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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 September 30, 2016

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes  x
 
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes x
 
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 Large accelerated filer                   x
Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company)
Smaller reporting company  o

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o
 
No x
 
The number of the registrant’s Common Units outstanding at October 26, 2016, was 35,454,462.
 



 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Dollars in thousands)
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Cash
$
10

 
$
31

Accounts and other receivables, less allowance for doubtful accounts of $453 and $430, respectively
46,327

 
74,355

Product exchange receivables
159

 
1,050

Inventories
107,476

 
75,870

Due from affiliates
8,194

 
10,126

Fair value of derivatives
89

 
675

Other current assets
4,439

 
5,718

Assets held for sale
73,197

 

Total current assets
239,891

 
167,825

 
 
 
 
Property, plant and equipment, at cost
1,301,233

 
1,387,814

Accumulated depreciation
(411,821
)
 
(404,574
)
Property, plant and equipment, net
889,412

 
983,240

 
 
 
 
Goodwill
17,296

 
23,802

Investment in WTLPG
129,794

 
132,292

Note receivable - Martin Energy Trading LLC
15,000

 
15,000

Other assets, net
48,951

 
58,314

Total assets
$
1,340,344

 
$
1,380,473

 
 
 
 
Liabilities and Partners’ Capital
 

 
 

Trade and other accounts payable
$
60,462

 
$
81,180

Product exchange payables
10,188

 
12,732

Due to affiliates
3,879

 
5,738

Income taxes payable
550

 
985

Fair value of derivatives
209

 

Other accrued liabilities
14,804

 
18,533

Liabilities held for sale
23,400

 

Total current liabilities
113,492

 
119,168

 
 
 
 
Long-term debt, net
913,504

 
865,003

Fair value of derivatives

 
206

Other long-term obligations
2,435

 
2,217

Total liabilities
1,029,431

 
986,594

 
 
 
 
Commitments and contingencies (Note 16)


 


Partners’ capital
310,913

 
393,879

Total partners’ capital
310,913

 
393,879

Total liabilities and partners' capital
$
1,340,344

 
$
1,380,473


See accompanying notes to consolidated and condensed financial statements.

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Terminalling and storage  *
$
30,770

 
$
33,578

 
$
93,565

 
$
100,828

Marine transportation  *
13,846

 
18,977

 
44,531

 
59,956

Natural gas services*
14,618

 
17,120

 
46,118

 
50,171

Sulfur services
2,700

 
3,090

 
8,100

 
9,270

Product sales: *
 
 
 
 
 
 
 
Natural gas services
57,378

 
86,714

 
207,368

 
330,803

Sulfur services
26,396

 
33,213

 
105,459

 
128,544

Terminalling and storage
28,829

 
33,329

 
85,349

 
102,901

 
112,603

 
153,256

 
398,176

 
562,248

Total revenues
174,537

 
226,021

 
590,490

 
782,473

 
 
 
 
 
 
 
 
Costs and expenses:
 

 
 

 
 

 
 

Cost of products sold: (excluding depreciation and amortization)
 

 
 

 
 

 
 

Natural gas services *
50,658

 
80,709

 
184,781

 
307,039

Sulfur services *
21,510

 
26,144

 
73,734

 
95,685

Terminalling and storage *
23,540

 
28,237

 
70,306

 
87,977

 
95,708

 
135,090

 
328,821

 
490,701

Expenses:
 

 
 

 
 

 
 

Operating expenses  *
39,488

 
45,310

 
121,542

 
138,399

Selling, general and administrative  *
8,049

 
8,666

 
24,364

 
26,507

Loss on impairment of goodwill

 

 
4,145

 

Depreciation and amortization
22,129

 
23,335

 
66,266

 
68,737

Total costs and expenses
165,374

 
212,401

 
545,138

 
724,344

 
 
 
 
 
 
 
 
Other operating income (loss)
13

 
(1,586
)
 
(1,582
)
 
(1,763
)
Operating income
9,176

 
12,034

 
43,770

 
56,366

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Equity in earnings of WTLPG
1,120

 
2,363

 
3,602

 
5,752

Interest expense, net
(11,779
)
 
(11,994
)
 
(34,046
)
 
(32,465
)
Gain on retirement of senior unsecured notes

 
728

 

 
728

Other, net
730

 
399

 
866

 
757

Total other expense
(9,929
)
 
(8,504
)
 
(29,578
)
 
(25,228
)
 
