MARTIN MIDSTREAM PARTNERS LP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

Commission file number 000-50056

MARTIN MIDSTREAM PARTNERS L.P.
(Exact name of registrant as specified in its charter)

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

4200 STONE ROAD
KILGORE, TEXAS 75662
(Address of principal executive offices)
(Zip Code)

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

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Name of exchange on
Title of each class which registered
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Common Units representing limited
partnership interests NASDAQ

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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 the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes No X
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As of December 31, 2002, 2,900,000 Common Units were outstanding. The
aggregate market value of the Common Units held by non-affiliates of Martin
Midstream Partners L.P. as of such date, approximated $51,047,314.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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MARTIN MIDSTREAM PARTNERS L.P.

FORM 10-K

PART I
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 23
Item 3. Legal Proceedings......................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders....................... 23

PART II
Item 5. Market for Our Common Equity and Related Unitholder Matters............... 24
Item 6. Selected Consolidated and Combined Financial Data......................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................ 53
Item 8. Financial Statements and Supplementary Data............................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 75

PART III
Item 10. Directors and Executive Officers of the Registrant......................... 76
Item 11. Executive Compensation..................................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................... 84
Item 13. Certain Relationships and Related Transactions............................. 86
Item 14. Controls and Procedures.................................................... 92

PART IV
Item 15. Exhibits, Financial Statements, Financial Statement Schedule, and
Reports on Form 8-K .................................................. 92

PART I

ITEM 1. BUSINESS

GENERAL

Martin Midstream Partners L.P. provides marine transportation,
terminalling, distribution and midstream logistical services for producers and
suppliers of hydrocarbon products and by-products, specialty chemicals and other
liquids. We also manufacture and market sulfur-based fertilizers and related
products. Hydrocarbon products and by-products are produced primarily by major
and independent oil and gas companies who often turn to independent third
parties, such as us, for the transportation and disposition of these products.
In addition to these major and independent oil and gas companies, our primary
customers include independent refiners, large chemical companies, fertilizer
manufacturers and other wholesale purchasers of hydrocarbon products and
by-products.

We operate primarily in the Gulf Coast region of the United States.
This region is a major hub for petroleum refining and natural gas processing. We
provide our marine transportation and midstream logistical services and
distribute liquefied petroleum gases ("LPGs") primarily to customers who are
located in this region or in close proximity to ports located along the Gulf of
Mexico Intracoastal Waterway and the Mississippi River inland waterway system.
The fertilizer and related products we manufacture are sold throughout the
United States. We believe our primary business lines, and our relationship with
Martin Resource Management Corporation ("Martin Resource Management" or "MRMC"),
allow us to provide our customers a unique offering of integrated services and
products. Our business lines are described below.

We were formed in 2002 by Martin Resource Management, a privately-held
company whose initial predecessor was incorporated in 1951 as a supplier of
products and services to drilling rig contractors. Since then, Martin Resource
Management has expanded its operations through acquisitions and internal
expansion initiatives as its management identified and capitalized on the needs
of producers and purchasers of hydrocarbon products and by-products and other
bulk liquids. Martin Resource Management retains control over our operations
through its ownership of our general partner, as well as a significant ownership
interest in us through its ownership of approximately 58.3% of our limited
partner interests in the form of subordinated units.

Martin Resource Management has operated our business for several years.
Martin Resource Management began operating our LPG distribution business in the
1950s. It began our marine transportation business in the late 1980s. It entered
into our fertilizer and terminalling businesses in the early 1990s. In recent
years, Martin Resource Management has increased the size of our asset base
through expansions and strategic acquisitions. For example, in 1997 and 1998, it
acquired a total of 18 tank barges and 11 pushboats for our marine
transportation business in two acquisitions. Additionally, in 1998 it acquired
our fertilizer plants in Odessa and Plainview, Texas as well as our plants in
Salt Lake City, Utah and Maricopa, Arizona. In 1999 and 2000, it built three
tanks and upgraded a fourth tank at our terminalling facilities. Finally, it
built our fertilizer plant in Seneca, Illinois in 1999 and 2000.

PRIMARY LINES OF BUSINESS

We organize our operations into four general lines of business that can
be summarized as follows:

o Marine Transportation Business. We own a marine fleet of 23 inland tank
barges, 12 inland pushboats and two offshore tug/barge tanker units
that transport hydrocarbon products and by-products. We provide these
transportation services on a fee basis primarily under annual
contracts.

o Terminalling Business. We operate three terminal facilities that
provide storage and handling services for hydrocarbon products and
by-products, specialty chemicals and other liquids. The nine product
tanks we own at these facilities have an aggregate storage capacity of
approximately 879,000 barrels. We generally charge a fixed fee for our
terminalling services and we have several long-term terminalling
contracts with customers.

o LPG Distribution Business. We purchase LPGs primarily from oil refiners
and natural gas processors. We store LPGs in our supply and storage
facilities for resale to propane retailers and industrial LPG users in

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Texas and the southeastern United States. We own three LPG supply and
storage facilities with an aggregate storage capacity of approximately
132,000 gallons and we lease approximately 128 million gallons of
underground storage capacity. We generally try to coordinate our sales
and purchases of LPGs based on the same daily price index for LPGs in
order to decrease the impact of LPG price fluctuations on our
profitability.

o Fertilizer Business. We manufacture and sell fertilizer products, which
are primarily sulfur-based, and other sulfur related products to
regional wholesale distributors and industrial users.

We receive a material portion of our net income and cash available for
distribution from our unconsolidated non-controlling 49.5% limited partner
interest in CF Martin Sulphur, L.P. ("CF Martin Sulphur"), a limited partnership
formed by Martin Resource Management and CF Industries, Inc. ("CF Industries")
in November 2000. CF Martin Sulphur collects and aggregates, transports, stores
and markets molten sulfur supplied by oil refiners and natural gas processors.
Martin Resource Management and CF Industries control CF Martin Sulphur through
equal ownership of CF Martin Sulphur's general partner. Martin Resource
Management manages the day-to-day operations of CF Martin Sulphur under a
long-term services agreement. We account for our limited partner interest using
the equity method of accounting, which requires us to report only the equity
earnings from this interest.

BUSINESS STRATEGY

The key components of our business strategy are to:

o Expand Services Provided to Existing Customers. We generally begin a
relationship with a customer by transporting or marketing a limited
range of products or providing a limited range of other services or
products. We believe expanding our service and product offerings to
existing customers is the most efficient and cost effective method of
utilizing our asset base and customer relationships to achieve internal
growth in revenues and cash flow. We believe significant opportunities
exist to provide additional services and products to existing
customers.

o Pursue Strategic Acquisitions. We survey the marketplace to identify
and pursue acquisitions that expand the services and products we offer
or that expand our geographic presence. After acquiring other
businesses, we will attempt to utilize our industry knowledge, network
of customers and suppliers and strategic asset base to operate the
acquired businesses more efficiently and competitively, thereby
increasing revenues and cash flow.

o Attract New Customers in Existing Geographic Markets. Our marine
transportation operations are primarily focused in the Gulf Coast
region and along the southern portion of the nation's inland waterway
system. We seek to identify and pursue opportunities to expand our
customer base for our marine transportation business in our existing
geographic markets. We sell our fertilizer products throughout the
United States and we sell our industrial sulfur products primarily in
the eastern United States. We seek to expand our customer base for
these products in these geographic markets.

o Expand Geographically. We work to identify and assess other attractive
geographic markets for our services and products based on the market
dynamics and the cost to penetrate such markets. We typically enter a
new market through an acquisition or by securing at least one major
customer or supplier and then dedicating or purchasing assets for
operation in the new market. Once in a new territory, we seek to expand
our operations within this new territory both by targeting new
customers and by selling additional services and products to our
original customers in the territory.

o Pursue Strategic Alliances. Many of our larger customers are
establishing strategic alliances with midstream logistics management
service providers to address logistical and transportation problems or
achieve operational synergies. These strategic alliances are typically
structured differently than our regular commercial relationships, with
the goal that such relationship would result in us providing or
receiving a more comprehensive package of services and/or products to
or from the customer or supplier. We intend to pursue strategic
alliances with significant customers in the future.

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COMPETITIVE STRENGTHS

We believe we are well positioned to execute our business strategy
because of the following competitive strengths:

o Asset Base and Integrated Distribution Network. We operate a
diversified asset base that, together with the services provided by
Martin Resource Management, enables us to offer our customers an
integrated distribution network consisting of transportation,
terminalling and midstream logistical services while minimizing our
dependence on the availability and pricing of services provided by
third parties. Our integrated distribution network enables us to
provide customers a complementary portfolio of transportation,
terminalling, distribution and midstream logistical services for
hydrocarbon products and by-products.

o Specialized Transportation Equipment and Storage Facilities. We have
the assets and expertise to handle and transport certain hydrocarbon
products and by-products with unique requirements for transportation
and storage, such as molten sulfur, asphalt and sulfuric acid. For
example, we own facilities and resources to transport molten sulfur and
asphalt, which must be maintained at temperatures between approximately
275 and 350 degrees Fahrenheit to remain in liquid form.

o Experienced Management Team and Operational Expertise. Members of our
management team have, on average, more than 22 years of experience in
the industries in which we operate. Further, members of our management
team have been employed by Martin Resource Management, on average, for
19 years. Our management team has a successful track record of creating
internal growth and completing acquisitions. We believe our management
team's experience and familiarity of our industry and businesses are
important assets that assist us in implementing our business strategies
and pursuing our growth strategies.

o Strong Industry Reputation and Established Relationships With Suppliers
and Customers. We believe we have established a reputation in our
industry as a reliable and cost-effective supplier of services to our
customers and have a track record of safe, efficient operation of our
facilities. Our management has also established long-term relationships
with many of our suppliers and customers. We believe we benefit from
our management's reputation and track record, and from these long-term
relationships.

o Financial Flexibility. We believe the borrowings available under our
revolving credit facility and our ability to issue additional
partnership units provides us with the financial flexibility to enable
us to pursue expansion and acquisition opportunities. As of December
31, 2002, we have $10 million available for expansion and acquisition
activities under this revolving credit facility.

MARINE TRANSPORTATION BUSINESS

INDUSTRY OVERVIEW

The United States inland waterway system is a vast and heavily used
transportation system. This inland waterway system is composed of a network of
interconnected rivers and canals that serve as water highways and is used to
transport vast quantities of products annually. This waterway system extends
approximately 26,000 miles, 12,000 miles of which are generally considered
significant for domestic commerce.

The Gulf Coast region is a major hub for petroleum refining.
Approximately two-thirds of United States refining capacity expansion in the
1990s occurred in this region. The hydrocarbon refining process generates
products and by-products that require transportation in large quantities from
the refinery or processor. Convenient access to and use of this waterway system
by the petroleum and petrochemical industry is a major reason for the current
location of United States refineries and petrochemical facilities. Recent growth
in refining and natural gas processing capacity has increased the volume of
hydrocarbon products and by-products transported within the Gulf Coast region,
which consequently has increased the need for transportation, storage and
distribution facilities.

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OUR MARINE FLEET

We own a fleet of inland and offshore tows that provide marine
transportation of hydrocarbon products and by-products produced in oil refining
and natural gas processing. Our marine transportation system operates on the
United States inland waterway system, primarily between domestic ports along the
Gulf of Mexico Intracoastal Waterway, the Mississippi River system and the
Tennessee-Tombigbee Waterway system. The marine transportation industry uses
pushboats and tugboats as power sources and tank barges for freight capacity.
The combination of the power source and tank barge freight capacity is called a
tow. Our inland tows generally consist of one pushboat and one to three tank
barges, depending upon the horsepower of the pushboat, the river or canal
capacity and conditions, and customer requirements. Our offshore tows consist of
one tugboat, with much greater horsepower than an inland pushboat, and one large
tank barge.

We transport asphalt, fuel oil, gasoline, sulfur and other bulk
liquids. Our inland barge fleet has an average age of approximately 16 years, as
compared to the industry average in 2002 of approximately 22 years. The
following is a brief description of the marine vessels we use in our marine
transportation business:

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(1) One of our three inland tank barges with capacity of 20,000 bbl and
under, and seven of our 20 inland tank barges with capacity of 20,000 to 30,000
bbl, are specialized and equipped to transport asphalt.

Our largest marine transportation customers include major and
independent oil and gas refining companies, petroleum marketing companies, CF
Martin Sulphur and Martin Resource Management. We conduct our marine
transportation services under spot contracts and under term contracts that
typically range from one to 12 months in length.

In order to maintain a balance of pricing flexibility and stable cash
flow, we strive to maintain an appropriate mix of spot versus term contracts,
based on current market conditions. We are currently a party to a three-year
charter agreement with Martin Resource Management for the use of four of our
marine vessels on a spot-contract basis subject to the availability of such
vessels at the time of Martin Resource Management's request. This contract, the
term of which began on November 1, 2002, covers our four vessels that are not
currently subject to term agreements. The fees we charge Martin Resource
Management are based on the then applicable market rates we charge third parties
on a spot-contract basis. Additionally, Martin Resource Management has agreed
for the three-year term to use these four vessels in a manner such that we will
receive at least $5.6 million annually for the use of these vessels by Martin
Resource Management and third parties. In the event we do not receive at least
$5.6 million annually for the use of these vessels, Martin Resource Management
will pay us any deficiency within 30 days after the end of the applicable
12-month period. We expect this agreement will allow us to maintain historic
cash flow levels from our marine vessels not currently chartered under term
contracts.

We have chartered one of our offshore tug/barge tanker units to CF
Martin Sulphur for a guaranteed daily rate, subject to certain adjustments. This
rate was determined on an arm's-length basis and was based on rates we charged
third parties at the time. This charter has an unlimited term but may be
cancelled by CF Martin Sulphur

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upon 90 days notice. We do not have the right to terminate this agreement.
However, we believe CF Martin Sulphur will not terminate this charter in the
near future because CF Martin Sulphur has multi-year delivery commitments
requiring it to use this offshore tug/barge tanker unit or risk not being able
to meet its delivery commitments.

COMPETITION

We compete primarily with other marine transportation companies. The
marine barging industry has experienced significant consolidation in the past
few years. The total number of tank barges and pushboats that operate in the
inland waters of the United States declined from approximately 4,200 in 1982 to
approximately 2,900 in 1993 and has remained relatively constant at 2,900 since
1993. We believe the earlier decrease primarily resulted from:

o the increasing age of the domestic tank barge fleet, resulting
in retirements;

o a reduction in tax incentives, which previously encouraged
speculative construction of new equipment;

o stringent operating standards to adequately address safety and
environmental risks;

o the elimination of government programs supporting small
refineries;

o an increase in environmental regulations mandating expensive
equipment modification; and

o more restrictive and expensive insurance.

There are several barriers to entry into the marine transportation
industry that discourage the emergence of new competitors. Examples of these
barriers to entry include:

o significant start-up capital requirements;

o the costs and operational difficulties of complying with
stringent safety and environmental regulations;

o the cost and difficulty in obtaining insurance; and

o the number and expertise of personnel required to support
marine fleet operations.

We believe the reduction of the number of tank barges, the consolidation among
barging companies and the significant barriers to entry in the industry have
resulted in a more stabilized and favorable pricing environment for our marine
transportation services.

We believe we compete favorably with many of our competitors.
Historically, competition within the marine transportation business was based
primarily on price. However, we believe customers are placing an increased
emphasis on safety, environmental compliance, quality and the availability of a
single source of supply of a diversified package of services. In particular, we
believe customers are increasingly seeking transportation vendors that can offer
marine, land, rail and terminal distribution services, as well as provide
operational flexibility, safety, environmental and financial responsibility,
adequate insurance and quality consistent with the customer's own operations and
policies. We operate a diversified asset base that, together with the services
provided by Martin Resource Management, enables us to offer our customers an
integrated distribution network consisting of transportation, terminalling,
distribution and midstream logistical services for hydrocarbon products and
by-products.

In addition to competitors who provide marine transportation services,
we also compete with providers of other modes of transportation, such as rail
tank cars, tractor-trailer tank trucks and, to a limited extent, pipelines. We
believe we offer a competitive advantage over rail tank cars and tractor-trailer
tank trucks because marine transportation is a more efficient, and generally
less expensive, mode of transporting hydrocarbon products and by-

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products. For example, a typical two inland barge unit carries a volume of
product equal to approximately 80 rail cars or 250 tanker trucks. Pipelines
generally provide a less expensive form of transportation than marine
transportation. However, pipelines are not able to transport most of the
products we transport and are generally a less flexible form of transportation
because they are limited to the fixed point-to-point distribution of commodities
in high volumes over extended periods of time.

SEASONALITY

The demand for our marine transportation business is subject to some
seasonality factors. Our asphalt shipments are generally higher during April
through November when weather allows for efficient road construction. However,
demand for marine transportation of sulfur, fuel oil and gasoline is directly
related to production of these products in the oil refining and natural gas
processing business which is fairly stable.

TERMINALLING BUSINESS

INDUSTRY OVERVIEW

The United States petroleum distribution system moves petroleum
products and by-products from oil refinery and natural gas processing facilities
to end users. This distribution system is comprised of a network of terminals,
storage facilities, pipelines, tankers, barges, rail cars and trucks. Terminals
play a key role in moving these products throughout the distribution system by
providing storage, blending and other ancillary services.

In the 1990's, the petroleum industry entered a period of
consolidation. Refiners and marketers developed large-scale, cost-efficient
operations resulting in several refinery acquisitions, combinations, alliances
and joint ventures. This consolidation resulted in major oil companies
integrating the various components of their businesses, including terminalling.
However, major integrated oil companies later concentrated their focus and
resources on their core competencies of exploration, production, refining and
retail marketing and examined ways to lower their distribution costs.
Additionally, the Federal Trade Commission required some divestitures of
terminal assets in markets in which merged companies, alliances and joint
ventures were regarded as having excessive market power. As a result of these
factors, oil and gas companies began to increasingly rely on third parties such
as us to perform many terminalling services.

Additionally, although many large energy and chemical companies own
terminalling facilities, these companies also use third party terminalling
services. Major energy and chemical companies typically have a strong demand for
terminals owned by independent operators when such terminals are strategically
located at or near key transportation links, such as deep-water ports. Major
energy and chemical companies also need independent terminal storage when their
owned storage facilities are inadequate, either because of lack of capacity, the
nature of the stored material or specialized handling requirements.

The Gulf Coast region is a major hub for petroleum refining.
Approximately two-thirds of United States refining capacity expansion in the
1990s occurred in this region. Growth in the refining and natural gas processing
industries has increased the volume of hydrocarbon products and by-products that
are transported within the Gulf Coast region, which consequently has increased
the need for terminalling services.

DESCRIPTION OF TERMINAL FACILITIES

We operate a marine terminal in Tampa, Florida and a marine terminal in
Beaumont, Texas. We also own an inland rail unloading terminal in Mont Belvieu,
Texas. Our terminal assets are located at strategic distribution points for the
products we handle and are in close proximity to our customers. Further, the
location and composition of our terminals are structured to complement our other
businesses and reflect our strategy to provide a broad range of integrated
services in the handling and transportation of hydrocarbon products and
by-products. We developed our terminalling assets by acquiring existing
terminalling facilities and then customizing and upgrading these facilities as
needed to integrate the facilities into our hydrocarbon product and by-product
transportation network and to more effectively service customers. We expect to
continue to acquire facilities and customize them as part of our growth
strategy.

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Our terminal facilities provide storage and handling services for
asphalt, sulfur, sulfuric acid, fuel oil, and other hydrocarbon products and
by-products. Our terminalling customers are primarily large oil refining and
natural gas processing companies. We charge a fixed monthly fee for the use of
our facilities, based on the capacity of the applicable tank. We conduct a
substantial portion of our terminalling operations under long-term contracts,
which enhances the stability and predictability of our operations and cash flow.
We attempt to balance our short term and long term terminalling contracts in
order to allow us to maintain a consistent level of cash flow while maintaining
flexibility to earn higher storage revenues when demand for storage space
increases. We also continually evaluate opportunities to add services and
increase access to our terminals to attract more customers and create additional
revenues.

The following is a brief summary of our terminals:

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(1) This terminal is located on land owned by the Tampa Port Authority
and leased to us under a lease which expires in December, 2006.

(2) A portion of this terminal is located on land owned by Martin
Resource Management and on land we own. We use marine terminal, loading and
unloading, and other common use facilities owned by Martin Resource Management
under a perpetual use, ingress-egress and utility facilities easement.

(3) In addition to the tanks listed in the table, CF Martin Sulphur
owns one tank at our Tampa terminal and three tanks at the Stanolind terminal.
Martin Resource Management owns two tanks at the Stanolind terminal.

Tampa Terminal. Our largest terminal complex is located on
approximately 10 acres owned by the Tampa Port Authority in Tampa, Florida. Our
lease with the Tampa Port Authority has a 10-year term which expires on December
15, 2006. We acquired the above ground assets at this terminal in March 1995 to
provide a terminalling venue for our sulfur marketing operations. Since March
1995, we have constructed a 16,000 long-ton sulfur tank and a 42,000 barrel fuel
oil tank and have made modifications to other tanks at the complex to comply
with regulatory and industry standards. We own seven tanks at our Tampa terminal
with approximately 719,000 barrels of storage capacity in the aggregate. CF
Martin Sulphur also owns a 16,000 long-ton sulfur tank at this facility.

Our Tampa terminal has:

o storage capacity for hydrocarbon products and by-products
consisting primarily of asphalt, sulfuric acid and fuel oil;

o a concrete, deep-water ship dock capable of receiving large
vessels and barges;

o a second barge dock that accommodates tug fueling and inland
barge loading;

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o 10 truck loading bays; and

o inline blending capability for both asphalt and fuel oil
customers.

Stanolind Terminal. Our Stanolind terminal is located on approximately
11 acres owned by Martin Resource Management and us on the Neches River in
Beaumont, Texas. We own the land on which our tanks are located. Martin Resource
Management owns the land on which the vessel, barge and truck loading and
unloading, and other common use facilities are located. We have full access to
our tanks and full use of the marine terminal, loading and unloading and other
common use facilities at this terminal under a perpetual easement. Please read
"Item 13. Certain Relationship and Related Transactions -- Additional Agreements
- - Other Agreements - Purchaser Use Easement, Ingress-Egress Easement and Utility
Facilities Easement" for a summary of this easement. We acquired this terminal
in 1997. Thereafter, we added two sulfur tanks and truck unloading facilities at
this facility. The terminal can handle both inland and offshore marine vessels.
Our Stanolind terminal has:

o storage capacity for various products, including asphalt and
fuel oil;

o assets to handle products transported by vessel, barge and
truck;

o one dock deep enough to accommodate vessels and barges
simultaneously; and

o capabilities for the transfer of asphalt and fuel oil from
vessel to barge.

We own two 80,000 barrel asphalt tanks at this terminal. CF Martin Sulphur owns
three sulfur tanks at this terminal, which have an aggregate capacity of 46,500
long tons. Martin Resource Management owns two sulfuric acid tanks at this
terminal, which have an aggregate capacity of 50,000 short tons. CF Martin
Sulphur has constructed a rail spur to provide rail access to the Stanolind
terminal.

Mont Belvieu Rail Unloading Terminal. We own an inland rail unloading
terminal located at Mont Belvieu, Texas. At this terminal, we unload and measure
hydrocarbon by-products and transport these products via a half-mile pipeline to
Enterprise Products Texas Operating L.P.'s LPG fractionator facility. Our fees
for the use of this facility are based on the number of gallons unloaded at the
terminal.

COMPETITION

We compete with independent terminal operators and major energy and
chemical companies that own their own terminalling facilities. We believe many
customers prefer to contract with independent terminal operators rather than
terminal operators owned by integrated energy and chemical companies, that may
have refining or marketing interests that compete with the customers.

Independent terminal owners generally compete on the basis of the
location and versatility of terminals, service and price. A favorably-located
terminal has access to various cost effective transportation modes, both to and
from the terminal, such as waterways, railroads, roadways and pipelines.
Terminal versatility depends upon the operator's ability to handle diverse
products, some of which have complex or specialized handling and storage
requirements. The service function of a terminal includes, among other things,
the safe storage of product at specified temperature, moisture and other
conditions, and receiving and delivering product to and from the terminal. All
of these services must be in compliance with applicable environmental and other
regulations.

We believe we successfully compete for terminal customers because of
the strategic location of our terminals along the Gulf Coast, our integrated
transportation services, our reputation, the prices we charge for our services
and the quality and versatility of our services. Additionally, while some
companies have significantly more terminalling capacity than us, not all
terminalling facilities located in the markets we serve are equipped to properly
handle specialty products such as asphalt, sulfur or sulfuric acid. As a result,
our facilities typically command higher terminal fees when compared to fees
charged for terminalling of other petroleum products.

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LPG DISTRIBUTION BUSINESS

INDUSTRY OVERVIEW

LPG is a by-product of oil refining and natural gas processing. LPG
consists of hydrocarbons that are vapors at normal temperatures and pressures
but change to liquid at moderate pressures. The main constituent of LPG is
propane, and LPG is often generally referred to as propane. Other LPG products
include butanes and natural gasoline.

Propane is used as a heating fuel, an engine fuel, an industrial fuel
and as a petrochemical feedstock in the production of ethylene and propylene.
Butane is used as a petrochemical feedstock in the production of ethylene and
butadiene (a key ingredient in synthetic rubber), as a blendstock for motor
gasoline and to derive isobutane through isomerization. Natural gasoline, a
mixture of pentanes and heavier hydrocarbons, is used primarily as motor
gasoline blend stock or petrochemical feedstock.

OUR LPG FACILITIES

We purchase LPGs primarily from major domestic oil refiners and natural
gas processors. We transport LPGs using Martin Resource Management's land
transportation fleet or by contracting with common carriers, owner-operators and
railroad tank cars. We typically enter into annual contracts with independent
retail distributors to deliver their estimated annual volume requirements based
on prevailing market prices. We believe dependable delivery is very important to
these customers and in some cases may be more important than price. We ensure
adequate supply of LPGs, including during times of peak demand, through:

o storage of propane purchased in off-peak months,

o efficient use of the transportation fleet of vehicles owned by
Martin Resource Management, and

o product management expertise to obtain supplies when needed.

The following is a brief description of our owned and leased LPG
facilities:

- ---------

(1) In addition, under a three-year throughput agreement we are
entitled to the sole access to and use of a truck loading and unloading and
pipeline distribution terminal owned by Martin Resource Management and located
at Mont Belvieu, Texas. This terminal facility has a storage capacity of 330,000
gallons.

(2) We lease our underground storage at Arcadia, Louisiana from Martin
Resource Management under a three-year product storage agreement, which is
renewable on a yearly basis thereafter subject to a redetermination of the lease
rate for each subsequent year.

(3) We lease our underground storage at Hattiesburg, Mississippi and
Mont Belvieu, Texas from third parties under one-year lease agreements, which we
have renewed annually for more than 20 years.

9

Our above ground storage facilities have one or more 12,000 or 30,000
gallon storage tanks. We lease underground storage capacity of 120 million
gallons in Arcadia, Louisiana from Martin Resource Management. We also lease 2.5
million gallons of underground storage in Mont Belvieu, Texas and 5.25 million
gallons at Hattiesburg, Mississippi from third parties under one-year lease
agreements. As a result of our and Martin Resource Management's distribution
system and storage capacity, we have the ability to buy and store large volumes
of LPGs that allow us to achieve product cost savings and avoid shortages during
periods of tight supply.

Our LPG customers consist of retail propane distributors, industrial
processors and refiners. For the year ended December 31, 2002, we sold
approximately 62% of our LPG volume to independent retail propane distributors
located in Texas and the southeastern United States and approximately 38% of our
LPG volume to refiners and industrial processors.

COMPETITION

We compete with large integrated LPG producers and marketers, as well
as small local independent marketers. LPGs compete primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price,
availability and portability.

SEASONALITY

The level of LPG supply and demand is subject to changes in domestic
production, weather, inventory levels and other factors. While production is not
seasonal, residential and wholesale demand is highly seasonal. This imbalance
causes increases in inventories during summer months when consumption is low and
decreases in inventories during winter months when consumption is high. If
inventories are low at the start of the winter, higher prices are more likely to
occur during the winter. Additionally, abnormally cold weather can put extra
upward pressure on prices during the winter because there are less readily
available sources of additional supply except for imports which are less
accessible and may take several weeks to arrive. General economic conditions and
inventory levels have a greater impact on industrial and refinery use of LPGs
than the weather.

Although the LPG industry is subject to seasonality factors, such
factors generally do not affect our LPG distribution business because we do not
consume LPGs. We generally maintain consistent margins in our LPG distribution
business because we attempt to pass increases and decreases in the cost of LPGs
directly to our customers. We generally try to coordinate our sales and
purchases of LPGs based on the same daily price index of LPGs in order to
decrease the impact of LPG price volatility on our profitability.

FERTILIZER BUSINESS

INDUSTRY OVERVIEW

Fertilizers are manufactured chemicals containing nutrients known to
improve the fertility of soils. Nitrogen, phosphorus, potassium and sulfur are
the four most important nutrients for crop growth. These nutrients are found
naturally in soils. However, soils used for agriculture become depleted of these
nutrients and frequently require fertilizers rich in these essential nutrients
to restore fertility. The Fertilizer Institute has estimated that the earth's
soil contains less than 20% of organic plant nutrients needed to meet worldwide
food production needs. As a result, we believe mineral fertilizer production
will continue to be an important industrial market.

