Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and the notes thereto included elsewhere in this quarterly report.
Overview
We are a publicly traded limited partnership with a diverse set of operations focused primarily in the U.S. Gulf Coast region. Our 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
• NGL marketing, distribution, and transportation services.
The petroleum products and by-products we collect, transport, store and market are produced primarily by major and independent oil and gas companies who often turn to third parties, such as us, for the transportation and disposition of these products. In addition to these major and independent oil and gas companies, our primary customers include independent refiners, large chemical companies, and other wholesale purchasers of these products. We operate primarily in the U.S. Gulf Coast region. This region is a major hub for petroleum refining, natural gas gathering and processing, and support services for the exploration and production industry.
We were formed in 2002 by Martin Resource Management Corporation, a privately-held company whose initial predecessor was incorporated in 1951 as a supplier of products and services to drilling rig contractors. Since then, Martin Resource Management Corporation has expanded its operations through acquisitions and internal expansion initiatives as its management identified and capitalized on the needs of producers and purchasers of petroleum products and by-products and other bulk liquids. Martin Resource Management Corporation is an important supplier and customer of ours. As of March 31, 2021, Martin Resource Management Corporation owned 15.8% of our total outstanding common limited partner units. Furthermore, Martin Resource Management Corporation controls Martin Midstream GP LLC ("MMGP"), our general partner, by virtue of its 51% voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights. Martin Resource Management Corporation directs our business operations through its ownership interests in and control of our general partner.
We entered into the Omnibus Agreement that governs, among other things, potential competition and indemnification obligations among the parties to the agreement, related party transactions, the provision of general administration and support services by Martin Resource Management Corporation and our use of certain of Martin Resource Management Corporation’s trade names and trademarks. Under the terms of the Omnibus Agreement, the employees of Martin Resource Management Corporation are responsible for conducting our business and operating our assets.
Martin Resource Management Corporation has operated our business since 2002. Martin Resource Management Corporation began operating our NGL business in the 1950s and our sulfur business in the 1960s. It began our land transportation business in the early 1980s and our marine transportation business in the late 1980s. It entered into our fertilizer and terminalling and storage businesses in the early 1990s.
Significant Recent Developments
Winter Storm Uri. In February 2021, we experienced Winter Storm Uri ("Uri"), an unprecedented storm bringing extreme cold temperatures to Texas and the surrounding areas, which resulted in gulf coast refineries running at reduced rates or halting operations entirely. The majority of the impact we experienced was centered around our transportation and sulfur services segments where we saw reduced activity due to Uri's impact on Gulf Coast refinery utilization. Additionally, our Smackover Refinery was down approximately nine days due to Uri, during which time we began preparations for the
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previously scheduled turnaround in March of 2021. This allowed us to minimize the amount of downtime at the Smackover Refinery which was back in operation by March 9, 2021.
COVID-19. We continue to monitor the impacts of the COVID-19 pandemic on all aspects of our business. Travel restrictions and stay-at-home orders implemented by governments in many regions and countries across the globe, including the U.S., have greatly impacted the demand for refined products resulting in a significant reduction in refinery utilization, which impacted our 2020 performance and continues to impact our marine and land transportation businesses in 2021.
Looking forward, we expect to continue to experience some adverse impacts of COVID-19 in our transportation segment through the middle part of the year but we believe that refinery utilization will continue to increase in the second half of 2021 as a result of widespread vaccinations, government stimulus, and a rebounding economy. This should ultimately improve refined product demand as people generally return to in-person work and resume travel. We expect this will positively impact our transportation segment as demand for our services improves.
Overall, 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 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, 2021 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 pandemic on the assumptions and estimates used in the preparation of the financial statements. 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 the pandemic 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 our results as of March 31, 2021.
Sale of Mega Lubricants. On December 22, 2020, we entered into an asset purchase and sale agreement to sell certain assets used in connection with our Mega Lubricants shore-based terminals business ("Mega Lubricants") to John W. Stone Oil Distributor, LLC ("Stone Oil") for $22.4 million. Mega Lubricants is engaged in the business of blending, manufacturing and delivering various marine application lubricants, sub-sea specialty fluids, and proprietary commercial and industrial products. The transaction closed on December 22, 2020. The proceeds from the transaction were used to reduce outstanding borrowings under our revolving credit facility.
