MARTIN MIDSTREAM PARTNERS L.P. 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.
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:
•Terminalling, processing, and storage services for petroleum products and by-products including the refining of naphthenic crude oil;
•Land and marine transportation services for petroleum products and by-products, chemicals, and specialty products;
•Sulfur and sulfur-based products processing, manufacturing, marketing, and distribution; and
•Specialty products, including natural gas liquids, 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 ofMarch 31, 2023 ,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. 31 --------------------------------------------------------------------------------
Significant Recent Developments
Issuance of 2028 Notes to Refinance Existing Secured Notes. OnFebruary 8, 2023 , we completed the sale of$400.0 million in aggregate principal amount of our 2028 Notes. We used the proceeds of the 2028 Notes to complete the tender offers for substantially all of our 2024 Notes and 2025 Notes, redeem all 2024 Notes and 2025 Notes that were not validly tendered, repay a portion of the indebtedness under our credit facility, and pay fees and expenses in connection with the foregoing. Simultaneously with the issuance of the 2028 Notes we amended our credit facility to, among other things, reduce the commitments thereunder from$275.0 million to$200.0 million (with further scheduled reductions to$175.0 million onJune 30, 2023 and$150.0 million onJune 30, 2024 ) and extend the scheduled maturity date of the credit facility toFebruary 8, 2027 . Exit from Butane Optimization Business. InJanuary 2023 , we announced that we anticipate the exit of our butane optimization business at the conclusion of the butane selling season during the second quarter of 2023. Electronic Level Sulfuric Acid Joint Venture. OnOctober 19, 2022 ,Martin ELSA Investment LLC , our affiliate, entered into definitive agreements with Samsung C&T America, Inc. andDongjin USA, Inc. , an affiliate of Dongjin Semichem Co., Ltd., to formDSM Semichem LLC ("DSM"). DSM will produce and distribute electronic level sulfuric acid ("ELSA"). By leveraging our existing assets located inPlainview, Texas and installing additional facilities (the "ELSA Facility") as required, DSM will produce ELSA that meets the strict quality standards required by the recent advances in semiconductor manufacturing. In addition to owning a 10% non-controlling interest in DSM, we will be the exclusive provider of feedstock to the ELSA Facility. We, through our affiliate MTI, will also provide land transportation services of the ELSA produced by DSM.The Partnership expects to fund approximately$20.0 million in aggregate capital expenditures in connection with this joint venture and the Partnership's related services in 2023 and 2024. Subsequent Events Quarterly Distribution. OnApril 19, 2023 , we declared a quarterly cash distribution of$0.005 per common unit for the first quarter of 2023, or$0.020 per common unit on an annualized basis, which will be paid onMay 15, 2023 to unitholders of record as ofMay 8, 2023 .
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 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, 2022 , filed with theSEC onMarch 2, 2023 .
Our Relationship with
•distributing asphalt, marine fuel and other liquids;
•providing marine bunkering and other shore-based marine services in
•operating a crude oil gathering business in
•providing crude oil gathering, refining, and marketing services of base oils,
asphalt, and distillate products in
•providing crude oil marketing and transportation from the well head to the end market;
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--------------------------------------------------------------------------------•operating an environmental consulting company;
•supplying employees and services for the operation of our business; and
•operating, solely for our account, the asphalt facilities in
We are and will continue to be closely affiliated 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
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$40.9 million of direct costs and expenses for the three months endedMarch 31, 2023 compared to$39.1 million for the three months endedMarch 31, 2022 . 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 endedMarch 31, 2023 and 2022, the Conflicts Committee approved reimbursement amounts of$3.5 million and$3.4 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, 2022 , filed with theSEC onMarch 2, 2023 . 33 --------------------------------------------------------------------------------
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 20% and 17% of our total costs and expenses during the three months endedMarch 31, 2023 and 2022, respectively.
