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, 2016



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 July 27, 2016, was 35,454,712.



	Page

PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2
Consolidated and Condensed Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 (audited)	2
Consolidated and Condensed Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	3
Consolidated and Condensed Statements of Capital for the Six Months Ended June 30, 2016 and 2015 (unaudited)	6
Consolidated and Condensed Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	7
Notes to Consolidated and Condensed Financial Statements	8

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

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, 2016			December 31, 2015
	(Unaudited)			(Audited)
Assets
Cash	$	28		$	31
Accounts and other receivables, less allowance for doubtful accounts of $372 and $430, respectively	50,360			74,355
Product exchange receivables	118			1,050
Inventories	90,636			75,870
Due from affiliates	7,972			10,126
Fair value of derivatives	—			675
Other current assets	5,129			5,718
Total current assets	154,243			167,825

Property, plant and equipment, at cost	1,391,544			1,387,814
Accumulated depreciation	(422,465		)	(404,574		)
Property, plant and equipment, net	969,079			983,240

Goodwill	19,657			23,802
Investment in WTLPG	130,474			132,292
Note receivable - Martin Energy Trading LLC	15,000			15,000
Other assets, net	53,279			58,314
Total assets	$	1,341,732		$	1,380,473

Liabilities and Partners’ Capital
Trade and other accounts payable	$	81,836		$	81,180
Product exchange payables	8,809			12,732
Due to affiliates	3,859			5,738
Income taxes payable	370			985
Fair value of derivatives	862			—
Other accrued liabilities	20,663			18,533
Total current liabilities	116,399			119,168

Long-term debt, net	878,891			865,003
Fair value of derivatives	—			206
Other long-term obligations	2,551			2,217
Total liabilities	997,841			986,594

Commitments and contingencies (Note 16)
Partners’ capital	343,891			393,879
Total partners’ capital	343,891			393,879
Total liabilities and partners' capital	$	1,341,732		$	1,380,473

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,
	2016			2015			2016			2015
Revenues:
Terminalling and storage *	$	31,090		$	33,453		$	62,795		$	67,250
Marine transportation *	14,339			20,343			30,685			40,979
Natural gas services*	15,403			16,564			31,500			33,051
Sulfur services	2,700			3,090			5,400			6,180
Product sales: *
Natural gas services	58,899			97,786			149,990			244,089
Sulfur services	39,588			45,284			79,063			95,331
Terminalling and storage	28,329			34,579			56,520			69,572
	126,816			177,649			285,573			408,992
Total revenues	190,348			251,099			415,953			556,452

Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services *	55,579			88,623			134,123			226,330
Sulfur services *	24,700			33,518			52,224			69,541
Terminalling and storage *	22,934			29,658			46,766			59,740
	103,213			151,799			233,113			355,611
Expenses:
Operating expenses *	40,822			47,783			82,054			93,089
Selling, general and administrative *	8,144			9,035			16,315			17,841
Loss on impairment of goodwill	4,145			—			4,145			—
Depreciation and amortization	22,089			22,685			44,137			45,402
Total costs and expenses	178,413			231,302			379,764			511,943

Other operating loss	(1,679		)	(167		)	(1,595		)	(177		)
Operating income	10,256			19,630			34,594			44,332

Other income (expense):
Equity in earnings of WTLPG	805			1,649			2,482			3,389
Interest expense, net	(12,155		)	(9,925		)	(22,267		)	(20,471		)
Other, net	74			(79		)	136			358
Total other expense	(11,276		)	(8,355		)	(19,649		)	(16,724		)

Net income (loss) before taxes	(1,020		)	11,275			14,945			27,608
Income tax expense	(191		)	(314		)	(242		)	(614		)
Income (loss) from continuing operations	(1,211		)	10,961			14,703			26,994
Income from discontinued operations, net of income taxes	—			—			—			1,215
Net income (loss)	(1,211		)	10,961			14,703			28,209
Less general partner's interest in net income	(3,869		)	(4,113		)	(8,080		)	(8,351		)
Less (income) loss allocable to unvested restricted units	4			(44		)	(39		)	(111		)
Limited partners' interest in net income (loss)	$	(5,076	)	$	6,804		$	6,584		$	19,747

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,
	2016		2015		2016		2015
Revenues:*
Terminalling and storage	$	20,590	$	23,061	$	41,548	$	43,535
Marine transportation	6,036		6,622		12,447		13,367
Natural gas services	129		—		442		—
Product Sales	968		1,759		1,668		3,348
Costs and expenses:*
Cost of products sold: (excluding depreciation and amortization)
Natural gas services	4,498		6,810		7,883		13,728
Sulfur services	3,810		3,618		7,622		7,242
Terminalling and storage	4,081		5,632		7,466		11,034
Expenses:
Operating expenses	18,088		18,915		35,445		39,315
Selling, general and administrative	6,911		5,849		12,343		11,843

