MARTIN MIDSTREAM PARTNERS L.P. 10-Q

Item 1. Financial Statements MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED BALANCE SHEETS (Dollars in thousands) March 31, 2021 December 31, 2020 (Unaudited) (Audited) Assets Cash $ 1,112 $ 4,958 Accounts and other receivables, less allowance for doubtful accounts of $ 248 and $ 261 , respectively 65,232 52,748 Inventories 38,716 54,122 Due from affiliates 22,213 14,807 Fair value of derivatives 12 — Other current assets 8,294 8,991 Total current assets 135,579 135,626 Property, plant and equipment, at cost 889,210 889,108 Accumulated depreciation ( 518,143 ) ( 509,237 ) Property, plant and equipment, net 371,067 379,871 Goodwill 16,823 16,823 Right-of-use assets 21,250 22,260 Deferred income taxes, net 22,178 22,253 Other assets, net 3,314 2,805 Total assets $ 570,211 $ 579,638 Liabilities and Partners’ Capital (Deficit) Current installments of long-term debt and finance lease obligations $ 335 $ 31,497 Trade and other accounts payable 56,271 51,900 Product exchange payables 237 373 Due to affiliates 1,214 435 Income taxes payable 696 556 Fair value of derivatives — 207 Other accrued liabilities 19,485 34,407 Total current liabilities 78,238 119,375 Long-term debt, net 513,272 484,597 Finance lease obligations 230 289 Operating lease liabilities 14,264 15,181 Other long-term obligations 8,541 7,067 Total liabilities 614,545 626,509 Commitments and contingencies Partners’ capital (deficit) ( 44,334 ) ( 46,871 ) Total partners’ capital (deficit) ( 44,334 ) ( 46,871 ) Total liabilities and partners' capital (deficit) $ 570,211 $ 579,638 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 March 31, 2021 2020 Revenues: Terminalling and storage * $ 18,378 $ 20,474 Transportation * 29,815 38,941 Sulfur services 2,950 2,915 Product sales: * Natural gas liquids 98,085 82,211 Sulfur services 31,885 25,408 Terminalling and storage 19,861 28,934 149,831 136,553 Total revenues 200,974 198,883 Costs and expenses: Cost of products sold: (excluding depreciation and amortization) Natural gas liquids * 79,135 69,835 Sulfur services * 21,214 15,295 Terminalling and storage * 14,502 23,680 114,851 108,810 Expenses: Operating expenses * 44,634 51,282 Selling, general and administrative * 10,609 10,462 Depreciation and amortization 14,434 15,239 Total costs and expenses 184,528 185,793 Other operating income (loss), net ( 760 ) 2,510 Operating income 15,686 15,600 Other income (expense): Interest expense, net ( 12,953 ) ( 9,925 ) Gain on retirement of senior unsecured notes — 3,484 Other, net — 3 Total other expense ( 12,953 ) ( 6,438 ) Net income before taxes 2,733 9,162 Income tax expense ( 222 ) ( 347 ) Net income 2,511 8,815 Less general partner's interest in net (income) ( 50 ) ( 176 ) Less (income) allocable to unvested restricted units ( 10 ) ( 55 ) Limited partners' interest in net income (loss) $ 2,451 $ 8,584 Net income per unit attributable to limited partners - basic $ 0.06 $ 0.22 Net income per unit attributable to limited partners - diluted $ 0.06 $ 0.22 Weighted average limited partner units - basic 38,692,609 38,640,862 Weighted average limited partner units - diluted 38,705,641 38,644,467 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 March 31, 2021 2020 Revenues:* Terminalling and storage $ 15,306 $ 15,874 Transportation 4,010 5,894 Product Sales 114 92 Costs and expenses:* Cost of products sold: (excluding depreciation and amortization) Sulfur services 2,535 2,767 Terminalling and storage 4,568 5,777 Expenses: Operating expenses 18,368 21,771 Selling, general and administrative 8,680 8,312 See accompanying notes to consolidated and condensed financial statements. 6 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL (DEFICIT) (Unaudited) (Dollars in thousands) Partners’ Capital (Deficit) Common Limited General Partner Amount Units Amount Total Balances - January 1, 2020 38,863,389 $ ( 38,342 ) $ 2,146 $ ( 36,196 ) Net income — 8,639 176 8,815 Issuance of restricted units 81,000 — — — Forfeiture of restricted units ( 84,134 ) — — — Cash distributions — ( 2,408 ) ( 49 ) ( 2,457 ) Unit-based compensation — 346 — 346 Purchase of treasury units ( 7,748 ) ( 9 ) — ( 9 ) Balances - March 31, 2020 38,852,507 $ ( 31,774 ) $ 2,273 $ ( 29,501 ) Balances - January 1, 2021 38,851,174 $ ( 48,776 ) $ 1,905 $ ( 46,871 ) Net income — 2,461 50 2,511 Issuance of restricted units 42,168 — — — Forfeiture of restricted units ( 83,436 ) — — — Cash distributions — ( 193 ) ( 4 ) ( 197 ) Unit-based compensation — 240 — 240 Purchase of treasury units ( 7,156 ) ( 17 ) — ( 17 ) Balances - March 31, 2021 38,802,750 $ ( 46,285 ) $ 1,951 $ ( 44,334 ) See accompanying notes to consolidated and condensed financial statements. 