricing certain assets and liabilities. These inputs are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources. Unobservable inputs represent the Partnership's own market assumptions. Unobservable inputs are used only if observable inputs are unavailable or not reasonably available without undue cost and effort. The two types of inputs are further prioritized into the following hierarchy:

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 reflect the entity's own assumptions and are not corroborated by market data.

Assets and liabilities measured at fair value on a recurring basis are summarized below:



	Level 2
	September 30, 2017		December 31, 2016
Commodity derivative contracts, net	$	133	$	(3,904	)

The Partnership is required to disclose estimated fair values for its financial instruments. Fair value estimates are set forth below for these financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

•

Accounts and other receivables, trade and other accounts payable, accrued interest payable, other accrued liabilities, income taxes payable and due from/to affiliates: The carrying amounts approximate fair value due to the short maturity and highly liquid nature of these instruments, and as such these have been excluded from the table below. There is negligible credit risk associated with these instruments.

•

Note receivable and long-term debt: 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 Partnership has not had any indicators which represent a change in the market spread associated with its variable interest rate debt. The estimated fair value of the senior unsecured notes is considered Level 1, as the fair value is based on quoted market prices in active markets. The estimated fair value of the note receivable - affiliates was determined by calculating the net present value of the 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.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)



	September 30, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Note receivable - affiliates	$	—	$	—	$	15,000	$	15,797
2021 Senior unsecured notes	372,522		384,600		372,239		377,882


(9)	Supplemental Balance Sheet Information

Components of "Other assets, net" were as follows:



	September 30, 2017		December 31, 2016
Customer contracts and relationships, net	$	28,067	$	36,528
Other intangible assets	1,881		2,280
Other	7,263		6,066
	$	37,211	$	44,874

Accumulated amortization of intangible assets was $59,594 and $48,876 at September 30, 2017 and December 31, 2016, respectively.

Components of "Other accrued liabilities" were as follows:



	September 30, 2017		December 31, 2016
Accrued interest	$	3,802	$	10,629
Asset retirement obligations	11,378		7,953
Property and other taxes payable	7,836		6,443
Accrued payroll	2,679		1,672
Other	15		20
	$	25,710	$	26,717

The schedule below summarizes the changes in our asset retirement obligations:



	September 30, 2017


Beginning asset retirement obligations	$	16,418
Revisions to existing liabilities¹	5,801
Accretion	277
Liabilities settled	(2,695		)
Ending asset retirement obligations	19,801
Current portion of asset retirement obligations	(11,378		)
Long-term portion of asset retirement obligations²	$	8,423

¹Several factors are considered in the annual review process, including inflation rates, current estimates for removal cost, discount rates, and the estimated remaining useful life of the assets. The 2017 revisions reflect changes in removal cost estimates and the estimated remaining useful life of assets.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

²The non-current portion of asset retirement obligations is included in "Other long-term obligations" on the Partnership's Consolidated and Condensed Balance Sheets.


(10)	Long-Term Debt

At September 30, 2017 and December 31, 2016, long-term debt consisted of the following:



	September 30, 2017		December 31, 2016
$664,444 Revolving credit facility at variable interest rate (4.24%¹ weighted average at September 30, 2017), due March 2020 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 $5,531 and $7,132, respectively²	$	457,469	$	435,868
$400,000 Senior notes, 7.25% interest, net of unamortized debt issuance costs of $2,310 and $2,823, respectively, including unamortized premium of $1,032 and $1,262, respectively, issued $250,000 February 2013 and $150,000 April 2014, $26,200 repurchased during 2015, due February 2021, unsecured^2,3	372,522		372,239
Total long-term debt, net	$	829,991	$	808,107

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. All amounts outstanding at September 30, 2017 and December 31, 2016 were at LIBOR plus an applicable margin. The applicable margin for revolving loans that are LIBOR loans ranges from 2.00% to 3.00% and the applicable margin for revolving loans that are base prime rate loans ranges from 1.00% to 2.00%. The applicable margin for existing LIBOR borrowings at September 30, 2017 is 3.00%. The credit facility contains various covenants which limit the Partnership’s ability to make certain investments and acquisitions; enter into certain agreements; incur indebtedness; sell assets; and make certain amendments to the Partnership's omnibus agreement with Martin Resource Management (the "Omnibus Agreement"). The Partnership is permitted to make quarterly distributions so long as no event of default exists.

² The Partnership is in compliance with all debt covenants as of September 30, 2017 and December 31, 2016, respectively.

³The 2021 indenture restricts the Partnership’s ability to sell assets; pay distributions or repurchase units or redeem or repurchase subordinated debt; make investments; incur or guarantee additional indebtedness or issue preferred units; and consolidate, merge or transfer all or substantially all of its assets. Many of these covenants will terminate if the notes achieve an investment grade rating from each of Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services and no default (as defined in the indenture) has occurred.

