UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number

000-50056

MARTIN MIDSTREAM PARTNERS L.P.

(Exact name of registrant as specified in its charter)

Delaware		05-0527861
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

Kilgore, Texas 75662
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (903) 983-6200

          Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

          Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

          The number of the registrant’s Common Units outstanding at November 4, 2009 was 13,688,152. The number of the registrant’s subordinated units outstanding at November 4, 2009 was 850,674.

 

 

		Page
PART I — FINANCIAL INFORMATION			2
Item 1. Financial Statements			2
Consolidated and Condensed Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008 (audited)			2
Consolidated and Condensed Statements of Operations for the Three and Nine Months ended September 30, 2009 and 2008 (unaudited)			3
Consolidated and Condensed Statements of Capital for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)			4
Consolidated and Condensed Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)			5
Consolidated and Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008 (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures about Market Risk			61
Item 4. Controls and Procedures			63
PART II. OTHER INFORMATION			64
Item 1. Legal Proceedings			64
Item 1A. Risk Factors			64
Item 5. Other Information			65
Item 6. Exhibits			67
SIGNATURE
CERTIFICATIONS
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

MARTIN MIDSTREAM PARTNERS L.P.

		September 30,				December 31,
		2009				2008
		(Unaudited)				(Audited)
Assets
Cash		$	5,924			$	7,983
Accounts and other receivables, less allowance for doubtful accounts of $829 and $481, respectively			60,727				68,117
Product exchange receivables			8,136				6,924
Inventories			40,298				42,461
Due from affiliates			2,904				555
Fair value of derivatives			2,572				3,623
Other current assets			1,365				1,079
Total current assets			121,926				130,742
Property, plant and equipment, at cost			544,389				537,381
Accumulated depreciation			(146,906	)			(125,256	)
Property, plant and equipment, net			397,483				412,125
Goodwill			37,268				37,405
Investment in unconsolidated entities			80,603				79,843
Fair value of derivatives			240				1,469
Other assets, net			6,126				7,332
		$	643,646			$	668,916
Liabilities and Partners’ Capital
Trade and other accounts payable		$	62,352			$	87,382
Product exchange payables			19,086				10,924
Due to affiliates			13,178				13,420
Income taxes payable			—				414
Fair value of derivatives			8,031				6,478
Current portion of capital lease obligations			107				—
Other accrued liabilities			5,387				6,077
Total current liabilities			108,141				124,695
Long-term debt and capital leases, less current maturities			306,204				295,000
Deferred income taxes			8,608				8,538
Fair value of derivatives			931				4,302
Other long-term obligations			1,481				1,667
Total liabilities			425,365				434,202
Partners’ capital			221,346				239,649
Accumulated other comprehensive income (loss)			(3,065	)			(4,935	)
Total partners’ capital			218,281				234,714
Commitments and contingencies		$	643,646			$	668,916

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Terminalling and storage *		$	9,103			$	8,527			$	28,684			$	26,347
Marine transportation *			17,785				20,116				49,222				55,828
Product sales:*
Natural gas services			103,061				188,200				268,749				577,317
Sulfur services			15,100				133,276				61,029				289,528
Terminalling and storage			6,314				14,267				28,853				36,525
			124,475				335,743				358,631				903,370
Total revenues			151,363				364,386				436,537				985,545
Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services *			96,358				178,996				248,693				562,170
Sulfur services *			7,716				121,158				34,742				253,462
Terminalling and storage			5,535				11,031				25,558				31,222
			109,609				311,185				308,993				846,854
Expenses:
Operating expenses *			22,762				26,093				70,169				76,505
Selling, general and administrative *			4,088				3,726				12,354				10,672
Depreciation and amortization			8,741				7,979				25,657				22,933
Total costs and expenses			145,200				348,983				417,173				956,964
Other operating income			125				17				5,198				143
Operating income			6,288				15,420				24,562				28,724
Other income (expense):
Equity in earnings of unconsolidated entities			2,139				3,503				5,227				11,385
Interest expense			(4,058	)			(4,971	)			(12,910	)			(13,609	)
Other, net			68				87				139				334
Total other income (expense)			(1,851	)			(1,381	)			(7,544	)			(1,890	)
Net income before taxes			4,437				14,039				17,018				26,834
Income tax benefit (expense)			80				(292	)			294				(753	)
Net income		$	4,517			$	13,747			$	17,312			$	26,081
General partner’s interest in net income		$	800			$	941			$	2,475			$	2,257
Limited partners’ interest in net income		$	3,717			$	12,806			$	14,837			$	23,824
Net income per limited partner unit — basic and diluted		$	0.26			$	0.88			$	1.02			$	1.64
Weighted average limited partner units — basic			14,532,826				14,532,826				14,532,826				14,532,826
Weighted average limited partner units — diluted			14,538,231				14,534,972				14,536,792				14,535,025
See accompanying notes to consolidated and condensed financial statements.
*     Related Party Transactions Included Above
Revenues:
Terminalling and storage		$	4,363			$	5,142			$	13,134			$	13,374
Marine transportation			4,776				6,383				14,529				18,826
Product Sales			1,340				10,769				4,384				21,782
Costs and expenses:
Cost of products sold: (excluding depreciation and amortization)
Natural gas services			17,211				28,051				38,552				77,033
Sulfur services			2,756				3,203				9,106				9,919
Expenses:
Operating expenses			8,942				9,578				26,850				28,989
Selling, general and administrative			1,637				1,329				4,822				3,969

MARTIN MIDSTREAM PARTNERS L.P.