 
 
 
 
 
 
 
Net income (loss) before taxes
(753
)
 
3,530

 
14,192

 
31,138

Income tax expense
(180
)
 
(200
)
 
(422
)
 
(814
)
Income (loss) from continuing operations
(933
)
 
3,330

 
13,770

 
30,324

Income from discontinued operations, net of income taxes

 

 

 
1,215

Net income (loss)
(933
)
 
3,330

 
13,770

 
31,539

Less general partner's interest in net (income) loss
18

 
(3,959
)
 
(8,062
)
 
(12,310
)
Less (income) loss allocable to unvested restricted units
3

 
(16
)
 
(36
)
 
(127
)
Limited partners' interest in net income (loss)
$
(912
)
 
$
(645
)
 
$
5,672

 
$
19,102

 
See accompanying notes to consolidated and condensed financial statements.

*Related Party Transactions Shown Below

3

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



*Related Party Transactions Included Above
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:*
 
 
 
 
 
 
 
Terminalling and storage
$
20,649

 
$
15,091

 
$
62,197

 
$
58,626

Marine transportation
4,861

 
6,552

 
17,308

 
19,919

Natural gas services
132

 

 
574

 

Product Sales
723

 
1,731

 
2,391

 
5,079

Costs and expenses:*
 
 
 
 
 
 
 
Cost of products sold: (excluding depreciation and amortization)
 
 
 
 
 
 
 
Natural gas services
2,946

 
6,470

 
10,829

 
20,198

Sulfur services
3,678

 
3,387

 
11,300

 
10,629

Terminalling and storage
3,766

 
3,227

 
11,232

 
14,261

Expenses:
 
 
 
 
 
 
 
Operating expenses
17,810

 
19,290

 
53,255

 
58,605

Selling, general and administrative
5,748

 
5,922

 
18,091

 
17,765


See accompanying notes to consolidated and condensed financial statements.


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Allocation of net income (loss) attributable to:
 
 
 
 
 
 
 
Limited partner interest:
 
 
 
 
 
 
 
 Continuing operations
$
(912
)
 
$
(645
)
 
$
5,672

 
$
18,366

 Discontinued operations

 

 

 
736

 
$
(912
)
 
$
(645
)
 
$
5,672

 
$
19,102

General partner interest:
 
 
 
 
 
 
 
  Continuing operations
$
(18
)
 
$
3,959

 
$
8,062

 
$
11,836

  Discontinued operations

 

 

 
474

 
$
(18
)
 
$
3,959

 
$
8,062

 
$
12,310

 
 
 
 
 
 
 
 
Net income (loss) per unit attributable to limited partners:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.02
)
 
$
0.16

 
$
0.52

Discontinued operations

 

 

 
0.02

 
$
(0.03
)
 
$
(0.02
)
 
$
0.16

 
$
0.54

 
 
 
 
 
 
 
 
Weighted average limited partner units - basic
35,346

 
35,308

 
35,358

 
35,309

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.03
)
 
$
(0.02
)
 
$
0.16

 
$
0.52

Discontinued operations

 

 

 
0.02

 
$
(0.03
)
 
$
(0.02
)
 
$
0.16

 
$
0.54

 
 
 
 
 
 
 
 
Weighted average limited partner units - diluted
35,346

 
35,308

 
35,381

 
35,369


See accompanying notes to consolidated and condensed financial statements.




5

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



 
Partners’ Capital
 
 
 
Common Limited
 
General Partner Amount
 
 
 
Units
 
Amount
 
 
Total
Balances - January 1, 2015
35,365,912

 
$
470,943

 
$
14,728

 
$
485,671

Net income

 
19,229

 
12,310

 
31,539

Issuance of common units, net

 
(330
)
 

 
(330
)
Issuance of restricted units
91,950

 

 

 

Forfeiture of restricted units
(1,250
)
 

 

 

General partner contribution

 

 
55

 
55

Cash distributions

 
(86,420
)
 
(13,526
)
 
(99,946
)
Reimbursement of excess purchase price over carrying value of acquired assets

 
1,500

 

 
1,500

Unit-based compensation

 
1,080

 

 
1,080

Balances - September 30, 2015
35,456,612

 
$
406,002

 
$
13,567

 
$
419,569

 
 
 
 
 
 
 
 
Balances - January 1, 2016
35,456,612

 
$
380,845

 
$
13,034

 
$
393,879

Net income

 
5,708

 
8,062

 
13,770

Issuance of common units, net of issuance related costs

 
(28
)
 

