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

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		05-0527861 (IRS Employer 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 August 5, 2009 was 13,688,152. The number of the registrant’s subordinated units outstanding at August 5, 2009 was 850,674.

 

 

		Page
PART I – FINANCIAL INFORMATION			2
Item 1. Financial Statements 2
Consolidated and Condensed Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008 (audited)			2
Consolidated and Condensed Statements of Operations for the Three Months and Six Months Ended June 30, 2009 and 2008 (unaudited)			3
Consolidated and Condensed Statements of Capital for the Three Months and Six Months Ended June 30, 2009 and 2008 (unaudited)			4
Consolidated and Condensed Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2009 and 2008 (unaudited)			5
Consolidated and Condensed Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures about Market Risk			53
Item 4. Controls and Procedures			54
PART II. OTHER INFORMATION			55
Item 1. Legal Proceedings			55
Item 1A. Risk Factors			55
Item 5. Other Information			55
Item 6. Exhibits			57
SIGNATURE
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

PART I – FINANCIAL INFORMATION

Item 1.		Financial Statements

MARTIN MIDSTREAM PARTNERS L.P.

CONSOLIDATED AND CONDENSED BALANCE SHEETS
(Dollars in thousands)

		June 30,				December 31,
		2009				2008
		(Unaudited)				(Audited)
Assets
Cash		$	9,573			$	7,983
Accounts and other receivables, less allowance for doubtful accounts of $754 and $481			53,425				68,117
Product exchange receivables			7,603				6,924
Inventories			34,563				42,461
Due from affiliates			7,003				555
Fair value of derivatives			2,470				3,623
Other current assets			834				1,079
Total current assets			115,471				130,742
Property, plant, and equipment, at cost			532,206				537,381
Accumulated depreciation			(138,783	)			(125,256	)
Property, plant and equipment, net			393,423				412,125
Goodwill			37,268				37,405
Investment in unconsolidated entities			80,613				79,843
Fair value of derivatives			487				1,469
Other assets, net			6,219				7,332
		$	633,481			$	668,916
Liabilities and Capital
Trade and other accounts payable		$	58,483			$	87,382
Product exchange payables			17,388				10,924
Due to affiliates			11,765				13,420
Income taxes payable			414				414
Fair value of derivatives			8,156				6,478
Other accrued liabilities			3,108				6,077
Total current liabilities			99,314				124,695
Long-term debt			297,200				295,000
Deferred income taxes			8,324				8,538
Fair value of derivatives			1,961				4,302
Other long-term obligations			1,471				1,667
Total liabilities			408,270				434,202
Partners’ capital			228,744				239,649
Accumulated other comprehensive loss			(3,533	)			(4,935	)
Total partners’ capital			225,211				234,714
Commitments and contingencies
		$	633,481			$	668,916

See accompanying notes to consolidated and condensed financial statements.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues:
Terminalling and storage		$	9,982			$	9,900			$	19,581			$	17,820
Marine transportation			15,101				19,309				31,437				35,712
Product sales:
Natural gas services			74,822				182,025				165,688				389,117
Sulfur services			19,343				86,027				45,929				156,252
Terminalling and storage			9,020				10,882				22,539				22,258
			103,185				278,934				234,156				567,627
Total revenues			128,268				308,143				285,174				621,159
Costs and expenses:
Cost of products sold:
Natural gas services			69,668				180,324				152,335				383,174
Sulfur services			8,591				75,964				27,026				132,304
Terminalling and storage			7,918				10,270				20,023				20,191
			86,177				266,558				199,384				535,669
Expenses:
Operating expenses			23,519				26,195				47,407				50,412
Selling, general and administrative			4,087				3,467				8,266				6,946
Depreciation and amortization			8,511				7,614				16,916				14,954
Total costs and expenses			122,294				303,834				271,973				607,981
Other operating income (loss)			5,073				(14	)			5,073				126
Operating income			11,047				4,295				18,274				13,304
Other income (expense):
Equity in earnings of unconsolidated entities			1,028				4,372				3,088				7,882
Interest expense			(4,183	)			(3,895	)			(8,852	)			(8,638	)
Other, net			49				67				71				247
Total other income (expense)			(3,106	)			544				(5,693	)			(509	)
Net income before taxes			7,941				4,839				12,581				12,795
Income tax benefit (expense)			(16	)			(522	)			214				(461	)
Net income		$	7,925			$	4,317			$	12,795			$	12,334
General partner’s interest in net income		$	868			$	665			$	1,675			$	1,316
Limited partners’ interest in net income		$	7,057			$	3,652			$	11,120			$	11,018
Net income per limited partner unit — basic and diluted		$	0.49			$	0.25			$	0.76			$	0.76
Weighted average limited partner units — basic			14,532,826				14,532,826				14,532,826				14,532,826
Weighted average limited partner units — diluted			14,537,737				14,535,779				14,537,119				14,535,564

