UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended September 30, 2004

OR

o	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.

4200 Stone Road
Kilgore, Texas 75662
(Address of principal executive offices, zip code)

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

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

     Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of the registrant’s Common Units outstanding at November 2, 2004 was 4,222,500.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MARTIN MIDSTREAM PARTNERS L.P.

See accompanying notes to consolidated and condensed financial statements.

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MARTIN MIDSTREAM PARTNERS L.P.

     See accompanying notes to consolidated and condensed financial statements.

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MARTIN MIDSTREAM PARTNERS L.P.

See accompanying notes to consolidated and condensed financial statements.

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MARTIN MIDSTREAM PARTNERS L.P.

See accompanying notes to consolidated and condensed financial statements.

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

1. Organization and Description of Business

     Martin Midstream Partners L.P. (the “Partnership”) provides terminalling, marine transportation, distribution and midstream logistical services for producers and suppliers of hydrocarbon products and by-products, lubricants 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, 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) terminalling; (2) 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

     In addition to matters discussed below in this note, the Partnership’s significant accounting policies are detailed in the audited consolidated and combined financial statements and notes thereto in the Partnership’s annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 23, 2004.

(a) Principles of Presentation and Consolidation

     The balance sheets as of September 30, 2004 and December 31, 2003, the statements of operations for the three months and nine months ended September 30, 2004 and 2003, and the statements of capital and cash flows for the nine months ended September 30, 2004 and 2003 are presented on a consolidated basis and include the operations of the Partnership and its two wholly-owned subsidiaries, Martin Operating GP LLC and Martin Operating Partnership L.P.

     These financial statements should be read in conjunction with the Partnership’s audited consolidated and combined financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 23, 2004. The Partnership’s unaudited consolidated and condensed financial statements have been prepared in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States for interim financial

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

reporting. Accordingly, these financial statements have been condensed and do not include all of the information and footnotes required by accounting principles for complete financial statements as are normally made in annual audited financial statements contained in the Partnership’s annual reports on Form 10-K. In the opinion of the management of the Partnership’s general partner, all adjustments necessary for a fair presentation of the Partnership’s results of operations, financial position and cash flows for the periods shown have been made. All such adjustments are of a normal recurring nature. Results for the nine months ended September 30, 2004 are not necessarily indicative of the results of operations for the full year.

3. Inventories

     Components of inventories at September 30, 2004 and December 31, 2003 were as follows:

4. Goodwill

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

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

5. CF Martin Sulphur L.P.

     The following table sets forth CF Martin Sulphur’s summarized net income information for the three and nine months ended September 30, 2004 and 2003. The Partnership owns an unconsolidated non-controlling 49.5% limited partnership interest in CF Martin Sulphur, which is accounted for using the equity method of accounting. During the three months ended September 30, 2004 and 2003, the Partnership recorded equity in earnings (loss) from CF Martin Sulphur of $(491) and $580, respectively, and recorded cash distributions therefrom of $495 and $891, respectively. During the nine months ended September 30, 2004 and 2003, the Partnership recorded equity in earnings from CF Martin Sulphur of $139 and $2,308, respectively, and recorded cash distributions therefrom of $1,683 and $2,673, respectively. This has resulted in the Partnership recording a negative investment in CF Martin Sulphur of $(833) which the Partnership expects to recover through future earnings.

     CF Martin Sulphur was not in compliance with the minimum EBITDA covenant for the second and third quarters of 2004 under its credit facility with Harris Trust and Savings Bank. The bank agreed to waive CF Martin Sulphur’s non-compliance with such covenant as of June 30, 2004 and September 30, 2004. On October 29, 2004, CF Martin Sulphur and Harris Trust and Savings Bank replaced the minimum EBITDA covenant with a cash flow leverage covenant and amended the maturity date of such credit facility to March 31, 2007. The Partnership believes that CF Martin Sulphur will maintain compliance with such amended covenant.

6. Related Party Transactions

     Included in the financial statements for the three months and nine months ended September 30, 2004 and 2003, are various related party transactions and balances primarily with MRMC and affiliates and CF Martin Sulphur. More information concerning these transactions is set forth elsewhere in this quarterly report and in the Partnership’s annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 23, 2004.

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

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

     MRMC and Affiliates

     CF Martin Sulphur

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

7. Business Segments

     The Partnership has four reportable segments: terminalling, marine transportation, 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.

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

Total assets by segment are as follows:

8. Follow On Offering

     In February 2004, the Partnership completed a public offering of 1,322,500 common units at a price of $27.94 per common unit, before the payment of underwriters’ discounts, commissions and offering expenses (per unit value is in dollars, not thousands). Following this offering, the common units represented a 47.8% limited partnership interest in the Partnership. Total proceeds from the sale of the 1,322,500 common units, net of underwriters’ discounts, commissions and offering expenses were $34,016. The Partnership’s general partner contributed $754 in cash to the Partnership in conjunction with the issuance in order to maintain its 2% general partner interest in the Partnership. The net proceeds were used to pay down revolving debt under the Partnership’s credit facility.