The fertilizer market is primarily driven by agricultural demand.
Worldwide consumption of mineral fertilizers grew from 117 million tons in 1980
to 138 million tons in 1990, and remained relatively flat from 1990 to 2000.
Despite the relative stagnation in the past ten years, we expect the worldwide
fertilizer market to grow over the next two decades. The United Nations has
estimated that the world population will reach 7.7 billion by 2020, an increase
of 35% from 5.7 billion in 1995. The United Nations also has estimated that the
world population in 2020 will require an estimated 40% more grain than the world
population in 1999 and that most of this increase in production will need to be
produced on existing cultivated land through increased yield per acre.
Consequently, we

10

expect agricultural demand for fertilizer products to increase to support the
greater agricultural output requirements for the increase in population.

Industrial sulfur products are used in a wide variety of industries.
For example, these products are used in power plants, paper mills, auto and tire
manufacturing plants, food processing plants, road construction, cosmetics and
pharmaceuticals. The largest consumers of industrial sulfur products are power
plants, paper mills and rubber products manufacturers.

OUR OPERATIONS AND PRODUCTS

We entered the fertilizer manufacturing business in 1990 through an
acquisition. We acquired two additional fertilizer manufacturing companies in
1998. Over the next two years we expended significant resources to replace and
update facilities and other assets at the companies, and to integrate each of
the businesses into our business. These acquisitions have subsequently increased
the profitability of our fertilizer business.

Fertilizer and related sulfur products are a natural extension of our
business because of our access to sulfur and our distribution capabilities. This
business allows us to leverage our relationship with CF Martin Sulphur by using
our access to its sulfur to produce a value added product for the fertilizer and
industrial sulfur market. Please read "-- CF Martin Sulphur -- Our
Commercial Relationship with CF Martin Sulphur." Our annual fertilizer and
industrial sulfur products sales have grown from approximately 62,000 tons in
1997 to approximately 158,000 tons in 2002 as a result of acquisitions and
internal growth.

We manufacture and market the following fertilizer and related sulfur
products:

o Plant nutrient sulfur products. We produce plant nutrient and
agricultural ground sulfur products at our two facilities in
Odessa, Texas. We also produce plant nutrient sulfur at our
facility in Seneca, Illinois. Our plant nutrient sulfur
product is a 90% degradable sulfur product marketed under the
Disper-Sul(R) trade name and sold throughout the United States
to direct application agricultural markets. Our agricultural
ground sulfur products are used primarily in the western
United States on grapes and vegetable crops.

o Ammonium sulfate products, NPK products and related blended
products. We produce various grades of ammonium sulfate
including coarse and standard grades, a 40% ammonium sulfate
solution and a Kosher-approved food grade material. We also
produce ammonium sulfate, nitrogen-phosphorus-potassium
products (commonly referred to as NPK products). Our NPK
products are an ammoniated phosphate fertilizer containing
nitrogen, phosphorus and potash that we manufacture so all
particles have a uniform composition. These products primarily
serve direct application agricultural markets within a
400-mile radius of our manufacturing plant in Plainview,
Texas. We blend our ammonium sulfate to make custom grades of
lawn and garden fertilizer at our facilities in Salt Lake
City, Utah and Maricopa, Arizona. We package these custom
grade products under both proprietary and private labels and
sell them to major retail distributors, and other retail
customers, of these products.

o Industrial sulfur products. We produce industrial sulfur
products such as emulsified sulfur, elemental pastille sulfur,
and industrial ground sulfur products. We produce emulsified
sulfur at our Texarkana, Texas facility. Emulsified sulfur is
primarily used to control the sulfur content in the pulp and
paper manufacturing processes. We produce elemental pastille
sulfur at our two Odessa, Texas facilities and at our Seneca,
Illinois facility. Elemental pastille sulfur is used to
increase the efficiency of the coal-fired precipitators in the
power industry. These industrial ground sulfur products are
also used in a variety of dusting and wettable sulfur
applications such as rubber manufacturing, fungicides, sugar
and animal feeds.

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OUR FERTILIZER PLANTS

The following is a brief description of our fertilizer plants:

In the United States, fertilizer is generally sold to farmers through
local dealers. These dealers are typically owned and supplied by much larger
wholesale distributors. We sell primarily to these wholesale distributors, as
well as to a small number of independent dealers throughout the United States.
Our industrial sulfur products are marketed primarily in the eastern United
States, where many paper manufacturers and power plants are located.

Our fertilizer products are sold in accordance with our price lists
that vary from state to state. We update our price lists periodically to make
seasonal pricing adjustments. If necessary, we adjust our price lists more
frequently to maintain competitive pricing. These products are sold at
negotiated prices, generally set on an annual basis. The pricing in our
industrial products business is generally very stable throughout any particular
year. We transport our fertilizer and industrial sulfur products to our
customers using third party common carriers. We utilize rail shipments for large
volume and long distance shipments where available.

COMPETITION

We compete with several other large fertilizer and sulfur products
manufacturers. However, we believe our close proximity to our customers is a
competitive advantage for us. Because our manufacturing plants are located close
to our customer base, we are able to save on freight costs and respond quickly
to customer requests, and we also believe we have greater insight about local
market conditions. Additionally, we believe our relationship with CF Martin
Sulphur affords us a secure and reliable source of sulfur materials.

SEASONALITY

Sales of our agricultural fertilizer are partly seasonal as a result of
increased demand during the growing season. Sales of our industrial sulfur-based
products, however, are generally consistent throughout the year. In 2002,
approximately 21% of our product sales volumes were to industrial users.

CF MARTIN SULPHUR

CF Martin Sulphur operates a molten sulfur distribution and marketing
business. We own an unconsolidated non-controlling 49.5% limited partner
interest in CF Martin Sulphur. CF Industries owns the remaining 49.5% limited
partner interest in CF Martin Sulphur. CF Industries is one of North America's
largest interregional cooperatives, owned by and serving nine regional farm
supply cooperatives. Through thousands of member-owned sales outlets, CF
Industries' nitrogen and phosphate fertilizers reach over one million farmers
and ranchers in 48 states and the Canadian provinces of Ontario and Quebec. CF
Industries is the third largest phosphate fertilizer producer in Florida. Our
49.5% interest in CF Martin Sulphur is subject to a buy-sell agreement which is
described in more detail in "--Management and Ownership" below.

SULFUR INDUSTRY OVERVIEW

Sulfur is a natural element and is required to produce a variety of
industrial products. In the United States, approximately 11 million tons of
sulfur is consumed annually, with the Tampa, Florida area being the largest
single

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market. Currently, all sulfur produced in the United States is "recovered
sulfur," or sulfur that is a by-product from oil refineries and natural gas
processing plants. Sulfur production in the United States is principally located
along the Gulf Coast, along major inland waterways and in some areas of the
western United States.

Sulfur is an important plant nutrient and is used in the manufacture of
phosphate fertilizers. Approximately 53% of worldwide sulfur consumption is
currently used for phosphate fertilizers, with the balance used for industrial
purposes. The primary application of sulfur in fertilizers occurs in the form of
sulfuric acid. Burning sulfur creates sulfur dioxide, which is subsequently
oxidized and dissolved in water to create sulfuric acid. The sulfuric acid is
then combined with phosphate rock to make phosphoric acid, the base material for
most high-grade phosphate fertilizers.

In addition to agricultural applications, sulfur (usually in the form
of sulfuric acid) is essential for manufacturing pharmaceuticals, paper,
chemicals, paint, steel, petroleum and other products. Sulfuric acid is the most
commonly produced chemical in the world.

BUSINESS AND ASSETS OF CF MARTIN SULPHUR

CF Martin Sulphur gathers molten sulfur from refiners, primarily
located on the Gulf Coast, and from natural gas processing plants, primarily
located in the southwestern United States. CF Martin Sulphur transports sulfur
by inland and offshore barges, rail cars and trucks and handled over 2.1 million
long tons of sulfur in 2002. Recovered sulfur is mainly kept in liquid form from
production to usage at a temperature of approximately 275 degrees Fahrenheit.
Because of the temperature requirement, the sulfur industry uses specialized
equipment to store and transport molten sulfur. CF Martin Sulphur has the
necessary transportation and storage assets and expertise to handle the unique
requirements for transportation and storage of molten sulfur.

The term of CF Martin Sulphur's commercial contracts typically range
from one to five years in length. The prices in such contracts are usually tied
to a published market indicator and fluctuate, typically quarterly, according to
the price movement of the indicator. CF Martin Sulphur also provides barge
transportation and tank storage to large integrated oil companies that produce
sulfur and fertilizer manufacturers that consume sulfur under transportation and
storage contracts that range from three to five years in duration. CF Martin
Sulphur also leases a 12,500-ton ocean going barge and a tug from us under an
annual renewable contract.

CF Martin Sulphur leases approximately 170 railcars equipped to
transport molten sulfur. It also has the following major marine assets it uses
to ship molten sulfur from our Beaumont, Texas terminal to our Tampa, Florida
terminal:

- ----------

(1) We own the Poseidon and Orion and lease them to CF Martin Sulphur.

13

The following is a brief description of the tanks owned by CF Martin
Sulphur and located at our terminals:

- ----------

OUR COMMERCIAL RELATIONSHIP WITH CF MARTIN SULPHUR

We are both an important supplier to and customer of CF Martin
Sulphur. We have chartered one of our offshore tug/barge tanker units to CF
Martin Sulphur for a guaranteed daily rate, subject to certain adjustments. This
charter has an unlimited term but may be cancelled by CF Martin Sulphur upon 90
days notice. CF Martin Sulphur paid to have this tug/barge tanker unit
reconfigured to carry molten sulfur. In the event CF Martin Sulphur terminates
this charter agreement, we are obligated to reimburse CF Martin Sulphur for a
portion of such reconfiguration costs. As of December 31, 2002, our aggregate
reimbursement liability would have been approximately $2.3 million. This amount
decreases by approximately $300,000 annually based on an amortization rate.

We did not have significant revenues from CF Martin Sulphur prior to
2002. However, as a result of this charter agreement, revenues from our
relationship with CF Martin Sulphur accounted for approximately 22% of our total
marine transportation revenues for the year ended December 31, 2002. In
addition, we purchase all our sulfur from CF Martin Sulphur at its cost under a
sulfur supply contract. This agreement has an annual term, which is renewable
for subsequent one-year periods.

We only own a non-controlling 49.5% limited partner interest in CF
Martin Sulphur. CF Martin Sulphur is managed by its general partner which is
jointly owned and controlled by CF Industries and Martin Resource Management.
Martin Resource Management also conducts the day-to-day operations of CF Martin
Sulphur under a long-term services agreement.

COMPETITION

Ten phosphate fertilizer manufacturers together consume a vast majority
of the total United States production of sulfur. These companies buy from
resellers as well as directly from producers. CF Martin Sulphur owns or leases
two of the four vessels currently used to transport molten sulfur between Tampa,
Florida and United States ports on the Gulf of Mexico. Its primary competition
consists of producers that sell their production directly to a fertilizer
manufacturer that has its own transportation assets, or foreign suppliers from
Mexico or Venezuela that sell into the Florida market.

MANAGEMENT AND OWNERSHIP

Management. CF Martin Sulphur is managed and operated by its general
partner which is equally owned and controlled by Martin Resource Management and
CF Industries. We have virtually no control over the operations or management of
CF Martin Sulphur. The partnership's general partner, CF Martin Sulphur, L.L.C.,
is operated by a board of four managers, two of which are designated by Martin
Resource Management and two of which are designated by CF Industries. The
managers designated by CF Industries have the sole authority to cause CF Martin
Sulphur, L.L.C. to act in regard to certain tax matters and in regard to certain
relationships between CF Martin Sulphur, on the one hand, and Martin Resource
Management and its affiliates on the other hand. Likewise, the managers
designated by Martin Resource Management have the sole authority to cause CF
Martin Sulphur, L.L.C. to act in regard to certain relationships between CF
Martin Sulphur, on the one hand, and CF Industries and its affiliates on the
other hand. For all other matters, all actions of the board of managers require
the unanimous vote of a properly constituted quorum of managers. The presence of
at least one manager designated by each of CF Industries and Martin Resource
Management must be present to constitute a proper quorum for the transaction of
company business. Martin Resource Management manages the day-to-day operations
of CF Martin Sulphur under a long-term services agreement.

14

Non-Competition Covenant. Each of Martin Resource Management and CF
Industries agreed that for so long as it owns an interest in CF Martin Sulphur,
and for five years after the disposition of its interest, it will not engage in
any business that competes, directly or indirectly, with the partnership in the
gathering, aggregation, transportation and sale of molten sulfur. This covenant
not to compete does not restrict or prohibit the parties from continuing certain
businesses the parties operated prior to the formation of the partnership, such
as Martin Resource Management's business of transporting sulfur by truck for
third parties as a carrier, or holding certain passive investments. As a result
of our 49.5% interest in CF Martin Sulphur, we are subject to this agreement not
to compete.

Distributions. Generally, distributions of cash from the partnership
will be allocated among partners on the basis of each partner's ownership
interest. The partnership agreement of CF Martin Sulphur states that
distributions of cash from the partnership to its partners, including us, will
be subject to the discretion of its general partner, except that the partnership
is required to make cash distributions, to the extent cash is available, as
follows:

o quarterly distributions of cash to partners to cover any
required quarterly federal and state tax payments (based on
the assumption that all partners pay federal income tax at the
highest rate applicable to corporations and based on other
assumptions with respect to state taxes), provided the cash
distribution for a quarter does not exceed 25% of the
forecasted cash available for distribution for the relevant
year; and

o annual distributions of cash generated by operations in excess
of the amounts CF Martin Sulphur, L.L.C. determines are
necessary to retain for future working capital and the
operation of the partnership's business, anticipated capital
expenditures and required debt service payments.

If the general partner of CF Martin Sulphur does not declare a distribution for
a period of a calendar quarter or longer, CF Martin Sulphur must make the
following distributions:

o not later than ten business days prior to the date during any
calendar quarter that any partner will be required to make an
estimated income tax payment to any federal or state tax
authority in respect of its share of CF Martin Sulphur's
taxable income during such period, CF Martin Sulphur must make
a cash distribution to each partner equal to the approximate
amount described immediately above in the first bullet point;
and

o not later than the 90th day following each fiscal year end, CF
Martin Sulphur must make an additional cash distribution to
its partners in an amount equal to the positive difference
between each partner's share of CF Martin Sulphur's
distributable cash and the sum of distributions already made
to that partner in respect of such fiscal year.

On December 19, 2002, CF Martin Sulphur made a cash distribution of
$891,000 to us. Additionally, CF Martin Sulphur made a distribution to us of
$891,000 on March 14, 2003.

Transfer Restrictions. Generally, we and the other partners in CF
Martin Sulphur are prohibited from transferring our interests in the partnership
to a third party until November 2005. Thereafter, a partner may only transfer
its interest if:

o the general partner consents to the transfer;

o the partner transfers its entire interest in the partnership;

o the person acquiring the interest does not compete with the
business of the non-transferring partners as conducted on the
date of the proposed transfer;

o the purchase price consists solely of cash;

15

o the non-transferring partners are given a right of first
refusal to purchase the interest on the same terms and
conditions as the third party offer; and

o the transfer otherwise complies with the provisions contained
in the partnership agreement of CF Martin Sulphur

Buy-Sell Right. Upon a change of control of either Martin Resource
Management or CF Industries, the other party has the right to implement a
buy-sell right contained in the CF Martin Sulphur partnership agreement. In
addition, this buy-sell right can also be implemented in the event that Martin
Resource Management no longer controls our general partner. If implemented, this
buy-sell mechanism requires the party subject to the change of control to
specify in good faith the fair market value of CF Martin Sulphur. The other
party then has the right for a specified period of time to either sell its and
its affiliates' limited and general partner interests to the other party, or buy
the limited and general partner interests owned by the other party and its
affiliates, at a price that, in either case, is based upon the proportionate
share of this value.

Additionally, beginning in November 2005, any partner may implement a
buy-sell right contained in the CF Martin Sulphur partnership agreement that
would require the initiating party to either sell the limited and general
partner interests owned by it and its affiliates to the other party, or buy the
limited and general partner interests owned by the other party and its
affiliates at a negotiated price or, if a price cannot be agreed upon, at a
price based upon the proportionate share of the fair market value of CF Martin
Sulphur as determined in good faith by the initiating party. This buy-sell right
may be exercised by any partner, but only once a year following each anniversary
date of the partnership agreement beginning November 2005. The partnership
agreement also provides for a similar buy-sell mechanism if Ruben Martin, who is
also our chief executive officer, is removed from the office of president of CF
Martin Sulphur, L.L.C. under prescribed circumstances.

The partnership agreement of CF Martin Sulphur provides that these
buy-sell rights may be exercised by CF Industries with respect to the general
and limited partner interests owned directly or indirectly by Martin Resource
Management and us. Consequently, our 49.5% limited partner interest in CF Martin
Sulphur will be treated as though it was owned directly by Martin Resource
Management for so long as Martin Resource Management is subject to this buy-sell
right.

Conversely, these buy-sell rights may be exercised by Martin Resource
Management and us with respect to the general and limited partner interests in
CF Martin Sulphur owned directly or indirectly by CF Industries. Martin Resource
Management has agreed with us that it will not exercise these buy-sell rights
without our prior written consent. If Martin Resource Management elects, with
our consent, to exercise its right to purchase the general and limited partner
interests CF Industries owns in CF Martin Sulphur, the purchase price for and
ownership of the interests will be allocated between us and Martin Resource
Management in accordance with our respective ownership interests in CF Martin
Sulphur. Martin Resource Management has also agreed with us that it will not
sell or transfer its interest in CF Martin Sulphur, L.L.C. without our prior
written consent, except in circumstances when Martin Resource Management is
obligated to sell such interest pursuant to either the limited liability company
agreement of CF Martin Sulphur, L.L.C. or the partnership agreement of CF Martin
Sulphur.

OUR RELATIONSHIP WITH MARTIN RESOURCE MANAGEMENT

Martin Resource Management is engaged in the following principal
business activities:

o providing land transportation of various liquids using a fleet
of approximately 310 trucks and road vehicles and
approximately 650 road trailers;

o distributing fuel oil, sulfuric acid, marine fuel and other
liquids;

o providing marine bunkering and other shore-based marine
services in Mobile, Alabama;

o operating a small crude oil gathering business in Stephens,
Arkansas;

16

o operating an underground LPG storage facility in Arcadia,
Louisiana;

o supplying employees and services for the operation of our
business;

o operating, for its account, our account and the account of CF
Martin Sulphur, the docks, roads, loading and unloading
facilities and other common use facilities or access routes at
our Stanolind terminal; and

o operating, solely for our account, an LPG truck loading and
unloading and pipeline distribution terminal in Mont Belvieu,
Texas.

We are and will continue to be closely affiliated with Martin Resource
Management as result of the following relationships.

Ownership. Martin Resource Management owns an approximate 58.3% limited
partner interest in us. Additionally, Martin Resource Management owns our
general partner which owns a 2.0% general partner interest in us and our
incentive distribution rights.

Management. Martin Resource Management directs our business operations
through its ownership and control of our general partner. We benefit from our
relationship with Martin Resource Management by gaining access to a significant
pool of management expertise and established relationships throughout the energy
industry. We do not have employees. Martin Resource Management employees are
responsible for conducting our business and operating our assets on our behalf.

We are parties to an omnibus agreement with Martin Resource Management.
The omnibus agreement requires us to reimburse Martin Resource Management for
all direct and indirect expenses it incurs or payments it makes on our behalf or
in connection with the operation of our business. We reimbursed Martin Resource
Management for $1.9 million of direct costs and expenses for the period from
November 6, 2002, the date of our initial public offering, to December 31, 2002.
The direct expenses Martin Resource Management incurs on our behalf consist
primarily of our allocable portion of salaries and employee benefits costs of
its employees who will provide direct support for our operations. There is no
monetary limitation on the amount we are required to reimburse Martin Resource
Management for direct expenses. Under the omnibus agreement, the amount we are
required to reimburse Martin Resource Management for indirect general and
administrative expenses and corporate overhead allocated to us is capped at $1.0
million from November 1, 2002 until November 1, 2003. Thereafter, this cap will
be subject to increases in subsequent years. We reimbursed Martin Resource
Management for $110,000 of indirect expenses for the period from November 6,
2002, the date of our initial public offering, to December 31, 2002. These
indirect expenses cover all of the centralized corporate functions Martin
Resource Management provides for us, such as accounting, treasury, clerical
billing, information technology, administration of insurance, general office
expenses and employee benefit plans and other general corporate overhead
functions we share with Martin Resource Management retained businesses.

Martin Resource Management also licenses certain of its trademarks and
tradenames to us under this omnibus agreement.

Commercial. We anticipate we will be both a significant customer and
supplier of the retained products and services offered by Martin Resource
Management following this offering. Our motor carrier agreement with Martin
Resource Management provides us with access to Martin Resource Management's
fleet of approximately 310 road vehicles and approximately 650 road trailers to
provide land transportation in the areas served by Martin Resource Management.
Our ability to utilize Martin Resource Management's land transportation
operations is currently a key component of our integrated distribution network.

We also use the underground storage facilities owned by Martin Resource
Management in our LPG distribution operations. We lease an underground storage
facility from Martin Resource Management in Arcadia, Louisiana with a storage
capacity of 120 million gallons. Our use of this storage facility gives us
greater flexibility in our operations by allowing us to store a sufficient
supply of product during times of decreased demand for use when demand
increases.

17

In the aggregate, our purchases of land transportation, storage
services, LPG products and sulfuric acid from Martin Resource Management would
have accounted for approximately 8%, 6% and 7% of our total cost of products
sold in 2002, 2001 and 2000, respectively. We also purchase marine fuel from
Martin Resource Management which we account for as an operating expense.

Correspondingly, Martin Resource Management is one of our significant
customers. It primarily uses our marine transportation, terminalling and LPG
distribution services for its operations. We provide marine transportation
services to Martin Resource Management under a charter agreement on a
spot-contract basis at applicable market rates. We provide terminalling services
under a terminal services agreement. Our sales to Martin Resource Management
would have accounted for approximately 5%, 4% and 4% of our total revenues in
2002, 2001 and 2000, respectively.

OMNIBUS AGREEMENT

We are a party to an omnibus agreement with Martin Resource Management.
In this agreement:

o Martin Resource Management agrees to not compete with us in
the marine transportation, terminalling, LPG distribution and
fertilizer businesses, subject to the exceptions described
more fully in "Item 13. Certain Relationships and Related
Transactions - Agreements -- Omnibus Agreement."

o Martin Resource Management agrees to indemnify us for a period
of five years for environmental losses arising prior to this
offering, as well as preexisting litigation and tax
liabilities.

o We agree to reimburse Martin Resource Management for the
provision of general and administrative services under the
partnership agreement, provided that indirect general and
administrative expenses and allocated corporate overhead will
not exceed $1.0 million during the twelve months following the
closing of our initial public offering. This cap may be
increased in subsequent years. This limitation shall not apply
to the cost of any third party legal, accounting or advisory
services received, or the direct expenses of Martin Resource
Management incurred, in connection with acquisition or
business development opportunities evaluated on our behalf.

o Martin Resource Management agrees to exercise its management
rights in CF Martin Sulphur in a manner it reasonably believes
is in our best interests, subject to the limitations described
more fully in "Item 13. Certain Relationships and Related
Transactions -- Agreements -- Omnibus Agreement."
Additionally, Martin Resource Management agrees it will not
purchase any third party interest in this partnership, or sell
its or our interest in this partnership, without our written
consent or, in some cases, only as we direct. In the event we
agree to purchase an interest in CF Martin Sulphur from a
third party, we and Martin Resource Management agree that the
purchase price for and ownership of such interest shall be
allocated between the us in accordance with our respective
ownership percentages in the partnership.

o We are prohibited from entering into certain material
agreements between us and Martin Resource Management without
the approval of the conflicts committee of our general
partner's board of directors.

MOTOR CARRIER AGREEMENT

We are a party to a three-year motor carrier agreement with Martin
Transport, Inc. ("Martin Transport"), a wholly owned subsidiary of Martin
Resource Management through which Martin Resource Management operates its land
transportation operations. Under this agreement, Martin Transport transports our
LPG shipments as well as other liquid products. Our shipping rates are fixed for
the first year of the agreement, subject to certain cost adjustments.
Thereafter, these rates may be adjusted as we mutually agree or in accordance
with a price index. Additionally, during the term of the agreement, shipping
charges are also subject to fuel surcharges determined on a weekly basis in
accordance with the U.S. Department of Energy's national diesel price list.

18

OTHER AGREEMENTS

We are also parties to the following:

o Terminal Services Agreement -- under which we provide
terminalling services to Martin Resource Management at a set
rate. This agreement has an initial term of three years. The
fees we charge under this agreement are fixed the first year
of the agreement and will be adjusted annually thereafter
based on a price index.

o Marine Transportation Agreement -- under which we provide
marine transportation services to Martin Resource Management
on a spot-contract basis. The fees we charge Martin Resource
Management are based on applicable market rates. Additionally,
Martin Resource Management has agreed for a period of three
years, beginning on November 1, 2002, to use our four vessels
that are currently not subject to term agreements in a manner
such that we will receive at least $5.6 million annually for
the use of these vessels by Martin Resource Management and
third parties.

o Product Storage Agreement -- under which Martin Resource
Management provides us underground storage for LPGs. This
agreement has an initial term of three years, beginning on
November 1, 2002. Our per-unit cost under this agreement is
fixed for the first year of the agreement and will be adjusted
annually based on a price index.

o Product Supply Agreements -- under which Martin Resource
Management agrees to provide us with marine fuel and sulfuric
acid. These agreements have an initial term of three years. We
purchase products at a set margin above Martin Resource
Management's cost for such products during the term of the
agreements.

o Throughput Agreement -- under which Martin Resource Management
agrees to provide us with sole access to and use of a LPG
truck loading and unloading and pipeline distribution terminal
located at Mont Belvieu, Texas. This agreement has an initial
term of three years. Our throughput is fixed for the first
year of the agreement and will be adjusted annually based on
an index price.

Finally, Martin Resource Management also granted us a perpetual,
non-exclusive use, ingress-egress and utility facilities easement in connection
with the transfer of our Stanolind terminal assets to us. Please read "Item 13.
Certain Relationships and Related Transactions -- Omnibus Agreement," "-- Motor
Carrier Agreement" and "-- Other Agreements" for a more complete discussion of
our contracts with Martin Resource Management.

INSURANCE

Loss of, or damage to, our vessels is insured through hull and
increased value insurance policies. Vessel operating liabilities such as
collision, cargo, environmental and personal injury are insured primarily
through our participation in mutual insurance associations and other reinsurance
arrangements, pursuant to which we are potentially exposed to assessments in the
event claims by us or other members exceed available funds and reinsurance.
Protection and indemnity, or P&I, insurance coverage is provided by P&I
associations and other insurance underwriters. Most of our vessels are entered
in P&I associations that are parties to a pooling agreement, known as the
International Group Pooling Agreement, or the Pooling Agreement, through which
approximately 95% of the world's commercial shipping tonnage is reinsured
through a group reinsurance policy. With regard to collision coverage, the first
$1,000,000 of coverage is insured by our hull policy and any excess is insured
by a P&I association. We insure our owned cargo through a domestic insurance
company. We insure cargo owned by third parties through our P&I coverage. As a
member of P&I associations that are parties of the Pooling Agreement, we are
subject to calls payable to the associations of which it is a member, based on
our claims record and the other members of the other P&I associations that are
parties to the Pooling Agreement. Except for our marine operations, we
self-insure against liability exposure up to a pre-determined amount, beyond
which we are covered by catastrophe insurance coverage.

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For pollution claims, our insurance covers up to $1 billion of
liability per accident or occurrence. For non-pollution incidents, our insurance
covers up to $2 billion of liability per accident or occurrence. We believe our
current insurance coverage is adequate to protect us against most accident
related risks involved in the conduct of our business and that we maintain
appropriate levels of environmental damage and pollution insurance coverage.
However, there can be no assurance that all risks are adequately insured
against, that any particular claim will be paid by the insurer, or that we will
be able to procure adequate insurance coverage at commercially reasonable rates
in the future.

ENVIRONMENTAL AND REGULATORY MATTERS

Our activities are subject to various federal, state and local laws and
regulations, as well as orders of regulatory bodies, governing a wide variety of
matters, including marketing, production, pricing, community right-to-know,
protection of the environment, safety and other matters.

Environmental. We believe our operations and facilities are in
substantial compliance with applicable environmental regulations. However, risks
of process upsets, accidental releases or spills are associated with our
operations and there can be no assurance that significant costs and liabilities
will not be incurred, including those relating to claims for damage to property
and persons.