7 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net Income $ 2,511 $ 8,815 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,434 15,239 Amortization of deferred debt issuance costs 755 492 Amortization of premium on notes payable — ( 77 ) Deferred income tax expense 75 286 Loss on sale of property, plant and equipment, net 760 190 Gain on retirement of senior unsecured notes — ( 3,484 ) Derivative (income) loss 1,436 ( 33 ) Net cash paid for commodity derivatives ( 1,655 ) ( 636 ) Unit-based compensation 240 346 Change in current assets and liabilities, excluding effects of acquisitions and dispositions: Accounts and other receivables ( 12,484 ) 26,413 Inventories 15,070 15,710 Due from affiliates ( 7,406 ) 2,729 Other current assets 633 ( 1,413 ) Trade and other accounts payable 1,984 ( 10,440 ) Product exchange payables ( 136 ) 450 Due to affiliates 779 ( 166 ) Income taxes payable 140 133 Other accrued liabilities ( 13,370 ) ( 9,118 ) Change in other non-current assets and liabilities 88 ( 547 ) Net cash provided by operating activities 3,854 44,889 Cash flows from investing activities: Payments for property, plant and equipment ( 2,514 ) ( 12,260 ) Payments for plant turnaround costs ( 1,674 ) ( 150 ) Proceeds from involuntary conversion of property, plant and equipment — 1,768 Proceeds from sale of property, plant and equipment 3 4,347 Net cash used in investing activities ( 4,185 ) ( 6,295 ) Cash flows from financing activities: Payments of long-term debt ( 87,790 ) ( 112,860 ) Payments under finance lease obligations ( 2,431 ) ( 1,864 ) Proceeds from long-term debt 87,000 76,000 Purchase of treasury units ( 17 ) ( 9 ) Payment of debt issuance costs ( 80 ) ( 192 ) Cash distributions paid ( 197 ) ( 2,457 ) Net cash used in financing activities ( 3,515 ) ( 41,382 ) Net decrease in cash ( 3,846 ) ( 2,788 ) Cash at beginning of period 4,958 2,856 Cash at end of period $ 1,112 $ 68 Non-cash additions to property, plant and equipment $ 2,855 $ 2,142 See accompanying notes to consolidated and condensed financial statements. 8 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (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, 2020, filed with the SEC on March 3, 2021. 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. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2021, the Partnership adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2019-12, Income Taxes (Accounting Standards Codification ("ASC") Topic 740): Simplifying the Accounting for Income Taxes , which removes certain exceptions to general principles in ASC 740 and clarifies and amends existing guidance within U.S. GAAP. Adoption of the new standard did not have a material impact on the Partnership’s consolidated financial statements. 9 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) NOTE 3. REVENUE The following table disaggregates our revenue by major source: Three Months Ended March 31, 2021 2020 Terminalling and storage segment Lubricant product sales $ 19,861 $ 28,934 Throughput and storage 18,378 20,474 $ 38,239 $ 49,408 Natural gas liquids segment Natural gas liquids product sales $ 98,085 $ 82,211 $ 98,085 $ 82,211 Sulfur services segment Sulfur product sales $ 7,068 $ 6,481 Fertilizer product sales 24,817 18,927 Sulfur services 2,950 2,915 $ 34,835 $ 28,323 Transportation segment Land transportation $ 22,956 $ 24,234 Inland transportation 6,724 13,706 Offshore transportation 135 1,001 $ 29,815 $ 38,941 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") 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. 10 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (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 below 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. 2021 2022 2023 2024 2025 Thereafter Total Terminalling and storage Throughput and storage $ 32,183 $ 40,394 $ 41,605 $ 42,854 $ 44,197 $ 294,141 $ 495,374 Sulfur services Sulfur product sales 12,874 16,279 15,233 975 975 — 46,336 Total $ 45,057 $ 56,673 $ 56,838 $ 43,829 $ 45,172 $ 294,141 $ 541,710 NOTE 4. INVENTORIES Components of inventories at March 31, 2021 and December 31, 2020 were as follows: March 31, 2021 December 31, 2020 Natural gas liquids $ 11,857 $ 27,878 Sulfur 222 24 Fertilizer 8,572 10,854 Lubricants 13,650 11,002 Other 4,415 4,364 $ 38,716 $ 54,122 11 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) NOTE 5. DEBT At March 31, 2021 and December 31, 2020, long-term debt consisted of the following: March 31, 2021 December 31, 2020 $ 300,000 Revolving credit facility at variable interest rate ( 5.00 % 1 weighted average at March 31, 2021), 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 $ 3,541 and $ 3,826 , respectively 2 $ 172,459 $ 144,174 $ 400,000 Senior notes, 7.25 % interest, net of unamortized debt issuance costs of $ — and $ — , respectively, including unamortized premium of $ — and $ — , respectively, issued $ 250,000 February 2013 and $ 150,000 April 2014, $ 26,200 repurchased during 2015, $ 9,344 repurchased during 2020, $ 335,666 refinanced as part of the August 2020 Exchange offer, $28,790 repaid at maturity in February 2021, unsecured 2,3,4 — 28,790 $ 53,750 Senior notes, 10.0 % interest, net of unamortized debt issuance costs of $ 3,291 and $ 3,577 , respectively, due February 2024, secured 2,3 50,459 50,173 $ 291,970 Senior notes, 11.5 % interest, net of unamortized debt issuance costs of $ 1,616 and $ 1,720 , respectively, due February 2025, secured 2,3 290,354 290,250 Total 513,272 513,387 Less: current portion — ( 28,790 ) Total long-term debt, net of current portion $ 513,272 $ 484,597 Current installments of finance lease obligations $ 335 $ 2,707 Finance lease obligations 230 289 Total finance lease obligations $ 565 $ 2,996 1 Interest rate fluctuates based on LIBOR or the base prime rate (set on the date of each advance) plus an applicable margin. The margin is set every three months. All amounts outstanding at December 31, 2020 were at LIBOR plus an applicable margin. All amounts outstanding at December 31, 2020 and March 31, 2021 were at LIBOR plus an applicable margin with LIBOR having a floor of 1.0 % per annum. The applicable margin for revolving loans that are LIBOR loans currently ranges from 2.75 % to 4.00 % and the applicable margin for revolving loans that are base prime rate loans currently ranges from 1.75 % to 3.00 %. The applicable margin for LIBOR borrowings at March 31, 2021 is 4.00 %. The credit facility contains various covenants that 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"). 2 The Partnership is in compliance with all debt covenants as of March 31, 2021 and December 31, 2020, respectively. 3 The indentures for each of the outstanding series of senior notes restrict 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 On February 15, 2021, the 2021 Notes matured and the Partnership retired the outstanding balance of $ 28,790 using funds borrowed under its revolving credit facility. The Partnership paid cash interest, net of capitalized interest, in the amount of $ 23,347 and $ 16,736 for the three months ended March 31, 2021 and 2020, respectively. Capitalized interest was $ 0 and $ 4 for the three months ended March 31, 2021 and 2020, respectively. 12 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) NOTE 6. 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 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 16 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. The components of lease expense for the three months ended March 31, 2021 and 2020 were as follows: Three Months Ended March 31, 2021 2020 Operating lease cost $ 2,302 $ 2,844 Finance lease cost: Amortization of right-of-use assets $ 90 589 Interest on lease liabilities $ 10 110 Short-term lease cost $ 3,108 3,423 Variable lease cost $ 33 $ 29 Total lease cost $ 5,543 $ 6,995 Supplemental balance sheet information related to leases at March 31, 2021 and December 31, 2020 was as follows: March 31, 2021 December 31, 2020 Operating Leases Operating lease right-of-use assets $ 21,250 $ 22,260 Current portion of operating lease liabilities included in "Other accrued liabilities" $ 7,368 $ 7,529 Operating lease liabilities $ 14,264 15,181 Total operating lease liabilities $ 21,632 $ 22,710 Finance Leases Property, plant and equipment, at cost $ 3,451 $ 10,352 Accumulated depreciation $ ( 1,177 ) ( 3,703 ) Property, plant and equipment, net $ 2,274 $ 6,649 Current installments of finance lease obligations $ 335 $ 2,707 Finance lease obligations $ 230 289 Total finance lease obligations $ 565 $ 2,996 13 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) The Partnership’s future minimum lease obligations as of March 31, 2021 consist of the following: Operating Leases Finance Leases Year 1 $ 8,237 $ 355 Year 2 5,519 232 Year 3 2,877 3 Year 4 1,740 — Year 5 1,113 — Thereafter 5,671 — Total $ 25,157 $ 590 Less amounts representing interest costs ( 3,525 ) ( 25 ) Total lease liability $ 21,632 $ 565 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 March 31, 2021 are as follows: 2021 - $ 15,715 ; 2022 - $ 13,692 ; 2023 - $ 13,297 ; 2024 - $ 13,297 ; 2025 - $ 12,908 ; subsequent years - $ 38,539 . 14 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) NOTE 7. SUPPLEMENTAL BALANCE SHEET INFORMATION Components of "Other accrued liabilities" were as follows: March 31, 2021 December 31, 2020 Accrued interest $ 4,956 $ 16,104 Asset retirement obligations 300 1,692 Property and other taxes payable 2,423 4,869 Accrued payroll 3,654 3,244 Operating lease liabilities 7,368 7,529 Other 784 969 $ 19,485 $ 34,407 The schedule below summarizes the changes in our asset retirement obligations: March 31, 2021 Beginning asset retirement obligations $ 8,759 Additions to asset retirement obligations — Accretion expense 104 Liabilities settled ( 22 ) Ending asset retirement obligations 8,841 Current portion of asset retirement obligations 1 ( 300 ) Long-term portion of asset retirement obligations 2 $ 8,541 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. 