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

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MARTIN MIDSTREAM PARTNERS L.P.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except where otherwise indicated)
September 30, 2004
(Unaudited)

9. Neches Terminal Asset Acquisition

     On June 1, 2004, the Partnership acquired a deep water marine terminal located near Beaumont, Texas and associated assets from Neches Industrial Park, Inc. (“Neches”) for $26.9 million (which includes an initial $1.0 million payment under a related non-competition agreement and subsequent payments of $50 per year for ten years). In addition, the Partnership paid $0.2 million in transaction costs. The purchase price was allocated $25.7 million to property, plant and equipment and $1.4 million to non-competition agreements in other assets, net. The terminal is located on approximately 50 acres of land on the Neches River and includes two dock structures, nine storage tanks with a total capacity of approximately 480,000 barrels, four rail spurs with service provided by three major rail companies, a bulk warehouse and associated pipelines, pipe racks, compressors and related equipment. The terminal and the acquired assets were used by Neches in the business of handling and storage of ammonia, sulfuric acid, asphalt, fuel oil and fertilizer through fee based contracts. The Partnership intends to continue to use the terminal and the acquired assets for such purposes. The acquisition was financed through the Partnership’s revolving credit facility (See Note 11.). The value of the non-competition agreement will be amortized on a straight line basis over the life of the agreement.

     The operations related to the acquisition have been included in the Partnership’s results of operations since the date of acquisition.

10. Freeport Terminal Asset Acquisition

     On September 17, 2004, the Partnership acquired a marine terminal located near Freeport, Texas and associated assets from Offshore Oil Services, Inc. (“OOS”) for $2.4 million. In addition, the Partnership paid $0.1 million in transaction costs. The purchase price was allocated $2.5 million to property, plant and equipment. The terminal is located on approximately 18 acres of land and includes two warehouses and an office building. The terminal and the acquired assets were used by OOS in the fuel oil and lubricant distribution and service business. The Partnership intends to continue to use the terminal and the acquired assets for such purposes. The acquisition was financed through the Partnership’s revolving credit facility (See Note 11).

     The operations related to the acquisition have been included in the Partnership’s results of operations since the date of acquisition.

11. Long-term Debt

     As of September 30, 2004, and through October 29, 2004, the Partnership’s credit facility consisted of a $55.0 million revolving credit facility and a $25.0 million term loan. The $55.0 million revolving credit facility was comprised of (i) a $25.0 million subfacility that was used for ongoing working capital needs and general partnership purposes and (ii) a $30.0 million subfacility that was used to finance permitted acquisitions and capital expenditures. In February 2004, the Partnership used the proceeds from its public offering of 1,322,500 common units to pay down revolving debt under the credit facility. In June 2004, it borrowed $27.0 million under its acquisition subfacility to acquire the Neches terminal assets. In September 2004, the Partnership borrowed $3.0 million under the acquisition subfacility to acquire the OOS terminal. Following such activity, as of September 30, 2004, the Partnership had $69.0 million of outstanding indebtedness, consisting of outstanding borrowings of $25.0 million under the term loan and $44.0 million under the revolving credit facility. As of September 30, 2004, the Partnership had no availability for expansion and acquisition activities under the revolving credit facility.

     On October 29, 2004, the Partnership entered into a $100 million amended and restated credit facility comprised of (i) a $30.0 million subfacility that will be used for ongoing working capital needs and general partnership purposes, and (ii) a $70.0 million subfacility that may be used to finance permitted acquisitions and capital expenditures. The Partnership’s existing debt of $69.0 million, as of October 29, 2004, has been refinanced under the amended and restated credit facility consisting of $14.0 million outstanding under the working capital subfacility and $55.0 million outstanding under the acquisition subfacility. In addition, the Partnership has issued a $2.5 million letter of credit under the working capital subfacility.

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     Draws made under the credit facility are normally made to fund working capital requirements, acquisitions and capital expenditures. During the current fiscal year, the outstanding balances thereunder have ranged from a low of $35.0 million to a high of $69.0 million.

     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. The Partnership 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 will range from 1.75% to 2.75% and the applicable margin for base prime rate loans will range from 0.75% to 1.75%. The Partnership incurs a commitment fee on the unused portions of the credit facility.

     In addition, the credit facility contains various covenants, which, among other things, 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 its 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, require the Partnership to maintain specified ratios of: (i) minimum net worth (as defined therein) of $65.0 million; (ii) EBITDA (as defined therein) 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 acquisition subfacility of not less than 1.5 to 1.0. The Partnership was in compliance with the debt covenants contained in its previous credit facility for the quarter ended September 30, 2004, and it would have been in compliance with the debt covenants in its amended and restated credit facility for the quarter ended September 30, 2004.

     The amount the Partnership is able to borrow under the working capital subfacility is based on a borrowing base formula tied to 75% of eligible accounts receivable plus 60% of eligible inventory. Without amending the credit facility, the Partnership can request an increase in eligible borrowings up to an additional $50.0 million, which can be applied to either the working capital subfacility, the acquisition subfacility or both, provided that there are one or more existing or new lenders willing to provide to such additional amount.

     Other than mandatory prepayments that would be triggered by certain asset dispositions or the issuance of subordinated indebtedness, the credit facility requires interest only payments on a quarterly basis until maturity. All outstanding principal and unpaid interest must be paid by October 29, 2008. 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     References in this quarterly 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 quarterly 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 quarterly report. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and the notes thereto included elsewhere in this quarterly report.

