MARTIN MIDSTREAM PARTNERS LP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and accompanying notes included elsewhere in this quarterly report.


Overview

We are a publicly traded limited partnership with a diverse set of operations
focused primarily in the Gulf Coast region of the U.S. Our four primary business
lines include:

•Services for the terminaling, processing, storage and packaging of petroleum products and by-products, including the refining of naphthenic crude oil;

•Land and maritime transport services for petroleum products and derivatives, chemical products and specialized products;

•Processing, manufacturing, marketing and distribution of sulfur and sulfur-based products; and

•NGL marketing, distribution and transportation services.


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, and other wholesale purchasers of these products. We operate
primarily in the Gulf Coast region of the U.S. 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 Corporation, 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 Corporation 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 Corporation is an
important supplier and customer of ours. As of June 30, 2022, Martin Resource
Management Corporation owned 15.7% of our total outstanding common limited
partner units. Furthermore, on December 28, 2021, Martin Resource Management
Corporation indirectly acquired, through its wholly owned subsidiary, Martin
Resource LLC, the remaining 49% voting interest (50% economic interest) in MMGP
Holdings, LLC ("Holdings"), which is the sole member of Martin Midstream GP LLC
("MMGP"), our general partner. Such interests were previously held by certain
affiliated investment funds managed by Alinda Capital Partners, which sold the
interests to Senterfitt Holdings Inc. ("Senterfitt") on November 23, 2021. At
such time, Senterfitt granted Martin Resource LLC the right to purchase such
interests for a period of ten years, which right was exercised on December 28,
2021. As a result, Martin Resource Management Corporation indirectly owns 100%
of MMGP. Martin Resource Management Corporation directs our business operations
through its ownership of our general partner. MMGP owns a 2.0% general partner
interest in us, and, until November 23, 2021, MMGP owned all of our incentive
distribution rights. On November 23, 2021, MMGP contributed to us all of our
incentive distribution rights for no consideration, whereupon the incentive
distribution rights were cancelled and cease to exist.

  We entered into 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 Corporation and our use of
certain of Martin Resource Management Corporation's trade names and trademarks.
Under the terms of the Omnibus Agreement, the employees of Martin Resource
Management Corporation are responsible for conducting our business and operating
our assets.

  Martin Resource Management Corporation has operated our business since our
inception in 2002. Martin Resource Management Corporation began operating our
NGL business in the 1950s and our sulfur business in the 1960s. It began our
land transportation business in the early 1980s and our marine transportation
business in the late 1980s. It entered into our fertilizer and terminalling and
storage businesses in the early 1990s.

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Important Recent Developments

Subsequent events


Quarterly Distribution. On July 20, 2022, we declared a quarterly cash
distribution of $0.005 per common unit for the second quarter of 2022, or $0.020
per common unit on an annualized basis, which will be paid on August 12, 2022 to
unitholders of record as of August 5, 2022.

Significant 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 U.S. GAAP. The preparation of these financial statements
requires 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 base
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. See the "Critical Accounting
Policies and Estimates" section in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and 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, 2021,
filed with the SEC on March 1, 2022.

Our relationship with Martin Resource Management Corporation

Martin Resource Management Corporation carries out the following main business activities:

•the distribution of fuel oil, asphalt, marine fuel and other liquids;

• provide marine bunkering and other marine services ashore in Texas,
Louisiana, Mississippi, Alabamaand Florida;

• operation of a crude oil gathering business in Stephens, Arkansas;

•provide collection, refining and marketing services of crude oil base oils, asphalt and distillates in Smackover, Arkansas;

• marketing and transporting crude oil from the wellhead to the end market;

•operating an environmental consulting firm;

•provide employees and services for the operation of our business; and

•the operation, solely on our behalf, of the asphalt installations of Hondo, South of Houston and Port Neches, TXand Omaha, Nebraska.

We are and will continue to be closely associated with Martin Resource Management Corporation as a result of the following relations.

Ownership


  Martin Resource Management Corporation owns approximately 15.7% of the
outstanding limited partner units. In addition, following its acquisition of the
remaining 49% voting interest (50% economic interest) in Holdings, which is the
sole member of MMGP, Martin Resource Management Corporation indirectly owns 100%
of MMGP, our general partner. MMGP owns a 2% general partner interest in us.