Subsequent Events
Quarterly Distribution. On April 21, 2021, we 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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated and condensed financial statements included elsewhere herein. We prepared these financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Our results may differ from these estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Changes in these estimates could materially affect our financial position, results of operations or cash flows. See the "Critical Accounting Policies and Estimates" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements included within our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.
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Our Relationship with Martin Resource Management Corporation
Martin Resource Management Corporation is engaged in the following principal business activities:
• distributing fuel oil, asphalt, marine fuel and other liquids;
• 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 our business; and
• operating, solely for our account, the asphalt facilities in Omaha, Nebraska, Port Neches, Texas, and South Houston, Texas
We are and will continue to be closely affiliated with Martin Resource Management Corporation as a result of the following relationships.
Ownership
Martin Resource Management Corporation owns approximately 15.8% of the outstanding limited partner units. In addition, Martin Resource Management Corporation controls MMGP, our general partner, by virtue of its 51% voting interest in Holdings, the sole member of MMGP. MMGP owns a 2% general partner interest in us and all of our incentive distribution rights.
Management
Martin Resource Management Corporation directs our business operations through its ownership interests in and control of our general partner. We benefit from our relationship with Martin Resource Management Corporation through access to a significant pool of management expertise and established relationships throughout the energy industry. We do not have employees. Martin Resource Management Corporation employees are responsible for conducting our business and operating our assets on our behalf.
Related Party Agreements
The Omnibus Agreement requires us to reimburse Martin Resource Management Corporation for all direct expenses it incurs or payments it makes on our behalf or in connection with the operation of our business. We reimbursed Martin Resource Management Corporation for $30.5 million of direct costs and expenses for the three months ended March 31, 2021 compared to $34.4 million for the three months ended March 31, 2020. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management Corporation for direct expenses.
In addition to the direct expenses, under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. In each of the three months ended March 31, 2021 and 2020, the Conflicts Committee approved reimbursement amounts of $3.5 million and $4.1 million, respectively. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually. These indirect expenses covered the centralized corporate functions Martin Resource Management Corporation provides for us, such as accounting, treasury, clerical, engineering, legal, billing, information technology, administration of insurance, general office expenses and employee benefit plans and other general corporate overhead functions we share with Martin R esource Management Corporation’s retained businesses. The Omnibus Agreement also contains significant non-compete provisions and indemnity obligations. Martin Resource Management Corporation also licenses certain of its trademarks and trade names to us under the Omnibus Agreement.
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These additional agreements include, but are not limited to, a master transportation services agreement, marine transportation agreements, terminal services agreements, a tolling agreement, and a sulfuric acid sales agency agreement. Pursuant to the terms of the Omnibus Agreement, we are prohibited from entering into certain material agreements with Martin Resource Management Corporation without the approval of the Conflicts Committee.
For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management Corporation, please refer to "Item 13. Certain Relationships and Related Transactions, and Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.
Commercial
We have been and anticipate that we will continue to be both a significant customer and supplier of products and services offered by Martin Resource Management Corporation. In the aggregate, the impact of related party transactions included in total costs and expenses accounted for approximately 19% and 21% of our total costs and expenses during the three months ended March 31, 2021 and 2020, respectively.
Correspondingly, Martin Resource Management Corporation is one of our significant customers. Our sales to Martin Resource Management Corporation accounted for approximately 10% and 11% of our total revenues for both the three months ended March 31, 2021 and 2020, respectively.
For a more comprehensive discussion concerning the agreements that we have entered into with Martin Resource Management Corporation, please refer to "Item 13. Certain Relationships and Related Transactions, and Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021.
Approval and Review of Related Party Transactions
If we contemplate entering into a transaction, other than a routine or in the ordinary course of business transaction, in which a related person will have a direct or indirect material interest, the proposed transaction is submitted for consideration to the board of directors of our general partner or to our management, as appropriate. If the board of directors of our general partner is involved in the approval process, it determines whether to refer the matter to the Conflicts Committee of our general partner's board of directors, as constituted under our limited partnership agreement. If a matter is referred to the Conflicts Committee, it obtains information regarding the proposed transaction from management and determines whether to engage independent legal counsel or an independent financial advisor to advise the members of the committee regarding the transaction. If the Conflicts Committee retains such counsel or financial advisor, it considers such advice and, in the case of a financial advisor, such advisor’s opinion as to whether the transaction is fair and reasonable to us and to our unitholders.
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How We Evaluate Our Operations
Our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with U.S. GAAP to analyze our performance. These include: (1) net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), (2) adjusted EBITDA, (3) distributable cash flow and (4) adjusted free cash flow. Our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow, and as key components of our internal financial reporting. We believe investors benefit from having access to the same financial measures that our management uses.
