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 March 31, 2018



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, a smaller reporting company, or an emerging growth 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 April 25, 2018, was 39,052,237.



	Page

PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2
Consolidated and Condensed Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017 (audited)	2
Consolidated and Condensed Statements of Operations for the Three Months Ended March 31, 2018 and 2017 (unaudited)	3
Consolidated and Condensed Statements of Capital for the Three Months Ended March 31, 2018 and 2017 (unaudited)	5
Consolidated and Condensed Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 (unaudited)	6
Notes to Consolidated and Condensed Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3. Quantitative and Qualitative Disclosures About Market Risk	44

Item 4. Controls and Procedures	45

PART II. OTHER INFORMATION	46

Item 1. Legal Proceedings	46

Item 1A. Risk Factors	46

Item 6. Exhibits	46

PART I – FINANCIAL INFORMATION



Item 1.	Financial Statements

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED BALANCE SHEETS

(Dollars in thousands)



	March 31, 2018			December 31, 2017
	(Unaudited)			(Audited)
Assets
Cash	$	184		$	27
Accounts and other receivables, less allowance for doubtful accounts of $419 and $314, respectively	84,554			107,242
Product exchange receivables	75			29
Inventories (Note 6)	73,894			97,252
Due from affiliates	25,866			23,668
Fair value of derivatives (Note 10)	82			—
Other current assets	6,004			4,866
Assets held for sale (Note 4)	9,442			9,579
Total current assets	200,101			242,663

Property, plant and equipment, at cost	1,265,516			1,253,065
Accumulated depreciation	(432,275		)	(421,137		)
Property, plant and equipment, net	833,241			831,928

Goodwill	17,296			17,296
Investment in WTLPG (Note 7)	130,644			128,810
Other assets, net (Note 9)	29,779			32,801
Total assets	$	1,211,061		$	1,253,498

Liabilities and Partners’ Capital
Trade and other accounts payable	$	86,751		$	92,567
Product exchange payables	10,200			11,751
Due to affiliates	1,084			3,168
Income taxes payable	659			510
Fair value of derivatives (Note 10)	—			72
Other accrued liabilities (Note 9)	15,234			26,340
Total current liabilities	113,928			134,408

Long-term debt, net (Note 8)	795,139			812,632
Other long-term obligations	10,808			8,217
Total liabilities	919,875			955,257

Commitments and contingencies (Note 15)
Partners’ capital (Note 11)	291,186			298,241
Total partners’ capital	291,186			298,241
Total liabilities and partners' capital	$	1,211,061		$	1,253,498

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
	March 31,
	2018			2017
Revenues:
Terminalling and storage *	$	24,064		$	24,658
Marine transportation *	11,454			12,821
Natural gas services*	15,356			14,665
Sulfur services	2,787			2,850
Product sales: *
Natural gas services	159,163			126,657
Sulfur services	34,900			39,527
Terminalling and storage	36,480			32,147
	230,543			198,331
Total revenues	284,204			253,325

Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services *	142,957			108,179
Sulfur services *	23,896			24,483
Terminalling and storage *	31,413			26,446
	198,266			159,108
Expenses:
Operating expenses *	33,001			35,057
Selling, general and administrative *	9,668			9,921
Depreciation and amortization	19,210			25,336
Total costs and expenses	260,145			229,422

Other operating loss	(2		)	(155		)
Operating income	24,057			23,748

Other income (expense):
Equity in earnings of WTLPG	1,595			905
Interest expense, net	(12,685		)	(10,920		)
Other, net	—			30
Total other expense	(11,090		)	(9,985		)

Net income before taxes	12,967			13,763
Income tax expense	(149		)	(180		)
Net income	12,818			13,583
Less general partner's interest in net income	(256		)	(272		)
Less income allocable to unvested restricted units	(8		)	(35		)
Limited partners' interest in net income	$	12,554		$	13,276

