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 June 30, 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. o

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



Yes o		No x

The number of the registrant’s Common Units outstanding at July 25, 2018, was 39,052,237.



	Page

PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2
Consolidated and Condensed Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 (audited)	2
Consolidated and Condensed Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)	3
Consolidated and Condensed Statements of Capital for the Six Months Ended June 30, 2018 and 2017 (unaudited)	5
Consolidated and Condensed Statements of Cash Flows for the Six Months Ended June 30, 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	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)



	June 30, 2018			December 31, 2017
	(Unaudited)			(Audited)
Assets
Cash	$	610		$	27
Accounts and other receivables, less allowance for doubtful accounts of $405 and $314, respectively	60,884			107,242
Product exchange receivables	174			29
Inventories (Note 6)	113,100			97,252
Due from affiliates	21,031			23,668
Other current assets	5,368			4,866
Assets held for sale (Note 4)	8,158			9,579
Total current assets	209,325			242,663

Property, plant and equipment, at cost	1,273,392			1,253,065
Accumulated depreciation	(450,564		)	(421,137		)
Property, plant and equipment, net	822,828			831,928

Goodwill	17,296			17,296
Investment in WTLPG (Note 7)	141,114			128,810
Other assets, net (Note 9)	28,202			32,801
Total assets	$	1,218,765		$	1,253,498

Liabilities and Partners’ Capital
Trade and other accounts payable	$	72,945		$	92,567
Product exchange payables	13,015			11,751
Due to affiliates	1,271			3,168
Income taxes payable	400			510
Fair value of derivatives (Note 10)	572			72
Other accrued liabilities (Note 9)	23,093			26,340
Total current liabilities	111,296			134,408

Long-term debt, net (Note 8)	831,928			812,632
Other long-term obligations	10,842			8,217
Total liabilities	954,066			955,257

Commitments and contingencies (Note 15)
Partners’ capital (Note 11)	264,699			298,241
Total partners’ capital	264,699			298,241
Total liabilities and partners' capital	$	1,218,765		$	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						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Revenues:
Terminalling and storage *	$	24,090		$	24,695		$	48,154		$	49,353
Marine transportation *	12,739			12,433			24,193			25,254
Natural gas services*	13,804			14,838			29,160			29,503
Sulfur services	2,787			2,850			5,574			5,700
Product sales: *
Natural gas services	90,643			73,666			249,806			200,323
Sulfur services	35,684			32,027			70,584			71,554
Terminalling and storage	36,824			33,413			73,304			65,560
	163,151			139,106			393,694			337,437
Total revenues	216,571			193,922			500,775			447,247

Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services *	87,642			70,198			230,599			178,377
Sulfur services *	28,739			21,207			52,635			45,690
Terminalling and storage *	33,206			29,897			66,166			58,026
	149,587			121,302			349,400			282,093
Expenses:
Operating expenses *	31,510			32,552			62,964			65,926
Selling, general and administrative *	8,572			8,909			18,240			18,830
Depreciation and amortization	20,891			20,326			40,101			45,662
Total costs and expenses	210,560			183,089			470,705			412,511

Other operating income (loss)	(490		)	15			(492		)	(140		)
Operating income	5,521			10,848			29,578			34,596

Other income (expense):
Equity in earnings of WTLPG	1,131			853			2,726			1,758
Interest expense, net	(13,766		)	(11,219		)	(26,451		)	(22,139		)
Other, net	—			520			—			550
Total other expense	(12,635		)	(9,846		)	(23,725		)	(19,831		)

Net income (loss) before taxes	(7,114		)	1,002			5,853			14,765
Income tax expense	(132		)	(13		)	(281		)	(193		)
Net income (loss)	(7,246		)	989			5,572			14,572
Less general partner's interest in net (income) loss	145			(19		)	(111		)	(291		)
Less (income) loss allocable to unvested restricted units	6			(3		)	(2		)	(38		)
Limited partners' interest in net income (loss)	$	(7,095	)	$	967		$	5,459		$	14,243

Net income (loss) per unit attributable to limited partners - basic	$	(0.18	)	$	0.03		$	0.14		$	0.38
Net income (loss) per unit attributable to limited partners - diluted	$	(0.18	)	$	0.03		$	0.14		$	0.38
Weighted average limited partner units - basic	38,722			38,357			38,829			37,842
Weighted average limited partner units - diluted	38,722			38,414			38,834			37,895

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				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Revenues:*
Terminalling and storage	$	20,507	$	20,331	$	40,532	$	40,035
Marine transportation	4,105		4,187		7,718		8,512
Natural gas services	—		6		—		118
Product Sales	426		724		1,068		2,154
Costs and expenses:*
Cost of products sold: (excluding depreciation and amortization)
Natural gas services	3,099		2,909		7,417		11,803
Sulfur services	4,345		3,767		8,871		7,442
Terminalling and storage	8,009		4,119		14,567		9,186
Expenses:
Operating expenses	14,339		16,452		27,723		32,828
Selling, general and administrative	6,498		6,500		14,219		14,068

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	—		14,281			291			14,572
Issuance of common units, net	2,990,000		51,071			—			51,071
Issuance of restricted units	12,000		—			—			—
Forfeiture of restricted units	(1,750	)	—			—			—
General partner contribution	—		—			1,098			1,098
Cash distributions	—		(36,952		)	(754		)	(37,706		)
Unit-based compensation	—		405			—			405
Purchase of treasury units	(200	)	(4		)	—			(4		)
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 - June 30, 2017	38,452,112		$	326,633		$	8,047		$	334,680

