References in this quarterly report on Form 10-Q to "Martin Resource Management" refers to Martin Resource Management Corporation and its subsidiaries, unless the context otherwise requires. 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 quarterly 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 "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the "SEC") on March 5, 2012, and in this report.

Overview

We are a publicly traded limited partnership with a diverse set of operations focused primarily in the United States Gulf Coast region. Our four primary business lines include:

? Terminalling and storage services for petroleum and by-products;

? Natural gas services;

? Sulfur and sulfur-based products gathering, processing, marketing, manufacturing and distribution; and

? Marine transportation services for petroleum products and by-products.

The petroleum products and by-products we collect, transport, store and market are produced primarily by major and independent oil and gas companies who often turn to 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 these products. We operate primarily in the Gulf Coast region of the United States. This region is a major hub for petroleum refining, natural gas gathering and processing and support services for the exploration and production industry.

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 owns an approximate 28.0% limited partnership interest in us. Furthermore, it owns and controls our general partner, which owns a 2.0% general partner interest in us and all of our incentive distribution rights.

Martin Resource Management has operated our business since 2002. Martin Resource Management began operating our natural gas services business in the 1950s and our sulfur business in the 1960s. It began our marine transportation business in the late 1980s. It entered into our fertilizer and terminalling and storage businesses in the early 1990s. In recent years, Martin Resource Management has increased the size of our asset base through expansions and strategic acquisitions.

Recent Developments

We believe one of the rationales driving investment in master limited partnerships, including us, is the opportunity for distribution growth offered by the partnerships. Such distribution growth is a function of having access to liquidity in the financial markets used for incremental capital investment (development projects and acquisitions) to grow distributable cash flow. Growth opportunities can be constrained by a lack of liquidity or access to the financial markets. During 2011 and thus far in 2012, the financial markets were available to us. As such, we were able to issue equity in February 2011 and January 2012 for the purpose of reducing outstanding indebtedness under our credit facility. Our credit facility is our primary source of liquidity and was refinanced in April 2011. Additionally we upsized our credit facility in April 2011, December 2011, and May 2012.

Conditions in our industry continue to be challenging in 2012. For example:

? Coupled with the general decline in drilling activity are the federal government's enhanced safety regulations and inspection requirements as it relates to deep-water drilling in the Gulf of Mexico. These enhanced safety regulations and inspection requirements of the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE) continue to provide uncertainty surrounding the requirements for and pace of issuance of permits on the Gulf of Mexico Outer Continental Shelf (OCS). Although permits began to be issued by the BOEMRE again during first quarter 2011, they have not been approved in a timely manner consistent with pre-BP/Macondo spill levels.

? There has been a decline in the demand for certain marine transportation services based on decreased refinery production resulting in an oversupply of equipment.

Despite the industry challenges we have faced, we are positioning ourselves for continued growth. In particular:

? We continue to adjust our business strategy to focus on maximizing our liquidity, maintaining a stable asset base, and improving the profitability of our assets by increasing their utilization while controlling costs. Over the past year we have had access to the capital markets and have appropriate levels of liquidity and operating cash flows to adequately fund our growth. Our goal over the next two years will be to increase growth capital expenditures primarily in our Terminalling and Storage and Sulfur Services segments.

? We continue to evaluate opportunities to enter into interest rate and commodity hedging transactions. We believe these transactions can beneficially remove risks associated with interest rate and commodity price volatility.

? During 2011 and the first part of 2012, we have experienced positive changing market dynamics in our Terminalling and Storage and Marine Transportation segments including activity associated with the rapidly developing basins such as the Eagle Ford shale in South Texas.

On June 18, 2012, we and a subsidiary of CenterPoint Energy Inc. (NYSE: CNP), ("CenterPoint") entered into a definitive agreement under which CenterPoint would acquire our East Texas and Northwest Louisiana natural gas gathering and processing assets owned by Prism Gas Systems 1, L.P., a wholly-owned subsidiary of us, and other natural gas gathering and processing assets also owned by us, for cash in a transaction valued at approximately $275,000 excluding any transaction costs and purchase price adjustments. The asset sale includes our 50% operating interest in Waskom Gas Processing Company. A subsidiary of CenterPoint currently owns the other 50% percent interest. The sale was completed on July 31, 2012.

Additionally, we have reached agreement with a private investor group to sell our interest in Matagorda Offshore Gathering System and Panther Interstate Pipeline Energy LLC for $2.0 million. These assets, along with the assets sold to CenterPoint are collectively referred to as the "Prism Assets". This sale is expected to be completed in the third quarter of 2012.

