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 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, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ____________ to ____________
 
Commission File Number
000-50056
MARTIN MIDSTREAM PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
05-0527861
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
4200 Stone Road
Kilgore, Texas 75662
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (903) 983-6200

Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Units representing limited partnership interests
MMLP
The NASDAQ Global Select Market
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, every Interactive Data File required to be submitted 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 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 
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 April 26, 2019, was 38,899,590.
 



 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Dollars in thousands)
 
March 31, 2019
 
December 31, 20181
 
(Unaudited)
 
(Unaudited)
Assets
 
 
 
Cash
$
227

 
$
300

Accounts and other receivables, less allowance for doubtful accounts of $675 and $576, respectively
77,420

 
90,757

Product exchange receivables
181

 
166

Inventories (Note 6)
70,541

 
86,207

Due from affiliates
27,035

 
18,845

Fair value of derivatives (Note 10)
150

 
4

Other current assets
7,135

 
6,106

Assets held for sale (Note 4)
5,502

 
5,652

Total current assets
188,191

 
208,037

 
 
 
 
Property, plant and equipment, at cost
1,311,020

 
1,311,573

Accumulated depreciation
(498,138
)
 
(487,840
)
Property, plant and equipment, net
812,882

 
823,733

 
 
 
 
Goodwill
17,785

 
17,785

Right-of-use assets (Note 9)
28,109

 

Deferred income taxes, net (Note 19)
24,412

 

Other assets, net (Note 10)
23,689

 
24,073

Total assets
$
1,095,068

 
$
1,073,628

 
 
 
 
Liabilities and Partners’ Capital
 

 
 

Current installments of long-term debt and finance lease obligations (Notes 8 and 9)
$
406,650

 
$
5,409

Trade and other accounts payable
76,488

 
65,723

Product exchange payables
14,234

 
13,237

Due to affiliates
4,103

 
2,135

Income taxes payable
989

 
445

Other accrued liabilities (Note 10)
22,150

 
24,802

Total current liabilities
524,614

 
111,751

 
 
 
 
Long-term debt and finance lease obligations, net (Notes 8 and 9)
377,976

 
662,731

Operating lease liabilities (Note 9)
19,734

 

Other long-term obligations
8,953

 
10,714

Total liabilities
931,277

 
785,196

 
 
 
 
Commitments and contingencies (Note 16)


 


Partners’ capital (Note 12)
163,791

 
288,432

Total partners’ capital
163,791

 
288,432

Total liabilities and partners' capital
$
1,095,068

 
$
1,073,628


See accompanying notes to consolidated and condensed financial statements.

1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.

2

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,
 
2019
 
20181
Revenues:
 
 
 
Terminalling and storage  *
$
23,104

 
$
24,047

Transportation  *
37,795

 
34,359

Natural gas services*
10,934

 
15,356

Sulfur services
2,859

 
2,787

Product sales: *
 
 
 
Natural gas services
116,474

 
159,162

Sulfur services
28,734

 
34,900

Terminalling and storage
31,067

 
36,463

 
176,275

 
230,525

Total revenues
250,967

 
307,074

 
 
 
 
Costs and expenses:
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

Natural gas services *
106,190

 
138,638

Sulfur services *
19,696

 
22,218

Terminalling and storage *
26,871

 
31,980

 
152,757

 
192,836

Expenses:
 

 
 

Operating expenses  *
56,656

 
56,934

Selling, general and administrative  *
11,144

 
10,939

Depreciation and amortization
18,982

 
19,990

Total costs and expenses
239,539

 
280,699

 
 
 
 
Other operating income (loss)
(720
)
 
8

Operating income (loss)
10,708

 
26,383

 
 
 
 
Other income (expense):
 

 
 

Interest expense, net
(13,671
)
 
(12,730
)
Other, net
3

 

Total other expense
(13,668
)
 
(12,730
)
 
 
 
 
Net income (loss) before taxes
(2,960
)
 
13,653

Income tax expense
(696
)
 
(149
)
Income (loss) from continuing operations
(3,656
)
 
13,504

Income from discontinued operations, net of income taxes

 
1,532

Net income (loss)
(3,656
)
 
15,036

Less general partner's interest in net (income) loss
73

 
(256
)
Less pre-acquisition (income) allocated to the general partner

 
(2,218
)
Less (income) loss allocable to unvested restricted units
2

 
(8
)
Limited partners' interest in net income (loss)
$
(3,581
)
 
$
12,554

 
 
 
 
 
See accompanying notes to consolidated and condensed financial statements.
1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.