Forward-Looking Statements

     This report on Form 10-Q 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 quarterly 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 quarterly 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 terminalling, marine transportation, 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.

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

	•		terminalling and sales of hydrocarbon products and by-products;
	•		marine transportation services for hydrocarbon products and by-products;
	•		distribution of LPGs; and
	•		manufacturing and marketing of fertilizer products, which are primarily sulfur-based, and other sulfur-related products.

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     In November 2000, Martin Resource Management and CF Industries, Inc. formed CF Martin Sulphur, L.P., a Delaware limited partnership (“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 contributed to us in connection with our formation. We own an unconsolidated 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 have historically carried our book investments as a single amount within the “other assets” caption on our balance sheet. However, as of September 30, 2004, our investment in CF Martin Sulphur was negative due to cash distributions in excess of our initial investment and cumulative earnings in the unconsolidated partnership. Therefore, on September 30, 2004, we have carried our negative investment on CF Martin Sulphur on our balance sheet as a single amount under the “other long term obligations” caption. We have not guaranteed the repayment of any debt of CF Martin Sulphur and we should not be otherwise required to repay any obligations of CF Martin Sulphur if it defaults on any such obligations. We anticipate that we will recover this negative investment in CF Martin Sulphur through future earnings.

  Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated and condensed 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, other than as described below, 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 condensed financial statements most significantly.

     You should also read Note 2, “Significant Accounting Policies” in Notes to Consolidated and Condensed Financial Statements contained in this quarterly report and the similar note in the consolidated and combined financial statements included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 23, 2004 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 and the determination of the fair value of our reporting units under SFAS No. 142, “Goodwill and Other Intangible Assets.”

     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 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 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 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 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 an unconsolidated non-controlling 49.5% limited partner interest in this 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

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CF Martin Sulphur and our relationship to Martin Resource Management, which guarantees certain of 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. As required by SFAS No. 142, we perform an annual impairment test of our recorded goodwill. In performing such test, we determined we had three “reporting units” which contained goodwill. These reporting units included our marine transportation, LPG distribution and fertilizer reporting segments. Our annual impairment test date is September 30.

     We perform 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) of each reporting unit. We determine fair value in each reporting unit based on a multiple of current annual cash flows. We determine such multiple from our recent experience with actual acquisitions and dispositions and valuing potential acquisitions and dispositions.

     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 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 our 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 reserves for bad debts to reduce the related receivable to the amount we ultimately expect to collect from customers.

     Estimated Losses. In evaluating the estimated losses from self-insured property damage, liability and occupational injury claims, we assess a number of factors, including the probability of incurring a loss, the nature of the claim and historical loss experience. Based on these assessments, we record specific reserves for third party liability claims, general liability claims and occupational injury claims in the amount we ultimately expect to pay on these claims.

Our Relationship with Martin Resource Management

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

	•		providing land transportation of various liquids using a fleet of approximately 362 trucks and road vehicles and approximately 687 road trailers;
	•		distributing fuel oil, sulfuric acid, marine fuel and other liquids;
	•		providing marine bunkering and other shore-based marine services in Alabama, Louisiana, Mississippi and Texas;
	•		operating a small crude oil gathering business in Stephens, Arkansas;
	•		operating an underground LPG storage facility in Arcadia, Louisiana;
	•		supplying employees and services for the operation of our business;
	•		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

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•

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 a result of the following relationships.

     Ownership. Martin Resource Management currently owns approximately 50.2% of our outstanding limited partnership interests. 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 through 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 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. We reimbursed Martin Resource Management for $7.4 million of direct costs and expenses for the three months ended September 30, 2004 compared to $5.1 million for the three months ended September 30, 2003. We reimbursed Martin Resource Management for $22.4 million of direct costs and expenses for the nine months ended September 30, 2004 compared to $16.6 million for the nine months ended September 30, 2003. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management for direct expenses. Under the omnibus agreement, the reimbursement amount with respect to indirect general and administrative and corporate overhead expenses was capped at $2.0 million for the twelve month period ending October 31, 2004. For each of the subsequent three 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. Effective January 2004, the cap was increased from $1.0 million to $2.0 million to account for the additional operations acquired in recent acquisitions, including the assets we acquired from Tesoro Marine Services, L.L.C. (“Tesoro Marine”). We reimbursed Martin Resource Management for $0.3 million of indirect expenses for the quarter ended September 30, 2004 compared to $0.2 million for the quarter ended 2003. We reimbursed Martin Resource Management for $0.8 million of indirect expenses for the nine months ended September 30, 2004 compared to $0.5 million for the nine months ended September 30, 2003. 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 have been and anticipate that we will continue to be both a significant customer and supplier of products and services offered by Martin Resource Management. Our motor carrier agreement with Martin Resource Management provides us with access to Martin Resource Management’s fleet of approximately 362 road vehicles and approximately 687 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.

     In the aggregate, our purchases of land transportation services, LPG storage services, sulfuric acid and fertilizer payroll reimbursements from Martin Resource Management accounted for 5% and 6% of our total cost of products sold during the three months and nine months ended September 30, 2004 and 8% of our total cost of products sold during both the three months and nine months ended September 30, 2003. We also purchase marine fuel from Martin Resource Management, which we account for as an operating expense.