EBITDA and Adjusted EBITDA . We define Adjusted EBITDA as EBITDA before unit-based compensation expenses, gains and losses on the disposition of property, plant and equipment, impairment and other similar non-cash adjustments. Certain items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing an entity's financial performance, such as cost of capital and historical costs of depreciable assets. We have included information concerning EBITDA and adjusted EBITDA because it provides investors and management with additional information to better understand the following: financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other similarly situated entities; and the viability of acquisitions and capital expenditure projects. Our method of computing adjusted EBITDA may not be the same method used to compute similar measures reported by other entities. The economic substance behind our use of adjusted EBITDA is to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and make distributions to our unitholders.
Distributable Cash Flow. We define Distributable Cash Flow as Adjusted EBITDA less cash paid for interest, cash paid for income taxes, maintenance capital expenditures, and plant turnaround costs. Distributable cash flow is a significant performance measure used by our management and by external users of our financial statements, such as investors, commercial banks and research analysts, to compare basic cash flows generated by us to the cash distributions it expects to pay unitholders. Distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit of such an entity is generally determined by the unit's yield, which in turn is based on the amount of cash distributions the entity pays to a unitholder.
Adjusted Free Cash Flow. Adjusted free cash flow is defined as distributable cash flow less growth capital expenditures and principle payments under finance lease obligations. Adjusted free cash flow is a significant performance measure used by our management and by external users of our financial statements and represents how much cash flow a business generates during a specified time period after accounting for all capital expenditures, including expenditures for growth and maintenance capital projects. We believe that adjusted free cash flow is important to investors, lenders, commercial banks and research analysts since it reflects the amount of cash available for reducing debt, investing in additional capital projects, paying distributions, and similar matters. Our calculation of adjusted free cash flow may or may not be comparable to similarly titled measures used by other entities.
EBITDA, adjusted EBITDA, distributable cash flow and adjusted free cash flow should not be considered alternatives to, or more meaningful than, net income, cash flows from operating activities, or any other measure presented in accordance with U.S. GAAP. Our method of computing these measures may not be the same method used to compute similar measures reported by other entities.
Reconciliation of Non-GAAP Financial Measures
The following table reconciles the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the three months ended March 31, 2021 and 2020.
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Reconciliation of EBITDA, Adjusted EBITDA, Distributable Cash Flow and Adjusted Free Cash Flow
Three Months Ended
March 31,
2021 2020
(in thousands)
Net income $ 2,511 $ 8,815
Adjustments:
Interest expense, net 12,953 9,925
Income tax expense 222 347
Depreciation and amortization 14,434 15,239
EBITDA 30,120 34,326
Adjustments:
Loss on sale of property, plant and equipment, net 760 190
Unrealized mark-to-market on commodity derivatives (219) (669)
Lower of cost or market adjustments — 335
Gain on repurchase of senior unsecured notes — (3,484)
Unit-based compensation 240 346
Adjusted EBITDA 30,901 31,044
Adjustments:
Interest expense, net (12,953) (9,925)
Income tax expense (222) (347)
Amortization of debt premium — (77)
Amortization of deferred debt issuance costs 755 492
Deferred income tax expense 75 286
Payments for plant turnaround costs (1,674) (150)
Maintenance capital expenditures (4,071) (3,026)
Distributable Cash Flow $ 12,811 $ 18,297
Adjustments:
Expansion capital expenditures $ (830) $ (5,346)
Principal payments under finance lease obligations (2,431) (1,864)
Adjusted Free Cash Flow $ 9,550 $ 11,087
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Results of Operations
The results of operations for the three months ended March 31, 2021 and 2020 have been derived from our consolidated and condensed financial statements.
We evaluate segment performance on the basis of operating income, which is derived by subtracting cost of products sold, operating expenses, selling, general and administrative expenses, and depreciation and amortization expense from revenues. The following table sets forth our operating revenues and operating income by segment for the three months ended March 31, 2021 and 2020. The results of operations for these interim periods are not necessarily indicative of the results of operations which might be expected for the entire year.
Our consolidated and condensed results of operations are presented on a comparative basis below. There are certain items of income and expense which we do not allocate on a segment basis. These items, including interest expense and indirect selling, general and administrative expenses, are discussed following the comparative discussion of our results within each segment.