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Partners’ Capital
																						Accumulated
																						Other
																		General				Comprehensive
		Common								Subordinated								Partner				Income (Loss)
		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			—				9,958				—				1,060				1,316				—				12,334
Cash distributions			—				(18,229	)			—				(2,416	)			(1,535	)			—				(22,180	)
Unit-based compensation			—				34				—				—				—				—				34
Adjustment in fair value of derivatives			—				—				—				—				—				(9,539	)			(9,539	)
Balances – June 30, 2008			12,837,480			$	236,283				1,701,346			$	(7,378	)		$	3,893			$	(16,301	)		$	216,497
Balances – January 1, 2009			13,688,152			$	239,333				850,674			$	(3,688	)						$	4,004			$	(4,935) $234,714
Net income			—				10,470				—				650				1,675				—				12,795
Cash distributions			—				(20,532	)			—				(1,276	)			(1,923	)			—				(23,731	)
Unit-based compensation			—				31				—				—				—				—				31
Adjustment in fair value of derivatives			—				—				—				—				—				1,402				1,402
Balances – June 30, 2009			13,688,152			$	229,302				850,674			$	(4,314	)		$	3,756			$	(3,533	)		$	225,211

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income		$	7,925			$	4,317			$	12,795			$	12,334
Changes in fair values of commodity cash flow hedges			(431	)			(8,700	)			(12	)			(8,487	)
Commodity cash flow hedging gains (losses) reclassified to earnings			(648	)			41				(1,345	)			(624	)
Changes in fair value of interest rate cash flow hedges			(317	)			4,112				(940	)			(428	)
Interest rate cash flow hedging gains reclassified to earnings			1,926				—				3,699				—
Comprehensive income		$	8,455			$	(230	)		$	14,197			$	2,795

See accompanying notes to consolidated and condensed financial statements.

MARTIN MIDSTREAM PARTNERS L.P.

		Six Months Ended
		June 30,
		2009				2008
Cash flows from operating activities:
Net income		$	12,795			$	12,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			16,916				14,954
Amortization of deferred debt issuance costs			562				559
Deferred taxes			(214	)			(155	)
Gain on sale of property, plant and equipment			(5,073	)			(126	)
Equity in earnings of unconsolidated entities			(3,088	)			(7,882	)
Distributions from unconsolidated entities			650				—
Distributions in-kind from equity investments			2,316				5,621
Non-cash mark-to-market on derivatives			2,874				5,195
Other			31				34
Change in current assets and liabilities, excluding effects of acquisitions and dispositions:
Accounts and other receivables			14,661				(22,959	)
Product exchange receivables			(679	)			(31,236	)
Inventories			7,898				(50,034	)
Due from affiliates			(2,392	)			(6,011	)
Other current assets			245				(6,509	)
Trade and other accounts payable			(29,099	)			64,546
Product exchange payables			6,464				46,302
Due to affiliates			7,789				2,595
Income taxes payable			—				69
Other accrued liabilities			(2,969	)			(34	)
Change in other non-current assets and liabilities			(100	)			(224	)
Net cash provided by operating activities			29,587				27,039
Cash flows from investing activities:
Payments for property, plant and equipment			(25,428	)			(52,756	)
Acquisitions, net of cash acquired			—				(5,983	)
Proceeds from sale of property, plant and equipment			19,610				404
Return of investments from unconsolidated entities			380				600
Distributions from (contributions to) unconsolidated entities for operations			(1,028	)			75
Net cash used in investing activities			(6,466	)			(57,660	)
Cash flows from financing activities:
Payments of long-term debt			(56,900	)			(100,791	)
Proceeds from long-term debt			59,100				160,770
Payments of debt issuance costs			—				(18	)
Cash distributions paid			(23,731	)			(22,180	)
Net cash provided by (used in) financing activities			(21,531	)			37,781
Net increase in cash			1,590				7,160
Cash at beginning of period			7,983				4,113
Cash at end of period		$	9,573			$	11,273

See accompanying notes to consolidated and condensed financial statements.