Net income per unit attributable to limited partners - basic	$	0.33		$	0.36
Net income per unit attributable to limited partners - diluted	$	0.32		$	0.36
Weighted average limited partner units - basic	38,621			37,321
Weighted average limited partner units - diluted	38,630			37,367

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
	March 31,
	2018		2017
Revenues:*
Terminalling and storage	$	20,025	$	19,704
Marine transportation	3,613		4,325
Natural gas services	—		112
Product Sales	642		1,430
Costs and expenses:*
Cost of products sold: (excluding depreciation and amortization)
Natural gas services	4,318		8,894
Sulfur services	4,526		3,675
Terminalling and storage	6,558		5,067
Expenses:
Operating expenses	13,384		16,376
Selling, general and administrative	7,721		7,568

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, 2017	35,452,062		$	304,594		$	7,412		$	312,006
Net income	—		13,311			272			13,583
Issuance of common units, net	2,990,000		51,188			—			51,188
Issuance of restricted units	12,000		—			—			—
Forfeiture of restricted units	(1,500	)	—			—			—
General partner contribution	—		—			1,098			1,098
Cash distributions	—		(17,725		)	(362		)	(18,087		)
Unit-based compensation	—		186			—			186
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
Balances - March 31, 2017	38,452,562		$	344,792		$	8,420		$	353,212

Balances - January 1, 2018	38,444,612		$	290,927		$	7,314		$	298,241
Net income	—		12,562			256			12,818
Issuance of common units, net of issuance related costs	—		(101		)	—			(101		)
Issuance of restricted units	633,425		—			—			—
Forfeiture of restricted units	(7,000	)	—			—			—
Cash distributions	—		(19,213		)	(392		)	(19,605		)
Unit-based compensation	—		132			—			132
Excess purchase price over carrying value of acquired assets	—		(26		)	—			(26		)
Purchase of treasury units	(18,800	)	(273		)	—			(273		)
Balances - March 31, 2018	39,052,237		$	284,008		$	7,178		$	291,186

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)



	Three Months Ended
	March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	12,818		$	13,583
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	19,210			25,336
Amortization of deferred debt issuance costs	819			721
Amortization of premium on notes payable	(77		)	(77		)
Loss on sale of property, plant and equipment	2			155
Equity in earnings of WTLPG	(1,595		)	(905		)
Derivative (income) loss	(2,470		)	2,495
Net cash received (paid) for commodity derivatives	2,316			(6,332		)
Unit-based compensation	132			186
Cash distributions from WTLPG	1,500			1,200
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables	22,693			19,110
Product exchange receivables	(46		)	(90		)
Inventories	23,306			20,580
Due from affiliates	(2,203		)	(477		)
Other current assets	(1,232		)	(491		)
Trade and other accounts payable	(3,621		)	(2,560		)
Product exchange payables	(1,551		)	(100		)
Due to affiliates	(2,084		)	(5,186		)
Income taxes payable	149			180
Other accrued liabilities	(13,310		)	(11,083		)
Change in other non-current assets and liabilities	634			281
Net cash provided by operating activities	55,390			56,526

Cash flows from investing activities:
Payments for property, plant and equipment	(15,165		)	(6,477		)
Acquisitions	—			(19,533		)
Payments for plant turnaround costs	—			(1,394		)
Proceeds from sale of property, plant and equipment	(88		)	1,481
Contributions to WTLPG	(1,739		)	—
Net cash used in investing activities	(16,992		)	(25,923		)

Cash flows from financing activities:
Payments of long-term debt	(101,000		)	(133,000		)
Proceeds from long-term debt	84,000			75,000
Proceeds from issuance of common units, net of issuance related costs	(101		)	51,188
General partner contribution	—			1,098
Purchase of treasury units	(273		)	—
Payment of debt issuance costs	(1,236		)	(16		)
Excess purchase price over carrying value of acquired assets	(26		)	(7,887		)
Reimbursement of excess purchase price over carrying value of acquired assets	—			1,125
Cash distributions paid	(19,605		)	(18,087		)
Net cash used in financing activities	(38,241		)	(30,579		)

Net increase in cash	157			24
Cash at beginning of period	27			15
Cash at end of period	$	184		$	39
Non-cash additions to property, plant and equipment	$	1,905		$	3,262

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)

March 31, 2018

(Unaudited)

NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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, 2017, filed with the Securities and Exchange Commission (the "SEC") on February 16, 2018, as amended by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2017 filed on March 29, 2018.