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, we believe that our accounting policies do not require us to make estimates using assumptions about matters that are highly uncertain. Changes in these estimates could materially affect our financial position, results of operations or cash flows. Significant items that are subject to such estimates and assumptions include the amount of the allowance for doubtful accounts receivable and the determination of the fair value of our reporting units under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 350 related to goodwill. A discussion of our significant accounting policies we have adopted and followed in the preparation of our consolidated financial statements is included within our Annual Report on Form 10-K for the year ended December 31, 2011, and there have been no material changes to these policies through June 30, 2012.

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 trucks and road vehicles and road trailers;

? distributing fuel oil, asphalt, 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 a lube oil processing facility in Smackover, Arkansas;

? operating an underground NGL storage facility in Arcadia, Louisiana;

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

? operating, solely for our account, our asphalt facilities in Omaha, Nebraska, Port Neches, Texas and South Houston, 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 owns an approximate 28.0% limited partnership interest and a 2% general partnership interest in us and all of 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.

Related Party Agreements

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 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 $27.3 million of direct costs and expenses for the three months ended June 30, 2012 compared to $20.9 million for the three months ended June 30, 2011. We reimbursed Martin Resource Management for $51.0 million of direct costs and expenses for the six months ended June 30, 2012 compared to $40.4 million for the six months ended June 30, 2011. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management for direct expenses.

In addition to the direct expenses, under the omnibus agreement, we are required to reimburse Martin Resource Management for indirect general and administrative and corporate overhead expenses. Effective October 1, 2011 through September 30, 2012, the Conflicts Committee of the board of directors of our general partner (the "Conflicts Committee") approved an annual reimbursement amount for indirect expenses of $6.6 million. We reimbursed Martin Resource Management for $1.6 and $1.0 million of indirect expenses for the three months ended June 30, 2012 and 2011, respectively. We reimbursed Martin Resource Management for $3.3 and $2.1 million of indirect expenses for the six months ended June 30, 2012 and 2011, respectively. These indirect expenses covered 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 omnibus agreement also contains significant non-compete provisions and indemnity obligations. Martin Resource Management also licenses certain of its trademarks and trade names to us under the omnibus agreement.

In addition to the omnibus agreement, we and Martin Resource Management have entered into various other agreements including, but not limited to, a motor carrier agreement, terminal services agreements, marine transportation agreements and other agreements for the provision of various goods and services. Pursuant to the terms of the omnibus agreement, we are prohibited from entering into certain material agreements with Martin Resource Management without the approval of the Conflicts Committee.

For a more comprehensive discussion concerning the omnibus agreement and the other agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions - Agreements" set forth in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 5, 2012.

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 road vehicles and 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 natural gas services operations. We lease an underground storage facility from Martin Resource Management in Arcadia, Louisiana with a storage capacity of 2.4 million barrels. 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, NGL storage services, sulfuric acid and lube oil product purchases and sulfur services payroll reimbursements from Martin Resource Management accounted for approximately 5% and 3% of our total cost of products sold during the three months ended June 30, 2012 and 2011, respectively and approximately 4% and 3% of our total cost of products sold for the six months ended June 30, 2012 and 2011, 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 terminalling, marine transportation and NGL distribution services for its operations. We provide terminalling and storage 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 7% and 8% of our total revenues for the three months ended June 30, 2012 and 2011, respectively. Our sales to Martin Resource Management accounted for approximately 7% and 9% of our total revenues for the six months ended June 30, 2012 and 2011, respectively. We provide terminalling and storage and marine transportation services to Midstream Fuel Service LLC and Midstream Fuel LLC provides terminal services to us to handle lubricants, greases and drilling fluids.

For a more comprehensive discussion concerning the agreements that we have entered into with Martin Resource Management, please refer to "Item 13. Certain Relationships and Related Transactions - Agreements" set forth in our annual report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 5, 2012.

Approval and Review of Related Party Transactions

If we contemplate entering into a transaction, other than a routine or in the ordinary course of business transaction, in which a related person will have a direct or indirect material interest, the proposed transaction is submitted for consideration to the board of directors of our general partner or to our management, as appropriate. If the board of directors is involved in the approval process, it determines whether to refer the matter to the Conflicts Committee, as constituted under our limited partnership agreement. Certain related party transactions are required to be submitted to the Conflicts Committee. If a matter is referred to the Conflicts Committee, it obtains information regarding the proposed transaction from management and determines whether to engage independent legal counsel or an independent financial advisor to advise the members of the committee regarding the transaction. If the Conflicts Committee retains such counsel or financial advisor, it considers such advice and, in the case of a financial advisor, such advisor's opinion as to whether the transaction is fair and reasonable to us and to our unitholders.

Results of Operations

The results of operations for the three and six months ended June 30, 2012 and 2011 have been derived from our consolidated and condensed financial statements.