15 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) NOTE 8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Partnership’s results of operations could be materially impacted by changes in commodity prices and 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 the 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 has established a hedging policy and 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. The Partnership has entered into hedging transactions as of March 31, 2021, to protect a portion of its commodity price risk exposure. These hedging arrangements are in the form of swaps for NGLs. At March 31, 2021, the Partnership had instruments totaling a gross notional quantity of 225,000 barrels settling during the period from April 30, 2021 through June 30, 2021. At December 31, 2020, the Partnership had instruments totaling a gross notional quantity of 137,000 barrels settling during the period from January 31, 2021 through February 28, 2021. These instruments settle against the applicable pricing source for each grade and location. For information regarding gains and losses on interest rate derivative instruments, see "Tabular Presentation of Gains and Losses on Derivative Instruments" below. (b) 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 March 31, 2021 December 31, 2020 Balance Sheet Location March 31, 2021 December 31, 2020 Derivatives not designated as hedging instruments: Current: Commodity contracts Fair value of derivatives $ 12 $ — Fair value of derivatives $ — $ 207 Total derivatives not designated as hedging instruments $ 12 $ — $ — $ 207 16 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) Effect of Derivative Instruments on the Consolidated and Condensed Statements of Operations For the Three Months Ended March 31, 2021 and 2020 Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives 2021 2020 Derivatives not designated as hedging instruments: Commodity contracts Cost of products sold $ ( 1,436 ) $ 33 Total effect of derivatives not designated as hedging instruments $ ( 1,436 ) $ 33 NOTE 9. PARTNERS' CAPITAL As of March 31, 2021, Partners’ capital consisted of 38,802,750 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 15.8 % 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. Impact on Partners Capital (Deficit) Related to Transactions Between Entities Under Common Control Under ASC 805, assets and liabilities transferred between entities under common control are accounted for at the historical cost of those entities' ultimate parent, in a manner similar to a pooling of interests. Any difference in the amount paid by the transferee versus the historical cost of the assets transferred is recorded as an adjustment to equity (contribution or distribution) by the transferee. This is in contrast with a business combination between unrelated parties, where assets and liabilities are recorded at their fair values at the acquisition date, with any excess of amounts paid over the fair value representing goodwill. From time to time, the most recent being in 2019, the Partnership has entered into common control acquisitions from Martin Resource Management Corporation. The consideration transferred totaling $ 550,773 exceeds the historical cost of the net assets received. This excess of the purchase price over the historical cost of the net assets received has resulted in cumulative distributions of $ 287,734 reflected as reductions to Partners' capital. 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 three months ended March 31, 2021 and 2020. 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. 17 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (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 allocated to the general partner and limited partners for purposes of calculating net income attributable to limited partners per unit: Three Months Ended March 31, 2021 2020 Net income $ 2,511 $ 8,815 Less general partner’s interest in net income (loss): Distributions payable on behalf of general partner interest 4 49 General partner interest in undistributed income (loss) 46 127 Less income allocable to unvested restricted units 10 55 Limited partners’ interest in net income $ 2,451 $ 8,584 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 March 31, 2021 2020 Basic weighted average limited partner units outstanding 38,692,609 38,640,862 Dilutive effect of restricted units issued 13,032 3,605 Total weighted average limited partner diluted units outstanding 38,705,641 38,644,467 18 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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. NOTE 10. 