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     Correspondingly, Martin Resource Management is one of our significant customers. It primarily uses our terminalling, marine transportation and LPG distribution services for its operations. Martin Resource Management is also a significant customer of fertilizer products and we provide terminalling services under a terminal services agreement. We provide marine transportation services to Martin Resource Management under a charter agreement on a spot-contract basis at applicable market rates. Our sales to Martin Resource Management accounted for approximately 5% and 4% of our total revenues for the three months ended September 30, 2004 and 2003, respectively. Our sales to Martin Resource Management accounted for approximately 6% and 5% of our total revenues for both the nine months ended September 30, 2004 and 2003, respectively. In connection with the closing of the Tesoro Marine asset acquisition, we entered into certain agreements with Martin Resource Management pursuant to which we provide terminalling and marine transportation services to Midstream Fuel and Midstream Fuel provides terminal services to us to handle lubricants, greases and drilling fluids.

  Omnibus Agreement

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

	•		Martin Resource Management agreed to not compete with us in the terminalling, marine transportation, LPG distribution and fertilizer businesses, subject to the exceptions described more fully in “Item 13. Certain Relationships and Related Transactions - Agreements — Omnibus Agreement” of our annual report on Form 10-K for the year ended December 31, 2003 filed on March 23, 2004.
	•		Martin Resource Management agreed to indemnify us for a period of five years for environmental losses arising prior to our initial public offering, which we closed in November 2002, as well as preexisting litigation and tax liabilities.
	•		We agreed to reimburse Martin Resource Management for the provision of general and administrative services under our partnership agreement, provided that the reimbursement amount with respect to indirect general and administrative and corporate overhead expenses was capped at $2.0 million for the year ending October 31, 2004. For each of the subsequent three 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. Effective January 2004, the cap was increased from $1.0 million to $2.0 million to account for the additional operations acquired in recent acquisitions, including the Tesoro Marine asset acquisition. In addition, our general partner has the right to agree to further increases in connection with expansions of our operations through the construction of new assets or businesses. This limitation does 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.
	•		Martin Resource Management agreed 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” of our annual report on Form 10-K for the year ended December 31, 2003 filed on March 23, 2004. Additionally, Martin Resource Management agreed 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 agreed 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.
	•		We are prohibited from entering into certain material agreements with 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 motor carrier agreement with Martin Transport, Inc., a wholly owned subsidiary of Martin Resource Management, through which Martin Resource Management operates its land transportation

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operations. This agreement has an initial term that expires in October 2005, 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. Under this agreement, Martin Transport transports our LPG shipments as well as other liquid products. Our shipping rates were fixed for the first year of the agreement, subject to certain cost adjustments. These rates are subject to adjustment 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.

  Other Agreements

     We are also parties to the following:

	•		Specialty Petroluem Terminal Services Agreement - under which we provide terminalling services to Martin Resource Management at a set rate. This agreement has an initial term that expires in October 2005, 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. The fees we charge under this agreement were fixed in the first year of the agreement and are adjusted annually based on a price index.
	•		Marine Transportation Agreement - under which we provide marine transportation services to Martin Resource Management on a spot-contract basis. This agreement has an initial term that expires in October 2005, 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. 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.
	•		Product Storage Agreement - under which Martin Resource Management provides us underground storage for LPGs. This agreement has an initial term that expires in October 2005, 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 was fixed for the first year of the agreement and is adjusted annually based on a price index.
	•		Product Supply Agreements - under which Martin Resource Management provides us with marine fuel and sulfuric acid. These agreements have an initial term that expires in October 2005, 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. We purchase products at a set margin above Martin Resource Management’s cost for such products during the term of the agreements.
	•		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 that expires in October 2005, 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 fee was fixed for the first year of the agreement and is adjusted annually based on a price index.
	•		Full Service, Fuel, and Lubricant Terminal Services Agreement — under which we provide terminalling services to Martin Resource Management. The per gallon throughput fee we charge under this agreement is fixed during the first year of the agreement and is adjusted annually based on a price index. The fee was based on comparable market rates for arms-length negotiated fees. Martin Resource Management has agreed to a minimum annual total throughput, as a result of which, at the first year fee rate, we will receive at least $2.3 million from Martin Resource Management. This agreement has a three-year term, which began in December 2003 and will automatically renew on a month-to-month basis until either party terminates the agreement by

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			giving written notice to the other party at least 60 days prior to the expiration of the then-applicable term. In September 2004, this agreement was amended to increase the throughput fee. In October 2004, this agreement was amended to include an additional throughput fee to be paid to us with respect to the terminal we acquired from Offshore Oil Services, Inc. (“OOS”).
	•		Transportation Services Agreement - under which we provide marine transportation services to Martin Resource Management. The fee per gallon we charge under this agreement is fixed during the first year of the agreement and is adjusted annually based upon mutual agreement of the parties or in accordance with a price index. The fee was based on comparable market rates for arms-length negotiated fees. This agreement has a three-year term, which began in December 2003, and will automatically renew for successive one-year terms 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. In addition, within 30 days of the expiration of the then-applicable term, both parties have the right to renegotiate the rate for the use of our vessels. If no agreement is reached as to a new rate by the end of the then-applicable term, the agreement will terminate.
	•		Lubricants and Drilling Fluids Terminal Services Agreement - under which Martin Resource Management provides terminal services to us. The per gallon handling fee and the percentage of our commissions we are charged under this agreement is fixed during the first year of the agreement and is adjusted annually based on a price index. The handling fee and percentage of commissions were based on Tesoro Marine’s historic allocated costs. We have agreed to a minimum annual total handling quantity and commission, as a result of which, at the first year fee rate, we will pay Martin Resource Management a minimum of $0.5 million. This agreement has a one-year term, which began in December 2003, and will automatically renew for successive one-year terms until either party terminates the agreement by giving written notice to the other party at least 60 days prior to the end of the then-applicable term.

