Business context and reporting period
Martin Midstream Partners L.P. filed this Form 10-K for the fiscal year ended December 31, 2019. The partnership operates Gulf Coast-focused terminalling and storage, transportation, sulfur services, and natural gas liquids (NGL) businesses. It relies on its sponsor, Martin Resource Management Corporation (MRMC), for management and support services and has significant commercial relationships with MRMC.
Comparative financial statements were retrospectively revised to include Martin Transport, Inc. (MTI), acquired from MRMC effective January 1, 2019, as a common-control transaction. The natural gas storage business sold in June 2019 is reported as discontinued operations; accordingly, continuing-operations results are not directly comparable to prior reported totals without considering these presentation changes.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $847.1 million | $1,020.1 million |
| Operating income | $58.1 million | $45.1 million |
| Income (loss) from continuing operations | $4.5 million | $(7.8) million |
| Net income (loss), including discontinued operations | $(174.9) million | $55.7 million |
| Adjusted EBITDA from continuing operations | $108.3 million | $107.2 million |
| Distributable cash flow from continuing operations | $41.8 million | $36.1 million |
| Cash provided by operating activities | $75.8 million | $105.0 million |
| Cash and cash equivalents at year-end | $2.9 million | $0.3 million |
| Total assets at year-end | $667.2 million | $1,073.6 million |
| Long-term debt, net of issuance costs and premium | $569.8 million | $656.5 million |
Operating margin was approximately 6.9% in 2019, compared with 4.4% in 2018. Adjusted EBITDA margin was approximately 12.8%, versus 10.5%. These are calculated from reported revenue and operating or adjusted EBITDA figures; adjusted EBITDA and distributable cash flow are non-GAAP measures.
At year-end, the partnership had $201.0 million outstanding on its revolving facility and $373.8 million of 7.25% senior notes due February 2021. The facility had $400 million of commitments, but covenant limits left only about $51.5 million of additional borrowing capacity. Outstanding letters of credit were $12.6 million. The reported revolving-facility weighted-average interest rate was 5.26%; management estimated that a 100-basis-point increase in floating rates would add about $2.0 million of annual interest expense.
Material changes versus the prior comparable period
- Revenue declined 17% year over year, mainly reflecting lower NGL and sulfur product prices, reduced product volumes, and the effects of asset dispositions. NGL segment revenue fell 26%; sulfur services revenue fell 16%; transportation revenue rose 3%.
- Operating income improved by $13.0 million, while adjusted EBITDA from continuing operations was broadly stable. The 2019 result included a $16.2 million gain from the East Texas Pipeline sale.
- The partnership recorded a $179.5 million loss from discontinued operations, chiefly a $178.8 million loss on the sale of natural gas storage assets. This drove the consolidated net loss despite positive continuing-operations income.
- Operating cash flow fell 28% to $75.8 million, including lower cash from discontinued operations and an unfavorable working-capital change. Continuing-operations operating cash flow was $68.0 million.
- Asset sales included natural gas storage for $210.1 million net proceeds and the East Texas Pipeline for $17.5 million. Proceeds were used to repay revolving borrowings. The partnership reported $300.5 million of debt paydown from dispositions, net of acquisitions.
- MTI was acquired for stated purchase consideration of $135.0 million, subject to a working-capital adjustment and an earn-out; the final reported cash consideration was $126.1 million after adjustments and assumed finance leases. The earn-out threshold for 2019 was not achieved.
Outlook, management commentary, risks and unusual items
- Management’s stated priorities are deleveraging, selective asset sales, disciplined capital spending, and focusing on businesses with stronger economic prospects. The filing does not provide a clear numerical earnings or EBITDA guidance range.
- The July 2019 credit-facility amendment extended maturity to August 31, 2023, conditional on refinancing the 2021 Notes by August 19, 2020; otherwise, the facility matures August 19, 2020. Management said it was seeking to refinance, but gave no assurance it could do so.
- On January 28, 2020, the partnership declared a fourth-quarter distribution of $0.0625 per unit, or $0.25 annualized. Management said the distribution reductions announced in 2019 and 2020 were expected to retain approximately $68.2 million annually for debt reduction and investment. Distributions paid during 2019 were $1.25 per common unit.
- Continuing-operations distributable cash flow of $41.8 million was below 2019 cash distributions paid of $49.1 million; the filing does not present this comparison as a formal distribution-coverage measure. Distribution payments are subject to reserves and credit-agreement restrictions.
- A May 2019 severe-weather incident damaged the Neches Terminal shiploader. It returned to service January 28, 2020; the reported 2019 EBITDA impact was $2.3 million after $1.3 million of business-interruption insurance proceeds.
- Key risks include refinancing and covenant headroom, substantial leverage, floating-rate exposure, commodity-price and seasonal demand changes, Gulf Coast weather and operational interruptions, environmental and safety liabilities, and dependence on MRMC. One NGL customer generated $112.3 million of 2019 revenue. MRMC accounted for approximately 11% of revenue and 7% of cost of products sold.
- The filing also cites the coronavirus outbreak as a potential risk to energy demand. This report was signed February 14, 2020; it does not quantify any resulting impact.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. However, a disputed customer indemnity and insurance claim remained unresolved, and the partnership said its potential exposure could not then be determined.
Important facts for investors to verify
- Whether the $373.8 million of 2021 Notes is refinanced by the August 19, 2020 deadline, and how that affects the revolving facility’s maturity and liquidity.
- Actual covenant borrowing capacity and compliance as operating results evolve; reported additional capacity was only about $51.5 million at year-end.
- Whether continuing cash flow can support debt service, required capital spending, and the reduced distribution; compare distributable cash flow with cash distributions and review reserve requirements.
- The effect of the natural-gas-storage divestiture and its large reported disposal loss on ongoing results, and the sustainability of earnings excluding disposal gains and other unusual items.
- Related-party economics and governance, including MRMC reimbursements, customer and supplier concentration, and the terms of the MTI acquisition.