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Three Months Ended March 31, 2021 (in thousands)
Terminalling and storage $ 39,834 $ (1,595) $ 38,239 $ 3,430 $ (1,122) $ 2,308
Transportation 33,969 (4,154) 29,815 (1,337) (4,166) (5,503)
Sulfur services 34,835 — 34,835 6,442 1,911 8,353
Natural gas liquids 98,085 — 98,085 11,070 3,377 14,447
Indirect selling, general and administrative
— — — (3,919) — (3,919)
Total $ 206,723 $ (5,749) $ 200,974 $ 15,686 $ — $ 15,686
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Three Months Ended March 31, 2020 (in thousands)
Terminalling and storage $ 51,134 $ (1,726) $ 49,408 $ 1,029 $ (271) $ 758
Transportation 45,174 (6,233) 38,941 2,389 (7,410) (5,021)
Sulfur services 28,336 (13) 28,323 11,296 2,562 13,858
Natural gas liquids 82,215 (4) 82,211 5,258 5,119 10,377
Indirect selling, general and administrative
— — — (4,372) — (4,372)
Total $ 206,859 $ (7,976) $ 198,883 $ 15,600 $ — $ 15,600
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Terminalling and Storage Segment
Comparative Results of Operations for the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands, except BBL per day)
Revenues:
Services $ 19,959 $ 22,167 $ (2,208) (10) %
Products 19,875 28,967 (9,092) (31) %
Total revenues 39,834 51,134 (11,300) (22) %
Cost of products sold 14,941 24,988 (10,047) (40) %
Operating expenses 12,793 12,951 (158) (1) %
Selling, general and administrative expenses 1,499 1,659 (160) (10) %
Depreciation and amortization 7,105 7,456 (351) (5) %
3,496 4,080 (584) (14) %
Other operating loss, net (66) (3,051) 2,985 98 %
Operating income $ 3,430 $ 1,029 $ 2,401 233 %
Shore-based throughput volumes (guaranteed minimum) (gallons) 20,000 20,000 — — %
Smackover refinery throughput volumes (guaranteed minimum) (BBL per day) 6,500 6,500 — — %
Services revenues. Services revenue decreased $2.2 million, of which $1.5 million was primarily a result of the disposition of the consigned lube business as part of the Mega Lubricants sale as well as decreases in throughput revenue of $0.2 million at our shore-based terminals. In addition, revenue at the Smackover refinery decreased $0.5 primarily due to the expiration of the capital recovery fee.
Products revenues. The disposition of our Mega Lubricants business resulted in a $7.7 million decrease in product revenues at our shore-based terminals. In addition, a 4% decrease in average sales price combined with a 3% decrease in sales volumes at our blending and packaging facilities resulted in a $1.4 million decrease to products revenues.
Cost of products sold. The disposition of our Mega Lubricants business resulted in an $8.4 million decrease in cost of products sold at our shore-based terminals. In addition, an 8% decrease in average cost per gallon combined with a 3% decrease in sales volumes at our blending and packaging facilities resulted in a $1.7 million decrease in cost of products sold.
Operating expenses. Operating expenses decreased $0.2 million primarily as a result of decreased compensation expense of $0.4 million, and repairs and maintenance of $0.1 million, offset by an increase in utilities of $0.3 million.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $0.2 million primarily as a result of decreased legal fees.
Depreciation and amortization. The decrease in depreciation and amortization is primarily the result of asset disposals, offset by recent capital expenditures.
Other operating loss, net. Other operating loss, net represents gains and losses from the disposition of property, plant and equipment.
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Transportation Segment
Comparative Results of Operations for the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Revenues $ 33,969 $ 45,174 $ (11,205) (25) %
Operating expenses 29,504 35,162 (5,658) (16) %
Selling, general and administrative expenses 1,800 2,135 (335) (16) %
Depreciation and amortization 3,998 4,280 (282) (7) %
$ (1,333) $ 3,597 $ (4,930) (137) %
Other operating loss, net (4) (1,208) 1,204 100 %
Operating income (loss) $ (1,337) $ 2,389 $ (3,726) (156) %
Marine Transportation Revenues. Inland revenues decreased $6.7 million, primarily related to a decrease in tows, utilization and transportation rates. In addition, offshore revenue decreased $0.9 million primarily due to a decrease in utilization. Additionally, ancillary revenue (primarily fuel) decreased $0.8 million.
