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 theGulf Coast region of theU.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 theGulf Coast region of theU.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 byMartin 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 ofJune 30, 2022 ,Martin Resource Management Corporation owned 15.7% of our total outstanding common limited partner units. Furthermore, onDecember 28, 2021 ,Martin Resource Management Corporation indirectly acquired, through its wholly owned subsidiary,Martin Resource LLC , the remaining 49% voting interest (50% economic interest) inMMGP Holdings, LLC ("Holdings"), which is the sole member ofMartin Midstream GP LLC ("MMGP"), our general partner. Such interests were previously held by certain affiliated investment funds managed byAlinda Capital Partners , which sold the interests toSenterfitt Holdings Inc. ("Senterfitt") onNovember 23, 2021 . At such time, Senterfitt grantedMartin Resource LLC the right to purchase such interests for a period of ten years, which right was exercised onDecember 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, untilNovember 23, 2021 , MMGP owned all of our incentive distribution rights. OnNovember 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 byMartin Resource Management Corporation and our use of certain ofMartin Resource Management Corporation's trade names and trademarks. Under the terms of the Omnibus Agreement, the employees ofMartin 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. 34 --------------------------------------------------------------------------------
Important Recent Developments
Subsequent events
Quarterly Distribution. OnJuly 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 onAugust 12, 2022 to unitholders of record as ofAugust 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 withU.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 endedDecember 31, 2021 , filed with theSEC onMarch 1, 2022 .
Our relationship with
•the distribution of fuel oil, asphalt, marine fuel and other liquids;
• provide marine bunkering and other marine services ashore in
• operation of a crude oil gathering business in
•provide collection, refining and marketing services of crude oil base oils, asphalt and distillates in
• 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
We are and will continue to be closely associated with
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 35
--------------------------------------------------------------------------------Martin Resource Management Corporation directs our business operations through its ownership interests in and control of our general partner. We benefit from our relationship withMartin 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 reimburseMartin 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 reimbursedMartin Resource Management Corporation for$40.2 million of direct costs and expenses for the three months endedJune 30, 2022 compared to$32.6 million for the three months endedJune 30, 2021 . We reimbursedMartin Resource Management Corporation for$79.3 million of direct costs and expenses for the six months endedJune 30, 2022 compared to$63.1 million for the six months endedJune 30, 2021 . There is no monetary limitation on the amount we are required to reimburseMartin Resource Management Corporation for direct expenses. In addition to the direct expenses, under the Omnibus Agreement, we are required to reimburseMartin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. In each of the three months endedJune 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 endedJune 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 functionsMartin 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 withMartin 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 withMartin 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 withMartin 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 endedDecember 31, 2021 , filed with theSEC onMarch 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 byMartin 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 endedJune 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 endedJune 30, 2022 and 2021, respectively.
Consequently,
represented approximately 9% and 11% of our total revenues for the three months ended
For a more comprehensive discussion concerning the agreements that we have entered into withMartin 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 endedDecember 31, 2021 , filed with theSEC onMarch 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
Distributable Cash Flow, and Adjusted Free Cash Flow
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