Correspondingly,
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, 2022 , filed with theSEC onMarch 2, 2023 .
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 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), adjusted EBITDA
after giving effect to the exit of the butane optimization business,
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 significant components in understanding and assessing an entity's financial performance, such as 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 (used in) 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 (used in) 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 (used in) 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 months
ended
Reconciliation of Net Income (Loss) to EBITDA, Adjusted EBITDA, and Adjusted
EBITDA After Giving Effect to the Exit of the Butane Optimization Business
Three Months Ended
March 31,
2023 2022
(in thousands)
Net income (loss) $ (5,086) $ 11,478
Adjustments:
Interest expense 15,657 12,429
Income tax expense 1,835 1,541
Depreciation and amortization 12,901 14,486
EBITDA 25,307 39,934
Adjustments:
(Gain) loss on disposition of property, plant and equipment 388 (14) Loss on extinguishment of debt 5,121 - Lower of cost or market and other non-cash adjustments (9,133) - Unit-based compensation 52 34 Adjusted EBITDA$ 21,735 $ 39,954 Adjustments:
Less: net income associated with butane optimization business
(305) (5,694)
Plus: lower of cost or market and other non-cash adjustments $ 9,133 $ -
Adjusted EBITDA after giving effect to the exit of the butane
optimization business $ 30,563 $ 34,260
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Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA,
Adjusted EBITDA After Giving Effect to the Exit of the Butane Optimization
Business, Distributable Cash Flow, and Adjusted Free Cash Flow
Three Months Ended
March 31,
2023 2022
(in thousands)
Net cash provided by operating activities $ 49,264 $ 28,375
Interest expense 1 13,582 11,646
Current income tax expense 658 620
Lower of cost or market and other non-cash adjustments (9,133) -
Commodity cash flow hedging gains reclassified to earnings - 816
Net cash paid for closed commodity derivative positions included in AOCI
- 615
Changes in operating assets and liabilities which (provided) used cash: Accounts and other receivables, inventories, and other current assets
(48,382) (3,896)
Trade, accounts and other payables, and other current liabilities
15,974 957
Other (228) 821
Adjusted EBITDA 21,735 39,954
Adjustments:Less: net income loss associated with butane optimization business
(305) (5,694)
Plus: lower of cost or market and other non-cash adjustments 9,133 -
Adjusted EBITDA after giving effect to the exit of the butane
optimization business 30,563 34,260
Adjustments:
Interest expense (15,657) (12,429)
Income tax expense (1,835) (1,541)
Deferred income taxes 1,177 921
Amortization of debt discount 400 -
Amortization of deferred debt issuance costs 1,675 783
Payments for plant turnaround costs (229) (1,435)
Maintenance capital expenditures (6,634) (5,399)
Distributable cash flow 9,460 15,160
Principal payments under finance lease obligations (6) (59)
Expansion capital expenditures (757) (3,101)
Adjusted free cash flow $ 8,697 $ 12,000
1 Net of amortization of debt issuance costs and discount, which are included in
interest expense but not included in net cash provided by (used in) operating
activities.