 
(28
)
Issuance of restricted units
13,800

 

 

 

Forfeiture of restricted units
(500
)
 

 

 

Cash distributions

 
(86,410
)
 
(13,680
)
 
(100,090
)
Unit-based compensation

 
712

 

 
712

Reimbursement of excess purchase price over carrying value of acquired assets

 
3,000

 

 
3,000

Purchase of treasury units
(15,200
)
 
(330
)
 

 
(330
)
Balances - September 30, 2016
35,454,712

 
$
303,497

 
$
7,416

 
$
310,913

 
See accompanying notes to consolidated and condensed financial statements.

6

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


 
Nine Months Ended
 
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
13,770

 
$
31,539

Less: Income from discontinued operations, net of income taxes

 
(1,215
)
Net income from continuing operations
13,770

 
30,324

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

 
 

Depreciation and amortization
66,266

 
68,737

Amortization and write-off of deferred debt issuance costs
2,965

 
4,142

Amortization of premium on notes payable
(230
)
 
(246
)
Loss on sale of property, plant and equipment
1,582

 
1,751

Loss on impairment of goodwill
4,145

 

Gain on retirement of senior unsecured notes

 
(728
)
Equity in earnings of unconsolidated entities
(3,602
)
 
(5,752
)
Derivative income
(1,867
)
 
(2,137
)
Net cash received for commodity derivatives
1,666

 

Net cash received for interest rate derivatives
160

 

Net premiums received on derivatives that settled during the year on interest rate swaption contracts
630

 
2,495

Unit-based compensation
712

 
1,080

Cash distributions from WTLPG
6,100

 
7,800

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

 
 

Accounts and other receivables
28,028

 
69,967

Product exchange receivables
891

 
909

Inventories
(31,606
)
 
(3,134
)
Due from affiliates
1,932

 
3,348

Other current assets
(4,693
)
 
354

Trade and other accounts payable
(15,782
)
 
(59,124
)
Product exchange payables
(2,544
)
 
6,360

Due to affiliates
(1,859
)
 
(1,935
)
Income taxes payable
(435
)
 
(386
)
Other accrued liabilities
(3,729
)
 
(8,490
)
Change in other non-current assets and liabilities
(765
)
 
(999
)
Net cash provided by continuing operating activities
61,735

 
114,336

Net cash used in discontinued operating activities

 
(1,352
)
Net cash provided by operating activities
61,735

 
112,984

Cash flows from investing activities:
 

 
 

Payments for property, plant and equipment
(31,884
)
 
(40,123
)
Acquisition of intangible assets
(2,150
)
 

Payments for plant turnaround costs
(1,614
)
 
(1,754
)
Proceeds from sale of property, plant and equipment
2,174

 
1,985

Proceeds from involuntary conversion of property, plant and equipment
23,400

 

Net cash used in continuing investing activities
(10,074
)
 
(39,892
)
Net cash provided by discontinued investing activities

 
41,250

Net cash provided by (used in) investing activities
(10,074
)
 
1,358

Cash flows from financing activities:
 

 
 

Payments of long-term debt
(219,700
)
 
(224,310
)
Proceeds from long-term debt
270,700

 
209,000

Proceeds from issuance of common units, net of issuance related costs
(28
)
 
(330
)
General partner contribution

 
55

Purchase of treasury units
(330
)
 

Payment of debt issuance costs
(5,234
)
 
(340
)
Reimbursement of excess purchase price over carrying value of acquired assets
3,000

 
1,500

Cash distributions paid
(100,090
)
 
(99,946
)
Net cash used in financing activities
(51,682
)
 
(114,371
)
Net decrease in cash
(21
)
 
(29
)
Cash at beginning of period
31

 
42

Cash at end of period
$
10

 
$
13

Non-cash additions to property, plant and equipment
$
1,068

 
$
4,389


See accompanying notes to consolidated and condensed financial statements.

7

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)




(1)
General

Martin Midstream Partners L.P. (the "Partnership") is a publicly traded limited partnership with a diverse set of operations focused primarily in the United States ("U.S.") Gulf Coast region. Its four primary business lines include:  natural gas services, including liquids transportation and distribution services and natural gas storage; terminalling and storage services for petroleum products and by-products including the refining of naphthenic crude oil, blending and packaging of finished lubricants; sulfur and sulfur-based products processing, manufacturing, marketing and distribution; and marine transportation services for petroleum products and by-products.
 
