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MARTIN MIDSTREAM PARTNERS LP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) References in this quarterly report on Form 10-Q to "Martin Resource Management" refers to Martin Resource Management Corporation and its subsidiaries, unless the context otherwise requires. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and the notes thereto included elsewhere in this quarterly report. Forward-Looking Statements This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements included in this quarterly report that are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including "forecast," "may," "believe," "will," "expect," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other "forward-looking" information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements. These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the "SEC") on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014, and in this report. Overview We are a publicly traded limited partnership with a diverse set of operations focused primarily in the United States ("U.S.") Gulf Coast region. Our four primary business lines include: • Terminalling and storage services for petroleum products and by-products including the refining, blending and packaging of finished lubricants; • Natural gas liquids distribution services and natural gas storage; • Sulfur and sulfur-based products gathering, processing, marketing, manufacturing and distribution; and • Marine transportation services for petroleum products and by-products. The petroleum products and by-products we collect, transport, store and market are produced primarily by major and independent oil and gas companies who often turn to third parties, such as us, for the transportation and disposition of these products. In addition to these major and independent oil and gas companies, our primary customers include independent refiners, large chemical companies, fertilizer manufacturers and other wholesale purchasers of these products. We operate primarily in the U.S. Gulf Coast region. This region is a major hub for petroleum refining, natural gas gathering and processing, and support services for the exploration and production industry. We were formed in 2002 by Martin Resource Management, a privately-held company whose initial predecessor was incorporated in 1951 as a supplier of products and services to drilling rig contractors. Since then, Martin Resource Management has expanded its operations through acquisitions and internal expansion initiatives as its management identified and capitalized on the needs of producers and purchasers of petroleum products and by-products and other bulk liquids. Martin Resource Management is an important supplier and customer of ours. As of September 30, 2014, Martin Resource Management owned 17.7% of our total outstanding common limited partner units. Furthermore, Martin Resource Management 30 -------------------------------------------------------------------------------- controls Martin Midstream GP LLC ("MMGP"), our general partner, by virtue of its 51% voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights. Martin Resource Management directs our business operation through its ownership interests in and control of our general partner. We entered into an omnibus agreement dated November 1, 2002, with Martin Resource Management (the "Omnibus Agreement") that governs, among other things, potential competition and indemnification obligations among the parties to the agreement, related party transactions, the provision of general administration and support services by Martin Resource Management and our use of certain of Martin Resource Management's trade names and trademarks. Under the terms of the Omnibus Agreement, the employees of Martin Resource Management are responsible for conducting our business and operating our assets. The historical operation of our business segments by Martin Resource Management provides us with several decades of experience and a demonstrated track record of customer service across our operations. Our current lines of business have been developed and systematically integrated over this period of more than 60 years, including natural gas services (1950s); sulfur (1960s); marine transportation (late 1980s); and terminalling and storage (early 1990s). This development of a diversified and integrated set of assets and operations has produced a complementary portfolio of midstream services that facilitates the maintenance of long-term customer relationships and encourages the development of new customer relationships. Recent Developments We believe one of the rationales driving investment in master limited partnerships, including us, is the opportunity for distribution growth offered by the partnerships. Such distribution growth is a function of having access to liquidity in the financial markets used for incremental capital investment (development projects and acquisitions) to grow distributable cash flow. We continually adjust our business strategy to focus on maximizing liquidity, maintaining a stable asset base which generates fee based revenues not sensitive to commodity prices, and improving profitability by increasing asset utilization and controlling costs. Over the past year, we have had access to the capital markets and have appropriate levels of liquidity and operating cash flows to adequately fund our growth. Over the next two years, we plan to increase expansion capital expenditures across our multiple business platforms. Public Offering. On September 29, 2014, we completed a public offering of 3,450,000 common units at a price of $36.91 per common unit, before the payment of underwriters' discounts, commissions and offering expenses (per unit value is in dollars, not thousands). Total proceeds from the sale of the 3,450,000 common units, net of underwriters' discounts, commissions and offering expenses were $122.6 million. Our general partner contributed $2.6 million in cash to us in conjunction with the issuance in order to maintain its 2% general partner interest in us. The net proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. Private Placement of Common Units. On August 29, 2014, we closed a private equity sale with Martin Resource Management, under which Martin Resource Management invested $45.0 million in cash in exchange for 1,171,265 common units. The pricing of $38.42 per common unit was based on the 10-day weighted average price of our common units for the 10 trading days ending August 8, 2014. In connection with the issuance of these common units, our general partner contributed $0.9 million in order to maintain its 2% general partner interest in us. The proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. Cardinal Gas Storage. On August 29, 2014, Redbird Gas Storage LLC ("Redbird"), a wholly owned subsidiary of the Partnership, completed the previously announced purchase of all of the outstanding Category A membership interests of Cardinal Gas Storage Partners LLC ("Cardinal") from Energy Capital Partners I, LP, Energy Capital Partners I-A, LP, Energy Capital Partners I-B IP, LP and Energy Capital Partners I (Cardinal IP), LP (together, "ECP") for cash of approximately $120.0 million, subject to certain post-closing adjustments. As a result of the acquisition, Redbird owns 100% of the Category A membership interests in Cardinal. Concurrent with the closing of the transaction, we retired all of the project level financing of various Cardinal subsidiaries. This transaction and repayment of the project financings was funded with borrowings under our revolving credit facility. On October 27, 2014, Cardinal merged with and into Redbird, and Redbird subsequently changed its name to Cardinal. 31 --------------------------------------------------------------------------------Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated and condensed financial statements included elsewhere herein. We prepared these financial statements in conformity with United States generally accepted accounting principles ("U.S. GAAP" or "GAAP"). The preparation of these financial statements required us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Our results may differ from these estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Changes in these estimates could materially affect our financial position, results of operations or cash flows. You should also read Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements included within our Annual Report on Form 10-K for the year ended December 31, 2013. The following table evaluates the potential impact of estimates utilized during the periods ended September 30, 2014 and 2013: Effect if Actual Results Judgments and Differ from Estimates and Description Uncertainties Assumptions Allowance for Doubtful Accounts We evaluate our allowance We evaluate the If actual collection for doubtful accounts on collectability of our results are not consistent an ongoing basis and accounts receivable based with our judgments, we may record adjustments when, on factors such as the experience increase in in management's judgment, customer's ability to pay, uncollectible receivables. circumstances warrant. the age of the receivable A 10% increase in our Reserves are recorded to and our historical allowance for doubtful reduce receivables to the collection experience. A accounts would result in a amount ultimately deterioration in any of decrease in net income of expected to be collected. these factors could result approximately $0.2 in an increase in the million. allowance for doubtful accounts balance. Depreciation Depreciation expense is Determination of The lives of our fixed computed using the depreciation expense assets range from 3 - 50 straight-line method over requires judgment years. If the depreciable the useful life of the regarding estimated useful lives of our assets were assets. lives and salvage values decreased by 10%, we of property, plant and estimate that annual equipment. As depreciation expense would circumstances warrant, increase approximately estimates are reviewed to $6.7 million, resulting in determine if any changes a corresponding reduction in the underlying in net income. assumptions are needed. Impairment of Long-Lived Assets We periodically evaluate Our impairment analyses Applying this impairment whether the carrying require management to use review methodology, we value of long-lived judgment in estimating have recorded an assets has been impaired future cash flows and impairment charge of $3.4 when circumstances useful lives, as well as million in our Marine indicate the carrying assessing the probability Transportation Segment value of the assets may of different outcomes. during the three and nine not be recoverable. These months ended September 30, evaluations are based on 2014 related to certain undiscounted cash flow offshore marine assets. No projections over the impairment was recorded remaining useful life of for the three and nine the asset. The carrying months ended September 30, value is not recoverable 2013. if it exceeds the sum of the undiscounted cash flows. Any impairment loss is measured as the excess of the asset's carrying value over its fair value. Impairment of Goodwill Goodwill is subject to a We determine fair value We are in the process of fair-value based using accepted valuation completing the most recent impairment test on an techniques, including annual review of goodwill annual basis, or more discounted cash flow, the as of August 31, 2014. frequently if events or guideline public company Based on preliminary changes in circumstances method and the guideline results of the evaluation, indicate that the fair transaction method. These no impairment is value of any of our analyses require indicated. reporting units is less management to make than its carrying amount. assumptions and estimates regarding industry and economic factors, future operating results and discount rates. We conduct impairment testing using present economic conditions, as well as future expectations. 32-------------------------------------------------------------------------------- Purchase Price Allocations We allocate the purchase The determination of fair If subsequent factors price of an acquired values of acquired assets indicate that estimates business to its and liabilities requires a and assumptions used to identifiable assets significant level of allocate costs to acquired (including identifiable management judgment. Fair assets and liabilities intangible assets) and values are estimated using differ from actual liabilities based on various methods as deemed results, the allocation their fair values at the appropriate. For between goodwill, other date of acquisition. Any significant transactions, intangible assets and excess of purchase price third party assessments fixed assets could in excess of amounts may be engaged to assist significantly differ. Any allocated to identifiable in the valuation process. such differences could assets and liabilities is impact future earnings recorded as goodwill. As through depreciation and additional information amortization expense. becomes available, we may Additionally, if estimated adjust the preliminary results supporting the allocation for a period valuation of goodwill or of up to one year. other intangible assets are not achieved, impairments could result. Asset Retirement Obligations Asset retirement Determining the fair value If actual results differ obligations ("AROs") of AROs requires from judgments and associated with a management judgment to assumptions used in contractual or regulatory evaluate required valuing an ARO, we may remediation requirement remediation activities, experience significant are recorded at fair estimate the cost of those changes in ARO balances. value in the period in activities and determine The establishment of an which the obligation can the appropriate interest ARO has no initial impact be reasonably estimated rate. on earnings. and depreciated over the life of the related asset or contractual term. The liability is determined using a credit-adjusted risk-free interest rate and is accreted over time until the obligation is settled. Environmental Liabilities We estimate environmental Estimating environmental Environmental liabilities liabilities using both liabilities requires have not adversely internal and external significant management affected our results of resources. Activities judgment as well as operations or financial include feasibility possible use of third condition in the past, and studies and other party specialists we do not anticipate that evaluations management knowledgeable in such they will in the future. considers appropriate. matters. Environmental liabilities are recorded in the period in which the obligation can be reasonably estimated. Our Relationship with Martin Resource Management Martin Resource Management is engaged in the following principal business activities: • providing land transportation of various liquids using a fleet of trucks and road vehicles and road trailers; • distributing fuel oil, asphalt, sulfuric acid, marine fuel and other liquids; • providing marine bunkering and other shore-based marine services in Alabama, Louisiana, Florida, Mississippi and Texas; • operating a crude oil gathering business in Stephens, Arkansas; • providing crude oil gathering, refining, and marketing services of base oils, asphalt, and distillate products in Smackover, Arkansas; • operating an environmental consulting company; • operating an engineering services company; • supplying employees and services for the operation of our business; • operating a natural gas optimization business; 33 --------------------------------------------------------------------------------• operating, for its account and our account, the docks, roads, loading and unloading facilities and other common use facilities or access routes at our Stanolind terminal; and • operating, solely for our account, the asphalt facilities in Omaha, Nebraska, Port Neches, Texas and South Houston, Texas. We are and will continue to be closely affiliated with Martin Resource Management as a result of the following relationships. Ownership Martin Resource Management owns approximately 17.7% of the outstanding limited partner units. In addition, Martin Resource Management controls MMGP, our general partner, by virtue of its 51% voting interest in Holdings, the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights. Management Martin Resource Management directs our business operations through its ownership interests in and control of our general partner. We benefit from our relationship with Martin Resource Management through access to a significant pool of management expertise and established relationships throughout the energy industry. We do not have employees. Martin Resource Management employees are responsible for conducting our business and operating our assets on our behalf. Related Party Agreements The Omnibus Agreement requires us to reimburse Martin Resource Management for all direct expenses it incurs or payments it makes on our behalf or in connection with the operation of our business. We reimbursed Martin Resource Management for $48.4 million of direct costs and expenses for the three months ended September 30, 2014 compared to $45.4 million for the three months ended September 30, 2013.We reimbursed Martin Resource Management for $135.4 million of direct costs and expenses for the nine months ended September 30, 2014 compared to $134.9 million for the nine months ended September 30, 2013. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management for direct expenses. In addition to the direct expenses, under the Omnibus Agreement, we are required to reimburse Martin Resource Management for indirect general and administrative and corporate overhead expenses. For the three months ended September 30, 2014 and 2013, the conflicts committee of our general partner ("Conflicts Committee") approved reimbursement amounts of $3.1 million and $2.7 million, respectively, reflecting our allocable share of such expenses. For the nine months ended September 30, 2014 and 2013, the Conflicts Committee approved reimbursement amounts of $9.4 million and $8.0 million, respectively. The Conflicts Committee of our general partner's board of directors will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually. These indirect expenses covered the centralized corporate functions Martin Resource Management provides for us, such as accounting, treasury, clerical, engineering, legal, billing, information technology, administration of insurance, general office expenses and employee benefit plans and other general corporate overhead functions we share with Martin Resource Management's retained businesses. The Omnibus Agreement also contains significant non-compete provisions and indemnity obligations. Martin Resource Management also licenses certain of its trademarks and trade names to us under the Omnibus Agreement. The agreements include, but are not