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.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

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 replaced most existing revenue recognition guidance in U.S. GAAP. 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 adopted 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. The Partnership adopted ASU 2014-09 on January 1, 2018 and did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance. Additional disclosures related to revenue recognition appear "Note 5. Revenue."

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)

March 31, 2018

(Unaudited)

NOTE 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 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"), to serve the asphalt market in San Antonio, Texas and surrounding areas. 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" during the three months ended March 31, 2017. During 2018, the Partnership paid an additional $26 related to a purchase price true-up, which was recorded as a further adjustment to "Partners' capital" for the three months ended March 31, 2018.



Original purchase price	$	27,420
Purchase price true-up	26
Historical carrying value of assets allocated to "Property, plant and equipment"	19,533
Excess purchase price over carrying value of acquired assets	$	7,913

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.

NOTE 4. DIVESTITURES, ASSET IMPAIRMENTS, AND DISCONTINUED OPERATIONS

Long-Lived Assets Held for Sale

At March 31, 2018 and December 31, 2017, certain terminalling and storage and marine transportation 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:



	March 31, 2018		December 31, 2017

Terminalling and storage	$	4,242	$	4,152
Marine transportation	5,200		5,427
Assets held for sale	$	9,442	$	9,579

These assets are considered non-core assets to the Partnership's operations and 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)

March 31, 2018

(Unaudited)

NOTE 5. REVENUE

The following table disaggregates our revenue by major source:



	Three Months Ended March 31,
	2018		2017
Terminalling and storage segment
Lubricant product sales	$	36,480	$	32,147
Throughput and storage	24,064		24,658
	$	60,544	$	56,805
Natural gas services segment
Natural gas liquids product sales	$	159,163	$	126,657
Natural gas storage	15,356		14,665
	$	174,519	$	141,322
Sulfur service segment
Sulfur product sales	$	11,837	$	13,080
Fertilizer product sales	23,063		26,447
Sulfur services	2,787		2,850
	$	37,687	$	42,377
Marine transportation segment
Inland transportation	$	9,692	$	11,291
Offshore transportation	1,762		1,530
	$	11,454	$	12,821

Revenue is measured based on a consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties where the Partnership is acting as an agent. The Partnership recognizes revenue when the Partnership satisfies a performance obligation, which typically occurs when the Partnership transfers control over a product to a customer or as the Partnership delivers a service.

The following is a description of the principal activities - separated by reportable segments - from which the Partnership generates revenue.

Terminalling and Storage Segment

Revenue is recognized for storage contracts based on the contracted monthly tank fixed fee. For throughput contracts, revenue is recognized based on the volume moved through the Partnership’s terminals at the contracted rate. For the Partnership’s tolling agreement, revenue is recognized based on the contracted monthly reservation fee and throughput volumes moved through the facility. When lubricants and drilling fluids are sold by truck or rail, revenue is recognized when title is transfered, which is either upon delivering product to the customer or when the product leaves the Partnership's facility, depending on the specific terms of the contract. Delivery of product is invoiced as the transaction occurs and is generally paid within a month.

Natural Gas Services Segment

Natural Gas Liquids ("NGL") distribution revenue is recognized when product is delivered by truck, rail, or pipeline to the Partnership's NGL customers. Revenue is recognized on title transfer of the product to the customer. Delivery of product is invoiced as the transaction occurs and are generally paid within a month. Natural gas storage revenue is recognized when the service is provided to the customer. The performance of the service is invoiced as the transaction occurs and is generally paid within a month.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

Sulfur Services Segment

Revenue from sulfur product sales is recognized when the customer takes title to the product. Delivery of product is invoiced as the transaction occurs and are generally paid within a month. Revenue from sulfur services is recognized as services are performed during each monthly period. The performance of the service is invoiced as the transaction occurs and is generally paid within a month.