The Partnership’s unaudited consolidated and condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and United States Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by U.S. GAAP for annual audited financial statements of the type contained in the Partnership’s annual reports on Form 10-K. In the opinion of the management of the Partnership’s general partner, all adjustments and elimination of significant intercompany balances necessary for a fair presentation of the Partnership’s financial position, results of operations, and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature. Results for such interim periods are not necessarily indicative of the results of operations for the full year. These financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the "SEC") on February 29, 2016, as amended by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2015 filed on March 30, 2016.

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.

As discussed further in Note 3, on October 14, 2016, the Partnership entered into a definitive agreement with NuStar Logistics, L.P. (“NuStar”) to sell its 900,000 barrel crude oil storage terminal, its refined product barge terminal, certain pipelines and related easements as well as dockage and trans-loading assets located in Corpus Christi, Texas ("CCCT Assets") for gross consideration of $107,000 plus the reimbursement of certain capital expenditures and prepaid items. The Partnership expects to receive net proceeds of approximately $93,000 after transaction fees and expenses as well as the application of certain net cash payments previously received by the Partnership in conjunction with its mandated relocation of certain dockage assets to the purchase price in the amount of $13,400. The Partnership expects to close the transaction prior to December 31, 2016. Proceeds from the sale will be used to reduce outstanding borrowings under the Partnership's revolving credit facility. The Partnership has classified the CCCT Assets, and the related liabilities, as held for sale at September 30, 2016.

(2)
New Accounting Pronouncements

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

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


8

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory, which applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method. This includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective on January 1, 2017. The Partnership does not anticipate that ASU 2015-11 will have a material effect on its consolidated and condensed financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Partnership on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Partnership is evaluating the effect that ASU 2014-09 will have on its consolidated and condensed financial statements and related disclosures. The Partnership has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
        
(3)
Divestitures and discontinued operations

On October 14, 2016, the Partnership entered into a definitive agreement with NuStar to sell its CCCT Assets for gross consideration of $107,000 plus the reimbursement of certain capital expenditures and prepaid items. The Partnership expects to receive net proceeds of approximately $93,000 after transaction fees and expenses as well as the application of certain net cash payments previously received by the Partnership in conjunction with its mandated relocation of certain dockage assets to the purchase price in the amount of $13,400. The Partnership expects to close the transaction prior to December 31, 2016. Proceeds from the sale will be used to reduce outstanding borrowings under the Partnership's revolving credit facility. The Partnership expects to record a gain from the divestiture. The Partnership has classified the CCCT Assets, and the related liabilities, as held for sale at September 30, 2016, as follows:
 
2016
Assets:
 
Other assets
$
4,333

Property, plant, and equipment
91,594

Accumulated depreciation
(25,091
)
Goodwill
2,361

Assets held for sale
$
73,197

 
 
Liabilities:
 
Current liabilities
$
23,400

Liabilities held for sale
$
23,400



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

Floating Storage Assets. On February 12, 2015, the Partnership sold all six of its 16,101 barrel liquefied petroleum gas ("LPG") pressure barges, (collectively referred to as the "Floating Storage Assets"). These assets were acquired on February 28, 2013. On December 19, 2014, the Partnership made the decision to dispose of the Floating Storage Assets. As a result, the Partnership classified the Floating Storage Assets as held for sale at December 31, 2014 and has presented the results of operations and cash flows of the Floating Storage Assets as discontinued operations for the three and nine months ended September 30, 2016 and 2015. The Partnership has retrospectively adjusted its prior period consolidated financial statements to comparably classify the amounts related to the operations and cash flows of the Floating Storage Assets as discontinued operations. The Floating Storage Assets were presented as discontinued operations under the guidance prior to the Partnership's adoption of ASU 2014-08 related to discontinued operations. The adoption of the amended guidance was effective for the Partnership January 1, 2015.