Balances - January 1, 2018	38,444,612		$	290,927		$	7,314		$	298,241
Net income	—		5,461			111			5,572
Issuance of common units, net of issuance related costs	—		(118		)	—			(118		)
Issuance of restricted units	633,425		—			—			—
Forfeiture of restricted units	(7,000	)	—			—			—
Cash distributions	—		(38,433		)	(784		)	(39,217		)
Unit-based compensation	—		520			—			520
Excess purchase price over carrying value of acquired assets	—		(26		)	—			(26		)
Purchase of treasury units	(18,800	)	(273		)	—			(273		)
Balances - June 30, 2018	39,052,237		$	258,058		$	6,641		$	264,699

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)



	Six Months Ended
	June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	5,572		$	14,572
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	40,101			45,662
Amortization of deferred debt issuance costs	1,689			1,445
Amortization of premium on notes payable	(153		)	(153		)
Loss on sale of property, plant and equipment	492			140
Equity in earnings of WTLPG	(2,726		)	(1,758		)
Derivative (income) loss	(2,069		)	2,392
Net cash received (paid) for commodity derivatives	2,569			(6,429		)
Unit-based compensation	520			405
Cash distributions from WTLPG	3,000			2,500
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables	46,592			29,522
Product exchange receivables	(145		)	(13		)
Inventories	(15,900		)	(19,065		)
Due from affiliates	2,632			(9,726		)
Other current assets	(699		)	(1,372		)
Trade and other accounts payable	(17,333		)	(4,067		)
Product exchange payables	1,264			246
Due to affiliates	(1,897		)	(5,774		)
Income taxes payable	(110		)	(468		)
Other accrued liabilities	(5,480		)	(2,761		)
Change in other non-current assets and liabilities	584			490
Net cash provided by operating activities	58,503			45,788

Cash flows from investing activities:
Payments for property, plant and equipment	(23,566		)	(19,756		)
Acquisitions	—			(19,533		)
Payments for plant turnaround costs	—			(1,591		)
Proceeds from sale of property, plant and equipment	98			1,597
Proceeds from repayment of Note receivable - affiliate	—			15,000
Contributions to WTLPG	(12,578		)	(145		)
Net cash used in investing activities	(36,046		)	(24,428		)

Cash flows from financing activities:
Payments of long-term debt	(199,000		)	(184,000		)
Proceeds from long-term debt	218,000			155,000
Proceeds from issuance of common units, net of issuance related costs	(118		)	51,071
General partner contribution	—			1,098
Purchase of treasury units	(273		)	(4		)
Payment of debt issuance costs	(1,240		)	(40		)
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	(39,217		)	(37,706		)
Net cash used in financing activities	(21,874		)	(21,343		)

Net increase in cash	583			17
Cash at beginning of period	27			15
Cash at end of period	$	610		$	32
Non-cash additions to property, plant and equipment	$	1,811		$	3,666

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)

June 30, 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.

Correction of Immaterial Error. The second quarter and year to date amounts for 2017 have been revised to reflect a reclassification in the presentation of certain expenses associated with the manufacturing and shipping of product related to a location in the Partnership's Terminalling and Storage operating segment. The reclassification resulted in a decrease in operating expenses from $34,435 to $32,552 and an increase in cost of products sold from $119,419 to $121,302 for the three months ended June 30, 2017, and a decrease in operating expenses from $69,492 to $65,926 and an increase in cost of products sold from $278,527 to $282,093 for the six months ended June 30, 2017.

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 in "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)

June 30, 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 six months ended June 30, 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 six months ended June 30, 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 June 30, 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:



	June 30, 2018		December 31, 2017

Terminalling and storage	$	4,358	$	4,152
Marine transportation	3,800		5,427
Assets held for sale	$	8,158	$	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)

June 30, 2018

(Unaudited)

NOTE 5. REVENUE

The following table disaggregates our revenue by major source:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Terminalling and storage segment
Lubricant product sales	$	36,824	$	33,413	$	73,304	$	65,560
Throughput and storage	24,090		24,695		48,154		49,353
	$	60,914	$	58,108	$	121,458	$	114,913
Natural gas services segment
Natural gas liquids product sales	$	90,643	$	73,666	$	249,806	$	200,323
Natural gas storage	13,804		14,838		29,160		29,503
	$	104,447	$	88,504	$	278,966	$	229,826
Sulfur service segment
Sulfur product sales	$	10,479	$	11,193	$	22,316	$	24,273
Fertilizer product sales	25,205		20,834		48,268		47,281
Sulfur services	2,787		2,850		5,574		5,700
	$	38,471	$	34,877	$	76,158	$	77,254
Marine transportation segment
Inland transportation	$	11,206	$	11,022	$	20,898	$	22,313
Offshore transportation	1,533		1,411		3,295		2,941
	$	12,739	$	12,433	$	24,193	$	25,254

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)

June 30, 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	$	25,119	$	50,629	$	49,330	$	46,022	$	41,505	$	393,700	$	606,305
Natural gas services
Natural gas storage	$	19,141	$	32,703	$	26,935	$	25,134	$	24,615	$	10,107	$	138,635
Sulfur services
Sulfur product sales	$	8,398	$	16,796	$	4,898	$	1,181	$	295	$	—	$	31,568
Marine transportation
Offshore transportation	$	3,128	$	6,205	$	6,069	$	—	$	—	$	—	$	15,402
Total	$	55,786	$	106,333	$	87,232	$	72,337	$	66,415	$	403,807	$	791,910

NOTE 6. INVENTORIES

Components of inventories at June 30, 2018 and December 31, 2017 were as follows:



	June 30, 2018		December 31, 2017
Natural gas liquids	$	60,176	$	47,462
Sulfur	14,542		8,436
Sulfur based products	12,108