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Results of Operations
The results of operations for the three months ended
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 months endedMarch 31, 2023 and 2022. 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. EffectiveJanuary 1, 2023 , we reorganized our Terminalling and Storage and Natural Gas Liquids operating segments. The underground NGL storage division of our Natural Gas Liquids operating segment was moved to the Terminalling and Storage operating segment. Further, our packaged lubricants and grease businesses were moved from the Terminalling and Storage operating segment to the Specialty Products operating segment (formerly named the Natural Gas Liquids segment). All prior period financial information has been revised to reflect these changes. 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 interest expense and indirect selling, general and administrative expenses, are discussed following the comparative discussion of our results within each segment. Three Months EndedMarch 31, 2023 Compared to the Three Months EndedMarch 31, 2022 Operating Operating Intersegment Revenues Operating Income Income (Loss) Operating Revenues after Operating (Loss) Intersegment after Revenues Eliminations Eliminations Income (Loss) Eliminations Eliminations Three Months Ended March 31, (in thousands) 2023 Terminalling and storage$ 23,919 $ (3,061)$ 20,858 $ 3,108 $ (3,044) $ 64 Transportation 61,939 (6,216) 55,723 9,442 (6,263) 3,179 Sulfur services 35,679 - 35,679 4,553 2,851 7,404 Specialty products 132,277 (8) 132,269 4,600 6,456 11,056 Indirect selling, general and administrative - - - (4,198) - (4,198) Total$ 253,814 $ (9,285)$ 244,529 $ 17,505 $ -$ 17,505 Operating Operating Intersegment Revenues Operating Income Income (Loss) Operating Revenues after Operating (Loss) Intersegment after Revenues Eliminations Eliminations Income (Loss) Eliminations
Eliminations
Three Months Ended March 31, (in thousands) 2022 Terminalling and storage$ 22,371 $ (2,974)$ 19,397 $ (112) $ (2,945)$ (3,057) Transportation 51,897 (5,187) 46,710 6,982 (5,193) 1,789 Sulfur services 59,123 - 59,123 12,652 2,185 14,837 Specialty products 154,009 (38) 153,971 10,049 5,953 16,002 Indirect selling, general and administrative - - - (4,122) - (4,122) Total$ 287,400 $ (8,199)$ 279,201 $ 25,449 $ -$ 25,449 38
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Terminalling and Storage Segment
Comparative Results of Operations for the Three Months EndedMarch 31, 2023 and 2022 Three Months Ended March 31, 2023 2022 Variance Percent Change (In
thousands, except BBL per day)
Revenues$ 23,919 $ 22,371 $ 1,548 7 % Cost of products sold 6 5 1 20 % Operating expenses 14,308 14,940 (632) (4) % Selling, general and administrative expenses 549 495 54 11 % Depreciation and amortization 5,599 7,000 (1,401) (20) % 3,457 (69) 3,526 5,110 % Other operating loss, net (349) (43) (306) (712) % Operating income (loss)$ 3,108 $ (112) $ 3,220 2,875 % Shore-based throughput volumes (gallons) 43,349 13,634 29,715 218 %Smackover refinery throughput volumes (guaranteed minimum) (BBL per day) 6,500 6,500 - - % Revenues. Revenues increased$1.5 million , of which$0.5 million was a result of reservation and throughput fees at ourSmackover refinery . In addition, revenue at our shore-based terminals increased$0.5 million as a result of increased throughput revenue of$0.9 million , offset by decreased space rent of$0.4 million . Specialty terminals increased$0.4 million due to throughput revenue of$0.3 million and service revenue of$0.1 million .
Cost of products sold. Costs of products sold remained relatively consistent period over period.
Operating expenses. Operating expenses decreased primarily as a result of
property insurance premiums of
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent period over period.
Depreciation and amortization. The decrease in depreciation and amortization is primarily the result of asset disposals, offset by capital expenditures.
Other operating income (loss), net. Other operating income (loss), net represents gains and losses from the disposition of property, plant and equipment.
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--------------------------------------------------------------------------------Transportation Segment
Comparative Results of Operations for the Three Months EndedMarch 31, 2023 and 2022 Three Months Ended March 31, 2023 2022 Variance Percent Change (In thousands) Revenues$ 61,939 $ 51,897 $ 10,042 19 % Operating expenses 46,190 39,202 6,988 18 % Selling, general and administrative expenses 2,549 2,169 380 18 % Depreciation and amortization 3,762 3,573 189 5 %$ 9,438 $ 6,953 $ 2,485 36 % Other operating income, net 4 29 (25) (86) % Operating income$ 9,442 $ 6,982 $ 2,460 35 %
Marine Transportation Revenues. Inland revenues increased
Land Transportation Revenues. Revenue increased
Operating expenses. The increase in operating expenses is primarily a result of
employee-related expenses of
Selling, general and administrative expenses. Selling, general and administrative expenses increased primarily due to higher employee-related expenses.