limited to, motor carrier agreements, marine transportation agreements, terminal services agreements, a tolling agreement, a sulfuric acid agreement, and various other miscellaneous agreements. Pursuant to the terms of the Omnibus Agreement, we are prohibited from entering into certain material agreements with Martin Resource Management without the approval of the Conflicts Committee of our general partner's board of directors. For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions - Agreements" set forth in our annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014. Commercial We have been and anticipate that we will continue to be both a significant customer and supplier of products and services offered by Martin Resource Management. Our motor carrier agreement with Martin Resource Management provides 34 -------------------------------------------------------------------------------- us with access to Martin Resource Management's fleet of road vehicles and road trailers to provide land transportation in the areas served by Martin Resource Management. Our ability to utilize Martin Resource Management's land transportation operations is currently a key component of our integrated distribution network. In the aggregate, the impact of related party transactions included in cost of products sold accounted for approximately 8% and 9% of our total cost of products sold during the three months ended September 30, 2014 and 2013, respectively. In the aggregate, the impact of related party transactions included in cost of products sold accounted for approximately 7% and 8% of our total cost of products sold during the nine months ended September 30, 2014 and 2013, respectively. We also purchase marine fuel from Martin Resource Management, which we account for as an operating expense. In the aggregate, the impact of related party transactions included in revenues accounted for approximately 7% of our total revenues for both the three months ended September 30, 2014 and 2013, respectively. Our sales to Martin Resource Management accounted for approximately 6% and 7% of our total revenues for the nine months ended September 30, 2014 and 2013, respectively. For a more comprehensive discussion concerning the agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions - Agreements" set forth in our annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014. Approval and Review of Related Party Transactions If we contemplate entering into a transaction, other than a routine or in the ordinary course of business transaction, in which a related person will have a direct or indirect material interest, the proposed transaction is submitted for consideration to the board of directors of our general partner or to our management, as appropriate. If the board of directors is involved in the approval process, it determines whether to refer the matter to the Conflicts Committee of our general partner's board of directors, as constituted under our limited partnership agreement. If a matter is referred to the Conflicts Committee, it obtains information regarding the proposed transaction from management and determines whether to engage independent legal counsel or an independent financial advisor to advise the members of the committee regarding the transaction. If the Conflicts Committee retains such counsel or financial advisor, it considers such advice and, in the case of a financial advisor, such advisor's opinion as to whether the transaction is fair and reasonable to us and to our unitholders. How We Evaluate Our Operations Our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with U.S. GAAP to analyze our performance. These include: (1) net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), (2) adjusted EBITDA and (3) distributable cash flow. Our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow, and as key components of our internal financial reporting. We believe investors benefit from having access to the same financial measures that our management uses. EBITDA and Adjusted EBITDA. Certain items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing an entity's financial performance, such as cost of capital and historic costs of depreciable assets. We have included information concerning EBITDA and adjusted EBITDA because they provide investors and management with additional information to better understand the following: financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other similarly situated entities; and the viability of acquisitions and capital expenditure projects. Our method of computing adjusted EBITDA may not be the same method used to compute similar measures reported by other entities. The economic substance behind our use of adjusted EBITDA is to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and make distributions to our unit holders. Distributable Cash Flow. Distributable cash flow is a significant performance measure used by our management and by external users of our financial statements, such as investors, commercial banks and research analysts, to compare basic cash flows generated by us to the cash distributions we expect to pay our unitholders. Distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit of such an entity 35 --------------------------------------------------------------------------------is generally determined by the unit's yield, which in turn is based on the amount of cash distributions the entity pays to a unitholder. EBITDA, adjusted EBITDA and distributable cash flow should not be considered alternatives to, or more meaningful than, net income, cash flows from operating activities, or any other measure presented in accordance with U.S. GAAP. Our method of computing these measures may not be the same method used to compute similar measures reported by other entities. Non-GAAP Financial Measures The following table reconciles the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the three and nine months ended September 30, 2014 and 2013. Reconciliation of EBITDA, Adjusted EBITDA, and Distributable Cash Flow Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Net income (loss) $ (26,905 ) $ 192 $ (16,078 ) $ 25,907 Adjustments: Interest expense 11,459 11,060 34,351 31,058 Income tax expense 300 303 954 910 Depreciation and amortization 16,743 13,698 45,329 37,944 EBITDA 1,597 25,253 64,556 95,819 Adjustments: Equity in (earnings) loss of unconsolidated entities (2,655 ) 577 (4,297 ) 878 Gain on sale of property, plant and equipment - - (54 ) (796 ) Impairment of long-lived assets 3,445 - 3,445 - Reduction in carrying value of investment in Cardinal due to the purchase of the controlling interest1 30,102 - 30,102 - Debt prepayment premium - - 7,767 - Distributions from unconsolidated entities 982 761 2,323 2,722 Unit-based compensation 201 257 589 737 Adjusted EBITDA 33,672 26,848 104,431 99,360 Adjustments: Interest expense (11,459 ) (11,060 ) (34,351 ) (31,058 ) Income tax expense (300 ) (303 ) (954 ) (910 ) Amortization of debt discount - 77 1,305 230 Amortization of debt premium (82 ) - (164 ) - Amortization of deferred debt issuance costs 827 815 5,415 2,890 Non-cash mark-to-market on derivatives 1,036 - 489 - Payments of installment notes payable and capital lease obligations - (91 ) - (251 ) Payments for plant turnaround costs (90 ) - (4,000 ) - Maintenance capital expenditures (4,306 ) (2,973 ) (13,260 ) (7,473 ) Distributable Cash Flow $ 19,298 $ 13,313 $ 58,911 $ 62,788 1 In the third quarter, we recorded a $30.1 million non-recurring, non-cash charge to our net income reflecting the reduction in our carrying value of our investment in Cardinal as a result of the Cardinal acquisition. Results of Operations 36 --------------------------------------------------------------------------------The results of operations for the nine months ended September 30, 2014 and 2013 have been derived from our consolidated and condensed financial statements. We evaluate segment performance on the basis of operating income, which is derived by subtracting cost of products sold, operating expenses, selling, general and administrative expenses, and depreciation and amortization expense from revenues. The following table sets forth our operating revenues and operating income by segment for the three and nine months ended September 30, 2014 and 2013. The results of operations for these interim periods are not necessarily indicative of the results of operations which might be expected for the entire year. Our consolidated and condensed results of operations are presented on a comparative basis below. There are certain items of income and expense which we do not allocate on a segment basis. These items, including equity in earnings (loss) of unconsolidated entities, interest expense, and indirect selling, general and administrative expenses, are discussed following the comparative discussion of our results within each segment. Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013 Operating Operating Revenues Operating Income Income (Loss) Operating Intersegment Revenues after Operating Intersegment after Revenues Eliminations Eliminations Income (Loss) Eliminations Eliminations Three Months Ended September 30, 2014 Terminalling and storage $ 80,948 $ (1,333 ) $ 79,615 $ 6,298 $ (378 ) $ 5,920 Natural gas services 236,058 - 236,058 6,439 1,045 7,484 Sulfur services 50,030 - 50,030 3,357 (1,722 ) 1,635 Marine transportation 25,859 (1,577 ) 24,282 400 1,055 1,455 Indirect selling, general and administrative - - - (4,479 ) - (4,479 ) Total $ 392,895 $ (2,910 ) $ 389,985 $ 12,015 $ - $ 12,015 Operating Operating Revenues Operating Income Income (Loss) Three Months Ended Operating Intersegment Revenues after Operating Intersegment after September 30, 2013 Revenues Eliminations Eliminations Income (Loss) Eliminations Eliminations Terminalling and storage $ 90,205 $ (1,199 ) $ 89,006 $ 8,052 $ (702 ) $ 7,350 Natural gas services 204,926 - 204,926 4,590 876 5,466 Sulfur services 42,097 - 42,097 753 (1,280 ) (527 ) Marine transportation 24,751 (1,164 ) 23,587 2,627 1,106 3,733 Indirect selling, general and administrative - - - (3,779 ) - (3,779 ) Total $ 361,979 $ (2,363 ) $ 359,616 $ 12,243 $ - $ 12,243 37-------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 Operating Operating Revenues Operating Income Income (Loss) Operating Intersegment Revenues after Operating Intersegment after Revenues Eliminations Eliminations Income (Loss) Eliminations Eliminations Nine Months Ended September 30, 2014 Terminalling and storage $ 255,162 $ (3,863 ) $ 251,299 $ 24,505 $ (1,909 ) $ 22,596 Natural gas services 818,361 - 818,361 19,899 2,865 22,764 Sulfur services 166,818 - 166,818 21,758 (4,169 ) 17,589 Marine transportation 73,255 (3,775 ) 69,480 682 3,213 3,895 Indirect selling, general and administrative - - - (14,214 ) - (14,214 )Total $ 1,313,596 $ (7,638 ) $ 1,305,958 $ 52,630 $ - $ 52,630 Operating Operating Revenues Operating Income Income (Loss) Operating Intersegment Revenues after Operating Intersegment after Revenues Eliminations Eliminations Income (Loss) Eliminations Eliminations Nine Months Ended September 30, 2013 Terminalling and storage $ 256,320 $ (3,507 ) $ 252,813 $ 27,657 $ (1,689 ) $ 25,968 Natural gas services 653,080 - 653,080 17,254 1,604 18,858 Sulfur services 173,378 - 173,378 19,659 (3,141 ) 16,518 Marine transportation 75,004 (2,785 ) 72,219 5,587 3,226 8,813 Indirect selling, general and administrative - - - (11,270 ) - (11,270 )Total $ 1,157,782 $ (6,292 ) $ 1,151,490 $ 58,887 $ - $ 58,887 38--------------------------------------------------------------------------------Terminalling and Storage Segment Comparative Results of Operations for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands, except BBL per day) Revenues: Services $ 33,213 $ 30,151 $ 3,062 10% Products 47,735 60,054 (12,319 ) (21)% Total revenues 80,948 90,205 (9,257 ) (10)% Cost of products sold 43,193 53,215 (10,022 ) (19)% Operating expenses 21,506 19,427 2,079 11% Selling, general and administrative expenses 786 979 (193 ) (20)% Depreciation and amortization 9,512 8,532 980 11% 5,951 8,052 (2,101 ) (26)% Other operating income 347 - 347 Operating income $ 6,298 $ 8,052 $ (1,754 ) (22)% Lubricant sales volumes (gallons) 8,193 10,638 (2,445 ) (23)% Shore-based throughput volumes (gallons) 64,338 65,516 (1,178 ) (2)% Smackover refinery throughput volumes (BBL per day) 7,123 6,878 245 4% Corpus Christi crude terminal (BBL per day) 173,315 101,921 71,394 70% Services revenues. Services revenue increased primarily due to a $1.4 million increase at our crude terminal in Corpus Christi, Texas, which is attributable to volume increases. In addition, revenue at our Smackover refinery increased $0.8 million due to increased throughput fee and volume. Products revenues. A 29% decrease in sales volumes at our blending and packaging facilities resulted in a $13.1 million decrease to product revenues. The decline in volumes resulted primarily from increased price competition. The average sales price from our blending and packaging assets increased 5%, resulting in a $2.3 million increase in product revenues. Cost of products sold. A 29% decrease in sales volumes at our blending and packaging facilities resulted in an $11.6 million decrease. The average price per gallon increased 7%, resulting in a $2.6 million increase in cost of goods sold. Operating expenses. Expenses at our specialty terminals increased $2.4 million, primarily due to a $1.0 million increase in pass-through expense, $0.8 million of additional repair and maintenance, and $0.3 million of increased utilities. Selling, general and administrative expenses. Selling, general and administrative expenses remained consistent. Depreciation and amortization. The increase in depreciation and amortization is due to the impact of recent capital expenditures. Other operating income. Other operating income increased primarily due to business interruption insurance proceeds received related to the Stanolind tank fire. 39 -------------------------------------------------------------------------------- Comparative Results of Operations for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands, except BBL per day) Revenues: Services $ 101,711 $ 88,770 $ 12,941 15% Products 153,451 167,550 (14,099 ) (8)% Total revenues 255,162 256,320 (1,158 ) -% Cost of products sold 139,028 148,624 (9,596 ) (6)% Operating expenses 61,628 54,860 6,768 12% Selling, general and administrative expenses 2,484 2,422 62 3% Depreciation and amortization 27,902 22,925 4,977 22% 24,120 27,489 (3,369 ) (12)% Other operating income 385 168 217 129% Operating income $ 24,505 $ 27,657 $ (3,152 ) (11)% Lubricant sales volumes (gallons) 26,170 29,885 (3,715 ) (12)% Shore-based throughput volumes (gallons) 186,956 207,533 (20,577 ) (10)% Smackover refinery throughput volumes (BBL per day) 5,803 6,780 (977 ) (14)% Corpus Christi crude terminal (BBL per day) 160,332 105,783 54,549 52% Services revenues. Services revenue increased $12.9 million, including $8.2 million attributable specialty terminals. The Corpus Christi crude terminal expansion contributed $6.3 million of this increase. In addition, revenue at our Smackover refinery increased $4.5 million due to increased pipeline fee revenue. Products revenues. A 17% decrease in sales volumes at our blending and packaging facilities resulted in a $20.2 million decrease to product revenues. The decline in volumes resulted primarily from increased price competition. The average sales price from our blending and packaging assets increased 6%, resulting in a $6.8 million increase in product revenues. Cost of products sold. A 17% decrease in sales volumes at our blending and packaging facilities resulted in an $18 million decrease. Average price per gallon increased 9%, resulting in an $8.6 million increase in cost of goods sold. Operating expenses. Operating expenses at our Smackover refinery increased $2.7 million primarily due to increased compensation expense of $1.2 million and $1.4 million increase in pass-through expense. Operating expenses at our Corpus Christi crude terminal increased $4.5 million primarily as a result of increased wharfage and regulatory fees. Selling, general and administrative expenses. Selling, general and administrative expenses remained consistent. Depreciation and amortization. The increase in depreciation and amortization is due to the impact of recent capital expenditures. Other operating income. Other operating income increased primarily due to business interruption insurance proceeds received related to the Stanolind tank fire. 40 --------------------------------------------------------------------------------Natural Gas Services Segment Comparative Results of Operations for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues: Marine transportation $ - $ 630 $ (630 ) (100)% Services 5,764 - 5,764 Products 230,294 204,296 25,998 13% Total revenues 236,058 204,926 31,132 15% Cost of products sold 218,882 196,719 22,163 11% Operating expenses 4,546 1,863 2,683 144% Selling, general and administrative expenses 3,507 1,156 2,351 203% Depreciation and amortization 2,684 598 2,086 349% Operating income $ 6,439 $ 4,590 $ 1,849 40% Distributions from unconsolidated entities $ 982 $ 761 $ 221 29% NGL sales volumes (Bbls) 3,737 3,162 575 18% Revenues. The decrease in marine transportation revenue is the result of redeploying marine transportation assets acquired in February 2013. The assets were originally engaged in marine transportation activities but are being utilized for floating product storage at one of our terminal locations. Services revenue for the three months ended September 30, 2014 represents the natural gas storage revenue related to the acquisition of Cardinal which occurred August 29, 2014. Natural gas services sales volumes increased 18%, resulting in a positive impact on revenues of $35.4 million. Our NGL average sales price per barrel decreased $2.98, or 5%, resulting in a decrease to revenue of $9.4 million. Cost of products sold. Our average cost per barrel decreased $3.64, or 6%. Our margins increased $0.66 per barrel during the period, primarily as a result of improved market conditions in the Louisiana butane market during 2014. Operating expenses. Operating expenses increased $1.7 million due to the acquisition of Cardinal. The remaining increase is primarily a result of activity at our NGL marine facility in Corpus Christi, Texas. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.8 million due to the acquisition of Cardinal. The remaining increase is primarily a result of increased compensation expense. Depreciation and amortization. The increase in depreciation and amortization is primarily due to the acquisition of Cardinal. Distributions from unconsolidated entities. Distributions from West Texas LPG Pipeline L.P. ("WTLPG") were $0.6 million in the 2014. The investment in WTLPG was acquired in May 2014. Distributions from Martin Energy Trading LLC ("MET") and Cardinal decreased $0.2 million each in 2014. 