Land Transportation Revenues. Freight revenue decreased primarily due to a 10% decrease in miles resulting in a $2.5 million decrease, offset by a 2% increase in transportation rates resulting in a $0.5 million increase. Additionally, fuel surcharge decreased $0.7 million.
Operating expenses. The decrease in operating expenses is primarily a result of decreases in compensation expense of $3.2 million, pass through expenses (primarily fuel) of $0.9 million, outside services of $0.7 million, repairs and maintenance of $0.4 million, and other operating expenses of $0.4 million.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased primarily due to decreased compensation expense.
Depreciation and amortization. Depreciation and amortization decreased as a result of recent disposals and assets being fully depreciated.
Other operating loss, net. Other operating loss, net represents losses from the disposition of property, plant and equipment.
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Sulfur Services Segment
Comparative Results of Operations for the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Revenues:
Services $ 2,950 $ 2,915 $ 35 1 %
Products 31,885 25,421 6,464 25 %
Total revenues 34,835 28,336 6,499 23 %
Cost of products sold 22,423 16,804 5,619 33 %
Operating expenses 2,009 2,910 (901) (31) %
Selling, general and administrative expenses 1,241 1,203 38 3 %
Depreciation and amortization 2,720 2,894 (174) (6) %
6,442 4,525 1,917 42 %
Other operating income, net — 6,771 (6,771) (100) %
Operating income $ 6,442 $ 11,296 $ (4,854) (43) %
Sulfur (long tons) 73 183 (110) (60) %
Fertilizer (long tons) 95 74 21 28 %
Total sulfur services volumes (long tons) 168 257 (89) (35) %
Services revenues. Services revenues increased slightly as a result of a contractually prescribed, index-based fee adjustment.
Products revenues. Products revenue increased $23.4 million as a result of a 92% rise in average sulfur services sales prices. Products revenues decreased $16.9 million due to a 35% decrease in sales volumes, primarily related to a 60% decr ease in sulfur volumes.
Cost of products sold. A 104% increase in product cost impacted cost of products sold by $17.5 million, resulting from a rise in commodity prices. A 35% decrease in sales volumes resulted in an offsetting decrease in cost of products sold of $11.9 million. Margin per ton increased $22.79, or 68%.
Operating expenses. Operating expenses decreased as a result of a decrease in marine fuel of $0.4 million, a decrease in assist tugs of $0.2 million, decreased outside towing of $0.2 million , and decreased repairs and maintenance of $0.1 million.
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization decreased as a result of decreased amortization of turnaround costs.
Other operating income, net. Other operating income, net decreased $2.7 million as a result of business interruption recoveries related to downtime associated with the Neches ship-loader insurance claim received in the first quarter of 2020. An additional $4.1 million decrease is related to a net gain from the disposition of property, plant and equipment during first quarter 2020.
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Natural Gas Liquids Segment
Comparative Results of Operations for the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Products Revenues $ 98,085 $ 82,215 $ 15,870 19 %
Cost of products sold 82,512 74,260 8,252 11 %
Operating expenses 995 939 56 6 %
Selling, general and administrative expenses 2,207 1,147 1,060 92 %
Depreciation and amortization 611 609 2 — %
11,760 5,260 6,500 124 %
Other operating loss, net (690) (2) (688) (34,400) %
Operating income $ 11,070 $ 5,258 $ 5,812 111 %
NGL sales volumes (Bbls) 2,145 2,445 (300) (12) %
Products Revenues. Our average sales price per barrel increased $12.10, or 36%, resulting in an increase to revenues of $29.6 million. The increase in average sales price per barrel was the result of an increase in market prices. Sales volumes decreased 12%, decreasing revenues by $13.7 million.
Cost of products sold . Our average cost per barrel increased $8.10, or 27%, increasing cost of products sold by $19.8 million. The increase in average cost per barrel was the result of an increase in market prices. The decrease in sales volume of 12% resulted in a $11.5 million decrease to cost of products sold. Our margins increased $4.01 per barrel, or 123%, during the period.
Operating expenses . Operating expenses remained relatively consistent.
Selling, general and administrative expenses . Selling, general and administrative increased $1.1 million as a result of increased compensation expense.
Depreciation and amortization. Depreciation and amortization remained relatively consistent.
Other operating income (loss), net. Other operating income, net represents gains and losses from the disposition of property, plant and equipment.
