MARTIN MIDSTREAM PARTNERS L.P. 10-Q

Item 1. Financial Statements MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED BALANCE SHEETS (Dollars in thousands) June 30, 2020 December 31, 2019 (Unaudited) (Audited) Assets Cash $ 52 $ 2,856 Accounts and other receivables, less allowance for doubtful accounts of $ 516 and $ 532 , respectively 48,517 87,254 Inventories 65,668 62,540 Due from affiliates 18,889 17,829 Other current assets 9,605 5,833 Assets held for sale — 5,052 Total current assets 142,731 181,364 Property, plant and equipment, at cost 899,225 884,728 Accumulated depreciation ( 493,115 ) ( 467,531 ) Property, plant and equipment, net 406,110 417,197 Goodwill 17,705 17,705 Right-of-use assets 24,554 23,901 Deferred income taxes, net 22,404 23,422 Other assets, net 3,475 3,567 Total assets $ 616,979 $ 667,156 Liabilities and Partners’ Capital (Deficit) Current installments of long-term debt and finance lease obligations $ 368,150 $ 6,758 Trade and other accounts payable 45,785 64,802 Product exchange payables 5,133 4,322 Due to affiliates 444 1,470 Income taxes payable 498 472 Fair value of derivatives — 667 Other accrued liabilities 26,496 28,789 Total current liabilities 446,506 107,280 Long-term debt, net 176,794 569,788 Finance lease obligations 405 717 Operating lease liabilities 17,081 16,656 Other long-term obligations 10,000 8,911 Total liabilities 650,786 703,352 Commitments and contingencies Partners’ capital (deficit) ( 33,807 ) ( 36,196 ) Total partners’ capital (deficit) ( 33,807 ) ( 36,196 ) Total liabilities and partners' capital (deficit) $ 616,979 $ 667,156 See accompanying notes to consolidated and condensed financial statements. 4 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (Dollars and units in thousands, except per unit amounts) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues: Terminalling and storage * $ 19,908 $ 21,377 $ 40,382 $ 44,481 Transportation * 31,485 41,321 70,426 79,116 Sulfur services 2,914 2,858 5,829 5,717 Product sales: * Natural gas liquids 30,299 57,398 112,510 173,872 Sulfur services 30,506 32,998 55,914 61,732 Terminalling and storage 25,526 31,371 54,460 62,438 86,331 121,767 222,884 298,042 Total revenues 140,638 187,323 339,521 427,356 Costs and expenses: Cost of products sold: (excluding depreciation and amortization) Natural gas liquids * 24,293 53,546 94,128 159,736 Sulfur services * 17,559 22,124 32,854 41,820 Terminalling and storage * 21,438 26,118 45,118 52,989 63,290 101,788 172,100 254,545 Expenses: Operating expenses * 44,202 53,579 95,484 105,428 Selling, general and administrative * 9,858 10,226 20,320 20,426 Depreciation and amortization 15,343 15,087 30,582 29,988 Total costs and expenses 132,693 180,680 318,486 410,387 Other operating income (loss), net 15 ( 1,633 ) 2,525 ( 2,353 ) Operating income 7,960 5,010 23,560 14,616 Other income (expense): Interest expense, net ( 9,377 ) ( 14,986 ) ( 19,302 ) ( 28,657 ) Gain on retirement of senior unsecured notes — — 3,484 — Other, net 4 1 7 4 Total other expense ( 9,373 ) ( 14,985 ) ( 15,811 ) ( 28,653 ) Net income (loss) before taxes ( 1,413 ) ( 9,975 ) 7,749 ( 14,037 ) Income tax expense ( 790 ) ( 639 ) ( 1,137 ) ( 1,335 ) Income (loss) from continuing operations ( 2,203 ) ( 10,614 ) 6,612 ( 15,372 ) Income from discontinued operations, net of income taxes — ( 180,568 ) — ( 179,466 ) Net income (loss) ( 2,203 ) ( 191,182 ) 6,612 ( 194,838 ) Less general partner's interest in net (income) loss 44 3,824 ( 132 ) 3,897 Less (income) loss allocable to unvested restricted units 10 65 ( 45 ) 67 Limited partners' interest in net income (loss) $ ( 2,149 ) $ ( 187,293 ) $ 6,435 $ ( 190,874 ) See accompanying notes to consolidated and condensed financial statements. *Related Party Transactions Shown Below 5 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (Dollars and units in thousands, except per unit amounts) * Related Party Transactions Included Above Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Revenues:* Terminalling and storage $ 15,942 $ 17,477 $ 31,816 $ 36,449 Transportation 5,393 5,856 11,287 11,499 Product Sales 38 286 130 707 Costs and expenses:* Cost of products sold: (excluding depreciation and amortization) Sulfur services 2,554 2,884 5,321 5,458 Terminalling and storage 4,249 7,203 10,026 13,112 Expenses: Operating expenses 19,440 24,407 41,211 46,943 Selling, general and administrative 8,055 8,558 16,367 17,093 See accompanying notes to consolidated and condensed financial statements. 6 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (Dollars and units in thousands, except per unit amounts) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Allocation of net income (loss) attributable to: Limited partner interest: Continuing operations $ ( 2,149 ) $ ( 10,398 ) $ 6,435 $ ( 15,060 ) Discontinued operations — ( 176,895 ) — ( 175,814 ) $ ( 2,149 ) $ ( 187,293 ) $ 6,435 $ ( 190,874 ) General partner interest: Continuing operations $ ( 44 ) $ ( 212 ) $ 132 $ ( 307 ) Discontinued operations — ( 3,612 ) — ( 3,590 ) $ ( 44 ) $ ( 3,824 ) $ 132 $ ( 3,897 ) Net income (loss) per unit attributable to limited partners: Basic: Continuing operations $ ( 0.06 ) $ ( 0.27 ) $ 0.17 $ ( 0.39 ) Discontinued operations — ( 4.55 ) — ( 4.52 ) $ ( 0.06 ) $ ( 4.82 ) $ 0.17 $ ( 4.91 ) Weighted average limited partner units - basic 38,662 38,871 38,651 38,912 Diluted: Continuing operations $ ( 0.06 ) $ ( 0.27 ) $ 0.17 $ ( 0.39 ) Discontinued operations — ( 4.55 ) — ( 4.52 ) $ ( 0.06 ) $ ( 4.82 ) $ 0.17 $ ( 4.91 ) Weighted average limited partner units - diluted 38,662 38,871 38,652 38,912 See accompanying notes to consolidated and condensed financial statements. 7 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL (DEFICIT) (Unaudited) (Dollars in thousands) Partners’ Capital (Deficit) Parent Net Investment Common Limited General Partner Amount Units Amount Total Balances - January 1, 2019 $ 23,720 39,032,237 $ 258,085 $ 6,627 $ 288,432 Net loss — — ( 190,941 ) ( 3,897 ) ( 194,838 ) Issuance of common units, net — — ( 259 ) — ( 259 ) Issuance of restricted units — 16,944 — — — Forfeiture of restricted units — ( 154,288 ) — — — Cash distributions — — ( 28,851 ) ( 589 ) ( 29,440 ) Unit-based compensation — — 715 — 715 Purchase of treasury units — ( 31,504 ) ( 392 ) — ( 392 ) Excess purchase price over carrying value of acquired assets — — ( 102,393 ) — ( 102,393 ) Deferred taxes on acquired assets and liabilities — — 24,781 — 24,781 Contribution to parent ( 23,720 ) — — — ( 23,720 ) Balances - June 30, 2019 $ — 38,863,389 $ ( 39,255 ) $ 2,141 $ ( 37,114 ) Balances - January 1, 2020 $ — 38,863,389 $ ( 38,342 ) $ 2,146 $ ( 36,196 ) Net income — — 6,480 132 6,612 Issuance of restricted units — 81,000 — — — Forfeiture of restricted units — ( 84,134 ) — — — Cash distributions — — ( 4,825 ) ( 98 ) ( 4,923 ) Unit-based compensation — — 709 — 709 Purchase of treasury units — ( 7,748 ) ( 9 ) — ( 9 ) Balances - June 30, 2020 $ — 38,852,507 $ ( 35,987 ) $ 2,180 $ ( 33,807 ) See accompanying notes to consolidated and condensed financial statements. 8 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Six Months Ended June 30, 2020 2019 Cash flows from operating activities: Net income (loss) $ 6,612 $ ( 194,838 ) Less: Loss from discontinued operations, net of income taxes — 179,466 Net income (loss) from continuing operations 6,612 ( 15,372 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 30,582 29,988 Amortization and write-off of deferred debt issuance costs 991 2,478 Amortization of premium on notes payable ( 153 ) ( 153 ) Deferred income tax expense 1,018 856 Loss on sale of property, plant and equipment, net 175 2,353 Gain on retirement of senior unsecured notes ( 3,484 ) — Derivative (income) loss ( 1,463 ) 2,322 Net cash paid for commodity derivatives 796 ( 249 ) Unit-based compensation 709 715 Change in current assets and liabilities, excluding effects of acquisitions and dispositions: Accounts and other receivables 37,180 28,073 Product exchange receivables — 59 Inventories ( 3,128 ) 3,044 Due from affiliates ( 1,060 ) ( 15,947 ) Other current assets ( 5,547 ) ( 3,061 ) Trade and other accounts payable ( 16,502 ) ( 2,800 ) Product exchange payables 811 ( 4,386 ) Due to affiliates ( 1,026 ) 428 Income taxes payable 26 131 Other accrued liabilities ( 2,452 ) ( 3,043 ) Change in other non-current assets and liabilities 541 ( 693 ) Net cash provided by continuing operating activities 44,626 24,743 Net cash provided by discontinued operating activities — 7,770 Net cash provided by operating activities 44,626 32,513 Cash flows from investing activities: Payments for property, plant and equipment ( 19,053 ) ( 14,102 ) Acquisitions — ( 23,720 ) Payments for plant turnaround costs ( 231 ) ( 4,742 ) Proceeds from involuntary conversion of property, plant and equipment 1,768 — Proceeds from sale of property, plant and equipment 4,369 659 Net cash used in continuing investing activities ( 13,147 ) ( 41,905 ) Net cash provided by discontinued investing activities — 209,155 Net cash provided by (used in) investing activities ( 13,147 ) 167,250 Cash flows from financing activities: Payments of long-term debt and finance lease obligations ( 160,082 ) ( 362,672 ) Proceeds from long-term debt 131,000 298,000 Proceeds from issuance of common units, net of issuance related costs — ( 259 ) Purchase of treasury units ( 9 ) ( 392 ) Payment of debt issuance costs ( 269 ) ( 386 ) Excess purchase price over carrying value of acquired assets — ( 102,393 ) Cash distributions paid ( 4,923 ) ( 29,440 ) Net cash used in financing activities ( 34,283 ) ( 197,542 ) Net increase (decrease) in cash ( 2,804 ) 2,221 Cash at beginning of period 2,856 300 Cash at end of period $ 52 $ 2,521 Non-cash additions to property, plant and equipment $ 1,276 $ 2,248 See accompanying notes to consolidated and condensed financial statements. 9 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION Martin Midstream Partners L.P. (the "Partnership") is a publicly traded limited partnership with a diverse set of operations focused primarily in the United States ("U.S.") Gulf Coast region. Its four primary business lines include: terminalling, processing, storage and packaging 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 natural gas liquids marketing, distribution, and transportation services. The Partnership’s unaudited consolidated and condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and U.S. Generally Accepted Accounting Principles ("U.S. GAAP") for interim financial reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by U.S. GAAP for annual audited financial statements of the type contained in the Partnership’s annual reports on Form 10-K. In the opinion of the management of the Partnership’s general partner, all adjustments and elimination of significant intercompany balances necessary for a fair presentation of the Partnership’s financial position, results of operations, and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature. Results for such interim periods are not necessarily indicative of the results of operations for the full year. These financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (the "SEC") on February 14, 2020. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated and condensed financial statements in conformity with U.S. GAAP. Actual results could differ from those estimates. Restructuring Support Agreement. On June 25, 2020, the Partnership entered into a restructuring support agreement (as amended on July 7, 2020, the "Restructuring Support Agreement") with certain holders (the "Supporting Holders") that beneficially own, as of July 24, 2020, over 74 % in principal amount of the Partnership’s 7.25 % senior unsecured notes due 2021 (the "2021 Notes"), pursuant to which such holders and the Partnership agreed to enter into and implement a proposed debt restructuring transaction through an exchange offer with respect to the 2021 Notes (the "Exchange Offer") and a cash tender offer (the "Cash Tender Offer"). The Restructuring Support Agreement contemplates the following transactions: • The Partnership agreed to commence the Exchange Offer to exchange the 2021 Notes, held by eligible holders of record, for either of: (1) $ 650 in cash for each $1,000 in principal amount of 2021 Notes tendered (together with the Cash Tender Offer, the "Cash Offers"), (2) $1,000 in principal amount of 11.50 % senior secured second lien notes due 2025 (the "Exchange Notes") for each $1,000 in principal amount of 2021 Notes tendered, and (3) (a) The right to acquire such holder’s pro rata share of $ 50 million of 10.00 % senior secured 1.5 lien notes due 2024 (the "New Notes", and the offer of the right to acquire such New Notes, the "Rights Offering"), the proceeds of which will be used to fund the Cash Offers; (b) Holders that participate in the Rights Offering will receive Unused Proceeds (as described below) on a pro rata basis based on the principal amount of 2021 Notes participating in the Rights Offering, and $ 1,000 in principal amount of Exchange Notes for each $1,000 in principal amount of such holder’s 2021 Notes remaining after application of an amount (the "Unused Proceeds") equal to (i) the difference between $ 50 million and the amount of cash actually used in the Cash Offers multiplied by (ii) 0.85 . 10 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) • In connection with the Exchange Offer, the Partnership agreed to (x) commence a consent solicitation to make certain proposed amendments to the terms of the indenture governing the 2021 Notes to (i) eliminate substantially all of the restrictive covenants in the indenture governing the 2021 Notes, (ii) delete certain events of default and (iii) reduce the required time period for the Partnership to deliver a notice of redemption from at least 30 days before a redemption date to at least three business days before a redemption date and (y) solicit votes to accept the Plan, as further described below. • The Partnership also agreed to commence a Cash Tender Offer to purchase 2021 Notes for $ 650 in cash for each $1,000 in principal amount of 2021 Notes tendered, to the extent held by holders of record not eligible to participate in the Exchange Offer. In connection with the Cash Tender Offer, the Partnership also agreed to commence a consent solicitation to make certain proposed amendments to the terms of the indenture governing the 2021 Notes, as described above. • Each Supporting Holder agreed to tender its 2021 Notes pursuant to the terms of the Exchange Offer and to deliver corresponding consents. The Restructuring Support Agreement contemplates various closing conditions, including, among other things, the negotiation of definitive documentation and a minimum tender condition (the "Minimum Participation Condition"), as described below. If the Exchange Offer and Cash Tender Offer are unsuccessful, the Restructuring Support Agreement provides agreed-upon terms for a pre-packaged financial restructuring plan (the "Plan") to be filed in cases commenced under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code" and such cases, the "Chapter 11 Cases"), subject to the terms and conditions of the Restructuring Support Agreement, including in the term sheet and the Plan attached thereto. As of 5:00 p.m., New York City time, on July 23, 2020 (the “Early Participation Date”), the Partnership received tenders of approximately $ 335.5 million aggregate principal amount of the 2021 Notes in the Exchange Offer and Cash Tender Offer, which represented approximately 92.045 % in principal amount of the 2021 Notes. On July 31, 2020, the required amount of Supporting Holders and the Partnership entered into an amendment to the Restructuring Support Agreement that, among other things, reduced the Minimum Participation Condition from 95 % to 92 % in principal amount of 2021 Notes tendered. As a result, the Minimum Participation Condition has been satisfied and, subject to satisfaction of other customary closing conditions, the Exchange offer and Cash Tender Offer will be consummated on or about August 12, 2020 and the Plan will not be filed. The Supporting Holders may terminate the Restructuring Support Agreement if, among other customary termination events, the Partnership files for bankruptcy other than as contemplated by the Restructuring Support Agreement. The Partnership expects to continue the operation of its business in the ordinary course and does not anticipate interruption in its operations during the restructuring regardless of whether the Partnership conducts its restructuring in or out of the chapter 11 process. The transactions contemplated by the Restructuring Support Agreement are not intended to impact trade vendors, employees, customers, or any related contractual agreements or obligations. The Partnership’s common units will remain outstanding and are not a part of the transactions contemplated by the Restructuring Support Agreement. See Note 18, "Subsequent Events" for further discussion of the Exchange Offer and the related transactions that are being conducted pursuant to the Restructuring Support Agreement. Divestiture of Natural Gas Storage Assets. On June 28, 2019, the Partnership completed the sale of its membership interests in Arcadia Gas Storage, LLC, Cadeville Gas Storage LLC, Monroe Gas Storage Company, LLC and Perryville Gas Storage LLC (the "Natural Gas Storage Assets") to Hartree Cardinal Gas, LLC ("Hartree"), a subsidiary of Hartree Bulk Storage, LLC. The Natural Gas Storage Assets consist of approximately 50 billion cubic feet of working capacity located in northern Louisiana and Mississippi. In consideration of the sale of the Natural Gas Storage Assets, the Partnership received cash proceeds of $ 210,067 after transaction fees and expenses. The net proceeds were used to reduce outstanding borrowings under the Partnership's revolving credit facility. The Partnership concluded the disposition represented a strategic shift which had a major effect on its financial results going forward. As a result, the Partnership has presented the results of operations and 11 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) cash flows relating to the Natural Gas Storage Assets as discontinued operations for the three and six months ended June 30, 2019. See Note 3 for more information. Impact of COVID-19 Pandemic. A novel strain of coronavirus ("COVID-19") surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. Due to the economic impacts of the COVID-19 pandemic, the markets have experienced a decline in oil prices in response to oil demand concerns. These concerns were further exacerbated by the price war among members of the Organization of Petroleum Exporting Countries ("OPEC") and other non-OPEC producer nations during the first quarter of 2020 and global storage considerations. Travel restrictions and stay-at-home orders implemented by governments in many regions and countries across the globe, including the United States, have greatly impacted the demand for refined products resulting in a significant reduction in refinery utilization. The COVID-19 pandemic has impacted the Partnership's 2020 performance to date, and the Partnership expects to continue to experience the impacts of COVID-19 throughout the remainder of 2020 as a result of continued reduction in refined product demand across the industries the Partnership serves. The extent to which the duration and severity of the pandemic impacts our business, results of operations, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. Accordingly, it is possible that the impact of the COVID-19 pandemic could have a material adverse effect on the Partnership's results of operations, financial position and cash flows for the year ended December 31, 2020, including the recoverability of long-lived assets and goodwill, the valuation of inventory, and the amount of expected credit losses. Management considered the impact of the COVID-19 pandemic on the assumptions and estimates used in the preparation of the financial statements. Management identified triggering events requiring the performance of impairment testing of long-lived assets and goodwill related to both the performance of the Partnership's unit price during the first quarter of 2020 and certain of the Partnership's businesses that are sensitive to reductions in refined product demand and refinery utilization. As a result, the Partnership recorded impairment charges totaling $ 4,352 related to long-lived assets during the first quarter of 2020. See Note 3 for more information. No impairments were identified related to goodwill. A sustained reduction in refinery demand and utilization could lead to future asset impairments as well as adversely affect access to capital and financing to be able to meet future obligations. Management also assessed the extent to which the current macroeconomic events brought about by COVID-19 and significant declines in refined product demand impacted the valuation of expected credit losses on accounts receivable and certain inventory items or resulted in modifications to any significant contracts. Ultimately the results of these assessments did not have a material impact on the Partnership's results as of June 30, 2020. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS During the first quarter of 2020, the Partnership adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses," which required the Partnership to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. Adoption of the new standard did not have a material impact on the Partnership’s consolidated financial statements. NOTE 3. DIVESTITURES AND DISCONTINUED OPERATIONS Divestiture of Natural Gas Storage Assets. On June 28, 2019, the Partnership completed the sale of the Natural Gas Storage Assets to Hartree, a subsidiary of Hartree Bulk Storage, LLC. The Natural Gas Storage Assets consist of approximately 50 billion cubic feet of working capacity located in northern Louisiana and Mississippi. In consideration of the sale of these assets, the Partnership received cash proceeds of $ 210,067 after transaction fees and expenses. The net proceeds were used to reduce outstanding borrowings under the Partnership's revolving credit facility. The Partnership has concluded the disposition represents a strategic shift and will have a major effect on its financial results going forward. As a result, the Partnership has presented the results of operations and cash flows relating to the Natural Gas Storage Assets as discontinued operations for the three and six months ended June 30, 2019. The operating results, which are included in income from discontinued operations, were as follows: 12 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 Total revenues $ 11,902 $ 22,836 Total costs and expenses and other, net, excluding depreciation and amortization ( 9,609 ) ( 15,360 ) Depreciation and amortization ( 4,080 ) ( 8,161 ) Other operating loss 1 ( 178,781 ) ( 178,781 ) Loss from discontinued operations before income taxes ( 180,568 ) ( 179,466 ) Income tax expense — — Loss from discontinued operations, net of income taxes $ ( 180,568 ) $ ( 179,466 ) 1 The three and six months ended June 30, 2019 includes a loss on the disposition of the Natural Gas Storage Assets of $ 178,781 . Long-Lived Assets Held for Sale At December 31, 2019, certain terminalling and storage and transportation assets met the criteria to be classified as held for sale in accordance with ASC 360-10 and are presented at the lower of the assets' carrying amount or fair value less cost to sell by segment in current assets in the table below. These assets are considered non-core assets to the Partnership's operations and did not qualify for discontinued operations presentation under the guidance of ASC 205-20. June 30, 2020 December 31, 2019 Terminalling and storage $ — $ 3,552 Transportation — 1,500 Assets held for sale $ — $ 5,052 In the first quarter of 2020, the Partnership identified a triggering event related to a decline in the fair value related to the assets classified as held for sale at December 31, 2019. As a result, an impairment charge of $ 3,052 and $ 1,300 was recorded in the Terminalling and Storage and Transportation segments, respectively, during the three months ended March 31, of 2020 and was recorded in "Other operating income (loss)" in the Partnership's Consolidated and Condensed Statements of Operations. At June 30, 2020, the remaining assets previously classified as held for sale in the amount of $ 700 no longer met the criteria to be classified as held for sale in accordance with ASC 360-10. 