Depreciation and amortization. Depreciation and amortization increased as a result of capital expenditures, offset by disposals.
Other operating income, net. Other operating income, net represents gains and losses from the disposition of property, plant and equipment.
40
--------------------------------------------------------------------------------Sulfur Services Segment
Comparative Results of Operations for the Three Months EndedMarch 31, 2023 and 2022 Three Months Ended March 31, 2023 2022 Variance Percent Change (In thousands) Revenues: Services$ 3,358 $ 3,084 $ 274 9 % Products 32,321 56,039 (23,718) (42) % Total revenues 35,679 59,123 (23,444) (40) % Cost of products sold 23,949 39,258 (15,309) (39) % Operating expenses 2,899 3,028 (129) (4) % Selling, general and administrative expenses 1,617 1,504 113 8 % Depreciation and amortization 2,677 2,709 (32) (1) % 4,537 12,624 (8,087) (64) % Other operating income, net 16 28 (12) (43) % Operating income$ 4,553 $ 12,652 $ (8,099) (64) % Sulfur (long tons) 74 114 (40) (35) % Fertilizer (long tons) 61 84 (23) (27) % Total sulfur services volumes (long tons) 135 198 (63) (32) %
Services revenues. Services revenues increased slightly as a result of a contractually prescribed, index-based fee adjustment.
Products revenues. Products revenues decreased$8.6 million as a result of a 15% drop in average sulfur services sales prices. Products revenues decreased$15.1 million due to a 32% decrease in sales volumes, primarily related to a 35% decrease in sulfur volumes. Cost of products sold. An 11% decrease in product cost impacted cost of products sold by$4.1 million , resulting from a drop in commodity prices. A 32% decrease in sales volumes resulted in an additional decrease in cost of products sold of$11.2 million .
Operating expenses. Operating expenses remained relatively consistent period over period.
Selling, general and administrative expenses. Selling, general and administrative expenses increased primarily due to higher employee-related expenses.
Depreciation and amortization. Depreciation and amortization remained relatively consistent period over period.
Other operating income (loss), net. Other operating income (loss), net represents gains and losses on the disposition of property, plant and equipment.
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--------------------------------------------------------------------------------Specialty Products Segment
Comparative Results of Operations for the Three Months EndedMarch 31, 2023 and 2022 Three Months Ended March 31, 2023 2022 Variance Percent Change (In thousands) Products revenues$ 132,277 $ 154,009 $ (21,732) (14) % Cost of products sold 124,451 139,780 (15,329) (11) % Operating expenses 14 38 (24) (63) % Selling, general and administrative expenses 2,290 2,938 (648) (22) % Depreciation and amortization 863 1,204 (341) (28) % 4,659 10,049 (5,390) (54) % Other operating loss, net (59) - (59) Operating income $ 4,600$ 10,049 $ (5,449) (54) % NGL sales volumes (Bbls) 1,691 1,597 94 6 % Other specialty products volumes (Bbls) 84 98 (14) (14) % Total specialty products volumes (Bbls) 1,775 1,695 80 5 % Products Revenues. Products revenues decreased$27.7 million as a result of an 18% drop in average specialty products sales prices. Products revenues increased$6.0 million due to a 5% increase in sales volumes, primarily related to a 6% increase in NGL volumes. Cost of products sold. A 15% decrease in product cost impacted cost of products sold by$20.9 million , resulting from a drop in commodity prices. A 5% increase in sales volumes resulted in an offsetting increase in cost of products sold of$5.6 million .
Selling, general and administrative expenses. Selling, general and administrative decreased primarily as a result of decreased compensation expense.
Depreciation and amortization. Depreciation and amortization decreased due to certain assets becoming fully depreciated during the fourth quarter 2022.