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 revenues and operating income by segment for the three months ended June 30, 2012 and 2011. The results of operations for the first three months of the year are not necessarily indicative of the results of operations which might be expected for the entire year.

The natural gas services segment information below excludes the discontinued operations of the Prism Assets for all periods.

                                                                       Operating                                                    Operating
                                                   Revenues            Revenues                            Operating Income       Income (loss)
                               Operating         Intersegment            after            Operating          Intersegment             after
                                Revenues         Eliminations        Eliminations       Income (loss)        Eliminations         Eliminations
                                                                                (In thousands)
Three months ended June 30,
2012
Terminalling and storage      $     41,430     $         (1,176 )   $        40,254     $       4,998     $             (654 )   $         4,344
Natural gas services               164,817                    -             164,817              (417 )                  384                 (33 )
Sulfur services                     67,093                    -              67,093            12,278                  1,142              13,420
Marine transportation               21,466                 (752 )            20,714             2,150                   (872 )             1,278
Indirect selling, general
and administrative                       -                    -                   -            (2,349 )                    -              (2,349 )
Total                         $    294,806     $         (1,928 )   $       292,878     $      16,660     $                -     $        16,660

Three months ended June 30,
2011
Terminalling and storage      $     39,766     $         (1,068 )   $        38,698     $       3,123     $             (172 )   $         2,951
Natural gas services               127,050                    -             127,050              (283 )                  243                 (40 )
Sulfur services                     76,933                    -              76,933            10,102                  1,884              11,986
Marine transportation               19,351               (1,975 )            17,376            (1,011 )               (1,955 )            (2,966 )
Indirect selling, general
and administrative                       -                    -                   -            (1,762 )                    -              (1,762 )
Total                         $    263,100     $         (3,043 )   $       260,057     $      10,169     $                -     $        10,169

Six months ended June 30,
2012
Terminalling and storage      $     84,464     $         (2,351 )   $        82,113     $       8,734     $           (1,308 )   $         7,426
Natural gas services               336,928                    -             336,928             2,426                    761               3,187
Sulfur services                    141,645                    -             141,645            24,813                  2,234              27,047
Marine transportation               43,033               (1,457 )            41,576             1,538                 (1,687 )              (149 )
Indirect selling, general
and administrative                       -                    -                   -            (4,767 )                    -              (4,767 )
Total                         $    606,070     $         (3,808 )   $       602,262     $      32,744     $                -     $        32,744

Six months ended June 30,
2011
Terminalling and storage      $     77,412     $         (2,046 )   $        75,366     $       6,340     $             (221 )   $         6,119
Natural gas services               264,205                    -             264,205             2,986                    448               3,434
Sulfur services                    136,691                    -             136,691            18,129                  3,768              21,897
Marine transportation               40,790               (4,015 )            36,775              (252 )               (3,995 )            (4,247 )
Indirect selling, general
and administrative                       -                    -                   -            (3,580 )                    -              (3,580 )
Total                         $    519,098     $         (6,061 )   $       513,037     $      23,623     $                -     $        23,623

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 June 30, 2012 Compared to the Three Months Ended June 30, 2011

Our total revenues before eliminations were $294.8 million for the three months ended June 30, 2012, compared to $263.1 million for the three months ended June 30, 2011, an increase of $31.7 million, or 12%. Our operating income before eliminations was $16.7 million for the three months ended June 30, 2012, compared to $10.2 million for the three months ended June 30, 2011, an increase of $6.5 million, or 64%.

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

Terminalling and Storage Segment

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

                                                         Three Months Ended
                                                              June 30,
                                                          2012          2011
                                                           (In thousands)
        Revenues:
        Services                                       $   22,222     $ 20,375
        Products                                           19,208       19,391
        Total revenues                                     41,430       39,766

        Cost of products sold                              17,890       18,290
        Operating expenses                                 13,922       12,939
        Selling, general and administrative expenses           51           92
        Depreciation and amortization                       4,944        4,745
                                                            4,623        3,700
        Other operating income (loss)                         375         (577 )
        Operating income                               $    4,998     $  3,123

Revenues. Our terminalling and storage revenues increased $1.7 million, or 4%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. Of the increase, $1.8 million is related to new terminalling assets commissioned in the second quarter of 2012, offset by a $0.1 million decrease in product revenues.

Cost of products sold. Our cost of products sold remained relatively flat for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

Operating Expenses. Operating expenses increased $1.0 million, or 8%, for the three months ended June 30, 2012 as compared to the same period of 2011. Of the increase, $0.8 million relates to increased repair and maintenance charges incurred at our Neches and Stanolind facilities for channel dredging and road . . .