Martin Midstream Partners L.P. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. The Partnership operates Gulf Coast-focused terminalling and storage, natural gas services, sulfur services, and marine transportation businesses.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $1,036.8 million | $1,642.1 million |
| Operating income | $70.2 million | $67.9 million |
| Income (loss) from continuing operations | $37.2 million | $(6.4) million |
| Net income (loss) | $38.4 million | $(11.7) million |
| Limited-partner net income (loss) per unit | $0.62 | $(0.49) |
| Adjusted EBITDA | $188.3 million | $149.0 million |
| Distributable cash flow | $133.9 million | $94.4 million |
| Cash from operating activities | $182.6 million | $115.6 million |
| Expansion, maintenance and turnaround spending | $68.7 million | $93.3 million |
Operating margin was approximately 6.8%, versus 4.1% in 2014; net margin was approximately 3.7%, versus a loss. The improvement in earnings and cash flow occurred despite sharply lower revenue, and reflects higher operating income, increased WTLPG distributions, and other year-over-year factors. Adjusted EBITDA and distributable cash flow are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or operating cash flow.
Debt, liquidity and distributions
- At year-end, the Partnership reported $865.0 million of long-term debt on the balance sheet. It separately describes $873.4 million of outstanding indebtedness, including $498.0 million drawn on its revolving facility and approximately $375.4 million of senior notes, including unamortized premium.
- The revolving facility commitment was reduced from $900 million to $700 million. After $1.1 million of letters of credit, nominal unused capacity was $200.9 million; covenant-based borrowing capacity was approximately $124.6 million at December 31, 2015.
- Cash was only $31,000 at year-end. Current assets were $167.8 million and current liabilities $119.2 million. The facility is secured by substantially all Partnership assets and has leverage and interest-coverage covenants; the Partnership reported compliance at year-end.
- The Partnership repurchased and retired $26.2 million of 7.25% senior notes, recording a $1.2 million gain. It sold six LPG pressure barges for $41.3 million and used the proceeds to reduce revolver borrowings.
- The quarterly common-unit distribution remained $0.8125, or $3.25 annualized. The fourth-quarter 2015 distribution was declared in January 2016 and paid in February. Distributions are subject to available cash, reserves and credit-agreement restrictions.
Material changes and operating drivers
- Revenue fell 36.9%, primarily because lower NGL prices reduced natural gas services product revenue; NGL volumes also declined 13%. NGL operating income nevertheless increased to $38.6 million from $30.6 million, and WTLPG equity earnings rose to $9.0 million from $3.1 million.
- Terminalling and storage revenue declined 17% to $270.4 million and segment operating income fell 31% to $18.8 million. Lubricant sales volumes declined 29% and shore-based throughput volumes 37%. A $9.3 million impairment charge related to an abandoned condensate-splitter project was recorded.
- Sulfur services revenue declined 21% to $170.2 million as product prices fell; operating income increased 6% to $27.1 million, with margins per ton reported as consistent.
- Marine transportation revenue declined 16% to $81.8 million, largely on lower fleet utilization. Operating income increased to $4.6 million from $3.3 million, while a $1.3 million impairment was recorded for one push boat and three barges.
- Fourth-quarter 2015 revenue was $254.4 million, operating income $13.8 million and net income $6.8 million, compared with $377.0 million, $12.2 million and $4.4 million, respectively, in fourth-quarter 2014. Fourth-quarter limited-partner earnings were $0.08 per unit versus a loss of $0.07.
Outlook, risks and unusual items
- Management cited weak, volatile commodity prices and reduced drilling activity, particularly in the Gulf of Mexico, as threats to throughput, NGL volumes and utilization of terminals and marine assets. It reduced planned growth capital spending, emphasizing liquidity, cost controls, asset utilization and asset rationalization.
- Management expected operating cash flow and borrowing capacity to cover 2016 working-capital needs and anticipated maintenance capital expenditures; the filing gives no earnings or distribution-growth guidance.
- Material exposures include leverage and refinancing needs, variable-rate debt, commodity-price and counterparty risks, seasonality and severe Gulf Coast weather, environmental and marine-accident liabilities, and dependence on Martin Resource Management for management, employees, services and commercial relationships.
- Martin Resource Management owned 17.7% of common units and controlled the general partner. It accounted for approximately 11% of 2015 revenue; related-party arrangements include reimbursed direct costs without a monetary cap and $13.7 million of approved indirect-cost reimbursements.
- Two legal matters were disclosed: a Louisiana lease-related property-work dispute, for which potential damages were not ascertainable, and a customer demand for defense and indemnity concerning lawsuits over private-label motor-oil marketing. The Partnership disputed the indemnity obligation and said exposure could not be determined. Management did not expect ordinary-course claims in aggregate to materially affect the Partnership.
- The filing reports $10.6 million of long-lived-asset impairment charges, but no goodwill impairment. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective at year-end.
Key investor verification points
- Confirm covenant headroom, revolver availability and leverage after the year-end draw increased to $530 million as of February 29, 2016.
- Assess whether distributable cash flow can sustain the $3.25 annualized distribution after debt service, required maintenance spending and reserves.
- Separate commodity-price-driven revenue declines from changes in underlying segment margins, volumes and utilization.
- Review the status and potential financial exposure of the two disclosed legal matters and any environmental or insurance contingencies.
- Evaluate related-party economics, cost reimbursements and customer/supplier concentration, including Martin Resource Management’s role and influence.