9

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



The Floating Storage Assets’ operating results, which are included in income from discontinued operations, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Total revenues from third parties1      
$

 
$

 
$

 
$
791

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

 

 

 
1,038

Depreciation and amortization

 

 

 

Other operating income2

 

 

 
1,462

Income from discontinued operations before income taxes

 

 

 
1,215

Income tax expense

 

 

 

Income from discontinued operations, net of income taxes
$

 
$

 
$

 
$
1,215


1 All revenues for the nine months ended September 30, 2015 were from third parties.

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

(4)
Inventories

Components of inventories at September 30, 2016 and December 31, 2015 were as follows: 
 
September 30, 2016
 
December 31, 2015
Natural gas liquids
$
65,107

 
$
20,959

Sulfur
6,959

 
13,812

Sulfur based products
12,541

 
19,400

Lubricants
19,918

 
18,675

Other
2,951

 
3,024

 
$
107,476

 
$
75,870



(5)
Investment in West Texas LPG Pipeline L.P.

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


10

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



Selected financial information for WTLPG is as follows:
 
As of September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Total
Assets
 
Members' Equity
 
Revenues
 
Net Income
 
Revenues
 
Net Income
2016
 
 
 
 
 
 
 
 
 
 
 
WTLPG
$
815,700

 
$
791,762

 
$
21,849

 
$
5,515

 
$
66,870

 
$
18,240

 
As of December 31,
 
 

 
 

 
 
 
 
2015
 

 
 

 
 

 
 

 
 
 
 
WTLPG
$
819,342

 
$
804,023

 
$
26,094

 
$
11,815

 
$
70,010

 
$
28,760


    
As of September 30, 2016 and December 31, 2015, the Partnership’s interest in cash of WTLPG was $1,189 and $1,060, respectively.

(6)
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 of the Partnership's derivatives are non-hedge derivatives and therefore all changes in fair values are recognized as gains and losses in the earnings of the periods in which they occur.

(a)    Commodity Derivative Instruments

The Partnership from time to time has used derivatives to manage the risk of commodity price fluctuation. Commodity risk is the adverse effect on the value of a liability or future purchase that results from a change in commodity price.  The Partnership has established a hedging policy and monitors and manages the commodity market risk associated with potential commodity risk exposure.  In addition, the Partnership has focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction. The Partnership has entered into hedging transactions as of September 30, 2016 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 net notional quantity of 441,000 barrels settling during the period from October 31, 2016 through March 31, 2017. These instruments settle against the applicable pricing source for each grade and location. Martin Energy Trading LLC ("MET"), an affiliate of Martin Resource Management, serves as the counterparty for all positions outstanding at September 30, 2016.

(b)    Interest Rate Derivative Instruments

The Partnership is exposed to market risks associated with interest rates. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate credit facility and its fixed rate senior unsecured notes. All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings.

During the nine months ended September 30, 2016 and 2015, the Partnership entered into contracts which provided the counterparty the option to enter into swap contracts to hedge the Partnership's exposure to changes in the fair value of its senior unsecured notes ("interest rate swaptions") through September 30, 2016 and 2015, respectively. In connection with the interest rate swaption contracts, the Partnership received premiums of $0 and $630, which represented their fair value on the date the transactions were initiated and were initially recorded as derivative liabilities on the Partnership's Consolidated and Condensed Balance Sheets, during the three and nine months ended September 30, 2016, respectively. In connection with the interest rate swaption contracts, the Partnership received premiums of $750 and $2,495, which represented their fair value on the date the

11

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



transactions were initiated and were initially recorded as derivative liabilities on the Partnership's Consolidated and Condensed Balance Sheets, during the three and nine months ended September 30, 2015, respectively. Each of the interest rate swaptions was fully amortized as of September 30, 2016 and 2015. Interest rate swaption contract premiums received are amortized over the period from initiation of the contract through their termination date. For the three and nine months ended September 30, 2016, the Partnership recognized $0 and $630, respectively, of premiums in "Interest expense, net" on the Partnership's Consolidated and Condensed Statements of Operations related to the interest rate swaption contracts. For the three and nine months ended September 30, 2015, the Partnership recognized $750 and $2,495, respectively, of premiums in "Interest expense, net" on the Partnership's Consolidated and Condensed Statements of Operations related to the interest rate swaption contracts.

As of December 31, 2015, the Partnership had a fixed-to-variable interest rate swap agreement with a notional principal amount of $50,000 of fixed-to-variable interest rate swap agreements, effectively converting the interest expense associated with a portion of the Partnership's 2021 senior unsecured notes from fixed rate to variable rate based on the LIBOR interest rate. The Partnership's swap agreement had a termination date that corresponded to the maturity date of the 2021 senior unsecured notes. This instrument was recorded on the Partnership's Consolidated and Condensed Balance Sheets at December 31, 2015 in "Fair value of derivatives" as a non current liability of $206. This position terminated on January 7, 2016, resulting in a benefit of $160.
   
