MMLP

Business Context and Reporting Period

Company: MARTIN MIDSTREAM PARTNERS L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A publicly traded limited partnership focused on the U.S. Gulf Coast region with four primary business lines: terminalling and storage, natural gas services, marine transportation, and sulfur services. The Partnership is closely affiliated with Martin Resource Management, which owns approximately 34.9% of the limited partnership interest and controls the general partner.

Key Financial Metrics

Note: Working capital is negative due to current liabilities ($235.5 million) exceeding current assets ($233.1 million).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 97% ($180.6 million) for the three months ended September 30, 2008, compared to the same period in 2007. This was driven primarily by higher commodity prices and increased volumes in the Natural Gas Services and Sulfur Services segments.
• Profitability: Net income increased 150% to $13.7 million for the quarter and 51% to $26.1 million for the nine-month period compared to 2007.
• Segment Performance:
  • Sulfur Services: Revenues surged 346% quarter-over-quarter due to a 312% increase in average sales prices.
  • Natural Gas Services: Revenues increased 56% quarter-over-quarter, driven by higher NGL and natural gas prices.
  • Marine Transportation: Revenues increased 28% due to fleet expansion and higher contract rates, partially offset by offshore vessel downtime.
• Debt Levels: Long-term debt increased from $225.0 million at December 31, 2007, to $280.0 million at September 30, 2008, reflecting borrowings to fund acquisitions and working capital.

Guidance, Outlook, Risks, and Unusual Items

• Hurricane Impact: The Partnership recognized an estimated loss of $1.6 million in the third quarter related to Hurricanes Gustav and Ike, covering deductibles for flood and wind damage. Insurance proceeds are expected to cover the remaining costs, potentially resulting in a gain if proceeds exceed the net book value of impaired assets.
• Internal Control Material Weakness: Management identified a material weakness in internal controls over financial reporting. An error was discovered regarding the failure to record the ineffective portion of certain commodity price swaps. This resulted in an additional $1.7 million in earnings for the third quarter. Procedures have been implemented to require quarterly consultation with a third-party derivatives specialist.
• Liquidity and Credit Markets: Management noted that current economic conditions, including fluctuating commodity prices and deteriorating credit markets, have created constraints on liquidity. While cash flow and the credit facility are expected to meet requirements, there is no assurance that additional financing can be secured on acceptable terms if needed.
• Legal Proceedings: The Partnership is cooperating with a U.S. Coast Guard investigation regarding a potential violation of the Act to Prevent Pollution from Ships. Additionally, there are ongoing lawsuits involving Martin Resource Management executives, though the Partnership is not a direct party to these suits.
• Related Party Transactions: The Partnership reimbursed Martin Resource Management for $16.8 million in direct costs and $0.7 million in indirect expenses for the quarter. Sales to Martin Resource Management accounted for approximately 6% of total revenues.

Investor Verification Checklist

• Derivative Accounting: Verify the accuracy of the $1.7 million adjustment related to the ineffective portion of commodity swaps and the effectiveness of the new internal controls implemented to prevent recurrence.
• Hurricane Recovery: Monitor the status of insurance claims related to Hurricanes Gustav and Ike to confirm the timing and amount of recoveries versus the $1.6 million recognized loss.
• Debt Covenants: Confirm continued compliance with credit facility covenants, specifically the EBITDA to interest expense ratio (minimum 3.0:1) and total funded debt to EBITDA ratio (maximum 4.75:1), given the increased debt load.
• Commodity Hedging: Review the extent of hedging (67% of natural gas and 68% of NGL volumes hedged for 2008) and the exposure to unhedged floating rate debt ($65 million) in the context of volatile energy prices.
• Related Party Dependence: Assess the impact of the omnibus agreement with Martin Resource Management, particularly the reimbursement of indirect expenses and the potential for cross-default if Martin Resource Management faces financial distress.