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, 2022 December 31, 2021 (Unaudited) (Audited) Assets Cash $ 312 $ 52 Accounts and other receivables, less allowance for doubtful accounts of $ 272 and $ 311 , respectively 84,063 84,199 Inventories 54,278 62,120 Due from affiliates 20,925 14,409 Fair value of derivatives 175 — Other current assets 10,403 12,908 Total current assets 170,156 173,688 Property, plant and equipment, at cost 903,095 898,770 Accumulated depreciation ( 562,485 ) ( 553,300 ) Property, plant and equipment, net 340,610 345,470 Goodwill 16,823 16,823 Right-of-use assets 25,238 21,861 Deferred income taxes, net 18,900 19,821 Other assets, net 2,381 2,198 Total assets $ 574,108 $ 579,861 Liabilities and Partners’ Capital (Deficit) Current installments of long-term debt and finance lease obligations $ 226 $ 280 Trade and other accounts payable 77,276 70,342 Product exchange payables 685 1,406 Due to affiliates 3,400 1,824 Income taxes payable 925 385 Other accrued liabilities 18,719 29,850 Total current liabilities 101,231 104,087 Long-term debt, net 483,151 498,871 Finance lease obligations 3 9 Operating lease liabilities 18,841 15,704 Other long-term obligations 8,861 9,227 Total liabilities 612,087 627,898 Commitments and contingencies Partners’ capital (deficit) ( 37,539 ) ( 48,853 ) Accumulated other comprehensive income (loss) ( 440 ) 816 Total partners’ capital (deficit) ( 37,979 ) ( 48,037 ) Total liabilities and partners' capital (deficit) $ 574,108 $ 579,861 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, 2022 2021 Revenues: Terminalling and storage * $ 19,413 $ 18,378 Transportation * 46,710 29,815 Sulfur services 3,084 2,950 Product sales: * Natural gas liquids 120,563 98,085 Sulfur services 56,039 31,885 Terminalling and storage 33,392 19,861 209,994 149,831 Total revenues 279,201 200,974 Costs and expenses: Cost of products sold: (excluding depreciation and amortization) Natural gas liquids * 107,098 79,135 Sulfur services * 37,785 21,214 Terminalling and storage * 26,699 14,502 171,582 114,851 Expenses: Operating expenses * 56,495 44,634 Selling, general and administrative * 11,203 10,609 Depreciation and amortization 14,486 14,434 Total costs and expenses 253,766 184,528 Other operating income (loss), net 14 ( 760 ) Operating income 25,449 15,686 Other income (expense): Interest expense, net ( 12,429 ) ( 12,953 ) Other, net ( 1 ) — Total other expense ( 12,430 ) ( 12,953 ) Net income before taxes 13,019 2,733 Income tax expense ( 1,541 ) ( 222 ) Net income 11,478 2,511 Less general partner's interest in net income ( 229 ) ( 50 ) Less income allocable to unvested restricted units ( 30 ) ( 10 ) Limited partners' interest in net income $ 11,219 $ 2,451 Net income per unit attributable to limited partners - basic $ 0.29 $ 0.06 Net income per unit attributable to limited partners - diluted $ 0.29 $ 0.06 Weighted average limited partner units - basic 38,722,246 38,692,609 Weighted average limited partner units - diluted 38,738,843 38,705,641 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, 2022 2021 Revenues:* Terminalling and storage $ 16,204 $ 15,306 Transportation 6,288 4,010 Product Sales 321 114 Costs and expenses:* Cost of products sold: (excluding depreciation and amortization) Sulfur services 2,676 2,535 Terminalling and storage 9,651 4,568 Expenses: Operating expenses 21,380 18,368 Selling, general and administrative 8,808 8,680 See accompanying notes to consolidated and condensed financial statements. 6 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (Dollars and units in thousands, except per unit amounts) Three Months Ended March 31, 2022 2021 Net income $ 11,478 $ 2,511 Changes in fair values of commodity cash flow hedges ( 440 ) — Comprehensive income $ 11,038 $ 2,511 See accompanying notes to consolidated and condensed financial statements. 7 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CAPITAL (DEFICIT) (Unaudited) (Dollars in thousands) Partners’ Capital (Deficit) Common Limited General Partner Amount Accumulated Other Comprehensive Income (Loss) Units Amount Total 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 ) Balances - January 1, 2022 38,802,750 $ ( 50,741 ) $ 1,888 $ 816 $ ( 48,037 ) Net income — 11,249 229 — 11,478 Issuance of restricted units 34,200 — — — — Cash distributions — ( 194 ) ( 4 ) — ( 198 ) Unit-based compensation — 34 — — 34 Gain reclassified from AOCI into income on commodity cash flow hedges — — — ( 816 ) ( 816 ) Loss recognized in AOCI on commodity cash flow hedges — — — ( 440 ) ( 440 ) Balances - March 31, 2022 38,836,950 $ ( 39,652 ) $ 2,113 $ ( 440 ) $ ( 37,979 ) See accompanying notes to consolidated and condensed financial statements. 8 MARTIN MIDSTREAM PARTNERS L.P. CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Three Months Ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 11,478 $ 2,511 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,486 14,434 Amortization of deferred debt issuance costs 783 755 Deferred income tax expense 921 75 (Gain) loss on sale of property, plant and equipment, net ( 14 ) 760 Derivative (income) loss ( 816 ) 1,436 Net cash paid for commodity derivatives ( 615 ) ( 1,655 ) Non cash unit-based compensation 34 240 Change in current assets and liabilities, excluding effects of acquisitions and dispositions: Accounts and other receivables 136 ( 12,484 ) Inventories 7,842 15,070 Due from affiliates ( 6,516 ) ( 7,406 ) Other current assets 2,434 633 Trade and other accounts payable 8,650 1,984 Product exchange payables ( 721 ) ( 136 ) Due to affiliates 1,576 779 Income taxes payable 540 140 Other accrued liabilities ( 11,002 ) ( 13,370 ) Change in other non-current assets and liabilities ( 821 ) 88 Net cash provided by operating activities 28,375 3,854 Cash flows from investing activities: Payments for property, plant and equipment ( 10,216 ) ( 2,514 ) Payments for plant turnaround costs ( 1,435 ) ( 1,674 ) Proceeds from sale of property, plant and equipment 297 3 Net cash used in investing activities ( 11,354 ) ( 4,185 ) Cash flows from financing activities: Payments of long-term debt ( 120,000 ) ( 87,790 ) Payments under finance lease obligations ( 59 ) ( 2,431 ) Proceeds from long-term debt 103,500 87,000 Purchase of treasury units — ( 17 ) Payment of debt issuance costs ( 4 ) ( 80 ) Cash distributions paid ( 198 ) ( 197 ) Net cash used in financing activities ( 16,761 ) ( 3,515 ) Net increase (decrease) in cash 260 ( 3,846 ) Cash at beginning of period 52 4,958 Cash at end of period $ 312 $ 1,112 Non-cash additions to property, plant and equipment $ 1,514 $ 2,855 See accompanying notes to consolidated and condensed financial statements. 9 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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 Gulf Coast region of the United States ("U.S."). 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 NGL 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, 2021, filed with the SEC on March 1, 2022. 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. 10 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) NOTE 3. REVENUE The following table disaggregates our revenue by major source: Three Months Ended March 31, 2022 2021 Terminalling and storage segment Lubricant product sales $ 33,392 $ 19,861 Throughput and storage 19,413 18,378 $ 52,805 $ 38,239 Natural gas liquids segment Natural gas liquids product sales $ 120,563 $ 98,085 $ 120,563 $ 98,085 Sulfur services segment Sulfur product sales $ 10,069 $ 7,068 Fertilizer product sales 45,970 24,817 Sulfur services 3,084 2,950 $ 59,123 $ 34,835 Transportation segment Land transportation $ 35,505 $ 22,956 Inland transportation 9,419 6,724 Offshore transportation 1,786 135 $ 46,710 $ 29,815 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. 11 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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. 2022 2023 2024 2025 2026 Thereafter Total Terminalling and storage Throughput and storage $ 32,192 $ 42,247 $ 43,571 $ 44,878 $ 46,164 $ 252,476 $ 461,528 Natural Gas Services Natural Gas Liquids 4,440 5,391 5,405 5,391 3,131 — 23,758 Sulfur services Sulfur product sales 13,278 16,953 14,493 2,156 1,181 295 48,356 Total $ 49,910 $ 64,591 $ 63,469 $ 52,425 $ 50,476 $ 252,771 $ 533,642 NOTE 4. INVENTORIES Components of inventories at March 31, 2022 and December 31, 2021 were as follows: March 31, 2022 December 31, 2021 Natural gas liquids $ 11,588 $ 20,034 Sulfur 892 612 Fertilizer 14,634 13,005 Lubricants 22,506 23,876 Other 4,658 4,593 $ 54,278 $ 62,120 12 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) NOTE 5. DEBT At March 31, 2022 and December 31, 2021, long-term debt consisted of the following: March 31, 2022 December 31, 2021 $ 275,000 Credit facility at variable interest rate ( 4.50 % 1 weighted average at March 31, 2022), due August 2023 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 $ 2,224 and $ 2,613 , respectively 2 $ 140,776 $ 156,887 $ 53,750 Senior notes due February 2024, 10.0 % interest, net of unamortized debt issuance costs of $ 2,146 and $ 2,433 , respectively, secured 2,3 51,604 51,317 $ 291,970 Senior notes due February 2025, 11.5 % interest, net of unamortized debt issuance costs of $ 1,199 and $ 1,303 , respectively, secured 2,3,4 290,771 290,667 Total 483,151 498,871 Less: current portion — — Total long-term debt, net of current portion $ 483,151 $ 498,871 Current installments of finance lease obligations $ 226 $ 280 Finance lease obligations 3 9 Total finance lease obligations $ 229 $ 289 1 Interest rate fluctuates based on LIBOR (set on the date of each advance) or the base prime rate plus an applicable margin. The margin is set every three months. All amounts outstanding at December 31, 2021 and March 31, 2022 were at LIBOR plus an applicable margin with LIBOR having a floor of 1.00 % 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, 2022 is 3.50 %. The applicable margin for LIBOR borrowings effective April 20, 2022 is 3.25 %. 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"). The credit facility was amended on July 16, 2021 to, among other things, reduce the commitments thereunder from $ 300,000 to $ 275,000 . 2 The Partnership was in compliance with all debt covenants as of March 31, 2022 and December 31, 2021, 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 April 14, 2022, the Partnership completed the payment of an aggregate principal amount of approximately $ 589 , or approximately 0.20 %, of its 11.50 % Senior Secured Second Lien Notes due 2025 (the “2025 Notes”), pursuant to its cash tender offer (the “Excess Cash Flow Offer”) to purchase up to $ 9,305 aggregate principal amount of the 2025 Notes. See “Note 17 – Subsequent Events” for more information on the Excess Cash Flow Offer. The Partnership paid cash interest in the amount of $ 21,851 and $ 23,347 for the three months ended March 31, 2022 and 2021, respectively. There was no capitalized interest for the three months ended March 31, 2022 and 2021, respectively. 13 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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 14 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, 2022 and 2021 were as follows: Three Months Ended March 31, 2022 2021 Operating lease cost $ 2,271 $ 2,302 Finance lease cost: Amortization of right-of-use assets $ 25 90 Interest on lease liabilities $ 4 10 Short-term lease cost $ 2,618 3,108 Variable lease cost $ 44 $ 33 Total lease cost $ 4,962 $ 5,543 Supplemental balance sheet information related to leases at March 31, 2022 and December 31, 2021 was as follows: March 31, 2022 December 31, 2021 Operating Leases Operating lease right-of-use assets $ 25,238 $ 21,861 Current portion of operating lease liabilities included in "Other accrued liabilities" $ 6,764 $ 6,600 Operating lease liabilities $ 18,841 15,704 Total operating lease liabilities $ 25,605 $ 22,304 Finance Leases Property, plant and equipment, at cost $ 1,071 $ 1,071 Accumulated depreciation $ ( 389 ) ( 364 ) Property, plant and equipment, net $ 682 $ 707 Current installments of finance lease obligations $ 226 $ 280 Finance lease obligations $ 3 9 Total finance lease obligations $ 229 $ 289 14 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) The Partnership’s future minimum lease obligations as of March 31, 2022 consist of the following: Operating Leases Finance Leases Year 1 $ 7,917 $ 231 Year 2 5,272 3 Year 3 4,021 — Year 4 3,220 — Year 5 2,349 — Thereafter 7,607 — Total $ 30,386 $ 234 Less amounts representing interest costs ( 4,781 ) ( 5 ) Total lease liability $ 25,605 $ 229 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, 2022 are as follows: 2022 - $ 14,018 ; 2023 - $ 14,848 ; 2024 - $ 14,441 ; 2025 - $ 13,874 ; 2026 - $ 8,173 ; subsequent years - $ 30,670 . 15 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) NOTE 7. SUPPLEMENTAL BALANCE SHEET INFORMATION Components of "Other accrued liabilities" were as follows: March 31, 2022 December 31, 2021 Accrued interest $ 4,930 $ 15,135 Asset retirement obligations — 261 Property and other taxes payable 2,347 4,631 Accrued payroll 4,582 2,973 Operating lease liabilities 6,764 6,600 Other 96 250 $ 18,719 $ 29,850 The schedule below summarizes the changes in our asset retirement obligations: March 31, 2022 Beginning asset retirement obligations $ 9,072 Additions to asset retirement obligations — Accretion expense 95 Liabilities settled ( 1,634 ) Ending asset retirement obligations 7,533 Current portion of asset retirement obligations 1 — Long-term portion of asset retirement obligations 2 $ 7,533 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. 16 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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. At the time derivative contracts are entered into, the Partnership assesses whether the nature of the instrument qualifies for hedge accounting treatment according to the requirements of ASC 815 – Derivatives and Hedging . For those transactions designated as hedging instruments for accounting purposes, the Partnership documents all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. The Partnership also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of hedged items. All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value. Changes in fair value for hedging instruments are recognized on the balance sheet through Accumulated Other Comprehensive Income ("AOCI"). Settlements related to effective hedging relationships will be reclassified from AOCI to earnings during the term at which the hedged transactions are reflected on the income statement. From time to time, derivatives designated for hedge accounting may be closed prior to contract expiration. The accounting treatment of closed positions depends on whether the closure occurred due to the hedged transaction occurring early or if the hedged transaction is still expected to occur as originally forecasted. For hedged transactions that occur early, the closure results in the realized gain or loss from closure being recognized in the same period the accelerated hedged transaction affects earnings. For hedged transactions that are still expected to occur as originally forecasted, the closure results in the realized gain or loss being deferred until the hedged transaction affects earnings. If it is determined that hedged transactions associated with cash flow hedges are no longer probable of occurring, the gain or loss associated with the instrument is recognized immediately into earnings. From time to time, we may have derivative financial instruments for which we do not elect hedge accounting. Changes in fair value for derivatives not designated as hedges 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, 2022, to protect a portion of its commodity price risk exposure. These hedging arrangements are in the form of swaps for NGLs. At March 31, 2022, the Partnership had instruments totaling a gross notional quantity of 80,000 barrels settling during the period from April 30, 2022 through May 31, 2022. At December 31, 2021, the Partnership had instruments totaling a gross notional quantity of 0 barrels. These instruments settle against the applicable pricing source for each grade and location. For information regarding gains and losses on commodity 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: 17 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) Derivative Assets Derivative Liabilities Fair Values Fair Values Balance Sheet Location March 31, 2022 December 31, 2021 Balance Sheet Location March 31, 2022 December 31, 2021 Derivatives designated as hedging instruments: Current: Commodity contracts Fair value of derivatives $ 175 $ — Fair value of derivatives $ — $ — The following table summarizes the loss recognized in AOCI at March 31, 2022 and December 31, 2021, respectively, and the gain (loss) reclassified from accumulated other comprehensive loss into earnings during the three months ended March 31, 2022 and 2021, respectively, for derivative financial instruments designated as cash flow hedges: Amount of Gain (Loss) Recognized in AOCI Location of Gain (Loss) Reclassified from AOCI into Income Amount of Gain (Loss) Reclassified from AOCI into Income 2022 2021 2022 2021 Commodity contracts $ ( 440 ) $ 816 Cost of products sold $ 816 $ — Total $ ( 440 ) $ 816 $ 816 $ — The following tables summarize the loss recognized in earnings for derivative instruments not designated as hedging instruments during the three months ended March 31, 2022 and 2021, respectively: Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives 2022 2021 Derivatives not designated as hedging instruments: Commodity contracts Cost of products sold $ — $ ( 1,436 ) Total effect of derivatives not designated as hedging instruments $ — $ ( 1,436 ) NOTE 9. PARTNERS' CAPITAL (DEFICIT) As of March 31, 2022, Partners’ capital consisted of 38,836,950 common limited partner units, representing a 98 % partnership interest, and a 2 % general partner interest. Martin Resource Management Corporation, through subsidiaries, owned 6,114,532 of the Partnership's common limited partner units representing approximately 15.7 % of the Partnership's outstanding common limited partner units. Martin Midstream GP LLC ("MMGP"), the Partnership's general partner, owns the 2 % general partnership interest. 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 18 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) 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 $ 552,123 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 $ 289,084 reflected as reductions to Partners' capital. Incentive Distribution Rights MMGP holds a 2 % general partner interest and, until November 23, 2021, MMGP held 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. On November 23, 2021, MMGP contributed to the Partnership all of the outstanding IDRs for no consideration, whereupon the IDRs were cancelled and cease to exist (the “IDR Elimination”). Until the IDR Elimination, the Partnership was required to distribute all of its available cash from operating surplus, as previously defined in the Partnership Agreement. The general partner was allocated no incentive distributions during the three months ended March 31, 2022 and 2021. 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. 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: 19 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) Three Months Ended March 31, 2022 2021 Net income $ 11,478 $ 2,511 Less general partner’s interest in net income: Distributions payable on behalf of general partner interest 4 4 General partner interest in undistributed earnings 225 46 Less income allocable to unvested restricted units 30 10 Limited partners’ interest in net income $ 11,219 $ 2,451 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, 2022 2021 Basic weighted average limited partner units outstanding 38,722,246 38,692,609 Dilutive effect of restricted units issued 16,597 13,032 Total weighted average limited partner diluted units outstanding 38,738,843 38,705,641 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 - LONG-TERM INCENTIVE PLANS 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 operating expense and 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, 2022 2021 Restricted unit Awards Employees $ — $ 194 Non-employee directors 34 46 Phantom unit Awards Employees 904 — Non-employee directors — — Total unit-based compensation expense $ 938 $ 240 20 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) Long-Term Incentive Plans The Partnership's general partner has long-term incentive plans for employees and directors of the general partner and its affiliates who perform services for the Partnership. Phantom Unit Plan On July 21, 2021, the board of directors of the general partner of the Partnership and the compensation committee of the general partner's board of directors (the "Compensation Committee") approved the Martin Midstream Partners L.P. 2021 Phantom Unit Plan (the “Plan”), effective as of the same date. The Plan permits the awards of phantom units and phantom unit appreciation rights (collectively, "phantom unit awards") to any employee or non-employee director of the Partnership, including its executive officers. The awards may be time-based or performance-based and will be paid, if at all, in cash. The award of a phantom unit entitles the participant to a cash payment equal to the value of the phantom unit on the vesting date or dates, which value is the fair market value of a common unit of the Partnership (a “Unit”) on such vesting date or dates. The award of a phantom unit appreciation right entitles the recipient to a cash payment equal to the difference between the value of a phantom unit on the vesting date or dates in excess of the value assigned by the Compensation Committee to the phantom unit as of the grant date. Phantom units and phantom unit appreciation rights granted to participants do not confer upon participants any right to a Unit. On July 21, 2021, the Compensation Committee approved forms of time-based award agreements for phantom units and phantom unit appreciation rights, both of which awards vest in full on the third anniversary of the grant date. The grant date value of a phantom unit under a phantom unit appreciation right award is equal to the average of the closing price for a Unit during the 20 trading days immediately preceding the grant date of the award. Generally, vesting of an award is subject to a participant remaining continuously employed with the Partnership through the vesting date. However, if prior to the vesting date (i) a participant is terminated without cause (as defined in the award agreement) or terminates employment after the participant has attained both the age of 65 and ten years of employment (“retirement-eligible”), a prorated portion of the award will vest and be paid in cash no later than the 30 th day following such termination date (subject to a six-month delay in payment for certain retirement-eligible participants) or (ii) there is a change in control of the Partnership (as defined in the Plan), the award will vest in full and be paid in cash no later than the 30 th day following the date of the change of control; provided, that the participant has been in continuous employment through the termination or change in control date, as applicable. On July 21, 2021, 620,000 phantom units and 1,245,000 phantom unit appreciation rights were granted to employees of the general partner and its affiliates who perform services for the Partnership. Phantom unit awards are recorded in operating expense and selling, general and administrative expense based on the fair value of the vested portion of the awards on the balance sheet date. The fair value of these awards is updated at each balance sheet date and changes in the fair value of the vested portions of the awards are recorded as increases or decreases to compensation expense within operating expense and selling, general and administrative expense in the Consolidated and Condensed Statements of Operations. All of the Partnership's outstanding phantom unit awards at March 31, 2022 met the criteria to be treated under liability classification in accordance with ASC 718, given that these awards will settle in cash on the vesting date. Compensation expense for the phantom awards is based on the fair value of the units as of the balance sheet date as further discussed below, and such costs are recognized ratably over the service period of the awards. As the fair value of liability awards is required to be re-measured each period end, stock compensation expense amounts recognized in future periods for these awards will vary. The estimated future cash payments of these awards are presented as liabilities within "Other current liabilities" and "Other long-term obligations" in the Consolidated and Condensed Balance Sheets. As of March 31, 2022, there was a total of $ 3,251 of unrecognized compensation costs related to non-vested phantom unit awards. These costs are expected to be recognized over a remaining life of 2.31 years. 21 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) The fair value of the phantom unit awards was estimated using a Monte Carlo valuation model as of the balance sheet date. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of the Partnership’s common units as well as set of peer companies. On April 20, 2022, the board of directors of the general partner of the Partnership and the Compensation Committee approved the First Amendment to the Plan, effective as of the same date, which amendment increased the total number of phantom units available for grant under the Plan from 2,000,000 units to 5,000,000 units. Restricted Unit Plan On May 26, 2017, the unitholders of the Partnership approved the Martin Midstream Partners L.P. 2017 Restricted Unit Plan (the "2017 LTIP"). The 2017 LTIP 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 2017 LTIP is administered by 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 2017 LTIP containing such terms as the Compensation Committee shall determine under the 2017 LTIP. With respect to time-based restricted units ("TBRUs"), 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 "PBRUs"). 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. PBRUs are earned only upon our achievement of an objective performance measure for the performance period. PBRUs 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 PBRUs awarded on March 1, 2018 were not achieved and the Partnership treated these units as forfeited at expiration on March 31, 2021. As such, the Partnership did not recognize compensation expense related to these 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. All of the Partnership's outstanding restricted unit awards at March 31, 2022 met the criteria to be treated under equity classification. In February 2022, the Partnership issued 11,400 TBRUs to each of the Partnership's three independent directors under the 2017 LTIP. These restricted common units vest in equal installments of 3,800 units on January 24, 2023, 2024, 2025, and 2026. In April 2022, the Partnership issued 13,800 TBRUs to each of the Partnership's three independent directors under the 2017 LTIP. These restricted common units vest in equal installments of 4,600 units on January 24, 2023, 2024, 2025, and 2026. 22 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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, 2022 is provided below: Number of Units Weighted Average Grant-Date Fair Value Per Unit Non-vested, beginning of period 114,876 $ 3.65 Granted (TBRU) 34,200 $ 3.11 Vested ( 38,514 ) $ 4.76 Forfeited — $ — Non-Vested, end of period 110,562 $ 3.10 Aggregate intrinsic value, end of period $ 464 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, 2022 and 2021 is provided below: Three Months Ended March 31, 2022 2021 Aggregate intrinsic value of units vested $ 188 $ 257 Fair value of units vested 92 1,418 As of March 31, 2022, there was $ 318 of unrecognized compensation cost related to non-vested restricted units. That cost is expected to be recognized over a weighted-average period of 2.81 years. NOTE 11. RELATED PARTY TRANSACTIONS As of March 31, 2022, Martin Resource Management Corporation owns 6,114,532 of the Partnership’s common units representing approximately 15.7 % of the Partnership’s outstanding limited partner units. Martin Resource Management Corporation controls the Partnership's general partner by virtue of its 100 % voting interest in MMGP Holdings, LLC ("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. 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, 2022 of approximately 15.7 % of the Partnership’s outstanding limited partnership units, 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. 23 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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 NGLs; 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 our account, the asphalt facilities in each of Hondo, South Houston and Port Neches, Texas and Omaha, Nebraska. • any business that Martin Resource Management Corporation acquires or constructs that has a fair market value of less than $ 5,000 ; • any business that Martin Resource Management Corporation acquires or constructs that has a fair market value of $ 5,000 or more if the Partnership has been offered the opportunity to purchase the business for fair market value and the Partnership declines to do so with the concurrence of the conflicts committee of the board of directors of the general partner of the Partnership (the "Conflicts Committee"); and • any business that Martin Resource Management Corporation acquires or constructs where a portion of such business includes a restricted business and the fair market value of the restricted business is $ 5,000 or more and represents less than 20 % of the aggregate value of the entire business to be acquired or constructed; provided that, following completion of the acquisition or construction, the Partnership will be provided the opportunity to purchase the restricted business. Services. Under the Omnibus Agreement, Martin Resource Management Corporation provides the Partnership with corporate staff, support services, and administrative services necessary to operate the Partnership’s business. The Omnibus Agreement requires the Partnership to reimburse Martin Resource Management Corporation for all direct expenses it incurs or payments it makes on the Partnership’s behalf or in connection with the operation of the Partnership’s business. There is no 24 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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, 2022, through December 31, 2022, the Conflicts Committee approved an annual reimbursement amount for indirect expenses of $ 13,491 . The Partnership reimbursed Martin Resource Management Corporation for $ 3,373 and $ 3,542 of indirect expenses for the three months ended March 31, 2022 and 2021, 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. The rates under the agreement 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 25 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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 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, 2022 and 2021 were $ 310 and $ 236 , respectively. 26 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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, 2022 2021 Revenues: Terminalling and storage $ 16,204 $ 15,306 Transportation 6,288 4,010 Product sales: Sulfur services 29 30 Terminalling and storage 289 84 321 114 $ 22,813 $ 19,430 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, 2022 2021 Cost of products sold: Sulfur services $ 2,676 $ 2,535 Terminalling and storage 9,651 4,568 $ 12,327 $ 7,103 The impact of related party operating expenses is reflected in the consolidated and condensed financial statements as follows: Three Months Ended March 31, 2022 2021 Operating expenses: Transportation $ 15,263 $ 13,059 Natural gas liquids 510 464 Sulfur services 1,245 743 Terminalling and storage 4,362 4,102 $ 21,380 $ 18,368 27 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (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, 2022 2021 Selling, general and administrative: Transportation $ 1,965 $ 1,670 Natural gas liquids 1,339 1,808 Sulfur services 996 771 Terminalling and storage 1,058 820 Indirect, including overhead allocation 3,450 3,611 $ 8,808 $ 8,680 NOTE 12. BUSINESS SEGMENTS The Partnership has four reportable segments: (1) terminalling and storage, (2) transportation, (3) sulfur services and (4) 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, 2021, filed with the SEC on March 1, 2022. The Partnership evaluates the performance of its reportable segments based on operating income. There is no allocation of interest expense. Three Months Ended March 31, 2022 Operating Revenues Intersegment Revenues Eliminations Operating Revenues after Eliminations Depreciation and Amortization Operating Income (Loss) after Eliminations Capital Expenditures and Plant Turnaround Costs Terminalling and storage $ 54,383 $ ( 1,578 ) $ 52,805 $ 7,606 $ 2,867 $ 3,945 Transportation 51,897 ( 5,187 ) 46,710 3,573 1,788 3,581 Sulfur services 59,123 — 59,123 2,709 14,837 1,962 Natural gas liquids 120,566 ( 3 ) 120,563 598 10,079 447 Indirect selling, general and administrative — — — — ( 4,122 ) — Total $ 285,969 $ ( 6,768 ) $ 279,201 $ 14,486 $ 25,449 $ 9,935 28 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) 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 The Partnership's assets by reportable segment as of March 31, 2022 and December 31, 2021, are as follows: March 31, 2022 December 31, 2021 Total assets: Terminalling and storage $ 251,461 $ 248,194 Transportation 150,265 145,177 Sulfur services 118,428 108,007 Natural gas liquids 53,954 78,483 Total assets $ 574,108 $ 579,861 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 various lawsuits filed against it, which generally alleged that the customer engaged in unlawful and deceptive business practices in connection with its marketing and advertising of its private label motor oil (the “Marketing Lawsuits”). The Partnership disputed and continues to dispute that it has any obligation to defend or indemnify the customer for the customer’s conduct. Accordingly, on January 7, 2016, the Partnership filed a Complaint for Declaratory Judgment in the Chancery Court of Davidson County, Tennessee (the “Tennessee Court”), under Case No. 16-0018-BC, requesting a judicial determination that the Partnership did not owe the customer the demanded defense and indemnity obligations (the “Declaratory Judgment Action”). The Marketing Lawsuits pending in federal court against the customer were transferred to the U.S. District Court for the Western District of Missouri under the consolidated case MDL No. 2709 for pretrial proceedings (the “Consolidated Lawsuits”). On March 1, 2017, at the joint request of the customer and the Partnership, the Tennessee Court administratively closed the Declaratory Judgment Action. Recently, the customer settled the Consolidated Lawsuits. On December 17, 2021, at the request of the customer, the Tennessee Court reopened the Declaratory Judgment Action and the customer asserted various counterclaims against the Partnership seeking, among other things, to recover its costs of defending and settling the Consolidated Lawsuits. At this time, we are unable to determine what ultimate exposure we may have in this matter, if any. The Partnership intends to vigorously defend the counterclaims asserted by the customer in the Declaratory Judgment Action. 29 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) 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. Assets and liabilities measured at fair value on a recurring basis are summarized below: Level 2 March 31, 2022 December 31, 2021 Commodity derivative contracts, net $ 175 $ — 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 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 2, as the fair value is based upon quoted prices for identical liabilities in markets that are not active. March 31, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value 2024 Notes $ 51,604 $ 54,795 $ 51,317 $ 55,220 2025 Notes $ 290,771 $ 302,774 $ 290,667 $ 307,146 Total $ 342,375 $ 357,569 $ 341,984 $ 362,366 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. 30 MARTIN MIDSTREAM PARTNERS L.P. NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except where otherwise indicated) March 31, 2022 (Unaudited) NOTE 16. INCOME TAXES Three Months Ended March 31, 2022 2021 Provision for income taxes $ 1,541 $ 222 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. Current state income taxes attributable to the Texas margin tax relating to the operation of the Partnership of $ 176 and $ 120 were recorded in income tax expense for the three months ended March 31, 2022 and 2021, respectively. Deferred taxes applicable to the Texas margin tax relating to the operation of the Partnership are immaterial. 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 $ 1,365 and $ 102 , related to the operation of the Taxable Subsidiary, for the three months ended March 31, 2022 and 2021, resulted in an effective income tax rate ("ETR") of 22.03 % and 29.32 %, respectively. The decrease in the ETR for the income taxes during the three months ended March 31, 2022 was primarily due to significantly larger pretax income recorded for the three months ended March 31, 2022, compared to the same period in 2021. The increase in the provision for income taxes for the three months ended March 31, 2022, compared to the same period in 2021, was primarily due to an increase in income before income taxes in the current period. A current federal income tax expense of $ 320 and $ 15 , related to the operation of the Taxable Subsidiary, was recorded for the three months ended March 31, 2022 and 2021, respectively. A current state income tax expense of $ 124 and $ 12 , related to the operation of the Taxable Subsidiary, was recorded for the three months ended March 31, 2022 and 2021, 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 $ 921 and $ 75 was recorded for the three months ended March 31, 2022 and 2021, respectively. A net deferred tax asset of $ 18,900 and $ 19,821 , related to the cumulative book and tax temporary differences, existed at March 31, 2022 and December 31, 2021, 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 Excess Cash Flow Offer. On April 14, 2022, the Partnership completed the payment of an aggregate principal amount of approximately $ 589 , or approximately 0.20 %, of its 2025 Notes, pursuant to its Excess Cash Flow Offer to purchase up to $ 9,305 aggregate principal amount of its outstanding 2025 Notes. The purchase price for the tendered 2025 Notes was 100 % of the aggregate principal amount thereof, plus accrued and unpaid interest to, but not including, the purchase date. Quarterly Distribution. On April 20, 2022, the Partnership declared a quarterly cash distribution of $ 0.005 per common unit for the first quarter of 2022, or $ 0.020 per common unit on an annualized basis, which will be paid on May 13, 2022 to unitholders of record as of May 6, 2022. 31