																						Accumulated
		Partners’ Capital																				Other
																		General				Comprehensive
		Common								Subordinated								Partner				Income
		Units				Amount				Units				Amount				Amount				Amount				Total
Balances — January 1, 2008			12,837,480			$	244,520				1,701,346			$	(6,022	)		$	4,112			$	(6,762	)		$	235,848
Net income			—				21,532				—				2,292				2,257				—				26,081
Cash distributions			—				(27,729	)			—				(3,675	)			(2,448	)			—				(33,852	)
Unit-based compensation			—				57				—				—				—				—				57
Purchase of treasury units			—				(93	)			—				—				—				—				(93	)
Adjustment in fair value of derivatives			—				—				—				—				—				(1,733	)			(1,733	)
Balances — September 30, 2008			12,837,480			$	238,287				1,701,346			$	(7,405	)		$	3,921			$	(8,495	)		$	226,308
Balances — January 1, 2009			13,688,152			$	239,333				850,674			$	(3,688	)		$	4,004			$	(4,935	)		$	234,714
Net income			—				13,969				—				868				2,475				—				17,312
Cash distributions			—				(30,799	)			—				(1,914	)			(2,884	)			—				(35,597	)
Unit-based compensation			—				59				—				—				—				—				59
Purchase of treasury units			—				(77	)			—				—				—				—				(77	)
Adjustment in fair value of derivatives			—				—				—				—				—				1,870				1,870
Balances — September 30, 2009			13,688,152			$	222,485				850,674			$	(4,734	)		$	3,595			$	(3,065	)		$	218,281

          See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	4,517			$	13,747			$	17,312			$	26,081
Changes in fair values of commodity cash flow hedges			115				6,834				103				(1,654	)
Cash flow hedging gains (losses) reclassified to earnings			(733	)			1,097				(2,078	)			473
Changes in fair value of interest rate cash flow hedges			(774	)			(124	)			(1,714	)			(552	)
Interest rate cash flow hedging gains reclassified to earnings			1,860				—				5,559				—
Comprehensive income		$	4,985			$	21,554			$	19,182			$	24,348

          See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities:
Net income		$	17,312			$	26,081
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			25,657				22,933
Amortization of deferred debt issuance costs			842				840
Deferred taxes			70				(222	)
Gain on sale of property, plant and equipment			(5,198	)			(143	)
Equity in earnings of unconsolidated entities			(5,227	)			(11,385	)
Distributions from unconsolidated entities			650				—
Distributions in-kind from equity investments			3,990				8,392
Non-cash mark-to-market on derivatives			2,332				(1,499	)
Other			59				57
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables			7,359				(17,295	)
Product exchange receivables			(1,212	)			(21,411	)
Inventories			2,163				(26,204	)
Due from affiliates			1,707				(5,604	)
Other current assets			(286	)			(1,548	)
Trade and other accounts payable			(25,362	)			54,306
Product exchange payables			8,162				22,744
Due to affiliates			9,202				9,957
Income taxes payable			(414	)			(204	)
Other accrued liabilities			(1,097	)			959
Change in other non-current assets and liabilities			(497	)			(111	)
Net cash provided by operating activities			40,212				60,643
Cash flows from investing activities:
Payments for property, plant and equipment			(31,684	)			(72,185	)
Acquisitions, net of cash acquired			—				(5,983	)
Proceeds from sale of property, plant and equipment			21,713				419
Return of investments from unconsolidated entities			660				995
Distributions from (contributions to) unconsolidated entities for operations			(833	)			(1,999	)
Net cash used in investing activities			(10,144	)			(78,753	)
Cash flows from financing activities:
Payments of long-term debt and capital lease obligations			(84,953	)			(180,391	)
Proceeds from long-term debt			88,500				235,370
Purchase of treasury units			(77	)			(93	)
Payments of debt issuance costs			—				(18	)
Cash distributions paid			(35,597	)			(33,852	)
Net cash provided by (used in) financing activities			(32,127	)			21,016
Net increase (decrease) in cash			(2,059	)			2,906
Cash at beginning of period			7,983				4,113
Cash at end of period		$	5,924			$	7,019

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

(1) General

          Martin Midstream Partners L.P. (the “Partnership”) is a publicly traded limited partnership with a diverse set of operations focused primarily in the United States Gulf Coast region. Its four primary business lines include: terminalling and storage services for petroleum products and by-products, natural gas services, marine transportation services for petroleum products and by-products, and sulfur and sulfur based products processing, manufacturing, marketing and distribution.

          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 for interim financial reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by generally accepted accounting principles 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 results of operations, financial position 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, 2008 filed with the Securities and Exchange Commission (the “SEC”) on March 4, 2009.

          (a) Use of Estimates

          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 financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates.

          (b) Unit Grants

          The Partnership issued 1,000 restricted common units to each of its three independent, non-employee directors under its long-term incentive plan in August 2009 from treasury units purchased by the Partnership in the open market for $77. These units vest in 25% increments beginning in January 2010 and will be fully vested in January 2013. The Partnership’s general partner did not make a contribution attributable to the restricted units issued to its three independent, non-employee directors in August 2009, as such units were purchased in the open market by the Partnership.