Other operating loss, net. Other operating income (loss), net represents gains and losses from the disposition of property, plant and equipment.
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--------------------------------------------------------------------------------Interest Expense
Comparative Components of Interest Expense, Net for the Three Months EndedMarch 31, 2023 and 2022 Three Months Ended March 31, 2023 2022 Variance Percent Change (In thousands) Credit facility$ 2,784 $ 1,923 $ 861 45 % Senior notes 10,213 9,305 908 10 % Amortization of deferred debt issuance costs 1,675 783 892 114 % Amortization of debt discount 400 - 400 Other 589 415 174 42 % Finance leases - 3 (3) (100) % Capitalized interest (4) - (4) Total interest expense, net$ 15,657 $ 12,429 $ 3,228 26 %
Indirect Selling, General and Administrative Expenses
Three Months Ended
March 31,
2023 2022 Variance Percent Change
(In thousands)
Indirect selling, general and administrative expenses $ 4,198 $ 4,122 $ 76 2 %
Indirect selling, general and administrative expenses remained relatively
consistent for the three months ended
Martin Resource Management Corporation allocates to us a portion of its indirect selling, general and administrative expenses for services such as accounting, legal, treasury, clerical, billing, information technology, administration of insurance, engineering, general office expense and employee benefit plans and other general corporate overhead functions we share withMartin Resource Management Corporation retained businesses. This allocation is based on the percentage of time spent byMartin Resource Management Corporation 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 betweenMartin Resource Management Corporation 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 reimburseMartin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. The Conflicts Committee of our general partner approved the following reimbursement amounts during the three months endedMarch 31, 2023 and 2022: Three Months Ended March 31, Percent 2023 2022 Variance Change (In thousands) Conflicts Committee approved reimbursement amount$ 3,496 $ 3,373 $ 123 4 %
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.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
General
Our primary sources of liquidity to meet operating expenses, service our indebtedness, fund capital expenditures and pay distributions to our unitholders have historically been cash flows generated by our operations, borrowings under our credit facility and access to debt and equity capital markets, both public and private. Set forth below is a description of our cash flows for the periods indicated.
Cash Flows - Three Months Ended
The following table details the cash flow changes between the three months
ended
Three Months Ended March 31,
2023 2022 Variance Percent Change
(In thousands)
Net cash provided by (used in):
Operating activities $ 49,264 $ 28,375 $ 20,889 74 %
Investing activities (4,218) (11,354) 7,136 63 %
Financing activities (45,034) (16,761) (28,273) (169) %
Net increase (decrease) in cash and cash equivalents
(95) %
Net cash provided by operating activities. The increase in net cash used in
operating activities for the three months ended March 31, 2023 includes a
decrease in operating results and other non-cash charges of $9.6 million offset
by a favorable variance in working capital of $30.5 million .
Net cash used in investing activities. Net cash used in investing activities
for the three months ended March 31, 2023 decreased $7.1 million . A decrease in
cash used of $3.9 million resulted from lower payments for capital expenditures
and plant turnaround costs in 2023. In addition, net proceeds from the sale of
property, plant and equipment increased $3.2 million .
Net cash used in financing activities. Net cash used in financing activities
for the three months ended March 31, 2023 increased primarily as a result of a
$14.7 million increase in net payments of long-term borrowings. Additionally,
payments of debt issuance costs increased $13.6 million .
Total Contractual Obligations
A summary of our total contractual cash obligations as ofMarch 31, 2023 , is as follows: Payments due by period Total Less than 1-3 3-5 Due Type of Obligation Obligation One Year Years Years Thereafter Credit facility$ 100,000 $ -
$ -
400,000 - - 400,000 -
Operating leases 47,113 9,593 19,657 10,648 7,215
Finance lease obligations 3 3 - - -
Interest payable on finance lease
obligations - - - - -
Interest payable on fixed long-term debt
obligations 223,426 46,000 92,000 85,426 -
Total contractual cash obligations
The interest payable under our
credit facility is not reflected in the above table because such amounts depend on the
outstanding balances and interest rates, which vary from time to time.