     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 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 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 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 accounts for the transactions under Emerging Issues Task Force 96-18 “Accounting for Equity Instruments That are Issued to other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” The cost resulting from the share-based payment transactions was $12 and $17 for the three months ended June 30, 2009 and 2008, respectively, and $31 and $34 for the six months ended June 30, 2009 and 2008, respectively. The Partnership’s general partner contributed cash of $2 in January 2006 and $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’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 for $93.

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

     (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 June 30, 2009 and 2008 the general partner received $724 and $590, respectively, in incentive distributions. For the six months ended June 30, 2009 and 2008 the general partner received $1,448 and $1,091, respectively, in incentive distributions.

     (d) Net Income per Unit

     In March 2008, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued EITF 07-4, “Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships” (“EITF 07-4”). EITF 07-4 addresses the application of the two-class method under SFAS No. 128 “Earnings Per Share” 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. EITF 07-4 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 EITF 07-04 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 months and six months ended June 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, EITF 07-04 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 six months ended June 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.

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

		Three Months Ended June								Six Months Ended
		30,								June 30,
		2009				2008				2009				2008
Net income		$	7,925			$	4,317			$	12,795			$	12,334
Less:
Distributions payable on behalf of IDRs			(724	)			(590	)			(1,448	)			(1,091	)
Distributions payable on behalf of general partner interest			(237	)			(222	)			(574	)			(444	)
Distributions payable to the general partner interest in excess of earnings allocable to the general partner interest			93				147				347				219
Limited partners’ interest in net income		$	7,057			$	3,652			$	11,120			$	11,018

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

     The weighted average units outstanding for basic net income per unit were 14,532,826 for both the three and six months ended June 30, 2009 and 2008. For diluted net income per unit, the weighted average units outstanding were increased by 4,911 and 2,953 for the three months ended June 30, 2009 and 2008, respectively, and 4,293 and 2,738 for the six months ended June 30, 2008 and 2007, 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.

     In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), to be effective for interim or annual financial periods ending after June 15, 2009. SFAS 165 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. SFAS 165 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 August 5, 2009, which is the date of the filing of its quarterly report on Form 10-Q.

     In April 2009, the FASB issued FASB Staff Position FAS 157-4, 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 (“FSP FAS 157-4”), which is effective for the Partnership for the quarterly period beginning April 1, 2009. FSP FAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides guidance for estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased and determining whether a transaction was orderly. FSP FAS 157-4 applies to all fair value measurements when appropriate. The Partnership adopted FSP FAS 157-4 effective April 1, 2009.

     In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”), which is effective for the Partnership for the quarterly period beginning April 1, 2009. FSP FAS 107-1 requires an entity to provide the annual disclosures required by FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, in its interim consolidated financial statements. The Partnership adopted FSP FAS 107-1 effective April 1, 2009.

     In April 2009, the FASB issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). This pronouncement amends FAS No. 141-R to clarify the initial and subsequent recognition, subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS No. 141(R)-1 requires that assets acquired and liabilities assumed in a business combination that

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

arise from contingencies be recognized at fair value, as determined in accordance with SFAS No. 157, if the acquisition-date fair value can be reasonably estimated. If the acquisition-date fair value of an asset or liability cannot be reasonably estimated, the asset or liability would be measured at the amount that would be recognized in accordance with FASB Statement No. 5, “Accounting for Contingencies” (“SFAS No. 5”), and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss.” FSP FAS No. 141(R)-1 became effective for the Partnership as of January 1, 2009. As the provisions of FSP FAS 141(R)-1 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 occurred during 2009.