The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may affect the environment, such
as emissions of pollutants, generation and disposal of wastes and use and
handling of chemical substances. The usual remedy for failure to comply with
these laws and regulations is the assessment of administrative, civil and, in
some instances, criminal penalties or, in some circumstances, injunctions. We
believe the cost of compliance with environmental laws and regulations will not
have a material adverse effect on our results of operations or financial
condition. However, it is possible the costs of compliance with environmental
laws and regulations will continue to increase, and thus there can be no
assurance as to the amount or timing of future expenditures for environmental
compliance or remediation, and actual future expenditures may be different from
the amounts currently anticipated. In the event of future increases in costs, we
may be unable to pass on those increases to our customers. We will attempt to
anticipate future regulatory requirements that might be imposed and plan
accordingly in order to remain in compliance with changing environmental laws
and regulations and to minimize the costs of such compliance.

Solid Waste. We currently own or lease, and have in the past owned or
leased, properties that have been used for the manufacturing, processing,
transportation and storage of hydrocarbon products and by-products. Solid waste
disposal practices within oil and gas related industries have improved over the
years with the passage and implementation of various environmental laws and
regulations. Nevertheless, a possibility exists that hydrocarbons and other
solid wastes may have been disposed of on or under various properties owned or
leased by us during the operating history of those facilities. In addition, a
small number of these properties may have been operated by third parties over
whom we had no control as to such entities' handling of hydrocarbons,
hydrocarbon by-products or other wastes and the manner in which such substances
may have been disposed of or released. State and federal laws applicable to oil
and natural gas wastes and properties have gradually become more strict and,
under such laws and regulations, we could be required to remove or remediate
previously disposed wastes or property contamination, including groundwater
contamination.

We generate both hazardous and nonhazardous solid wastes which are
subject to requirements of the federal Resource Conservation and Recovery Act
and comparable state statutes. From time to time, the U.S. Environmental
Protection Agency ("EPA") has considered making changes in nonhazardous waste
standards that would result in stricter disposal requirements for these wastes.
Furthermore, it is possible some wastes generated by us that are currently
classified as nonhazardous may in the future be designated as "hazardous
wastes," resulting in the wastes being subject to more rigorous and costly
disposal requirements. Changes in applicable regulations may result in an
increase in our capital expenditures or operating expenses.

Superfund. The Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law,
and similar state laws, impose liability without regard to fault or the legality
of the original conduct, on certain classes of persons, including the owner or
operator of a site and

20

companies that disposed or arranged for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the EPA and, in some cases, third
parties to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs they incur. Although certain hydrocarbons are not subject to CERCLA's
reach because "petroleum" is excluded from CERCLA's definition of a "hazardous
substance," in the course of our ordinary operations we will generate wastes
that may fall within the definition of a "hazardous substance." We may be
responsible under CERCLA for all or part of the costs required to clean up sites
at which such wastes have been disposed. We have not received any notification
that we may be potentially responsible for cleanup costs under CERCLA.

Clean Air Act. Our operations are subject to the Federal Clean Air Act
and comparable state statutes. Amendments to the Clean Air Act adopted in 1990
contain provisions that may result in the imposition of increasingly stringent
pollution control requirements with respect to air emissions from the operations
of our terminal facilities, processing and storage facilities and fertilizer and
related products manufacturing and processing facilities. Such air pollution
control requirements may include specific equipment or technologies, permits
with emissions and operational limitations, pre-approval of new or modified
projects or facilities producing air emissions, and similar measures. For
example, the Mont Belvieu terminal we use is located in the Houston-Galveston
ozone non-attainment area, which is categorized as a "severe" non-attainment
area under the Clean Air Act. "Severe" non-attainment areas are subject to more
restrictive regulations for the issuance of air permits for new or modified
facilities. In addition, existing sources of air emissions in the
Houston-Galveston area are subject to stringent emission reduction requirements.
Failure to comply with applicable air statutes or regulations may lead to the
assessment of administrative, civil or criminal penalties, and/or result in the
limitation or cessation of construction or operation of certain air emission
sources. We believe our operations, including our manufacturing, processing and
storage facilities and terminals, are in substantial compliance with applicable
air emission control requirements.

Clean Water Act. The Federal Water Pollution Control Act, also known as
the Clean Water Act, and similar state laws require containment of potential
discharges of contaminants into federal and state waters. Regulations
promulgated under these laws require entities that discharge into federal and
state waters obtain National Pollutant Discharge Elimination System ("NPDES")
and/or state permits authorizing these discharges. The Clean Water Act and
analogous state laws provide penalties for releases of unauthorized contaminants
into the water and impose substantial liability for the costs of removing spills
from such waters. In addition, the Clean Water Act and analogous state laws
require that individual permits or coverage under general permits be obtained by
covered facilities for discharges of stormwater runoff. We believe that
compliance with the conditions of such permits will not have a material effect
on our operations.

On August 7, 2000, a spill of molten sulfur occurred at our Stanolind
terminal near Beaumont, Texas, which at the time was owned and operated by
Martin Gas Sales LLC, a wholly-owned subsidiary of Martin Resource Management
("Martin Gas Sales"). The Texas Department of Health and Texas Natural Resource
Conservation Commission investigated the spill and its clean-up. These agencies
found that there was no impact on public health, and that there was no reason to
remove the solidified sulfur from the river bottom. However, the United States
attorney in Beaumont, Texas, initiated an investigation under the criminal
provisions of the Clean Water Act. To avoid protracted litigation and possible
criminal claims against employees, Martin Gas Sales agreed to plead guilty to a
single felony violation of the federal Clean Water Act and was sentenced to pay
a $50,000 fine. As part of its plea agreement with the United States, Martin Gas
Sales also agreed to implement a remedial program at our Stanolind terminal and
our sulfur loading facility in Tampa, Florida. Martin Gas Sales instituted the
remedial program as of March 1, 2002, and we believe that it has been
substantially implemented, although it must remain in effect for five years.
Martin Gas Sales does not have any contracts with the United States that might
be affected by a debarment or listing proceeding, and the United States
Attorney's Office has agreed to inform any agency initiating a debarment or
listing proceeding of the implementation of the remedial program. A previous
criminal conviction, however, may result in increased fines and other sanctions
if Martin Gas Sales is subsequently convicted or pleads guilty to a similar
offense in the future. Martin Resource Management will indemnify us under the
omnibus agreement for any losses we suffer within five years from November 6,
2002, the date of our initial public offering, that relate to or result from,
this event.

Oil Pollution Act. The Oil Pollution Act of 1990, as amended ("OPA")
imposes a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in

21

United States waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages. The OPA also requires
that all newly constructed tank barges engaged in oil transportation in the
United States be double hulled and all existing single hull tank barges be
retrofitted with double hulls or phased out by 2015. Additionally, the OPA
imposes other requirements, such as the preparation of an oil spill contingency
plan. We believe we are substantially in compliance with all of these
requirements.

Safety Regulation. The Company's marine transportation operations are
subject to regulation by the United States Coast Guard, federal laws, state laws
and certain international treaties. Tank ships, pushboats, tugboats and barges
are required to meet construction and repair standards established by the
American Bureau of Shipping, a private organization, and the United States Coast
Guard and to meet operational and safety standards presently established by the
United States Coast Guard. We believe our marine operations and our terminals
are in substantial compliance with current applicable safety requirements.

Occupational Health Regulations. The workplaces associated with our
manufacturing, processing, terminal and storage facilities are subject to the
requirements of the federal Occupational Safety and Health Act ("OSHA") and
comparable state statutes. We believe we have conducted our operations in
substantial compliance with OSHA requirements, including general industry
standards, record keeping requirements and monitoring of occupational exposure
to regulated substances. In May 2001, Martin Resource Management paid a small
fine in relation to the settlement of alleged OSHA violations at our facility in
Plainview, Texas. Although we believe the amount of this fine and the nature of
these violations were not, as an individual event, material to our business or
operations, this violation may result in increased fines and other sanctions if
we are cited for similar violations in the future. Our marine vessel operations
are also subject to safety and operational standards established and monitored
by the U.S. Coast Guard.

In general, we expect to increase our expenditures relating to
compliance with likely higher industry and regulatory safety standards such as
those described above. These expenditures cannot be accurately estimated at this
time, but we do not expect them to have a material adverse effect on our
business.

Jones Act. The Jones Act is a federal law that restricts maritime
transportation between locations in the United States to vessels built and
registered in the United States and owned and manned by United States citizens.
Since we engage in maritime transportation between locations in the United
States, we are subject to the provisions of the law. As a result, we are
responsible for monitoring the ownership of our subsidiaries that engage in
maritime transportation and for taking any remedial action necessary to insure
that no violation of the Jones Act ownership restrictions occurs. The Jones Act
also requires that all United States-flag vessels be manned by United States
citizens. Foreign-flag seamen generally receive lower wages and benefits than
those received by United States citizen seamen. This requirement significantly
increases operating costs of United States-flag vessel operations compared to
foreign-flag vessel operations. Certain foreign governments subsidize their
nations' shipyards. This results in lower shipyard costs both for new vessels
and repairs than those paid by United States-flag vessel owners. The United
States Coast Guard and American Bureau of Shipping maintain the most stringent
regime of vessel inspection in the world, which tends to result in higher
regulatory compliance costs for United States-flag operators than for owners of
vessels registered under foreign flags of convenience.

Merchant Marine Act of 1936. The Merchant Marine Act of 1936 is a
federal law that provides that, upon proclamation by the president of the United
States of a national emergency or a threat to the national security, the United
States Secretary of Transportation may requisition or purchase any vessel or
other watercraft owned by United States citizens (including us, provided that we
are considered a United States citizen for this purpose.) If one of our
pushboats, tugboats or tank barges were purchased or requisitioned by the United
States government under this law, we would be entitled to be paid the fair
market value of the vessel in the case of a purchase or, in the case of a
requisition, the fair market value of charter hire. However, if one of our
pushboats or tugboats is requisitioned or purchased and its associated tank
barge is left idle, we would not be entitled to receive any compensation for the
lost revenues resulting from the idled barge. We also would not be entitled to
be compensated for any consequential damages we suffer as a result of the
requisition or purchase of any of our pushboats, tugboats or tank barges.

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EMPLOYEES

We do not have any employees. Under the Omnibus Agreement, Martin
Resource Management provides us with corporate staff and support services. These
services include centralized corporate functions, such as accounting, treasury,
engineering, information technology, insurance, administration of employee
benefit plans and other corporate services. Martin Resource Management employs
approximately 285 individuals who provide direct support to our operations. None
of these employees are represented by labor unions. To date, Martin Resource
Management has not experienced any work stoppages.

ITEM 2. PROPERTIES

A description of our properties is contained in "Item 1. Business."

We believe we have satisfactory title to our assets. Some of the
easements, rights-of-way, permits, licenses or similar documents relating to the
use of the properties that have been transferred to us in connection with our
initial public offering, required the consent of third parties, which in some
cases is a governmental entity. We believe we have obtained sufficient
third-party consents, permits and authorizations for the transfer of assets
necessary for us to operate our business in all material respects. With respect
to any third-party consents, permits or authorizations that have not been
obtained, we believe the failure to obtain these consents, permits or
authorizations will not have a material adverse effect on the operation of our
business.

Title to our property may be subject to encumbrances. We believe none
of these encumbrances materially detract from the value of our properties or our
interest in these properties, or materially interfere with their use in the
operation of our business.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we are subject to certain legal proceedings claims
and disputes that arise in the ordinary course of our business. Although we
cannot predict the outcomes of these legal proceedings, we do not believe these
actions, in the aggregate, will have a material adverse impact on our financial
position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED UNITHOLDER MATTERS

Our common units are traded on the NASDAQ National Market ("NASDAQ")
under the symbol "MMLP." As of December 31, 2002, there were approximately 13
holders of record and approximately 3,397 beneficial owners of our common units.
The following table sets forth the high and low sales prices of our common units
for the period from November 6, 2002, the date of our initial public offering,
to December 31, 2002, the end of our fiscal year, based on the daily composite
listing of stock transactions for the NASDAQ and cash distributions declared per
common and subordinated units during those periods:

- ----------

On June 21, 2002 in connection with our initial formation, we issued to
our general partner a 2% general partner interest for $20, and to Martin
Resource LLC, a 98% limited partner interest for $980 in an offering exempt from
registration under Section 4(2) of the Securities Act of 1933.

On November 6, 2002, as consideration for the contribution of assets
and liabilities by Martin Resource Management and its affiliates, we issued to
Martin Resource Management and its affiliates 4,253,362 subordinated units
representing limited partner interests as well as rights to receive incentive
distributions in a private placement offering exempt from registration under
Section 4(2) of the Securities Act of 1933. In addition, the capital
contribution of our general partner was increased so that the general partner
interest held by our general partner remained at 2%.

On January 20, 2003 we declared an initial prorated cash distribution
of $0.3077 per unit, which was paid on February 14, 2003 to common and
subordinated unitholders of record as of the close of business on January 31,
2003. This distribution was equivalent to a full minimum quarterly distribution
of $0.50 per unit prorated for the period from November 6, 2002, the date of the
closing of our initial public offering of its common units, through December 31,
2002.

Within 45 days after the end of each quarter, we will distribute all of
our available cash, as defined in our partnership agreement, to unitholders of
record on the applicable record date. During the subordination period (as
described below), the common units will have the right to receive distributions
of available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.50 per quarter, plus any arrearages in the payment
of the minimum quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating surplus may be made on
the subordinated units. Our available cash consists generally of all cash on
hand at the end of the fiscal quarter, less reserves that our general partner
determines are necessary to:

o provide for the proper conduct of our business;

o comply with applicable law, any of our debt instruments, or
other agreements; or

o provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;

plus all cash on hand for the quarter resulting from working capital borrowings
made after the end of the quarter on the date of determination of available
cash.

24

Our general partner has broad discretion to establish cash reserves
that it determines are necessary or appropriate to properly conduct our
business. These can include cash reserves for future capital and maintenance
expenditures, reserves to stabilize distributions of cash to the unitholders and
our general partner, reserves to reduce debt, or, as necessary, reserves to
comply with the terms of any of our agreements or obligations. Our distributions
are effectively made 98 percent to unitholders and two percent to our general
partner, subject to the payment of incentive distributions to our general
partner if certain target cash distribution levels to common unitholders are
achieved. Incentive distributions to our general partner increase to 15 percent,
25 percent and 50 percent based on incremental distribution thresholds as set
forth in our partnership agreement.

Our ability to distribute available cash is contractually restricted by
the terms of our credit facility. Our credit facility contains covenants
requiring us to maintain certain financial ratios. We are prohibited from making
any distributions to unitholders if the distribution would cause an event of
default, or an event of default is existing, under our credit facility. Please
read "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Description of Our
Credit Facility."

During the subordination period, the common units will have the right
to receive distributions of available cash from operating surplus in an amount
equal to the minimum quarterly distribution of $0.50 per quarter, plus any
arrearages in the payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units. The purpose of the
subordinated units is to increase the likelihood that during the subordination
period there will be available cash to be distributed on the common units.

The subordination period will extend until the first day of any quarter
beginning after September 30, 2009 in which each of the following tests are met:

o distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the minimum quarterly distribution for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date;

o the "adjusted operating surplus" as defined in the partnership
agreement generated during each of the three consecutive,
non-overlapping four-quarter periods immediately preceding
that date equaled or exceeded the sum of the minimum quarterly
distributions on all of the outstanding common units and
subordinated units during those periods on a fully diluted
basis and the related distribution on the 2% general partner
interest during those periods; and

o there are no arrearages in payment of the minimum quarterly
distribution on the common units.

Upon expiration of the subordination period, each outstanding subordinated unit
will convert into one common unit and will participate pro rata with the other
common units in distributions of available cash.

ITEM 6. SELECTED CONSOLIDATED AND COMBINED FINANCIAL DATA

The following selected consolidated and combined financial data are
qualified by reference to and should be read in conjunction with our
Consolidated and Combined Financial Statements and Notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this document.

25

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

References in this annual report to "we," "ours," "us" or like terms
when used in a historical context refer to the assets and operations of Martin
Resource Management's business contributed to us in connection with our initial
public offering on November 6, 2002. References in this annual report to "Martin
Resource Management" refers to Martin Resource Management Corporation and its
subsidiaries, unless the context otherwise requires. We refer to liquefied
petroleum gas as "LPG" in this annual report. You should read the following
discussion of our financial condition and results of operations in conjunction
with the consolidated and combined financial statements and the notes thereto
included elsewhere in this annual report.

FORWARD-LOOKING STATEMENTS

This report on Form 10-K includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements
included in this annual report that are not historical facts (including any
statements concerning plans and objectives of management for future operations
or economic performance, or assumptions or forecasts related thereto),
including, without limitation, the information set forth in "Managements
Discussion and Analysis of Financial Condition and Results of Operation", are
forward-looking statements. These statements can be identified by the use of
forward-looking terminology including "forecast," "may," "believe," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. We and our representatives may from time to time make other oral or
written statements that are also forward-looking statements.

These forward-looking statements are made based upon management's
current plans, expectations, estimates, assumptions and beliefs concerning
future events impacting us and therefore involve a number of risks and
uncertainties. We caution that forward-looking statements are not guarantees and
that actual results could differ materially from those expressed or implied in
the forward-looking statements.

Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of important reasons,
including those discussed under "Risks Related to our Business" and elsewhere in
this annual report.

OVERVIEW

We are a Delaware limited partnership formed by Martin Resource
Management to receive the transfer of substantially all of the assets,
liabilities and operations of Martin Resource Management related to the four
lines of business that we operate in. We provide marine transportation,
terminalling, distribution and midstream logistical services for producers and
suppliers of hydrocarbon products and by-products, specialty chemicals and other
liquids. We also manufacture and market sulfur-based fertilizers and related
products. Hydrocarbon products and by-products are produced primarily by major
and independent oil and gas companies who often turn to independent third
parties, such as us, for the transportation and disposition of these products.
In addition to these major and independent oil and gas companies, our primary
customers include independent refiners, large chemical companies, fertilizer
manufacturers and other wholesale purchasers of hydrocarbon products and
by-products. We operate primarily in the Gulf Coast region of the United States.

In connection with the November 6, 2002 closing of the initial public offering
of common units representing limited partner interests in us, Martin Resource
Management, and certain of its subsidiaries conveyed to us certain of their
assets, liabilities and operations, in exchange for the following: (i) a 2%
general partnership interest held by our general partner, an indirect
wholly-owned subsidiary of Martin Resource Management, (ii) incentive
distribution rights granted by us, and (iii) 4,253,362 subordinated units in us.
The operations that were contributed to us relate to four primary lines of
business: (1) marine transportation of hydrocarbon and hydrocarbon by-products;
(2) terminalling of hydrocarbon and hydrocarbon by-products; (3) LPG
distribution; and (4) fertilizer manufacturing.

27

We analyze and report our results of operations on a segment basis. Our
four operating segments are as follows:

o marine transportation services for hydrocarbon products and
by-products;

o terminalling of hydrocarbon products and by-products;

o distribution of LPGs; and

o manufacturing and marketing fertilizer products, which are primarily
sulfur-based, and other sulfur-related products.

In November 2000, Martin Resource Management and CF Industries formed
CF Martin Sulphur. CF Martin Sulphur collects and aggregates, transports, stores
and markets molten sulfur. Prior to November 2000, Martin Resource Management
operated this molten sulfur business as part of its LPG distribution business
which was recently contributed to us in connection with our formation. We have a
non-controlling 49.5% limited partner interest in CF Martin Sulphur. We account
for this interest in CF Martin Sulphur using the equity method since we do not
control this entity. As a result, we have not included any portion of the
revenue, operating costs or operating income attributable to CF Martin Sulphur
in our results of operations or in the results of operations of any of our
operating segments. Rather, we have included only our share of its net income in
our statement of operations.

Under the equity method of accounting, we do not include any individual
assets or liabilities of CF Martin Sulphur on our balance sheet; instead, we
carry our book investment as a single amount within the "other assets" caption
on our balance sheet. We have not guaranteed the repayment of any debt of CF
Martin Sulphur and we should not otherwise be required to repay any obligations
of CF Martin Sulphur if it defaults on any such obligations.

Our operations were part of a taxable consolidated group prior to
November 6, 2002. Therefore, for all periods prior to November 6, 2002 our
consolidated and combined financial statements include the effects of applicable
income taxes in order to comply with generally accepted accounting principles.
Subsequent to November 6, 2002, we have not been subject to federal or state
income taxes as a result of our partnership structure. Therefore, our results of
operations subsequent to November 6, 2002 do not include the effects of any
income taxes.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations are based on the related consolidated and combined financial
statements included elsewhere herein. We prepared these financial statements in
conformity with generally accepted accounting principles. The preparation of
these financial statements required us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We based our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances.
Our results may differ from these estimates. Currently, we believe that our
accounting policies do not require us to make estimates using assumptions about
matters that are highly uncertain. However, we have described below the critical
accounting policies that we believe could impact our consolidated and combined
financial statements most significantly.

You should also read Note 2, "Summary of Significant Accounting
Policies" in Notes to Consolidated and Combined Financial Statements contained
in this annual report in conjunction with this Management's Discussion and
Analysis of Financial Condition and Results of Operations. Some of the more
significant estimates in these financial statements include the amount of the
allowance for doubtful accounts receivable, the benefit period for the
amortization of goodwill (prior to January 1, 2002) and other intangibles and
the determination of the fair value of our reporting units under SFAS No. 142.

Product Exchanges. We enter into product exchange agreements with third
parties whereby we agree to exchange LPGs with third parties. We record the
balance of LPGs due to other companies under these agreements

28

at quoted market product prices and the balance of LPGs due from other companies
at the lower of cost or market. Cost is determined using the first-in, first-out
("FIFO") method.

Revenue Recognition. For our marine transportation segment, we
recognize revenue for contracted trips upon completion of the trips. For time
charters, we recognize revenue based on the daily rate. For our terminalling
segment, we recognize revenue monthly for storage contracts based on the
contracted monthly tank fixed fee. For throughput contracts, we recognize
revenue based on the volume moved through our terminals at the contracted rate.
For our LPG distribution segment, we recognize revenue for product delivered by
truck upon the delivery of LPGs to our customers, which occurs when the customer
physically receives the product. When product is sold in storage, or by
pipeline, we recognize revenue when the customer receives the product from
either the storage facility or pipeline. For our fertilizer segment, we
recognize revenue when the customer takes title to the product, either at our
plant or the customer's facility.

Equity Method Investment. We use the equity method of accounting for
our interest in CF Martin Sulphur because we only own a non-controlling 49.5%
limited partner interest in this entity. In accordance with EITF Issue 89-7,
Exchange of Assets or Interest in a Subsidiary for a Non-Controlling Equity
Interest in a New Entity, we did not recognize a gain when we contributed our
molten sulfur business to CF Martin Sulphur because we concluded we had an
implied commitment to support the operations of this entity as a result of our
role as a supplier of product to CF Martin Sulphur and our relationship to
Martin Resource Management, which guarantees the debt of this entity.

As a result of the non-recognition of this gain, the amount we
initially recorded as an investment in CF Martin Sulphur on our balance sheet is
less than the amount of our underlying equity in this entity as recorded on the
books of CF Martin Sulphur. We are amortizing such excess amount over 20 years,
the expected life of the net assets contributed to this entity, as additional
equity in earnings of CF Martin Sulphur in our statements of operations.

Goodwill. We adopted SFAS No. 142 effective January 1, 2002. As
discussed above, SFAS No. 142 discontinues goodwill amortization over its
estimated useful life; rather goodwill is subject to a fair-value based
impairment test in the year of adoption and on an annual basis.

The amount of our unamortized goodwill as of December 31, 2001 was $2.9
million. We performed the initial and annual impairment tests required by SFAS
No. 142 as of January 1, 2002 and September 30, 2002, respectively. In
performing such tests, we determined we had three "reporting units" which
contained goodwill. These reporting units were three of our reporting segments
and were: marine transportation, LPG distribution and fertilizer.

We performed the first test under SFAS No. 142 which is to compare the
fair value of each reporting unit to the related carrying amount (including
amounts for goodwill) in the consolidated and combined financial statements. We
determined fair value in each reporting unit based on a multiple of current
annual cash flows. We determined such multiple from our recent experience with
actual acquisitions and dispositions and valuing potential acquisitions and
dispositions.

For all three reporting units, the fair value exceeded the carrying
amount of the reporting units, indicated no impairment of goodwill.

Prior to January 1, 2002, we amortized goodwill on a straight-line
basis over the expected future periods to be benefited, generally 15 years. We
assessed goodwill for recoverability by determining whether the amortization of
the goodwill balance over its remaining life could be recovered through
undiscounted future operating cash flows of the acquired operation.

Environmental Liabilities. We have historically not experienced
circumstances requiring us to account for environmental remediation obligations.
If such circumstances arise, we would estimate remediation obligations utilizing
a remediation feasibility study and any other related environmental studies that
we may elect to perform. We would record changes to our estimated environmental
liability as circumstances change or events occur, such as

29

the issuance of revised orders by governmental bodies or court or other judicial
orders and our evaluation of the likelihood and amount of the related eventual
liability.

Allowance for Doubtful Accounts. In evaluating the collectibility of
its accounts receivable, we assess a number of factors, including a specific
customer's ability to meet its financial obligations to us, the length of time
the receivable has been past due and historical collection experience. Based on
these assessments, we record both specific and general reserves for bad debts to
reduce the related receivable to the amount we ultimately expects to collect
from customers.

OUR RELATIONSHIP WITH MARTIN RESOURCE MANAGEMENT

We are both an important supplier to and customer of Martin Resource
Management. We provide marine transportation and terminalling services to Martin
Resource Management under the following agreements. Each agreement has a
three-year term, that began on November 1, 2002, and will automatically renew
for consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term.

o We provide marine transportation services to Martin Resource
Management under an agreement on a spot-contract basis. We
charge fees to Martin Resource Management under this agreement
based on applicable market rates. Additionally, under this
agreement, Martin Resource Management has agreed, for a three
year period beginning November 1, 2002, to use four of our
vessels in a manner such that we receive at least $5.6 million
annually for the use of these vessels by Martin Resource
Management and third parties.

o Martin Resource Management leases one of our tanks at our
Tampa terminal under a terminal services agreement. The tank
lease fee is fixed for the first year of the agreement and
will be adjusted annually thereafter based on a price index.

We purchase land transportation services, underground storage services,
sulfuric acid and marine fuel from Martin Resource Management. We also have
exclusive access to and use of a truck loading and unloading terminal and
pipeline distribution system owned by Martin Resource Management at Mont
Belvieu, Texas. We purchase these products and services under the following
agreements. Each agreement has a three-year term and will automatically renew
for consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term.

o Martin Resource Management transports LPG shipments and other
liquid products under a motor carrier agreement. Our shipping
rates are fixed for the first year of the agreement, subject
to certain cost adjustments. After the first year, shipping
rates may be adjusted as we and Martin Resource Management
mutually agree or in accordance with a price index.

o We lease 120 million gallons of underground LPG storage
capacity in Arcadia, Louisiana from Martin Resource Management
under an underground storage agreement. Our per-unit cost
under this agreement is fixed for the first year of the
agreement and will be adjusted annually thereafter based on a
price index.

o We purchase sulfuric acid and marine fuel on a spot-contract
basis at a set margin over Martin Resource Management's cost
under product supply agreements.

o We use Martin Resource Management's Mont Belvieu truck loading
and unloading terminal and pipeline distribution system under
a throughput agreement. Our throughput fees are fixed for the
first year of the agreement and then will be adjusted on an
annual basis thereafter in accordance with a price index.

30

With the exception of marine transportation services, which we provide
to Martin Resource Management at applicable market rates, the pricing and rates
of all of these agreements were based the same prices and rates in place prior
to our initial public offering.

Martin Resource Management directs our business operations through its
ownership and control of our general partner and under an omnibus agreement,
which was entered into on November 1, 2002. We are required to reimburse Martin
Resource Management for all direct and indirect expenses it incurs or payments
it makes on our behalf or in connection with the operation of our business.
Under the omnibus agreement, the amount we are required to reimburse Martin
Resource Management for indirect general and administrative expenses and
corporate overhead allocated to us is capped at $1.0 million during the first
year of the agreement. In each of the following four years, this amount may be
increased by no more than the percentage increase in the consumer price index
for the applicable year. In addition, our general partner has the right to agree
to further increases in connection with expansions of our operations through the
acquisition or construction of new assets or businesses.

OUR RELATIONSHIP WITH CF MARTIN SULPHUR

We are both an important supplier to and customer of CF Martin Sulphur.
We have chartered one of our offshore tug/barge tanker units to CF Martin
Sulphur for a guaranteed daily rate, subject to certain adjustments. This
charter has an unlimited term but may be cancelled by CF Martin Sulphur upon 90
days notice. CF Martin Sulphur paid to have this tug/barge tanker unit
reconfigured to carry molten sulfur. In the event CF Martin Sulphur terminates
this charter agreement, we are obligated to reimburse CF Martin Sulphur for a
portion of such reconfiguration costs. As of December 31, 2002, our aggregate
reimbursement liability would have been approximately $2.3 million. This amount
decreases by approximately $300,000 annually based on an amortization rate.

We did not have significant revenues from CF Martin Sulphur prior to
2002.

In addition, we purchase all our sulfur from CF Martin Sulphur at its
cost under a sulfur supply contract. This agreement has an annual term, which is
renewable for subsequent one-year periods.

We only own a non-controlling 49.5% limited partner interest in CF
Martin Sulphur. CF Martin Sulphur is managed by its general partner which is
jointly owned and controlled by CF Industries and Martin Resource Management.
Martin Resource Management also conducts the day-to-day operations of CF Martin
Sulphur under a long-term services agreement.