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Letters of Credit. At
Off-Balance Sheet Arrangements. We do not have any off-balance sheet financing arrangements.
Description of Our Indebtedness
Credit Facility
AtMarch 31, 2023 , we maintained a$200.0 million credit facility that matures onFebruary 8, 2027 . As ofMarch 31, 2023 , we had$100.0 million outstanding under the credit facility and$19.2 million of outstanding irrevocable letters of credit, leaving a maximum available amount to be borrowed under our credit facility for future revolving credit borrowings and letters of credit of$80.8 million . After giving effect to our then current borrowings, letters of credit, and the financial covenants contained in our credit facility, we had the ability to borrow approximately$39.6 million in additional amounts thereunder as ofMarch 31, 2023 . EffectiveFebruary 8, 2023 , in connection with the completion of our sale of the 2028 Notes, we amended our credit facility (the "amended credit facility") to, among other things, reduce the commitments thereunder from$275.0 million to$200.0 million (with further scheduled reductions to$175.0 million onJune 30, 2023 and$150.0 million onJune 30, 2024 ) and extend the scheduled maturity date of the amended credit facility toFebruary 8, 2027 . The commitments under the amended credit facility can be increased from time to time upon our request, subject to certain conditions (including the consent of the increasing lenders), up to an additional$50.0 million . The amended credit facility is used for ongoing working capital needs and general partnership purposes, and to finance permitted investments, acquisitions and capital expenditures. Prior to the credit facility amendment, the level of outstanding draws on our credit facility fromJanuary 1, 2023 throughFebruary 8, 2023 ranged from a low of$148.5 million to a high of$184.0 million . FromFebruary 8, 2023 throughMarch 31, 2023 , the level of outstanding draws on our amended credit facility ranged from a low of$100.0 million to a high of$138.0 million . The amended credit facility is guaranteed by substantially all of our subsidiaries, other thanMartin ELSA Investment LLC . Obligations under the amended 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 certain subsidiaries. We may prepay all amounts outstanding under the amended credit facility at any time without premium or penalty (other than customary breakage costs associated with Adjusted Term SOFR (as defined in the amended credit facility), subject to certain notice requirements. The amended credit facility requires mandatory prepayments of amounts outstanding thereunder with excess cash that exceeds$25.0 million and the net proceeds of certain asset sales. Indebtedness under the credit facility bears interest at our option at the Adjusted Term SOFR (as defined in the amended credit facility), plus an applicable margin, or the Alternate Base Rate (the highest of the Federal Funds Rate plus 0.50%, the one-month Adjusted Term SOFR 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 amended credit facility, and we pay a commitment fee per annum on the unused revolving credit commitments under the amended credit facility. The letter of credit fee, the commitment fee and the applicable margins for our interest rate vary quarterly based on our Total Leverage Ratio (as defined in the amended 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: 45 --------------------------------------------------------------------------------
Term SOFR Rate
Loans and
Letters of
Leverage Ratio ABR Loans Credit
Less than 3.00 to 1.00 1.75 % 2.75 %
Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00 2.00 % 3.00 %
Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00 2.25 % 3.25 %
Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00 2.50 % 3.50 %
Greater than or equal to 4.50 to 1.00 2.75 % 3.75 %
The applicable margin for Adjusted Term SOFR borrowings at
The amended 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, that require maintenance of: • a minimum Interest Coverage Ratio (as defined in the amended credit facility) of 2.00:1.00; • a maximum Total Leverage Ratio of 4.75:1.00, stepping down to 4.50:1.00 onMarch 31, 2025 ; and • a maximum First Lien Leverage Ratio (as defined in the amended credit facility) of 1.50:1.00. In addition, the amended 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 (including a limit on our ability to make quarterly distributions to unitholders in excess of$0.005 per unit unless our pro forma Total Leverage Ratio is less than 4.50:1.00, our pro forma First Lien Leverage Ratio is less than 1.00 to 1.00, and our pro forma liquidity is greater than or equal to 35% of the commitments under our amended credit facility) and certain other restricted payments; (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; and (xi) permit our joint