*Related Party Transactions Shown Below

3

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,
 
2019
 
20181
Revenues:*
 
 
 
Terminalling and storage
$
18,972

 
$
20,008

Transportation
5,643

 
6,693

Product Sales
421

 
624

Costs and expenses:*
 
 
 
Cost of products sold: (excluding depreciation and amortization)
 
 
 
Sulfur services
2,574

 
2,848

Terminalling and storage
5,909

 
5,579

Expenses:
 
 
 
Operating expenses
22,536

 
23,088

Selling, general and administrative
8,535

 
7,926



See accompanying notes to consolidated and condensed financial statements.

1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.


4

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,
 
2019
 
20181
Allocation of net income (loss) attributable to:
 
 
 
   Limited partner interest:
 
 
 
 Continuing operations
$
(3,581
)
 
$
11,054

 Discontinued operations

 
1,500

 
$
(3,581
)
 
$
12,554

   General partner interest:
 
 
 

  Continuing operations
$
(73
)
 
$
225

  Discontinued operations

 
31

 
$
(73
)
 
$
256

 
 
 
 

Net income (loss) per unit attributable to limited partners:
 
 
 
Basic:
 
 
 

Continuing operations
$
(0.09
)
 
$
0.29

Discontinued operations

 
0.04

 
$
(0.09
)
 
$
0.33

Weighted average limited partner units - basic
38,682

 
38,621

Diluted:
 
 
 

Continuing operations
$
(0.09
)
 
$
0.29

Discontinued operations

 
0.03

 
$
(0.09
)
 
$
0.32

Weighted average limited partner units - diluted
38,682

 
38,630


See accompanying notes to consolidated and condensed financial statements.

1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.


5

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



 
 
 
Partners’ Capital
 
 
 
Parent Net Investment1
 
Common Limited
 
General Partner Amount
 
 
 
 
Units
 
Amount
 
 
Total
Balances - January 1, 2018
$
24,240

 
38,444,612

 
$
290,927

 
$
7,314

 
$
322,481

Net income
2,218

 

 
12,562

 
256

 
15,036

Issuance of common units, net

 

 
(101
)
 

 
(101
)
Issuance of restricted units

 
633,425

 

 

 

Forfeiture of restricted units

 
(7,000
)
 

 

 

Cash distributions

 

 
(19,213
)
 
(392
)
 
(19,605
)
Deemed contribution to Martin Resource Management Corporation
(2,342
)
 

 

 

 
(2,342
)
Unit-based compensation

 

 
132

 

 
132

Purchase of treasury units

 
(18,800
)
 
(273
)
 

 
(273
)
Excess purchase price over carrying value of acquired assets

 

 
(26
)
 

 
(26
)
Balances - March 31, 2018
$
24,116

 
39,052,237

 
$
284,008

 
$
7,178

 
$
315,302

 
 
 
 
 
 
 
 
 
 
Balances - January 1, 2019
$
23,720

 
39,032,237

 
$
258,085

 
$
6,627

 
$
288,432

Net loss

 

 
(3,583
)
 
(73
)
 
(3,656
)
Issuance of restricted units

 
16,944

 

 

 

Forfeiture of restricted units

 
(118,087
)
 

 

 

Cash distributions

 

 
(19,221
)
 
(392
)
 
(19,613
)
Unit-based compensation

 

 
352

 

 
352

Excess purchase price over carrying value of acquired assets

 

 
(102,393
)
 

 
(102,393
)
Deferred taxes on acquired assets and liabilities

 

 
24,781

 

 
24,781

Contribution to parent
(23,720
)
 

 

 

 
(23,720
)
Purchase of treasury units

 
(31,504
)
 
(392
)
 

 
(392
)
Balances - March 31, 2019
$

 
38,899,590

 
$
157,629

 
$
6,162

 
$
163,791

 
See accompanying notes to consolidated and condensed financial statements.

