Martin Midstream Partners L.P. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statement amounts are unaudited and, unless stated otherwise, in millions of dollars. The Partnership operates natural gas services, terminalling and storage, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $225.6 | $305.4 | Down 26.1% |
| Operating income | $24.3 | $24.7 | Down 1.5% |
| Operating margin | 10.8% | 8.1% | Up 2.7 percentage points |
| Net income | $15.9 | $17.2 | Down 7.7% |
| Net income from continuing operations | $15.9 | $16.0 | Down 0.7% |
| Limited partners’ earnings per unit | $0.33 | $0.37 | Continuing operations: $0.33 vs. $0.34 |
| Net cash provided by operating activities | $45.3 | $46.7 | Down $1.4 |
| Adjusted EBITDA | $49.3 | $50.4 | Down 2.1% |
| Distributable cash flow | $32.5 | $37.1 | Down 12.3% |
Revenue and cost of products sold both fell substantially, largely reflecting lower commodity prices and volumes. Operating income held comparatively steady as lower costs and stronger natural gas services results offset weakness elsewhere. Natural gas services operating income rose 55% to $13.8 million; terminalling and storage declined 7% to $7.3 million; sulfur services declined 7% to $8.9 million; and marine transportation moved from $3.7 million of operating income to a $0.6 million loss.
Cash and cash equivalents were only $46,000 at quarter-end. Total assets were $1.343 billion and partners’ capital was $377.1 million. Long-term debt, net, was $873.6 million, up from $865.0 million at December 31, 2015. Net interest expense was $10.1 million, down from $10.5 million.
Material changes, liquidity and capital
- Quarter-end revolving-facility borrowings were $506.0 million, with $0.1 million of letters of credit. The filing reported $193.9 million of nominal remaining capacity, but estimated only about $120.5 million was available to borrow under financial covenants.
- On April 27, 2016, the facility’s capacity was reduced from $700.0 million to $664.4 million and its maturity extended from March 2028? No: from March 28, 2018 to March 28, 2020. At March 31, the Partnership reported compliance with all debt covenants and expected continued compliance for the next twelve months.
- Operating cash flow was $45.3 million. Investing activities used $20.3 million, including $17.3 million for property, plant and equipment and $2.2 million for intangible assets. Financing activities used $25.0 million, including $33.4 million of cash distributions.
- Capital expenditures and plant turnaround costs totaled $15.6 million, down from $19.3 million; maintenance capital rose to $6.0 million from $1.8 million, while expansion capital declined to $8.5 million from $16.1 million.
- The Partnership declared a Q1 distribution of $0.8125 per common unit, or $3.25 annualized, payable May 13, 2016. Reported Q1 distributable cash flow was slightly below the $33.4 million of distributions paid during the quarter; the filing does not establish coverage of the newly declared distribution from that quarter’s cash flow.
Outlook, risks and unusual items
- Management cited sustained weak and volatile commodity prices, reduced drilling activity, and possible declines in pipeline and terminal throughput, NGL volumes, and utilization. It reduced planned growth capital spending to preserve liquidity and limit reliance on uncertain capital markets.
- Shippers challenged WTLPG’s July 2015 rate increase. In March 2016, the Texas Railroad Commission ordered pre-increase rates to remain in effect during the proceeding. A hearing was scheduled for October 19, 2016; the outcome could affect the Partnership’s investment and related earnings.
- Unhedged floating-rate debt creates interest-rate exposure: management estimated a 1 percentage-point rate increase would raise annual interest expense and reduce net income by approximately $5.0 million. The Partnership’s NGL commodity hedges had zero net notional barrels settling April–June 2016; the filing reported a $0.5 million derivative asset at quarter-end.
- Two disclosed disputes have uncertain exposure: a Louisiana lease/property claim and a customer demand for defense and indemnity in connection with lawsuits concerning private-label motor oil marketing. Management said it could not determine potential exposure in either matter. It did not believe ordinary-course legal matters in aggregate would materially affect financial position, results or liquidity.
- Management expected cash from operations and borrowing capacity to meet 2016 working-capital needs, anticipated maintenance capital and scheduled debt payments. This is an expectation, not quantified earnings or distribution guidance. The filing reports no material change to the prior annual report’s risk factors.
- Related-party dependence is significant: Martin Resource Management controlled the general partner, supplied operating and administrative services, and accounted for approximately 13% of Q1 revenue, compared with 9% a year earlier. The Partnership also had a $15.0 million note receivable from its affiliate Martin Energy Trading at a 15% annual interest rate.
Important facts for investors to verify
- Track covenant headroom and actual borrowing availability after the facility amendment, alongside debt maturities, variable-rate exposure and the very low reported cash balance.
- Assess whether distributable cash flow can support the $0.8125 quarterly unit distribution, especially if commodity prices, volumes or utilization remain weak.
- Monitor the WTLPG rate proceeding and its potential impact on the value and earnings of the Partnership’s 20% interest.
- Review segment trends, particularly marine transportation’s operating loss and the volume declines in terminalling, natural gas and sulfur services.
- Follow developments and potential exposure in the two customer/property disputes and assess ongoing related-party arrangements and affiliate credit risk.
Correction: The credit facility’s prior maturity was March 28, 2018, not March 2028.