     In March 2008, the EITF issued EITF 07-4. EITF 07-4 addresses the application of the two-class method under SFAS No. 128 “Earnings Per Share” in determining income per unit for master limited partnerships having multiple classes of securities that may participate in partnership distributions. EITF 07-4 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 EITF 07-04 on January 1, 2009. See Note 1 (d) for more information.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and was effective for the Partnership on January 1, 2009. Since SFAS No. 161 requires enhanced disclosures concerning derivatives and hedging activities (see Note 7 for disclosures related to the adoption of SFAS 161), the adoption of SFAS 161 effective January 1, 2009 did not affect the consolidated financial position, results of operations or cash flows of the Partnership.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 establishes new accounting, disclosure and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 was effective for the Partnership on January 1, 2009. The adoption of SFAS No. 160 had no impact on the Partnership’s consolidated financial statements. However, it could impact accounting for future transactions.

     In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) establishes revised principles and requirements for how entities will recognize and measure assets and liabilities acquired in a business combination, including but not limited to, generally expensing of acquisition costs as incurred and valuing noncontrolling interests (minority interests) at fair value at the acquisition date. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141(R) will impact all acquisitions closed on or after January 1, 2009.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), 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. SFAS No. 157 does not require any new fair value measurements. The Partnership adopted SFAS 157 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 June 30, 2009, the Partnership does not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities. See Note 3 – Fair Value Measurements for further information.

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

     Accounting Standards Not Yet Adopted.

     In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which amends the consolidation guidance applicable to variable interest entities under FASB Interpretation No. 46 (R), “Consolidation of Variable Interest Entities”. SFAS 167 is intended to improve financial reporting by enterprises involved with variable interest entities. 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.

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”), which amends SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 168 will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the effective date, SFAS 168 will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in SFAS 168 will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Partnership is currently assessing the impact SFAS 168 will have on its financial statements.

     During the first quarter of 2008, the Partnership adopted SFAS 157. SFAS 157 established a framework for measuring fair value and expanded disclosures about fair value measurements. The adoption of SFAS 157 had no impact on the Partnership’s financial position or results of operations.

     SFAS 157 applies to all assets and liabilities that are being measured and reported on a fair value basis. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value of each asset and liability carried at fair value into one of the following categories:

  Level 1: Quoted market prices in active markets for identical assets or liabilities.

  Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

  Level 3: Unobservable inputs that are not corroborated by market data.

     The Partnership’s derivative instruments which consist of commodity and interest rate swaps are required to be measured at fair value on a recurring basis. The fair value of the Partnership’s derivative instruments is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets, which is considered Level 2. Refer to Notes 7, 8 and 9 for further information on the Partnership’s derivative instruments and hedging activities.

     The following items are measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at June 30, 2009:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant
						Active Markets for				Other				Significant
						for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		June 30,
Description		2009				(Level 1)				(Level 2)				(Level 3)
Assets
Interest rate derivatives		$	1,117			$	—			$	1,117			$	—
Commodity derivatives			1,840				—				1,840				—
Total assets		$	2,957			$	—			$	2,957			$	—

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

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant
						Active Markets for				Other				Significant
						for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		June 30,
Description		2009				(Level 1)				(Level 2)				(Level 3)
Liabilities
Interest rate derivatives		$	(9,856	)		$	—			$	(9,856	)		$	—
Commodity derivatives			(261	)			—				(261	)			—
Total liabilities		$	(10,117	)		$	—			$	(10,117	)		$	—

     The following items are measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at December 31, 2008:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant
						Active Markets for				Other				Significant
						for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
		December 31,
Description		2008				(Level 1)				(Level 2)				(Level 3)
Assets
Commodity derivatives		$	5,092			$	—			$	5,092			$	—
Liabilities
Interest rate derivatives		$	(10,780	)		$	—			$	(10,780	)		$	—

     During the second quarter of 2009, the Partnership adopted FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This staff position amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about the fair value of financial instruments of publicly-traded companies for interim reporting periods as well as in annual financial statements. This staff position also amends APB Opinion No. 28, “Interim Financial Reporting”, to require the aforementioned disclosures in summarized financial information at interim reporting periods. The basis for fair value estimates are set forth below for the Partnership’s financial instruments.

     The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

	•		Accounts and other receivables, trade and other accounts payable, other accrued liabilities, income taxes payable and due from/to affiliates — The carrying amounts approximate fair value because of the short maturity of these instruments.
	•		Long-term debt including current installments — The carrying amount of the revolving and term loan facilities approximates fair value due to the debt having a variable interest rate.