RESULTS OF OPERATIONS

The results of operations for the years ended December 31, 2001 and
2000 have been derived from the combined financial statements of Martin
Midstream Partners Predecessor. The combined results of operations for the year
ended December 31, 2002 have been derived from the combined financial statements
of Martin Midstream Partners Predecessor for the period from January 1, 2002
through November 5, 2002 and the consolidated financial statements of Martin
Midstream Partners, L.P. for the period from November 6, 2002 through December
31, 2002.

31

Prior to November 6, 2002, our consolidated and combined financial
statements reflected our operations as being subject to income taxes. Subsequent
to November 6, 2002, we are not subject to income taxes due to our partnership
structure. Therefore, we believe a more meaningful comparison of the results of
our operations is income before income taxes.

Our effective income tax rates for the period from January 1, 2002
through November 5, 2002 and the years ended December 31, 2001 and 2000 were
37%, 37% and 48%, respectively. Our effective income tax rates for the periods
we were taxable differed from the federal tax rate of 34% primarily as a result
of state income taxes and the non-deductibility of certain goodwill amortization
for book purposes.

We evaluate segment performance on the basis of operating income, which
is derived by subtracting cost of products sold, operating expenses, selling,
general and administrative expenses, and depreciation and amortization expense
from revenues. The following table sets forth our operating income by segment,
and equity in earnings of unconsolidated entities, for the years ended December
31, 2002, 2001, and 2000.

Our results of operations are discussed on a comparative basis below.
We discuss items we do not allocate on a segment basis, such as equity in
earnings of unconsolidated entities, interest expense, income tax expenses, and
indirect selling, general and administrative expenses, after the comparative
discussion of our results within each segment.

YEAR ENDED DECEMBER 31, 2002 (COMBINED) COMPARED TO YEAR ENDED DECEMBER 31, 2001

Our total revenues were $149.9 million in 2002 compared to $163.1
million in 2001, a decrease of $13.2 million, or 8%. Our cost of products sold
was $110.5 million in 2002 compared to $119.8 million in 2001, a decrease of
$9.3 million, or 8%. Our total operating expenses were $19.7 million in 2002
compared to $20.5 million in 2001, a decrease of $0.8 million, or 4%.

Our total selling, general and administrative expenses were $6.6
million in 2002 compared to $7.5 million in 2001, a decrease of $0.9 million, or
12%. Depreciation and amortization was $4.5 million in 2002 compared to $4.1
million in 2001, an increase of $0.4 million, or 9%. Our operating income was
$8.6 million in 2002 compared to $11.2 million in 2001, a decrease of $2.7
million, or 24%.

These results of operations are discussed in greater detail on a
segment basis below.

MARINE TRANSPORTATION BUSINESS

The following table summarizes our results of operations in our marine
transportation segment.

Revenues. Our marine transportation revenues decreased $4.2 million, or
15%, in 2002 compared to 2001. This decrease was primarily due to lower rates we
charged for our services, lower demand for our services and the temporary
non-use of two of our offshore barge units. The decrease in demand for our
services, as well as the decrease in our rates, was primarily due to an
industry-wide decrease in the transportation of fuel oil. In 2001, higher
natural gas prices created additional demand for fuel oil as a substitute for
natural gas. When natural gas prices declined by the end of the second quarter
of 2001, the demand for and price of fuel oil returned to normal levels.
Additionally, we placed one of our offshore barge units in a shipyard for 56
days during the first quarter of 2002. This unit historically carried fuel oil
and was placed in the shipyard in order to modify it to carry molten sulfur. We
placed another of our offshore barge units in a shipyard for 30 days for repair
and maintenance. The unavailability of these two barge units resulted in a
decrease in revenues during 2002. These vessels are both currently in operation
and under term contracts.

Operating expenses. Operating expense decreased $0.6 million, or 4% in
2002 compared to 2001. This decrease was due primarily to lower expenses
incurred while two of our barge units were in a shipyard for the

33

conversion and maintenance discussed above. Additionally, in November 2002, we
purchased two inland barges that were previously utilized under an operating
lease agreement.

Selling general and administrative expenses. Selling, general, and
administrative expenses were $.5 million for both years.

Depreciation and amortization. Depreciation and amortization increased
$0.4 million, or 14% in 2002 compared to 2001. This increase was due primarily
to depreciation of maintenance capital expenditures made during 2001.
Additionally, in November 2002, we purchased two inland barges that were
previously utilized under an operating lease agreement.

In summary, our marine transportation operating income decreased $3.9
million, or 50%, in 2002 compared to 2001.

TERMINALLING BUSINESS

The following table summarizes our results of operations in our
terminalling segment.

Revenues. Our terminalling revenues increased $0.8 million, or 18%, in
2002 compared to 2001. We received most of this increased revenue from two newly
constructed asphalt tanks we put into service in May 2002.

Operating expenses. Our operating expenses increased $0.1 million, or
10%, in 2002 compared to 2001.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.3 million for both years.

Depreciation and amortization. Depreciation and amortization increased
$0.1 million, or 44%, in 2002 compared to 2001.

In summary, our terminalling operating income increased $0.6 million,
or 33% in 2002 compared to 2001.

LPG DISTRIBUTION BUSINESS

The following table summarizes our results of operations in our LPG distribution
segment.

34

Revenues. Our LPG distribution revenues decreased $6.2 million, or 6%
in 2002 compared to 2001. This decrease was primarily due to decreases in LPG
sales prices. Our average LPG sales price, on a per gallon basis, was 15% lower
in 2002 compared to 2001. This decrease in price primarily resulted from an
industry-wide decrease in the demand for LPG's during the winter of 2001/2002
compared to the winter of 2000/2001 because of colder than normal temperature
during the first quarter of 2001. This decrease was offset by an industry wide
increase in the demand for LPG's during the winter of 2002/2003 compared to the
winter of 2001/2002 because of colder than normal temperatures during the fourth
quarter of 2002. Our LPG sales volume increased 10% in 2002 compared to 2001.

Cost of products sold. Our cost of products sold decreased $6.5
million, or 7%, in 2002 compared to 2001. This decrease approximated our
decrease in sales and was a result of a 15%, decrease in the average price per
gallon for product in 2002 compared to 2001.

Operating expenses. Operating expenses decreased $0.2 million, or 15%
in 2002 compared to 2001.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.6 million, or 30% in 2002 compared to 2001.
This decrease was primarily due to a lower amount of incentive compensation in
the first quarter of 2002 as compared to the first quarter of 2001. We paid a
bonus in the first quarter of 2001 because of extraordinary operating results
occurring in such quarter. This was a one-time bonus payment and was not part of
an annual or other incentive compensation program. The remainder of the decrease
was due to reduced bad debt costs and related legal fees.

Depreciation and amortization. Depreciation and amortization was
approximately the same for both years.

In summary, our LPG distribution operating income increased $1.2
million, or 110%, in 2002 compared to 2001.

FERTILIZER BUSINESS

The following table summarizes our results of operation in our
fertilizer segment.

Revenues. Our fertilizer business revenues decreased $3.6 million, or
11%, in 2002 compared to 2001. We had a decrease in sales of our premium, higher
priced products as our average selling price per ton fell 9% in 2002 compared to
2001. Additionally, our sales volume declined 2%, mainly as a result of our
elimination of certain low margin customers in the wholesale lawn and garden
division.

Cost of products sold and operating expenses. Our cost of products sold
and operating expenses decreased $2.8 million, or 11%, in 2002 compared to 2001.
As mentioned, our sales volume decreased 2% and we also sold a higher proportion
of lower-priced products in 2002 compared to 2001. Consequently, we purchased
less higher-

35

priced raw materials for our premium products in 2002. Therefore, our average
raw material cost, on a per ton basis, was lower in 2002 compared to 2001.

Selling, general and administrative expenses. Selling, general, and
administrative expenses decreased $0.5 million, or 18%, in 2002 compared to
2001.

Depreciation and amortization. Depreciation and amortization was
approximately the same for both years.

In summary, our fertilizer operating income decreased $0.2 million, or
17%, in 2002 compared to 2001.

STATEMENT OF OPERATIONS ITEMS AS A PERCENTAGE OF REVENUES.

In the aggregate, our cost of products sold, operating expenses,
selling, general and administrative expenses, and depreciation and amortization
have remained relatively constant as a percentage of revenues for the years
ended December 31, 2002 and December 31, 2001. The following table summarizes,
on a comparative basis, these items of our statement of operations as a
percentage of our revenues.

EQUITY IN EARNINGS OF UNCONSOLIDATED ENTITIES

Prior to November 6, 2002, equity in earnings of unconsolidated
entities primarily related to our 49.5% non-controlling limited partner interest
in CF Martin Sulphur but also included a 50% interest in a sulfur fungicide
joint venture. Subsequent to November 6, 2002, this line item includes the CF
Martin Sulphur investment only as the interest in the fungicide joint venture
was retained by MRMC.

Equity in earnings of unconsolidated entities in 2002 increased $1.7
million, or 142%, compared to 2001, due to the improved operating results of CF
Martin Sulphur. CF Martin Sulphur's average margin of products sold during 2002
increased approximately 40% when compared to its average margin during 2001. The
improved sulfur margins were primarily due to an increased demand for sulfur.
Additionally, CF Martin Sulphur sold 1.1 million tons in 2002 compared to 0.9
million tons in 2001, an increase of 19%. This increase was primarily due to the
new tug/barge tanker unit we chartered to CF Martin Sulphur which was put into
service in February 2002. In 2002, we received cash distributions of $0.9
million from CF Martin Sulphur. In 2001, we received cash distributions of $0.4
million from CF Martin Sulphur.

Equity in earnings of CF Martin Sulphur includes amortization of the
difference between our book investment in the partnership and our related
underlying equity balance. Such amortization amounted to $0.5 million for both
years.

INTEREST EXPENSE

Our interest expense for all operations was $3.6 million for 2002
compared to $5.4 million for 2001, a decrease of $1.8 million, or 33%. This
decrease was primarily due to lower interest rates on our variable rate debt in
2002 compared to 2001.

36

INDIRECT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Indirect selling, general and administrative expense was $1.0 million
for 2002 compared to $0.8 million for 2001, an increase of $0.2 million or 33%.
This increase was primarily due to higher legal and accounting fees associated
with public company filings.

Martin Resource Management allocates to us a portion of its indirect
selling, general and administrative expenses for services such as accounting,
engineering, information technology and risk management. This allocation is
based on the percentage of time spent by Martin Resource Management personnel
that provide such centralized services. Generally accepted accounting principles
also permit other methods for allocation of these expenses, such as basing the
allocation on the percentage of revenues contributed by a segment. The
allocation of these expenses between Martin Resource Management and us is
subject to a number of judgments and estimates, regardless of the method used.
We can provide no assurances that our method of allocation, in the part or in
the future, is or will be the most accurate or appropriate method of allocation
of these expenses. Other methods could result in a higher allocation of selling,
general and administrative expenses to us, which would reduce our net income.
Subsequent to November 1, 2002, under an omnibus agreement between us and Martin
Resource Management, the amount we are required to reimburse Martin Resource
Management for indirect general and administrative expenses and corporate
overhead allocated to us is capped at $1.0 million during the first year of the
agreement. In each of the following four years, this amount may be increased by
no more than the percentage increase in the consumer price index for the
applicable year. In addition, our general partner has the right to agree to
further increases in connection with expansions of our operations through the
acquisition or construction of new assets or businesses.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Our total revenues were $163.1 million in 2001 compared to $199.8
million in 2000, a decrease of $36.7 million, or 18%. Our cost of products sold
was $119.8 million in 2001 compared to $150.1 million in 2000, a decrease of
$30.3 million, or 20%. Our total operating expenses were $20.5 million in 2001
compared to $26.0 million in 2000, a decrease of $5.5 million, or 21%.

Our total selling, general and administrative expenses were $7.5
million in 2001 compared to $7.9 million in 2000, a decrease of $0.4 million, or
5%. Depreciation and amortization was $4.1 million in 2001 compared to $6.4
million in 2000, a decrease of $2.3 million, or 36%. Our operating income was
$11.2 million in 2001 compared to $9.5 million in 2000, an increase of $1.8
million, or 19%.

These results of operations are discussed in greater detail on a
segment basis below.

MARINE TRANSPORTATION BUSINESS

The following table summarizes our results of operations in our marine
transportation segment.

Revenues. Our marine transportation revenues increased $2.6 million, or
10%, in 2001 compared to 2000. This increase was primarily due to increased
demand for our fuel oil barge services. The increase in demand for fuel oil
transportation resulted from a dramatic increase in natural gas prices in early
2001, which lead industrial

37

customers to switch to fuel oil as a substitute for natural gas. This increase
in demand also resulted in an increase in the rates we were able to charge for
our services.

Operating expenses. Operating expenses increased $0.6 million, or 3%,
in 2001 compared to 2000. This increase in operating expenses was attributable
to the increased utilization of our marine transportation assets.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.1 million, or 30%, in 2001 compared to
2000, primarily due to an increase in personnel costs associated with the hiring
of maintenance personnel to internalize maintenance costs.

Depreciation and amortization. Depreciation and amortization decreased
$0.5 million, or 17%, in 2001 compared to 2000.

In summary, our marine transportation operating income increased $2.4
million, or 44%, in 2001 compared to 2000.

TERMINALLING BUSINESS

The following table summarizes our results of operations in our
terminalling segment.

Revenues. Our terminalling revenues increased $0.4 million, or 10%, in
2001 compared to 2000. This increase was primarily due to one contract renewal
and one new contract we executed in early 2000. Our contract renewal related to
a sulfuric acid storage contract at our Tampa terminal, which enabled us to
increase our storage rates for this tank. Our new contract related to the
leasing of one of our tanks in Tampa we historically leased to an affiliate. The
new customer paid higher rates than the rates we charged to our affiliate. The
increase in revenues in 2001 as compared to 2000 is the result of these two
contracts being in place during all of 2001 while they were in place for only a
portion of the year in 2000.

Operating expenses. Operating expenses decreased $0.6 million, or 36%,
in 2001 compared to 2000. This decrease was due primarily to the loss of
expenses associated with the molten sulfur tank in our Tampa terminal, which we
contributed to CF Martin Sulphur in November 2000.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 10%, in 2001 compared to
2000.

Depreciation and amortization. Depreciation and amortization decreased
$0.2 million, or 42%, in 2001 compared to 2000.

In summary, our terminalling operating income increased $1.3 million,
or 319%, in 2001 compared to 2000.

38

LPG DISTRIBUTION BUSINESS

The following table summarizes our results of operations in our LPG
distribution segment.

As discussed previously, our molten sulphur business operations were
transferred to CF Martin Sulphur in November 2000. Therefore, revenues,
operating costs and operating income were reflected in the historical combined
income statements prior to that time, and, subsequently, have been reflected
through our non-controlling 49.5% limited partnership interest CF Martin Sulphur
under the equity method of accounting.

Revenues. Our distribution revenues decreased $45.2 million, or 31%, in
2001 compared to 2000. In November 2000, we contributed our molten sulfur
storage and distribution business to CF Martin Sulphur Prior to this
transaction, we reported revenues from this business in this segment.
Approximately 86% of our $45.2 million decline in revenues in this segment
during 2001, or $38.8 million, was attributable to the loss of our molten sulfur
business revenues. The remaining 14% of this decrease, or $6.4 million, was
primarily due to an industry-wide decrease in the demand and sales price of LPGs
during 2001 compared to 2000. This decrease in demand and sales price was
primarily caused by warmer temperatures during much of 2001. Our average LPG
sales price during 2001 was 8% lower than our average sales price during 2000.
The impact of this decrease in price on our revenues was partially offset by an
increase in our sales volume in 2001. Our LPG sales volume during 2001 was 2%
higher than our sales volume during 2000. This increased volume was a result of
increased demand of certain industrial customers, whose demand is not affected
significantly by temperature changes.

Cost of products sold. Our cost of products sold decreased $35.2
million, or 27%, in 2001 compared to 2000. This decrease is due primarily to the
contribution of our molten sulfur storage and distribution business to CF Martin
Sulphur and the decrease in the sales prices of LPGs for the reasons described
above.

Operating expenses. Our distribution operating expenses decreased $5.5
million, or 78%, in 2001 compared to 2000. This decrease was due primarily to
expenses we no longer incurred after the contribution of our molten sulfur
storage and distribution business to CF Martin Sulphur.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.2 million, or 7%, in 2001 compared to 2000.

Depreciation and amortization. Depreciation and amortization decreased
$1.5 million, or 80%, in 2001 compared to 2000. This decrease was due primarily
to the contribution of our molten sulfur storage and distribution business to CF
Martin Sulphur in November 2000.

In summary, our LPG distribution operating income decreased $2.8
million, or 73%, in 2001 compared to 2000.

39

FERTILIZER BUSINESS

The following table summarizes our results of operations in our fertilizer
segment.

Revenues. Our fertilizer business revenues increased $5.5 million, or
21%, in 2001 compared to 2000. Our sales volume during 2001 was about the same
as our sales volume during 2000. Our increase in revenues was primarily due to
increases in our sales of higher-priced fertilizer products, which resulted in a
higher average per ton sales price. In particular, we had an unusually large
order under a term contract for one of our higher-priced products during 2001.
Consequently, our average sales price, on a per ton basis, during 2001 was 21%
higher than our average sales price during 2000.

Cost of products sold and operating expenses. Our cost of products sold
and operating expenses increased $4.9 million, or 23%, in 2001 compared to 2000.
This increase in cost of products sold and operating expenses was primarily the
result of our increased production of higher-priced products that required more
expensive raw materials.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $0.1 million, or 3%, in 2001 compared to 2000.

Depreciation and amortization. Depreciation and amortization was $1.0
million for both 2001 and 2000.

In summary, our fertilizer operating income increased $0.8 million, or
125%, in 2001 compared to 2000.

STATEMENT OF OPERATIONS ITEMS AS A PERCENTAGE OF REVENUES.

In the aggregate, our cost of products sold, operating expenses,
selling, general and administrative expenses, and depreciation and amortization
have remained relatively constant as a percentage of revenues for the years
ended December 31, 2001 and December 31, 2000. The following table summarizes,
on a comparative basis, these items of our statement of operations as a
percentage of our revenues.

EQUITY IN EARNINGS OF UNCONSOLIDATED ENTITIES

Equity in earning of unconsolidated entities primarily relates to our
49.5% non-controlling limited partner interest in CF Martin Sulphur, L.P. In
addition this line item includes our 50% interest in a sulfur fungicide joint
venture. This joint venture interest will be retained by Martin Resource
Management.

40

In 2001, equity in earnings of unconsolidated entities increased by
$1.3 million over 2000, substantially due to earnings from CF Martin Sulphur
L.P. for a full twelve months in 2001 compared to only one month in 2000.

Equity in earnings of CF Martin Sulphur includes amortization of the
difference between our book investment in the partnership and our related
underlying equity balance. Such amortization amounted to $0.5 million in 2001
compared to $0.1 million in 2000.

INTEREST EXPENSE

Our interest expense for all operations was $5.4 million for 2001
compared to $7.9 million for 2000, a decrease of $2.6 million, or 32%. This
decrease was primarily due to our reduced debt resulting from the debt assumed
by CF Martin Sulphur in connection with the contribution of our molten sulfur
storage and distribution business to it in November, 2000.

INDIRECT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Indirect selling, general and administrative expense decreased to $0.1
million, or 11%, to $0.8 million in 2001 compared to $0.9 million in 2000.

In our historical combined financial statements, Martin Resource
Management allocated to us a portion of its indirect selling, general and
administrative expenses for services such as accounting, engineering,
information technology and risk management. This allocation was based on the
percentage of time spent by Martin Resource Management personnel that provide
such centralized services. Generally accepted accounting principles also permit
other methods for allocation of these expenses, such as basing the allocation on
the percentage of revenues contributed by a segment. The allocation of these
expenses between Martin Resource Management and us is subject to a number of
judgments and estimates, regardless of the method used. We can provide no
assurances that our method of allocation, in the past or in the future, is or
will be the most accurate or appropriate method of allocation of these expenses.
Other methods could result in a higher allocation of selling, general and
administrative expenses to us, which would reduce our net income. Subsequent to
November 1, 2002, under an omnibus agreement between us and Martin Resource
Management, the amount we are required to reimburse Martin Resource Management
for indirect general and administrative expenses and corporate overhead
allocated to us is capped at $1.0 million during the first year of the
agreement. In each of the following four years, this amount may be increased by
no more than the percentage increase in the consumer price index for the
applicable year. In addition, our general partner has the right to agree to
further increases in connection with expansions of our operations through the
acquisition or construction of new assets or businesses.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS AND CAPITAL EXPENDITURES

In 2002, cash increased $1.6 million as a result of $5.1 million
provided by operating activities, $4.1 million used in investing activities, and
$0.6 million provided by financing activities. In 2001, cash decreased $0.1
million as a result of $11.1 million provided by operating activities, $6.8
million used in investing activities, and $4.4 million used in financing
activities. In 2000, cash remained constant as a result of $1.6 million provided
by operating activities, $3.1 million used in investing activities, and $1.4
million provided by financing activities.

For the periods presented, our investing activities consisted primarily
of capital expenditures. Generally, our capital expenditure requirements have
consisted, and we expect that our capital requirements will continue to consist,
of:

o maintenance capital expenditures, which are capital
expenditures made to replace assets to maintain our existing
operations and to extend the useful lives of our assets; and

41

o expansion capital expenditures, which are capital expenditures
made to grow our business, to expand and upgrade our existing
marine transportation, terminalling, storage and manufacturing
facilities, and to construct new plants, storage facilities,
terminalling facilities and new marine transportation assets.

For 2002, 2001, and 2000 our capital expenditures for property and
equipment were $5.3 million, $6.2 million and $3.9 million, respectively.

As to each period:

o In 2002, we spent $4.8 million for expansion and $0.5 million
for maintenance.

o In 2001, we spent $3.8 million for expansion and $2.5 million
for maintenance.

o In 2000, we spent $2.0 million for expansion and $1.9 million
for maintenance.

In 2002, our expansion capital expenditures were primarily for the
construction of two new asphalt tanks and the purchase of two inland barges that
were previously operated under an operating lease agreement. Our maintenance
capital expenditures were primarily made in our marine transportation business
for required Coast Guard dry dockings of our vessels.

In 2001, our expansion capital expenditures were primarily for the
conversion of an inland tug barge unit to equip it to carry asphalt, the
construction of two new asphalt tanks and the addition of a new fertilizer line
at one of our plants. Our maintenance capital expenditures were primarily made
in our marine transportation business for required Coast Guard dry dockings of
our vessels.

In 2000, our expansion capital expenditures were primarily to complete
a new fertilizer plant in Seneca, Illinois and upgrade a tank at our Tampa
terminal. Our maintenance capital expenditures were primarily made in our marine
transportation business for required Coast Guard dry dockings of our vessels.

In 2002, our financing activities consisted primarily of our initial
public offering and related transactions. Net proceeds from the offering of
$50.6 million along with an initial draw from our new credit facility of $37.2
million, net of issuance costs, were used to pay off our existing debt of $8.8
million and debt and related costs assumed from Martin Resource Management of
$73.3 million. Additionally, we paid down $2.2 million of our new credit
facility during the period subsequent to our initial public offering.

In 2001 and 2002, financing activities consisted of payments of long
term debt to financial lenders and net borrowings from or payments to affiliates
pursuant to inter-company loans. In 2001, we were able to finance our capital
expenditures with operating cash flow and then make net repayments of $4.4
million. In 2000, we needed net borrowings of $1.4 million to help fund capital
expenditures.

CAPITAL RESOURCES

Historically, we have generally satisfied our working capital
requirements and funded our capital expenditures with cash generated from
operations and borrowings. We expect our primary sources of funds for short-term
liquidity needs will be cash flows from operations, borrowings under our
revolving line of credit and cash distributions received from CF Martin Sulphur.

In connection with our initial public offering, on November 6, 2002 we
assumed certain debt of Martin Resource Management with an aggregate outstanding
balance of approximately $73.3 million and related costs. We used the proceeds
of the offering and borrowings under our $60.0 million combined term and
revolving credit facility to repay all of this assumed debt. We also used a
portion of these proceeds to complete the purchase of two asphalt barges under
an assumed lease-buy back arrangement with a third party for $2.9 million, which
we accounted for as an expansion capital expenditure. As of December 31, 2002,
we had $35.0 million of outstanding

42

indebtedness, consisting of outstanding borrowings of $25.0 million under our
new term loan and $10.0 million under our $35.0 million revolving line of
credit.

However, our ability to satisfy our debt service obligations, fund
planned capital expenditures and pay distributions to our unitholders will
depend upon our future operating performance, which is subject to certain risks.
Please read "Risks Relating to Our Business" for a discussion of such risks.

Total Contractual Cash Obligations; No Off Balance Sheet Arrangements.
A summary of our total contractual cash obligations, as of December 31, 2002, is
as follows (amounts in thousands):

We have no commercial commitments such as lines of credit or guarantees
that might result from a contingent event that would require our performance
pursuant to a funding commitment.

We do not have any off-balance sheet financing arrangements.

DESCRIPTION OF OUR CREDIT FACILITY

In connection with the closing of our initial public offering on
November 6, 2002, we entered into a new syndicated $35.0 million revolving line
of credit and $25.0 million term loan led by Royal Bank of Canada, as
administrative agent, lead arranger and book runner. The $35.0 million revolving
credit facility comprised of (i) a $25.0 million working capital subfacility
that will be used for ongoing working capital needs and general partnership
purposes and (ii) a $10.0 million subfacility that may be used to finance
permitted acquisitions and capital expenditures. As of December 31, 2002 we had
outstanding borrowings of $25.0 million under the term loan, and $10.0 million
under our revolving line of credit.

Our obligations under the credit facility are secured by substantially
all of our assets, including, without limitation, inventory, accounts
receivable, vessels, equipment and fixed assets. We may prepay all amounts
outstanding under this facility at any time without penalty.

Indebtedness under the credit facility bears interest at either LIBOR
plus an applicable margin or the base prime rate plus an applicable margin. The
applicable margin for LIBOR loans ranges from 1.75% to 2.75% (currently 2.75%)
and the applicable margin for base prime rate loans will range from 0.75% to
1.75%. We incur a commitment fee on the unused portions of the revolving line of
credit facility.

In addition, the credit facility contains various covenants, which,
among other things, will limit our ability to: (i) incur indebtedness; (ii)
grant certain liens; (iii) merge or consolidate unless we are the survivor; (iv)
sell all or substantially all of our assets; (v) make acquisitions; (vi) make
certain investments; (vii) make capital expenditures; (viii) make distributions
other than from available cash; (ix) create obligations for some lease payments;
(x) engage in transactions with affiliates; or (xi) engage in other types of
business.

The credit facility also contains covenants, which, among other things,
requires us to maintain specified ratios of: (i) minimum net worth (as defined
in the credit facility) of $35.0 million; (ii) EBITDA (as defined in the credit
facility) to interest expense of not less than 3.0 to 1.0; (iii) total debt to
EBITDA, pro forma for any asset

43

acquisition, of not more than 3.5 to 1.0; (iv) current assets to current
liabilities of not less than 1.1 to 1.0; and (v) an orderly liquidation value of
pledged fixed assets to the aggregate outstanding principal amount of our term
indebtedness and our revolving acquisition subfacility of not less than 2.0 to
1.0. We were in compliance with our debt covenants for the period November 6,
2002 through December 31, 2002 and as of December 31, 2002.

The amount we are able to borrow under the working capital borrowing
base is based on a formula. Under this formula, our borrowing base is calculated
based on 75% of eligible accounts receivable plus 60% of eligible inventory.
Such borrowing base is being reduced by $375,000 per quarter during the entire
three year term of our revolving credit facility. This quarterly reduction may
decrease the amount we may borrow under the working capital subfacility and
could result in quarterly mandatory prepayments to the extent that borrowings
under this subfacility exceed the revised borrowing base.

Other than mandatory prepayments that would be triggered by certain
asset dispositions, the issuance of subordinated indebtedness or as required
under the above noted borrowing base reductions, the credit facility requires
interest only payments on a quarterly basis until maturity. All outstanding
principal and unpaid interest must be paid by November 6, 2005. The credit
facility contains customary events of default, including, without limitation,
payment defaults, cross-defaults to other material indebtedness,
bankruptcy-related defaults, change of control defaults and litigation-related
defaults.

SEASONALITY

A substantial portion of our revenues are dependent on sales prices of
products, particularly LPGs and fertilizers, which fluctuate in part based on
winter and spring weather conditions. The demand for LPGs is strongest during
the winter heating season. The demand for fertilizers is strongest during the
early spring planting season. However, our marine transportation and
terminalling businesses, and the molten sulfur business of CF Martin Sulphur,
are typically not impacted by seasonal fluctuations. We expect to derive a
majority of our net income from these lines of business and our non-controlling
interest in CF Martin Sulphur. Therefore, we do not expect that our overall net
income will be impacted by seasonality factors.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 discontinues goodwill amortization over its
estimated useful life; rather, goodwill is subject to a fair-value based
impairment test in the year of adoption and on an annual basis. Similarly,
goodwill associated with equity-method investments will no longer be amortized.
With regard to intangible assets, SFAS No. 142 states that an acquired
intangible asset should be recognized separately if the benefit of the
intangible asset is obtained through contractual rights or if the intangible
asset can be sold, transferred, licensed, rented or exchanged, without regard to
the acquirer's intent. We adopted SFAS No. 142 effective January 1, 2002. The
impact of such adoption is discussed in "Critical Accounting Policies" below.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." SFAS No. 143 requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred, with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. We will adopt SFAS No. 143 effective January 1, 2003 and do not
expect it will have a material impact on our financial condition or results of
operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," and APB Opinion No. 30, "Reporting the Results of
Operation-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objective of SFAS No. 144 is to establish one accounting model for long-lived
assets to be

44

disposed of by sale as well as resolve implementation issues related to SFAS No.
121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a
material impact on our financial condition or results of operations.