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,
	2016			2015		2016		2015
Allocation of net income (loss) attributable to:
Limited partner interest:
Continuing operations	$	(5,076	)	$	6,804	$	6,584	$	18,896
Discontinued operations	—			—		—		851
	$	(5,076	)	$	6,804	$	6,584	$	19,747
General partner interest:
Continuing operations	$	3,869		$	4,113	$	8,080	$	7,992
Discontinued operations	—			—		—		359
	$	3,869		$	4,113	$	8,080	$	8,351

Net income (loss) per unit attributable to limited partners:
Basic:
Continuing operations	$	(0.14	)	$	0.19	$	0.19	$	0.54
Discontinued operations	—			—		—		0.02
	$	(0.14	)	$	0.19	$	0.19	$	0.56

Weighted average limited partner units - basic	35,346			35,308		35,366		35,316

Diluted:
Continuing operations	$	(0.14	)	$	0.19	$	0.19	$	0.54
Discontinued operations	—			—		—		0.02
	$	(0.14	)	$	0.19	$	0.19	$	0.56

Weighted average limited partner units - diluted	35,346			35,376		35,380		35,372

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, 2015	35,365,912		$	470,943		$	14,728		$	485,671
Net income	—		19,858			8,351			28,209
Issuance of common units, net	—		(269		)	—			(269		)
Issuance of restricted units	91,950		—			—			—
Forfeiture of restricted units	(1,000	)	—			—			—
General partner contribution	—		—			55			55
Cash distributions	—		(57,612		)	(8,965		)	(66,577		)
Reimbursement of excess purchase price over carrying value of acquired assets	—		750			—			750
Unit-based compensation	—		750			—			750
Balances - June 30, 2015	35,456,862		$	434,420		$	14,169		$	448,589

Balances - January 1, 2016	35,456,612		$	380,845		$	13,034		$	393,879
Net income	—		6,623			8,080			14,703
Issuance of restricted units	13,800		—			—			—
Forfeiture of restricted units	(250	)	—			—			—
Cash distributions	—		(57,603		)	(9,119		)	(66,722		)
Unit-based compensation	—		486			—			486
Reimbursement of excess purchase price over carrying value of acquired assets	—		1,875			—			1,875
Purchase of treasury units	(15,200	)	(330		)	—			(330		)
Balances - June 30, 2016	35,454,962		$	331,896		$	11,995		$	343,891

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,
	2016			2015
Cash flows from operating activities:
Net income	$	14,703		$	28,209
Less: Income from discontinued operations, net of income taxes	—			(1,215		)
Net income from continuing operations	14,703			26,994
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	44,137			45,402
Amortization of deferred debt issuance costs	2,247			1,742
Amortization of premium on notes payable	(153		)	(164		)
Loss (gain) on sale of property, plant and equipment	1,595			165
Loss on impairment of goodwill	4,145			—
Equity in earnings of unconsolidated entities	(2,482		)	(3,389		)
Derivative income	(1,125		)	(1,745		)
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			1,745
Unit-based compensation	486			750
Cash distributions from WTLPG	4,300			4,400
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables	23,995			58,689
Product exchange receivables	932			2,752
Inventories	(14,766		)	12,204
Due from affiliates	2,154			3,800
Other current assets	509			(711		)
Trade and other accounts payable	(3,429		)	(46,283		)
Product exchange payables	(3,923		)	2,308
Due to affiliates	(1,879		)	(118		)
Income taxes payable	(615		)	(438		)
Other accrued liabilities	2,130			(959		)
Change in other non-current assets and liabilities	(614		)	(1,709		)
Net cash provided by continuing operating activities	74,803			105,435
Net cash used in discontinued operating activities	—			(1,351		)
Net cash provided by operating activities	74,803			104,084
Cash flows from investing activities:
Payments for property, plant and equipment	(27,844		)	(28,027		)
Acquisition of intangible assets	(2,150		)	—
Payments for plant turnaround costs	(1,184		)	(1,754		)
Proceeds from sale of property, plant and equipment	655			776
Proceeds from involuntary conversion of property, plant and equipment	9,100			—
Net cash used in continuing investing activities	(21,423		)	(29,005		)
Net cash provided by discontinued investing activities	—			41,250
Net cash provided by (used in) investing activities	(21,423		)	12,245
Cash flows from financing activities:
Payments of long-term debt	(163,700		)	(151,000		)
Proceeds from long-term debt	180,700			101,000
Proceeds from issuance of common units, net of issuance related costs	—			(269		)
General partner contribution	—			55
Purchase of treasury units	(330		)	—
Payment of debt issuance costs	(5,206		)	(306		)
Reimbursement of excess purchase price over carrying value of acquired assets	1,875			750
Cash distributions paid	(66,722		)	(66,577		)
Net cash used in financing activities	(53,383		)	(116,347		)
Net decrease in cash	(3		)	(18		)
Cash at beginning of period	31			42
Cash at end of period	$	28		$	24
Non-cash additions to property, plant and equipment	$	989		$	3,767

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, 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.