41 -------------------------------------------------------------------------------- Comparative Results of Operations for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues: Marine transportation $ 365 $ 2,475 $ (2,110 ) (85)% Services 5,764 - 5,764 Products 812,232 650,605 161,627 25% Total revenues 818,361 653,080 165,281 25% Cost of products sold 779,136 627,748 151,388 24% Operating expenses 8,779 3,834 4,945 129% Selling, general and administrative expenses 6,684 2,800 3,884 139% Depreciation and amortization 3,863 1,444 2,419 168% Operating income $ 19,899 $ 17,254 $ 2,645 15% Distributions from unconsolidated entities $ 2,323 $ 2,722 $ (399 ) (15)% NGL sales volumes (Bbls) 12,734 9,883 2,851 29% Revenues. The decrease in marine transportation revenue is the result of redeploying marine transportation assets acquired in February 2013. The assets were originally engaged in marine transportation activities but are being utilized for floating product storage at one of our terminal locations. Services revenue for the nine months ended September 30, 2014 represents the natural gas storage revenue related to the acquisition of Cardinal which occurred August 29, 2014. Natural gas services sales volumes increased 29%, positively impacting revenues $181.9 million. The increase in volumes was a result of additional operations in the Louisiana butane market. Our NGL average sales price per barrel decreased $2.05, or 3%, resulting in a decrease to revenues of $20.2 million. Cost of products sold. Our average cost per barrel decreased $2.33, or 4%. Our margins increased $0.29 per barrel during the period as a result of decreased market prices. Operating expenses. Operating expenses increased $1.7 million due to the acquisition of Cardinal. The remaining increase is primarily as a result of activity at our NGL marine facility in Corpus Christi, Texas. Selling, general and administrative expenses. Selling, general and administrative expenses increased $1.8 million due to the acquisition of Cardinal. The remaining increase is primarily as a result of increased compensation expense. Depreciation and amortization. The increase in depreciation and amortization is primarily due to the acquisition of Cardinal as well as the addition of recent capital expenditures. Distributions from unconsolidated entities. Distributions from WTLPG were $0.6 million in 2014. The investment in WTLPG was acquired in May 2014. Distributions from MET increased $0.3 million while distributions from Cardinal decreased $1.3 million. 42--------------------------------------------------------------------------------Sulfur Services Segment Comparative Results of Operations for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues: Services $ 3,037 $ 3,001 $ 36 1% Products 46,993 39,096 7,897 20% Total revenues 50,030 42,097 7,933 19% Cost of products sold 38,932 34,085 4,847 14% Operating expenses 4,497 4,166 331 8% Selling, general and administrative expenses 1,166 1,069 97 9% Depreciation and amortization 2,078 2,024 54 3% Operating income $ 3,357 $ 753 $ 2,604 346% Sulfur (long tons) 251.0 211.8 39.2 19% Fertilizer (long tons) 52.1 44.8 7.3 16% Total sulfur services volumes (long tons) 303.1 256.6 46.5 18% Revenues. Product revenues were positively impacted by rising market prices in our sulfur business. Revenues increased $7.2 million due to an 18% increase in sales volumes. Additionally, revenues increased $0.7 million as a result of a 2% increase in average sales price. Cost of products sold. A 3% decrease in prices reduced cost of products sold by $1.1 million. An 18% increase in volumes increased our costs by an additional $6.0 million. Margin per ton increased $7.07, or 36%, resulting in an increase in gross margin of $3.1 million. Operating expenses. Our operating expenses increased as a result of higher fuel expense. Selling, general and administrative expenses. Selling, general and administrative expenses increased as a result of higher employee benefit costs. Depreciation and amortization. The increase in depreciation and amortization is due to the impact of recent capital expenditures. 43 -------------------------------------------------------------------------------- Comparative Results of Operations for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues: Services $ 9,112 $ 9,003 $ 109 1% Products 157,706 164,375 (6,669 ) (4)% Total revenues 166,818 173,378 (6,560 ) (4)% Cost of products sold 122,281 131,849 (9,568 ) (7)% Operating expenses 13,283 12,791 492 4% Selling, general and administrative expenses 3,404 3,132 272 9% Depreciation and amortization 6,092 5,947 145 2% Operating income $ 21,758 $ 19,659 $ 2,099 11% Sulfur (long tons) 645.5 614.9 30.6 5% Fertilizer (long tons) 233.1 219.8 13.3 6% Total sulfur services volumes (long tons) 878.6 834.7 43.9 5% Revenues. Product revenue declined $14.6 million attributable to a 9% decrease in prices. An increase in sales volumes resulted in increased revenue of $7.9 million. Cost of products sold. Cost of products sold decreased $15.7 million due to a 12% reduction in prices. An increase in volumes resulted in a $6.1 million increase in cost of products sold. Margin per ton increased $1.35, or 3%, resulting in an increase in gross margin of $2.9 million. Operating expenses. Our operating expenses increased primarily as a result of higher tank car lease expenses. Selling, general and administrative expenses. Selling, general and administrative expenses increased as a result of higher employee benefit costs. Depreciation and amortization. Depreciation and amortization remained consistent. Marine Transportation Segment Comparative Results of Operations for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues $ 25,859 $ 24,751 $ 1,108 4% Operating expenses 19,181 19,352 (171 ) (1)% Selling, general and administrative expenses 364 228 136 60% Depreciation and amortization 2,469 2,544 (75 ) (3)% 3,845 2,627 1,218 46% Impairment of long-lived assets (3,445 ) - (3,445 ) Operating income $ 400 $ 2,627 $ (2,227 ) (85)% Inland revenues. A $0.5 million increase in inland revenues is primarily attributable to $0.2 million from increased utilization of the inland fleet. In addition, ancillary charges, primarily the rebill of fuel, increased $0.3 million. 44 --------------------------------------------------------------------------------Offshore revenues. A $0.5 million increase in offshore revenue consists primarily of ancillary charges, related to the rebill of fuel. Operating expenses. Operating expenses decreased as a result of decreased repairs and maintenance expense of $0.7 million, outside towing of $0.3 million, and $0.2 million of property and liability premiums. Offsetting these decreases is an increase in pass-through ancillary expenses of $1.0 million. Selling, general and administrative expenses. Selling, general and administrative expenses increased primarily due to an increase in legal fees. Depreciation and amortization. Depreciation and amortization decreased slightly as a result of certain marine assets becoming fully depreciated and the disposal of equipment, offset by increases in depreciable assets related to recent capital expenditures. Impairment of long-lived assets. Impairment of long-lived assets represents the write-down of one offshore tow. Comparative Results of Operations for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revenues $ 73,255 $ 75,004 $ (1,749 ) (2)% Operating expenses 60,805 61,417 (612 ) (1)% Selling, general and administrative expenses 867 1,000 (133 ) (13)% Depreciation and amortization 7,472 7,628 (156 ) (2)% 4,111 4,959 (848 ) (17)% Impairment of long-lived assets (3,445 ) - (3,445 ) Other operating income 16 628 (612 ) (97)% Operating income $ 682 $ 5,587 $ (4,905 ) (88)% Inland revenues. Inland revenues increased $1.6 million as a result of $2.0 million related to increased utilization of the inland fleet. Offsetting this increase was a reduction of $0.4 million in ancillary charges, primarily rebill expenses. Offshore revenues. A decrease in offshore revenues of $3.8 million is primarily due to decreased utilization of the offshore fleet as a result of regulatory shipyard inspections and maintenance. Operating expenses. The decrease in operating expenses is a result of decreased outside towing of $1.4 million, group life and health insurance of $1.0 million, barge rental of $1.0 million, and property insurance premiums and claims of $0.2 million. Offsetting these decreases is an increase of repairs and maintenance of $3.0 million. Selling, general and administrative expenses. Selling, general and administrative expenses decreased primarily as a result of a decrease in consulting fees. Depreciation and amortization. Depreciation and amortization decreased slightly as a result of certain marine assets becoming fully depreciated and the disposal of equipment, offset by increases in depreciable assets related to recent capital expenditures. Impairment of long-lived assets. Impairment of long-lived assets represents the write-down of one offshore tow. Other operating income. Other operating income represents gains from the disposition of property, plant and equipment. 