13 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 4. REVENUE The following table disaggregates our revenue by major source: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Terminalling and storage segment Lubricant product sales $ 25,526 $ 31,371 $ 54,460 $ 62,438 Throughput and storage 19,908 21,377 40,382 44,481 $ 45,434 $ 52,748 $ 94,842 $ 106,919 Natural gas liquids segment Natural gas liquids product sales $ 30,299 $ 57,398 $ 112,510 $ 173,872 $ 30,299 $ 57,398 $ 112,510 $ 173,872 Sulfur services segment Sulfur product sales $ 6,367 $ 8,204 $ 12,849 $ 18,156 Fertilizer product sales 24,139 24,794 43,065 43,576 Sulfur services 2,914 2,858 5,829 5,717 $ 33,420 $ 35,856 $ 61,743 $ 67,449 Transportation segment Land transportation $ 19,873 $ 25,497 $ 44,107 $ 49,616 Inland transportation 10,611 14,188 24,317 26,665 Offshore transportation 1,001 1,636 2,002 2,835 $ 31,485 $ 41,321 $ 70,426 $ 79,116 Revenue is measured based on a consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties where the Partnership is acting as an agent. The Partnership recognizes revenue when the Partnership satisfies a performance obligation, which typically occurs when the Partnership transfers control over a product to a customer or as the Partnership delivers a service. The following is a description of the principal activities - separated by reportable segments - from which the Partnership generates revenue. Terminalling and Storage Segment Revenue is recognized for storage contracts based on the contracted monthly tank fixed fee. For throughput contracts, revenue is recognized based on the volume moved through the Partnership’s terminals at the contracted rate. For the Partnership’s tolling agreement, revenue is recognized based on the contracted monthly reservation fee and throughput volumes moved through the facility. When lubricants and drilling fluids are sold by truck or rail, revenue is recognized when title is transferred, which is either upon delivering product to the customer or when the product leaves the Partnership's facility, depending on the specific terms of the contract. Delivery of product is invoiced as the transaction occurs and is generally paid within a month. Throughput and storage revenue in the table above includes non-cancelable revenue arrangements that are under the scope of ASC 842, whereby the Partnership has committed certain Terminalling and Storage assets in exchange for a minimum fee. Natural Gas Liquids Segment Natural Gas Liquids ("NGL") distribution revenue is recognized when product is delivered by truck, rail, or pipeline to the Partnership's NGL customers. Revenue is recognized on title transfer of the product to the customer. Delivery of product is invoiced as the transaction occurs and is generally paid within a month. 14 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Sulfur Services Segment Revenue from sulfur and fertilizer product sales is recognized when the customer takes title to the product. Delivery of product is invoiced as the transaction occurs and is generally paid within a month. Revenue from sulfur services is recognized as services are performed during each monthly period. The performance of the service is invoiced as the transaction occurs and is generally paid within a month. Transportation Segment Revenue related to land transportation is recognized for line hauls based on a mileage rate. For contracted trips, revenue is recognized upon completion of the particular trip. The performance of the service is invoiced as the transaction occurs and is generally paid within a month. Revenue related to marine transportation is recognized for time charters based on a per day rate. For contracted trips, revenue is recognized upon completion of the particular trip. The performance of the service is invoiced as the transaction occurs and is generally paid within a month. The table includes estimated minimum revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the reporting period. The Partnership applies the practical expedient in ASC 606-10-50-14(a) and does not disclose information about remaining performance obligations that have original expected durations of one year or less. 2020 2021 2022 2023 2024 Thereafter Total Terminalling and storage Throughput and storage $ 23,123 $ 43,273 $ 40,394 $ 41,605 $ 42,854 $ 338,339 $ 529,588 Sulfur services Sulfur product sales 12,980 17,025 14,879 13,834 975 975 60,668 Total $ 36,103 $ 60,298 $ 55,273 $ 55,439 $ 43,829 $ 339,314 $ 590,256 NOTE 5. INVENTORIES Components of inventories at June 30, 2020 and December 31, 2019 were as follows: June 30, 2020 December 31, 2019 Natural gas liquids $ 26,783 $ 19,097 Sulfur 5,257 4,586 Fertilizer 11,478 15,852 Lubricants 18,209 18,925 Other 3,941 4,080 $ 65,668 $ 62,540 15 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 6. DEBT At June 30, 2020 and December 31, 2019, long-term debt consisted of the following: June 30, 2020 December 31, 2019 $ 400,000 Revolving credit facility at variable interest rate ( 3.44 % 1 weighted average at June 30, 2020), due August 2023 4 secured by substantially all of the Partnership’s assets, including, without limitation, inventory, accounts receivable, vessels, equipment, fixed assets and the interests in the Partnership’s operating subsidiaries, net of unamortized debt issuance costs of $ 4,206 and $ 4,586 , respectively 2 $ 176,794 $ 196,414 $ 400,000 Senior notes, 7.25 % interest, net of unamortized debt issuance costs of $ 428 and $ 770 , respectively, including unamortized premium of $ 191 and $ 344 , respectively, issued $ 250,000 February 2013 and $ 150,000 April 2014, $ 26,200 repurchased during 2015, $ 9,344 repurchased during 2020, due February 2021, unsecured 2,3,4,5 364,219 373,374 Total 541,013 569,788 Less: current portion ( 364,219 ) — Total long-term debt, net of current portion $ 176,794 $ 569,788 Current installments of finance lease obligations $ 3,931 $ 6,758 Finance lease obligations 405 717 Total finance lease obligations $ 4,336 $ 7,475 1 Interest rate fluctuates based on the LIBOR rate plus an applicable margin set on the date of each advance. The margin above LIBOR is set every three months. Indebtedness under the credit facility bears interest at LIBOR plus an applicable margin or the base prime rate plus an applicable margin. All amounts outstanding at June 30, 2020 and December 31, 2019 were at LIBOR plus an applicable margin. The applicable margin for revolving loans that are LIBOR loans currently ranges from 2.25 % to 3.50 % and the applicable margin for revolving loans that are base prime rate loans currently ranges from 1.25 % to 2.50 %. The applicable margin for existing LIBOR borrowings at June 30, 2020 is 3.25 %. The credit facility contains various covenants which limit the Partnership’s ability to make distributions; make certain investments and acquisitions; enter into certain agreements; incur indebtedness; sell assets; and make certain amendments to the Partnership's omnibus agreement with Martin Resource Management Corporation (the "Omnibus Agreement"). Upon the earlier of (i) the closing of the Exchange Offer and related transactions and (ii) August 15, 2020, the applicable margin for revolving loans that are LIBOR loans will range from 2.75 % to 4.00 % and the applicable margin for revolving loans that are base prime rate loans will range from 1.75 % to 3.00 %. Starting on such date, LIBOR will have a floor of 1.0 % per annum. 2 The Partnership is in compliance with all debt covenants as of June 30, 2020 and December 31, 2019, respectively. 3 The 2021 indenture restricts the Partnership’s ability to sell assets; pay distributions or repurchase units or redeem or repurchase subordinated debt; make investments; incur or guarantee additional indebtedness or issue preferred units; and consolidate, merge or transfer all or substantially all of its assets. 4 As of June 30, 2020, the 2021 Notes were due within twelve months and have therefore been presented as a current liability on the Consolidated and Condensed Balance Sheets at June 30, 2020. The Partnership's amended revolving credit facility includes a provision that accelerates the August 31, 2023 maturity date of the revolving credit facility to (i) August 19, 2020 if either (x) more than $ 36.5 million of the 2021 Notes remain outstanding after completion of the Exchange Offer or (y) the Exchange Offer has not been completed by August 15, 2020 and the Partnership has not commenced the chapter 11 proceedings contemplated by the Plan prior to August 19, 2020 or (ii) October 16, 2020 if the Partnership commences such chapter 11 proceedings and the Plan is not effective by October 16, 2020. On July 8, 2020, the Partnership amended its revolving credit facility to, among other things, permit the Exchange Offer. Certain of the amendments to the revolving credit facility became effective immediately, such as a modification to its maturity date to facilitate either the Exchange Offer or the Plan. Other amendments to the revolving credit facility will become effective upon the completion of the Exchange Offer and related transactions, or on August 15, 2020 if the Exchange Offer and 16 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) such related transactions have not closed by such date. The subsequent amendments to the Partnership’s revolving credit facility include, among other things, a reduction of the aggregate revolving commitments thereunder from $ 400 million to $ 300 million and an increase in the pricing under the revolving credit facility. On July 9, 2020, the Partnership commenced the Exchange Offer and related transactions and offers contemplated by the Restructuring Support Agreement. As of the Early Participation Date, the Partnership received sufficient 2021 Notes tendered such that the Minimum Participation Condition has been satisfied and, subject to satisfaction of other customary closing conditions, the Exchange offer and Cash Tender Offer will be consummated on or about August 12, 2020 and the Plan will not be filed. In addition, the Partnership received the requisite majority consent necessary for the adoption of the proposed amendments to the indenture governing the 2021 Notes (the “2021 Notes Indenture”), which will, among other things, eliminate substantially all of the restrictive covenants in the 2021 Notes Indenture, delete certain events of default, and shorten the period of advance notice required to be given to holders of 2021 Notes from 30 days to three business days in the case of a redemption of the 2021 Notes. See Note 18, "Subsequent Events" for further discussion of the Exchange Offer and related transactions. If we are unable to refinance the 2021 Notes either via the Exchange Offer or the Plan, in each case as contemplated by the Restructuring Support Agreement, we would be in default under our revolving credit facility. An event of default under our revolving credit facility would allow the lenders to declare the balance outstanding thereunder due and payable in full, which could trigger cross-defaults under other agreements, which could also result in the acceleration of those obligations by the counterparties to those agreements. Pending the successful implementation of the refinancing of the 2021 Notes, the conditions described above have raised substantial doubt about the Partnership’s ability to continue as a going concern. The Partnership’s management is engaged in ongoing communication with credit providers and presently believes the measures being taken will enable the Partnership to successfully refinance the 2021 Notes and comply with covenants under its revolving credit facility, although no assurance can be given. 