          The Partnership issued 1,000 restricted common units to each of its three independent, non-employee directors under its long-term incentive plan in May 2008 from treasury units purchased by the Partnership in the open market for $93. These units vest in 25% increments beginning in January 2009 and will be fully vested in January 2012. The Partnership’s general partner did not make a contribution attributable to the restricted units issued to its three independent, non-employee directors in May 2008, as such units were purchased in the open market by the Partnership.

          The Partnership issued 1,000 restricted common units to each of its three independent, non-employee directors under its long-term incentive plan in May 2007. These units vest in 25% increments beginning in January 2008 and will be fully vested in January 2011. The Partnership’s general partner contributed cash of $3 in May 2007 to the Partnership in conjunction with the issuance of these restricted units in order to maintain its 2% general partner interest in the Partnership.

          The Partnership issued 1,000 restricted common units to each of its three independent, non-employee directors under its long-term incentive plan in January 2006. These units vest in 25% increments on the anniversary of the grant date each year and will be fully vested in January 2010. The Partnership’s

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

general partner contributed cash of $2 in January 2006 to the Partnership in conjunction with the issuance of these restricted units in order to maintain its 2% general partner interest in the Partnership.

          The Partnership accounts for the transactions under certain provisions of FASB ASC 505-50-55 related to equity-based payments to non-employees. The cost resulting from the share-based payment transactions was $28 and $28 for the three months ended September 30, 2009 and 2008, respectively, and $59 and $58 for the nine months ended September 30, 2009 and 2008, respectively.

          (c) Incentive Distribution Rights

          The Partnership’s general partner, Martin Midstream GP LLC, holds a 2% general partner interest and certain incentive distribution rights (“IDRs”) in the Partnership. IDRs are a separate class of non-voting limited partner interest that may be transferred or sold by the general partner under the terms of the partnership agreement, and represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution and any cumulative arrearages on common units once certain target distribution levels have been achieved. The Partnership is required to distribute all of its available cash from operating surplus, as defined in the partnership agreement. The target distribution levels entitle the general partner to receive 2% of quarterly cash distributions up to $0.55 per unit, 15% of quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, 25% of quarterly cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit, and 50% of quarterly cash distributions in excess of $0.75 per unit. For the three months ended September 30, 2009 and 2008 the general partner received $724 and $680, respectively, in incentive distributions. For the nine months ended September 30, 2009 and 2008 the general partner received $2,172 and $1,771, respectively, in incentive distributions.

          (d) Net Income per Unit

          In March 2008, the FASB amended the provisions of 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. To the extent the partnership agreement does not explicitly limit distributions to the general partner, any earnings in excess of distributions are to be allocated to the general partner and limited partners utilizing the distribution formula for available cash specified in 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 losses specified in the partnership agreement. ASC 260-10 is to be applied retrospectively for all financial statements presented and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.

          The Partnership adopted the amended provisions of ASC 260-10 on January 1, 2009. Adoption did not impact the Partnership’s computation of earnings per limited partner unit as cash distributions exceeded earnings for the three and nine months ended September 30, 2009 and 2008, and the IDRs do not share in losses under the partnership agreement. In the event the Partnership’s earnings exceed cash distributions, ASC 260-10 will have an impact on the computation of the Partnership’s earnings per limited partner unit. The Partnership agreement does not explicitly limit distributions to the general partner; therefore, any earnings in excess of distributions are to be allocated to the general partner and limited partners utilizing the distribution formula for available cash specified in the Partnership agreement. For the three and nine months ended September 30, 2009 and 2008, the general partner’s interest in net income, including the IDRs, represents distributions declared after period end on behalf of the general partner interest and IDRs less the allocated excess of distributions over earnings for the periods.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

          The following table reconciles net income to limited partners’ interest in net income:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	4,517			$	13,747			$	17,312			$	26,081
Less:
Distributions payable on behalf of IDRs			(724	)			(680	)			(2,172	)			(1,771	)
Distributions payable on behalf of general partner interest			(237	)			(233	)			(712	)			(677	)
Distributions payable to the general partner interest in excess of earnings allocable to the general partner interest			161				(28	)			409				191
Limited partners’ interest in net income		$	3,717			$	12,806			$	14,837			$	23,824

          The weighted average units outstanding for basic net income per unit was 14,532,826 for both the three and nine months ended September 30, 2009 and 2008. For diluted net income per unit, the weighted average units outstanding were increased by 5,405 and 2,146 for the three months ended September 30, 2009 and 2008, respectively, and 3,966 and 2,199 for the nine months ended September 30, 2009 and 2008, respectively, due to the dilutive effect of restricted units granted under the Partnership’s long-term incentive plan.

          (e) Income taxes

          With respect to the Partnership’s taxable subsidiary (Woodlawn Pipeline Co., Inc.), income taxes are accounted for under the asset and liability method. 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.

(2) New Accounting Pronouncements

          In June 2009, the “Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (the “Codification”), which authorized the Codification as the sole source for authoritative U.S. GAAP. Following the Codification, FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification. The Partnership adopted the Codification for the quarter ended September 30, 2009.

          In May 2009, the FASB amended the provisions of ASC 855 related to subsequent events, to be effective for interim or annual financial periods ending after June 15, 2009. ASC 855 does not materially change the existing guidance but introduces the concept of financial statements being “available to be issued.” It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. ASC 855 became effective for the Partnership on April 1, 2009, and the adoption did not have an impact on its financial statements. The Partnership has evaluated subsequent events through November 4, 2009, which is the date of the filing of its quarterly report on Form 10-Q. (See Note 16 for more information regarding subsequent events).