Marine Transportation Segment

Revenue is recognized for time charters based on a per day rate. For contracted trips, revenue is recognized upon completion of the particular trip. The performance of the service is invoiced as the transaction occurs and is generally paid within a month.

The table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period. The Partnership applies the practical expedient in ASC 606-10-50-14(a) and does not disclose information about remaining performance obligations that have original expected durations of one year or less.



	2018		2019		2020		2021		2022		Thereafter		Total
Terminalling and storage
Storage and throughput	$	37,571	$	50,629	$	49,330	$	46,022	$	41,505	$	393,700	$	618,757
Natural gas services
Natural gas storage	$	31,309	$	32,932	$	27,011	$	25,134	$	24,615	$	12,068	$	153,069
Sulfur services
Sulfur product sales	$	12,597	$	16,796	$	4,898	$	1,181	$	295	$	—	$	35,767
Marine transportation
Offshore transportation	$	4,675	$	6,205	$	6,069	$	—	$	—	$	—	$	16,949
Total	$	86,152	$	106,562	$	87,308	$	72,337	$	66,415	$	405,768	$	824,542

NOTE 6. INVENTORIES

Components of inventories at March 31, 2018 and December 31, 2017 were as follows:



	March 31, 2018		December 31, 2017
Natural gas liquids	$	18,922	$	47,462
Sulfur	11,299		8,436
Sulfur based products	19,107		18,674
Lubricants	21,874		20,086
Other	2,692		2,594
	$	73,894	$	97,252

NOTE 7. 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)

March 31, 2018

(Unaudited)

Selected financial information for WTLPG is as follows:



	As of March 31,						Three Months Ended March 31,
	Total Assets		Long-Term Debt		Members' Equity		Revenues		Net Income
2018
WTLPG	$	870,691	$	—	$	839,028	$	23,041	$	7,706
	As of December 31,
2017
WTLPG	$	837,163	$	—	$	787,426	$	19,719	$	4,525

NOTE 8. LONG-TERM DEBT

At March 31, 2018 and December 31, 2017, long-term debt consisted of the following:



	March 31, 2018		December 31, 2017
$664,444 Revolving credit facility at variable interest rate (4.86%¹ weighted average at March 31, 2018), 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 $5,573 and $4,986, respectively^2,3	$	422,427	$	440,014
$400,000 Senior notes, 7.25% interest, net of unamortized debt issuance costs of $1,967 and $2,138, respectively, including unamortized premium of $879 and $956, respectively, issued $250,000 February 2013 and $150,000 April 2014, $26,200 repurchased during 2015, due February 2021, unsecured^3,4	372,712		372,618
Total long-term debt, net	$	795,139	$	812,632

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 March 31, 2018 and December 31, 2017 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 March 31, 2018 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.

²On February 21, 2018, the Partnership amended its revolving credit facility to, among other things, (i) create an inventory financing sublimit tranche, which is a part of and not in addition to the already existing commitments under the revolving credit facility, under which availability is subject to a borrowing base calculated by reference to eligible petroleum products inventory, (ii) exclude the amount of loans under the inventory financing sublimit tranche from total outstanding indebtedness for purposes of determining leverage ratio covenants under the revolving credit facility, (iii) increase the maximum permitted leverage ratio (as defined in the credit agreement, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) from 5.25 to 1.00, with a temporary springing provision to 5.50 to 1.00 under certain scenarios, to 5.75 to 1.00 for the first and second quarters of 2018, 5.50 to 1.00 for the next three quarters and 5.25 to 1.00, with the temporary springing provision to 5.50 to 1.00 going back into effect, thereafter and (iv) decrease the maximum permitted senior leverage ratio (as defined in the credit agreement, being generally computed as the ratio of total secured funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) from 3.50 to 1.00 to 3.25 to 1.00. The maximum amount of the inventory financing sublimit tranche is $10,000 during the period between March 1 and June 30 of each year, and $75,000 at all

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

other times during each year.