5 In March 2020, the Partnership repurchased on the open market an aggregate $ 9,344 of the 2021 Notes, resulting in a gain on retirement of $ 3,484 . The Partnership paid cash interest, net of capitalized interest, in the amount of $ 2,376 and $ 7,330 for the three months ended June 30, 2020 and 2019, respectively. The Partnership paid cash interest, net of capitalized interest, in the amount of $ 19,113 and $ 26,693 for the six months ended June 30, 2020 and 2019, respectively. Capitalized interest was $ 6 and $ 0 for the three months ended June 30, 2020 and 2019, respectively. Capitalized interest was $ 9 and $ 2 for the six months ended June 30, 2020 and 2019, respectively. NOTE 7. LEASES The Partnership has numerous operating leases primarily for terminal facilities and transportation and other equipment. The leases generally provide that all expenses related to the equipment are to be paid by the lessee. Operating lease Right-of-Use ("ROU") assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Partnership's leases do not provide an implicit rate of return, the Partnership uses its imputed collateralized rate based on the information available at commencement date in determining the present value of lease payments. The estimated rate is based on a risk-free rate plus a risk-adjusted margin. Our leases have remaining lease terms of 1 year to 17 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year. The Partnership includes extension periods and excludes termination periods from its lease term if, at commencement, it is reasonably likely that the Partnership will exercise the option. 17 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) The components of lease expense for the six months ended June 30, 2020 and 2019 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Operating lease cost $ 2,767 $ 2,784 $ 5,611 $ 5,381 Finance lease cost: Amortization of right-of-use assets $ 526 688 $ 1,115 1,310 Interest on lease liabilities $ 86 185 $ 196 368 Short-term lease cost $ 3,492 2,671 $ 6,915 5,222 Variable lease cost $ 22 $ 22 $ 50 $ 50 Total lease cost $ 6,893 $ 6,350 $ 13,887 $ 12,331 Supplemental balance sheet information related to leases at June 30, 2020 and December 31, 2019 was as follows: June 30, 2020 December 31, 2019 Operating Leases Operating lease right-of-use assets $ 24,554 $ 23,901 Current portion of operating lease liabilities included in "Other accrued liabilities" $ 7,906 $ 7,722 Operating lease liabilities $ 17,081 16,656 Total operating lease liabilities $ 24,987 $ 24,378 Finance Leases Property, plant and equipment, at cost $ 11,107 $ 15,367 Accumulated depreciation $ ( 3,360 ) ( 3,941 ) Property, plant and equipment, net $ 7,747 $ 11,426 Current installments of finance lease obligations $ 3,931 $ 6,758 Finance lease obligations $ 405 717 Total finance lease obligations $ 4,336 $ 7,475 18 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) The Partnership’s future minimum lease obligations as of June 30, 2020 consist of the following: Operating Leases Finance Leases Year 1 $ 8,964 $ 4,044 Year 2 6,731 252 Year 3 4,055 172 Year 4 1,887 — Year 5 1,210 — Thereafter 6,319 — Total $ 29,166 $ 4,468 Less amounts representing interest costs ( 4,179 ) ( 132 ) Total lease liability $ 24,987 $ 4,336 The Partnership has non-cancelable revenue arrangements that are under the scope of ASC 842 whereby we have committed certain terminalling and storage assets in exchange for a minimum fee. Future minimum revenues the Partnership expects to receive under these non-cancelable arrangements as of June 30, 2020 are as follows: 2020 - $ 9,960 ; 2021 - $ 14,019 ; 2022 - $ 13,004 ; 2023 - $ 12,609 ; 2024 - $ 12,609 ; subsequent years - $ 49,414 . 19 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 8. SUPPLEMENTAL BALANCE SHEET INFORMATION Components of "Other accrued liabilities" were as follows: June 30, 2020 December 31, 2019 Accrued interest $ 10,121 $ 10,761 Asset retirement obligations — 25 Property and other taxes payable 4,305 5,411 Accrued payroll 2,749 3,011 Operating lease liabilities 7,906 7,722 Other 1,415 1,859 $ 26,496 $ 28,789 The schedule below summarizes the changes in our asset retirement obligations: June 30, 2020 Beginning asset retirement obligations $ 8,936 Additions to asset retirement obligations 379 Accretion expense 206 Liabilities settled ( 510 ) Ending asset retirement obligations 9,011 Current portion of asset retirement obligations 1 — Long-term portion of asset retirement obligations 2 $ 9,011 1 The current portion of asset retirement obligations is included in "Other accrued liabilities" on the Partnership's Consolidated and Condensed Balance Sheets. 2 The non-current portion of asset retirement obligations is included in "Other long-term obligations" on the Partnership's Consolidated and Condensed Balance Sheets. 20 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Partnership’s revenues and cost of products sold are materially impacted by changes in commodity prices. Additionally, the Partnership's results of operations are materially impacted by changes in interest rates. In an effort to manage its exposure to these risks, the Partnership periodically enters into various derivative instruments, including commodity and interest rate hedges. All derivatives and hedging instruments are non-hedge derivatives and are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized as gains and losses in earnings of the periods in which they occur. (a) Commodity Derivative Instruments The Partnership from time to time has used derivatives to manage the risk of commodity price fluctuation. Commodity risk is the adverse effect on the value of a liability or future purchase that results from a change in commodity price. The Partnership monitors and manages the commodity market risk associated with potential commodity risk exposure. In addition, the Partnership has focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction. These hedging arrangements are in the form of swaps for NGLs. At June 30, 2020, the Partnership has instruments totaling a gross notional quantity of 0 barrels. At December 31, 2019, the Partnership had instruments totaling a gross notional quantity of 452,000 barrels settling during the period from January 31, 2020 through February 29, 2020. These instruments settle against the applicable pricing source for each grade and location. (b) Interest Rate Derivative Instruments The Partnership is exposed to market risks associated with interest rates. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. From time to time, the Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate credit facility and its 2021 Notes. At June 30, 2020 and December 31, 2019, the Partnership did not have any outstanding interest rate derivative instruments. For information regarding gains and losses on interest rate derivative instruments, see "Tabular Presentation of Gains and Losses on Derivative Instruments" below. (c) Tabular Presentation of Gains and Losses on Derivative Instruments The following table summarizes the fair value and classification of the Partnership’s derivative instruments in its Consolidated and Condensed Balance Sheets: Fair Values of Derivative Instruments in the Consolidated and Condensed Balance Sheets Derivative Assets Derivative Liabilities Fair Values Fair Values Balance Sheet Location June 30, 2020 December 31, 2019 Balance Sheet Location June 30, 2020 December 31, 2019 Derivatives not designated as hedging instruments: Current: Commodity contracts Fair value of derivatives $ — $ — Fair value of derivatives $ — $ 667 Total derivatives not designated as hedging instruments $ — $ — $ — $ 667 21 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations For the Three Months Ended June 30, 2020 and 2019 Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives 2020 2019 Derivatives not designated as hedging instruments: Commodity contracts Cost of products sold $ ( 162 ) $ ( 2,083 ) Total effect of derivatives not designated as hedging instruments $ ( 162 ) $ ( 2,083 ) Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations For the Six Months Ended June 30, 2020 and 2019 Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives 2020 2019 Derivatives not designated as hedging instruments: Commodity contracts Cost of products sold $ ( 129 ) $ ( 2,322 ) Total effect of derivatives not designated as hedging instruments $ ( 129 ) $ ( 2,322 ) NOTE 10. PARTNERS' CAPITAL As of June 30, 2020, Partners’ capital consisted of 38,852,507 common limited partner units, representing a 98 % partnership interest, and a 2 % general partner interest. Martin Resource Management Corporation, through subsidiaries, owns 6,114,532 of the Partnership's common limited partner units representing approximately 15.7 % of the Partnership's outstanding common limited partner units. Martin Midstream GP LLC ("MMGP"), the Partnership's general partner, owns the 2 % general partnership interest. Martin Resource Management Corporation controls the Partnership's general partner, by virtue of its 51 % voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of the Partnership's general partner. The partnership agreement of the Partnership (the "Partnership Agreement") contains specific provisions for the allocation of net income and losses to each of the partners for purposes of maintaining their respective partner capital accounts. Incentive Distribution Rights MMGP holds a 2 % general partner interest and certain incentive distribution rights ("IDRs") in the Partnership. IDRs are a separate class of non-voting limited partner interest that may be transferred or sold by the general partner under the terms of the Partnership Agreement, and represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution and any cumulative arrearages on common units once certain target distribution levels have been achieved. The Partnership is required to distribute all of its available cash from operating surplus, as defined in the Partnership Agreement. The general partner was allocated no incentive distributions during the six months ended June 30, 2020 and 2019. The target distribution levels entitle the general partner to receive 2 % of quarterly cash distributions from the minimum of $ 0.50 per unit up to $ 0.55 per unit, 15 % of quarterly cash distributions in excess of $ 0.55 per unit until all unitholders have received $ 0.625 per unit, 25 % of quarterly cash distributions in excess of $ 0.625 per unit until all unitholders have received $ 0.75 per unit and 50 % of quarterly cash distributions in excess of $ 0.75 per unit. 22 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Distributions of Available Cash The Partnership distributes all of its available cash (as defined in the Partnership Agreement) within 45 days after