MARTIN MIDSTREAM PARTNERS L.P. annual report, FY2013

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Business context and reporting period

Martin Midstream Partners L.P. filed this Form 10-K for the fiscal year ended December 31, 2013. The partnership operates primarily on the U.S. Gulf Coast in terminalling and storage, natural gas liquids (NGL) services, sulfur services, and marine transportation. Figures below are annual unless noted; the filing also reports fourth-quarter results.

Financial performance and liquidity

  • Revenue: $1.634 billion, up 9.6% from $1.490 billion in 2012. Natural Gas Services was the largest segment by revenue, at $987.7 million.
  • Profit: Operating income increased 12.0% to $82.7 million; operating margin was approximately 5.1%, versus 5.0% in 2012. The partnership recorded a net loss of $13.4 million, or $0.49 per limited partner unit, compared with net income of $102.0 million, or $3.96 per unit, in 2012. Prior-year net income included $64.9 million from discontinued operations, including the Prism asset-sale gain.
  • Cash generation: Operating cash flow was $112.2 million, versus $32.7 million. Adjusted EBITDA was $138.0 million, up from $121.3 million; distributable cash flow was $87.0 million, up from $80.3 million. These are non-GAAP measures as defined by the partnership.
  • Capital spending: Capital expenditures were $99.0 million, including $87.6 million of expansion and $11.4 million of maintenance spending. Cash used in investing activities was $186.8 million, compared with $15.0 million in 2012.
  • Balance sheet and liquidity: At year-end, cash was $16.5 million, total assets were $1.098 billion, and total liabilities were $837.5 million. Long-term debt was $658.7 million, including $235.0 million drawn on the revolving facility and approximately $423.7 million of senior notes, net of discount. The facility had $364.9 million of stated undrawn capacity, but covenant-based borrowing capacity was approximately $83.6 million. The filing does not provide a clear actual leverage ratio.
  • Interest and distributions: Interest expense rose 39% to $42.5 million. The partnership reported a $3.11 distribution per common unit for 2013. It separately states that the fourth-quarter 2013 distribution was declared at $0.785 per unit, paid in February 2014, or $3.14 annualized.

Material changes versus the prior comparable period

  • Natural Gas Services operating income more than doubled to $31.7 million, mainly reflecting higher NGL volumes, including the Louisiana butane market, and improved margins. Revenue growth was largely volume-driven; average NGL selling prices declined.
  • Terminalling and Storage operating income grew 26% to $35.3 million, supported by Corpus Christi crude terminal activity, the Talen’s acquisition, and higher refinery throughput.
  • Sulfur Services operating income fell 30% to $26.0 million. Lower volumes and prices, a shift from a buy/sell contract to fee-based handling, and plant turnaround downtime weighed on results.
  • Marine Transportation operating income rose 34% to $9.0 million, with additional revenue from Talen’s and the Florida Marine assets.
  • The dominant unusual item was a $54.1 million share of Cardinal Gas Storage’s Monroe facility impairment, recorded in equity losses of unconsolidated entities. Total equity losses were $53.0 million, compared with $1.1 million in 2012; this and higher interest expense drove the annual net loss.
  • Year-end debt increased from $475.0 million to $658.7 million. The partnership issued $250 million of 7.25% senior notes due 2021 and expanded its revolving facility to $600 million; proceeds from the notes primarily repaid revolver borrowings.

Outlook, risks and other notable matters

  • Management said it expects current capital projects to be funded by operating cash flow, cash balances, and borrowing capacity, while noting future capital needs could require additional funding. It plans to increase expansion capital expenditures over the next two years, primarily in Terminalling and Storage and Natural Gas Services; no specific forecast amount was provided.
  • In February 2014, the partnership increased the revolver maximum to $637.5 million and announced full redemption of the 8.875% 2018 notes for approximately $182.8 million, expected to be funded with revolver borrowings.
  • Key risks include Gulf Coast weather and operational disruptions; seasonal NGL and fertilizer demand; commodity-price and energy-cost volatility; environmental and marine incident exposure; competition; debt covenants and floating-rate exposure; and dependence on Martin Resource Management (MRM) for personnel, services, and commercial relationships.
  • MRM owned 19.1% of common units and controlled the general partner. The partnership reimbursed MRM $177.1 million for direct costs and expenses in 2013; Conflicts Committee-approved indirect reimbursements were $10.6 million, up from $7.6 million. The 2014 approved indirect reimbursement was $12.5 million.
  • Management and KPMG reported effective disclosure controls and internal control over financial reporting; the financial statements received an unqualified audit opinion. Management stated that ordinary-course legal matters were not expected to have a material adverse effect. No material environmental costs were reported for 2013.

Important facts for investors to verify

  1. Review the Cardinal impairment, Monroe’s weaker operating outlook, and the assumptions supporting the remaining carrying value of the Cardinal investment.
  2. Assess covenant headroom and liquidity: the filing gives $364.9 million of nominal revolver availability but only about $83.6 million of covenant-based borrowing capacity at year-end.
  3. Evaluate whether operating cash flow and distributable cash flow can sustain distributions and planned expansion spending, particularly given the working-capital contribution to 2013 operating cash flow.
  4. Check the impact of refinancing the 2018 notes with revolver borrowings, including the resulting floating-rate exposure; a 1% rate increase on year-end unhedged floating debt was estimated to raise annual interest expense by $2.4 million.
  5. Reconcile the filing’s distribution disclosures: the quarterly table lists $0.7825 for the fourth quarter of 2013, while the subsequent-events disclosure says $0.785 was declared and paid in February 2014.
  6. Monitor segment-level margins and customer concentration, as well as related-party charges and the terms of transactions with MRM.