     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 “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.

     Further information concerning our relationship with Martin Resource Management and its affiliates is set forth in our annual report for the year ended December 31, 2003 on Form 10-K filed with the Securities and Exchange Commission on March 23, 2004.

  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 September 30, 2004, our aggregate reimbursement liability would have been approximately $1.7 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 17% and 21% of our total marine transportation revenues for the three months ended September 30, 2004 and 2003, respectively. Revenues from our relationship with CF Martin Sulphur accounted for approximately 17% and 22% of our total marine transportation revenues for the nine months ended September 30, 2004 and 2003, respectively. 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 own an unconsolidated non-controlling 49.5% limited partner interest in CF Martin Sulphur. CF Martin Sulphur is managed by its general partner who 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.

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     Further information concerning our relationship with CF Martin Sulphur is set forth in our annual report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 23, 2004.

  Results of Operations

     The results of operations for the three months and nine months ended September 30, 2004 and 2003 have been derived from the consolidated and condensed financial statements of the Partnership.

     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 three months and nine months ended September 30, 2004 and 2003. The results of operations for the first nine months of the year are not necessarily indicative of the results of operations which might be expected for the entire year.

     Our results of operations are discussed on a comparative basis below. There are certain items of income and expense which we do not allocate on a segment basis. These items, including equity in earnings (loss) of unconsolidated entities, interest expense, and indirect selling, general and administrative expenses, are discussed after the comparative discussion of our results within each segment.

Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30, 2003

     Our total revenues were $72.2 million for the three months ended September 30, 2004 compared to $40.2 million for the three months ended September 30, 2003, an increase of $32.0 million, or 79%. Our cost of products sold was $55.9 million for the three months ended September 30, 2004 compared to $30.7 million for the three months ended September 30, 2003, an increase of $25.3 million, or 82%. Our total operating expenses were $8.5 million for the three months ended September 30, 2004 compared to $5.0 million for the three months ended September 30, 2003, an increase of $3.5 million, or 70%.

     Our total selling, general and administrative expenses were $2.3 million for the three months ended September 30, 2004 compared to $1.4 million for the three months ended September 30, 2003, an increase of $0.9 million, or 60%. Total depreciation and amortization was $2.4 million for the three months ended September 30, 2004 compared to $1.2 million for the three months ended September 30, 2003 an increase of $1.2 million, or 102%. Our operating income was $3.1 million for the three months ended September 30, 2004 compared to $2.0 million for the three months ended September 30, 2003, an increase of $1.1 million, or 56%.

     The results of operations are described in greater detail on a segment basis below.

Terminalling Business.

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

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     Revenues. Our terminalling revenues increased $5.5 million or 310% for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was due primarily to additional revenue generated by the Tesoro Marine assets we acquired in December 2003. These assets accounted for $2.3 million in terminalling service revenues and $2.1 million in lubricant product sales in the third quarter of 2004. In the third quarter, we also had increased revenues of $1.2 million generated from the terminal assets we acquired from Neches Industrial Park, Inc. (“Neches”) in June 2004. This increase was partially offset by $0.2 million as a result of one asphalt tank that was not being utilized in the third quarter of 2004 due to softness in the asphalt markets in which we operate.

     Cost of products sold. Our cost of products sold was $1.7 million for the three months ended September 30, 2004. This amount represents our lubricant cost of products sold as a result of the Tesoro Marine acquisition.

     Operating expenses. Operating expenses increased $1.7 million, or 479%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was primarily a result of additional operating expenses of $1.0 million from the Tesoro Marine asset acquisition, and $0.6 million from the Neches terminal acquisition.

     Selling, general and administrative expenses. Selling, general & administrative expenses increased $0.4 million, or 131%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was a result of the Tesoro Marine asset acquisition.

     Depreciation and amortization. Depreciation and amortization increased $0.9 million, or 730%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was a result of both the Tesoro Marine asset acquisition and the Neches terminal acquisition.

     In summary, our terminalling operating income increased $0.8 million, or 81%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Marine Transportation Business

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

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     Revenues. Our marine transportation revenues increased $1.9 million, or 30%, for the three months ended September 30, 2004, compared to the three months ended September 30, 2003. A revenue increase of $1.6 million was generated as a result of marine transportation assets acquired from Tesoro Marine and other parties in the fourth quarter of 2003. Inland marine assets we operated in both three month periods generated an additional revenue increase of $0.3 million. We also leased additional inland equipment in the third quarter which generated incremental revenue of $0.6 million. The total increase of inland revenues was a result of increased business volume and also a result of charging our inland customers the increase in our fuel costs. Offsetting these inland revenue increases was a decrease of $0.4 million in offshore revenues. This was a result of our offshore asphalt tow having decreased demand for its services in the third quarter due to softness in the asphalt markets in which we operate. Also, the four hurricanes which impacted the Gulf of Mexico and Florida in the third quarter negatively impacted our revenues by $0.4 million.