RISKS RELATED TO OUR BUSINESS

Important factors that could cause actual results to differ materially
from our expectations include, but are not limited to, the risks set forth
below. The risks described below should not be considered to be comprehensive
and all-inclusive. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations,
financial condition and results of operations. If any events occur that give
rise to the following risks, our business, financial condition, or results of
operations could be materially and adversely affected, and as a result, the
trading price of our common units could be materially and adversely impacted.
These risk factors should be read in conjunction with other information set
forth in this annual report, including our consolidated and combined financial
statements and the related notes. Many of such factors are beyond our ability to
control or predict. Investors are cautioned not to put undue reliance on
forward-looking statements.

WE MAY NOT HAVE SUFFICIENT CASH AFTER THE ESTABLISHMENT OF CASH
RESERVES AND PAYMENT OF OUR GENERAL PARTNER'S EXPENSES TO ENABLE US TO PAY THE
MINIMUM QUARTERLY DISTRIBUTION EACH QUARTER. Our available cash from operating
surplus would have been insufficient in 2002 to pay the minimum quarterly
distribution on all our units. We may not have sufficient available cash each
quarter in the future to pay the minimum quarterly distribution on all our
units. Under the terms of our partnership agreement, we must pay our general
partner's expenses and set aside any cash reserve amounts before making a
distribution to our unitholders. The amount of cash we can distribute on our
common units principally depends upon the amount of net cash generated from our
operations, which will fluctuate from quarter to quarter based on, among other
things:

o the costs of acquisitions, if any;

o the prices of hydrocarbon products and by-products;

o fluctuations in our working capital;

o the level of capital expenditures we make;

o restrictions contained in our debt instruments and our debt
service requirements;

o our ability to make working capital borrowings under our
revolving credit facility; and

o the amount, if any, of cash reserves established by our
general partner in its discretion.

You should also be aware that the amount of cash we have available for
distribution depends primarily on our cash flow, including cash flow from
working capital borrowings, and not solely on profitability, which will be
affected by non-cash items. In addition, our general partner determines the
amount and timing of asset purchases and sales, capital expenditures,
borrowings, issuances of additional partnership securities and the establishment
of reserves, each of which can affect the amount of cash that is distributed to
our unitholders. As a result, we may make cash distributions during periods when
we record losses and may not make cash distributions during periods when we
record net income.

ADVERSE WEATHER CONDITIONS COULD REDUCE OUR RESULTS OF OPERATIONS AND
ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS. Our distribution network and
operations are primarily concentrated in the Gulf Coast region and along the
Mississippi River inland waterway. Weather in these regions is often severe and
can be a major factor in our day-to-day operations. Our marine transportation
operations can be significantly delayed, impaired or postponed by adverse
weather conditions, such as fog in the winter and spring months, and certain
river conditions. Additionally, our marine transportation operations and our
assets in the Gulf of Mexico, including our barges, pushboats, tugboats and
terminals, can be adversely impacted or damaged by hurricanes, tropical storms,
tidal waves or other related events.

45

National weather conditions have a substantial impact on the demand for
our products. Unusually warm weather during the winter months can cause a
significant decrease in the demand for LPG products, fuel oil and gasoline.
Likewise, extreme weather conditions (either wet or dry) can decrease the demand
for fertilizer. For example, an unusually wet spring can delay planting of
seeds, which can leave insufficient time to apply fertilizer at the planting
stage. Conversely, drought conditions can kill or severely stunt the growth of
crops, thus eliminating the need to nurture plants with fertilizer. Any of these
or similar conditions could result in a decline in our net income and cash flow,
which would reduce our ability to make distributions to our unitholders.

WE EXPECT TO RECEIVE A MATERIAL PORTION OF OUR NET INCOME AND CASH
AVAILABLE FOR DISTRIBUTION FROM OUR NON-CONTROLLING 49.5% LIMITED PARTNER
INTEREST IN CF MARTIN SULPHUR. We expect to receive a material portion of our
net income and cash available for distribution from our non-controlling 49.5%
limited partner interest in CF Martin Sulphur. CF Industries owns the remaining
49.5% limited partner interest. We have virtually no rights or control over the
operations or management of cash generated by this entity. CF Martin Sulphur is
managed by its general partner, which is owned equally by CF Industries and
Martin Resource Management. Deadlocks between CF Industries and Martin Resource
Management over issues relating to the operation of CF Martin Sulphur could have
an adverse impact on its results of operations and, consequently, the amount and
timing of cash generated by its operations that is available for distribution to
its partners, including us as a limited partner.

Additionally, the partnership agreement for CF Martin Sulphur requires
this entity to make cash distributions to its limited partners subject to the
discretion of its general partner, other than in limited circumstances. As a
result, we will be substantially dependent upon the discretion of the general
partner with respect to the amount and timing of cash distributions from this
entity. If the general partner of this entity does not distribute the cash
generated by its operations to its limited partners, as a result of a deadlock
between CF Industries and Martin Resource Management or for any other reason,
including operating difficulties or if CF Martin Sulphur is unable to meet its
debt service obligations, our cash flow and quarterly distributions would be
reduced significantly.

WE MAY HAVE TO SELL OUR INTEREST OR BUY THE OTHER PARTNERSHIP INTERESTS
IN CF MARTIN SULPHUR AT A TIME WHEN IT MAY NOT BE IN OUR BEST INTEREST TO DO SO.
The CF Martin Sulphur partnership agreement contains a buy-sell mechanism that
could be implemented by a partner under certain circumstances. As a result of
this buy-sell mechanism, we could be forced to either sell our limited partner
interest or buy the limited and general partner interests of CF Industries in CF
Martin Sulphur at a time when it would not be in our best interest. In addition,
we may not have sufficient cash or available borrowing capacity under our
revolving credit facility to allow us to elect to purchase the limited and
general partner interest of CF Industries, in which case we may be forced to
sell our limited partner interest as a result of this buy-sell mechanism when we
would otherwise prefer to keep this interest. Further, if CF Industries
implements this buy-sell mechanism and we decide to use cash from operations or
obtain financing to purchase CF Industries' interest in this partnership, this
transaction could adversely impact our ability to make distributions to our
unitholders. Conversely, if we are required to sell our interest in this
partnership and thereby lose our share of distributable income from its
operations, our ability to make subsequent distributions to our unitholders
could be adversely affected.

IF CF MARTIN SULPHUR ISSUES ADDITIONAL INTERESTS, OUR OWNERSHIP
INTEREST IN THIS PARTNERSHIP WOULD BE DILUTED. CONSEQUENTLY, OUR SHARE OF CF
MARTIN SULPHUR'S DISTRIBUTABLE CASH WOULD BE REDUCED, WHICH COULD ADVERSELY
AFFECT OUR ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS. CF Martin Sulphur
has the ability under its partnership agreement to issue additional general and
limited partner interests. If CF Martin Sulphur issues additional interests, our
ownership percentage in CF Martin Sulphur, and our share of CF Martin Sulphur's
distributable cash, will decrease. This decrease in our ownership interest could
reduce the amount of cash distributions we receive from CF Martin Sulphur and
could adversely affect our ability to make distributions to our unitholders.

IF WE INCUR MATERIAL LIABILITIES THAT ARE NOT FULLY COVERED BY
INSURANCE, SUCH AS LIABILITIES RESULTING FROM ACCIDENTS ON RIVERS OR AT SEA,
SPILLS, FIRES OR EXPLOSIONS, OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE
DISTRIBUTIONS TO OUR UNITHOLDERS COULD BE ADVERSELY AFFECTED. Our operations are
subject to the operating hazards and risks incidental to marine transportation,
terminalling and the distribution of hydrocarbon products and by-products and
other industrial products. These hazards and risks include:

46

o accidents on rivers or at sea and other hazards that could
result in releases, spills and other environmental damages,
personal injuries, loss of life and suspension of operations;

o leakage of LPGs and other hydrocarbon by-products;

o fires and explosions;

o damage to transportation, terminalling and storage facilities,
and surrounding properties caused by natural disasters; and

o terrorist attacks or sabotage.

As a result, we may be a defendant in various legal proceedings and litigation.
Although we maintain insurance, such insurance may not be adequate to protect us
from all material expenses related to potential future claims for personal and
property damage. If we incur material liabilities that are not covered by
insurance, our operating results, cash flow and ability to make distributions to
our unitholders could be adversely affected.

Changes in the insurance markets attributable to the September 11, 2001
terrorist attacks, and their aftermath, may make some types of insurance more
difficult or expensive for us to obtain. As a result of the September 11 attacks
and the risk of future terrorist attacks, we may be unable to secure the levels
and types of insurance we would otherwise have secured prior to September 11.
Moreover, the insurance that may be available to us may be significantly more
expensive than our existing insurance coverage.

THE PRICE VOLATILITY OF HYDROCARBON PRODUCTS AND BY-PRODUCTS CAN REDUCE
OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
We and our affiliates purchase hydrocarbon products and by-products such as
molten sulfur, sulfur derivatives, fuel oil, LPGs, asphalt and other bulk
liquids and sell these products to wholesale and bulk customers and to other end
users. We also generate revenues through the terminalling of certain products
for third parties. The price and market value of hydrocarbon products and
by-products can be volatile. On occasion, our revenues have been adversely
affected by this volatility during periods of decreasing prices that resulted in
a reduction in the value and resale price of our inventory. Future price
volatility could have an adverse impact on our results of operations, cash flow
and ability to make distributions to our unitholders.

RESTRICTIONS IN OUR DEBT AGREEMENTS MAY PREVENT US FROM MAKING
DISTRIBUTIONS TO OUR UNITHOLDERS. We have approximately $35.0 million of
indebtedness, composed of $10.0 million of debt under our revolving line of
credit and $25.0 million of term debt. Our payment of principal and interest on
our debt will reduce the cash available for distribution to our unitholders. In
addition, we are prohibited by our revolving credit facility from making cash
distributions during an event of default or if the payment of a distribution
would cause an event of default under any of our debt agreements. Our leverage
and various limitations in our revolving credit facility may reduce our ability
to incur additional debt, engage in some transactions and capitalize on
acquisition or other business opportunities that could increase cash flows and
distributions to our unitholders.

IF WE DO NOT HAVE SUFFICIENT CAPITAL RESOURCES FOR ACQUISITIONS OR
OPPORTUNITIES FOR EXPANSION, OUR GROWTH WILL BE LIMITED. We intend to explore
acquisition opportunities in order to expand our operations and increase our
profitability. We may finance acquisitions through public and private equity
financing, or we may use our limited partnership interests for all or a portion
of the consideration to be paid in acquisitions. Distributions of cash with
respect to these equity securities or limited partner interests may reduce the
amount of cash distributions that would otherwise be made on the common units.
In addition, in the event our limited partnership interests do not maintain a
sufficient valuation, or potential acquisition candidates are unwilling to
accept our limited partnership interests as all or part of the consideration, we
may be required to use our cash resources, if available, or rely on other
financing arrangements to pursue acquisitions. If we use funds from operations,
other cash resources or increased borrowings for an acquisition, the acquisition
could adversely impact our ability to make our minimum quarterly distributions
to our unitholders. Additionally, if we do not have sufficient capital
resources, or are not able to obtain financing on terms acceptable to us, for
acquisitions, our ability to implement our growth strategies may be adversely
impacted.

47

FUTURE ACQUISITIONS AND EXPANSIONS MAY NOT BE SUCCESSFUL, MAY
SUBSTANTIALLY INCREASE OUR INDEBTEDNESS AND CONTINGENT LIABILITIES, AND MAY
CREATE INTEGRATION DIFFICULTIES. As part of our business strategy, we intend to
acquire businesses or assets we believe complement our operations. These
acquisitions may require substantial capital and the incurrence of additional
indebtedness. If we make acquisitions, our capitalization and results of
operations may change significantly. Further, any acquisition could result in:

o the discovery of material undisclosed liabilities of the
acquired business or assets;

o the unexpected loss of key employees or customers from the
acquired businesses;

o difficulties resulting from our integration of the operations,
systems and management of the acquired business; and

o an unexpected diversion of our management's attention from
other operations.

If any of our future acquisitions are unsuccessful or result in unanticipated
events, such acquisitions could adversely affect our results of operations, cash
flow and ability to make distributions to our unitholders.

SEGMENTS OF OUR BUSINESS ARE SEASONAL AND COULD CAUSE OUR REVENUES TO
VARY. The demand for LPGs is highest in the winter. Therefore, revenues from our
LPG distribution business is higher in the winter than in other seasons. Our
fertilizer business experiences an increase in demand during the spring, which
increases the revenue generated by this business line in this period compared to
other periods. The seasonality of the revenue from these business lines may
cause our results of operations to vary on a quarter to quarter basis and thus
could cause our cash available for quarterly distributions to fluctuate from
period to period.

THE HIGHLY COMPETITIVE NATURE OF OUR INDUSTRY COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS.
We operate in a highly competitive marketplace in each of our primary business
segments. Most of our competitors in each segment are larger companies with
greater financial and other resources than we possess. We may lose customers and
future business opportunities to our competitors and any such losses could
adversely affect our results of operations and ability to make distributions to
our unitholders.

OUR BUSINESS IS SUBJECT TO FEDERAL, STATE AND LOCAL LAWS AND
REGULATIONS RELATING TO ENVIRONMENTAL, SAFETY AND OTHER REGULATORY MATTERS. THE
VIOLATION OF, OR THE COST OF COMPLIANCE WITH, THESE LAWS AND REGULATIONS COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO
OUR UNITHOLDERS. Our business is subject to a wide range of environmental,
safety and other regulatory laws and regulations. For example, our operations
are subject to permit requirements and increasingly stringent regulations under
numerous environmental laws, such as the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, and similar state and local laws. Our
costs could increase due to more strict pollution control requirements or
liabilities resulting from compliance with future required operating or other
regulatory permits. New environmental regulations might adversely impact our
results of operations and ability to pay distributions to our unitholders.
Federal and state agencies also could impose additional safety requirements, any
of which could adversely affect our results of operations and ability to make
distributions to our unitholders.

THE LOSS OR INSUFFICIENT ATTENTION OF KEY PERSONNEL COULD NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR
UNITHOLDERS. ADDITIONALLY, IF NEITHER RUBEN MARTIN NOR SCOTT MARTIN IS THE CHIEF
EXECUTIVE OFFICER OF OUR GENERAL PARTNER, AMOUNTS WE OWE UNDER OUR CREDIT
FACILITY MAY BECOME IMMEDIATELY DUE AND PAYABLE. Our success is largely
dependent upon the continued services of members of the senior management team
of Martin Resource Management. Those senior executive officers have significant
experience in our businesses and have developed strong relationships with a
broad range of industry participants. The loss of any of these executives could
have a material adverse effect on our relationships with these industry
participants, our results of operations and our ability to make distributions to
our unitholders. Additionally, if neither Ruben Martin nor Scott Martin is the
chief executive officer of our general partner, the lender under our credit
facility could declare amounts outstanding thereunder immediately due and
payable. If such event occurs, we may be required to

48

refinance our debt on unfavorable terms, which could negatively impact our
results of operations and our ability to make distribution to our unitholders.

We do not have employees. We rely solely on officers and employees of
Martin Resource Management to operate and manage our business. Martin Resource
Management conducts businesses and activities of its own in which we have no
economic interest. There could be competition for the time and effort of the
officers and employees who provide services to our general partner. If these
officers and employees do not or cannot devote sufficient attention to the
management and operation of our business, our results of operation and ability
to make distributions to our unitholders may be reduced.

OUR LOSS OF SIGNIFICANT COMMERCIAL RELATIONSHIPS WITH MARTIN RESOURCE
MANAGEMENT COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND ABILITY TO MAKE
DISTRIBUTIONS TO OUR UNITHOLDERS. Martin Resource Management provides us with
various services and products pursuant to various commercial contracts. The loss
of any of these services provided by Martin Resource Management could have a
material adverse impact on our results of operations, cash flow and ability to
make distributions to our unitholders. Additionally, we provide marine
transportation and terminalling services to Martin Resource Management to
support its retained businesses under various commercial contracts. The loss of
Martin Resource Management as a customer could have material adverse impact on
our results of operations, cash flow and ability to make distributions to our
unitholders.

OUR BUSINESS WOULD BE ADVERSELY AFFECTED IF OPERATIONS AT OUR
TRANSPORTATION, TERMINALLING AND DISTRIBUTION FACILITIES WERE INTERRUPTED. OUR
BUSINESS WOULD ALSO BE ADVERSELY AFFECTED IF THE OPERATIONS OF OUR CUSTOMERS AND
SUPPLIERS WERE INTERRUPTED. Our operations are dependent upon our terminalling
and storage facilities and various means of transportation. We are also
dependent upon the uninterrupted operations of certain facilities owned or
operated by our suppliers and customers. Any significant interruption at these
facilities or inability to transport products to or from these facilities or to
or from our customers for any reason would adversely affect our results of
operations, cash flow and ability to make distributions to our unitholders.
Operations at our facilities and at the facilities owned or operated by our
suppliers and customers could be partially or completely shut down, temporarily
or permanently, as the result of any number of circumstances that are not within
our control, such as:

o catastrophic events;

o environmental remediations;

o labor difficulties; and

o disruptions in the supply of our products to our facilities or
means of transportation.

Additionally, terrorist attacks and acts of sabotage could target oil and gas
production facilities, refineries, processing plants and other infrastructure
facilities. Any interruptions at our facilities, facilities owned or operated by
our suppliers or customers, or in the oil and gas industry as a whole caused by
such attacks or acts could have a material adverse affect on our results of
operations, cash flow and ability to make distributions to our unitholders.

OUR MARINE TRANSPORTATION BUSINESS WOULD BE ADVERSELY AFFECTED IF WE DO
NOT SATISFY THE REQUIREMENTS OF THE JONES ACT OR IF THE JONES ACT WERE MODIFIED
OR ELIMINATED. The Jones Act is a federal law that restricts domestic marine
transportation in the United States to vessels built and registered in the
United States. Furthermore, the Jones Act requires that the vessels be manned
and owned by United States citizens. If we fail to comply with these
requirements, our vessels lose their eligibility to engage in coastwise trade
within United States domestic waters.

The requirements that our vessels be United States built and manned by
United States citizens, the crewing requirements and material requirements of
the Coast Guard and the application of United States labor and tax laws
significantly increase the costs of United States flag vessels when compared
with foreign flag vessels. During the past several years, certain interest
groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag
competition for trades and cargoes reserved for United States flag vessels under
the Jones Act and cargo preference

49

laws. If the Jones Act were to be modified to permit foreign competition that
would not be subject to the same United States government imposed costs, we may
need to lower the prices we charge for our services in order to compete with
foreign competitors, which would adversely affect our cash flow and ability to
make distributions to our unitholders.

OUR MARINE TRANSPORTATION BUSINESS WOULD BE ADVERSELY AFFECTED IF THE
UNITED STATES GOVERNMENT PURCHASES OR REQUISITIONS ANY OF OUR VESSELS UNDER THE
MERCHANT MARINE ACT. We are subject to the Merchant Marine Act of 1936, which
provides that, upon proclamation by the President of the United States of a
national emergency or a threat to the national security, the United States
Secretary of Transportation may requisition or purchase any vessel or other
watercraft owned by United States citizens (including us, provided that we are
considered a United States citizen for this purpose.) If one of our pushboats,
tugboats or tank barges were purchased or requisitioned by the United States
government under this law, we would be entitled to be paid the fair market value
of the vessel in the case of a purchase or, in the case of a requisition, the
fair market value of charter hire. However, if one of our pushboats or tugboats
is requisitioned or purchased and its associated tank barge is left idle, we
would not be entitled to receive any compensation for the lost revenues
resulting from the idled barge. We also would not be entitled to be compensated
for any consequential damages we suffer as a result of the requisition or
purchase of any of our pushboats, tugboats or tank barges. If any of our vessels
are purchased or requisitioned for an extended period of time by the United
States government, such transactions could have a material adverse affect on our
results of operations, cash flow and ability to make distributions to our
unitholders.

REGULATION AFFECTING THE DOMESTIC TANK VESSEL INDUSTRY MAY LIMIT OUR
ABILITY TO DO BUSINESS, INCREASE OUR COSTS AND ADVERSELY IMPACT OUR RESULTS OF
OPERATIONS AND ABILITY TO MAKE DISTRIBUTIONS TO OUR UNITHOLDERS. The U.S. Oil
Pollution Act of 1990, or OPA 90, provides for the phase out of single-hull
vessels and the phase-in of the exclusive operation of double-hull tank vessels
in U.S. waters. Under OPA 90, substantially all tank vessels that do not have
double hulls will be phased out by 2015 and will not be permitted to come to
U.S. ports or trade in U.S. waters. The phase out dates vary based on the age of
the vessel and other factors. All of our offshore tank barges are double-hull
vessels and have no phase out date. We have six inland single-hull barges that
will be phased out in the year 2015. The phase out of these single-hull vessels
in accordance with OPA 90 may require us to make substantial capital
expenditures, which could adversely affect our operations and market position
and reduce our cash available for distribution.

COST REIMBURSEMENTS WE PAY TO MARTIN RESOURCE MANAGEMENT MAY BE
SUBSTANTIAL AND WILL REDUCE OUR CASH AVAILABLE FOR DISTRIBUTION TO OUR
UNITHOLDERS. Under our omnibus agreement with Martin Resource Management, Martin
Resource Management provides us with corporate staff and support services on
behalf of our general partner that are substantially identical in nature and
quality to the services it conducted for our business prior to our formation.
The omnibus agreement requires us to reimburse Martin Resource Management for
the costs and expenses it incurs in rendering these services, including an
overhead allocation to us of Martin Resource Management's indirect general and
administrative expenses from its corporate allocation pool. These payments may
be substantial. Payments to Martin Resource Management will reduce the amount of
available cash for distribution to our unitholders.

MARTIN RESOURCE MANAGEMENT HAS CONFLICTS OF INTEREST AND LIMITED
FIDUCIARY RESPONSIBILITIES, WHICH MAY PERMIT IT TO FAVOR ITS OWN INTERESTS TO
THE DETRIMENT OF OUR UNITHOLDERS. Martin Resource Management owns an approximate
58.3% limited partner interest in us and owns and controls our general partner,
which owns our 2.0% general partner interest and incentive distribution rights.
Conflicts of interest may arise between Martin Resource Management and our
general partner, on the one hand, and our unitholders, on the other hand. As a
result of these conflicts, our general partner may favor its own interests and
the interests of Martin Resource Management over the interests of our
unitholders. Potential conflicts of interest between us, Martin Resource
Management and our general partner could occur in many of our day-to-day
operations including, among others, the following situations:

o Officers of Martin Resource Management who provide services to
us also devote significant time to the businesses of Martin
Resource Management and are compensated by Martin Resource
Management for that time.

50

o We own a non-controlling 49.5% limited partnership interest in
CF Martin Sulphur, which operates a business involving the
acquisition, handling and sale of molten sulfur. As a limited
partner, we have virtually no rights or control over the
operation and management of this entity. The day-to-day
operation and control of this partnership is managed by its
general partner, CF Martin Sulphur, L.L.C., which is owned
equally by CF Industries and Martin Resource Management.
Because we have very limited control over the operations and
management of CF Martin Sulphur, we are subject to the risks
that this business may be operated in a manner that would not
be in our interest. For example, the amount of cash
distributed to us from CF Martin Sulphur could decrease if it
uses a significant amount of cash from operations or
additional debt to make significant capital expenditures or
acquisitions.

o Neither the partnership agreement nor any other agreement
requires Martin Resource Management to pursue a business
strategy that favors us or utilizes our assets or services.
Martin Resource Management's directors and officers have a
fiduciary duty to make these decisions in the best interests
of the shareholders of Martin Resource Management without
regard to the best interests of the common unitholders.

o Martin Resource Management may compete with us, subject to the
limitations set forth in the omnibus agreement.

o Our general partner is allowed to take into account the
interests of parties other than us, such as Martin Resource
Management, in resolving conflicts of interest, which has the
effect of reducing its fiduciary duty to our unitholders.

o Under the partnership agreement, our general partner may limit
its liability and reduce its fiduciary duties, while also
restricting the remedies available to our unitholders for
actions that, without the limitations and reductions, might
constitute breaches of fiduciary duty. As a result of
purchasing units, our unitholders will consent to some actions
and conflicts of interest that, without such consent, might
otherwise constitute a breach of fiduciary or other duties
under applicable state law.

o Our general partner determines which costs incurred by Martin
Resource Management are reimbursable by us.

o The partnership agreement does not restrict our general
partner from causing us to pay it or its affiliates for any
services rendered on terms that are fair and reasonable to us
or from entering into additional contractual arrangements with
any of these entities on our behalf.

o Our general partner controls the enforcement of obligations
owed to us by Martin Resource Management.

o Our general partner decides whether to retain separate
counsel, accountants or others to perform services for us.

o In some instances, our general partner may cause us to borrow
funds to permit us to pay cash distributions, even if the
purpose or effect of the borrowing is to make a distribution
on the subordinated units, to make incentive distributions or
to accelerate the expiration of the subordination period.

o Our general partner has broad discretion to establish
financial reserves for the proper conduct of our business.
These reserves also will affect the amount of cash available
for distribution. Our general partner may establish reserves
for distribution on the subordinated units, but only if those
reserves will not prevent us from distributing the full
minimum quarterly distribution, plus any arrearages, on the
common units for the following four quarters.

OUR GENERAL PARTNER'S DISCRETION IN DETERMINING THE LEVEL OF OUR CASH
RESERVES MAY ADVERSELY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS TO OUR
UNITHOLDERS. Our partnership agreement requires our general partner to

51

deduct from operating surplus cash reserves it determines in its reasonable
discretion to be necessary to fund our future operating expenditures. In
addition, our partnership agreement permits our general partner to reduce
available cash by establishing cash reserves for the proper conduct of our
business, to comply with applicable law or agreements to which we are a party or
to provide funds for future distributions to partners. These cash reserves will
affect the amount of cash available for distribution to our unitholders.

OUR LIMITED PARTNERS MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS
THAT WE HAVE NOT COMPLIED WITH APPLICABLE STATUTES OR THAT UNITHOLDER ACTION
CONSTITUTES CONTROL OF OUR BUSINESS. The limitations on the liability of holders
of limited partner interests for the obligations of a limited partnership have
not been clearly established in some states. The holder of one of our common
units could be held liable in some circumstances for our obligations to the same
extent as a general partner if a court determined that:

o we had been conducting business in any state without
compliance with the applicable limited partnership statute; or

o the right or the exercise of the right by our unitholders as a
group to remove or replace our general partner, to approve
some amendments to the partnership agreement, or to take other
action under the partnership agreement constituted
participation in the "control" of our business.

Our general partner generally has unlimited liability for our
obligations, such as our debts and environmental liabilities, except for our
contractual obligations that are expressly made without recourse to our general
partner. In addition, under some circumstances, a unitholder may be liable to us
for the amount of a distribution for a period of three years from the date of
the distribution.

THE CONTROL OF OUR GENERAL PARTNER MAY BE TRANSFERRED TO A THIRD PARTY,
AND THAT PARTY COULD REPLACE OUR CURRENT MANAGEMENT TEAM, WITHOUT UNITHOLDER
CONSENT. ADDITIONALLY, IF MARTIN RESOURCE MANAGEMENT NO LONGER CONTROLS OUR
GENERAL PARTNER, AMOUNTS WE OWE UNDER OUR CREDIT FACILITY MAY BECOME IMMEDIATELY
DUE AND PAYABLE. Our general partner may transfer its general partner interest
to a third party in a merger or in a sale of all or substantially all of its
assets without the consent of the unitholders. Furthermore, there is no
restriction in the partnership agreement on the ability of the owner of our
general partner to transfer its ownership interest in our general partner to a
third party. A new owner of our general partner could replace the directors and
officers of our general partner with its own designees and to control the
decisions taken by our general partner.

If, at any time, Martin Resource Management no longer controls our
general partner, the lender under our credit facility may declare all amounts
outstanding thereunder immediately due and payable. If such event occurs, we may
be required to refinance our debt on unfavorable terms, which could negatively
impact our results of operations and our ability to make distribution to our
unitholders.

MARTIN RESOURCE MANAGEMENT MAY ENGAGE IN LIMITED COMPETITION WITH US.
Martin Resource Management may engage in limited competition with us. If Martin
Resource Management does engage in competition with us, we may lose customers or
business opportunities, which could have an adverse impact on our results of
operations, cash flow and ability to make distributions to our unitholders.

THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS. If we
were treated as a corporation for federal income tax purposes, we would pay tax
on our income at corporate rates, which is currently a maximum of 35%.
Distributions to our unitholders would generally be taxed again as corporate
distributions, and no income, gains, losses, or deductions would flow through to
our unitholders. Because a tax would be imposed upon us as a corporation, the
cash available for distribution to unitholders would be substantially reduced.
Although it is not possible to predict the amount of corporate-level tax that
would be due in a given year, it is likely that our ability to make minimum
quarterly distributions would be impaired. Consequently, treatment of us as a
corporation would result in a material reduction in the anticipated cash flow
and after-tax return to our common unitholders and therefore would likely result
in a substantial reduction in the value of the common units.

52

Current law may change so as to cause us to be taxable as a corporation
for federal income tax purposes or otherwise subject us to entity-level
taxation. Our partnership agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects us to taxation
as a corporation or otherwise subjects us to entity-level taxation for federal,
state or local income tax purposes, then the minimum quarterly distribution
amount and the target distribution amount will be adjusted to reflect the impact
of that law on us.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market
rates and prices. The principal market risk to which we are exposed is commodity
price risk for LPGs. We also incur, to a lesser extent, risks related to
interest rate fluctuations. We do not engage in commodity contract trading or
hedging activities.

Commodity Price Risk. Our LPG storage and distribution business is a
"margin-based" business in which our gross profits depend on the excess of our
sales prices over our supply costs. As a result, our profitability is sensitive
to changes in the market price of LPGs. LPGs are a commodity and the price we
pay for them can fluctuate significantly in response to supply and other market
conditions over which we have no control. When there are sudden and sharp
decreases in the market price of LPGs, we may not be able to maintain our
margins. Consequently, sudden and sharp decreases in the wholesale cost of LPGs
could reduce our gross profits. We attempt to minimize our exposure to market
risk by maintaining a balanced inventory position by matching our physical
inventories and purchase obligations with sales commitments. We do not acquire
and hold inventory or derivative financial instruments for the purpose of
speculating on price changes that might expose us to indeterminable losses.

Interest Rate Risk. We will be exposed to changes in interest rates as
a result of our term loan and revolving credit facility, each of which will have
a floating interest rate. We had $35.0 million of indebtedness outstanding under
this facility at December 31, 2002. The impact of a 1% increase in interest
rates on this amount of debt would result in an increase in interest expense,
and a corresponding decrease in income before taxes of approximately $0.4
million annually.

53

54

INDEPENDENT AUDITOR'S REPORT

The Board of Directors
Martin Midstream GP LLC:

We have audited the accompanying consolidated and combined balance
sheets, respectively, of Martin Midstream Partners L.P. and subsidiaries
(successor) and Martin Midstream Partners Predecessor (predecessor)
(collectively, Martin Midstream) as of December 31, 2002 and 2001, and the
related consolidated and combined, respectively, statements of operations,
capital/equity, and cash flows for the period from November 6, 2002 through
December 31, 2002 (successor) and for the period from January 1, 2002 through
November 5, 2002 and for the years ended December 31, 2001 and 2000
(predecessor). These financial statements are the responsibility of Martin
Midstream's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated and combined, respectively,
financial position of Martin Midstream and the results of their operations and
their cash flows for each of the specified periods in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in Note 2 to the consolidated and combined financial
statements, Martin Midstream changed its method of accounting for goodwill and
other intangible assets in 2002.

KPMG LLP

Shreveport, Louisiana
March 19, 2003

55

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNERS PREDECESSOR - SEE NOTE 1)
CONSOLIDATED AND COMBINED BALANCE SHEETS

See accompanying notes to consolidated and combined financial statements.

56

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNERS PREDECESSOR - SEE NOTE 1)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated and combined financial statements.

57

MARTIN MIDSTREAM PARTNERS L.P.
CONSOLIDATED AND COMBINED STATEMENTS OF CAPITAL/EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

58

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNERS PREDECESSOR - SEE NOTE 1)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated and combined financial statements.

59

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

Martin Midstream Partners, L.P. (the "Partnership") provides marine
transportation, terminalling, distribution and midstream logistical services for
producers and suppliers of hydrocarbon products and by-products, specialty
chemicals and other liquids. The Partnership also manufactures and markets
sulfur-based fertilizers and related products and owns an unconsolidated
non-controlling 49.5% limited partnership interest in CF Martin Sulphur L.P.
("CF Martin Sulphur"), which operates a sulfur storage and transportation
business. The Partnership operates primarily in the Gulf Coast region of the
United States.

Before November 6, 2002, the Partnership was an inactive indirect,
wholly-owned subsidiary of Martin Resource Management Corporation ("MRMC"). In
connection with the November 6, 2002 closing of the initial public offering of
common units representing limited partner interests in the Partnership (see Note
3, Initial Public Offering), MRMC and certain of its subsidiaries
conveyed to the Partnership certain of their assets, liabilities and operations,
in exchange for the following: (i) a 2% general partnership interest in the
Partnership held by Martin Midstream GP LLC, an indirect wholly-owned subsidiary
of MRMC (the "General Partner"), (ii) incentive distribution rights granted by
the Partnership, and (iii) 4,253,362 subordinated units of the Partnership. The
operations that were contributed to the Partnership relate to four primary lines
of business: (1) marine transportation of hydrocarbon products and hydrocarbon
by-products; (3) liquefied petroleum gas ("LPG") distribution; and (4)
fertilizer manufacturing.

Hydrocarbon products and by-products are produced primarily by major
and independent oil and gas companies who often turn to independent third
parties for the transportation and disposition of these products. In addition to
these major and independent oil and gas companies, the Partnership's primary
customers include independent refiners, large chemical companies, fertilizer
manufacturers and other wholesale purchasers of hydrocarbon products and
by-products.

Following the Partnership's initial public offering, MRMC retained
various assets, liabilities, and operations not related to the four lines of
business noted above as well as certain assets, liabilities and operations
within the LPG distribution and fertilizer manufacturing lines of business.

(2) SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF PRESENTATION, COMBINATION AND CONSOLIDATION

Prior to November 6, 2002, the financial statements have been referred
to as those of the Martin Midstream Partners Predecessor and presented as
combined financial statements. Subsequent to November 6, 2002, the financial
statements are referred to as consolidated financial statements of the
Partnership. Financial information related to the Partnership's financial
position, results of operations or cash flows prior to November 6, 2002 exclude
the assets and operations retained by MRMC, except for those assets and
operations retained by MRMC related to the LPG distribution and fertilizer
manufacturing lines of business. Financial information related to the
Partnership's financial position, results of operations or cash flows subsequent
to November 6, 2002 exclude all of the assets and operations retained by MRMC,
thus including only the assets and operations conveyed to the Partnership. All
intercompany transactions within the applicable reporting entities have been
eliminated.

The conveyance of the assets, liabilities and operations described
above is treated as a reorganization of entities under common control and has
been recorded at historical cost.

The consolidated financial statements (from November 6, 2002) include
the operations of the Partnership and its two wholly-owned subsidiaries, Martin
Operating GP LLC and Martin Operating Partnership L.P.

60

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(b) PRODUCT EXCHANGES

Product exchange balances due to other companies under negotiated
agreements are recorded at quoted market product prices while balances due from
other companies are recorded at the lower of cost (determined using the
first-in, first-out [FIFO] method) or market.

(c) INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined by using the FIFO method for all inventories.

(d) REVENUE RECOGNITION

Revenue for the Partnership's four operating segments are recognized as
follows:

Marine transportation -- Revenue is recognized for contracted trips
upon completion of the particular trip. For time charters, revenue is
recognized based on a per day rate.

Terminalling -- Revenue is recognized for storage contracts based on
the contracted monthly tank fixed fee. For throughput contracts,
revenue is recognized based on the volume moved through our terminals
at the contracted rate.

LPG distribution -- When product is sold by truck, revenue is
recognized upon delivering product to our customers as title to the
product transfers when the customer physically receives the product.
When product is sold in storage, or by pipeline, revenue is recognized
when the customer receives product from either the storage facility or
pipeline.

Fertilizer -- Revenue is recognized when the customer takes title to
the product, either at our plant or the customer facility.

(e) EQUITY METHOD INVESTMENTS

The Partnership has a 49.5% non-controlling limited partner interest in
CF Martin Sulphur, L.P. ("CF Martin Sulphur"), which is accounted for by the
equity method. This partnership collects and aggregates, transports, stores and
markets molten sulfur supplied by oil refiners and natural gas processors.

There is a difference in the Partnership's basis in CF Martin Sulphur
and in the Partnership's underlying equity on CF Martin Sulphur's books. Such
difference is being amortized over 20 years as additional equity in earnings
(losses) of unconsolidated entities.

Prior to November 6, 2002, the Predecessor had a 50% interest in a
joint venture which manufactures and sells a sulfur fungicide product. This
investment was retained by MRMC and not contributed to the Partnership.
Subsequent to November 6, 2002, the Partnership's only equity method investment
is its interest in CF Martin Sulphur, as the interest in this fungicide joint
venture was retained by MRMC.

(f) PROPERTY, PLANT, AND EQUIPMENT

Owned property, plant, and equipment is stated at cost, less
accumulated depreciation. Owned buildings and equipment are depreciated using
straight-line method over the estimated lives of the respective assets.

Routine maintenance and repairs are charged to operating expense while
costs of betterments and renewals are capitalized. When an asset is retired or
sold, its cost and related accumulated depreciation are removed from the

61

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

accounts and the difference between net book value of the asset and proceeds
from disposition is recognized as gain or loss.

(g) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of costs over fair value of assets of
businesses acquired. The Partnership adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. In connection with
SFAS No. 142's transitional goodwill impairment evaluation, the Statement
required the Partnership to perform an assessment of whether there was an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Partnership was required to identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Partnership was required to determine
the fair value of each reporting unit and compare it to the carrying amount of
the reporting unit within six months of January 1, 2002. The Partnership was
also required to perform an additional "annual" test during 2002. To the extent
the carrying amount of a reporting unit exceeded the fair value of the reporting
unit, the Partnership would be required to perform the second step of the
impairment test, as this is an indication that the reporting unit goodwill may
be impaired. The Partnership completed the initial test in the second quarter of
2002 and the annual test in the third quarter of 2002 with no indication of
impairment.

Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 15
years, and assessed for recoverability by determining whether the amortization
of the goodwill balance over its remaining life could be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, was measured based on projected discounted
future operating cash flows using a discount rate reflecting the Predecessor's
average cost of funds.

Amortization of goodwill totaled $300, and $291 and for the years ended
December 31, 2001, and 2000, respectively, and accumulated amortization amounted
to $967 at December 31, 2001.

(h) DEBT ISSUANCE COSTS

In connection with the closing of the Partnership's initial public
offering on November 6, 2002, the Partnership entered into a new syndicated
$35,000 revolving line of credit and $25,000 term loan. The Partnership incurred
debt issuance costs related this debt facility of $1,420. Amortization of debt
issuance costs, which are included in interest expense for the period from
November 6, 2002 through December 31, 2002 totaled $79, and accumulated
amortization amounted to $79 at December 31, 2002. The unamortized balance of
debt issuance costs, classified as other assets, at December 31, 2002 amounted
to $1,341.

(i) IMPAIRMENT OF LONG-LIVED ASSETS

SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale; and broadens the scope of businesses to be disposed of
that qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Partnership adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did not affect the Partnership's
financial statements.

In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of

62

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the balance sheet. Goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value. Prior to the adoption of SFAS No. 144,
the Partnership accounted for long-lived assets in accordance with SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.

(j) INDIRECT SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Indirect selling, general and administrative expenses are incurred by
MRMC and allocated to the Partnership to cover costs of centralized corporate
functions such as accounting, treasury, engineering, information technology,
risk management and other corporate services. Such expenses are based on the
percentage of time spent by MRMC's personnel that provide such centralized
services. Subsequent to November 1, 2002, under an omnibus agreement between the
Partnership and MRMC, the amount the Partnership is required to reimburse MRMC
for indirect general and administrative expenses and corporate overhead
allocated to the Partnership is capped at $1.0 million during the first year of
the agreement. In each of the following four years, this amount may be increased
by no more than the percentage increase in the consumer price index for the
applicable year. In addition, the Partnership's general partner has the right to
agree to further increases in connection with expansions of the Partnership's
operations through the acquisition or construction of new assets or businesses

(k) INCOME TAXES

Subsequent to November 6, 2002, the operations of the Partnership are
not subject to income taxes.

Prior to November 6, 2002, the operations of the Predecessor were
included in the consolidated MRMC federal tax return and income taxes were
calculated based on the combined tax attributes of MRMC's operations. Prior to
November 6, 2002, income taxes were accounted for under the asset and liability
method. Deferred tax assets and liabilities were 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 and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities were measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences were expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates was recognized in income in the period that included the
enactment date.

(l) ENVIRONMENTAL LIABILITIES

The Partnership's policy is to accrue for losses associated with
environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances change. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed probable.

(m) ALLOWANCE FOR DOUBTFUL ACCOUNTS.

Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the Partnership's best
estimate of the amount of probable credit losses in the Partnership's existing
accounts receivable.

63

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(n) 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 and combined financial statements
in conformity with accounting principles generally accepted in the United States
of America. Actual results could differ from those estimates.

(o) COMPREHENSIVE INCOME

For all periods presented, net income is the only component of
comprehensive income, therefore, net income is equal to total comprehensive
income.

(3) INITIAL PUBLIC OFFERING

On November 6, 2002, the Partnership completed its initial public
offering of 2,900,000 common units representing limited partnership interests at
a price of $19.00 per common unit. The common units represent a 39.7% limited
partnership interest in the Partnership. Total proceeds from the sale of the
2,900,000 common units were $55,100 before the payment of offering costs and
underwriting commissions. Concurrent with the closing of the initial public
offering, the Partnership (i) assumed borrowings of $67,200, related accrued
interest of $4,600 and related prepayment penalties of $1,500 from MRMC and its
subsidiaries, and (ii) entered into a $60,000 credit facility with a syndicate
of financial institutions led by Royal Bank of Canada. This credit facility is
composed of a $25,000 term loan and a $35,000 revolving line of credit comprised
of a $25,000 working capital subfacility that will be used for ongoing working
capital needs and general partnership purposes and a $10,000 subfacility that
may be used to finance permitted acquisitions and capital expenditures. On
November 6, 2002, the Operating Partnership borrowed $25,000 under the term loan
and $12,200 under the revolving line of credit.

A summary of the proceeds received from these transactions and the use
of the proceeds received therefrom is as follows (all amounts are in millions):

PROCEEDS RECEIVED:
Sale of common units ......................... $ 55,100
Borrowing under term loan .................... 25,000
Borrowing under revolving line credit ........ 12,200
-----------

Total proceeds received .................. $ 92,300
===========

USE OF PROCEEDS:
Underwriter's fees ........................... $ 3,900
Professional fees and other costs ............ 4,000
Repayment of assumed debt and related costs .. 73,300
Repayment of debt under promissory note ...... 8,200
Buyout of operating lease for two barges ..... 2,900
-----------

Total use of proceeds ............... $ 92,300
===========

(4) INVENTORIES

Components of inventories at December 31, 2002 and 2001 were as
follows:

64

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(5) PROPERTY, PLANT AND EQUIPMENT

At December 31, 2002 and 2001, property, plant, and equipment consisted
of the following:

Depreciation expense was $3,658 for the period from January 1, 2002 through
November 5, 2002 and $732 for the period from November 6, 2002 through December
31, 2002. Depreciation expense for the years ended December 31, 2001 and 2000
was $3,750 and $6,050, respectively.

(6) GOODWILL

The following information relates to goodwill balances as of the
periods presented:

The following is a reconciliation of reported net income to the amounts
that would have been reported had the Partnership been subject to SFAS 142
during all periods presented:

65

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(7) LEASES

The Partnership has numerous non-cancelable operating leases primarily
for transportation and other equipment. The leases generally provide that all
expenses related to the equipment are to be paid by the lessee. Management
expects to renew or enter into similar leasing arrangements for similar
equipment upon the expiration of the current lease agreements.

The future minimum lease payments under non-cancelable operating leases
for years subsequent to December 31, 2002 are as follows: 2003 -- $195; 2004 --
$38; 2005 -- $29; 2006 -- $26; and 2007 -- $18.

Total rent expense for operating leases for the period from November 6,
2002 through December 31, 2002 was $283 and for the period from January 1, 2002
through November 5, 2002 was $1,868. Rent expense for the year ended December
31, 2001 and 2000 was $1,377 and $2,390, respectively.

(8) INVESTMENT IN UNCONSOLIDATED PARTNERSHIP

On November 22, 2000, the Predecessor contributed certain assets and
liabilities to acquire a 49.5% non-controlling limited partnership interest in a
partnership, C.F. Martin Sulphur, L.P. (CF Martin), which is an independent
provider of transportation, terminalling, marketing and logistics management
services for molten sulfur. The carrying amount of assets and liabilities
contributed by the Predecessor were as follows:

Accounts and other receivables..................................... $ 8,314
Inventories........................................................ 3,176
Other current assets............................................... 97
Net property, plant, and equipment................................. 22,967
Other assets....................................................... 29
Accounts payable and accrued expenses.............................. (7,575)
Long-term debt, including current installments..................... (30,014)
--------
$ (3,006)
========

The long-term debt contributed included $18.0 million of
non-Predecessor debt which was contributed to the Predecessor by MRMC and then
contributed by the Predecessor to the unconsolidated partnership.

The gain of $3,006 was not recognized in connection with the exchange
due to the Predecessor having an actual and implied commitment to support the
operations of the partnership due to its continued involvement as a supplier of
services to CF Martin and MRMC's guaranty of CF Martin's debt. The difference in
the original carrying value (deferred credit of $3,006) of the Predecessor
investment in the unconsolidated partnership and its share of the original net
assets of $7,474 is being amortized over 20 years as additional equity in
earnings in the partnership.

66

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

Certain financial information related to 1) the Partnership investment
and equity in earnings in the unconsolidated partnership and 2) the
unconsolidated partnership is as follows:

(9) LONG-TERM DEBT

At December 31, 2002 and 2001, long-term debt consisted of the
following:

* Interest rate fluctuates based on the LIBOR rate plus 275 basis points
set on the date of each advance.

** Interest rate fluctuates based on LIBOR rate plus 275 basis points and
is reset every six months. Such interest rate was set in November, 2002
at 4.1938%.

67

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

Indebtedness under the credit facility bears interest at either LIBOR
plus an applicable margin or the base prime rate plus an applicable margin. The
applicable margin for LIBOR loans ranges from 1.75% to 2.75% (currently 2.75%)
and the applicable margin for base prime rate loans ranges from 0.75% to 1.75%.
The Partnership incurs a commitment fee on the unused portions of the revolving
line of credit facility.

In addition, the credit facility contains various covenants, which,
among other things, will limit the Partnership's ability to: (i) incur
indebtedness; (ii) grant certain liens; (iii) merge or consolidate unless we are
the survivor; (iv) sell all or substantially all of our assets; (v) make
acquisitions; (vi) make certain investments; (vii) make capital expenditures;
(viii) make distributions other than from available cash; (ix) create
obligations for some lease payments; (x) engage in transactions with affiliates;
or (xi) engage in other types of business.

The credit facility also contains certain covenants, which, among other
things, requires the Partnership to maintain specified ratios of: (i) minimum
net worth, (as defined in the credit facility) of $35,000; (ii) EBITDA (as
defined in the credit facility) to interest expense of not less than 3.0 to 1.0;
(iii) total debt to EBITDA, pro forma for any asset acquisition, of not more
than 3.5 to 1.0; (iv) current assets to current liabilities of not less than 1.1
to 1.0; and (v) an orderly liquidation value of pledged fixed assets to the
aggregate outstanding principal amount of the term indebtedness and the
revolving acquisition subfacility of not less than 2.0 to 1.0. The Partnership
was in compliance with our debt covenants for the period from November 6, 2002
through December 31, 2002 and as of December 31, 2002.

The amount the Partnership is able to borrow under the working capital
borrowing base is based on a formula. Under this formula, the Partnership's
borrowing base is calculated based on 75% of eligible accounts receivable plus
60% of eligible inventory. Such borrowing base is being reduced by $375 per
quarter during the entire three year term of the revolving credit facility.

The Partnership's obligations under the credit facility are secured by
substantially all of its assets, including, without limitation, inventory,
accounts receivable, vessels, equipment and fixed assets. Other than mandatory
prepayments that would be triggered by certain asset dispositions, the issuance
of subordinated indebtedness or as required under the above noted borrowing base
reductions, the credit facility will require interest only payments on a
quarterly basis until maturity.

(10) INCOME TAXES

The components of income tax expense (benefit) for the period from the
period from January 1, 2002 through December 31, 2002, and the year ended
December 31, 2001 and 2000, are as follows:

68

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

The income tax expense (benefit) for the period from January 1, 2002
through November 5, 2002 and the years ended 2001 and 2000 differs from the
"expected" tax expense (benefit) (computed by applying the federal corporate
rate of 34% to income before income taxes) as follows:

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2001
include:

In assessing the realizability of deferred tax assets, management
considered whether it was more likely than not that some portion or all of the
deferred tax assets would not be realized. The ultimate realization of deferred
tax assets was dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considered the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets were deductible,
management believed it was more likely than not the Predecessor would realize
the benefits of these deductible differences.

At December 31, 2001, the Predecessor had total net operating loss
carryforwards for federal income tax purposes of $6,021.

The tax basis of the Partnership's net assets were $14,760 as of
December 31, 2002.

69

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

(11) RELATED PARTY TRANSACTIONS

Included in the consolidated and combined financial statements for the
years ended December 31, 2002, 2001 and 2000, are various related party
transactions and balances primarily with 1) MRMC and affiliates and 2) CF Martin
Sulphur.

Significant transactions with these related parties are reflected in the
consolidated and combined financial statements as follows:

MRMC AND AFFILIATES

CF MARTIN SULPHUR

70

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

Effective November 1, 2002, the Partnership entered into a three-year
charter agreement with Martin Resource Management for the use of four of the
Partnership's marine vessels on a spot-contract basis. The Partnership will
charge fees to Martin Resource Management based on the then applicable market
rates we charge to third parties on a spot-contract basis. Under the provisions
of the charter agreement, Martin Resource Management has agreed to use these
four vessels in a manner such that the Partnership will receive at least $5,600
in revenue, annually, for the use of these vessels by Martin Resource Management
and third parties. In the event the Partnership does not receive at least $5,600
annually for the use of these vessels, Martin Resource Management will pay us
any deficiency within 30 days after the end of the applicable 12-month period.
For the period from November 6, 2002, the date of the Partnership's initial
public offering, until December 31, 2002, a total of $1,247 was invoiced for the
use of these vessels which includes $771 invoiced to Martin Resource Management.

The Partnership is a party to an omnibus agreement with Martin Resource
Management. The omnibus agreement requires us to reimburse Martin Resource
Management for all direct and indirect expenses it incurs or payments it makes
on our behalf or in connection with the operation of our business, provided that
indirect general and administrative expense and allocated corporate overhead
will not exceed $1,000 during the twelve months following the closing of our
initial public offering. This cap may be increased in subsequent years. This
limitation shall not apply to the cost of any third party legal, accounting or
advisory services received, or the direct expenses of Martin Resource Management
incurred, in connection with acquisition or business development opportunities
evaluated on our behalf.

The Partnership reimbursed Martin Resource Management for $110 of
indirect expenses for the period from November 6, 2002, the date of the initial
public offering, to December 31, 2002. These indirect expenses cover all of the
centralized corporate functions Martin Resource Management provides for us, such
as accounting, treasury, clerical billing, information technology,
administration of insurance, general office expenses and employee benefit plans
and other general corporate overhead functions we share with Martin Resource
Management retained businesses.

The Partnership reimbursed Martin Resource Management for $1,913 of
direct costs and expenses for the period from November 6, 2002, the date of the
initial public offering, to December 31, 2002. The direct expenses Martin
Resource Management incurs on the Partnership's behalf consist primarily of our
allocable portion of salaries and employee benefits costs of its employees who
provide direct support for our operations. There is no monetary limitation on
the amount the Partnership is required to reimburse Martin Resource Management
for direct expenses.

(12) FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that the Partnership disclose
estimated fair values for its financial instruments. 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 and due 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
approximates fair value due to the debt having a variable interest rate.

(13) COMMITMENTS AND CONTINGENCIES

Under the Partnership's marine transportation agreement with CF Martin
Sulphur the Partnership could be obligated to reimburse CF Martin Sulphur for a
portion of the expenditures CF Martin Sulphur incurred in connection with
reconfiguring a tug/barge tanker unit to carry molten sulfur. The Partnership
believes that the risk is remote that we will ever need to pay any amounts to CF
Martin Sulphur under this reimbursement obligation. As

71

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

of December 31, 2002, the aggregate reimbursement liability would have been
approximately $2.3 million. This amount decreases by approximately $300 annually
based on an amortization rate.

From time to time, the Partnership is subject to various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Partnership.

(14) BUSINESS SEGMENTS

The Partnership has four reportable segments: transportation,
terminalling, LPG distribution, and fertilizer. The Partnership's reportable
segments are strategic business units that offer different products and
services. The operating income of these segments is reviewed by the chief
operating decision maker to assess performance and make business decisions.

72

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

Total assets by segment are as follows:

Revenues from one customer in the LPG distribution segment were
$17,065, $16,246 and $23,302 for the years ended December 31, 2002, 2001 and
2000 respectively.

(15) NON-CASH TRANSACTIONS

During 2000 the Predecessor transferred property, plant and equipment
with a net book value of $2,902 to affiliates of MRMC recording an offsetting
amount to reduce due to affiliates. In November of 2000, the Predecessor
contributed the following assets and liabilities to acquire a 49.5%
non-controlling limited partnership interest in CF Martin:

Accounts and other receivables .................. $ 8,314
Inventories ..................................... 3,176
Other current assets ............................ 97
Net property, plant and equipment ............... 22,967
Other assets .................................... 29
Accounts payable and accrued expenses ........... (7,575)
Long-term debt, including current installments .. (30,014)
------------
$ (3,006)
============

In connection with the Partnership's initial public offering, on
November 6, 2002, MRMC retained certain assets and liabilities previously
included in the consolidated and combined financial statements of the
Predecessor. Related amounts and their impact on owner's equity were as follows:

Cash ........................................ $ (71)
Accounts receivable ......................... (238)
Net property, plant and equipment ........... (1,765)
Investment in unconsolidated joint venture .. 257
Trade and other payables .................... 68
Due to affiliates ........................... 4,120
Deferred taxes .............................. 38
------------
$ 2,409
============

73

MARTIN MIDSTREAM PARTNERS L.P.
(SUCCESSOR TO MARTIN MIDSTREAM PARTNER'S PREDECESSOR)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in Thousands)

On November 6, 2002, immediately prior to the Partnership's
initial public offering, MRMC contributed $73,263 indebtedness and related costs
to the Partnership. Additionally, on November 6, 2002, $34,173 of due to
affiliates and $11,588 of deferred income taxes were converted to owner's
equity/partners' capital.

74

CONSOLIDATED AND COMBINED QUARTERLY INCOME STATEMENT INFORMATION

(UNAUDITED)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

75

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT OF MARTIN MIDSTREAM PARTNERS L.P.

Martin Midstream GP LLC, as our general partner, manages our operations
and activities on our behalf. Our general partner was not elected by our
unitholders and will not be subject to re-election in the future. Unitholders do
not directly or indirectly participate in our management or operation. Our
general partner owes a fiduciary duty to our unitholders. Our general partner is
liable, as general partner, for all of our debts (to the extent not paid from
our assets), except for indebtedness or other obligations that are made
specifically non-recourse to it. However, whenever possible, our general partner
seeks to provide that our indebtedness or other obligations are non-recourse to
our general partner.

We are managed and operated by the directors and officers of our
general partner. All of our operational personnel are employees of Martin
Resource Management. All of the officers of our general partner will spend a
substantial amount of time managing the business and affairs of Martin Resource
Management and its other affiliates. These officers may face a conflict
regarding the allocation of their time between our business and the other
business interests of Martin Resource Management. Our general partner intends to
cause its officers to devote as much time to the management of our business and
affairs as is necessary for the proper conduct of our business and affairs.

DIRECTORS AND EXECUTIVE OFFICERS OF MARTIN MIDSTREAM GP LLC

The following table shows information for the directors and executive
officers of our general partner. Executive officers and directors are elected
for one-year terms.

Ruben S. Martin serves as President, Chief Executive Officer and a
member of the Board of Directors of our general partner. Mr. Martin has served
as President of Martin Resource Management since 1981 and has served in various
capacities within the company since 1974. Mr. Martin has also served as
President of CF Martin Sulphur, LLC, since its inception in 2000. Mr. Martin and
Scott D. Martin, see below, are brothers. Mr. Martin holds a bachelor of science
degree in industrial management from the University of Arkansas.

Robert D. Bondurant serves as Executive Vice President and Chief
Financial Officer of our general partner. Mr. Bondurant joined Martin Resource
Management in 1983 as Controller and subsequently was appointed Chief Financial
Officer and a member of its Board of Directors in 1990. Mr. Bondurant served in
the audit department at Peat Marwick, Mitchell and Co. from 1980 to 1983. Mr.
Bondurant is also the Chief Financial Officer and Secretary of CF Martin
Sulphur, LLC. Mr. Bondurant holds a bachelor of business administration degree
in accounting from Texas A&M University and is a Certified Public Accountant,
licensed in the state of Texas.