the end of each quarter to unitholders of record and to the general partner. Available cash is generally defined as all cash and cash equivalents of the Partnership on hand at the end of each quarter less the amount of cash reserves its general partner determines in its reasonable discretion is necessary or appropriate to: (i) provide for the proper conduct of the Partnership’s business; (ii) comply with applicable law, any debt instruments or other agreements; or (iii) provide funds for distributions to unitholders and the general partner for any one or more of the next four quarters, plus all cash on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter. Net Income per Unit The Partnership follows the provisions of the FASB ASC 260-10 related to earnings per share, which addresses the application of the two-class method in determining income per unit for master limited partnerships having multiple classes of securities that may participate in partnership distributions accounted for as equity distributions. Undistributed earnings are allocated to the general partner and limited partners utilizing the contractual terms of the Partnership Agreement. Distributions to the general partner pursuant to the IDRs are limited to available cash that will be distributed as defined in the Partnership Agreement. Accordingly, the Partnership does not allocate undistributed earnings to the general partner for the IDRs because the general partner's share of available cash is the maximum amount that the general partner would be contractually entitled to receive if all earnings for the period were distributed. When current period distributions are in excess of earnings, the excess distributions for the period are to be allocated to the general partner and limited partners based on their respective sharing of income and losses specified in the Partnership Agreement. Additionally, as required under FASB ASC 260-10-45-61A, unvested share-based payments that entitle employees to receive non-forfeitable distributions are considered participating securities, as defined in FASB ASC 260-10-20, for earnings per unit calculations. For purposes of computing diluted net income per unit, the Partnership uses the more dilutive of the two-class and if-converted methods. Under the if-converted method, the weighted-average number of subordinated units outstanding for the period is added to the weighted-average number of common units outstanding for purposes of computing basic net income per unit and the resulting amount is compared to the diluted net income per unit computed using the two-class method. The following is a reconciliation of net income from continuing operations and net income from discontinued operations allocated to the general partner and limited partners for purposes of calculating net income attributable to limited partners per unit: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Continuing operations: Income (loss) from continuing operations $ ( 2,203 ) $ ( 10,614 ) $ 6,612 $ ( 15,372 ) Less general partner’s interest in net income (loss): Distributions payable on behalf of general partner interest 4 11 53 31 General partner interest in undistributed income (loss) ( 48 ) ( 223 ) 79 ( 338 ) Less income (loss) allocable to unvested restricted units ( 10 ) ( 4 ) 45 ( 5 ) Limited partners’ interest in net income (loss) $ ( 2,149 ) $ ( 10,398 ) $ 6,435 $ ( 15,060 ) 23 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Discontinued operations: Income from discontinued operations $ — $ ( 180,568 ) $ — $ ( 179,466 ) Less general partner’s interest in net income (loss): Distributions payable on behalf of IDRs — — — — Distributions payable on behalf of general partner interest — 185 — 362 General partner interest in undistributed income — ( 3,797 ) — ( 3,952 ) Less income allocable to unvested restricted units — ( 61 ) — ( 62 ) Limited partners’ interest in net income $ — $ ( 176,895 ) $ — $ ( 175,814 ) The Partnership allocates the general partner's share of earnings between continuing and discontinued operations as a proportion of net income from continuing and discontinued operations to total net income. The following are the unit amounts used to compute the basic and diluted earnings per limited partner unit for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Basic weighted average limited partner units outstanding 38,661,852 38,871,420 38,651,357 38,912,250 Dilutive effect of restricted units issued — — 540 — Total weighted average limited partner diluted units outstanding 38,661,852 38,871,420 38,651,897 38,912,250 All outstanding units were included in the computation of diluted earnings per unit and weighted based on the number of days such units were outstanding during the periods presented. All common unit equivalents were antidilutive for the three and six months ended June 30, 2019 and the three months ended June 30, 2020 because the limited partners were allocated a net loss in this period. NOTE 11. UNIT BASED AWARDS The Partnership recognizes compensation cost related to unit-based awards to both employees and non-employees in its consolidated and condensed financial statements in accordance with certain provisions of ASC 718. Amounts recognized in selling, general, and administrative expense in the consolidated and condensed financial statements with respect to these plans are as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Employees $ 301 $ 300 $ 602 $ 629 Non-employee directors 62 63 107 86 Total unit-based compensation expense $ 363 $ 363 $ 709 $ 715 All of the Partnership's outstanding awards at June 30, 2020 met the criteria to be treated under equity classification. Long-Term Incentive Plans The Partnership's general partner has a long-term incentive plan for employees and directors of the general partner and its affiliates who perform services for the Partnership. 24 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) On May 26, 2017, the unitholders of the Partnership approved the Martin Midstream Partners L.P. 2017 Restricted Unit Plan (the "2017 LTIP"). The plan currently permits the grant of awards covering an aggregate of 3,000,000 common units, all of which can be awarded in the form of restricted units. The plan is administered by the compensation committee of the general partner’s board of directors (the "Compensation Committee"). A restricted unit is a unit that is granted to grantees with certain vesting restrictions, which may be time-based and/or performance-based. Once these restrictions lapse, the grantee is entitled to full ownership of the unit without restrictions. The Compensation Committee may determine to make grants under the plan containing such terms as the Compensation Committee shall determine under the plan. With respect to time-based restricted units ("TBRU's"), the Compensation Committee will determine the time period over which restricted units granted to employees and directors will vest. The Compensation Committee may also award a percentage of restricted units with vesting requirements based upon the achievement of specified pre-established performance targets ("Performance Based Restricted Units" or "PBRU's"). The performance targets may include, but are not limited to, the following: revenue and income measures, cash flow measures, net income before interest expense and income tax expense ("EBIT"), net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), distribution coverage metrics, expense measures, liquidity measures, market measures, corporate sustainability metrics, and other measures related to acquisitions, dispositions, operational objectives and succession planning objectives. PBRU's are earned only upon our achievement of an objective performance measure for the performance period. PBRU's which vest are payable in common units. Unvested units granted under the 2017 LTIP may or may not participate in cash distributions depending on the terms of each individual award agreement. The restricted units issued to directors generally vest in equal annual installments over a four -year period. Restricted units issued to employees generally vest in equal annual installments over three years of service. In February 2020, the Partnership issued 27,000 TBRU's to each of the Partnership's three independent directors under the 2017 LTIP. These restricted common units vest in equal installments of 6,750 units on January 24, 2021, 2022, 2023, and 2024. On March 1, 2018, the Partnership issued 301,550 TBRU's and 317,925 PBRU's to certain employees of Martin Resource Management Corporation. The TBRU's vest in equal installments over a three -year service period. The PBRU's will vest at the conclusion of a three -year performance period based on certain performance targets. In addition, the PBRU's awarded on March 1, 2018 that are achieved will only vest if the grantee is employed by Martin Resource Management Corporation on March 31, 2021. As of June 30, 2020, the Partnership is unable to ascertain if certain performance conditions will be achieved and, as such, has not recognized compensation expense for the vesting of the units. The Partnership will record compensation expense for the vested portion of the units once the achievement of the performance condition is deemed probable. The restricted units are valued at their fair value at the date of grant which is equal to the market value of common units on such date. A summary of the restricted unit activity for the six months ended June 30, 2020 is provided below: Number of Units Weighted Average Grant-Date Fair Value Per Unit Non-vested, beginning of period 379,019 $ 13.91 Granted (TBRU) 81,000 $ 2.53 Vested ( 101,128 ) $ 13.95 Forfeited ( 84,134 ) $ 13.90 Non-Vested, end of period 274,757 $ 10.54 Aggregate intrinsic value, end of period $ 327 25 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) A summary of the restricted units’ aggregate intrinsic value (market value at vesting date) and fair value of units vested (market value at date of grant) during the three and six months ended June 30, 2020 and 2019 is provided below: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Aggregate intrinsic value of units vested $ — $ — $ 151 $ 1,351 Fair value of units vested — — 1,427 1,551 As of June 30, 2020, there was $ 1,249 of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 1.37 years. NOTE 12. RELATED PARTY TRANSACTIONS As of June 30, 2020, Martin Resource Management Corporation owns 6,114,532 of the Partnership’s common units representing approximately 15.7 % of the Partnership’s outstanding limited partner units. Martin Resource Management Corporation controls the Partnership's general partner by virtue of its 51 % voting interest in Holdings, the sole member of the Partnership's general partner. The Partnership’s general partner, MMGP, owns a 2 % general partner interest in the Partnership and the Partnership’s IDRs. The Partnership’s general partner’s ability, as general partner, to manage and operate the Partnership, and Martin Resource Management Corporation’s ownership as of June 30, 2020, effectively gives Martin Resource Management Corporation the ability to veto some of the Partnership’s actions and to control the Partnership’s management. The following is a description of the Partnership’s material related party agreements and transactions: Omnibus Agreement Omnibus Agreement . The Partnership and its general partner are parties to the Omnibus Agreement dated November 1, 2002, with Martin Resource Management Corporation 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 the Partnership’s use of certain Martin Resource Management Corporation trade names and trademarks. The Omnibus Agreement was amended on November 25, 2009, to include processing crude oil into finished products including