During the 2nd quarter of 2016, the Partnership agreed to commence a relocation of one of its docks at the Partnership's Corpus Christi crude terminal location due to the construction of a new bridge near the facility. During the three months ended June 30, 2016, the Partnership received proceeds in the amount of $9,100 related to the relocation. The Partnership expects to record a gain from this involuntary conversion that will be recorded when the relocation is completed, which is expected to be no later than the 3rd quarter of 2017.


(2)	New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases. This standard 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.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): 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 is evaluating the effect that ASU 2015-11 will have 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

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)

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)	Discontinued operations and divestitures

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 six months ended June 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.

The Floating Storage Assets’ operating results, which are included in income from discontinued operations, were as follows:



	Three Months Ended June 30,				Six Months Ended June 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 six months ended June 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 June 30, 2016 and December 31, 2015 were as follows:



	June 30, 2016		December 31, 2015
Natural gas liquids	$	45,027	$	20,959
Sulfur	8,385		13,812
Sulfur based products	16,092		19,400
Lubricants	18,349		18,675
Other	2,783		3,024
	$	90,636	$	75,870

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)


(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.

Selected financial information for WTLPG is as follows:



	As of June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	Total Assets		Members' Equity		Revenues		Net Income		Revenues		Net Income
2016
WTLPG	$	815,035	$	795,247	$	20,166	$	4,027	$	45,021	$	12,725
	As of December 31,
2015
WTLPG	$	819,342	$	804,023	$	21,762	$	8,242	$	43,916	$	16,945

As of June 30, 2016 and December 31, 2015, the Partnership’s interest in cash of WTLPG was $700 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 June 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 383,000 barrels settling during the period from October 31, 2016 through March 31, 2017. These instruments settle against OPIS Mont Belvieu (non-TET) monthly average price. Martin Energy Trading LLC ("MET") serves as the counterparty for all positions outstanding at June 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.

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)

During the six months ended June 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 June 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 six months ended June 30, 2016, respectively. In connection with the interest rate swaption contracts, the Partnership received premiums of $1,120 and $1,745, 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 six months ended June 30, 2015, respectively. Each of the interest rate swaptions was fully amortized as of June 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 six months ended June 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 six months ended June 30, 2015, the Partnership recognized $1,120 and $1,745, 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.

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	June 30, 2016		December 31, 2015		Balance Sheet Location	June 30, 2016		December 31, 2015
Derivatives not designated as hedging instruments:	Current:
Commodity contracts	Fair value of derivatives	$	—	$	675	Fair value of derivatives	$	862	$	—
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		$	—	$	675		$	862	$	206

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)

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

For the Three Months Ended June 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	$	—		$	1,120
Commodity contracts	Cost of products sold	(876		)	—
Total derivatives not designated as hedging instruments		$	(876	)	$	1,120

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

For the Six Months Ended June 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	$	1,745
Interest rate contracts	Interest expense	366		—
Commodity contracts	Cost of products sold	129		—
Total derivatives not designated as hedging instruments		$	1,125	$	1,745


(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
	June 30, 2016			December 31, 2015
Commodity derivative contracts	$	(862	)	$	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:

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 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 interest 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.



	June 30, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
Note receivable - MET	$	15,000	$	15,814	$	15,000	$	15,830
2021 Senior unsecured notes	372,050		345,054		371,861		318,000


(8)	Supplemental Balance Sheet Information

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



	June 30, 2016		December 31, 2015
Customer contracts and relationships, net	$	44,243	$	50,452
Other intangible assets	2,556		1,818
Other	6,480		6,044
	$	53,279	$	58,314

Accumulated amortization of intangible assets was $42,156 and $32,842 at June 30, 2016 and December 31, 2015, respectively.