ventures to incur indebtedness or grant certain liens. The amended 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 amended 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 amended 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 amended credit facility also contains certain default provisions relating toMartin Resource Management Corporation . IfMartin Resource Management Corporation no longer controls our general partner, the lenders under the amended credit facility may declare all amounts outstanding thereunder immediately due and payable. In addition, an event of default byMartin Resource Management Corporation under its credit facility could independently result in an event of default under our amended credit facility if it is deemed to have a material adverse effect on us. 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 amended credit facility will immediately become due and payable. If any other event of default exists under our amended credit facility, the lenders may terminate their commitments to lend us money, accelerate the maturity of the indebtedness outstanding under the amended credit facility and exercise other rights and remedies. In addition, if any event of default exists under our amended credit facility, the lenders may commence foreclosure or other actions against the collateral. 46 --------------------------------------------------------------------------------
Senior Secured Notes due 2028
For a description of our 11.50% senior secured second lien notes due 2028, 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 endedDecember 31, 2022 , filed with theSEC onMarch 2, 2023 .
Capital Resources and Liquidity
Historically, we have generally satisfied our working capital requirements and funded our debt service obligations and capital expenditures with cash generated from operations and borrowings under our credit facility. OnMarch 31, 2023 , we had cash and cash equivalents of$0.05 million and available borrowing capacity of$80.8 million under our credit facility with$100.0 million of borrowings outstanding. After giving effect to our then current borrowings, letters of credit, and the financial covenants contained in our credit facility, we had the ability to borrow approximately$39.6 million in additional amounts thereunder as ofMarch 31, 2023 . As discussed above, we amended our credit facility effective as ofFebruary 8, 2023 , to, among other things, reduce the commitments thereunder from$275.0 million to$200.0 million (with further scheduled reductions to$175.0 million onJune 30, 2023 and$150.0 million onJune 30, 2024 ) and extend the scheduled maturity date of the credit facility toFebruary 8, 2027 . We expect that our primary sources of liquidity to meet operating expenses, service our indebtedness, pay distributions to our unitholders and fund capital expenditures will be provided by cash flows generated by our operations, borrowings under our credit facility and access to the debt and equity capital markets. Our ability to generate cash from operations will depend upon our future operating performance, which is subject to certain risks. For a discussion of such risks, please read "Item 1A. Risk Factors" of our Form 10-K for the year endedDecember 31, 2022 , filed with theSEC onMarch 2, 2023 . In addition, due to the covenants in our credit facility, our financial and operating performance impacts the amount we are permitted to borrow under that facility.
We are in compliance with all debt covenants as of
Interest Rate Risk
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 is 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 refinery blending season. The demand for fertilizers is strongest during the early spring planting season. However, our Terminalling andStorage and Transportation business segments and the molten sulfur business are typically not impacted by seasonal fluctuations and a significant portion of our net income is derived from our Terminalling and Storage, Sulfur Services and Transportation business segments. Further, extraordinary weather events, such as hurricanes, have in the past, and could in the future, impact our Terminalling and Storage, Sulfur Services, and Transportation business segments.
Impact of Inflation
Inflation did not have a material impact on our results of operations for the three months endedMarch 31, 2023 or 2022. Inflation 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 for products consumed by our operations, such as diesel fuel, natural gas, chemicals, and other supplies, could adversely affect our results of operations. 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. 47 --------------------------------------------------------------------------------
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 three months endedMarch 31, 2023 or 2022. 48
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