For information regarding gains and losses on interest rate derivative instruments, see "Tabular Presentation of Gains and Losses on Derivative Instruments" below.

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

The following table summarizes the fair value and classification of the Partnership’s derivative instruments in its Consolidated and Condensed Balance Sheets:
 
Fair Values of Derivative Instruments in the Consolidated Balance Sheets
 
Derivative Assets
Derivative Liabilities
 
 
Fair Values
 
Fair Values
 
 Balance Sheet Location
September 30, 2016
 
December 31, 2015
 Balance Sheet Location
September 30, 2016
 
December 31, 2015
Derivatives not designated as hedging instruments:
Current:
 
 
 
 
 
 
 
Commodity contracts
Fair value of derivatives
$
89

 
$
675

Fair value of derivatives
$
209

 
$

Derivatives not designated as hedging instruments:
Non Current:
 

 
 

Non Current:
 
 
 

Interest rate contracts
Fair value of derivatives

 

Fair value of derivatives

 
206

Total derivatives not designated as hedging instruments
 
$
89

 
$
675

 
$
209

 
$
206




12

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations
For the Three Months Ended September 30, 2016 and 2015
 
Location of Gain (Loss)
Recognized in Income on
 Derivatives
Amount of Gain (Loss) Recognized in
Income on Derivatives
 
 
2016
 
2015
Derivatives not designated as hedging instruments:
 
 
Interest rate swaption contracts
Interest expense
$

 
$
750

Commodity contracts
Cost of products sold
742

 
(358
)
Total derivatives not designated as hedging instruments
$
742

 
$
392


Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations
For the Nine Months Ended September 30, 2016 and 2015
 
Location of Gain (Loss)
Recognized in Income on
 Derivatives
Amount of Gain (Loss) Recognized in
Income on Derivatives
 
 
2016
 
2015
Derivatives not designated as hedging instruments:
 
 
Interest rate swaption contracts
Interest expense
$
630

 
$
2,495

Interest rate contracts
Interest expense
366

 

Commodity contracts
Cost of products sold
871

 
(358
)
Total derivatives not designated as hedging instruments
$
1,867

 
$
2,137



(7)
Fair Value Measurements

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

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that reflect the entity's own assumptions and are not corroborated by market data.

Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
Level 2
 
September 30, 2016
 
December 31, 2015
Commodity derivative contracts, net
$
(120
)
 
$
675

Interest rate derivative contracts

 
(206
)

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


13

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



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

Note receivable and long-term debt including current portion: The carrying amount of the revolving credit facility approximates fair value due to the debt having a variable interest rate and is in Level 2. The Partnership has not had any indicators which represent a change in the market spread associated with its variable interest rate debt.

The estimated fair value of the senior unsecured notes is based on market prices of similar debt. The estimated fair value of the note receivable from Martin Energy Trading was determined by calculating the net present value of the payments over the life of the note. The note is considered Level 3 due to the lack of observable inputs for similar transactions between related parties.
 
September 30, 2016
 
December 31, 2015
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Note receivable - MET
$
15,000

 
$
15,803

 
$
15,000

 
$
15,830

2021 Senior unsecured notes
372,144

 
359,184

 
371,861

 
318,000



(8)
Supplemental Balance Sheet Information

Components of "Other assets, net" were as follows:
 
September 30, 2016
 
December 31, 2015
Customer contracts and relationships, net
$
40,386

 
$
50,452

Other intangible assets
2,417

 
1,818

Other
6,148

 
6,044

 
$
48,951

 
$
58,314



Accumulated amortization of intangible assets was $47,521 and $32,842 at September 30, 2016 and December 31, 2015, respectively.
    
Components of "Other accrued liabilities" were as follows:
 
September 30, 2016
 
December 31, 2015
Accrued interest
$
3,721

 
$
10,365

Property and other taxes payable
8,535

 
6,668

Accrued payroll
2,505

 
1,389

Other
43

 
111

 
$
14,804

 
$
18,533




14

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2016
(Unaudited)



(9)
Long-Term Debt

At September 30, 2016 and December 31, 2015, long-term debt consisted of the following:
 
September 30,
2016
 
December 31,
2015
$664,4443 Revolving credit facility at variable interest rate (3.53%1 weighted average at September 30, 2016), 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 $7,640 and $4,858, respectively2
$
541,360

 
$
493,142