          In April 2009, the FASB amended the provisions of ASC 820-10-65-4 related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly, which provides additional guidance for estimating fair value in accordance with ASC 820 related to fair value measurements, when the volume and level of activity for the asset or liability have significantly decreased. This pronouncement also includes guidance on identifying circumstances that indicate a transaction is not orderly. The Partnership adopted this pronouncement on

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

April 1, 2009. The adoption did not have a material effect on the Partnership’s financial position or results of operations.

          In April 2009, FASB amended the provisions of ASC 825-10-65 related to interim disclosures about fair value of financial instruments, which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements for interim reporting periods ending after June 15, 2009. The Company adopted certain provisions of ASC 825-10-65 effective April 1, 2009.

          In April 2009, the FASB amended the provisions of ASC 805-10, 805-20 and 805-30 related to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies, to amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under ASC. Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. The Partnership adopted this guidance on January 1, 2009. As the provisions of this guidance are applied prospectively to business combinations with an acquisition date on or after the guidance became effective, the impact to the Partnership cannot be determined until the transactions occur. No such transactions have occurred during 2009.

          In March 2008, the FASB amended the provisions of 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. ASC 260-10 is to be applied retrospectively for all financial statements presented and is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Partnership adopted this guidance on January 1, 2009. See Note 1(d) for more information.

          In March 2008, FASB amended the provisions of ASC 815-10-65 related to disclosures about derivative instruments and hedging activities, which requires enhanced disclosures concerning (1) the manner in which an entity uses derivatives (and the reasons it uses them), (2) the manner in which derivatives and related hedged items are accounted for and (3) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance and cash flows. ASC 815-10-65 is effective for financial statements issued for fiscal years and interim periods beginning on or after November 15, 2008. The Partnership adopted this guidance on January 1, 2009, and the adoption did not have a material impact on the Partnership’s financial position or results of operations.

          In December 2007, the FASB amended the provisions of ASC 810-10-65 related to noncontrolling interests in consolidated financial statements, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810-10-65 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC 810-10-65 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. The amendments to ASC 810-10-65 were effective for the Partnership on January 1, 2009. The adoption of certain provisions of ASC 810-10-65 had no impact on the Partnership’s consolidated financial statements. However, it could impact accounting for future transactions.

          In December 2007, FASB amended the provisions of ASC 805-10-65 related to business combinations, which establishes principles and requirements for how an acquiror in a business combination (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase price and (3) determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10-65 applies prospectively to business combinations for which the

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Partnership adopted certain provisions of ASC 805-10-65 on January 1, 2009. The application of ASC 805-10-65 will cause management to evaluate future transactions under different conditions than previously completed significant acquisitions, particularly related to the near-term and long-term economic impact of expensing transaction costs. No such transactions have occurred during 2009.

          In September 2006, the FASB amended the provisions of ASC Topic 820 related to fair value measurements and disclosures, which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. ASC 820 does not require any new fair value measurements. The Partnership adopted ASC 820 as of January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities, which was delayed to fiscal years beginning after November 15, 2008, which the Partnership therefore adopted as of January 1, 2009. As of September 30, 2009, the Partnership does not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities. See Note 7 — Fair Value Measurements for further information.

          Accounting Standards Not Yet Adopted

          In August 2009, the FASB issued Accounting Standards Update 2009-05, “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value” (“Update 2009-05”). Update 2009-05 provides clarification regarding valuation techniques when a quoted price in an active market for an identical liability is not available in addition to treatment of the existence of restrictions that prevent the transfer of a liability. Update 2009-05 also clarifies that both a quoted price in an active market for an identical liability at the measurement date and the quoted price for an identical liability when traded as an asset in an active market (when no adjustments to the quoted price of the asset are required) are Level 1 fair value measurements. This update is effective for the first reporting period, including interim periods, beginning after August 27, 2009. The Partnership is currently assessing the impact Update 2009-05 will have on its financial statements.

          In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). As of September 30, 2009, SFAS 167 has not been incorporated within the FASB ASC. SFAS 167 amends previous accounting related to the Consolidation of Variable Interest Entities to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, SFAS 167 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. The Partnership is currently assessing the impact SFAS 167 will have on its financial statements.

(3) Acquisitions

          Stanolind Assets — In January 2008, the Partnership acquired 7.8 acres of land, a deep water dock and two sulfuric acid tanks at its Stanolind terminal in Beaumont, Texas from Martin Resource Management for $5,983 which was allocated to property, plant and equipment. Martin Resource Management entered into a lease agreement with the Partnership for use of the sulfuric acid tanks. In connection with the acquisition, the Partnership borrowed approximately $6,000 under its credit facility.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

(4) Inventories

          Components of inventories at September 30, 2009 and December 31, 2008 were as follows:

		September 30,				December 31,
		2009				2008
Natural gas liquids		$	22,014			$	10,530
Sulfur			249				6,522
Sulfur based products			10,573				14,879
Lubricants			4,875				8,110
Other			2,587				2,420
		$	40,298			$	42,461

(5) Investments in Unconsolidated Entities and Joint Ventures

          The Partnership’s Prism Gas Systems I, L.P. (“Prism Gas”) subsidiary owns an unconsolidated 50% interest in Waskom Gas Processing Company (“Waskom”), the Matagorda Offshore Gathering System (“Matagorda”) and Panther Interstate Pipeline Energy LLC (“PIPE”). As a result, these assets are accounted for by the equity method.