naphthenic lubricants, distillates, asphalt and other intermediate cuts. The Omnibus Agreement was amended further on October 1, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management Corporation. Non-Competition Provisions . Martin Resource Management Corporation has agreed for so long as it controls the general partner of the Partnership, not to engage in the business of: • providing terminalling and storage services for petroleum products and by-products including the refining, blending and packaging of finished lubricants; • providing land and marine transportation of petroleum products, by-products, and chemicals; • distributing NGL's; and • manufacturing and selling sulfur-based fertilizer products and other sulfur-related products. This restriction does not apply to: • the ownership and/or operation on the Partnership’s behalf of any asset or group of assets owned by it or its affiliates; • any business operated by Martin Resource Management Corporation, including the following: ◦ distributing fuel oil, marine fuel and other liquids; 26 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) ◦ providing marine bunkering and other shore-based marine services in Texas, Louisiana, Mississippi, Alabama, and Florida; ◦ operating a crude oil gathering business in Stephens, Arkansas; ◦ providing crude oil gathering, refining, and marketing services of base oils, asphalt, and distillate products in Smackover, Arkansas; ◦ providing crude oil marketing and transportation from the well head to the end market; ◦ operating an environmental consulting company; ◦ supplying employees and services for the operation of the Partnership's business; and ◦ operating, solely for our account, the asphalt facilities in each of Hondo, South Houston and Port Neches, Texas and Omaha, Nebraska. • any business that Martin Resource Management Corporation acquires or constructs that has a fair market value of less than $ 5,000 ; • any business that Martin Resource Management Corporation acquires or constructs that has a fair market value of $ 5,000 or more if the Partnership has been offered the opportunity to purchase the business for fair market value and the Partnership declines to do so with the concurrence of the conflicts committee of the board of directors of the general partner of the Partnership (the "Conflicts Committee"); and • any business that Martin Resource Management Corporation acquires or constructs where a portion of such business includes a restricted business and the fair market value of the restricted business is $ 5,000 or more and represents less than 20 % of the aggregate value of the entire business to be acquired or constructed; provided that, following completion of the acquisition or construction, the Partnership will be provided the opportunity to purchase the restricted business. Services. Under the Omnibus Agreement, Martin Resource Management Corporation provides the Partnership with corporate staff, support services, and administrative services necessary to operate the Partnership’s business. The Omnibus Agreement requires the Partnership to reimburse Martin Resource Management Corporation for all direct expenses it incurs or payments it makes on the Partnership’s behalf or in connection with the operation of the Partnership’s business. There is no monetary limitation on the amount the Partnership is required to reimburse Martin Resource Management Corporation for direct expenses. In addition to the direct expenses, under the Omnibus Agreement, the Partnership is required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. Effective January 1, 2020, through December 31, 2020, the Conflicts Committee approved an annual reimbursement amount for indirect expenses of $ 16,410 . The Partnership reimbursed Martin Resource Management Corporation for $ 4,103 and $ 4,164 of indirect expenses for the three months ended June 30, 2020 and 2019, respectively. The Partnership reimbursed Martin Resource Management Corporation for $ 8,261 and $ 8,328 of indirect expenses for the six months ended June 30, 2020 and 2019, respectively. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually. These indirect expenses are intended to cover the centralized corporate functions Martin Resource Management Corporation provides to the Partnership, 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 the Partnership shares with Martin Resource Management Corporation retained businesses. The provisions of the Omnibus Agreement regarding Martin Resource Management Corporation’s services will terminate if Martin Resource Management Corporation ceases to control the general partner of the Partnership. 27 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Related Party Transactions . The Omnibus Agreement prohibits the Partnership from entering into any material agreement with Martin Resource Management Corporation without the prior approval of the Conflicts Committee. For purposes of the Omnibus Agreement, the term "material agreements" means any agreement between the Partnership and Martin Resource Management Corporation that requires aggregate annual payments in excess of the then-applicable agreed upon reimbursable amount of indirect general and administrative expenses. Please read "Services" above. License Provisions. Under the Omnibus Agreement, Martin Resource Management Corporation has granted the Partnership a nontransferable, nonexclusive, royalty-free right and license to use certain of its trade names and marks, as well as the trade names and marks used by some of its affiliates. Amendment and Termination. The Omnibus Agreement may be amended by written agreement of the parties; provided, however, that it may not be amended without the approval of the Conflicts Committee if such amendment would adversely affect the unitholders. The Omnibus Agreement was first amended on November 25, 2009, to permit the Partnership to provide refining services to Martin Resource Management Corporation. The Omnibus Agreement was amended further on October 1, 2012, to permit the Partnership to provide certain lubricant packaging products and services to Martin Resource Management Corporation. Such amendments were approved by the Conflicts Committee. The Omnibus Agreement, other than the indemnification provisions and the provisions limiting the amount for which the Partnership will reimburse Martin Resource Management Corporation for general and administrative services performed on its behalf, will terminate if the Partnership is no longer an affiliate of Martin Resource Management Corporation. Master Transportation Services Agreement Master Transportation Agreement. Martin Transport, Inc. ("MTI"), a wholly owned subsidiary of the Partnership, is a party to a master transportation services agreement effective January 1, 2019, with certain wholly owned subsidiaries of Martin Resource Management Corporation. Under the agreement, MTI agreed to transport Martin Resource Management Corporation's petroleum products and by-products. Term and Pricing. The agreement will continue unless either party terminates the agreement by giving at least 30 days' written notice to the other party. These rates are subject to any adjustments which are mutually agreed upon or in accordance with a price index. Additionally, shipping charges are also subject to fuel surcharges determined on a weekly basis in accordance with the U.S. Department of Energy’s national diesel price list. Indemnification. MTI has agreed to indemnify Martin Resource Management Corporation against all claims arising out of the negligence or willful misconduct of MTI and its officers, employees, agents, representatives and subcontractors. Martin Resource Management Corporation has agreed to indemnify MTI against all claims arising out of the negligence or willful misconduct of Martin Resource Management Corporation and its officers, employees, agents, representatives and subcontractors. In the event a claim is the result of the joint negligence or misconduct of MTI and Martin Resource Management Corporation, indemnification obligations will be shared in proportion to each party’s allocable share of such joint negligence or misconduct. Marine Agreements Marine Transportation Agreement. The Partnership is a party to a marine transportation agreement effective January 1, 2006, as amended, under which the Partnership provides marine transportation services to Martin Resource Management Corporation on a spot-contract basis at applicable market rates. Effective each January 1, this agreement automatically renews for consecutive one year periods unless either party terminates the agreement by giving written notice to the other party at least 60 days prior to the expiration of the then applicable term. The fees the Partnership charges Martin Resource Management Corporation are based on applicable market rates. Marine Fuel. The Partnership is a party to an agreement with Martin Resource Management Corporation dated November 1, 2002, under which Martin Resource Management Corporation provides the Partnership with marine fuel from its locations in the Gulf of Mexico at a fixed rate in excess of the Platt’s U.S. Gulf Coast Index for #2 Fuel Oil. Under this agreement, the Partnership agreed to purchase all of its marine fuel requirements that occur in the areas serviced by Martin Resource Management Corporation. 28 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Terminal Services Agreements Diesel Fuel Terminal Services Agreement. Effective January 1, 2016, the Partnership entered into a second amended and restated terminalling services agreement under which the Partnership provides terminal services to Martin Resource Management Corporation for marine fuel distribution. At such time, the per-gallon throughput fee the Partnership charged under this agreement was increased when compared to the previous agreement and may be adjusted annually based on a price index. This agreement was further amended on January 1, 2017, October 1, 2017, April 1, 2019, and January 1, 2020 to modify its minimum throughput requirements and throughput fees. The term of this agreement is currently evergreen and it will continue on a month to month basis until terminated by either party by giving 60 days’ written notice. Miscellaneous Terminal Services Agreements. The Partnership is currently party to several terminal services agreements and from time to time the Partnership may enter into other terminal service agreements for the purpose of providing terminal services to related parties. Individually, each of these agreements is immaterial but when considered in the aggregate they could be deemed material. These agreements are throughput based with a minimum volume commitment. Generally, the fees due under these agreements are adjusted annually based on a price index. Other Agreements Cross Tolling Agreement. The Partnership is a party to an amended and restated tolling agreement with Cross Oil Refining and Marketing, Inc. ("Cross") dated October 28, 2014, under which the Partnership processes crude oil into finished products, including naphthenic lubricants, distillates, asphalt and other intermediate cuts for Cross. The tolling agreement expires November 25, 2031. Under this tolling agreement, Cross agreed to process a minimum of 6,500 barrels per day of crude oil at the facility at a fixed price per barrel. Any additional barrels are processed at a modified price per barrel. In addition, Cross agreed to pay a monthly reservation fee and a periodic fuel surcharge fee based on certain parameters specified in the tolling agreement. Further, certain capital improvements, to the extent requested by Cross, are reimbursed through a capital recovery fee. As of December 31, 2019, the annual capital recovery fee reimbursement