45 -------------------------------------------------------------------------------- Equity in Earnings (Loss) of Unconsolidated Entities for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Equity in earnings of WTLPG $ 1,138 $ - 1,138 Equity in earnings (loss) of Cardinal 1,135 (984 ) 2,119 215% Equity in earnings of MET 382 577 (195 ) (34)% Equity in loss of Caliber - (170 ) 170 100% Equity in earnings (loss) of unconsolidated entities $ 2,655 $ (577 ) $ 3,232 (560)% The investment in WTLPG was acquired in May 2014. The increase in equity in earnings of Cardinal is attributable to improved Cardinal results of operations primarily due to Cadeville Gas Storage, LLC ("Cadeville") and Perryville Gas Storage, LLC ("Perryville"), both of which were completed late in the second quarter of 2013. Cadeville and Perryville are subsidiaries of Cardinal. In addition, the 2013 period includes a $1.8 million one-time charge for employee severance and incentive payments for the completion of the Cadeville and Perryville projects ahead of schedule and under budget. On August 29, 2014, the Partnership acquired the approximate 57.8% Category A interest in Cardinal it did not previously own. Results of operations are included in the Natural Gas Services segment subsequent to that date. Equity in earnings of MET, recorded initially in April 2013, represent dividends on our 100% investment in its preferred interests. During March 2013, the Partnership acquired 100% of the preferred interests in MET, a subsidiary of Martin Resource Management, for $15,000. In August, 2014, MET converted its preferred equity to subordinated debt, resulting in a note receivable from MET. The investment in Caliber Gathering, LLC ("Caliber") was sold in November 2013. As a result, there is no equity in earnings (loss) in the 2014 period. Equity in Earnings (Loss) of Unconsolidated Entities for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Equity in earnings of WTLPG $ 1,907 $ - $ 1,907 Equity in earnings (loss) of Cardinal 892 (1,561 ) 2,453 157% Equity in earnings of MET 1,498 1,171 327 28% Equity in loss of Caliber - (488 ) 488 100% Equity in earnings (loss) of unconsolidated entities $ 4,297 $ (878 ) $ 5,175 589% The investment in WTLPG was acquired in May 2014. The increase in equity in earnings of Cardinal is attributable to improved Cardinal results of operations primarily due to Cadeville and Perryville, both of which were completed late in the second quarter of 2013. Cadeville and Perryville are subsidiaries of Cardinal. In addition, the 2013 period includes a $1.8 million one-time charge for employee severance and incentive payments for the completion of the Cadeville and Perryville projects ahead of schedule and under budget. On August 29, 2014, the Partnership acquired the approximate 57.8% Category A interest in Cardinal it did not previously own. Equity in earnings of MET, recorded initially in April 2013, represent dividends on our 100% investment in its preferred interests. During March 2013, the Partnership acquired 100% of the preferred interests in MET, a subsidiary of Martin Resource Management, for $15,000. In August, 2014, MET converted its preferred equity to subordinated debt, resulting in a note receivable from MET. The investment in Caliber was sold in November 2013. As a result, there is no equity in earnings (loss) in the 2014 period. 46 --------------------------------------------------------------------------------Interest Expense Comparative Components of Interest Expense for the Three Months Ended September 30, 2014 and 2013 Three Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revolving loan facility $ 3,719 $ 2,010 $ 1,709 85% 8.875% Senior notes - 3,883 (3,883 ) (100)% 7.250% Senior notes 7,251 4,531 2,720 60% Amortization of deferred debt issuance costs 827 815 12 1% Amortization of debt discount and premium (82 ) 77 (159 ) (206)% Impact of interest rate derivative activity 63 - 63 Other (85 ) 70 (155 ) (221)% Capitalized interest (234 ) (326 ) 92 28% Total interest expense $ 11,459 $ 11,060 $ 399 4% Comparative Components of Interest Expense for the Nine Months Ended September 30, 2014 and 2013 Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Revolving loan facility $ 8,325 $ 5,273 $ 3,052 58% 8.875 % Senior notes 3,882 11,648 (7,766 ) (67)% 7.250 % Senior notes 19,002 11,530 7,472 65% Amortization of deferred debt issuance costs 5,415 2,890 2,525 87% Amortization of debt discount and premium 1,141 230 911 396% Impact of interest rate derivative activity (2,864 ) - (2,864 ) Other 407 231 176 76% Capitalized interest (957 ) (744 ) (213 ) 29% Total interest expense $ 34,351 $ 31,058 $ 3,293 11% Interest expense includes includes $2.6 million and $1.2 million, respectively, of non-cash charges for the write-off of unamortized debt issuance costs and unamortized discount on notes payable, respectively. These charges relate to the April 1, 2014 redemption of the entire $175.0 million balance of 8.875% senior unsecured notes due in 2018. In addition, we incurred a debt prepayment premium of $7.8 million related to the senior note redemption. This transaction is recorded as "Debt prepayment premium" in the Consolidated and Condensed Statement of Operations for the nine months ended September 30, 2014. Indirect Selling, General and Administrative Expenses Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2014 2013 Variance Change 2014 2013 Variance Change (In thousands) (In thousands) Indirect selling, general and administrative expenses $ 4,479 $ 3,779 $ 700 19% $ 14,214 $ 11,270 $ 2,944 26% Indirect selling, general and administrative expenses increased primarily as a result of higher allocated overhead expenses from Martin Resource Management. 47 -------------------------------------------------------------------------------- Martin Resource Management allocates to us a portion of its indirect selling, general and administrative expenses for services such as accounting, treasury, clerical billing, information technology, administration of insurance, engineering, general office expense and employee benefit plans and other general corporate overhead functions we share with Martin Resource Management retained businesses. This allocation is based on the percentage of time spent by Martin Resource Management personnel that provide such centralized services. GAAP also permits other methods for allocation of these expenses, such as basing the allocation on the percentage of revenues contributed by a segment. The allocation of these expenses between Martin Resource Management and us is subject to a number of judgments and estimates, regardless of the method used. We can provide no assurances that our method of allocation, in the past or in the future, is or will be the most accurate or appropriate method of allocation for these expenses. Other methods could result in a higher allocation of selling, general and administrative expense to us, which would reduce our net income. Under the Omnibus Agreement, we are required to reimburse Martin Resource Management for indirect general and administrative and corporate overhead expenses. The Conflicts Committee of our general partner approved the following reimbursement amounts: Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 2014 2013 Variance Change 2014 2013 Variance Change (In thousands) (In thousands) Conflicts Committee approved reimbursement amount $ 3,134 $ 2,655 $ 479 18% $ 9,401 $ 7,966 $ 1,435 18% The amounts reflected above represent our allocable share of such expenses. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually. Liquidity and Capital Resources General Our primary sources of liquidity to meet operating expenses, pay distributions to our unitholders and fund capital expenditures are cash flows generated by our operations and access to debt and equity markets, both public and private. We have recently completed several transactions that have improved our liquidity position, helping fund our acquisitions and organic growth projects. As a result of these financing activities, discussed in further detail below, management believes that expenditures for our current capital projects will be funded with cash flows from operations, current cash balances and our current borrowing capacity under the expanded revolving credit facility. However, it may be necessary to raise additional funds to finance our future capital requirements. Our ability to satisfy our working capital requirements, to fund planned capital expenditures and to satisfy our debt service obligations will also depend upon our future operating performance, which is subject to certain risks. Please read "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014, as well as our updated risk factors contained in "Part II - Other Information, Item 1A. Risk Factors" set forth elsewhere herein, for a discussion of such risks. Debt Financing Activities In April 2014, we completed a $150.0 million private placement add-on of 7.250% senior unsecured notes due in 2021. We filed with the SEC a registration statement to exchange these notes for substantially identical notes that are registered under the Securities Act and commenced an exchange offer on April 28, 2014. The exchange offer was completed during the second quarter of 2014. On April 1, 2014, we redeemed all $175.0 million of the 8.875% senior unsecured notes due in 2018 from their holders. On June 27, 2014, we increased the maximum amount of borrowings and letters of credit under our revolving credit facility from $637.5 million to $900.0 million utilizing the accordion feature of our revolving credit facility. 