     Operating expenses. Operating expenses increased $1.9 million, or 43%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. An increase of $1.3 million was primarily a result of marine transportation assets acquired from Tesoro Marine and other parties in the fourth quarter of 2003. The remaining increase was a result of increased operating costs, including leased inland equipment and fuel expenses. A portion of these increased costs were a result of having to relocate marine transportation assets out of the path of the four hurricanes that impacted the Gulf of Mexico and Florida in the third quarter.

     Selling, general, and administrative expenses. Selling, general & administrative expenses were approximately the same for both three month periods.

     Depreciation and Amortization. Depreciation and amortization increased $0.3 million, or 32%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was primarily a result of maintenance capital expenditures made in the last twelve months.

     In summary, our marine transportation operating income decreased $0.2 million, or 18%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

     LPG Distribution Business.

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

     Revenues. Our LPG distribution revenue increased $24.9 million, or 94%, for the three months ended September 30, 2004, compared to the three months ended September 30, 2003. Sales volume increased 32% as a result of increased demand from industrial customers and increased sales to retail propane customers, as we improved our market share in certain portions of our marketing area. Also, our average sales price increased 47% for the third quarter of 2004 compared to the third quarter of 2003. This increase was due to a general increase in the prices of LPGs.

     Cost of products sold. Our cost of products sold increased $24.0 million, or 93%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase was due to a general increase in the prices of LPG’s. This increase was less than our increase in LPG revenue, as we were able to increase our per gallon margins.

     Operating expenses. Operating expenses were approximately the same for both three month periods.

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     Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.1 million, or 24% for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

     Depreciation and amortization. Depreciation and amortization was approximately the same for both three month periods.

     In summary, an LPG distribution operating income increased $0.9 million or 317%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Fertilizer Business

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

     Revenues. Our fertilizer business revenues decreased $0.4 million, or 7%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. Our sales volume decreased 7%, due to competitive pricing pressure from alternative fertilizer products. Our average sales price per ton was approximately the same for both three month periods.

     Cost of products sold and operating expenses. Our cost of products sold and operating expenses decreased $0.4 million, or 8%, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This decrease approximated our decrease in fertilizer revenues.

     Selling, general, and administrative expenses. Selling, general and administrative expenses increased $0.1 million, or 27% for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

     Depreciation and amortization. Depreciation and amortization was approximately the same for both three month periods.

     In summary our fertilizer operating loss increased $0.1 million for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003

     Our total revenues were $202.5 million for the nine months ended September 30, 2004 compared to $140.1 million for the nine months ended September 30, 2003, an increase of $62.4 million, or 45%. Our cost of products sold was $156.8 million for the nine months ended September 30, 2004 compared to $109.7 million for the nine months ended September 30, 2003, an increase of $47.1 million or 43%. Our total operating expenses were $23.4 million for the nine months ended September 30, 2004 compared to $14.9 million for the nine months ended September 30, 2003, an increase of $8.5 million, or 57%.

     Our total selling, general and administrative expenses were $6.4 million for the nine months ended September 30, 2004 compared to $4.6 million for the nine months ended September 30, 2003, an increase of $1.8 million, or 39%. Total depreciation and amortization was $6.3 million for the nine months ended September 30, 2004 compared to $3.5 million for the nine months ended September 30, 2003, an increase of $2.8 million or 79%.

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Our operating income was $9.7 million for the nine months ended September 30, 2004 compared to $7.4 million for the nine months ended September 30, 2003, an increase of $2.3 million, or 31%.

     The results of operations are described in greater detail on a segment basis below.

Terminalling Business.

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

     Revenues. Our terminalling revenues increased $13.6 million , or 271%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was primarily due to additional revenue generated by the Tesoro Marine assets we acquired in December 2003. These assets accounted for $5.9 million in terminalling service revenues and $6.1 million in lubricant products sales in the first nine months of 2004. During the first nine months of 2004, we also had increased revenues of $1.6 million from the Neches terminal acquisition. This increase was partially offset by $0.3 million as a result of one asphalt tank that was not being utilized in the second and third quarter of 2004 due to softness in the asphalt markets in which we operate.

     Cost of products sold. Our cost of products sold was $5.0 million for the nine months ended September 30, 2004. This amount represents lubricant cost of products sold as a result of the Tesoro Marine acquisition.

     Operating expenses. Operating expenses increased $3.7 million, or 344%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was primarily a result of additional operating expenses of $3.0 million from the Tesoro Marine asset acquisition, and $0.8 million from the Neches terminal acquisition.

     Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.9 million, or 96%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was primarily a result of the Tesoro Marine asset acquisition.

     Depreciation and amortization. Depreciation and amortization increased $2.2 million, or 578%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was a result of the Tesoro Marine asset acquisition and the Neches terminal acquisition.