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 March 31, 2021 2020 Employees $ 194 $ 301 Non-employee directors 46 45 Total unit-based compensation expense $ 240 $ 346 All of the Partnership's outstanding awards at March 31, 2021 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. 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 performance conditions related to the PBRU's awarded on March 1, 2018 were not achieved and the Partnership, as such, did not recognize compensation expense for the vesting of the units. 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 2021, the Partnership issued 14,056 TBRU's to each of the Partnership's three independent directors under the 2017 LTIP. These restricted common units vest in equal installments of 3,514 units on January 24, 2022, 2023, 2024, and 2025. 19 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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 three months ended March 31, 2021 is provided below: Number of Units Weighted Average Grant-Date Fair Value Per Unit Non-vested, beginning of period 273,424 $ 10.52 Granted (TBRU) 42,168 $ 2.49 Vested ( 117,280 ) $ 11.96 Forfeited ( 83,436 ) $ 13.90 Non-Vested, end of period 114,876 $ 3.65 Aggregate intrinsic value, end of period $ 284 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 months ended March 31, 2021 and 2020 is provided below: Three Months Ended March 31, 2021 2020 Aggregate intrinsic value of units vested $ 257 $ 151 Fair value of units vested 1,418 1,427 As of March 31, 2021, there was $ 395 of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 2.59 years. NOTE 11. RELATED PARTY TRANSACTIONS As of March 31, 2021, Martin Resource Management Corporation owns 6,114,532 of the Partnership’s common units representing approximately 15.8 % 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 March 31, 2021, 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. 20 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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 asphalt, marine fuel and other liquids; ◦ providing shore-based marine services in Texas, Louisiana, Mississippi, and Alabama; ◦ operating a crude oil gathering business in Stephens, Arkansas; ◦ providing crude oil gathering 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 the Partnership's account, the asphalt facilities in Omaha, Nebraska, Port Neches, Texas, and South Houston, Texas. • 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 21 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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, 2021, through December 31, 2021, the Conflicts Committee approved an annual reimbursement amount for indirect expenses of $ 14,386 . The Partnership reimbursed Martin Resource Management Corporation for $ 3,542 and $ 4,103 of indirect expenses for the three months ended March 31, 2021 and 2020, 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. 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 22 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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. 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 expired 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. East Texas Mack Leases. MTI leases equipment, including tractors and trailers, from East Texas Mack Sales ("East Texas Mack"). Certain of our directors or officers are owners of East Texas Mack, including entities affiliated with Ruben Martin, who owns approximately 46 % of the issued and outstanding stock of East Texas Mack. Amounts paid to East Texas Mack for tractor and trailer lease payments and lease residuals for the three months ended March 31, 2021 and 2020 were $ 236 and $ 105 , respectively. 23 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) 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: Three Months Ended March 31, 2021 2020 Revenues: Terminalling and storage $ 15,306 $ 15,874 Transportation 4,010 5,894 Product sales: Sulfur services 30 19 Terminalling and storage 84 73 114 92 $ 19,430 $ 21,860 The impact of related party cost of products sold is reflected in the consolidated and condensed financial statements as follows: Three Months Ended March 31, 2021 2020 Cost of products sold: Sulfur services $ 2,535 $ 2,767 Terminalling and storage 4,568 5,777 $ 7,103 $ 8,544 The impact of related party operating expenses is reflected in the consolidated and condensed financial statements as follows: Three Months Ended March 31, 2021 2020 Operating expenses: Transportation $ 13,059 $ 15,553 Natural gas liquids 464 497 Sulfur services 743 1,146 Terminalling and storage 4,102 4,575 $ 18,368 $ 21,771 24 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) The impact of related party selling, general and administrative expenses is reflected in the consolidated and condensed financial statements as follows: Three Months Ended March 31, 2021 2020 Selling, general and administrative: Transportation $ 1,670 $ 1,839 Natural gas liquids 1,808 704 Sulfur services 771 743 Terminalling and storage 820 838 Indirect, including overhead allocation 3,611 4,188 $ 8,680 $ 8,312 NOTE 12. 