Components of "Other accrued liabilities" were as follows:



	June 30, 2016		December 31, 2015
Accrued interest	$	10,431	$	10,365
Property and other taxes payable	6,566		6,668
Accrued payroll	3,602		1,389
Other	64		111
	$	20,663	$	18,533

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)


(9)	Long-Term Debt

At June 30, 2016 and December 31, 2015, long-term debt consisted of the following:



	June 30, 2016		December 31, 2015
$664,444³ Revolving credit facility at variable interest rate (3.46%¹ weighted average at June 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 $8,159 and $4,858, respectively²	$	506,841	$	493,142
$400,000 Senior notes, 7.25% interest, net of unamortized debt issuance costs of $3,165 and $3,507, respectively, including unamortized premium of $1,415 and $1,568, respectively, issued $250,000 February 2013 and $150,000 April 2014, due February 2021, unsecured²	372,050		371,861
Total long-term debt, net	$	878,891	$	865,003

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 June 30, 2016 and December 31, 2015 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 June 30, 2016 is 3.00%. The credit facility contains various covenants which limit the Partnership’s ability to make certain investments and acquisitions; enter into certain agreements; incur indebtedness; sell assets; and make certain amendments to the Partnership's omnibus agreement with Martin Resource Management (the "Omnibus Agreement"). The Partnership is permitted to make quarterly distributions so long as no event of default exists.

² The Partnership is in compliance with all debt covenants as of June 30, 2016.

³ On April 27, 2016, the Partnership made certain strategic amendments to its credit facility which, among other things, decreased its borrowing capacity from $700,000 to $664,444 and extended the maturity date of the facility from March 28, 2018 to March 28, 2020. In connection with the amendment, the Partnership expensed $820 of unamortized debt issuance costs determined not to have continuing benefit.

The Partnership paid cash interest, net of proceeds received from interest rate swaptions and capitalized interest, in the amount of $4,757 and $22,116 for the three and six months ended June 30, 2016, respectively. The Partnership paid cash interest, net of proceeds received from interest rate swaptions and capitalized interest, in the amount of $3,015 and $21,104 for the three and six months ended June 30, 2015, respectively. Capitalized interest was $358 and $682 for the three and six months ended June 30, 2016, respectively. Capitalized interest was $570 and $1,095 for the three and six months ended June 30, 2015, respectively.


(10)	Partners' Capital

As of June 30, 2016, Partners’ capital consisted of 35,454,962 common limited partner units, representing a 98% partnership interest and a 2% general partner interest. Martin Resource Management, through subsidiaries, owns 6,264,532 of the Partnership's common limited partner units representing approximately 17.7% of the Partnership's outstanding common limited partner units. Martin Midstream GP LLC ("MMGP"), the Partnership's general partner, owns the 2% general partnership interest. Martin Resource Management controls the Partnership's general partner, by virtue of its 51% voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of the Partnership's general partner.

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

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)

Incentive Distribution Rights

MMGP holds a 2% general partner interest and certain incentive distribution rights ("IDRs") in the Partnership. IDRs are a separate class of non-voting limited partner interest that may be transferred or sold by the general partner under the terms of the Partnership Agreement, and represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution and any cumulative arrearages on common units once certain target distribution levels have been achieved. The Partnership is required to distribute all of its available cash from operating surplus, as defined in the Partnership Agreement. The general partner was allocated $3,893 and $7,786 in incentive distributions during the three and six months ended June 30, 2016, respectively. The general partner was allocated $3,893 and $7,631 in incentive distributions during the three and six months ended June 30, 2015, respectively.

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

Distributions of Available Cash

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

Net Income per Unit

The Partnership follows the provisions of the FASB ASC 260-10 related to earnings per share, which addresses the application of the two-class method in determining income per unit for master limited partnerships having multiple classes of securities that may participate in partnership distributions accounted for as equity distributions. Undistributed earnings are allocated to the general partner and limited partners utilizing the contractual terms of the Partnership Agreement. Distributions to the general partner pursuant to the IDRs are limited to available cash that will be distributed as defined in the Partnership Agreement. Accordingly, the Partnership does not allocate undistributed earnings to the general partner for the IDRs because the general partner's share of available cash is the maximum amount that the general partner would be contractually entitled to receive if all earnings for the period were distributed. When current period distributions are in excess of earnings, the excess distributions for the period are to be allocated to the general partner and limited partners based on their respective sharing of income and losses specified in the Partnership Agreement. Additionally, as required under FASB ASC 260-10-45-61A, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities, as defined in FASB ASC 260-10-20, for earnings per unit calculations.

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

MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

(Dollars in thousands, except where otherwise indicated)

June 30, 2016

(Unaudited)



	Three Months Ended June 30,		Six Months Ended June 30,
Continuing operations:	2016	2015	2016	2015
Income (loss) from continuing operations