     In summary, terminalling operating income increased $1.9 million, or 69%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Marine Transportation Business

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

     Revenues. Our marine transportation revenues increased $5.5 million, or 28%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. A revenue increase of $4.8 million was generated as a result of marine transportation assets acquired from Tesoro Marine and other parties in the fourth quarter of 2003. Inland marine assets we operated in both nine month periods generated an additional revenue increase of $1.3 million. We also leased additional inland equipment which generated incremental revenue of $1.2 million. The total increase in inland revenues was a result of increased business volume and also a result of charging our inland customers the increase in our fuel costs. Offsetting these increases in inland revenue was a decrease of $1.4 million in offshore revenues. This was a result of our offshore asphalt tow undergoing repairs for over two months during this period as well as decreased demand for its services in the second and third quarter due to softness in the asphalt markets in which we operate. Also, the four hurricanes which impacted the Gulf of Mexico and Florida in the third quarter negatively impacted our revenues by $0.4 million.

     Operating expenses. Operating expenses increased $4.9 million, or 38%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. An increase of $3.5 million was primarily a result of marine transportation assets acquired from Tesoro Marine and other parties in the fourth quarter of 2003. The remaining increase was a result of increased operating costs, including leased operating equipment and fuel expenses. A portion of these increased costs were a result of having to relocate marine transportation assets out of the path of the four hurricanes that impacted the Gulf of Mexico and Florida in the third quarter.

     Selling, general and administrative expenses. Selling, general & administrative expenses decreased $0.1 million, or 39%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

     Depreciation and Amortization. Depreciation and amortization increased $0.5 million, or 21%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was due to acquisitions made in the fourth quarter of 2003 and capital expenditures made in the last twelve months.

     In summary, our marine transportation operating income increased $0.2 million, or 4%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

LPG Distribution Business

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

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     Revenues. Our LPG distribution revenues increased $41.0 million, or 43%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Our sales volume increased 15% as a result of increased demand from industrial customers and increased sales to retail propane customers, as we improved our market share in certain portions of our marketing area. Also, our average sales price per gallon was 24% higher in the first nine months of 2004 compared to the first nine months of 2003. This price increase was due to a general increase in the prices of LPGs.

     Costs of product sold. Our cost of products increased $40.4 million, or 44%, for the nine months ending September 30, 2004 compared to the nine months ended September 30, 2003. This increase was due to a general increase in the prices of LPG’s. Our gross margin per gallon remained the same for both nine month periods.

     Operating expenses. Operating expenses declined $0.1 million, or 12%, for the nine months ended September 30, 2004 compared to the nine months ended June 30, 2003.

     Selling, general and administrative expenses. Selling, general & administrative expenses increased $0.2 million, or 21%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

     Depreciation and amortization. Depreciation and amortization was approximately the same for both nine month periods.

     In summary, our LPG distribution income increased $0.6 million, or 39%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Fertilizer Business

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

     Revenues. Our fertilizer revenues increased $2.3 million, or 11%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Our sales volume increased 2%. We also experienced a 9% increase in our average sales price, as we were able to pass through increased raw material costs.

     Costs of products sold and operating expenses. Our cost of products sold and operating expenses increased $1.7 million, or 10%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase was due to our sales volume increase of 2% and a 7% increase in our cost per ton of fertilizer products sold. This increased cost per ton was a result of price increases in raw materials.

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     Selling, general and administrative expenses. Selling, general & administrative expenses increased $0.2 million, or 17%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

     Depreciation and amortization. Depreciation and amortization was approximately the same for both nine month periods.

     In summary, our fertilizer operating income increased $0.3 million, or 38%, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Statement of Operations Items as a Percentage of Revenues

     Our cost of products sold, operating expenses, selling, general and administrative expenses, and depreciation and amortization as a percentage of revenues for the three months ended September 30, 2004 and 2003 are as follows:

  Equity in Earnings of Unconsolidated Entities

  For the three months and nine months ended September 30, 2004 and 2003, equity in earnings of unconsolidated entities relates to our unconsolidated non-controlling 49.5% limited partner interest in CF Martin Sulphur.

     Equity in earnings of unconsolidated entities for the three months ended September 30, 2004 decreased by $0.9 million for the same period in 2003. The biggest contributing factor to this decrease was because CF Martin’s operating costs in its Gulf of Mexico barge transportation system are primarily fixed and it could only transport 76% of its normal volume from the western Gulf of Mexico to Tampa, Florida due to the four hurricanes that impacted the Gulf of Mexico and Florida in the third quarter of 2004. Due to these factors, the cash distribution we received from CF Martin Sulphur decreased by $0.4 million for the three months ended September 30, 2004 compared to the same period in 2003. For the three months ended September 30, 2004, we received a cash distribution of $0.5 million. For the same period in 2003, we received a cash distribution of $0.9 million.

     Equity in earnings of unconsolidated entities for the nine months ended September 30, 2004 decreased $1.8 million, or 77%, for the same period in 2003. As a result, we have recorded a negative investment in CF Martin Sulphur of $(833) which we expect to recover through future earnings. This decrease was the result of a 13% decline in volume sold and a decline in the operating margin. The decrease in volume sold was a result of reduced demand by a certain customer in the second quarter of 2004 and a reduction of sulfur supply available for sale in the first quarter of 2004. The decline in operating margin was a result of decreased utilization of CF Martin’s barge transportation system in the third quarter of 2004 due to the four hurricanes that impacted the Gulf of Mexico and Florida. Due to these factors, the cash distributions we received from CF Martin Sulphur decreased by $1.0 million for the nine months ended September 30, 2004 compared to the same period in 2003. For the nine months ended September 30, 2004 we received cash distributions of $1.7 million. For the same period in 2003, we received cash distributions of $2.7 million.