48 --------------------------------------------------------------------------------Equity Offerings On September 29, 2014, we completed a public offering of 3,450,000 common units at a price of $36.91 per common unit, before the payment of underwriters' discounts, commissions and offering expenses (per unit value is in dollars, not thousands). Total proceeds from the sale of the 3,450,000 common units, net of underwriters' discounts, commissions and offering expenses were $122.6 million. Our general partner contributed $2.6 million in cash to us in conjunction with the issuance in order to maintain its 2% general partner interest in us. The net proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. On August 29, 2014, we closed a private equity sale with Martin Resource Management, under which Martin Resource Management invested $45.0 million in cash in exchange for 1,171,265 common units. The pricing of $38.42 per common unit was based on the 10-day weighted average price of our common units for the 10 trading days ending August 8, 2014. In connection with the issuance of these common units, our general partner contributed $0.9 million in order to maintain its 2% general partner interest in us. The proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. On May 12, 2014, we completed a public offering of 3,600,000 common units at a price of $41.51 per common unit, before the payment of underwriters' discounts, commissions and offering expenses (per unit value is in dollars, not thousands). Total proceeds from the sale of the 3,600,000 common units, net of underwriters' discounts, commissions and offering expenses were $143.4 million. Our general partner contributed $3.1 million in cash to us in conjunction with the issuance in order to maintain its 2% general partner interest in us. The net proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. In March 2014, we entered into an equity distribution agreement with multiple underwriters (the "Sales Agents") for the ongoing distribution of our common units. Pursuant to this program, we offered and sold common unit equity through the Sales Agents for aggregate proceeds of $3.5 million and $20.6 million during the three and nine months ended September 30, 2014, respectively. The Partnership paid $0.1 million and $0.3 million in compensation to the Sales Agents for the three and nine months ended September 30, 2014, respectively. Under the the program, we issued 89,252 and 506,408 common units during the three and nine months ended September 30, 2014, respectively. Common units issued were at market prices prevailing at the time of the sale. We also received capital contributions from our general partner of $0.4 million during the nine months ended September 30, 2014 related to these issuances to maintain its 2.0% general partner interest in us. The net proceeds from the common unit issuances were used to pay down outstanding amounts under our revolving credit facility. Due to the foregoing, we believe that cash generated from operations and our borrowing capacity under our credit facility will be sufficient to meet our working capital requirements, anticipated maintenance capital expenditures and scheduled debt payments in 2014. Finally, our ability to satisfy our working capital requirements, to fund planned capital expenditures and to satisfy our debt service obligations will depend upon our future operating performance, which is subject to certain risks. Please read "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2013, filed with the SEC on March 3, 2014, as amended, by Amendment No. 1 on Form 10-K/A for the year ended December 31, 2013 filed on March 28, 2014, as well as our updated risk factors contained in "Part II - Other Information, Item 1A. Risk Factors" set forth elsewhere herein, for a discussion of such risks. Cash Flows - Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 The following table details the cash flow changes between the nine months ended September 30, 2014 and 2013: Nine Months Ended September 30, Percent 2014 2013 Variance Change (In thousands) Net cash provided by (used in): Operating activities $ 53,001 $ 62,168 $ (9,167 ) (15)% Investing activities (296,464 ) (167,119 ) (129,345 ) (77)% Financing activities 229,927 99,834 130,093 130% Net decrease in cash and cash equivalents $ (13,536 ) $ (5,117 ) $ (8,419 ) (165)% 49 -------------------------------------------------------------------------------- Net cash provided by operating activities for the nine months ended September 30, 2014 decreased compared to the prior year period primarily due to an $18.4 million unfavorable variance in working capital. In addition, 2013 included $8.7 million of cash used in discontinued operating activities. There was no cash used in or provided by operating activities in 2014. Net cash used in investing activities for the nine months ended September 30, 2014 increased compared to the prior year period due to a $134.4 million equity investment in WTLPG in 2014. In addition, cash paid for acquisitions increased $26.1 million in the 2014 period. Finally, contributions to unconsolidated entities decreased $27.5 million in 2014. Net cash provided by financing activities for the nine months ended September 30, 2014 increased compared to the prior period due to $331.6 million in net proceeds from the issuance of common units during 2014 offset by a $204.8 million decrease in net long-term debt borrowings in the current period. Capital Expenditures Our operations require continual investment to upgrade or enhance operations and to ensure compliance with safety, operational, and environmental regulations. Our capital expenditures consist primarily of: •maintenance capital expenditures made to maintain existing assets and operations •expansion capital expenditures to acquire assets to grow our business, to expand existing facilities, such as projects that increase operating capacity, or to reduce operating costs •plant turnaround costs made at our refinery to perform maintenance, overhaul and repair operations and to inspect, test and replace process materials and equipment. The following table summarizes our capital expenditure activity, excluding amounts paid for acquisitions, for the periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 (In thousands) (In thousands) Expansion capital expenditures $ 12,979 $ 36,999 $ 45,262 $ 61,118 Maintenance capital expenditures 4,306 2,973 13,260 7,473 Plant turnaround costs 90 - 4,000 - Total $ 17,375 $ 39,972 $ 62,522 $ 68,591 Expansion capital expenditures were made primarily in our Terminalling and Storage, Marine Transportation, and Natural Gas Services segments during the three and nine months ended September 30, 2014. Within our Terminalling and Storage segment, expenditures were made primarily at our Corpus Christi crude terminal, Smackover refinery, and certain smaller organic growth projects ongoing in our specialty terminalling operations. Within our Marine Transportation segment, expenditures were made related to the construction of new barges. Within our Natural Gas Services segment, expenditures were made on ongoing organic growth projects. Maintenance capital expenditures were made primarily in our Marine Transportation, Terminalling and Storage, and Sulfur Services segments to maintain our existing assets and operations during the three and nine months ended September 30, 2014. For the three and nine months ended September 30, 2014, plant turnaround costs relate to our Smackover refinery. Expansion capital expenditures were made primarily in our Terminalling and Storage segment during the three and nine months ended September 30, 2013. Within our Terminalling and Storage segment, expenditures were made primarily at our Corpus Christi crude terminal and Smackover refinery. Maintenance capital expenditures were made primarily in our Terminalling and Storage and Marine Transportation segments to maintain our existing assets and operations during the three and nine months ended September 30, 2013. Capital Resources Historically, we have generally satisfied our working capital requirements and funded our capital expenditures with cash generated from operations and borrowings. We expect our primary sources of funds for short-term liquidity will be cash flows from operations and borrowings under our credit facility. 50 -------------------------------------------------------------------------------- As of September 30, 2014, we had $910.1 million of outstanding indebtedness, consisting of outstanding borrowings of $402.1 million (including unamortized premium) under our Senior Notes due in 2021 and $508.0 million under our revolving credit facility. Total Contractual Cash Obligations. A summary of our total contractual cash obligations as of September 30, 2014, is as follows: Payments due by period Total Less than 1-3 3-5 Due Type of Obligation Obligation One Year Years Years Thereafter Revolving credit facility $ 508,000 $ - $ - $ 508,000 $ - 2021 Senior unsecured notes 402,077 - - - 402,077 Throughput commitment 40,641 5,069 10,632 11,327 13,613 Operating leases 40,190 11,462 17,924 5,643 5,161 Interest expense: ¹ Revolving credit facility 51,660 14,812 29,624 7,224 - 2021 Senior unsecured notes 186,083 29,000 58,000 58,000 41,083Total contractual cash obligations $ 1,228,651 $ 60,343 $ 116,180 $ 590,194 $ 461,934 ¹Interest commitments are estimated using our current interest rates for the respective credit agreements over their remaining terms. Letters of Credit. At September 30, 2014, we had outstanding irrevocable letters of credit in the amount of $10.6 million, which were issued under our revolving credit facility. Off Balance Sheet Arrangements. We do not have any off-balance sheet financing arrangements. Description of Our Long-Term Debt 2021 Senior Notes For a description of our 2021, 7.250% senior unsecured notes, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Description of Our Long-Term Debt" in our Annual Report on Form 10-K for the year ended December 31, 2013. Revolving Credit Facility On November 10, 2005, we entered into a $225.0 million multi-bank credit facility, which was subsequently amended most recently on June 27, 2014 when we increased our maximum amount of borrowings to $900.0 million utilizing the accordion feature of our revolving credit facility. As of September 30, 2014, we had $508.0 million outstanding under the revolving credit facility and $10.6 million of letters of credit issued, leaving a maximum available to be borrowed under our credit facility for future revolving credit borrowings and letters of credit of $381.4 million. Subject to the financial covenants contained in our credit facility and based on our existing EBITDA (as defined in our credit facility) calculations, as of September 30, 2014, we have the ability to incur approximately $80.5 million of that amount. The revolving credit facility is used for ongoing working capital needs and general partnership purposes, and to finance permitted investments, acquisitions and capital expenditures. During the nine months ended September 30, 2014, the level of outstanding draws on our credit facility has ranged from a low of $220.0 million to a high of $657.0 million. The credit facility is guaranteed by substantially all of our subsidiaries. Obligations under the credit facility are secured by first priority liens on substantially all of our assets and those of the guarantors, including, without limitation, inventory, accounts receivable, bank accounts, marine vessels, equipment, fixed assets and the interests in our subsidiaries and certain of our equity method investees. 51-------------------------------------------------------------------------------- We may prepay all amounts outstanding under the credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The credit facility requires mandatory prepayments of amounts outstanding thereunder with the net proceeds of certain asset sales, equity issuances and debt incurrences. Indebtedness under the credit facility bears interest at our option at the Eurodollar Rate (the British Bankers Association LIBOR Rate) plus an applicable margin or the Base Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0%, or the administrative agent's prime rate) plus an applicable margin. We pay a per annum fee on all letters of credit issued under the credit facility, and we pay a commitment fee per annum on the unused revolving credit availability under the credit facility. The letter of credit fee, the commitment fee and the applicable margins for our interest rate vary quarterly based on our leverage ratio (as defined in the credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) and are as follows: Eurodollar Rate Letters of Leverage Ratio Base Rate Loans Loans Credit Less than 3.00 to 1.00 0.75 % 1.75 % 1.75 % Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00 1.00 % 2.00 % 2.00 % Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00 1.25 % 2.25 % 2.25 % Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00 1.50 % 2.50 % 2.50 % Greater than or equal to 4.50 to 1.00 1.75 % 2.75 % 2.75 % The applicable margin for revolving loans that are LIBOR loans ranges from 1.75% to 2.75% and the applicable margin for revolving loans that are base prime rate loans ranges from 0.75% to 1.75%. The applicable margin for LIBOR borrowings at September 30, 2014 is 2.75%. The credit facility includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 5.25 to 1.00 with a temporary springing provision to 5.50 to 1.00 under certain scenarios. The maximum permitted senior leverage ratio (as defined in the credit facility but generally computed as the ratio of total secured funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) is 3.50 to 1.00. The minimum interest coverage ratio (as defined in the credit facility but generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges to consolidated interest charges) is 2.50 to 1.00. In addition, the credit facility contains various covenants, which, among other things, limit our and our subsidiaries' ability to: (i) grant or assume liens; (ii) make investments (including investments in our joint ventures) and acquisitions; (iii) enter into certain types of hedging agreements; (iv) incur or assume indebtedness; (v) sell, transfer, assign or convey assets; (vi) repurchase our equity, make distributions and certain other restricted payments, but the credit facility permits us to make quarterly distributions to unitholders so long as no default or event of default exists under the credit facility; (vii) change the nature of our business; (viii) engage in transactions with affiliates; (ix) enter into certain burdensome agreements; (x) make certain amendments to the Omnibus Agreement and our material agreements; (xi) make capital expenditures; and (xii) permit our joint ventures to incur indebtedness or grant certain liens. The credit facility contains customary events of default, including, without limitation, (i) failure to pay any principal, interest, fees, expenses or other amounts when due; (ii) failure to meet the quarterly financial covenants; (iii) failure to observe any other agreement, obligation, or covenant in the credit facility or any related loan document, subject to cure periods for certain failures; (iv) the failure of any representation or warranty to be materially true and correct when made; (v) our, or any of our subsidiaries' default under other indebtedness that exceeds a threshold amount; (vi) bankruptcy or other insolvency events involving us or any of our subsidiaries; (vii) judgments against us or any of our subsidiaries, in excess of a threshold amount; (viii) certain ERISA events involving us or any of our subsidiaries, in excess of a threshold amount; (ix) a change in control (as defined in the credit facility); and (x) the invalidity of any of the loan documents or the failure of any of the collateral documents to create a lien on the collateral. The credit facility also contains certain default provisions relating to Martin Resource Management. If Martin Resource Management no longer controls our general partner, the lenders under the credit facility may declare all amounts outstanding thereunder immediately due and payable. In addition, an event of default by Martin Resource Management under its credit facility could independently result in an event of default under our credit facility if it is deemed to have a material adverse effect on us. 52 -------------------------------------------------------------------------------- If an event of default relating to bankruptcy or other insolvency events occurs with respect to us or any of our subsidiaries, all indebtedness under our credit facility will immediately become due and payable. If any other event of default exists under our credit facility, the lenders may terminate their commitments to lend us money, accelerate the maturity of the indebtedness outstanding under the credit facility and exercise other rights and remedies. In addition, if any event of default exists under our credit facility, the lenders may commence foreclosure or other actions against the collateral. As of October 29, 2014, our outstanding indebtedness includes $500.0 million under our credit facility. We are subject to interest rate risk on our credit facility due to the variable interest rate and may enter into interest rate swaps to reduce this variable rate risk. Seasonality A substantial portion of our revenues are dependent on sales prices of products, particularly NGLs and fertilizers, which fluctuate in part based on winter and spring weather conditions. The demand for NGLs is strongest during the winter heating season and the refinery blending season. The demand for fertilizers is strongest during the early spring planting season. However, our Terminalling and Storage and Marine Transportation segments and the molten sulfur business are typically not impacted by seasonal fluctuations. A significant portion of our net income is derived from our terminalling and storage, sulfur and marine transportation businesses. Therefore, we do not expect that our overall net income will be impacted by seasonality factors. However, extraordinary weather events, such as hurricanes, have in the past, and could in the future, impact our Terminalling and Storage and Marine Transportation segments. Impact of Inflation Inflation did not have a material impact on our results of operations for the nine months ended September 30, 2014 or 2013. Although the impact of inflation has been insignificant in recent years, it is still a factor in the U.S. economy and may increase the cost to acquire or replace property, plant and equipment. It may also increase the costs of labor and supplies. In the future, increasing energy prices could adversely affect our results of operations. Diesel fuel, natural gas, chemicals and other supplies are recorded in operating expenses. An increase in price of these products would increase our operating expenses which could adversely affect net income. We cannot provide assurance that we will be able to pass along increased operating expenses to our customers. Environmental Matters Our operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. We incurred no material environmental costs, liabilities or expenditures to mitigate or eliminate environmental contamination during the nine months ended September 30, 2014 or 2013. 53-------------------------------------------------------------------------------- |