1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.


6

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


 
Three Months Ended
 
March 31,
 
2019
 
20181
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(3,656
)
 
$
15,036

Less: Income from discontinued operations, net of income taxes

 
(1,532
)
Net income (loss) from continuing operations
(3,656
)
 
13,504

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

 
 

Depreciation and amortization
18,982

 
19,990

Amortization of deferred debt issuance costs
895

 
819

Amortization of premium on notes payable
(77
)
 
(77
)
Deferred taxes
369

 

Loss (gain) on sale of property, plant and equipment
720

 
(8
)
Derivative loss (gain)
239

 
(2,470
)
Net cash received (paid) for commodity derivatives
(385
)
 
2,316

Unit-based compensation
352

 
132

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

 
 

Accounts and other receivables
13,335

 
22,120

Product exchange receivables
(15
)
 
(46
)
Inventories
15,665

 
23,306

Due from affiliates
(7,384
)
 
(1,844
)
Other current assets
(250
)
 
(931
)
Trade and other accounts payable
10,933

 
(2,711
)
Product exchange payables
997

 
(1,551
)
Due to affiliates
1,162

 
(2,181
)
Income taxes payable
544

 
149

Other accrued liabilities
(11,038
)
 
(13,234
)
Change in other non-current assets and liabilities
(785
)
 
609

Net cash provided by continuing operating activities
40,603

 
57,892

Net cash provided by discontinued operating activities

 
1,437

Net cash provided by operating activities
40,603

 
59,329

 
 
 
 
Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(6,973
)
 
(16,557
)
Acquisitions
(23,720
)
 

Payments for plant turnaround costs
(3,827
)
 

Proceeds from sale of property, plant and equipment
574

 
(32
)
Net cash used in continuing investing activities
(33,946
)
 
(16,589
)
Net cash used in discontinuing investing activities

 
(1,739
)
Net cash used in investing activities
(33,946
)
 
(18,328
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Payments of long-term debt and finance lease obligations
(89,255
)
 
(101,261
)
Proceeds from long-term debt
205,000

 
84,000

Proceeds from issuance of common units, net of issuance related costs

 
(101
)
Purchase of treasury units
(392
)
 
(273
)
Deemed distribution to Martin Resource Management Corporation

 
(2,342
)
Payment of debt issuance costs
(77
)
 
(1,236
)
Excess purchase price over carrying value of acquired assets
(102,393
)
 
(26
)
Cash distributions paid
(19,613
)
 
(19,605
)
Net cash used in financing activities
(6,730
)
 
(40,844
)
 
 
 
 
Net increase (decrease) in cash
(73
)
 
157

Cash at beginning of period
300

 
89

Cash at end of period
$
227

 
$
246

Non-cash additions to property, plant and equipment
$
2,001

 
$
1,905


See accompanying notes to consolidated and condensed financial statements.
1 Financial information for 2018 has been revised to include results attributable to MTI acquired from Martin Resource Management Corporation. See Note 1 – Nature of Operations and Basis of Presentation.

7

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(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 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, 2018, filed with the Securities and Exchange Commission (the "SEC") on February 19, 2019.

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 first quarter amounts for 2018 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 an increase in operating expenses and a decrease in cost of products sold in the amount of $1,547 for the three months ended March 31, 2018.

Acquisition of Martin Transport, Inc. On January 2, 2019, the Partnership acquired all of the issued and outstanding equity of Martin Transport, Inc. (“MTI”) from Martin Resource Management Corporation. MTI operates a fleet of tank trucks providing transportation of petroleum products, liquid petroleum gas, chemicals, sulfur and other products, as well as owns 23 terminals located throughout the Gulf Coast and Southeastern regions of the United States.

The acquisition of MTI was considered a transfer of net assets between entities under common control. As a result, the acquisition of MTI was recorded at amounts based on the historical carrying value of these assets at January 1, 2019, and the Partnership is required to update its historical financial statements to include the activities of MTI as of the date of common control. See Note 3 for more information. The Partnership’s accompanying historical financial statements have been retrospectively updated to reflect the effects on financial position, cash flows and results of operations attributable to the activities of MTI as if the Partnership owned these assets for the periods presented. See Note 3 for separate results of MTI for the three months ended March 31, 2018. Net income attributable to MTI for periods prior to the Partnership’s acquisition of the assets is not allocated to the limited partners for purposes of calculating net income per limited partner unit. See Note 12.