          On June 30, 2006, the Partnership’s Prism Gas subsidiary, acquired a 20% ownership interest in a partnership which owns the lease rights to the assets of the Bosque County Pipeline (“BCP”). The lease contract terminated in June 2009, and, as such, the investment was fully amortized as of June 30, 2009.

          In accounting for the acquisition of the interests in Waskom, Matagorda and PIPE, the carrying amount of these investments exceeded the underlying net assets by approximately $46,176. The difference was attributable to property and equipment of $11,872 and equity method goodwill of $34,304. The excess investment relating to property and equipment is being amortized over an average life of 20 years, which approximates the useful life of the underlying assets. Such amortization amounted to $148 for both the three months ended September 30, 2009 and 2008, respectively and $444 for both the nine months ended September 30, 2009 and 2008, respectively, and has been recorded as a reduction of equity in earnings of unconsolidated entities. The remaining unamortized excess investment relating to property and equipment was $9,646 and $10,092 at September 30, 2009 and December 31, 2008, respectively. The equity-method goodwill is not amortized; however, it is analyzed for impairment annually or if changes in circumstance indicate that a potential impairment exists. No impairment was recognized for the nine months ended September 30, 2009 or 2008.

          As a partner in Waskom, the Partnership receives distributions in kind of natural gas liquids (“NGLs”) that are retained according to Waskom’s contracts with certain producers. The NGLs are valued at prevailing market prices. In addition, cash distributions are received and cash contributions are made to fund operating and capital requirements of Waskom.

          Activity related to these investment accounts for the nine months ended September 30, 2009 and 2008 is as follows:

		Waskom				PIPE				Matagorda				BCP				Total
Investment in unconsolidated entities, December 31, 2008		$	74,978			$	1,214			$	3,559			$	92			$	79,843
Distributions in kind			(3,990	)			—				—				—				(3,990	)
Distributions from unconsolidated entities			(650	)			—				—				—				(650	)
Contributions to unconsolidated entities:
Cash contributions			—				90				—				—				90
Contributions to unconsolidated entities for operations			743				—				—				—				743
Return of investments			—				(395	)			(265	)			—				(660	)
Equity in earnings:
Equity in earnings (losses) from operations			5,071				573				119				(92	)			5,671
Amortization of excess investment			(412	)			(11	)			(21	)			—				(444	)
Investment in unconsolidated entities, September 30, 2009		$	75,740			$	1,471			$	3,392			$	-—			$	80,603

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

		Waskom				PIPE				Matagorda				BCP				Total
Investment in unconsolidated entities, December 31, 2007		$	70,237			$	1,582			$	3,693			$	178			$	75,690
Distributions in kind			(8,392	)			—				—				—				(8,392	)
Contributions to (distributions from) unconsolidated entities:
Cash contributions			1,250				—				—				80				1,330
Contributions to (distributions from) unconsolidated entities for operations			669				—				—				—				669
Return of investments			(300	)			(180	)			(515	)			—				(995	)
Equity in earnings:
Equity in earnings from operations			11,451				17				485				(124	)			11,829
Amortization of excess investment			(412	)			(11	)			(21	)			—				(444	)
Investment in unconsolidated entities, September 30, 2008		$	74,503			$	1,408			$	3,642			$	134			$	79,687

          Select financial information for significant unconsolidated equity method investees is as follows:

										Three Months Ended								Nine Months Ended
		As of September 30								September 30								September 30
		Total				Partners’								Net								Net
		Assets				Capital				Revenues				Income				Revenues				Income
2009
Waskom		$	83,280			$	70,079			$	21,027			$	4,158			$	48,645			$	10,142

		As of December 31
2008
Waskom		$	78,661			$	67,730			$	34,113			$	7,154			$	96,653			$	22,902

          As of September 30, 2009 and December 31, 2008 the amount of the Partnership’s consolidated retained earnings that represents undistributed earnings related to the unconsolidated equity method investees is $31,127 and $27,208, respectively. There are no material restrictions to transfer funds in the form of dividends, loans or advances related to the equity method investees.

          As of September 30, 2009 and December 31, 2008, the Partnership’s interest in cash of the unconsolidated equity method investees was $880 and $1,956, respectively.

(6) Derivative Instruments and Hedging Activities

          The Partnership’s results of operations are materially impacted by changes in crude oil, natural gas and natural gas liquids prices and interest rates. In an effort to manage our exposure to these risks, we periodically enter into various derivative instruments, including commodity and interest rate hedges. We are required to recognize all derivative instruments as either assets or liabilities at fair value on our Consolidated Balance Sheets and to recognize certain changes in the fair value of derivative instruments on our Consolidated Statements of Operations.

          The Partnership performs, at least quarterly, a retrospective assessment of the effectiveness of our hedge contracts, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. As a result of our effectiveness assessment at September 30, 2009, we believe certain hedge contracts will continue to be effective in offsetting changes in cash flow or fair value attributable to the hedged risk.