of $ 2,088 expired. An additional $ 2,586 of capital recovery fee reimbursement will expire on December 31, 2020. All of these fees (other than the fuel surcharge and capital recovery fee) are subject to escalation annually based upon the greater of 3 % or the increase in the Consumer Price Index for a specified annual perio d . A lso, the Partnership renegotiated a crude transportation contract set to expire in the first half of 2022 resulting in a reduction in revenue of $ 2,145 annually beginning January 1, 2020. Other Miscellaneous Agreements. From time to time the Partnership enters into other miscellaneous agreements with Martin Resource Management Corporation for the provision of other services or the purchase of other goods. The tables below summarize the related party transactions that are included in the related financial statement captions on the face of the Partnership’s Consolidated and Condensed Statements of Operations. The revenues, costs and expenses reflected in these tables are tabulations of the related party transactions that are recorded in the corresponding captions of the consolidated and condensed financial statements and do not reflect a statement of profits and losses for related party transactions. The impact of related party revenues from sales of products and services is reflected in the consolidated and condensed financial statements as follows: 29 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenues: Terminalling and storage $ 15,942 $ 17,477 $ 31,816 $ 36,449 Transportation 5,393 5,856 11,287 11,499 Product sales: Sulfur services 9 9 28 16 Terminalling and storage 29 277 102 691 38 286 130 707 $ 21,373 $ 23,619 $ 43,233 $ 48,655 The impact of related party cost of products sold is reflected in the consolidated and condensed financial statements as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Cost of products sold: Sulfur services $ 2,554 $ 2,884 $ 5,321 $ 5,458 Terminalling and storage 4,249 7,203 10,026 13,112 $ 6,803 $ 10,087 $ 15,347 $ 18,570 The impact of related party operating expenses is reflected in the consolidated and condensed financial statements as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Operating expenses: Transportation $ 13,388 $ 16,319 $ 28,941 $ 31,299 Natural gas liquids 498 2,054 995 4,079 Sulfur services 1,137 1,402 2,283 2,326 Terminalling and storage 4,417 4,632 8,992 9,239 $ 19,440 $ 24,407 $ 41,211 $ 46,943 The impact of related party selling, general and administrative expenses is reflected in the consolidated and condensed financial statements as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Selling, general and administrative: Transportation $ 1,817 $ 1,729 $ 3,656 $ 3,457 Natural gas liquids 533 1,128 1,237 2,317 Sulfur services 746 710 1,489 1,426 Terminalling and storage 835 737 1,673 1,454 Indirect, including overhead allocation 4,124 4,254 8,312 8,439 $ 8,055 $ 8,558 $ 16,367 $ 17,093 30 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 13. BUSINESS SEGMENTS The Partnership has four reportable segments: terminalling and storage, transportation, sulfur services and natural gas liquids. The Partnership’s reportable segments are strategic business units that offer different products and services. The operating income of these segments is reviewed by the chief operating decision maker to assess performance and make business decisions. The accounting policies of the operating segments are the same as those described in Note 2 in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020. The Partnership evaluates the performance of its reportable segments based on operating income. There is no allocation of administrative expenses or interest expense. Three Months Ended June 30, 2020 Operating Revenues Intersegment Revenues Eliminations Operating Revenues after Eliminations Depreciation and Amortization Operating Income (Loss) after Eliminations Capital Expenditures and Plant Turnaround Costs Terminalling and storage 46,976 ( 1,542 ) 45,434 7,272 2,969 3,427 Transportation 35,259 ( 3,774 ) 31,485 4,328 ( 2,078 ) 772 Sulfur services 33,420 — 33,420 3,131 8,814 1,739 Natural gas liquids 30,300 ( 1 ) 30,299 612 2,616 70 Indirect selling, general and administrative — — — — ( 4,361 ) — Total $ 145,955 $ ( 5,317 ) $ 140,638 $ 15,343 $ 7,960 $ 6,008 Three Months Ended June 30, 2019 Operating Revenues Intersegment Revenues Eliminations Operating Revenues after Eliminations Depreciation and Amortization Operating Income (Loss) after Eliminations Capital Expenditures and Plant Turnaround Costs Terminalling and storage 54,351 ( 1,603 ) 52,748 7,826 4,254 3,668 Transportation 47,233 ( 5,912 ) 41,321 3,778 ( 2,629 ) 746 Sulfur services 35,856 — 35,856 2,854 7,528 3,273 Natural gas liquids 57,398 — 57,398 629 456 940 Indirect selling, general and administrative — — — — ( 4,599 ) — Total $ 194,838 $ ( 7,515 ) $ 187,323 $ 15,087 $ 5,010 $ 8,627 Six Months Ended June 30, 2020 Operating Revenues Intersegment Revenues Eliminations Operating Revenues after Eliminations Depreciation and Amortization Operating Income (Loss) after Eliminations Capital Expenditures and Plant Turnaround Costs Terminalling and storage $ 98,110 $ ( 3,268 ) $ 94,842 $ 14,728 $ 3,727 $ 7,022 Transportation 80,433 ( 10,007 ) 70,426 8,608 ( 7,099 ) 4,698 Sulfur services 61,756 ( 13 ) 61,743 6,025 22,672 4,874 Natural gas liquids 112,515 ( 5 ) 112,510 1,221 12,993 175 Indirect selling, general and administrative — — — — ( 8,733 ) — Total $ 352,814 $ ( 13,293 ) $ 339,521 $ 30,582 $ 23,560 $ 16,769 31 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) Six Months Ended June 30, 2019 Operating Revenues Intersegment Revenues Eliminations Operating Revenues after Eliminations Depreciation and Amortization Operating Income (Loss) after Eliminations Capital Expenditures and Plant Turnaround Costs Terminalling and storage $ 110,243 $ ( 3,324 ) $ 106,919 $ 15,663 $ 9,069 $ 9,013 Transportation 92,419 ( 13,303 ) 79,116 7,348 ( 6,509 ) 3,207 Sulfur services 67,449 — 67,449 5,722 13,908 5,479 Natural gas liquids 173,872 — 173,872 1,255 7,314 1,227 Indirect selling, general and administrative — — — — ( 9,166 ) — Total $ 443,983 $ ( 16,627 ) $ 427,356 $ 29,988 $ 14,616 $ 18,926 The Partnership's assets by reportable segment as of June 30, 2020 and December 31, 2019, are as follows: June 30, 2020 December 31, 2019 Total assets: Terminalling and storage $ 286,233 $ 292,136 Transportation 163,951 170,045 Sulfur services 104,113 110,780 Natural gas liquids 62,682 94,195 Total assets $ 616,979 $ 667,156 NOTE 14. COMMITMENTS AND CONTINGENCIES Contingencies From time to time, the Partnership is subject to various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Partnership. On December 31, 2015, the Partnership received a demand from a customer in its lubricants packaging business for defense and indemnity in connection with lawsuits filed against it in various United States District Courts, which generally allege that the customer engaged in unlawful and deceptive business practices in connection with its marketing and advertising of its private label motor oil. The Partnership disputes that it has any obligation to defend or indemnify the customer for its conduct. Accordingly, on January 7, 2016, the Partnership filed a Complaint for Declaratory Judgment in the Chancery Court of Davidson County, Tennessee requesting a judicial determination that the Partnership does not owe the customer the demanded defense and indemnity obligations. The lawsuits against the customer have been transferred to the United States District Court for the Western District of Missouri for consolidated pretrial proceedings. On March 1, 2017, at the request of the parties, the Chancery Court of Davidson County, Tennessee administratively closed the Partnership's lawsuit pending rulings in the United States District Court for the Western District of Missouri. In the event that either party moves the Chancery Court of Davidson County, Tennessee to reopen the case, we expect the Court would grant such motion and reopen the case. Further, the same customer has made a claim under the Partnership’s insurance policy. The insurer has denied the claim. However, in the event that the customer is successful in pursuing the claim, such action would negatively impact the Partnership because the Partnership may have certain reimbursement obligations it would owe the insurance company. If the case is reopened or the insurance claim by the customer is successful, we are currently unable to determine the exposure we may have in this matter, if any. 32 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) NOTE 15. FAIR VALUE MEASUREMENTS The Partnership uses a valuation framework based upon inputs that market participants use in pricing certain assets and liabilities. These inputs are classified into two categories: observable inputs and unobservable inputs. Observable inputs represent market data obtained from independent sources. Unobservable inputs represent the Partnership's own market assumptions. Unobservable inputs are used only if observable inputs are unavailable or not reasonably available without undue cost and effort. The two types of inputs are further prioritized into the following hierarchy: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that reflect the entity's own assumptions and are not corroborated by market data. Assets and liabilities measured at fair value on a recurring basis are summarized below: Level 2 June 30, 2020 December 31, 2019 Commodity derivative contracts, net $ — $ ( 667 ) The Partnership is required to disclose estimated fair values for its financial instruments. Fair value estimates are set forth below for these financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument: • Accounts and other receivables, trade and other accounts payable, accrued interest payable, other accrued liabilities, income taxes payable and due from/to affiliates: The carrying amounts approximate fair value due to the short maturity and highly liquid nature of these instruments, and as such these have been excluded from the table below. There is negligible credit risk associated with these instruments. • Current and non-current portion of long-term debt: The carrying amount of the revolving credit facility approximates fair value due to the debt having a variable interest rate and is in Level 2. The estimated fair value of the 2021 Notes is considered Level 1, as the fair value is based on quoted market prices in active markets. June 30, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value 2021 Notes $ 364,219 $ 294,685 $ 373,374 $ 343,470 NOTE 16. CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Partnership's operations are conducted by its operating subsidiaries as it has no independent assets or operations. Martin Operating Partnership L.P. (the "Operating Partnership"), the Partnership’s wholly-owned subsidiary, and the Partnership's other operating subsidiaries have issued in the past, and may issue in the future, unconditional guarantees of senior or subordinated debt securities of the Partnership. The guarantees that have been issued are full, irrevocable and unconditional and joint and several. In addition, the Operating Partnership may also issue senior or subordinated debt securities which, if issued, will be fully, irrevocably and unconditionally guaranteed by the Partnership. Substantially all of the Partnership's operating subsidiaries are subsidiary guarantors of its 2021 Notes and any subsidiaries other than the subsidiary guarantors are minor. NOTE 17. INCOME TAXES Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Provision for income taxes $ 790 $ 639 $ 1,137 $ 1,335 33 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) The operations of a partnership are generally