Divestiture of WTLPG Partnership Interest. On July 31, 2018, the Partnership completed the sale of its 20 percent non-operating interest in West Texas LPG Pipeline L.P. ("WTLPG") to ONEOK, Inc. (“ONEOK”). 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. A wholly-owned subsidiary of ONEOK, Inc. is the operator of the assets. The Partnership has concluded the disposition represents a strategic shift and will have a major effect on its financial results going forward. As a result, the Partnership has presented the results of operations and cash flows relating to its equity method investment in WTLPG as discontinued operations for the three months ended March 31, 2018. See Note 4 for more information.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Non-employee Share-Based Payment Accounting, which will expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The standard is effective for Partnership's financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Partnership adopted this

8

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



standard effective January 1, 2019. The result of this adoption did not have a material impact on the Partnership's consolidated and condensed financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. Lessor accounting under the new standard is substantially unchanged and the Partnership believes substantially all of our leases will continue to be classified as operating leases under the new standard. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required.  The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. The Partnership adopted this ASU on January 1, 2019, electing the transition option provided under ASU 2018-11. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Partnership elected the "package of practical expedients", which permits the Partnership not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. The Partnership elected the short-term lease recognition exemption for all leases that qualify. This means, for those assets that qualify, the Partnership did not recognize Right-of-Use ("ROU") assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. See "Note 9. Leases" for more information.

NOTE 3. ACQUISITIONS

Martin Transport Inc. Stock Purchase Agreement. On January 2, 2019, the Partnership acquired all of the issued and outstanding equity of MTI, a wholly-owned subsidiary of Martin Resource Management Corporation which operates a fleet of tank trucks providing transportation of petroleum products, liquid petroleum gas, chemicals, sulfur and other products, as well as owns 23 terminals located throughout the Gulf Coast and Southeastern regions of the United States for total consideration as follows:
Purchase price1
$
135,000

Plus: Working Capital Adjustment
2,795

Less: Finance lease obligations assumed
(11,682
)
Cash consideration paid
$
126,113



1The stock purchase agreement also includes a $10,000 earn-out based on certain performance thresholds.
The transaction closed on January 2, 2019 and was effective as of January 1, 2019 and was funded with borrowings under the Partnership's revolving credit facility.


9

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



This acquisition is considered a transfer of net assets between entities under common control. The acquisition of MTI was recorded at the historical carrying value of the assets at the acquisition date, which were as follows:
Accounts receivable, net
$
11,724

Inventories
1,138

Due from affiliates
1,042

Other current assets
897

Property, plant and equipment, net
25,383

Goodwill
489

Other noncurrent assets
362

Current installments of finance lease obligations
(5,409
)
Accounts payable
(2,564
)
Due to affiliates
(482
)
Other accrued liabilities
(2,588
)
Finance lease obligations, net of current installments
(6,272
)
Historical carrying value of assets acquired
$
23,720



The excess purchase price over the historical carrying value of the assets at the acquisition date was $102,393 and was recorded as an adjustment to "Partners' capital".

The separate results of operations related to MTI for the three months ended March 31, 2018 which were recast as part of the Partnership's consolidated and condensed statements of operations were as follows:
 
Three Months Ended March 31, 2018
Transportation revenue
$
29,909

 
 
Operating expenses
25,536

Selling, general and administrative
1,340

Depreciation and amortization
780

Total costs and expenses
27,656

 
 
Other operating income, net
10

Operating income
2,263

 
 
Other income:
 
Interest expense
(45
)
 
 
Income before income taxes
2,218

Income taxes

Net income
$
2,218



NOTE 4. DIVESTITURES AND DISCONTINUED OPERATIONS

Discontinued Operations
    
Divestiture of WTLPG Partnership Interest. On July 31, 2018, the Partnership completed the sale of its 20 percent non-operating interest in WTLPG to ONEOK. 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. A wholly-owned subsidiary of ONEOK, Inc. is the operator of the assets. In consideration for the sale of these assets, the Partnership received cash proceeds of $193,705, after transaction fees and expenses. The proceeds from the sale were used to reduce outstanding borrowings under the Partnership's revolving credit facility.  The Partnership has concluded the disposition represents a strategic shift and will have a major effect on its financial results going forward. As a result, the Partnership has presented the results of operations and cash flows relating to its equity method investment in WTLPG as discontinued operations for the three months ended March 31, 2018.