The Partnership paid cash interest, net of proceeds received from interest rate swaptions and capitalized interest, in the amount of $18,578 and $18,644 for the three months ended September 30, 2017 and 2016, respectively. The Partnership paid cash interest, net of proceeds received from interest rate swaptions and capitalized interest, in the amount of $41,087 and $40,760 for the nine months ended September 30, 2017 and 2016, respectively. Capitalized interest was $130 and $229 for the three months ended September 30, 2017 and 2016, respectively. Capitalized interest was $575 and $911 for the nine months ended September 30, 2017 and 2016, respectively.


(11)	Partners' Capital

As of September 30, 2017, Partners’ capital consisted of 38,448,112 common limited partner units, representing a 98% partnership interest, and a 2% general partner interest. Martin Resource Management, through subsidiaries, owns 6,264,532 of the Partnership's common limited partner units representing approximately 16.3% of the Partnership's outstanding common limited partner 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 MMGP Holdings, LLC ("Holdings"), the sole member of the Partnership's general partner.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

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

Issuance of Common Units

On February 22, 2017, the Partnership completed a public offering of 2,990,000 common units at a price of $18.00 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 2,990,000 common units, net of underwriters' discounts, commissions and offering expenses, were $51,061. Additionally, the Partnership's general partner contributed $1,098 in cash to the Partnership in conjunction with the issuance in order to maintain its 2.0% general partner interest in the Partnership. All of the net proceeds were used to pay down outstanding amounts under the Partnership's revolving credit facility.

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. The general partner was allocated no incentive distributions during the three months ended September 30, 2017 and 2016, respectively. The general partner was allocated $0 and $7,786 in incentive distributions during the nine months ended September 30, 2017 and 2016, respectively.

The target distribution levels entitle the general partner to receive 2% of quarterly cash distributions from the minimum of $0.50 per unit up to $0.55 per unit, 15% of quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, 25% of quarterly cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit and 50% of quarterly cash distributions in excess of $0.75 per unit.

Distributions of Available Cash

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

Net Income per Unit

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

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

For purposes of computing diluted net income per unit, the Partnership uses the more dilutive of the two-class and if-converted methods. Under the if-converted method, the weighted-average number of subordinated units outstanding for the period is added to the weighted-average number of common units outstanding for purposes of computing basic net income per unit and the resulting amount is compared to the diluted net income per unit computed using the two-class method. The following is a reconciliation of net income allocated to the general partner and limited partners for purposes of calculating net income attributable to limited partners per unit:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	(16,286	)	$	(933	)	$	(1,714	)	$	13,770
Less general partner’s interest in net income (loss):
Distributions payable on behalf of IDRs	—			—			—			7,786
Distributions payable on behalf of general partner interest	392			361			1,177			1,696
General partner interest in undistributed loss	(717		)	(379		)	(1,211		)	(1,420		)
Less income (loss) allocable to unvested restricted units	(38		)	(3		)	—			36
Limited partners’ interest in net income (loss)	$	(15,923	)	$	(912	)	$	(1,680	)	$	5,672

The following are the unit amounts used to compute the basic and diluted earnings per limited partner unit for the periods presented:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Basic weighted average limited partner units outstanding	38,357,171	35,346,412	38,015,704	35,358,217
Dilutive effect of restricted units issued	—	—	—	22,850
Total weighted average limited partner diluted units outstanding	38,357,171	35,346,412	38,015,704	35,381,067

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 periods presented. All common unit equivalents were antidilutive for the three and nine months ended September 30, 2017 and the three months ended September 30, 2016 because the limited partners were allocated a net loss in this period.


(12)	Related Party Transactions

As of September 30, 2017, Martin Resource Management owns 6,264,532 of the Partnership’s common units representing approximately 16.3% of the Partnership’s outstanding limited partner 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 September 30, 2017, of approximately 16.3% of the Partnership’s outstanding limited partner 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:

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

September 30, 2017

(Unaudited)

Omnibus Agreement

Omnibus Agreement. The Partnership and its general partner are parties to the Omnibus Agreement dated November 1, 2002, with Martin Resource Management that governs, among other things, potential competition and indemnification obligations among the parties to the agreement, related party transactions, the provision of general administration and support services by Martin Resource Management and the Partnership’s use of certain Martin Resource Management trade names and trademarks. The Omnibus Agreement was amended on November 25, 2009, to include processing crude oil into finished products including naphthenic lubricants, distillates, asphalt and other intermediate cuts. The Omnibus Agreement was amended further on October 1, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management.

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


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

•providing marine transportation of petroleum products and by-products;

•distributing NGLs; and

•manufacturing and selling sulfur-based fertilizer products and other sulfur-related products.

This restriction does not apply to:


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


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


◦	providing land transportation of various liquids;


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


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


◦	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 crude oil, natural gas, natural gas liquids, and biofuels optimization business; and