not subject to income taxes, except for Texas margin tax, because its income is taxed directly to its partners. MTI, a wholly owned subsidiary of the Partnership, is subject to income taxes due to its corporate structure. Total income tax expense of $ 590 and $ 937 , related to the operation of the subsidiary, for the three and six months ended June 30, 2020, resulted in an effective income tax rate of ( 472 )% and 98.32 %, respectively. Total income tax expense of $ 429 and $ 877 , related to the operation of the subsidiary, for the three and six months ended June 30, 2019, respectively, resulted in an effective income tax rate ("ETR") of 26.3 % and 25.49 %, respectively. The following items caused the quarterly and year-to-date ETR to be significantly different from the historical annual effective income tax rate ("AETR"): • Pretax loss recorded for the three months ended June 30, 2020 due to the economic downturn resulting from the coronavirus pandemic. • The Partnership has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the AETR for the full year to "ordinary" income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The Partnership has used a discrete ETR method to calculate taxes for the three and six month periods ended June 30, 2020. The Partnership determined that since small changes in estimated "ordinary" income would result in significant changes in the estimated AETR, the historical method would not provide a reliable estimate for the three and six month periods ended June 30, 2020. • During the second quarter and six months ended June 30, 2020, the Partnership recorded an income tax expense of approximately $ 341 related to the filing of the 2019 Federal income tax return, which decreased the quarter-to-date ETR by 272.8 % and increased the year-to-date ETR by 35.78 %. The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted on March 27, 2020, in response to the market volatility and instability resulting from the COVID-19 pandemic, and includes changes to various income tax provisions including, but not limited to, providing for a five-year carryback of net operating losses generated in taxable years beginning after December 31, 2017, and before January 1, 2021, suspension of the 80% taxable income limitation for net operating losses generated after December 31, 2017, and before January 1, 2021, and relaxation of the limitation of adjusted taxable income as determined under Internal Revenue Code Section 163(j) from 30% to 50% when determining the deduction for business interest expense for 2019 and 2020. Since, prior to its acquisition by the Partnership, MTI was a Qualified Subchapter S subsidiary ("QSub") of Martin Resource Management Corporation, it is precluded from carrying back net operating losses to its QSub taxable years. The other applicable provisions of the CARES Act have no material impact on the AETR, deferred taxes, or valuation allowances. A current federal income tax expense (benefit) of $( 307 ) and $( 174 ), related to the operation of the subsidiary, were recorded for the three and six months ended June 30, 2020, respectively, and $( 78 ) and $ 218 , for the three and six months ended June 30, 2019, respectively. A current state income tax expense (benefit) of $ 164 and $ 93 , related to the operation of the subsidiary, were recorded for the three and six months ended June 30, 2020, respectively, and $ 20 and $( 198 ) for the three and six months ended June 30, 2019, respectively. With respect to MTI, income taxes are accounted for under the asset and liability method pursuant to the provisions of ASC 740 related to income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A deferred tax expense related to the MTI temporary differences of $ 733 and $ 487 was recorded for the three months ended June 30, 2020 and 2019, respectively, and $ 1,018 and $ 856 was recorded for the six months ended June 30, 2020 and 2019, respectively. A deferred tax asset of $ 22,404 and $ 23,422 , related to the cumulative book and tax temporary differences, existed at June 30, 2020 and December 31, 2019, respectively. 34 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) All income tax positions taken for all open years are more likely than not to be sustained based upon their technical merit under applicable tax laws. NOTE 18. SUBSEQUENT EVENTS Quarterly Distribution. On July 27, 2020, the Partnership declared a quarterly cash distribution of $ 0.005 per common unit for the second quarter of 2020, or $ 0.020 per common unit on an annualized basis, which will be paid on August 14, 2020 to unitholders of record as of August 7, 2020. Amendment to Credit Facility . On July 8, 2020, the Partnership amended its revolving credit facility (such amendment, the "Credit Facility Amendment") to, in part, facilitate the transactions contemplated by the Restructuring Support Agreement. Upon the closing of the Credit Facility Amendment, the revolving credit facility was amended to, among other things: • require the Partnership to prepay revolving loans to the extent that its Excess Cash (as defined in the Credit Facility Amendment) exceeds $ 25.0 million; and • provide that the maturity date of the lenders’ commitments under the revolving credit facility is August 31, 2023; however, the maturity date will be: ◦ August 19, 2020 if either (x) more than $ 36.5 million of the 2021 Notes remain outstanding after completion of the Exchange Offer or (y) the Exchange Offer has not been completed by August 15, 2020 and the Partnership has not commenced the chapter 11 proceedings contemplated by the Plan prior to August 19, 2020; or ◦ October 16, 2020 if the Partnership commences the chapter 11 proceedings contemplated by the Plan and the Plan is not effective by October 16, 2020. Upon the earlier of (x) the closing of the Exchange Offer and Cash Tender Offer and satisfaction of certain other conditions set forth in the Credit Facility Amendment and (y) August 15, 2020, the Credit Facility Amendment will amend the Partnership’s revolving credit facility to, among other things: • permit the Partnership to issue up to $ 54.0 million of the New Notes and up to $ 323.0 million of the Exchange Notes, subject to the restrictions set forth therein; • reduce the aggregate amount of commitments under the revolving credit facility from $ 400 million to $ 300 million; • require an additional $ 25 million reduction in the commitments under the revolving credit facility if the Partnership receives $ 25 million or more in net cash proceeds from any asset sale; • limit the Partnership’s ability to make quarterly distributions to its unitholders in excess of $ 0.005 per unit unless the Partnership’s Total Leverage Ratio (as defined in the revolving credit facility) is below 3.75 x; • increase the pricing under the revolving credit facility and add a 1.0 % LIBOR floor; • require the Partnership to maintain a minimum Interest Coverage Ratio (as defined in the revolving credit facility) of 2.0 :1.0 with respect to the fiscal quarters ending in September and December of 2020, 1.75 :1.0 with respect to each fiscal quarter ending in 2021, and 2.0 x with respect to each fiscal quarter thereafter; • require the Partnership to maintain a maximum Total Leverage Ratio (as defined in the Credit Facility Amendment) of not more than 5.75 :1.0 with respect to the fiscal quarters ending in September and December of 2020 and March and June of 2021, 5.50 with respect to the fiscal quarter ending in September of 2021, 5.00 with respect to the fiscal quarter ending in December of 2021 and the fiscal quarters ending in March, June and September of 2022, and 35 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) June 30, 2020 (Unaudited) 4.50 :1.0 with respect to each fiscal quarter thereafter, which financial covenant replaces the existing maximum Leverage Ratio (as defined in the revolving credit facility in effect prior to the Credit Facility Amendment); • require the Partnership to maintain a maximum First Lien Leverage Ratio (as defined in the Credit Facility Amendment) of not more than 2.25 :1.0 with respect to the fiscal quarters ending in September and December of 2020 and each fiscal quarter ending in 2021, and 2.0 :1.0 with respect to each fiscal quarter thereafter, which financial covenant replaces the existing maximum Senior Leverage Ratio (as defined in the revolving credit facility in effect prior to the Credit Facility Amendment). Backstop Agreement . On July 9, 2020, the Partnership entered into a Backstop Agreement with certain of the Supporting Holders of the 2021 Notes, pursuant to which such Supporting Holders agreed to purchase any unsubscribed New Notes that are not purchased by eligible holders in the Rights Offering, or if the Exchange Offer and Cash Tender Offer are not consummated, pursuant to the Plan. The Partnership has agreed to pay the Supporting Holders a backstop commitment fee of $ 3.75 million allocated among the Supporting Holders based on their pro rata shares of the backstop commitment, which commitment fee will be paid in New Notes. However, if the Restructuring Support Agreement is terminated due to the Partnership’s governing body exercising its fiduciary duties, if the backstop agreement is materially breached by the Partnership and therefore terminated by the Supporting Holdings, or if the New Notes are not issued by August 17, 2020 and the Partnership has not commenced Chapter 11 Cases, the commitment fee will be paid in cash. Exchange Offer . On July 9, 2020, the Partnership commenced the Exchange Offer, the Cash Tender Offer, the Rights Offering and the consent solicitation contemplated by the Restructuring Support Agreement. The Exchange Offer expires at 5:00 p.m., New York City time, on August 7, 2020; however, the Early Participation Date occurred at 5:00 p.m., New York City time, on July 23, 2020. As of the Early Participation Date, the Partnership received tenders of approximately $ 335.5 million aggregate principal amount of the 2021 Notes, which represented approximately 92.045 % in principal amount of the 2021 Notes. On July 31, 2020, the required amount of Supporting Holders and the Partnership entered into an amendment to the Restructuring Support Agreement that, among other things, reduced the Minimum Participation Condition from 95 % to 92 % in principal amount of 2021 Notes tendered. As a result, the Minimum Participation Condition has been satisfied and, subject to satisfaction of other customary closing conditions, the Exchange offer and Cash Tender Offer will be consummated on or about August 12, 2020 and the Plan will not be filed. In addition, the Partnership received the requisite majority consent necessary for the adoption of the proposed amendments to the 2021 Notes Indenture, which will, among other things, eliminate substantially all of the restrictive covenants in the 2021 Notes Indenture, delete certain events of default, and shorten the period of advance notice required to be given to holders of 2021 Notes from 30 days to three business days in the case of a redemption of the 2021 Notes. This description of the Exchange Offer, Cash Tender Offer and related consent solicitations (collectively, the "Offers") is for informational purposes only and does not constitute an offer to purchase or exchange or a solicitation of an offer to purchase or exchange any 2021 Notes or an offer to sell securities. The Offers are being made only pursuant to the Exchange Offer Memorandum, Consent Solicitation, Rights Offering, and Disclosure Statement Soliciting Acceptances of a Prepackaged Plan of Reorganization (the "Offering Memorandum") and Offer to Purchase and Consent Solicitation Statement, each dated July 9, 2020, which set forth a more detailed description of the terms of the Offers. 36