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Interest Expense, Net
Comparative Components of Interest Expense, Net for the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Revolving loan facility $ 2,091 $ 2,444 $ (353) (14) %
Senior Notes 9,657 6,531 3,126 48 %
Amortization of deferred debt issuance costs 755 492 263 53 %
Amortization of debt premium — (77) 77 100 %
Other 441 425 16 4 %
Finance leases 9 114 (105) (92) %
Capitalized interest — (4) 4 100 %
Total interest expense, net $ 12,953 $ 9,925 $ 3,028 31 %
Indirect Selling, General and Administrative Expenses
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Indirect selling, general and administrative expenses
$ 3,919 $ 4,372 $ (453) (10) %
Indirect selling, general and administrative expenses decreased for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily due to a decrease in the indirect expenses allocated from Martin Resource Management.
Martin Resource Management Corporation allocates to us a portion of its indirect selling, general and administrative expenses for services such as accounting, legal, treasury, clerical, billing, information technology, administration of insurance, engineering, general office expense and employee benefit plans and other general corporate overhead functions we share with Martin Resource Management Corporation retained businesses. This allocation is based on the percentage of time spent by Martin Resource Management Corporation personnel that provide such centralized services. GAAP also permits other methods for allocation of these expenses, such as basing the allocation on the percentage of revenues contributed by a segment. The allocation of these expenses between Martin Resource Management Corporation and us is subject to a number of judgments and estimates, regardless of the method used. We can provide no assurances that our method of allocation, in the past or in the future, is or will be the most accurate or appropriate method of allocation for these expenses. Other methods could result in a higher allocation of selling, general and administrative expense to us, which would reduce our net income.
Under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. The Conflicts Committee of our general partner approved the following reimbursement amounts during the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Conflicts Committee approved reimbursement amount
$ 3,542 $ 4,103 $ (561) (14) %
The amounts reflected above represent our allocable share of such expenses. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.
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Liquidity and Capital Resources
General
Our primary sources of liquidity to meet operating expenses, service our indebtedness, fund capital expenditures and pay distributions to our unitholders have historically been cash flows generated by our operations, borrowings under our revolving credit facility and access to debt and equity capital markets, both public and private. Set forth below is a description of our cash flows for the periods indicated.
Cash Flows - Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
The following table details the cash flow changes between the three months ended March 31, 2021 and 2020:
Three Months Ended March 31, Variance Percent Change
2021 2020
(In thousands)
Net cash provided by (used in):
Operating activities $ 3,854 $ 44,889 $ (41,035) (91) %
Investing activities (4,185) (6,295) 2,110 34 %
Financing activities (3,515) (41,382) 37,867 92 %
Net increase (decrease) in cash and cash equivalents $ (3,846) $ (2,788) $ (1,058) (38) %
Net cash provided by operating activities. The decrease in net cash provided by operating activities for the three months ended March 31, 2021 includes a decrease in operating results of $6.3 million and an unfavorable variance in working capital of $39.0 million. Offsetting this decrease was a $3.7 million increase in other non-cash charges and a favorable variance in other non-current assets and liabilities of $0.6 million.
Net cash used in investing activities. Net cash used in investing activities for the three months ended March 31, 2021 decreased $2.1 million. A decrease in cash used of $8.2 million resulted from higher payments for capital expenditures and plant turnaround costs in 2020. Net proceeds from the sale of property, plant and equipment decreased $4.3 million and proceeds received from the involuntary conversion of property, plant and equipment decreased $1.8 million.
Net cash used in financing activities. Net cash used in financing activities for the three months ended March 31, 2021 decreased primarily as a result of a $36.1 million decrease in net payments of long-term borrowings. Further, cash distributions paid decreased $2.3 million and costs associated with our credit facility decreased $0.1 million. Offsetting was an increase in payments of finance lease obligations of $0.6 million.
Total Contractual Obligations
A summary of our total contractual cash obligations as of March 31, 2021, is as follows:
Payments due by period
Type of Obligation Total
Obligation Less than
One Year 1-3
Years 3-5
Years Due
Thereafter
Revolving credit facility $ 176,000 $ — $ 176,000 $ — $ —
11.5% senior secured notes, due 2025 291,970 — — 291,970 —
10.0% senior secured notes, due 2024 53,750 — 53,750 — —
Throughput commitment 7,961 6,357 1,604 — —
Operating leases 25,157 8,237 8,396 2,853 5,671
Finance lease obligations 565 335 230 — —
Interest payable on finance lease obligations 25 19 6 — —
Interest payable on fixed long-term debt obligations 147,185 38,952 77,455 30,778 —
Total contractual cash obligations $ 702,613 $ 53,900 $ 317,441 $ 325,601 $ 5,671
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The interest payable under our credit facility is not reflected in the above table because such amounts depend on the outstanding balances and interest rates, which vary from time to time.
Letters of Credit . At March 31, 2021, we had outstanding irrevocable letters of credit in the amount of $20.4 million, which were issued under our revolving credit facility.
Off Balance Sheet Arrangements. We do not have any off-balance sheet financing arrangements.
Description of Our Indebtedness
Revolving Credit Facility
At March 31, 2021, we maintained a $300.0 million revolving credit facility that matures on August 31, 2023. As of March 31, 2021, we had $176.0 million outstanding under the revolving credit facility and $20.4 million of outstanding irrevocable letters of credit, leaving a maximum available to be borrowed under our credit facility for future revolving credit borrowings and letters of credit of $103.6 million. After giving effect to our then current borrowings, letters of credit to the extent drawn, and the financial covenants contained in our revolving credit facility, we had the ability to borrow approximately $29.3 million in additional amounts thereunder as of March 31, 2021.
The revolving credit facility is used for ongoing working capital needs and general partnership purposes, and to finance permitted investments, acquisitions and capital expenditures. During the three months ended March 31, 2021, the level of outstanding draws on our credit facility has ranged from a low of $148.0 million to a high of $201.0 million.
The credit facility is guaranteed by substantially all of our subsidiaries. Obligations under the credit facility are secured by first priority liens on substantially all of our assets and those of the guarantors, including, without limitation, inventory, accounts receivable, bank accounts, marine vessels, equipment, fixed assets and the interests in our subsidiaries.
We may prepay all amounts outstanding under the credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The credit facility requires mandatory prepayments of amounts outstanding thereunder with excess cash that exceeds $25.0 million and the net proceeds of certain asset sales, equity issuances and debt incurrences. If we sell assets and receive net cash proceeds in excess of $25.0 million, the commitments of the lenders under the revolving credit facility will be reduced by $25.0 million.
Indebtedness under the credit facility bears interest at our option at the Eurodollar Rate (LIBOR), with a floor for LIBOR of 1%, plus an applicable margin, or the Base Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0%, or the administrative agent’s prime rate) plus an applicable margin. We pay a per annum fee on all letters of credit issued under the credit facility, and we pay a commitment fee per annum on the unused revolving credit commitments under the credit facility. The letter of credit fee, the commitment fee and the applicable margins for our interest rate vary quarterly based on our Total Leverage Ratio (as defined in the credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) and are as follows as of March 31, 2021:
Leverage Ratio
Base Rate Loans Eurodollar
Rate
Loans Letters of Credit
Less than 3.00 to 1.00 1.75 % 2.75 % 2.75 %
Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00 2.00 % 3.00 % 3.00 %
Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00 2.25 % 3.25 % 3.25 %
Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00 2.50 % 3.50 % 3.50 %
Greater than or equal to 4.50 to 1.00 and less than 5.00 to 1.00 2.75 % 3.75 % 3.75 %
Greater than or equal to 5.00 to 1.00 3.00 % 4.00 % 4.00 %
The applicable margin for LIBOR borrowings at March 31, 2021 is 4.00%, with a 1% floor for LIBOR.
The credit facility includes financial covenants that are tested on a quarterly basis, based on the rolling four quarter period that ends on the last day of each fiscal quarter.
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In addition, the credit facility contains various covenants, which, among other things, limit our and our subsidiaries’ ability to: (i) grant or assume liens; (ii) make investments (including investments in our joint ventures) and acquisitions; (iii) enter into certain types of hedging agreements; (iv) incur or assume indebtedness; (v) sell, transfer, assign or convey assets; (vi) repurchase our equity, make distributions (including a limit on our ability to make quarterly distributions to unitholders in excess of $0.005 per unit unless our Total Leverage Ratio (as defined in the credit facility) is below 3.75:1:00) and certain other restricted payments; (vii) change the nature of our business; (viii) engage in transactions with affiliates; (ix) enter into certain burdensome agreements; (x) make certain amendments to the Omnibus Agreement and our material agreements; and (xi) permit our joint ventures to incur indebtedness or grant certain liens.