The operating results, which are included in income from discontinued operations, were as follows:
 
Three Months Ended March 31, 2018
 
 
Total costs and expenses and other, net, excluding depreciation and amortization1
$
(63
)
Equity in earnings
1,595

Income from discontinued operations before income taxes
1,532

Income tax expense

Income from discontinued operations, net of income taxes
$
1,532


1 These expenses represent direct operating expenses as a result of the Partnership's ownership interest in WTLPG.

Long-Lived Assets Held for Sale

At March 31, 2019 and December 31, 2018, 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, 2019
 
December 31, 2018
 
 
 
 
Terminalling and storage
$
3,552

 
$
3,552

Transportation
1,950

 
2,100

    Assets held for sale
$
5,502

 
$
5,652



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.


10

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



NOTE 5. REVENUE

The following table disaggregates our revenue by major source:
 
Three Months Ended March 31,
 
2019
 
2018
Terminalling and storage segment
 
 
 
Lubricant product sales
$
31,067

 
$
36,463

Throughput and storage
23,104

 
24,047

 
$
54,171

 
$
60,510

Natural gas services segment
 
 
 
Natural gas liquids product sales
$
116,474

 
$
159,162

Natural gas storage
10,934

 
15,356

 
$
127,408

 
$
174,518

Sulfur service segment
 
 
 
Sulfur product sales
$
9,952

 
$
11,837

Fertilizer product sales
18,782

 
23,063

Sulfur services
2,859

 
2,787

 
$
31,593

 
$
37,687

Transportation segment
 
 
 
Land transportation
$
24,119

 
$
22,905

Inland transportation
12,477

 
9,692

Offshore transportation
1,199

 
1,762

 
$
37,795

 
$
34,359



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

11

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



service is provided to the customer. The performance of the service is invoiced as the transaction occurs and is generally paid within a month.

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.

Transportation Segment

Revenue related to land transportation is recognized for line hauls based on a mileage 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.

Revenue related to marine transportation 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 minimum 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.
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Terminalling and storage
 
 
 
 
 
 
 
 
 
 
 
 
 
Throughput and storage
$
37,676

 
$
49,355

 
$
46,642

 
$
42,735

 
$
42,854

 
$
392,624

 
$
611,886

Natural gas services
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas storage
28,593

 
32,119

 
26,276

 
24,615

 
10,107

 

 
121,710

Sulfur services
 
 
 
 
 
 
 
 
 
 
 
 
 
Sulfur product sales
12,811

 
4,898

 
1,181

 
295

 

 

 
19,185

Transportation
 
 
 
 
 
 
 
 
 
 
 
 
 
Offshore transportation
4,675

 

 

 

 

 

 
4,675

Total
$
83,755

 
$
86,372

 
$
74,099

 
$
67,645

 
$
52,961

 
$
392,624

 
$
757,456



NOTE 6. INVENTORIES

Components of inventories at March 31, 2019 and December 31, 2018 were as follows: 
 
March 31, 2019
 
December 31, 2018
Natural gas liquids
$
14,750

 
$
32,388

Sulfur
14,648

 
12,818

Fertilizer
13,425

 
14,208

Lubricants
23,752

 
22,887

Other
3,966

 
3,906

 
$
70,541

 
$
86,207



NOTE 7. INVESTMENT IN WEST TEXAS LPG PIPELINE L.P.

As discussed in Note 4, on July 31, 2018, the Partnership completed the sale of its 20% non-operating interest in WTLPG. Prior to the sale, the Partnership owned 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 recognized its 20% interest in WTLPG as "Investment in WTLPG" on its Consolidated and Condensed Balance Sheets. The Partnership accounted for its ownership interest in WTLPG under the equity method of accounting. As discussed in Note 4, the Partnership sold its 20% non-operating partnership interest to ONEOK on July 31, 2018.