          All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. If a derivative qualifies for hedge accounting, changes in the fair value can be offset against the change in the fair value of the hedged item through earnings or recognized in accumulated other comprehensive income (“AOCI”) until such time as the hedged item is recognized in earnings. The Partnership is exposed to the risk that periodic changes in the fair value of derivatives qualifying for hedge accounting will not be effective, as defined, or that derivatives will no longer qualify for hedge accounting. To the extent that the periodic changes in the fair value of the derivatives are not effective, that ineffectiveness is recorded to earnings. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last period is recorded to earnings; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

transaction occurs, then would be reclassified to earnings or if it is determined that continued reporting of losses in AOCI would lead to recognizing a net loss on the combination of the hedging instrument and the hedge transaction in future periods, then the losses would be immediately reclassified to earnings.

          For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in earnings.

          In March 2008, the FASB amended the provisions of ASC Topic 820 related to fair value measurements and disclosures, which changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Partnership adopted this guidance on January 1, 2009.

          Commodity Derivative Instruments

          The Partnership is exposed to market risks associated with commodity prices and uses derivatives to manage the risk of commodity price fluctuation. The Partnership has established a hedging policy and monitors and manages the commodity market risk associated with its commodity risk exposure. The Partnership has entered into hedging transactions through 2010 to protect a portion of its commodity exposure. These hedging arrangements are in the form of swaps for crude oil, natural gas, and natural gasoline. In addition, the Partnership is focused on utilizing counterparties for these transactions whose financial condition is appropriate for the credit risk involved in each specific transaction.

          Due to the volatility in commodity markets, the Partnership is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which is determined on a derivative by derivative basis. This may result, and has resulted in increased volatility in the Partnership’s financial results. Factors that have and may continue to lead to ineffectiveness and unrealized gains and losses on derivative contracts include: a substantial fluctuation in energy prices, the number of derivatives the Partnership holds, and significant weather events that have affected energy production. The number of instances in which the Partnership has discontinued hedge accounting for specific hedges is primarily due to those reasons. However, even though these derivatives may not qualify for hedge accounting, the Partnership continues to hold the instruments as it believes they continue to afford the Partnership opportunities to manage commodity risk exposure.

          As of September 30, 2009 and 2008, the Partnership has both derivative instruments qualifying for hedge accounting with fair value changes being recorded in AOCI as a component of partners’ capital and derivative instruments not designated as hedges being marked to market with all market value adjustments being recorded in earnings.

          Set forth below is the summarized notional amount and terms of all instruments held for price risk management purposes at September 30, 2009 (all gas quantities are expressed in British Thermal Units, crude oil and natural gas liquids are expressed in barrels). As of September 30, 2009, the remaining term of the contracts extend no later than December 2010, with no single contract longer than one year. For the three and nine months ended September 30, 2009, changes in the fair value of the Partnership’s derivative contracts were recorded in both earnings and in AOCI as a component of partners’ capital.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

		Total
		Volume				Remaining Terms
Transaction Type		Per Month		Pricing Terms		of Contracts
Mark to Market Derivatives::
Crude Oil Swap		3,000 BBL		Fixed price of $69.08 settled against WTI NYMEX average monthly closings		October 2009 to December 2009		$	(8	)
Crude Oil Swap		3,000 BBL		Fixed price of $70.90 settled against WTI NYMEX average monthly closings		October 2009 to December 2009			9
Crude Oil Swap		1,000 BBL		Fixed price of $70.45 settled against WTI NYMEX average monthly closings		October 2009 to December 2009			2
Crude Oil Swap		3,000 BBL		Fixed price of $72.25 settled against WTI NYMEX average monthly closings		January 2010 to December 2010			(54	)
Crude Oil Swap		2,000 BBL		Fixed price of $69.15 settled against WTI NYMEX average monthly closings		January 2010 to December 2010			(106	)
Crude Oil Swap		1,000 BBL		Fixed price of $104.80 settled against WTI NYMEX average monthly closings		January 2010 to December 2010			370
Total swaps not designated as cash flow hedges								$	213
Cash Flow Hedges:
Natural Gas swap		30,000 MMBTU		Fixed price of $9.025 settled against Inside Ferc Columbia Gulf daily average		October 2009 to December 2009		$	389
Natural Gasoline Swap		2,000 BBL		Fixed price of $86.42 settled against Mt. Belvieu Non-TET natural gasoline average monthly postings.		October 2009 to December 2009			160
Natural Gasoline Swap		1,000 BBL		Fixed price of $94.14 settled against Mt. Belvieu Non-TET natural gasoline average monthly postings		January 2010 to December 2010			379
Total swaps designated as cash flow hedges								$	928
Total net fair value of commodity derivatives								$	1,141

          Based on estimated volumes, as of September 30, 2009, the Partnership had hedged approximately 56% and 27% of its commodity risk by volume for 2009 and 2010, respectively. The Partnership anticipates entering into additional commodity derivatives on an ongoing basis to manage its risks associated with these market fluctuations, and will consider using various commodity derivatives, including forward contracts, swaps, collars, futures and options, although there is no assurance that the Partnership will be able to do so or that the terms thereof will be similar to the Partnership’s existing hedging arrangements.

          The Partnership’s credit exposure related to commodity cash flow hedges is represented by the positive fair value of contracts to the Partnership at September 30, 2009. These outstanding contracts expose the Partnership to credit loss in the event of nonperformance by the counterparties to the agreements. The Partnership has incurred no losses associated with counterparty nonperformance on derivative contracts.