The credit facility contains customary events of default, including, without limitation: (i) failure to pay any principal, interest, fees, expenses or other amounts when due; (ii) failure to meet the quarterly financial covenants; (iii) failure to observe any other agreement, obligation, or covenant in the credit facility or any related loan document, subject to cure periods for certain failures; (iv) the failure of any representation or warranty to be materially true and correct when made; (v) our, or any of our subsidiaries’ default under other indebtedness that exceeds a threshold amount; (vi) bankruptcy or other insolvency events involving us or any of our subsidiaries; (vii) judgments against us or any of our subsidiaries, in excess of a threshold amount; (viii) certain ERISA events involving us or any of our subsidiaries, in excess of a threshold amount; (ix) a change in control (as defined in the credit facility); and (x) the invalidity of any of the loan documents or the failure of any of the collateral documents to create a lien on the collateral.
The credit facility also contains certain default provisions relating to Martin Resource Management Corporation. If Martin Resource Management Corporation no longer controls our general partner, the lenders under the credit facility may declare all amounts outstanding thereunder immediately due and payable. In addition, an event of default by Martin Resource Management Corporation under its credit facility could independently result in an event of default under our credit facility if it is deemed to have a material adverse effect on us.
If an event of default relating to bankruptcy or other insolvency events occurs with respect to us or any of our subsidiaries, all indebtedness under our credit facility will immediately become due and payable. If any other event of default exists under our credit facility, the lenders may terminate their commitments to lend us money, accelerate the maturity of the indebtedness outstanding under the credit facility and exercise other rights and remedies. In addition, if any event of default exists under our credit facility, the lenders may commence foreclosure or other actions against the collateral.
Senior Secured Notes due 2025 and 2024
For a description of our 11.50% senior secured second lien notes due 2025 and 10.00% senior secured 1.5 lien notes due 2024, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Description of Our Long-Term Debt" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Capital Resources and Liquidity
Historically, we have generally satisfied our working capital requirements and funded our debt service obligations and capital expenditures with cash generated from operations and borrowings under our revolving credit facility.
On March 31, 2021, we had cash and cash equivalents of $1.1 million and available borrowing capacity of $103.6 million under our revolving credit facility with $176.0 million of borrowings outstanding. After giving effect to our current borrowings, outstanding letters of credit and the financial covenants contained in our revolving credit facility, we had the ability to borrow approximately $29.3 million in additional amounts thereunder as of March 31, 2021. Our revolving credit facility matures on August 31, 2023
We expect that our primary sources of liquidity to meet operating expenses, service our indebtedness, pay distributions to our unitholders and fund capital expenditures will be provided by cash flows generated by our operations, borrowings under our revolving credit facility and access to the debt and equity capital markets. Our ability to generate cash from operations will depend upon our future operating performance, which is subject to certain risks. For a discussion of such risks, please read "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2020, filed with the SEC on March 3, 2021. In addition, due to the covenants in our revolving credit facility, our financial and operating performance impacts the amount we are permitted to borrow under that facility.
We are in compliance with all debt covenants as of March 31, 2021 and expect to be in compliance for the next twelve months.
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Interest Rate Risk
We are subject to interest rate risk on our credit facility due to the variable interest rate and may enter into interest rate swaps to reduce this variable rate risk.
Seasonality
A substantial portion of our revenues is dependent on sales prices of products, particularly NGLs and fertilizers, which fluctuate in part based on winter and spring weather conditions. The demand for NGLs is strongest during the winter heating season and refinery blending season. The demand for fertilizers is strongest during the early spring planting season. However, our Terminalling and Storage and Transportation business segments and the molten sulfur business are typically not impacted by seasonal fluctuations and a significant portion of our net income is derived from our Terminalling and Storage, Sulfur Services and Transportation business segments. Further, extraordinary weather events, such as hurricanes, have in the past, and could in the future, impact our Terminalling and Storage, Sulfur Services, and Transportation business segments.
Impact of Inflation
Inflation did not have a material impact on our results of operations for the three months ended March 31, 2021 or 2020. Although the impact of inflation has been insignificant in recent years, it is still a factor in the U.S. economy and may increase the cost to acquire or replace property, plant and equipment. It may also increase the costs of labor and supplies. In the future, increasing energy prices could adversely affect our results of operations. Diesel fuel, natural gas, chemicals and other supplies are recorded in operating expenses. An increase in price of these products would increase our operating expenses which could adversely affect net income. We cannot provide assurance that we will be able to pass along increased operating expenses to our customers.
Environmental Matters
Our operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. We incurred no material environmental costs, liabilities or expenditures to mitigate or eliminate environmental contamination during the three months ended March 31, 2021 or 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.