³ The Partnership is in compliance with all debt covenants as of March 31, 2018 and December 31, 2017, respectively.

⁴The 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.

The Partnership paid cash interest, net of capitalized interest, in the amount of $18,878 and $18,181 for the three months ended March 31, 2018 and 2017, respectively. Capitalized interest was $161 and $223 for the three months ended March 31, 2018 and 2017, respectively.

NOTE 9. SUPPLEMENTAL BALANCE SHEET INFORMATION

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



	March 31, 2018		December 31, 2017
Customer contracts and relationships, net	$	23,484	$	25,252
Other intangible assets	1,624		1,752
Other	4,671		5,797
	$	29,779	$	32,801

Accumulated amortization of intangible assets was $41,984 and $39,462 at March 31, 2018 and December 31, 2017, respectively.

Components of "Other accrued liabilities" were as follows:



	March 31, 2018		December 31, 2017
Accrued interest	$	4,952	$	11,726
Asset retirement obligations	3,360		5,429
Property and other taxes payable	3,279		5,638
Accrued payroll	3,636		3,385
Other	7		162
	$	15,234	$	26,340

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

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



	March 31, 2018


Beginning asset retirement obligations	$	13,512
Revisions to existing liabilities¹	4,756
Accretion expense	147
Liabilities settled	(4,360		)
Ending asset retirement obligations	14,055
Current portion of asset retirement obligations²	(3,360		)
Long-term portion of asset retirement obligations³	$	10,695

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 2018 revisions reflect changes in removal cost estimates and the estimated remaining useful life of assets.

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

³The non-current portion of asset retirement obligations is included in "Other long-term obligations" on the Partnership's Consolidated and Condensed Balance Sheets.

NOTE 10. 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 March 31, 2018 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 50 barrels settling during the period from May 1, 2018 through June 30, 2018. At December 31, 2017, the Partnership had instruments totaling a gross notional quantity of 145 barrels settling during the period from January 31, 2018 through February 28, 2018. These instruments settle against the applicable pricing source for each grade and location.

(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. From time to time, the Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate credit

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

facility and its fixed rate senior unsecured notes. At March 31, 2018 and 2017, the Partnership did not have any outstanding interest rate derivative instruments.

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 and Condensed Balance Sheets
	Derivative Assets					Derivative Liabilities
		Fair Values					Fair Values
	Balance Sheet Location	March 31, 2018		December 31, 2017		Balance Sheet Location	March 31, 2018		December 31, 2017
Derivatives not designated as hedging instruments:	Current:
Commodity contracts	Fair value of derivatives	$	82	$	—	Fair value of derivatives	$	—	$	72
Total derivatives not designated as hedging instruments		$	82	$	—		$	—	$	72

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

For the Three Months Ended March 31, 2018 and 2017



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		2018		2017
Derivatives not designated as hedging instruments:
Commodity contracts	Cost of products sold	$	2,470	$	(2,495	)
Total effect of derivatives not designated as hedging instruments		$	2,470	$	(2,495	)

NOTE 11. PARTNERS' CAPITAL

As of March 31, 2018, Partners’ capital consisted of 39,052,237 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 16.0% 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.

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,

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

not thousands). Total proceeds from the sale of the 2,990,000 common units, net of underwriters' discounts, commissions and offering expenses, were $51,188. 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 March 31, 2018 and 2017.

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.