76

Donald R. Neumeyer serves as Executive Vice President and Chief
Operating Officer of our general partner. Mr. Neumeyer joined Martin Resource
Management in March of 1982 as an operations manager. He has served as Vice
President of Operations and Chief Operating Officer since 1983 and as a Director
since 1990. From 1978 to 1982 Mr. Neumeyer was employed by Crystal Oil Company
of Shreveport, Louisiana as Vice President of Marketing, Refining and Gas
Processing. From 1970 to 1978 Mr. Neumeyer was employed by Mobil Oil Corporation
in various capacities within its pipeline, crude oil, and gas liquid operations.
Mr. Neumeyer holds a bachelor of science in mechanical engineering from Southern
Methodist University in Dallas and is a registered professional engineer in the
state of Texas.

Wesley M. Skelton serves as Executive Vice President, Controller and
Chief Administrative Officer of our general partner. Mr. Skelton joined Martin
Resource Management in 1981 and has served as Chief Administrative Officer since
1981 and a Director since 1990. Prior to joining Martin Resource Management, Mr.
Skelton served as Treasurer of First Federal Savings & Loan, Marshall Texas from
January 1977 through January 1981 and was employed by Peat Marwick Mitchell & Co
from August 1973 through January 1977. Mr. Skelton holds a bachelor of business
administration degree from the University of Texas, and is a Certified Public
Accountant licensed in the state of Texas.

Scott D. Martin serves as General Manager, Marine Operations and as a
member of the Board of Directors of our general partner. Mr. Martin has served
as a Director of Martin Resource Management since 1990. He currently serves as
General Manager of Martin Gas Marine and has held a variety of positions in
marketing, transportation, terminalling, finance, operations and business
development with Martin Resource Management since 1980. Mr. Martin and Ruben S.
Martin, see above, are brothers. Mr. Martin holds a bachelor of science degree
in business administration from University of Arkansas, where he is a member of
the Walton Business School advisory board.

John P. Gaylord serves as a member of the Board of Directors of our
general partner. Mr. Gaylord has served as the President of Jacintoport Terminal
Company since 1992. He originally joined Jacintoport Terminal Company when it
was founded in 1989 as Vice President of Finance. Jacintoport Terminal Company
is the general partner of Chartco Terminal L.P. which has storage and
terminalling operations in Houston, Texas. Mr. Gaylord holds a bachelor of arts
degree from Texas Christian University and a masters of business administration
degree from Southern Methodist University.

C. Scott Massey serves as a member of the Board of Directors of our
general partner. Mr. Massey has been self employed as a Certified Public
Accountant since 1999. From 1977 to 1998, Mr. Massey worked for KPMG Peat
Marwick, LLP in various positions, including, most recently, as a Partner in the
firm's Tax Practice -- Energy, Real Estate, Timber from 1986 to 1998. Mr. Massey
received a bachelor of business administration degree from the University of
Texas at Austin and a juris doctor degree from the University of Houston. Mr.
Massey is a Certified Public Accountant, licensed in the states of Louisiana and
Texas.

Richard D. Waters, Jr. serves as a member of the Board of Directors of
our general partner. Mr. Waters is a partner of JPMorgan Partners, the private
equity investing arm of J.P. Morgan Chase & Co. Prior to joining Chase Capital
Partners, the predecessor to JPMorgan Partners, in 1996, Mr. Waters had served
in Chase's Merchant Banking Group since 1986. Mr. Waters also serves as a
director of NuCo2 Inc. Mr. Waters received a bachelor of arts degree in
economics from Hamilton College and a master of business administration degree
from Columbia University.

Additional Information Regarding the Board of Directors of our General Partner

BOARD MEETINGS AND COMMITTEES

From November 6, 2002, the date of our initial public offering, to
December 31, 2002, the Board of Directors of our general partner held two
meetings. All five directors then in office attended both of these meetings. We
have standing conflicts, audit, compensation and nominating committees of the
Board of Directors of our general partner. The current members of the
committees, the number of meetings held by each committee from November 6, 2002
to December 31, 2002, and a brief description of the functions performed by each
committee are set forth below:

77

Conflicts Committee (2 meetings). The members of the conflicts
committee are Messrs. Gaylord (chairman), Massey and Waters. All three
of the members of the conflicts committee, attended all meetings of the
committee for the period noted above. The primary responsibility of the
conflicts committee is to review matters that the directors believe may
involve conflicts of interest. The conflicts committee determines if
the resolution of the conflict of interest is fair and reasonable to
us. The members of the conflicts committee may not be officers or
employees of our general partner or directors, officers, or employees
of its affiliates and must meet the independence standards to serve on
an audit committee of a board of directors established by the Nasdaq
National Market. Any matters approved by the conflicts committee will
be conclusively deemed to be fair and reasonable to us, approved by all
of our partners, and not a breach by our general partner of any duties
it may owe us or our unitholders.

Audit Committee (2 meetings). The members of the audit committee are
Messrs. Gaylord, Massey (chairman) and Waters. All three of the
members, attended all meetings of the audit committee for the period
noted above. The primary responsibilities of the audit committee are to
review our external financial reporting, recommend engagement of our
independent auditors and review procedures for internal auditing and
the adequacy of our internal accounting controls. The members of the
audit committee may not be officers or employees of our general partner
or directors, officers, or employees of its affiliates and must meet
the independence standards to serve on an audit committee of a board of
directors established by the Nasdaq National Market. The audit
committee's report relating to the 2002 fiscal year appears on page 79.

Compensation Committee (2 meetings). The members of the compensation
committee are Messrs. Gaylord, Massey and Waters (chairman). All three
of the members, attended all meetings of the compensation committee for
the period noted above. The primary responsibility of the compensation
committee is to oversee compensation decisions for the outside
directors of our general partner and executive officers of our general
partner (in the event they are to be paid by our general partner) as
well as our long-term incentive plan.

Nominating Committee (no meetings). The members of the nominating
committee are Messrs. Gaylord, Massey and Waters (chairman). The
primary responsibility of the nominating committee is to select and
recommend nominees for election to the Board of Directors of our
general partner.

COMPENSATION OF DIRECTORS

Non-employee directors of our general partner are entitled to receive
an annual retainer fee of $20,000 dollars per year. All directors of our general
partner are entitled to reimbursement for their reasonable out-of-pocket
expenses in connection with their travel to and from, and attendance at,
meetings of the Board of Directors or committees thereof.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the compensation committee of our general
partner that are identified above were the only persons who served on such
committee during 2002. Other than these independent directors, no other officer
or employee of our general partner or its subsidiaries is a member of the
compensation committee. Employees of Martin Resource Management, through our
general partner, are the individuals who work on our matters.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Our general partner's directors, officers and beneficial owners of more
than 10 percent of a registered class of our equity securities are required to
file reports of ownership and reports of changes in ownership with the SEC and
the NASDAQ. Directors, officers and beneficial owners of more than 10 percent of
our equity securities are also required to furnish us with copies of all such
reports that are filed. Based on our review of copies of such forms and
amendments, we believe directors, executive officers and greater than 10 percent
beneficial owners complied with all filing requirements during the year ended
December 31, 2002, with the exception that Ruben S. Martin,

78

Scott D. Martin, and Messrs. Bondurant, Skelton and Neumeyer should each have
filed a Form 3 on October 31, 2002, the date our registration statement became
effective. Each of them filed the appropriate Form 3 on November 6, 2002, the
date of our initial public offering.

REIMBURSEMENT OF EXPENSES OF OUR GENERAL PARTNER

Our general partner will not receive a management fee or other
compensation for its management of us. Our general partner and its affiliates
will be reimbursed for expenses incurred on our behalf. All direct general and
administrative expenses will be charged to us as incurred. Indirect general and
administrative and corporate overhead costs relate to centralized corporate
functions that we share with Martin Resource Management, including certain
accounting, treasury, engineering, information technology, insurance,
administration of employee benefit plans and other corporate services. The
reimbursement amount with respect to indirect general and administrative and
corporate overhead expenses will not exceed $1.0 million for the first year. For
each of the following four years, this amount may be increased by no more than
the percentage increase in the consumer price index and is also subject to
adjustment for expansions of our operations. General and administrative expenses
directly associated with providing services to us (such as legal and accounting
services) are not included in the overhead allocation pool and are therefore not
subject to the $1.0 million cap. The partnership agreement provides that our
general partner will determine the expenses that are allocable to us in any
reasonable manner determined by our general partner in its sole discretion.
Please read "Item 13. Certain Relationships and Related Transactions --
Agreements -- Omnibus Agreement."

REPORT OF THE AUDIT COMMITTEE

TO THE UNITHOLDERS OF
MARTIN MIDSTREAM PARTNERS L.P.

The Board of Directors of Martin Midstream GP LLC (the "General
Partner") maintains an audit committee comprising three outside directors. The
Board of Directors and the audit committee believe that the audit committee's
current member composition satisfies the rules of the Nasdaq National Market
that govern audit committee composition, including the requirement that audit
committee members all be "independent" as that term is defined by Nasdaq.

The audit committee oversees the financial process of Martin Midstream
Partners L.P. (the "Partnership") on behalf of the entire Board of Directors.
Management has the primary responsibility for the Partnership's financial
statements and the reporting process, including the systems of internal
controls. In fulfilling its oversight responsibilities, the audit committee
reviewed and discussed the audited financial statements with management. The
Board of Directors has adopted a written Charter of the audit committee.

The audit committee reviewed and discussed with the independent
auditors all communications required by generally accepted auditing standards,
including those described in Statement on Auditing Standards No. 61. In
addition, the audit committee has discussed with the Partnership's independent
auditors the auditors' independence from management, the General Partner and the
Partnership, including the matters in the written disclosures below and the
letter from the independent auditors required by the Independence Standards
Board, Standard No. 1.

The audit committee discussed with the independent auditors the overall
scope and plans for their audit. The audit committee meets with the independent
auditors, with and without management present, to discuss the results of their
examination, their evaluation of the Partnership's and the General Partner's
internal controls and the overall quality of the their financial reporting. The
audit committee held two meetings during 2002.

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The following table presents fees for professional services rendered by
KPMG LLP for the audit of the Partnership's annual financial statements for
2002, and fees billed for other services rendered by KPMG LLP.

Audit fees (1) ......................... $ 975,000
Audit related fees ..................... $ --
------------
Audit and audit related fees .. $ 975,000

Tax fees (2) ........................... $ 248,000

All other fees ......................... $ --
------------
Total fees .................... $ 1,223,000
============

(1) Audit fees includes fees for audits of the 2002 financial
statements of the Partnership ($200,000) audit fees also includes audits of
2001, 2000, and 1999 financial statements of the Predecessor included in the
Partnership's Registration Statement on Form S-1 and fees for services related
to the review of such registration statement and the issuance of the related
comfort letter to the underwriters ($775,000).

(2) Tax fees are for services related to tax research and consultation
related to the formation of the Partnership.

In reliance on the reviews and discussions referred to above, the audit
committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Partnership's Annual
Report on Form 10-K for the year ended December 31, 2002 for filing with the
Securities and Exchange Commission. The audit committee also determined that the
provision of the non-audit services rendered KPMG LLP was compatible with
maintaining KPMG LLP's independence.

March 19, 2003 AUDIT COMMITTEE

C. Scott Massey (Chairman)
John P. Gaylord
Richard D. Waters, Jr.

ITEM 11. EXECUTIVE COMPENSATION

We have no employees. We are managed by the executive officers of our
general partner. These executive officers are employed by Martin Resource
Management. We reimburse Martin Resource Management for certain indirect general
and administrative expenses, including compensation expense allocated to the
service of these individuals, that are allocated to us pursuant to the omnibus
agreement. During the twelve month period ended November 6, 2003, the
reimbursement for such indirect general and administrative expenses is capped at
$1 million. The following table sets forth the compensation expense that was
allocated for the services of each of the executive officers of our general
partner for the period from November 6, 2002, the date of our initial public
offering to December 31, 2002. This expense was paid by us to Martin Resource
Management for the service of such officers pursuant to the omnibus agreement.
Please see "Item 13. Certain Relationships and Related Transactions - Agreements
- - Omnibus Agreement" for a discussion of the omnibus agreement.

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SUMMARY COMPENSATION TABLE

- ----------

(1) Period from November 1, 2002, the date of our initial public offering,
through December 31, 2002.

COMPENSATION OF DIRECTORS

Officers of our general partner who also serve as directors will not
receive additional compensation. Each independent director will receive
compensation for attending meetings of the directors as well as committee
meetings. The amount of compensation to be paid to the independent directors is
set forth in Item 9. Directors and Executive Officers of the Registrant.

MARTIN MIDSTREAM PARTNERS L.P. LONG-TERM INCENTIVE PLAN

Our general partner has adopted the Martin Midstream Partners L.P.
Long-Term Incentive Plan for employees and directors of our general partner and
its affiliates who perform services for us. As of March 20, 2003, no awards have
been granted pursuant to the long-term incentive plan. The long-term incentive
plan consists of two components, restricted units and unit options. The
long-term incentive plan currently permits the grant of awards covering an
aggregate of 725,000 common units, 241,667 of which may be awarded in the form
of restricted units and 483,333 of which may be awarded in the form of unit
options. The plan is administered by the compensation committee of our general
partner's board of directors.

Our general partner's board of directors in its discretion may
terminate or amend the long-term incentive plan at any time with respect to any
units for which a grant has not yet been made. Our general partner's board of
directors also has the right to alter or amend the long-term incentive plan or
any part of the plan from time to time, including increasing the number of units
that may be reserved for issuance under the plan subject to any applicable
unitholder approval. However, no change in any outstanding grant may be made
that would materially impair the rights of the participant without the consent
of the participant.

RESTRICTED UNITS

A restricted unit is a "phantom" unit that entitles the grantee to
receive a common unit upon the vesting of the phantom unit, or in the discretion
of the compensation committee, cash equivalent to the value of a common unit.
The compensation committee may determine to make grants under the plan to
employees and directors containing such terms as the compensation committee
shall determine under the plan. The compensation committee will determine the
period over which restricted units granted to employees and directors will vest.
The committee may base its determination upon the achievement of specified
financial objectives. In addition, the restricted units will vest upon a change
of control of us, our general partner or Martin Resource Management or if our
general partner ceases to be an affiliate of Martin Resource Management.

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If a grantee's employment or membership on the board of directors
terminates for any reason, the grantee's restricted units will be automatically
forfeited unless, and to the extent, the compensation committee provides
otherwise. Common units to be delivered upon the vesting of restricted units may
be common units acquired by our general partner in the open market, common units
already owned by our general partner, common units acquired by our general
partner directly from us or any affiliate of our general partner or any
combination of the foregoing. Our general partner will be entitled to
reimbursement by us for the cost incurred in acquiring common units. If we issue
new common units upon vesting of the restricted units, the total number of
common units outstanding will increase. The committee responsible for the
administration of the long-term incentive plan, in its discretion, may grant
distribution equivalent rights with respect to any restricted unit grants.

We intend the issuance of the common units upon vesting of the
restricted units under the plan to serve as a means of incentive compensation
for performance and not primarily as an opportunity to participate in the equity
appreciation of the common units. Therefore, plan participants will not pay any
consideration for the common units they receive, and we will receive no
remuneration for the units.

UNIT OPTIONS

The long-term incentive plan currently permits the grant of options
covering common units. As of March 20, 2003, we have not granted any common unit
options to directors or employees of our general partner, or its affiliates. In
the future, the compensation committee may determine to make grants under the
plan to employees and directors containing such terms as the committee shall
determine. Unit options will have an exercise price that, in the discretion of
the committee, may not be less than the fair market value of the units on the
date of grant. In general, unit options granted will become exercisable over a
period determined by the compensation committee. In addition, the unit options
will become exercisable upon a change in control of us, our general partner,
Martin Resource Management or if our general partner ceases to be an affiliate
of Martin Resource Management or upon the achievement of specified financial
objectives.

Upon exercise of a unit option, our general partner will acquire common
units in the open market or directly from us or any affiliate of our general
partner or use common units already owned by our general partner, or any
combination of the foregoing. Our general partner will be entitled to
reimbursement by us for the difference between the cost incurred by our general
partner in acquiring these common units and the proceeds received by our general
partner from an optionee at the time of exercise. Thus, the cost of the unit
options will be borne by us. If we issue new common units upon exercise of the
unit options, the total number of common units outstanding will increase, and
our general partner will pay us the proceeds it received from the optionee upon
exercise of the unit option. The unit option plan has been designed to furnish
additional compensation to employees and directors and to align their economic
interests with those of common unitholders.

MARTIN RESOURCE MANAGEMENT EMPLOYEE BENEFIT PLANS

Martin Resource Management has employee benefit plans for its employees
and consultants who perform services for us. The following summary of these
plans is not complete but outlines the material provisions of these plans.

Martin Resource Management Employee Stock Ownership Plan. Martin
Resource Management maintains an employee stock ownership plan that covers
employees who satisfy certain minimum age and service requirements. This
employee stock ownership plan is referred to in this prospectus as the "ESOP."
Under the terms of the ESOP, Martin Resource Management has the discretion to
make contributions in an amount determined by its board of directors. Those
contributions are allocated under the terms of the ESOP and invested primarily
in the common stock of Martin Resource Management. Participants in the ESOP
become 100% vested upon completing five years of vesting service or upon their
attainment of age 65, permanent disability or death during employment. Any
forfeitures of non-vested accounts are allocated to the accounts of employed
participants. Except for rollover contributions, participants are not permitted
to make contributions to the ESOP.

Martin Resource Management Profit Sharing Plan. Martin Resource
Management maintains a profit sharing plan that covers employees who satisfy
certain minimum age and service requirements. This profit sharing

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plan is referred to in this prospectus as the "401(k) Plan." Eligible employees
may elect to participate in the 401(k) Plan by electing pre-tax contributions up
to 15% of their regular compensation and/or a portion of their discretionary
bonuses. Matching contributions are made to the 401(k) Plan in a percentage
determined in the discretion of the board of directors of Martin Resource
Management. Participants in the 401(k) Plan become 100% vested in matching
contributions made for them upon completing five years of vesting service or
upon their attainment of age 65, permanent disability or death during
employment.

Martin Resource Management Phantom Stock Plan. Under Martin Resource
Management's phantom stock plan, phantom stock units granted thereunder have a
ten year life and are non-transferable. Each recipient may exercise an election
to receive either

o an equivalent number of shares of Martin Resource Management,
or

o cash based on the latest valuation of the shares of common
stock of Martin Resource Management held by the ESOP.

Any common stock of Martin Resource Management received cannot be pledged or
encumbered. The recipient must sign an agreement waiving any voting rights with
respect to shares received. Cash elections are paid in five equal annual
installments. A put option, exercisable at the then fair market value of the
common stock, is exercisable by the employee in the event Martin Resource
Management is sold prior to an employee's election to receive common stock or
cash.

Martin Resource Management Non-Qualified Option Plan. In September
1999, Martin Resource Management adopted a stock option plan designed to retain
and attract qualified management personnel, directors and consultants. Under the
plan, Martin Resource Management is authorized to issue to qualifying parties
from time to time options to purchase up to 1,000 shares of its common stock
with terms not to exceed ten years from the date of grant and at exercise prices
generally not less than fair market value on the date of grant.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 20, 2003, the beneficial
ownership of the outstanding equity securities of us, by (i) each person who is
known to us to beneficially own more than 5 percent of our outstanding units,
(ii) each director of our general partner and (iii) all directors and executive
officers of our General Partner as a group.

- ----------

(1) The address Martin Resource Management Corporation and all of the
individuals listed in this table is c/o Martin Midstream Partners,
L.P., 4200 Stone Road, Kilgore, Texas 75662.

(2) The percent of class shown is less than one percent unless otherwise
noted.

(3) Includes the 4,253,362 subordinated units owned directly by Martin
Resource Management. Ruben S. Martin beneficially owns securities in
Martin Resource Management representing approximately 51.6% of the
voting power thereof and serves as its Chairman of the Board and
President. Scott D. Martin owns securities in Martin Resource
Management representing approximately 51.6% of the voting power thereof
and serves on its Board of Directors. As a result, each of Ruben S.
Martin and Scott D. Martin may be deemed to be the beneficial owner of
the subordinated units owned by Martin Resource Management.

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Martin Resource Management owns our general partner and, together with
our general partner, owns approximately 59.5% of our outstanding units. The
table below sets forth information as March 20, 2003 concerning (i) the
beneficial ownership of the redeemable preferred stock of Martin Resource
Management, (ii) each person owning in excess of 5% of common stock of Martin
Resource Management, and (iii) the common stock ownership of (a) each director
of Martin Resource Management, (b) each executive officer of Martin Resource
Management, and (c) all such executive officers and directors of Martin Resource
Management as a group. Except as indicated, each individual has sole voting and
investment power over all shares listed opposite his or her name.

- ----------

* Represents less than 1.0%

(1) The business address of each shareholder, director and executive
officer of Martin Resource Management is c/o Martin Resource Management
Corporation, 4200 Stone Road, Kilgore, Texas 75662.

(2) Ruben S. Martin and Scott D. Martin are the co-trustees of the R.S.
Martin Jr. Children's Trust No. One f/b/o Angela Santi Jones and
exercise shared control over the voting and disposition of the
securities owned by this trust. As a result, these persons may be
deemed to be the beneficial owners of the securities held by such
trust; thus, the number of shares of common stock reported herein as
beneficially owned by such individuals includes the 1,278 shares owned
by such trust.

(3) Ruben S. Martin, Scott D. Martin and Wesley M. Skelton are the
co-trustees of the Martin Resource Management Corporation Employee
Stock Ownership Trust and exercise shared control over the voting and
disposition of the securities owned by this trust. As a result, these
persons may be deemed to be the beneficial owners of the securities
held by such trust; thus, the number of shares of common stock reported
herein as beneficially owned by such individuals includes the 735
shares owned by such trust. Mr. Skelton disclaims beneficial ownership
of these 735 shares.

(4) Ruben S. Martin is the trustee and Scott D. Martin is the successor
trustee of the Martin Grandchild's Trust f/b/o Angela Jones and
exercise shared control over the voting and disposition of the
securities owned by this trust. As a result, these persons may be
deemed to be the beneficial owners of the securities held by such
trust; thus, the number of shares of redeemable preferred stock
reported herein as beneficially owned by such individuals includes the
2,527 shares owned by such trust.

(5) Ruben S. Martin is the beneficial owner of the general partner of RSM,
III Investments, Ltd. and exercises control over the voting and
disposition of the securities owned by this entity. As a result, he may
be deemed to be the beneficial owner of the securities held by such
entity; thus, the number of shares of preferred stock reported herein
as beneficially owned by such individual includes the 2,267 shares
owned by such entity.

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(6) Scott D. Martin is the beneficial owner of the general partner of SKM
Partnership, Ltd. and exercises control over the voting and disposition
of the securities owned by this entity. As a result, he may be deemed
to be the beneficial owner of the securities held by such entity; thus,
the number of shares of preferred stock reported herein as beneficially
owned by such individual includes the 2,560 shares owned by such
entity.

(7) Messrs. Neumeyer, Skelton and Bondurant have the right to acquire 36,
28 and 100 shares, respectively, by virtue of options issued under
Martin Resource Management's nonqualified stock option plan.

The following table sets forth information regarding securities
authorized for issuance under our long-term incentive plan as of December 31,
2002.

EQUITY COMPENSATION PLAN INFORMATION

- ----------

(1) Our general partner has adopted and maintains the Martin Midstream
Partners L.P. Long-Term Incentive Plan. For a description of the
material features of this plan, please see "Item 11. Executive
Compensation - Martin Midstream Partners L.P. Long-Term Incentive Plan"
above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Martin Resource Management owns 4,253,362 subordinated units
representing an approximate 59.5% limited partner interest in us. Our general
partner is a wholly-owned subsidiary of Martin Resource Management. Our general
partner owns a 2.0% general partner interest in us and the incentive
distribution rights. Our general partner's ability, as general partner, to
manage and operate us, and Martin Resource Management's ownership of an
approximate 59.5% limited partner interest in us, effectively gives Martin
Resource Management the ability to veto some of our actions and to control our
management.

DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES

The following table summarizes the distributions and payments to be
made by us to our general partner and its affiliates in connection with our
formation, ongoing operation and liquidation. These distributions and payments
were determined by and among affiliated entities and, consequently, are not the
result of arm's-length negotiations.

AGREEMENTS

We and Martin Resource Management have entered into various agreements
that are not the result of arm's-length negotiations and consequently may not be
as favorable to us as they might have been if we had negotiated them with
unaffiliated third parties.

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OMNIBUS AGREEMENT

We and our general partner are parties to an omnibus agreement with
Martin Resource Management that governs, among other things, potential
competition and indemnification obligations among the parties to the agreement,
related party transactions, the provision of general administration and support
services by Martin Resource Management and our use of certain of Martin Resource
Management's tradenames and trademarks.

Non-Competition Provisions. Martin Resource Management agrees for so
long as Martin Resource Management controls the general partner not to engage in
the business of:

o providing marine transportation of hydrocarbon products and
by-products;

o providing terminalling services for hydrocarbon products and
by-products;

o distributing LPGs; and

o manufacturing and selling fertilizer products and other
sulfur-related products.

This restriction do not apply to:

o the operation on our behalf of any asset or group of assets
owned by us or our affiliates;

o any business operated by Martin Resource Management, including
the following:

o providing land transportation of various liquids,

o distributing fuel oil, sulfuric acid, marine fuel and
other liquids,

o providing marine bunkering and other shore-based
marine services in Mobile, Alabama,

o operating a small crude oil gathering business in
Stephens, Arkansas,

o operating an underground LPG storage facility in
Arcadia, Louisiana, and

o operating, solely for our account, a LPG truck loading
and unloading and pipeline distribution terminal in
Mont Belvieu, Texas.

o any business that Martin Resource Management acquires or
constructs that has a fair market value of less than $5.0
million;

o any business that Martin Resource Management acquires or
constructs that has a fair market value of $5.0 million or
more if we have been offered the opportunity to purchase the
business for fair market value, and we decline to do so with
the concurrence of our conflicts committee; and

o any business that Martin Resource Management acquires or
constructs where a portion of such business includes a
restricted business and the fair market value of the
restricted business is $5.0 million or more and represents
less than 20% of the aggregate value of the entire business to
be acquired or constructed; provided that, following
completion of the acquisition or construction, we are provided
the opportunity to purchase the restricted business.

Indemnification Provisions. Under the omnibus agreement, Martin
Resource Management is obligated to indemnify us for five years after the
closing of our initial public offering:

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o certain potential environmental liabilities associated with
the operation of the assets contributed to us, and assets
retained, by Martin Resource Management that relate to events
or conditions occurring or existing before the closing of our
initial public offering, and

o any payments we are required to make, as a successor in
interest to affiliates of Martin Resource Management, under
environmental indemnity provisions contained in the
contribution agreement associated with the contribution of
assets by Martin Resource Management to CF Martin Sulphur in
November 2000.

However, Martin Resource Management's maximum liability for this
indemnification obligation will not exceed $7.5 million. Martin Resource
Management will also indemnify us for liabilities relating to:

o legal actions currently against Martin Resource Management at
the time of our formation;

o events and conditions associated with any assets retained by
Martin Resource Management;

o certain defects in the title to the assets contributed to us
by Martin Resource Management that arise within four years
after the closing of this offering to the extent such defects
materially and adversely affect our ownership and operation of
such assets;

o our failure to obtain certain consents and permits necessary
to conduct our business to the extent such liabilities arise
within three years after the closing of our initial public
offering; and

o certain income tax liabilities attributable to the operation
of the assets contributed to us prior to the time that they
were contributed.

Services. Under the omnibus agreement, Martin Resource Management
provides us with corporate staff and support services that are substantially
identical in nature and quality to the services previously provided by Martin
Resource Management in connection with its management and operation of our
assets during the one-year period prior to date of the agreement. These services
include centralized corporate functions, such as accounting, treasury,
engineering, information technology, insurance, administration of employee
benefit plans and other corporate services. Martin Resource Management is
reimbursed by us for the costs and expenses it incurs in rendering these
services, including an overhead allocation to us of Martin Resource Management's
indirect general and administrative expenses from its corporate allocation pool.
The reimbursement amount with respect to indirect general and administrative
expenses and the corporate overhead allocation will not exceed $1.0 million for
the first year. For each of the following four years, this amount may be
increased by no more than the percentage increase in the consumer price index
for the applicable year. In addition, our general partner may agree, with the
consent of the conflicts committee of our general partner, to further increases
in connection with expansions of our operations through the acquisition or
construction of new assets or businesses. After this five-year period, our
general partner will determine the general and administrative expenses that will
be allocated to us. Administrative and general expenses directly associated with
providing services to us (such as legal and accounting services) are not
included in the overhead allocation pool and are therefore not subject to the
$1.0 million cap. The provisions of the omnibus agreement regarding Martin
Resource Management's services will terminate if Martin Resource Management
ceases to control our general partner.