  Management

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Martin Resource Management Corporation directs our business operations through
its ownership interests in and control of our general partner. We benefit from
our relationship with Martin Resource Management Corporation through access to a
significant pool of management expertise and established relationships
throughout the energy industry. We do not have employees. Martin Resource
Management Corporation 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
Corporation 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 Corporation for $40.2 million of direct costs and expenses
for the three months ended June 30, 2022 compared to $32.6 million for the three
months ended June 30, 2021. We reimbursed Martin Resource Management Corporation
for $79.3 million of direct costs and expenses for the six months ended June 30,
2022 compared to $63.1 million for the six months ended June 30, 2021. There is
no monetary limitation on the amount we are required to reimburse Martin
Resource Management Corporation for direct expenses.

In addition to the direct expenses, under the Omnibus Agreement, we are required
to reimburse Martin Resource Management Corporation for indirect general and
administrative and corporate overhead expenses. In each of the three months
ended June 30, 2022 and 2021, the Conflicts Committee approved reimbursement
amounts of $3.4 million and $3.7 million, respectively. In each of the six
months ended June 30, 2022 and 2021, the Conflicts Committee approved
reimbursement amounts of $6.7 million and $7.2 million, respectively. The
Conflicts Committee 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
Corporation 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
Corporation's retained businesses. The Omnibus Agreement also contains
significant non-compete provisions and indemnity obligations. Martin Resource
Management Corporation also licenses certain of its trademarks and trade names
to us under the Omnibus Agreement.

  These additional related party agreements include, but are not limited to, a
master transportation services agreement, marine transportation agreements,
terminal services agreements, a tolling agreement, and a sulfuric acid sales
agency agreement. Pursuant to the terms of the Omnibus Agreement, we are
prohibited from entering into certain material agreements with Martin Resource
Management Corporation without the approval of the Conflicts Committee.

  For a more comprehensive discussion concerning the Omnibus Agreement and the
other agreements that we have entered into with Martin Resource Management
Corporation, please refer to "Item 13. Certain Relationships and Related
Transactions, and Director Independence" set forth in our Annual Report on Form
10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.

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 Corporation. In the aggregate, the impact of related party
transactions included in total costs and expenses accounted for approximately
18% and 21% of our total costs and expenses during the three months ended June
30, 2022 and 2021, respectively. In the aggregate, the impact of related party
transactions included in total costs and expenses accounted for approximately
17% and 20% of our total costs and expenses during the six months ended June 30,
2022 and 2021, respectively.

Consequently, Martin Resource Management Corporation is one of our important customers. Our sales to Martin Resource Management Corporation
represented approximately 9% and 11% of our total revenues for the three months ended June 30, 2022 and 2021, respectively. Our sales to Martin Resource Management Corporation represented approximately 9% and 10% of our total revenues for the six months ended June 30, 2022 and 2021, respectively.


For a more comprehensive discussion concerning the agreements that we have
entered into with Martin Resource Management Corporation, please refer to "Item
13. Certain Relationships and Related Transactions, and Director Independence"
set forth in our Annual Report on Form 10-K for the year ended December 31,
2021, filed with the SEC on March 1, 2022.

Approval and review of related party transactions

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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 of our general partner 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, the Conflicts Committee 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.

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Non-GAAP Financial Measures


To assist management in assessing our business, we use the following non-GAAP
financial measures: earnings before interest, taxes, and depreciation and
amortization ("EBITDA"), adjusted EBITDA (as defined below), distributable cash
flow available to common unitholders ("Distributable Cash Flow"), and free cash
flow after growth capital expenditures and principal payments under finance
lease obligations ("Adjusted Free Cash Flow"). 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.

Certain items excluded from EBITDA and Adjusted EBITDA are important to understanding and evaluating an entity’s financial performance, such as the cost of capital and historical costs of depreciable assets.


EBITDA and Adjusted EBITDA. We define Adjusted EBITDA as EBITDA before
unit-based compensation expenses, gains and losses on the disposition of
property, plant and equipment, impairment and other similar non-cash
adjustments. Adjusted EBITDA is used as a supplemental performance and liquidity
measure by our management and by external users of our financial statements,
such as investors, commercial banks, research analysts, and others, to assess:

•the financial performance of our assets without regard to financing methods,
capital structure, or historical cost basis;
•the ability of our assets to generate cash sufficient to pay interest costs,
support our indebtedness, and make cash distributions to our unitholders; and
•our operating performance and return on capital as compared to those of other
companies in the midstream energy sector, without regard to financing methods or
capital structure.