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:

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)



	Three Months Ended March 31,
	2018			2017
Net income	$	12,818		$	13,583
Less general partner’s interest in net income (loss):
Distributions payable on behalf of IDRs	—			—
Distributions payable on behalf of general partner interest	392			392
General partner interest in undistributed loss	(136		)	(120		)
Less income allocable to unvested restricted units	8			35
Limited partners’ interest in net income (loss)	$	12,554		$	13,276

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 March 31,
	2018	2017
Basic weighted average limited partner units outstanding	38,621,375	37,321,263
Dilutive effect of restricted units issued	8,252	46,121
Total weighted average limited partner diluted units outstanding	38,629,627	37,367,384

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.

NOTE 12. 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,
	2018		2017
Employees	$	96	$	159
Non-employee directors	36		27
Total unit-based compensation expense	$	132	$	186

All of the Partnership's outstanding awards at March 31, 2018 met the criteria to be treated under equity classification.

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.

On May 26, 2017, the unitholders of the Partnership approved the Martin Midstream Partners L.P. 2017 Restricted Unit Plan (the "2017 LTIP"). The plan currently permits the grant of awards covering an aggregate of 3,000,000 common units, all of which can be awarded in the form of restricted units. The plan is administered by the compensation committee of the general partner’s board of directors (the "Compensation Committee").

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

A restricted unit is a unit that is granted to grantees with certain vesting restrictions, which may be time-based and/or performance-based. Once these restrictions lapse, the grantee is entitled to full ownership of the unit without restrictions. The Compensation Committee may determine to make grants under the plan containing such terms as the Compensation Committee shall determine under the plan. With respect to time-based restricted units ("TBRU's", the Compensation Committee will determine the time period over which restricted units granted to employees and directors will vest. The Compensation Committee may also award a percentage of restricted units with vesting requirements based upon the achievement of specified pre-established performance targets ("Performance Based Restricted Units" or "PBRU's"). The performance targets may include, but are not limited to, the following: revenue and income measures, cash flow measures, net income before interest expense and income tax expense ("EBIT"), net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), distribution coverage metrics, expense measures, liquidity measures, market measures, corporate sustainability metrics, and other measures related to acquisitions, dispositions, operational objectives and succession planning objectives. PBRU's are earned only upon our achievement of an objective performance measure for the performance period. PBRU's which vest are payable in common units. Unvested units granted under the 2017 LTIP may or may not participate in cash distributions depending on the terms of each individual award agreement.

The restricted units issued to directors generally vest in equal annual installments over a four-year period. Restricted units issued to employees generally vest in equal annual installments over three years of service.

On February 20, 2018, the Partnership issued 4,650 TBRU's to each of the Partnership's three independent directors under the 2017 LTIP. These restricted common units vest in equal installments of 1,550 units on January 24, 2019, 2020, 2021, and 2022.

On March 1, 2018, the Partnership issued 301,550 TBRU's and 317,925 PBRU's to certain employees of Martin Resource Management. The TBRU's vest in equal installments over a three-year service period. The PBRU's will vest at the conclusion of a three-performance period based on certain performance targets. In addition, the PBRU's awarded on March 1, 2018 that are achieved will only vest if the grantee is employed by Martin Resource Management on March 31, 2021.

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, 2018 is provided below:



	Number of Units			Weighted Average Grant-Date Fair Value Per Unit
Non-vested, beginning of period	98,750			$	24.80
Granted (TBRU)	315,500			$	13.89
Granted (PBRU)	317,925			$	13.89
Vested	(80,550		)	$	27.71
Forfeited	(7,000		)	$	13.90
Non-Vested, end of period	644,625			$	13.91

Aggregate intrinsic value, end of period	$	8,702

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, 2018 and 2017 is provided below:



	Three Months Ended March 31,
	2018		2017
Aggregate intrinsic value of units vested	$	1,188	$	125
Fair value of units vested	2,232		170

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

March 31, 2018

(Unaudited)

As of March 31, 2018, there was $4,431 of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 3.01 years.

NOTE 13. RELATED PARTY TRANSACTIONS

As of March 31, 2018, Martin Resource Management owns 6,264,532 of the Partnership’s common units representing approximately 16.0% 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 March 31, 2018, of approximately 16.0% 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:

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: