Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a publicly traded limited partnership with a diverse set of operations focused primarily in the Gulf Coast region of the U.S. Our four primary business lines include:
• Terminalling, processing, and storage services for petroleum products and by-products;
• 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
• Marketing, distribution, and transportation services for NGLs and blending and packaging services for specialty lubricants and grease.
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 Gulf Coast region of the U.S. This region is a major hub for petroleum refining, natural gas gathering and processing, and support services for the exploration and production industry.
Significant Recent Developments
Exit from Butane Optimization Business. In the second quarter of 2023, we completed the previously announced exit of our butane optimization business at the conclusion of the butane selling season. Going forward, with respect to butane, we will operate as a fee-based butane logistics business, primarily utilizing our north Louisiana underground storage assets, which have both truck and rail capability. This logistics business will also utilize our truck transportation assets for fee-based product movements. As a result of this new business model, we will no longer carry butane inventory going forward, enabling us to reduce commodity risk exposure, cash flow and earnings volatility, and working capital requirements.
The following revenues and costs, which are included in the historical financial results for the years ended December 31, 2023 and 2022 will not be incurred under the new fee-based butane logistics business model.
2023 2022
Products revenue $ 70,539 $ 172,756
Cost of products sold 72,283 190,677
Selling, general and administrative expenses 512 2,094
$ (2,256) $ (20,015)
Issuance of 2028 Notes to Refinance Existing Secured Notes . On February 8, 2023, we completed the sale of $400.0 million in aggregate principal amount of our 2028 Notes. We used the proceeds of the 2028 Notes to complete the tender offers for substantially all of our 2024 Notes and 2025 Notes, redeem all 2024 Notes and 2025 Notes that were not validly tendered, repay a portion of the indebtedness under our credit facility, and pay fees and expenses in connection with the foregoing. Simultaneously with the issuance of the 2028 Notes we amended our credit facility to, among other things, reduce the commitments thereunder from $275.0 million to $200.0 million (with further scheduled reductions to $175.0 million on June 30, 2023 and $150.0 million on June 30, 2024) and extend the scheduled maturity date of the credit facility to February 8, 2027.
Electronic Level Sulfuric Acid Joint Venture. On October 19, 2022, Martin ELSA Investment LLC, our affiliate, entered into definitive agreements with Samsung C&T America, Inc. and Dongjin USA, Inc., an affiliate of Dongjin Semichem Co., Ltd., to form DSM Semichem LLC (“DSM”). DSM will produce and distribute electronic level sulfuric acid (“ELSA”). By leveraging our existing assets located in Plainview, Texas and installing additional facilities (the “ELSA Facility”) as required, DSM will produce ELSA that meets the strict quality standards required by the recent advances in semiconductor manufacturing. In addition to owning a 10% non-controlling interest in DSM, we will be the exclusive provider of feedstock to the ELSA Facility. We, through our affiliate MTI, will also provide land transportation services of the ELSA produced by DSM. We expect to fund approximately $25.5 million in aggregate capital expenditures in connection with this joint venture. As of December 31, 2023, we have funded approximately $8.6 million toward ELSA related project costs.
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For more information about the potential physical effects of climate change and environmental regulation on our business, see our environmental and climate change related risk factors in Section 1A “Risk Factors.”
Subsequent Events
Quarterly Distribution. On January 23, 2024, we declared a quarterly cash distribution of $0.005 per common unit for the fourth quarter of 2023, or $0.02 per common unit on an annualized basis, which was paid on February 14, 2024 to unitholders of record as of February 7, 2024.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated financial statements included elsewhere herein. We prepared these financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP" or "GAAP"). The preparation of these financial statements required 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 based 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. You should also read Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements. The following table evaluates the potential impact of estimates utilized during the periods ended December 31, 2023 and 2022:
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Description Judgments and Uncertainties Effect if Actual Results Differ from Estimates and Assumptions
Impairment of Long-Lived Assets
We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of the assets may not be recoverable. These evaluations are based on undiscounted cash flow projections over the remaining useful life of the asset. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows. Any impairment loss is measured as the excess of the asset's carrying value over its fair value. Our impairment analyses require management to use judgment in estimating future cash flows and useful lives, as well as assessing the probability of different outcomes. Applying this impairment review methodology, no impairment was recorded during the years ended December 31, 2023 or 2022.
Impairment of Goodwill
Goodwill is subject to a fair-value based
impairment test on an annual basis, or more frequently if events or changes in circumstances indicate that the fair value of any of our reporting units is less than its carrying amount. When assessing the recoverability of goodwill , we may first assess qualitative factors in determining
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative assessment is not required. If an initial qualitative assessment indicates that it is more likely than not the carrying amount exceeds the fair value of a reporting unit, a quantitative analysis will be performed. We may also elect to bypass the qualitative assessment and proceed directly to a quantitative analysis depending on the facts and circumstances. As part of the quantitative evaluation, we determine fair value using accepted valuation techniques, including discounted cash flow, the guideline public company method and the guideline transaction method. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates. We conduct impairment testing using present economic conditions, as well as future expectations. Based upon the most recent annual review as of August 31, 2023, no goodwill impairment exists within our reporting units for the years ended December 31, 2023. No goodwill impairment was recorded during the year ended December 31, 2022.
Our Relationship with Martin Resource Management Corporation
Martin Resource Management Corporation directs our business operations through its ownership of our general partner and under the Omnibus Agreement. In addition to the direct expenses payable to Martin Resource Management Corporation under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. For the years ended December 31, 2023 and 2022, the board of directors of our general partner approved reimbursement amounts of $14.0 million and $13.5 million, respectively, reflecting our allocable share of such expenses. The board of directors of our general partner will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.
We are required 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. Martin Resource Management Corporation also licenses certain of its trademarks and trade names to us under the Omnibus Agreement.
We are both an important supplier to and customer of Martin Resource Management Corporation. All of these services and goods are purchased and sold pursuant to the terms of a number of agreements between us and Martin Resource Management Corporation. For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management Corporation, please see "Item 13. Certain Relationships and Related Transactions, and Director Independence."
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Non-GAAP Financial Measures
To assist management in assessing our business, we use the following non-GAAP financial measures: earnings before interest, taxes, and depreciation and amortization ("EBITDA"), adjusted EBITDA (as defined below), adjusted EBITDA after giving effect to the exit of the butane optimization business, distributable cash flow available to common unitholders (“Distributable Cash Flow”), and free cash flow after growth capital expenditures and principal payments under finance lease obligations ("Adjusted Free Cash Flow"). Our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with U.S. GAAP to analyze our performance.
Certain items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing an entity's financial performance, such as cost of capital and historical costs of depreciable assets.
EBITDA and Adjusted EBITDA . We define Adjusted EBITDA as EBITDA before unit-based compensation expenses, gains and losses on the disposition of property, plant and equipment, impairment and other similar non-cash adjustments. Adjusted EBITDA is used as a supplemental performance and liquidity measure by our management and by external users of our financial statements, such as investors, commercial banks, research analysts, and others, to assess:
• the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
• the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness, and make cash distributions to our unitholders; and
• our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing methods or capital structure.
The GAAP measures most directly comparable to adjusted EBITDA are net income (loss) and net cash provided by (used in) operating activities. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), net cash provided by (used in) operating activities, or any other measure of financial performance presented in accordance with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate Adjusted EBITDA in the same manner.
Adjusted EBITDA does not include interest expense, income tax expense, and depreciation and amortization. Because we have borrowed money to finance our operations, interest expense is a necessary element of our costs and our ability to generate cash available for distribution. Because we have capital assets, depreciation and amortization are also necessary elements of our costs. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider net income (loss) and net cash provided by (used in) operating activities as determined under GAAP, as well as adjusted EBITDA, to evaluate our overall performance.
Distributable Cash Flow and Adjusted Free Cash Flow. We define Distributable Cash Flow as Net Cash Provided by (Used in) Operating Activities less cash received (plus cash paid) for closed commodity derivative positions included in Accumulated Other Comprehensive Income (Loss), plus changes in operating assets and liabilities which (provided) used cash, less maintenance capital expenditures and plant turnaround costs. Distributable Cash Flow is a significant performance measure used by our management and by external users of our financial statements, such as investors, commercial banks and research analysts, to compare basic cash flows generated by us to the cash distributions we expect to pay unitholders. Distributable Cash Flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Distributable Cash Flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit of such an entity is generally determined by the unit's yield, which in turn is based on the amount of cash distributions the entity pays to a unitholder.
We define Adjusted Free Cash Flow as Distributable Cash Flow less growth capital expenditures and principal payments under finance lease obligations. Adjusted Free Cash Flow is a significant performance measure used by our management and by external users of our financial statements and represents how much cash flow a business generates during a specified time period after accounting for all capital expenditures, including expenditures for growth and maintenance capital projects. We believe that Adjusted Free Cash Flow is important to investors, lenders, commercial banks and research analysts since it reflects the amount of cash available for reducing debt, investing in additional capital projects, paying distributions, and similar matters. Our calculation of Adjusted Free Cash Flow may or may not be comparable to similarly titled measures used by other entities.
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The GAAP measure most directly comparable to Distributable Cash Flow and Adjusted Free Cash Flow is Net Cash Provided by (Used in) Operating Activities. Distributable Cash Flow and Adjusted Free Cash Flow should not be considered alternatives to, or more meaningful than, Net Income (Loss), Operating Income (Loss), Net Cash Provided by (Used in) Operating Activities, or any other measure of liquidity presented in accordance with GAAP. Distributable Cash Flow and Adjusted Free Cash Flow have important limitations because they exclude some items that affect Net Income (Loss), Operating Income (Loss), and Net Cash Provided by (Used in) Operating Activities. Distributable Cash Flow and Adjusted Free Cash Flow may not be comparable to similarly titled measures of other companies because other companies may not calculate these non-GAAP metrics in the same manner. To compensate for these limitations, we believe that it is important to consider Net Cash Provided by (Used in) Operating Activities determined under GAAP, as well as Distributable Cash Flow and Adjusted Free Cash Flow, to evaluate our overall liquidity.
Non-GAAP Financial Measures
The following tables reconcile the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the years ended December 31, 2023 and 2022, which represents EBITDA, adjusted EBITDA, adjusted EBITDA after giving effect to the exit of the butane optimization business, distributable cash flow, and adjusted free cash flow:
Reconciliation of Net Loss to EBITDA, Adjusted EBITDA, and Adjusted EBITDA After Giving Effect to the Exit of the Butane Optimization Business
Year Ended December 31,
2023 2022
(in thousands)
Net loss $ (4,549) $ (10,334)
Adjustments:
Interest expense 60,290 53,665
Income tax expense 5,918 7,927
Depreciation and amortization 49,895 56,280
EBITDA 111,554 107,538
Adjustments:
Gain on disposition of property, plant and equipment (1,373) (5,669)
Loss on extinguishment of debt 5,121 —
Lower of cost or net realizable value and other non-cash adjustments (12,850) 12,850
Unit-based compensation 163 161
Adjusted EBITDA 102,615 114,880
Adjustments:
Plus: net loss associated with butane optimization business 2,256 20,015
Plus: lower of cost or net realizable value and other non-cash adjustments 12,850 (12,850)
Adjusted EBITDA after giving effect to the exit of the butane optimization business
$ 117,721 $ 122,045
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Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA, Adjusted EBITDA After Giving Effect to the Exit of the Butane Optimization Business, Distributable Cash Flow, and Adjusted Free Cash Flow
Year Ended December 31,
2023 2022
(in thousands)
Net cash provided by operating activities $ 137,468 $ 16,148
Interest expense 1
54,112 50,513
Current income tax expense 1,732 2,183
Lower of cost or market and other non-cash adjustments (12,850) 12,850
Commodity cash flow hedging gains reclassified to earnings — 901
Net cash received for closed commodity derivative positions included in AOCI — (85)
Changes in operating assets and liabilities which (provided) used cash:
Accounts and other receivables, inventories, and other current assets (97,149) 38,179
Trade, accounts and other payables, and other current liabilities 16,891 (4,428)
Other 2,411 (1,381)
Adjusted EBITDA 102,615 114,880
Plus: net loss associated with butane optimization business 2,256 20,015
Plus: lower of cost or net realizable value and other non-cash adjustments 12,850 (12,850)
Adjusted EBITDA after giving effect to the exit of the butane optimization business
117,721 122,045
Adjustments:
Interest expense (60,290) (53,665)
Income tax expense (5,918) (7,927)
Deferred income taxes 4,186 5,744
Amortization of deferred debt issuance costs 3,978 3,152
Amortization of discount on notes payable 2,200 —
Payments for plant turnaround costs (4,825) (5,176)
Maintenance capital expenditures (24,277) (19,074)
Distributable Cash Flow 32,775 45,099
Principal payments under finance lease obligations (9) (279)
Expansion capital expenditures (11,034) (6,883)
Adjusted Free Cash Flow $ 21,732 $ 37,937
1 Net of amortization of debt issuance costs and discount, which are included in interest expense but not included in net cash provided by operating activities.
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Results of Operations
The results of operations for the years ended December 31, 2023 and 2022 have been derived from our consolidated financial statements. Discussions of the year ended December 31, 2021 that are not included in this Annual Report on Form 10-K and year-to-year comparisons of the year ended December 31, 2022 and the year ended December 31, 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.
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.
Our consolidated 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 after the comparative discussion of our results within each segment.
The following table sets forth our operating revenues and operating income by segment for the years ended December 31, 2023 and 2022.
Operating Revenues Revenues
Intersegment Eliminations Operating Revenues
after Eliminations Operating Income (loss) Operating Income Intersegment Eliminations Operating
Income (loss)
after
Eliminations
(In thousands)
Year Ended December 31, 2023:
Terminalling and storage $ 95,459 $ (8,945) $ 86,514 $ 14,532 $ (8,856) $ 5,676
Specialty products 346,863 (86) 346,777 17,109 13,226 30,335
Sulfur services 140,995 — 140,995 17,412 13,024 30,436
Transportation 240,926 (17,249) 223,677 33,701 (17,394) 16,307
Indirect selling, general and administrative
— — — (16,030) — (16,030)
Total $ 824,243 $ (26,280) $ 797,963 $ 66,724 $ — $ 66,724
Year Ended December 31, 2022:
Terminalling and storage $ 92,612 $ (12,419) $ 80,193 $ 1,189 $ (12,291) $ (11,102)
Specialty products 540,636 (123) 540,513 1,445 22,697 24,142
Sulfur services 179,164 — 179,164 24,186 9,960 34,146
Transportation 239,275 (20,267) 219,008 41,357 (20,366) 20,991
Indirect selling, general and administrative
— — — (16,914) — (16,914)
Total $ 1,051,687 $ (32,809) $ 1,018,878 $ 51,263 $ — $ 51,263
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Terminalling and Storage Segment
Comparative Results of Operations for the Years Ended December 31, 2023 and 2022
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Revenues $ 95,459 $ 92,612 $ 2,847 3%
Cost of products sold 75 19 56 295%
Operating expenses 57,393 63,177 (5,784) (9)%
Selling, general and administrative expenses 2,070 1,967 103 5%
Depreciation and amortization 21,030 26,094 (5,064) (19)%
14,891 1,355 13,536 999%
Other operating loss, net (359) (166) (193) (116)%
Operating income $ 14,532 $ 1,189 $ 13,343 1,122%
Shore-based throughput volumes (gallons) 162,363 85,017 77,346 91%
Smackover refinery throughput volumes (guaranteed minimum BBL per day) 6,500 6,500 — —%
Services revenues. Service revenues increased $2.8 million. Revenue at our shore-based terminals increased $2.6 million, including $2.4 million in fuel throughput and $0.4 million in drilling fluids commission, offset by a reduction in space rent of $0.2 million. In addition, revenue at our specialty terminals increased $1.9 million primarily as a result of higher throughput and storage revenue attributable to contractually prescribed, index-based fee adjustments. Revenue at our Smackover refinery decreased $1.8 million as a result of decreased pipeline revenue of $4.6 million, offset by increases in throughput revenue of $1.1 million, reservation fees of $1.1 million and natural gas surcharge of $0.8 million.
Cost of products sold. Cost of products sold remained relatively consistent.
Operating expenses. Operating expenses decreased primarily as a result of lease expense of $4.9 million and natural gas utilities of $1.1 million.
Selling, general and administrative expenses. Selling, general and administrative expenses increased primarily as a result of increased employee-related expenses.
Depreciation and amortization. Depreciation and amortization decreased primarily as a result of assets being fully depreciated, 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 Years Ended December 31, 2023 and 2022
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Revenues $ 240,926 $ 239,275 $ 1,651 1%
Operating expenses 184,334 176,198 8,136 5%
Selling, general and administrative expenses 9,787 8,215 1,572 19%
Depreciation and amortization 14,879 14,567 312 2%
31,926 40,295 (8,369) (21)%
Other operating income, net 1,775 1,062 713 67%
Operating income $ 33,701 $ 41,357 $ (7,656) (19)%
Marine Transportation Revenues . Inland revenues increased $7.4 million primarily related to transportation rates. Revenue was also impacted by a decrease in pass-through revenue (primarily fuel) of $2.9 million.
Land Transportation Revenues. Freight revenue increased primarily due to a 25% increase in load count combined with a 1% increase in total miles, which resulted in a $7.0 million increase. Additionally, ancillary revenue decreased $9.8 million .
Operating expenses . The increase in operating expenses is primarily a result of increased employee-related expenses of $5.2 million, lease expense of $5.1 million, insurance premiums of $3.0 million, shop expenses of $0.7 million and outside towing of $0.7 million, offset by a decrease in pass through expenses (primarily fuel) of $6.6 million.
Selling, general and administrative expenses . Selling, general and administrative expenses increased primarily due to increased employee-related expenses.
Depreciation and amortization . Depreciation and amortization increased as a result of recent capital expenditures, offset by recent disposals.
Other operating income, net. Other operating income, net represents gains from the disposition of property, plant and equipment.
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Sulfur Services Segment
Comparative Results of Operations for the Years Ended December 31, 2023 and 2022
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Revenues:
Services $ 13,430 $ 12,337 $ 1,093 9%
Products 127,565 166,827 (39,262) (24)%
Total revenues 140,995 179,164 (38,169) (21)%
Cost of products sold 93,842 127,018 (33,176) (26)%
Operating expenses 13,143 15,335 (2,192) (14)%
Selling, general and administrative expenses 5,925 6,081 (156) (3)%
Depreciation and amortization 10,690 11,099 (409) (4)%
17,395 19,631 (2,236) (11)%
Other operating income, net 17 4,555 (4,538) (100)%
Operating income $ 17,412 $ 24,186 $ (6,774) (28)%
Sulfur (long tons) 478.0 452.0 26.0 6%
Fertilizer (long tons) 254.0 211.0 43.0 20%
Sulfur services volumes (long tons) 732.0 663.0 69.0 10%
Services revenues. Services revenues increased as a result of a contractually prescribed, index-based fee adjustment.
Products revenues. Products revenues decreased $51.3 million as a result of a 31% drop in average sulfur services sales prices. Products revenues increased an offsetting $12.0 million due to a 10% rise in sales volumes, primarily related to a 20% increase in fertilizer volumes.
Cost of products sold. A 33% decrease in product cost impacted cost of products sold by $42.0 million, resulting from reduced commodity prices. A 10% increase in sales volumes resulted in an offsetting increase in cost of products sold of $8.8 million. Margin per ton decreased $13.97, or 23%.
Operating expenses. Operating expenses decreased due to a decrease in outside towing of $1.1 million, marine fuel expense of $0.7 million, insurance premiums and claims of $0.3 million, contract labor of $0.3 million, and repairs and maintenance of marine assets of $0.3 million. Offsetting these decreases, employment expenses increased $0.4 million combined with a $0.1 million increase in utilities expense.
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization decreased as a result of the sale of Stockton assets in the third quarter of 2022, offset by recent capital expenditures.
Other operating income, net. Other operating income, net represents gains from the disposition of property, plant and equipment.
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Specialty Products Segment
Comparative Results of Operations for the Years Ended December 31, 2023 and 2022
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Products revenues $ 346,863 $ 540,636 (193,773) (36)%
Cost of products sold 319,200 526,043 (206,843) (39)%
Operating expenses 78 118 (40) (34)%
Selling, general and administrative expenses 7,120 8,728 (1,608) (18)%
Depreciation and amortization 3,296 4,520 (1,224) (27)%
17,169 1,227 15,942 1,299%
Other operating income (loss), net (60) 218 (278) (128)%
Operating income $ 17,109 $ 1,445 $ 15,664 1,084%
NGL sales volumes (Bbls) 3,681 5,791 (2,110) (36) %
Other specialty products volumes (Bbls) 367 391 (24) (6) %
Total specialty products volumes (Bbls) 4,048 6,182 (2,134) (35) %
Products revenues. Product revenues decreased $102.2 million due to the exit of the butane optimization business in the second quarter 2023. For the remaining products, sales volumes decreased 19%, lowering revenues by $62.9 million, primarily related to a 20% decrease in NGL sales volume. Our average sales price per barrel decreased $8.56, or 8%, decreasing revenues by $28.7 million.
Cost of products sold . Cost of products sold decreased $118.4 million due to the exit of the butane optimization business in the second quarter 2023. For the remaining products, the decrease in sales volumes of 19% resulted in a $56.2 million reduction to cost of products sold. Our average cost per barrel decreased $9.63, or 10%, decreasing cost of products sold by $32.3 million. Our margins increased $1.07 per barrel, or 11%, during the period.
Operating expenses . Operating expenses remained relatively consistent.
Selling, general and administrative expenses . Selling, general and administrative expenses decreased primarily due to the exit of the butane optimization business in the second quarter of 2023.
Depreciation and amortization. Depreciation and amortization decreased due to certain assets becoming fully depreciated during the fourth quarter of 2022.
Other operating income (loss), net. Other operating income (loss), net represents gains and losses from the disposition of property, plant and equipment.
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Interest Expense
Comparative Components of Interest Expense, Net for the Years Ended December 31, 2023 and 2022
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Credit facility $ 7,587 $ 9,654 $ (2,067) (21)%
Senior notes 45,352 38,903 6,449 17%
Amortization of deferred debt issuance costs 3,978 3,152 826 26%
Amortization of debt discount 2,200 — 2,200
Other 1,483 1,948 (465) (24)%
Finance leases 1 8 (8) (100)%
Capitalized interest (310) — (310)
Total interest expense, net $ 60,290 $ 53,665 $ 6,625 12%
Indirect Selling, General and Administrative Expenses
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Indirect selling, general and administrative expenses $ 16,030 $ 16,914 $ (884) (5)%
Indirect selling, general and administrative expenses decreased primarily due to decreases in employee-related expenses of $1.4 million, offset by a $0.9 million increase in the indirect expenses allocated from Martin Resource Management Corporation.
Martin Resource Management Corporation allocates to us a portion of its indirect selling, general and administrative expenses for services 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 Resource Management Corporation's 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 board of directors of our general partner approved the following reimbursement amounts:
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Board approved reimbursement amount $ 13,982 $ 13,491 $ 491 4%
The amounts reflected above represent our allocable share of such expenses. The board of directors of our general partner will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.
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Liquidity and Capital Resources
General
Our primary sources of liquidity to meet operating expenses, service our indebtedness, fund capital expenditures and pay distributions to our unitholders have historically been cash flows generated by our operations, borrowings under our credit facility and access to debt and equity capital markets, both public and private. Set forth below is a description of our cash flows for the periods indicated.
Cash Flows - Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The following table details the cash flow changes between the years ended December 31, 2023 and 2022:
Year Ended December 31, Variance Percent Change
2023 2022
(In thousands)
Net cash provided by (used in):
Operating activities $ 137,468 $ 16,148 $ 121,320 751%
Investing activities (33,660) (24,644) (9,016) (37)%
Financing activities (103,799) 8,489 (112,288) (1,323)%
Net increase (decrease) in cash and cash equivalents $ 9 $ (7) $ 16 229%
Net cash provided by operating activities. Net cash provided by operating activities for the year ended December 31, 2023 increased $121.3 million, primarily as a result of a favorable variance in changes in working capital of $114.0 million combined with an increase in operating results and non-cash items of $11.1 million.
Net cash used in investing activities. Net cash used in investing activities for the year ended December 31, 2023 increased $9.0 million. An increase in cash used of $6.7 million resulted from higher payments for capital expenditures and plant turnaround costs in 2023 combined with a decrease of $2.3 million in net proceeds received from the sale of property, plant and equipment.
Net cash provided by (used in) financing activities. Net cash (used in) provided by financing activities for the year ended December 31, 2023 decreased $112.3 million primarily as a result of a $99.3 million decrease in net borrowings from long-term debt combined with increased debt issuance costs of $14.2 million.
Total Contractual Obligations
A summary of our total contractual cash obligations as of December 31, 2023 is as follows (dollars in thousands):
Payments due by period
Type of Obligation Total
Obligation Less than
One Year 1-3
Years 3-5
Years Due
Thereafter
Credit facility $ 42,500 $ — $ — $ 42,500 $ —
11.5% senior secured notes, due 2028 400,000 — — 400,000 —
Operating leases 70,054 18,345 30,542 15,734 5,433
Interest payable on fixed long-term debt obligations 188,926 46,000 92,000 50,926 —
Total contractual cash obligations $ 701,480 $ 64,345 $ 122,542 $ 509,160 $ 5,433
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 December 31, 2023, we had outstanding irrevocable letters of credit in the amount of $9.2 million, which were issued under our credit facility.
Off Balance Sheet Arrangements. We do not have any off-balance sheet financing arrangements.
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Description of Our Indebtedness
Credit Facility
At December 31, 2023, we maintained a $175.0 million credit facility that matures February 8, 2027. As of December 31, 2023, we had $42.5 million outstanding under the credit facility and $9.2 million of outstanding irrevocable letters of credit, leaving a maximum amount available to be borrowed under our credit facility for future borrowings and letters of credit of $123.3 million. After giving effect to our then current borrowings, outstanding letters of credit and the financial covenants contained in our credit facility, we had the ability to borrow approximately $109.0 million in additional amounts thereunder as of December 31, 2023.
Effective February 8, 2023, in connection with the completion of our sale of the 2028 Notes, we amended our credit facility (the “amended credit facility”) to, among other things, reduce the commitments thereunder from $275.0 million to $200.0 million (with further scheduled reductions to $175.0 million on June 30, 2023 and $150.0 million on June 30, 2024) and extend the scheduled maturity date of the amended credit facility to February 8, 2027. The commitments under the amended credit facility can be increased from time to time upon our request, subject to certain conditions (including the consent of the increasing lenders), up to an additional $50.0 million.
The amended credit facility is used for ongoing working capital needs and general partnership purposes, including to finance permitted investments, acquisitions and capital expenditures. Prior to the credit facility amendment, the level of outstanding draws on our credit facility from January 1, 2023 through February 8, 2023 ranged from a low of $148.5 million to a high of $184.0 million. From February 8, 2023 through December 31, 2023, the level of outstanding draws on our amended credit facility ranged from a low of $42.5 million to a high of $138.0 million.
The amended credit facility is guaranteed by substantially all of our subsidiaries, other than Martin ELSA Investment LLC. Obligations under the amended credit facility are secured by first priority liens on substantially all of our assets and those of the guarantors, including, without limitation, inventory, accounts receivable, bank accounts, marine vessels, equipment, fixed assets and the interests in certain subsidiaries.
We may prepay all amounts outstanding under the amended credit facility at any time without premium or penalty (other than customary breakage costs associated with Term SOFR (as defined in the amended credit facility), subject to certain notice requirements. The amended credit facility requires mandatory prepayments of amounts outstanding thereunder with excess cash that exceeds $25.0 million and the net proceeds of certain asset sales.
Indebtedness under the credit facility bears interest at our option at the Adjusted Term SOFR (as defined in the amended credit facility), plus an applicable margin, or the Alternate Base Rate (the highest of the Federal Funds Rate plus 0.50%, the one-month Adjusted Term SOFR plus 1.0%, or the administrative agent’s prime rate) plus an applicable margin. We pay a per annum fee on all letters of credit issued under the amended credit facility, and we pay a commitment fee per annum on the unused revolving credit commitments under the amended credit facility. The letter of credit fee, the commitment fee and the applicable margins for our interest rate vary quarterly based on our Total Leverage Ratio (as defined in the amended credit facility, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) and are as follows:
Leverage Ratio
ABR Loans Term SOFR Rate Loans and Letters of Credit
Less than 3.00 to 1.00 1.75 % 2.75 %
Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00 2.00 % 3.00 %
Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00 2.25 % 3.25 %
Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00 2.50 % 3.50 %
Greater than or equal to 4.50 to 1.00 2.75 % 3.75 %
The applicable margin for Adjusted Term SOFR borrowings at December 31, 2023 was 3.25%. The applicable margin for Adjusted Term SOFR borrowings at February 21, 2024 is 3.25%.
The amended credit facility includes financial covenants that are tested on a quarterly basis, based on the rolling four quarter period that ends on the last day of each fiscal quarter, that require maintenance of:
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• a minimum Interest Coverage Ratio (as defined in the amended credit facility) of at least 2.00:1.00;
• a maximum Total Leverage Ratio of not more than 4.75:1.00, stepping down to 4.50:1.00 on March 31, 2025; and
• a maximum First Lien Leverage Ratio (as defined in the amended credit facility) of not more than 1.50:1.00.
In addition, the amended credit facility contains various covenants, which, among other things, limit our and our subsidiaries’ ability to: (i) grant or assume liens; (ii) make investments (including investments in our joint ventures) and acquisitions; (iii) enter into certain types of hedging agreements; (iv) incur or assume indebtedness; (v) sell, transfer, assign or convey assets; (vi) repurchase our equity, make distributions (including a limit on our ability to make quarterly distributions to unitholders in excess of $0.005 per unit unless our Total Leverage Ratio is below 3.75:1:00, pro forma first lien leverage is less than 1.00 to 1.00, and our pro forma liquidity is greater than or equal to 35% of the commitments under our amended credit facility) and certain other restricted payments; (vii) change the nature of our business; (viii) engage in transactions with affiliates; (ix) enter into certain burdensome agreements; (x) make certain amendments to the Omnibus Agreement and our material agreements; and (xi) permit our joint ventures to incur indebtedness or grant certain liens.
The amended credit facility contains customary events of default, including, without limitation: (i) failure to pay any principal, interest, fees, expenses or other amounts when due; (ii) failure to meet the quarterly financial covenants; (iii) failure to observe any other agreement, obligation, or covenant in the amended credit facility or any related loan document, subject to cure periods for certain failures; (iv) the failure of any representation or warranty to be materially true and correct when made; (v) our, or any of our subsidiaries’ default under other indebtedness that exceeds a threshold amount; (vi) bankruptcy or other insolvency events involving us or any of our subsidiaries; (vii) judgments against us or any of our subsidiaries, in excess of a threshold amount; (viii) certain ERISA events involving us or any of our subsidiaries, in excess of a threshold amount; (ix) a change in control (as defined in the amended credit facility); and (x) the invalidity of any of the loan documents or the failure of any of the collateral documents to create a lien on the collateral.
The amended credit facility also contains certain default provisions relating to Martin Resource Management Corporation. If Martin Resource Management Corporation no longer controls our general partner, the lenders under the amended credit facility may declare all amounts outstanding thereunder immediately due and payable. In addition, an event of default by Martin Resource Management Corporation under its credit facility could independently result in an event of default under our amended credit facility if it is deemed to have a material adverse effect on us.
If an event of default relating to bankruptcy or other insolvency events occurs with respect to us or any of our subsidiaries, all indebtedness under our amended credit facility will immediately become due and payable. If any other event of default exists under our amended credit facility, the lenders may terminate their commitments to lend us money, accelerate the maturity of the indebtedness outstanding under the amended credit facility and exercise other rights and remedies. In addition, if any event of default exists under our amended credit facility, the lenders may commence foreclosure or other actions against the collateral.
2028 Senior Secured Notes and Indenture
General
On February 8, 2023, the Issuers issued $400.0 million aggregate principal amount of their 11.50% senior secured second lien notes due 2028 (the "2028 Notes"). The 2028 Notes were issued under an indenture, dated as of February 8, 2023 (the "2028 Notes Indenture"), among the Issuers, the guarantors party thereto, and U.S. Bank Trust Company, National Association, as trustee and as collateral trustee.
The 2028 Notes are guaranteed on a full, joint and several basis by each of the Partnership’s domestic restricted subsidiaries (other than Martin Midstream Finance Corp.). The 2028 Notes will be guaranteed in the future by each of our domestic restricted subsidiaries, in each case, if and so long as such entity guarantees (or is an obligor with respect to) any other indebtedness for borrowed money of either the Issuers or any guarantor. The 2028 Notes and the guarantees thereof are secured on a second-priority basis by a lien on substantially all assets of the Issuers and the guarantors, subject to the terms of an intercreditor agreement (the “Intercreditor Agreement”) and certain exceptions.
The 2028 Notes and the guarantees thereof are, pursuant to the Intercreditor Agreement, secured by second-priority liens and thus are effectively junior to any obligations under our credit facility, which are secured on a "first-lien" basis, to the extent of the value of the collateral securing such first-lien and second-lien obligations. The 2028 Notes and the guarantees thereof rank effectively senior to all of the Issuers’ existing and future unsecured indebtedness to the extent of the value of the collateral securing the 2028 Notes and such guarantees.
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Maturity and Interest
The 2028 Notes will mature on February 15, 2028. Interest on the 2028 Notes accrues at a rate of 11.50% per annum and is payable semi-annually in cash in arrears on February 15 and August 15 of each year, commencing on August 15, 2023.
Redemption
At any time prior to August 15, 2025, the Issuers may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2028 Notes at a redemption price of 111.50% of the principal amount of the 2028 Notes redeemed, plus accrued and unpaid interest to the redemption date, with an amount not greater than the net cash proceeds of one or more equity offerings by the Partnership, so long as the redemption occurs within 180 days of completing such equity offering and 65% of the aggregate principal amount of the 2028 Notes remains outstanding immediately after such redemption. In addition, at any time prior to August 15, 2025, the Issuers may redeem all or a portion of the 2028 Notes at a redemption price equal to 100% of the principal amount of the 2028 Notes redeemed, plus an applicable make-whole premium and accrued and unpaid interest to the redemption date.
On and after August 15, 2025, the Issuers may redeem all or a portion of the 2028 Notes at redemption prices set forth in the 2028 Indenture, plus accrued and unpaid interest to the redemption date.
If a Change of Control (as defined in the 2028 Indenture) occurs, the Partnership must offer to repurchase the 2028 Notes at a price equal to 101% of the aggregate principal amount of the 2028 Notes, plus accrued and unpaid interest to the date of repurchase.
Certain Covenants and Events of Default
The terms of the 2028 Notes Indenture, among other things, limit the ability of the Partnership and certain of its subsidiaries to make distributions and other restricted payments, sell assets, make investments, create liens on assets, enter into sale and leaseback transactions, and consolidate, merge or transfer all or substantially all of its assets and the assets of its subsidiaries.
The 2028 Notes Indenture provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of other agreements in the Indenture; defaults in failure to pay certain other indebtedness; the failure to pay final judgments of certain amounts of money against the Partnership or certain of its subsidiaries; the failure of certain guarantees to be enforceable; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is not cured within the time periods specified, the trustee under the 2028 Notes Indenture or the holders of at least 25% in principal amount of the 2028 Notes may declare all the 2028 Notes to be due and payable immediately.
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.
At December 31, 2023, we had cash and cash equivalents of $0.05 million and available borrowing capacity of $123.3 million under our credit facility with $42.5 million of borrowings outstanding. After giving effect to our then current borrowings, letters of credit, and the financial covenants contained in our credit facility, we had the ability to borrow approximately $109.0 million in additional amounts thereunder as of December 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 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 this Form 10-K. In addition, due to the covenants in our credit facility, our financial and operating performance impacts the amount we are permitted to borrow under that facility.
The Partnership is in compliance with all debt covenants as of December 31, 2023 and expects 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 fertilizers and NGLs, which fluctuate in part based on spring and winter weather conditions. The demand for fertilizers is strongest during the early spring planting season. The demand for NGLs is strongest during the winter heating 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 in 2023, 2022 or 2021. Inflation may increase the cost to acquire or replace property, plant and equipment. It may also increase the costs of labor and supplies. In the future, increasing energy prices for products consumed by our operations, such as diesel fuel, natural gas, chemicals, and other supplies, could adversely affect our results of operations. An increase in price of these products would increase our operating expenses which could adversely affect net income. We cannot provide assurance that we will be able to pass along increased operating expenses to our customers.
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 2023, 2022 or 2021.
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