The GAAP measures most directly comparable to adjusted EBITDA are net income
(loss) and net cash provided by operating activities. Adjusted EBITDA should not
be considered an alternative to, or more meaningful than, net income (loss),
operating income (loss), net cash provided by operating activities, or any other
measure of financial performance presented in accordance with GAAP. Adjusted
EBITDA may not be comparable to similarly titled measures of other companies
because other companies may not calculate Adjusted EBITDA in the same manner.

Adjusted EBITDA does not include interest expense, income tax expense, and
depreciation and amortization. Because we have borrowed money to finance our
operations, interest expense is a necessary element of our costs and our ability
to generate cash available for distribution. Because we have capital assets,
depreciation and amortization are also necessary elements of our costs.
Therefore, any measures that exclude these elements have material limitations.
To compensate for these limitations, we believe that it is important to consider
net income (loss) and net cash provided by operating activities as determined
under GAAP, as well as adjusted EBITDA, to evaluate our overall performance.

Distributable Cash Flow. We define Distributable Cash Flow as Net Cash Provided
by (Used in) Operating Activities less cash received (plus cash paid) for closed
commodity derivative positions included in Accumulated Other Comprehensive
Income (Loss), plus changes in operating assets and liabilities which (provided)
used cash, less maintenance capital expenditures and plant turnaround costs.
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 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 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.

Adjusted Free Cash Flow. We define Adjusted Free Cash Flow as Distributable Cash
Flow less growth capital expenditures and principal payments under finance lease
obligations. Adjusted Free Cash Flow is a significant performance measure used
by our management and by external users of our financial statements and
represents how much cash flow a business generates during a specified time
period after accounting for all capital expenditures, including expenditures for
growth and maintenance capital projects. We believe that Adjusted Free Cash Flow
is important to investors, lenders, commercial banks and research analysts since
it reflects the amount of cash available for reducing debt, investing in
additional capital projects, paying distributions, and similar matters. Our
calculation of Adjusted Free Cash Flow may or may not be comparable to similarly
titled measures used by other entities.

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The GAAP measure most directly comparable to Distributable Cash Flow and
Adjusted Free Cash Flow is Net Cash Provided by (Used in) Operating Activities.
Distributable Cash Flow and Adjusted Free Cash Flow should not be considered
alternatives to, or more meaningful than, Net Income (Loss), Operating Income
(Loss), Net Cash Provided by (Used in) Operating Activities , or any other
measure of liquidity presented in accordance with GAAP. Distributable Cash Flow
and Adjusted Free Cash Flow have important limitations because they exclude some
items that affect Net Income (Loss), Operating Income (Loss), and Net Cash
Provided by (Used in) Operating Activities. Distributable Cash Flow and Adjusted
Free Cash Flow may not be comparable to similarly titled measures of other
companies because other companies may not calculate these non-GAAP metrics in
the same manner. To compensate for these limitations, we believe that it is
important to consider Net Cash Provided by (Used in) Operating Activities
determined under GAAP, as well as Distributable Cash Flow and Adjusted Free Cash
Flow, to evaluate our overall liquidity.

The following tables reconcile the non-GAAP financial measurements used by
management to our most directly comparable GAAP measures for the three and six
months ended June 30, 2022 and 2021, which represents EBITDA, Adjusted EBITDA,
Distributable Cash Flow, and Adjusted Free Cash Flow:

       Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA

                                                             Three Months Ended June 30,                           Six Months Ended June 30,
                                                          2022                          2021                   2022                          2021
                                                                    (in thousands)                                       (in thousands)
Net income                                                 6,606                       (6,612)                 18,084                       (4,101)
Adjustments:
Interest expense                                          12,846                       13,309                  25,275                       26,262
Income tax expense                                         2,037                          935                   3,578                        1,157
Depreciation and amortization                             14,800                       14,483                  29,286                       28,917
EBITDA                                                    36,289                       22,115                  76,223                       52,235

Adjustments:

(Gain) loss on disposition of property, plant and
equipment                                                   (246)                         (89)                   (260)                         671

Unrealized mark-to-market on commodity derivatives             -                          424                       -                          205

Lower of cost or market and other non-cash
adjustments                                                2,242                            -                   2,242                            -
Unit-based compensation                                       45                           48                      79                          288
Adjusted EBITDA                                           38,330                       22,498                  78,284                       53,399



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Reconciliation of Net cash contributed by operating activities to adjusted EBITDA,

              Distributable Cash Flow, and Adjusted Free Cash Flow

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