Selected financial information for WTLPG during the period of ownership is as follows:
 
Three Months Ended March 31,
2018
Revenues
 
Net Income
WTLPG
$
23,041

 
$
7,706


    
NOTE 8. LONG-TERM DEBT

At March 31, 2019 and December 31, 2018, long-term debt consisted of the following:
 
March 31,
2019
 
December 31,
2018
$664,444 Revolving credit facility at variable interest rate (5.49%1 weighted average at March 31, 2019), 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 $2,890 and $3,537, respectively2,4
$
401,110

 
$
283,463

$400,000 Senior notes, 7.25% interest, net of unamortized debt issuance costs of $1,283 and $1,454, respectively, including unamortized premium of $573 and $650, respectively, issued $250,000 February 2013 and $150,000 April 2014, $26,200 repurchased during 2015, due February 2021, unsecured2,3
373,090

 
372,996

Total
774,200

 
656,459

Less: current portion
(401,110
)
 

Total long-term debt, net of current portion
$
373,090

 
$
656,459

     
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, 2019 and December 31, 2018 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, 2019 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 Corporation (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 March 31, 2019 and December 31, 2018, respectively.

3 The 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.


12

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



4 On April 16, 2019, the Partnership amended its revolving credit facility to, among other things, reduce commitments from $664,444 to $500,000 and to adjust the permitted Leverage Ratio (as defined in the credit agreement) to 5.85 times for the fiscal quarters ended March 31, 2019 and June 30, 2019.

As of March 31, 2019, the Partnership’s revolving credit facility was due within twelve months and has therefore been presented as a current liability on the Partnership’s March 31, 2019 consolidated and condensed balance sheets.  The Partnership intends to extend the maturity of the credit facility and had previously determined to delay the extension until after finalization of the marketing and sales process related to the sale of its natural gas storage assets, which if consummated would allow the impact of the receipt of the proceeds to give effect to the amended commitment amount and the extended maturity date.
The Partnership paid cash interest, net of capitalized interest, in the amount of $19,363 and $18,878 for the three months ended March 31, 2019 and 2018, respectively.  Capitalized interest was $2 and $161 for the three months ended March 31, 2019 and 2018, respectively.

NOTE 9. LEASES

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. The Partnership elected the effective date transition method in ASC 842 and adopted the standard beginning January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Partnership elected the "package of practical expedients", which permits the Partnership not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Partnership also elected the short-term lease recognition exemption, meaning the Partnership does not recognize ROU assets or lease liabilities for all leases that qualify. Lease agreements with lease and non-lease components are combined as a single lease component. Variable lease payments are generally expensed as incurred and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. 

The adoption of this standard resulted in the recording of approximately $19,047 of additional assets and liabilities on its Consolidated Balance Sheet as of January 1, 2019. The Partnership also acquired certain operating leases in the MTI transaction that resulted in additional assets and liabilities being recorded at the transaction date in accordance with ASU 2016-02 in the amount of $6,505.
 
The Partnership has numerous operating leases primarily for terminal facilities and transportation and other equipment. The leases generally provide that all expenses related to the equipment are to be paid by the lessee.

Our leases have remaining lease terms of 1 year to 18 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. The Partnership includes extension periods and excludes termination periods from its lease term if, at commencement, it is reasonably likely that the Partnership will exercise the option.
    
The Partnership's future minimum lease obligations as of December 31, 2018 consisted of the following:


13

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
March 31, 2019
(Unaudited)



 
Operating Leases
Year 1
$
13,126

Year 2
7,194

Year 3
4,262

Year 4
2,642

Year 5
1,749

Thereafter
7,823

 
$
36,796



The components of lease expense for the three months ended March 31, 2019 were as follows:
 
March 31, 2019
Operating lease cost
$
5,290

 
 
Finance lease cost:
 
     Amortization of right-of-use assets
$
622

     Interest on lease liabilities
183

Total finance lease cost
$
805



Supplemental cash flow information for the three months ended March 31, 2019 related to leases was as follows:
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows from operating leases
$
5,310

     Operating cash flows from finance leases
183

     Financing cash flows from finance leases
1,256

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
     Operating leases
$
5,245

     Finance leases