     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.

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

		2009				2008
Natural gas liquids		$	16,256			$	10,530
Sulfur			449				6,522
Sulfur based products			12,218				14,879
Lubricants			3,065				8,110
Other			2,575				2,420
		$	34,563			$	42,461

     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. This interest is accounted for by the equity method of accounting.

     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 and $297 for the three and six months ended June 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 $9,795 and $10,092 at June 30, 2009 and December 31, 2008, respectively. The equity-method goodwill is not amortized in accordance with SFAS 142; however, it is analyzed for impairment annually or if changes in circumstance indicate that a potential impairment exists. No impairment was recognized for the six months ended June 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 six months ended June 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			(2,316	)			—				—				—				(2,316	)
Distributions from unconsolidated entities			(650	)			—				—				—				(650	)
Contributions to unconsolidated entities:
Cash contributions			—				90				—				—				90
Contributions to unconsolidated entities for operations			938				—				—				—				938
Return of investments			—				(145	)			(235	)			—				(380	)
Equity in earnings:
Equity in earnings (losses) from operations			2,993				388				96				(92	)			3,385
Amortization of excess investment			(275	)			(8	)			(14	)			—				(297	)
Investment in unconsolidated entities, June 30, 2009		$	75,668			$	1,539			$	3,406			$	—			$	80,613

MARTIN MIDSTREAM PARTNERS L.P.
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
June 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			(5,621	)			—				—				—				(5,621	)
Contributions to (distributions from) unconsolidated entities:
Cash contributions			500				—				—				80				580
Contributions to (distributions from) unconsolidated entities for operations			(655	)			—				—				—				(655	)
Return of investments			(300	)			(105	)			(195	)			—				(600	)
Equity in earnings:
Equity in earnings from operations			7,875				84				302				(82	)			8,179
Amortization of excess investment			(275	)			(8	)			(14	)			—				(297	)
Investment in unconsolidated entities, June 30, 2008		$	71,761			$	1,553			$	3,786			$	176			$	77,276

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

		As of June 30								Three Months Ended June 30							Six Months Ended June 30
		Total				Partner’s								Net								Net
		Assets				Capital				Revenues				Income				Revenues				Income
2009
Waskom		$	78,162			$	69,659			$	12,188			$	2,046			$	27,618			$	5,985

		As of December 31
2008
Waskom		$	78,661			$	67,730			$	35,807			$	8,468			$	62,540			$	15,748

     As of June 30, 2009 and December 31, 2008, the Partnership’s interest in cash of the unconsolidated equity method investees was $1,131 and $1,956, respectively.

     In March 2008, the FASB issued SFAS 161 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 under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Partnership adopted SFAS 161 on January 1, 2009.

     Derivative Financial Instruments

     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 the Partnership’s exposure to these risks, the Partnership periodically enters into various derivative instruments, including commodity and interest rate hedges. In accordance with SFAS 133, the Partnership is required to recognize all derivative instruments as either assets or liabilities at fair value on our Consolidated Balance Sheets and to recognize

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

certain changes in the fair value of derivative instruments on the Partnership’s Consolidated Statements of Operations.

     The Partnership performs, at least quarterly, both a prospective and retrospective assessment of the effectiveness of our hedge contracts, including assessing the possibility of counterparty default. If it is determined that a derivative is no longer expected to be highly effective, the Partnership discontinues hedge accounting prospectively and recognizes subsequent changes in the fair value of the hedge in earnings.

     Cash flow hedges

     For derivative instruments that are designated and qualify as cash flow hedges under SFAS 133, 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.

     The following table summarizes the fair values and classification of the Partnership’s derivative instruments in its Condensed and Consolidated Balance Sheet:

		Fair Values of Derivative Instruments in the Consolidated Balance Sheet
		Derivative Assets										Derivative Liabilities
				Fair Values										Fair Values
				June 30,				December 31,						June 30,				December 31,
		Balance Sheet Location		2009				2008				Balance Sheet Location		2009				2008
Derivatives designated as hedging instruments under Statement 133:
		Current:										Current:
Interest rate contracts		Fair value of derivatives		$	—			$	—			Fair value of derivatives		$	937			$	5,427
Commodity contracts		Fair value of derivatives			1,328				2,430			Fair value of derivatives			—				—
					1,328				2,430						937				5,427
		Non-current:										Non-current:
Interest rate contracts		Fair value of derivatives			150				—			Fair value of derivatives			—				4,050
Commodity contracts		Fair value of derivatives			169				716			Fair value of derivatives			—				—
					319				716						—				4,050
Total derivatives designated as hedging instruments under Statement 133				$	1,647			$	3,146					$	937			$	9,477
Derivatives not designated as hedging instruments under Statement 133:
		Current:										Current:
Interest rate contracts		Fair value of derivatives		$	963			$	—			Fair value of derivatives		$	7,092			$	1,051
Commodity contracts		Fair value of derivatives			179				1,193			Fair value of derivatives			127				—
					1,142				1,193						7,219				1,051

		Fair Values of Derivative Instruments in the Consolidated Balance Sheet
		Derivative Assets										Derivative Liabilities
				Fair Values										Fair Values
				June 30,				December 31,						June 30,				December 31,
		Balance Sheet Location		2009				2008				Balance Sheet Location		2009				2008
		Non-current:										Non-current:
Interest rate contracts		Fair value of derivatives			4				—			Fair value of derivatives			1,827				252
Commodity contracts		Fair value of derivatives			164				753			Fair value of derivatives			134				—
					168				753						1,961				252
Total derivatives not designated as hedging instruments under Statement 133				$	1,310			$	1,946					$	9,180			$	1,303

		Effect of Derivative Instruments on the Consolidated Statement of Operations
		For the Six Months Ended June 30, 2009 and 2008
																				Ineffective Portion and Amount
		Effective Portion																		Excluded from Effectiveness Testing
										Location of Gain										Location of
										or (Loss)		Amount of Gain or (Loss)								Gain or				Amount of Gain or
		Amount of Gain or								Reclassified from		Reclassified from								(Loss)				(Loss) Recognized in
		(Loss) Recognized in								Accumulated OCI		Accumulated OCI into								Income on				Income on
		OCI on Derivatives								into Income		Income								Derivatives				Derivatives
		2009				2008						2009				2008								2009				2008
Derivatives designated as hedging instruments under Statement 133
Interest rate contracts		$	(317	)		$	4,112			Interest Expense		$	(1,926	)		$	—			Interest Expense				$	—			$	—
Commodity contracts			(431	)			(8,700	)		Natural Gas Revenues			648				43			Natural Gas Revenues					—				(84	)
Total derivatives designated as hedging instruments under Statement 133		$	(748	)		$	(4,588	)				$	(1,278	)		$	43							$	—			$	(84	)

				Amount of Gain or
		Location of Gain or (Loss)		(Loss) Recognized in
		Recognized in Income on		Income on Derivatives
		Derivatives		2009				2008
Derivatives not designated as hedging instruments under Statement 133
Interest rate contracts		Interest Expense		$	(57	)		$	(193	)
Commodity contracts		Natural Gas Services Revenues			(1,606	)			(6,008	)
Total derivatives not designated as				$	(1,663	)		$	(6,201	)
hedging instruments under Statement 133

		Effect of Derivative Instruments on the Consolidated Statement of Operations
		For the Six Months Ended June 30, 2009 and 2008
																				Ineffective Portion and Amount
		Effective Portion																		Excluded from Effectiveness Testing
										Location of Gain										Location of
										or (Loss)		Amount of Gain or (Loss)								Gain or				Amount of Gain or
		Amount of Gain or								Reclassified from		Reclassified from								(Loss)				(Loss) Recognized in
		(Loss) Recognized in								Accumulated OCI		Accumulated OCI into								Income on				Income on
		OCI on Derivatives								into Income		Income								Derivatives				Derivatives
		2009				2008						2009				2008								2009				2008
Derivatives designated as hedging instruments under Statement 133
Interest rate contracts		$	(940	)		$	(428	)		Interest Expense		$	(3,699	)		$	—			Interest Expense				$	—			$	—
Commodity contracts			(12	)			(8,487	)		Natural Gas Revenues			1,366				587			Natural Gas Revenues					(21	)			37
Total derivatives designated as hedging instruments under Statement 133		$	(952	)		$	(8,915	)				$	(2,333	)		$	587							$	(21	)		$	37