     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 $0.1 million for both three month periods and $0.4 million for both nine month periods.

     CF Martin Sulphur was not in compliance with the minimum EBITDA covenant for the second and third quarters of 2004 under its credit facility with Harris Trust and Savings Bank. The bank agreed to waive CF Martin

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Sulphur’s non-compliance with such covenant as of June 30, 2004 and September 30, 2004. On October 29, 2004, CF Martin Sulphur and the Bank replaced the minimum EBITDA covenant with a cash flow leverage covenant and amended the maturity date of such credit facility to March 31, 2007. We believe that CF Martin Sulphur will maintain compliance with such amended covenant.

     Interest Expense

     Our interest expense for all operations was $0.9 million for the three months ended September 30, 2004, compared to the $0.4 million for the three months ended September 30, 2003, an increase of $0.5 million or 122%. This increase was primarily due to an increase in average debt outstanding and an increase in interest rates in the third quarter of 2004 compared to the same period in 2003. Additionally, there was an increase in amortization of deferred debt costs of $0.1 million in the third quarter of 2004 compared to the same period in 2003.

     Our interest expense for all operations was $2.3 million for the nine months ended September 30, 2004 compared to $1.4 million for the nine months ended September 30, 2003, an increase of $0.9 million, or 62%. This increase was primarily due to an increase in average debt outstanding and an increase in interest rates in the first nine months of 2004 compared to the first nine months of 2003. Additionally, there was an increase in amortization of deferred debt costs of $0.4 million for the first nine months of 2004 compared to the same period in 2003.

     Indirect Selling, General and Administrative Expenses

     Indirect selling, general and administrative expenses were $0.7 million for the three months ended September 30, 2004 compared to $0.4 million for the three months ended September 30, 2003, an increase of $0.3 million or 63%. The increase was primarily due to increased overhead allocation of $0.1 million from MRMC and increased costs related to implementation of procedures under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).

     Indirect selling, general and administrative expenses were $1.9 million for the nine months ended September 30, 2004 compared to $1.3 million for the nine months ended September 30, 2003, an increase of $0.6 million or 44%. The increase was primarily due to increased overhead allocation of $0.2 million from MRMC and increased costs related to implementation of procedures under Sarbanes-Oxley.

     Martin Resource Management allocates to us a portion of its indirect selling, general and administrative expenses for services such as accounting, treasury, clerical billing, information technology, administration of insurance, engineering, general office expenses and employee benefit plans and other general corporate overhead functions we share with Martin Resource Management retained businesses. 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 allocating 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 allocating these expenses. Other methods could result in a higher allocation of selling, general and administrative expenses to us, which would reduce our net income. Under the omnibus agreement, the reimbursement amount with respect to indirect general and administrative and corporate overhead expenses was capped at $2.0 million for the year period ending October 31, 2004. For each of the subsequent three 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. Effective January 2004, the cap was increased from $1.0 million to $2.0 million to account for the additional operations acquired in acquisitions, including the Tesoro Marine acquisition. In addition, our general partner has the right to agree to increases in this cap in connection with expansions of our operations through the acquisition or construction of new assets or businesses. Martin Resource Management allocated indirect selling, general and administrative expenses of $0.3 million for the three months ended September 30, 2004 compared to $0.2 million for the three months ended September 30, 2003. Martin Resource Management allocated indirect selling, general and administrative expenses of $0.8 million for the nine months ended September 30, 2004 compared to $0.5 million for the nine months ended September 30, 2003.

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  Liquidity and Capital Resources

     Cash Flows and Capital Expenditures

     For the nine months ended September 30, 2004, cash was unchanged as a result of $7.9 million provided by operating activities, $31.8 million used in investing activities and $23.9 million provided by financing activities. For the nine months ended September 30, 2003, cash increased $4.2 million, as a result of $12.4 million provided by operating activities, $1.3 million provided by investing activities and $9.5 million used in financing activities.

     For the nine months ended September 30, 2004 and 2003, our investing activities consisted of $1.7 million and $2.7 million, respectively, of cash distributions from an unconsolidated partnership and capital expenditures.

     Generally, our capital expenditure requirements have consisted, and we expect that our capital requirements will continue to consist, of:

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

     For the nine months ended September 30, 2004 and 2003, our capital expenditures for property and equipment were $32.6 million and $1.3 million, respectively.

     As to each period:

	•		For the nine months ended September 30, 2004 we spent $28.9 million for expansion and $3.7 million for maintenance. Our expansion capital expenditures were made in connection with the Neches and OOS terminal acquisitions. Our maintenance capital expenditures were primarily made for marine equipment, including expenditures as a result of increased steel and shipyard costs, and terminal and fertilizer facilities.
	•		For the nine months ended September 30, 2003, we spent $0.1 million for the buyout of certain operating leases and $1.2 million for maintenance of marine equipment and fertilizer facilities.