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, 2020, filed with the SEC on March 3, 2021. 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 March 31, 2021 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 $ 39,834 $ ( 1,595 ) $ 38,239 $ 7,105 $ 2,308 $ 2,665 Transportation 33,969 ( 4,154 ) 29,815 3,998 ( 5,503 ) 525 Sulfur services 34,835 — 34,835 2,720 8,353 3,064 Natural gas liquids 98,085 — 98,085 611 14,447 321 Indirect selling, general and administrative — — — — ( 3,919 ) — Total $ 206,723 $ ( 5,749 ) $ 200,974 $ 14,434 $ 15,686 $ 6,575 Three Months Ended March 31, 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 $ 51,134 $ ( 1,726 ) $ 49,408 $ 7,456 $ 758 $ 3,745 Transportation 45,174 ( 6,233 ) 38,941 4,280 ( 5,021 ) 3,926 Sulfur services 28,336 ( 13 ) 28,323 2,894 13,858 2,985 Natural gas liquids 82,215 ( 4 ) 82,211 609 10,377 105 Indirect selling, general and administrative — — — — ( 4,372 ) — Total $ 206,859 $ ( 7,976 ) $ 198,883 $ 15,239 $ 15,600 $ 10,761 25 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) The Partnership's assets by reportable segment as of March 31, 2021 and December 31, 2020, are as follows: March 31, 2021 December 31, 2020 Total assets: Terminalling and storage $ 255,508 $ 252,794 Transportation 151,458 151,953 Sulfur services 102,474 94,154 Natural gas liquids 60,771 80,737 Total assets $ 570,211 $ 579,638 NOTE 13. 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. NOTE 14. 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. 26 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) Assets and liabilities measured at fair value on a recurring basis are summarized below: Level 2 March 31, 2021 December 31, 2020 Commodity derivative contracts, net $ 12 $ ( 207 ) 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, 2024 Notes, and 2025 Notes (collectively, the "Senior Notes") is considered Level 1, as the fair value is based on quoted market prices in active markets. March 31, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value 2021 Notes $ — $ — $ 28,790 $ 28,581 2024 Notes $ 50,459 $ 56,033 $ 50,173 $ 55,214 2025 Notes $ 290,354 $ 299,239 $ 290,250 $ 288,692 Total $ 340,813 $ 355,272 $ 369,213 $ 372,487 NOTE 15. 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 Senior Notes and any subsidiaries other than the subsidiary guarantors are minor. NOTE 16. INCOME TAXES Three Months Ended March 31, 2021 2020 Provision for income taxes $ 222 $ 347 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 (the "Taxable Subsidiary"). Total income tax expense of $ 102 and $ 347 , related to the operation of the Taxable Subsidiary, for the three months ended March 31, 2021 and 2020, resulted in an effective income tax rate ("ETR") of 29.32 % and 32.17 %, respectively. 27 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2021 (Unaudited) The decrease in the effective income tax rate for the income taxes during the three months ended March 31, 2021, compared to the three months ended March 31, 2020, is primarily due to a decrease in permanent differences. The decrease in the provision for income taxes during the three months ended March 31, 2021, compared to the similar period in 2020, was primarily due to the impact of a decrease in income before income taxes in the current period. A current federal income tax expense of $ 15 and $ 133 , related to the operation of the Taxable Subsidiary, were recorded for the three months ended March 31, 2021 and 2020, respectively. A current state income tax expense (benefit) of $ 12 and $( 72 ), related to the operation of the Taxable Subsidiary, was recorded for the three months ended March 31, 2021 and 2020, 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 $ 75 and $ 286 was recorded for the three months ended March 31, 2021 and 2020, respectively. A net deferred tax asset of $ 22,178 and $ 22,253 , related to the cumulative book and tax temporary differences, existed at March 31, 2021 and December 31, 2020, respectively. 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 17. SUBSEQUENT EVENTS Quarterly Distribution. On April 21, 2021, the Partnership declared a quarterly cash distribution of $ 0.005 per common unit for the first quarter of 2021, or $ 0.020 per common unit on an annualized basis, which will be paid on May 14, 2021 to unitholders of record as of May 7, 2021. 28