          On all transactions where the Partnership is exposed to counterparty risk, the Partnership analyzes the counterparty’s financial condition prior to entering into an agreement, has established a maximum credit limit threshold pursuant to its hedging policy, and monitors the appropriateness of these limits on an ongoing basis. The Partnership has agreements with three counterparties containing collateral provisions. Based on

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

those current agreements, cash deposits are required to be posted whenever the net fair value of derivatives associated with the individual counterparty exceed a specific threshold. If this threshold is exceeded, cash is posted by the Partnership if the value of derivatives is a liability to the Partnership. As of September 30, 2009 the Partnership has no cash collateral deposits posted with counterparties.

          The Partnership’s principal customers with respect to Prism Gas’ natural gas gathering and processing are large, natural gas marketing services, oil and gas producers and industrial end-users. In addition, substantially all of the Partnership’s natural gas and NGL sales are made at market-based prices. The Partnership’s standard gas and NGL sales contracts contain adequate assurance provisions which allows for the suspension of deliveries, cancellation of agreements or discontinuance of deliveries to the buyer unless the buyer provides security for payment in a form satisfactory to the Partnership.

Impact of Commodity Cash Flow Hedges

          Crude Oil

          For the three months ended September 30, 2009 and 2008, gains on swap hedge contracts increased crude revenue by $145 and $4,079, respectively. For the nine months ended September 30, 2009 and 2008, losses on swap hedge contracts decreased crude revenue by $541 and $1,958, respectively. As of September 30, 2009 an unrealized derivative fair value gain of $811 related to current and terminated cash flow hedges of crude oil price risk was recorded in AOCI. Fair value gains of $40, $148 and $623 are expected to be reclassified into earnings in 2009, 2010 and 2011, respectively. The actual reclassification to earnings for contracts remaining in effect will be based on mark-to-market prices at the contract settlement date or for those terminated contracts based on the recorded values at September 30, 2009 adjusted for any impairment, along with the realization of the gain or loss on the related physical volume, which is not reflected above.

          Natural Gas

          For the three months ended September 30, 2009 and 2008, gains on swap hedge contracts increased gas revenue by $511 and $811, respectively. For the nine months ended September 30, 2009 and 2008, net gains and losses on swap hedge contracts increased gas revenue by $1,383 and decreased gas revenue by $515, respectively. As of September 30, 2009 an unrealized derivative fair value gain of $389 related to cash flow hedges of natural gas was recorded in AOCI. This fair value gain is expected to be reclassified into earnings in 2009. The actual reclassification to earnings will be based on mark-to-market prices at the contract settlement date, along with the realization of the gain or loss on the related physical volume, which is not reflected above.

          Natural Gas Liquids

          For the three months ended September 30, 2009 and 2008, net gains and losses on swap hedge contracts increased liquids revenue by $232 and decreased liquids revenue by $81, respectively. For the nine months ended September 30, 2009 and 2008, net gains and losses on swap hedge contracts increased liquids revenue by $36 and decreased liquids revenue by $827, respectively. As of September 30, 2009, an unrealized derivative fair value gain of $1,369 related to current and terminated cash flow hedges of natural gas liquids price risk was recorded in AOCI. Fair value gains of $160, $317 and $892 are expected to be reclassified into earnings in 2009, 2010 and 2011, respectively. The actual reclassification to earnings for contracts remaining in effect will be based on mark-to-market prices at the contract settlement date or for those terminated contracts based on the recorded values at September 30, 2009 adjusted for any impairment, along with the realization of the gain or loss on the related physical volume, which is not reflected above.

          For information regarding fair value amounts and gains and losses on commodity derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

Interest Rate Derivative Instruments

          The Partnership is exposed to market risks associated with interest rates. The Partnership enters into interest rate swaps to manage interest rate risk associated with the Partnership’s variable rate debt and term loan credit facilities. All derivatives and hedging instruments are included on the balance sheet as an asset or a liability measured at fair value and changes in fair value are recognized currently in earnings unless specific hedge accounting criteria are met. If a derivative qualifies for hedge accounting, changes in the fair value can be offset against the change in the fair value of the hedged item through earnings or recognized in accumulated other comprehensive income (“AOCI”) until such time as the hedged item is recognized in earnings.

          The Partnership has entered into several cash flow hedge agreements with an aggregate notional amount of $205,000 to hedge its exposure to increases in the benchmark interest rate underlying its variable rate revolving and term loan credit facilities.

          The Partnership designated the following swap agreements as cash flow hedges. Under these swap agreements, the Partnership pays a fixed rate of interest and receives a floating rate based on a one-month or three-month U.S. Dollar LIBOR rate to match the floating rates of the bank facility at which the Partnership periodically elects to borrow. Because these swaps are designated as a cash flow hedge, the changes in fair value, to the extent the swap is effective, are recognized in other comprehensive income until the hedged interest costs are recognized in earnings. At the inception of these hedges, these swaps were identical to the hypothetical swap as of the trade date, and will continue to be identical as long as the accrual periods and rate resetting dates for the debt and these swaps remain equal. This condition results in a 100% effective swap for the following hedges:

						Paying				Receiving
Date of Hedge		Notional Amount				Fixed Rate				Floating Rate		Maturity Date
April 2009		$	40,000				1.000	%		1 Month LIBOR		October 2010
April 2009		$	25,000				0.720	%		1 Month LIBOR		January 2010
March 2009		$	25,000				1.290	%		1 Month LIBOR		September 2010
March 2009		$	40,000				0.970	%		1 Month LIBOR		December 2009
February 2009		$	75,000				1.295	%		1 Month LIBOR		November 2010
The following interest rate swaps have been de-designated as cash flow hedges by the Partnership:
						Paying				Receiving
Date of Hedge		Notional Amount				Fixed Rate				Floating Rate		Maturity Date
September 2007		$	25,000				4.605	%		3 Month LIBOR		September 2010
November 2006		$	40,000				4.820	%		3 Month LIBOR		December 2009
March 2006		$	75,000				5.250	%		3 Month LIBOR		November 2010
October 2008		$	40,000				2.820	%		3 Month LIBOR		October 2010
January 2008		$	25,000				3.400	%		3 Month LIBOR		January 2010
The following interest rate swaps have not been designated as cash flow hedges by the Partnership:
						Paying				Receiving
Date of Hedge		Notional Amount				Fixed Rate				Floating Rate		Maturity Date
November 2006		$	30,000				4.765	%		3 Month LIBOR		March 2010
						Receiving				Paying
Date of Hedge		Notional Amount				Fixed Rate				Floating Rate		Maturity Date
April 2009		$	25,000				1.070	%		3 Month LIBOR		January 2010
April 2009		$	40,000				1.240	%		3 Month LIBOR		October 2010
March 2009		$	40,000				1.420	%		3 Month LIBOR		December 2009
March 2009		$	25,000				1.590	%		1 Month LIBOR		September 2010
February 2009		$	75,000				1.445	%		1 Month LIBOR		November 2010

          These swaps have been recorded at fair value with an offset to current earnings.

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

          The Partnership recognized increases in interest expense of $1,959 and $5,559 for the three and nine months ended September 30, 2009, respectively, related to the difference between the fixed rate and the floating rate of interest on the interest rate swap and net cash settlement of interest rate hedges.

          The Partnership recognized increases in interest expense of $916 and $1,882 for the three and nine months ended September 30, 2008, respectively, related to the difference between the fixed rate and the floating rate of interest on the interest rate swap and net cash settlement of interest rate hedges.

          The net effective fixed rate for the Partnership’s hedged portion of long-term debt is 4.20% as of September 30, 2009. See Note 10 for more information on the Partnership’s long-term debt and related interest rates.

          For information regarding fair value amounts and gains and losses on interest rate derivative instruments and related hedged items, see “Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items” within this Note.

Tabular Presentation of Fair Value Amounts, and Gains and Losses on Derivative Instruments and Related Hedged Items

          The following table summarizes the fair values and classification of our derivative instruments in our Condensed and Consolidated Balance Sheet:

		Fair Values of Derivative Instruments in the Consolidated Balance Sheet
		Derivative Assets												Derivative Liabilities
						Fair Values												Fair Values
						September 30,				December 31,								September 30,				December 31,
		Balance Sheet Location				2009				2008				Balance Sheet Location				2009				2008
Derivatives designated as hedging instruments:		Current:												Current:
Interest rate contracts		Fair value of derivatives				$	—			$	—			Fair value of derivatives				$	1,104			$	5,427
Commodity contracts		Fair value of derivatives					838				2,430			Fair value of derivatives					—				—
							838				2,430								1,104				5,427
		Non-current:												Non-current:
Interest rate contracts		Fair value of derivatives					6				—			Fair value of derivatives					—				4,050
Commodity contracts		Fair value of derivatives					90				716			Fair value of derivatives					—				—
							96				716								—				4,050
Total derivatives designated as hedging instruments						$	934			$	3,146							$	1,104			$	9,477
Derivatives not designated as hedging instruments:		Current:												Current:
Interest rate contracts		Fair value of derivatives				$	1,441			$	—			Fair value of derivatives				$	6,824			$	1,051
Commodity contracts		Fair value of derivatives					293				1,193			Fair value of derivatives					103				—
							1,734				1,193								6,927				1,051

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2009
(Unaudited)

		Derivative Assets												Derivative Liabilities
						Fair Values												Fair Values
						September 30,				December 31,								September				December 31,
		Balance Sheet Location				2009				2008				Balance Sheet Location				30, 2009				2008
		Non-current:												Non-current:
Interest rate contracts		Fair value of derivatives					57				—			Fair value of derivatives					867				252
Commodity contracts		Fair value of derivatives					87				753			Fair value of derivatives					64				—
							144				753								931				252
Total derivatives not designated as hedging instruments						$	1,878			$	1,946							$	7,858			$	1,303

Effect of Derivative Instruments on the Consolidated Statement of Operations
For the Three Months Ended September 30, 2009 and 2008

																						Ineffective Portion and Amount
		Effective Portion																				Excluded from Effectiveness Testing
										Location of Gain				Amount of Gain or								Location of				Amount of Gain or
		Amount of Gain or								or (Loss)				(Loss) Reclassified								Gain or (Loss)				(Loss) Recognized
		(Loss) Recognized in								Reclassified from				from Accumulated								Recognized in				in Income on
		OCI on Derivatives								Accumulated OCI				OCI into Income								Income on				Derivatives
		2009				2008				into Income				2009				2008				Derivatives				2009				2008
Derivatives designated as hedging instruments
Interest rate contracts		$	(774	)		$	(124	)		Interest Expense				$	(1,860	)		$	—			Interest Expense				$	—			$	—
Commodity contracts			115				6,834			Natural Gas Services Revenues					733				(3,188	)		Natural Gas Services Revenues					—				2,091
Total derivatives designated as hedging instruments		$	(659	)		$	6,710							$	(1,127	)		$	3,188							$	—			$	2,091