Related Party Transactions. The omnibus agreement prohibits us from
entering into any material agreement with Martin Resource Management without the
prior approval of the conflicts committee of our general partner's board of
directors. For purposes of the omnibus agreement, the term material agreements
means any agreement between us and Martin Resource Management that requires
aggregate annual payments in excess of then-applicable limitation on the
reimbursable amount of indirect general and administrative expenses. Please read
"-- Services" above.

License Provisions. Under the omnibus agreement, Martin Resource
Management has granted us a nontransferable, nonexclusive, royalty-free right
and license to use certain of its tradenames and marks, as well as the
tradenames and marks used by some of its affiliates.

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Management of CF Martin Sulphur. Subject to the limitations referred to
below, Martin Resource Management agreed that it will exercise its management
rights regarding the operations of CF Martin Sulphur in a manner that it
reasonably believes is in our best interests. Martin Resource Management also
agreed that it will not approve or consent to any amendment to the CF Martin
Sulphur partnership agreement without our prior written consent. Please read
"Item 1. Business -- CF Martin Sulphur" for a discussion of Martin Resource
Management's management rights regarding the operations of CF Martin Sulphur.
However, in no event will persons affiliated with Martin Resource Management who
serve as managers of CF Martin Sulphur L.L.C., the general partner of CF Martin
Sulphur, be required to act in any manner that such person reasonably believes
would violate law or constitute a breach of a fiduciary or similar duty. Except
when obligated to do so, Martin Resource Management also agrees that it will
neither sell its or our interest in CF Martin Sulphur, nor purchase an interest
of a third party in the partnership, in accordance with the partnership
agreement of CF Martin Sulphur without our written consent and, in some cases,
only as directed by us. In the event we and Martin Resource Management agree to
purchase an interest of a third party in CF Martin Sulphur, we agree that the
purchase price for and ownership of such interest will be allocated between us
in accordance with our respective ownership percentages in the partnership.

Amendment and Termination. The omnibus agreement may be amended by
written agreement of the parties; provided, however that it may not be amended
without the approval of the conflicts committee of our general partner if such
amendment would adversely affect the unitholders. The omnibus agreement, other
than the indemnification provisions and the provisions limiting the amount for
which we will reimburse Martin Resource Management for general and
administrative services performed on our behalf, will terminate if we are no
longer an affiliate of Martin Resource Management.

MOTOR CARRIER AGREEMENT

We have entered into a motor carrier agreement with Martin Transport,
Inc., a wholly owned subsidiary of Martin Resource Management through which
Martin Resource Management operates its land transportation operations. Under
the agreement, Martin Transport agreed to ship our LPG shipments as well as
other liquid products.

Term and Pricing. This agreement has a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term. Our shipping rates are
be fixed for the first year of the agreement, subject to adjustments resulting
from cost items imposed on Martin Transport as the result of circumstances
beyond Martin Transport's control and affecting similarly- situated private
trucking companies. Thereafter, these rates will be adjusted on at least an
annual basis as negotiated by the parties. In the event the parties are not able
to agree on adjustments, the rates previously in effect will be adjusted
according to a price index. Shipping charges under the agreement are also
subject to a fuel surcharge determined each week in accordance with in the most
recent U.S. Department of Energy's national diesel price index.

Indemnification. Martin Transport will indemnify us against all claims
arising out of the negligence or willful misconduct of Martin Transport and its
officers, employees, agents, representatives and subcontractors. We will
indemnify Martin Transport against all claims arising out of the negligence or
willful misconduct of us and our officers, employees, agents, representatives
and subcontractors. In the event a claim is the result of the joint negligence
or misconduct of Martin Transport and us, our indemnification obligations will
be shared in proportion to each party's allocable share of such joint negligence
or misconduct.

OTHER AGREEMENTS

Terminal Services Agreement. We have entered into a terminal services
agreement with Martin Resource Management under which we provide the following
services for Martin Resource Management at our terminals:

o we unload, transfer and store products received from vessels
or trucks at the terminal; and

o we transfer products stored at the terminal to vessels or
trucks.

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This agreement has a three-year term and will automatically renew for
consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term.

Marine Transportation Agreement. We have entered into a marine
transportation agreement under which we provide marine transportation services
to Martin Resource Management on a spot-contract basis at applicable market
rates. This agreement has a three-year term and will automatically renew for
consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term. Additionally, Martin Resource Management
will agree for a three year period to use our four vessels that are currently
not subject to term agreements in a manner such that we will receive at least
$5.6 million annually for the use of these vessels by Martin Resource Management
and third parties.

Underground Storage Agreement. We have entered into a product storage
agreement with Martin Resource Management under which we lease storage space at
Martin Resource Management's underground storage facility located in Arcadia,
Louisiana. This agreement has a three-year term and will automatically renew for
consecutive one-year periods unless either party terminates the agreement by
giving written notice to the other party at least 30 days prior to the
expiration of the then-applicable term. Our per-unit cost under this agreement
is fixed for the first year of the agreement and will be adjusted annually based
on a price index. We will indemnify Martin Resource Management from any damages
resulting from our delivery of products that are contaminated or otherwise fail
to conform to the product specifications established in the agreement, as well
as any damages resulting from our transportation, storage, use or handling of
products.

Marine Fuel. We have entered into an agreement with Martin Resource
Management under which Martin Resource Management provides us with marine fuel
at its docks located in Mobile, Alabama, Theodore, Alabama, Pascagoula,
Mississippi and Tampa, Florida. We agreed to purchase all of our marine fuel
requirements that occur in the areas services by these docks under this
agreement. Martin Resource Management provides fuel at a set margin of $.035
above its cost on a spot-contract basis. This agreement has a three-year term
and will automatically renew for consecutive one-year periods unless either
party terminates the agreement by giving written notice to the other party at
least 30 days prior to the expiration of the then-applicable term.

Sulfuric Acid. We have entered into an agreement with Martin Resource
Management under which Martin Resource Management provides sulfuric acid for our
Plainview facility. We agreed to purchase all of our sulfuric acid requirements
for our Plainview facility under this agreement. Martin Resource Management
provides sulfuric acid at a set margin of $4.00 per short ton above its cost on
a spot-contract basis. This agreement has a three-year term and will
automatically renew for consecutive one-year periods unless either party
terminates the agreement by giving written notice to the other party at least 30
days prior to the expiration of the then-applicable term.

Throughput Agreement. We have entered into a three-year throughput
agreement under which Martin Resource Management agrees to provide us with sole
access to and use of a LPG truck loading and unloading and pipeline distribution
terminal located at Mont Belvieu, Texas. This agreement has a three-year term
and will automatically renew for consecutive one-year periods unless either
party terminates the agreement by giving written notice to the other party at
least 30 days prior to the expiration of the then-applicable term. Our
throughput fees are fixed for the first year of the agreement and will be
adjusted annually based on an index price.

Purchaser Use Easement, Ingress-Egress Easement, and Utility Facilities
Easement. We have entered into a Purchaser Use Easement, Ingress-Egress Easement
and Utility Facilities Easement with Martin Resource Management under which we
have complete, non-exclusive access to, and use of, all marine terminal
facilities, all loading and unloading facilities for vessels, barges and trucks
and other common use facilities located at the Stanolind terminal. This easement
has a perpetual duration. We did not incur any expenses, costs or other
financial obligations under the easement. Martin Resource Management is be
obligated to maintain, and repair all common use areas and facilities located at
this terminal. We share the use of these common use areas and facilities only
with Martin Resource Management and CF Martin Sulphur who also have tanks
located at the Stanolind facility. See "Item 1. Business -- Terminalling
Business -- Description of Terminal Facilities."

91

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of the filing of this report, we
carried out an evaluation, under the supervision and with the participation of
the management of our general partner, including the Chief Executive Officer and
Chief Financial Officer of our general partner, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in
Exchange Act Rule 15d-14(c). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer of our general partner concluded that our
disclosure controls and procedures are effective in enabling us to record,
process, summarize and report information required to be disclosed in our
periodic filings with the Securities and Exchange Commission within the required
time period. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent to
the date we carried out our evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL SCHEDULES AND REPORTS ON FORM
8-K

(a) Financial Statements and Financial Schedules

(1) The following financial statements of Martin Midstream
Partners L.P. and Subsidiaries and Martin Midstream Partners
Predecessor are included in Part II, Item 8:

Report of Independent Accountants
Consolidated and Combined Balance Sheets
Consolidated and Combined Statements of Income
Consolidated and Combined Statements of Changes in
Capital/Equity
Consolidated and Combined Statements of Cash Flows
Notes to the Consolidated and Combined Financial Statements

(2) Financial Statements of CF Martin Sulphur, L.P. for the years
ended December 31, 2002 and December 31, 2001, an
unconsolidated affiliate in which Martin Midstream Partners
L.P. holds a non-controlling 49.5% interest which is accounted
for by the equity method. These financial statements are being
included pursuant to Rule 3-09 of Regulation S-X. In the
future, if CF Martin Sulphur, L.P. does not meet the tests set
forth in such regulation, financial statements of C.F. Martin
Sulphur, L.P. will not be included in the reports of Martin
Midstream Partners L.P. filed under the Securities Exchange
Act of 1934.

Financial schedules under this item are not applicable or
required.

(b) Reports on Form 8-K

On November 19, 2002, Martin Midstream Partners L.P. filed a
Current Report on Form 8-K (dated as of November 6, 2002)
announcing the completion of the sale of its common units to
the public and filing execution copies of exhibits to its
Registration Statement on Form S-1 (Registration No.
333-91706).

On December 12, 2002, Martin Midstream Partners L.P. filed a
Current Report on Form 8-K, which included its press release
dated December 11, 2002 as Exhibit 99.1, announcing its
third-quarter earnings call and the release of financial
results for the quarter ended September 30, 2002.

On December 12, 2002, Martin Midstream Partners L.P. filed a
Current Report on Form 8-K, which included its press release
dated December 12, 2002 as Exhibit 99.1, announcing financial
results for the quarter ended September 30, 2002.

On December 12, 2002, Martin Midstream Partners L.P. filed a
Current Report on Form 8-K, which furnished as Exhibits 99.1
and 99.2 the submissions of Ruben S. Martin, Chief Executive
Officer and President of the general partner of the Registrant
and Robert D. Bondurant, Executive Vice President and Chief
Financial Officer of the Registrant to the Securities and
Exchange Commission of certifications pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

92

On January 21, 2003, Martin Midstream Partners L.P. filed a
Current Report on Form 8-K, which included its press release
dated January 20, 2003 as Exhibit 99.1, announcing the
declaration of its first minimum quarterly distribution.

(c) Exhibits

Reference is made to the Index to Exhibits beginning on page
97 for a list of all exhibits filed as part of this report.

93

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report to be signed on our behalf
by the undersigned thereunto duly authorized representative.

Martin Midstream Partners L.P.
(Registrant)

By: Martin Midstream GP LLC
Its General Partner

Date: March 25, 2003 By: /s/ RUBEN S. MARTIN
-------------------------------
Ruben S. Martin
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 25th day of March, 2003.

94

CERTIFICATION
PURSUANT TO AND IN CONNECTION WITH THE
ANNUAL REPORTS ON FORM 10-K
TO BE FILED UNDER SECTIONS 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED

I, Ruben S. Martin, certify that:

1. I have reviewed this annual report on Form 10-K of Martin Midstream
Partners L.P.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

/s/ RUBEN S. MARTIN
- -----------------------------------------------------
Ruben S. Martin, President and
Chief Executive Officer of
Martin Midstream GP LLC,
the General Partner of Martin Midstream Partners L.P.

95

CERTIFICATION
PURSUANT TO AND IN CONNECTION WITH THE
ANNUAL REPORTS ON FORM 10-K
TO BE FILED UNDER SECTIONS 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED

I, Robert D. Bondurant, certify that:

1. I have reviewed this annual report on Form 10-K of Martin Midstream
Partners L.P.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 25, 2003

/s/ ROBERT D. BONDURANT
- -----------------------------------------------------
Robert D. Bondurant, Executive Vice President and
Chief Financial Officer of Martin Midstream GP LLC,
the General Partner of Martin Midstream Partners L.P.

96

INDEX TO EXHIBITS

* Filed herewith

98

Financial Statement Schedule
Pursuant to Item 15(a)2

CF MARTIN SULPHUR, L.P.

Financial Statements

December 31, 2002 and 2001

(With Independent Auditors' Report Thereon)

INDEPENDENT AUDITORS' REPORT

The Partners
CF Martin Sulphur, L.P.:

We have audited the accompanying balance sheets of CF Martin Sulphur, L.P. as of
December 31, 2002 and 2001, and the related statements of operations, changes in
partners' capital, and cash flows for the years ended December 31, 2002 and 2001
and the period from November 22, 2000 (inception) through December 31, 2000.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CF Martin Sulphur, L.P. at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years ended December 31, 2002 and 2001 and the period from November 22,
2000 (inception) through December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in note 1 to the financial statements, the Partnership changed its
method of accounting for goodwill in 2002.

February 26, 2003

CF MARTIN SULPHUR, L.P.
Balance Sheets
December 31, 2002 and 2001

2

CF MARTIN SULPHUR, L.P.
Statements of Operations
Years ended December 31, 2002 and 2001
and the period from November 22, 2000 (inception)
through December 31, 2000

See accompanying notes to financial statements.

3

CF MARTIN SULPHUR, L.P.
Statements of Changes in Partners' Capital
Years ended December 31, 2002 and 2001
and the period from November 22, 2000 (inception)
through December 31, 2000

See accompanying notes to financial statements.

4

CF MARTIN SULPHUR, L.P.
Statements of Cash Flows
Years ended December 31, 2002 and 2001
and the period from November 22, 2000 (inception)
through December 31, 2000

See accompanying notes to financial statements.

5

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) DESCRIPTION OF BUSINESS

C.F. Martin Sulphur, L.P. (the Partnership) was formed
pursuant to the provisions of the Delaware Revised Uniform
Limited Partnership Act for the primary purpose of being an
independent provider of transportation, terminalling,
marketing and logistics management services for molten sulfur.
Prior to November 6, 2002, ownership in the Partnership, as
defined in the Agreement, was shared among CF Martin Sulphur,
L.L.C. as General Partner (1.0 percent) and CF Industries,
Inc. (49.5 percent), Martin Gas Sales, Inc. (24.35 percent),
Martin Gas Marine, Inc. (24.80 percent) and Martin Transport,
Inc. (.35 percent) (collectively the "Martin Companies") as
Limited Partners. Effective November 6, 2002, the interests
held by the Martin Companies were contributed into Martin
Operating Partnership, L.P. (MOP). The Partnership will
continue in existence perpetually, unless earlier terminated
in accordance with the Agreement of Limited Partnership
(Agreement). Partnership income, gain, loss and distributions
will be allocated, in accordance with the limited partnership
agreement, in accordance with the respective partners
percentage interests.

CF Martin Sulphur, L.L.C. (the Company), a Delaware Limited
Liability Company, was formed November 22, 2000 for the
purpose of holding the general partner interest in the
Partnership, and further, to manage the Partnership and
conduct, direct and exercise full control over all activities
of the Partnership. All management powers over the business
and affairs of the Partnership are exclusively vested in the
general partner. The Company is owned by CF Industries, Inc.
(50 percent) and Martin Resource Management Corporation (MRMC)
(50 percent). Martin Operating Partnership, L.P. is wholly
owned by Martin Midstream Partners, L.P. which is 60.3% owned
by MRMC.

The Partnership does not have any employees because
substantially all of its operations and administrative
functions are provided by MRMC.

(b) CASH EQUIVALENTS

For purposes of reporting cash flows, the Partnership
considers investments with maturities at date of purchase of
three months or less to be cash equivalents.

(c) PRODUCT EXCHANGES

Product exchange balances due to other companies under
negotiated agreements are recorded at quoted market product
prices while balances due from other companies are recorded at
the lower of cost (determined using the first-in, first-out
(FIFO) method) or market.

(d) INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined by using the first-in, first-out (FIFO) method for
all inventories. Sulfur inventory cost consists of the cost of
purchasing the sulfur and all direct and indirect charges
necessary to get the sulfur to its existing condition and
location.

6

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

(e) PROPERTY, PLANT, AND EQUIPMENT

Owned property, plant, and equipment is stated at cost, less
accumulated depreciation. Owned buildings and equipment are
depreciated using the straight-line method over the estimated
lives of the respective assets.

Routine maintenance and repairs are charged to operating
expense while costs of betterments and renewals are
capitalized. When an asset is retired or sold, its cost and
related accumulated depreciation are removed from the accounts
and the difference between net book value of the asset and
proceeds from disposition is recognized as gain or loss.

Property, plant and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.

(f) GOODWILL

Prior to January 1, 2002, the Company amortized goodwill over
the expected periods to be benefited, 20 years. Amortization
of goodwill totaled approximately $467,000 for 2001 and
$39,000 for the period from November 22, 2000 (inception)
through December 31, 2000. Accumulated amortization as of
December 31, 2001 was approximately $506,000.

The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002. SFAS No. 142 eliminates the
amortization for goodwill and other intangible assets with
indefinite lives. Intangible assets with lives restricted by
contractual, legal, or other means will continue to be
amortized over their useful lives. Goodwill and other
intangible assets not subject to amortization are tested for
impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. SFAS
142 requires a two-step process for testing impairment. First,
the estimated fair value of the reporting unit is compared to
its carrying value to determine whether an indication of
impairment exists. If impairment is indicated, then the fair
value of the reporting unit's goodwill is determined by
allocating the unit's fair value to its assets and liabilities
(including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination.
The amount of impairment for goodwill is measured as the
excess of its carrying value over its fair value. The Company
completed its assessment of goodwill impairment as of the date
of adoption and a subsequent periodic impairment assessment as
of December 31, 2002. The assessments did not result in an
indication of goodwill impairment as of either date.

7

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

The following is a reconciliation of reported net earnings to
the amounts that would have been reported had the Partnership
been subject to SFAS 142 during the year ended December 31,
2001 and the period from November 22, 2000 (inception) through
December 31, 2000.

(g) INCOME TAXES

The federal income tax effect of Partnership activities has
not been reflected in the financial statements since such
taxes are the responsibility of the individual partners.

(h) USE OF ESTIMATES

Management of the Partnership has made a number of estimates
and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reporting of amounts of revenues and expenses during the
reporting period to prepare these financial statements in
conformity with accounting principles generally accepted in
the United States of America. Actual results could differ from
those estimates.

(i) REVENUE RECOGNITION

Sulfur sales and freight revenue are recorded at delivery.

(j) RECLASSIFICATIONS

Certain amounts previously reported for prior years have been
reclassified to conform with the 2002 presentation.

(k) COMPREHENSIVE INCOME

For all periods presented, net income is the only component of
comprehensive income, therefore, net income is equal to total
comprehensive income.

(l) SEGMENT REPORTING

The Partnership operates in one reportable operating segment.

8

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

(2) PROPERTY, PLANT, AND EQUIPMENT

At December 31, 2002 and 2001, net property, plant, and equipment
consisted of the following:

Depreciation expense was $1,830,147 and $1,308,556 for the years ended
December 31, 2002 and 2001, respectively; and $108,744 for the period
from November 22, 2000 (inception) through December 31, 2000.

(3) LONG-TERM DEBT

At December 31, 2002 and 2001, long-term debt consisted of the
following:

The aggregate maturities of long-term debt for the next five years are
as follows: 2003 - $1,042,000; 2004 - $1,042,000; 2005 - $1,042,000;
2006 - $1,042,000; and 2007 - $697,000.

9

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

The United States Government Guaranteed Ship Financing Bonds (the Bonds),
1995 Series, were originally issued by Martin Gas Marine, Inc. with
aggregate original principal totaling $14,526,000 including $9,195,000
designated "Barge Series Bonds" and $5,331,000 designated "Tug Series
Bonds." The Bonds were issued under a trust indenture dated November 30,
1995. The Bonds were issued to finance the construction of a 10,500
long-ton molten sulfur barge (the "barge") and a 7,000 horsepower
ocean-going tug (the "tug"). At inception, Martin Gas Marine, Inc.
transferred to the Partnership all of its rights, title and interest in
the vessels. In return, the Partnership assumed all liability under the
indenture, including the outstanding bonds in the aggregate principal
amount of $12,014,000, net of $18,000 upon formation.

The Bonds have been guaranteed as to unpaid interest and principal by the
United States of America under Title XI of the Merchant Marine Act of
1936, as amended. The Partnership also pays an additional fee on the
outstanding balance to the United States Maritime Administration for its
guarantee. As collateral security for the guarantee, the Partnership has
assumed the executed Security Agreement and First Preferred Fleet
Mortgage to grant to the Secretary of the Maritime Administration a
security interest in the barge, certain other tangible or intangible
property the Shipowner may acquire pursuant to the construction contract,
and a Reserve Fund and Financial Agreement. In addition to the foregoing,
MRMC has guaranteed full payment of the guarantee fees and principal and
interest on the outstanding bonds.

In November 2000, the Partnership entered into a Credit Agreement with
Harris Trust and Savings Bank consisting of a $5,000,000 Revolving Note
maturing in November 2003. There were no amounts outstanding under the
Revolving Note at December 31, 2002 and 2001.

Interest on the facility is due and payable monthly at a rate fluctuating
with the base rate in effect on the date of the respective draws. The
Revolving Note is secured by all accounts, general intangibles,
inventory, and deposit accounts of the Partnership.

Under the terms of the Credit Agreement, the Revolving Note facility
borrowing base will equal the sum of (a) 80% of eligible accounts
receivable, excluding exchanges plus (b) 65% of eligible inventory. The
amount available under the borrowing base was approximately $5,858,000
(limited to the $5,000,000 maximum under the Revolving Note) and
$2,594,000 at December 31, 2002 and 2001, respectively.

Commitment fees are due and payable quarterly under the Credit Agreement
at the rate of .5% per annum on the average daily unused portion of the
Commitment.

Under the terms of the Partnership's debt agreements, the Partnership is
required to maintain compliance with certain financial ratios and
covenants. The agreements also contain restrictions as to distributions
of capital and dividends from the Partnership. These agreements also
restrict liens on assets. The Partnership was in compliance with all
restrictive covenants as of and for all periods presented. Under the
terms of the debt agreements, substantially all assets of the Partnership
are pledged.

(4) RELATED PARTY TRANSACTIONS

Included in the financial statements for December 31, 2002 and 2001 are
various related party transactions and balances.

10

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

The Partnership was provided management, employee, terminal operations
and marine transportation services through a Master Services Agreement
(MSA) with MRMC, Martin Gas Marine, Inc., and Martin Gas Sales, Inc.
through November 6, 2002 and MRMC and MOP subsequent to November 6, 2002.
The fees related to these services are reflected in operating and general
and administrative expenses in the financial statements. The MSA remains
in effect until November 22, 2010 and may be extended for successive
periods of one year.

Under the MSA, the Partnership (through November 6, 2002) paid the Martin
Companies and MRMC a base management services fee, as agreed to by the
Partnership and MRMC; subsequent to November 6, 2002, this services fee
will be paid to MRMC and MOP. Upon formation and until January 1, 2002,
the base service fee was $53,200 per month and after January 1, 2002 the
base is adjusted annually to reflect increased or decreased costs of the
Martin Companies and MRMC (through November 6, 2002) and MRMC and MOP
subsequently, in providing the services. During the first twenty years of
the MSA, MRMC will provide the Partnership with a $19,600 per month
credit against each base management service fee. If the MSA is terminated
for any reason prior to the expiration of the twentieth year, MRMC will
make a cash payment to the Partnership in an amount specified in the MSA
applicable to the termination date.

Additionally, under the MSA, the Partnership will pay MRMC and MOP
certain employee services allocated costs, terminal operations allocated
costs, and marine transportation services fees, equal to the actual
direct costs and expenses incurred by MRMC and MOP in providing such
services.

The Partnership also entered into a Motor Carrier Agreement whereby
Martin Transport, Inc. provides the interstate and unregulated intrastate
transportation of sulfur, by tank truck, in the United States of America.
The Motor Carrier Agreement has an initial term of three years and shall
continue in effect thereafter, until canceled by either the Partnership
or Martin Transport, Inc. Total amounts paid by the Partnership related
to this agreement are reflected in cost of sulfur sold in the financial
statements. The freight charges are billed at actual costs based on rates
that are charged to unrelated parties for the identical origins and
destinations.

The Partnership sells and purchases sulfur from related parties in the
normal course of business. The Partnership purchased .4122 acres of land
from Martin Gas Sales, Inc. during April 2002.

11

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

Significant transactions with related parties reflected in the financial
statements for the years ended December 31, 2002 and 2001 are as follows:

In addition, certain operating expenses are paid directly by MRMC and MOP
and then reimbursed by the Partnership. Such pass-through arrangements
amounted to $2,113,835 and $2,695,091 in 2002 and 2001, respectively.

12

CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

The balance sheets at December 31, 2002 and 2001 include receivables and
payables from related parties as follows:

Accounts receivable from related parties represent trade sales. As of
November 6, 2002, Martin Resources, Inc., certain operations of Martin
Gas Marine, and Martin Gas Sales, Inc. became divisions of a newly
formed publicly traded partnership, Martin Midstream Partners, L.P.,
which owns Martin Operating Partnership.

(5) TIME CHARTER

Effective October 25, 2001, the Partnership entered into a time charter
agreement with Martin Gas Marine (MGM) for the usage of an ocean going
tug (Orion) and barge (Poseidon) (together, the "Vessels") for the
transportation of sulfur. The charter has an unlimited overall term,
however the Partnership committed to a minimum term of one year. After
this one year term, the Partnership may cancel at any time. The
Partnership currently anticipates the service period related to the
charter to be a minimum of three years.

The Poseidon was previously an oil barge and needed to be converted for
sulfur transportation. Such conversion was begun at the inception of the
charter and was completed in late February 2002. Total conversion costs
were approximately $3,600,000, all paid to third parties. A portion
(estimated to be 29%) of the conversion costs will be completely borne by
the Partnership and a portion (estimated to be 71%) are eligible for
reimbursement from MGM. Such reimbursement will occur upon termination of
the charter and return of the vessels back to MGM and will be calculated
on a basis which considers actual cost less accumulated depreciation.
Amortization of the leasehold costs began concurrent with placing of the
vessel in service in late February 2002. For the leasehold improvement
costs completely borne by the Partnership, such costs are being amortized
over the expected service life of the charter, three years. For the
leasehold improvements subject to reimbursement, such costs are being
amortized over the expected life of the improvements to the vessels.

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CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

In addition, the charter specified a reduced daily fee to MGM during the
conversion period, which amounted to $7,000 per day, plus a minimum
standby crew fee not to exceed $2,000 per day. At the end of the
conversion period, such costs amounted to approximately $1,123,000. These
costs are included in other assets on the balance sheet and are being
amortized over the expected service life of the charter (three years
beginning late February 2002). Net costs included in other assets were
approximately $811,000 and $559,000 as of December 31, 2002 and 2001,
respectively. Amortization expense totaled approximately $312,000 for
2002.

The base charter fee is $15,000 per day plus fuel and port charges for
the first two years with a CPI increase beginning in the third year. This
base charter fee began in late February 2002 when the vessels were placed
in service by the Partnership. The total expense recorded during 2002
related to the base charter fee was $4,630,000, which is reflected in
operating expense in the income statement.

The Partnership will periodically evaluate the estimated service life of
the charter and adjust related amortization accordingly.

Based on the expected life of the charter, the Partnership would expect
to pay the following amounts: 2003 - $5,475,000; 2004 - $5,475,000; and
2005 - $840,000.

(6) LEASES

The Partnership has numerous noncancelable operating leases primarily for
railroad tank cars. Management expects to renew or enter into similar
leasing arrangements for similar properties upon the expiration of the
current lease agreements.

The future minimum lease payments under noncancelable operating leases
for years subsequent to December 31, 2002 are as follows: 2003 -
$428,400; 2004 - $428,400; 2005 - $428,400; and 2006 - $71,400.

During the normal course of business, the Partnership enters into various
short-term operating leases which are renewed as needed. The more
significant of these agreements includes the leasing of railroad tank
cars.

In addition, the Partnership subleases from MOP a portion of the real
property MOP leases at The Tampa Port Authority. Future minimum lease
payments under the sublease agreement for years subsequent to December
31, 2002 are as follows: 2003 - $14,220; 2004 - $14,220; 2005 - $14,220;
and 2006 - $13,628.

Total rent expense for operating leases for the years ended December 31,
2002 and 2001 and the period from November 22, 2000 (inception) through
December 31, 2000, was $1,084,832, $1,051,759, and $111,524,
respectively.

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CF MARTIN SULPHUR, L.P.

Notes to Financial Statements

December 31, 2002 and 2001

(7) COMMITMENTS AND CONTINGENCIES

The Partnership has a long-term purchase contract with a nonaffiliated
vendor for the purchase of a portion of its sulfur needs. The agreement
remains in place until December 2003, with optional renewal periods
ranging from one to three years upon the completion of the initial term.
Annual purchase commitments under the agreement are approximately 237,000
tons of sulfur, with the price based upon published sulfur prices,
adjusted monthly. Product purchases under the agreement for the years
ended December 31, 2002 and 2001 and the period from November 22, 2000
(inception) through December 31, 2000, were approximately $7,567,000,
$5,848,000, and $517,000, respectively.

In addition to the foregoing, from time to time, the Partnership is
involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Partnership.

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