MMLP

Business Context and Reporting Period

Company: Martin Midstream Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: A publicly traded limited partnership focused on the U.S. Gulf Coast region with four primary business lines: terminalling and storage, natural gas services, sulfur services, and marine transportation. The partnership is closely affiliated with Martin Resource Management, which owns approximately 40.8% of the limited partnership units and controls the general partner.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 50% to $454.6 million, driven primarily by a 75% increase in Natural Gas Services revenues ($290.0 million) and a 68% increase in Sulfur Services revenues ($77.3 million). These increases were attributed to higher commodity prices and increased sales volumes.
• Profitability Decline: Despite revenue growth, Net Income decreased 70% to $4.8 million. Operating Income fell 30% to $16.7 million. The decline was primarily due to a significant increase in Interest Expense ($16.2 million vs. $9.3 million) and lower operating margins in the Natural Gas segment due to pricing structures.
• Interest Expense Spike: Interest expense rose 74% year-over-year, largely due to the issuance of $200 million in Senior Notes in March 2010 and the termination of interest rate swaps which incurred a $3.85 million fee.
• Segment Performance:
  • Terminalling & Storage: Operating income decreased 54% to $6.4 million, impacted by the absence of historical refining margins from the Cross assets included in the recast 2009 figures.
  • Natural Gas Services: Operating income decreased 31% to $1.9 million despite revenue growth, as NGL and natural gas margins compressed.
  • Sulfur Services: Operating income increased 21% to $7.7 million due to higher market prices.
  • Marine Transportation: Operating income increased 181% to $2.4 million due to increased fleet utilization.

Guidance, Outlook, Risks, and Unusual Items

• Capital Markets Activity: The partnership completed a public offering of 1.65 million common units in February 2010, raising net proceeds of $50.5 million. In March 2010, it issued $200 million in 8.875% Senior Notes due 2018, raising approximately $197.2 million. Proceeds were used to repay revolving credit facility borrowings.
• Debt Restructuring: The credit facility was amended in March 2010 to decrease the aggregate size to $275 million, convert term loans to revolving loans, and extend the maturity to March 2013. As of June 30, 2010, $100 million was outstanding with $174.9 million available.
• Acquisitions: Through its unconsolidated joint venture Waskom, the partnership acquired the Harrison Gathering System for approximately $20 million in January 2010.
• Risk Factors:
  • Deepwater Horizon Spill: The explosion and subsequent moratorium on deep-water drilling in the Gulf of Mexico created uncertainty regarding future industry operations and potential revenue reductions for shore-based terminalling.
  • Related Party Dependence: Significant reliance on Martin Resource Management for management, administrative services, and as a major customer/supplier. Litigation involving Martin Resource Management executives could impact the partnership's credit facility if deemed to have a material adverse effect.
  • Commodity Price Volatility: Results are materially impacted by fluctuations in crude oil, natural gas, and NGL prices. The partnership hedges approximately 46% of its 2010 commodity risk.
• Unusual Items: A $3.85 million termination fee was paid in March 2010 for early extinguishment of interest rate swap agreements. Additionally, 2009 financial statements were recast to include results from the Cross assets acquired in late 2009.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the new credit facility covenants, specifically the leverage ratio (max 4.50:1) and interest coverage ratio (min 3.00:1), given the recent debt issuance.
• Related Party Transactions: Review the Omnibus Agreement and related party transaction volumes, as Martin Resource Management accounts for a significant portion of revenues and costs.
• Margin Compression: Analyze the Natural Gas Services segment margins, which declined despite volume growth, to understand the impact of pricing structures and commodity spreads.
• Litigation Impact: Monitor the status of the ongoing litigation involving Martin Resource Management executives (Scott D. Martin vs. Ruben S. Martin, III) and its potential effect on the partnership's credit facility and management stability.
• Deepwater Horizon Exposure: Assess the specific exposure of the terminalling and marine transportation segments to the Gulf of Mexico drilling moratorium and potential regulatory changes.