Martin Midstream Partners L.P. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unless stated otherwise, amounts below are in millions; financial statements are unaudited. The partnership operates Gulf Coast businesses in terminalling and storage, transportation, sulfur services, and natural gas liquids (NGLs).
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $211.3 | $152.5 | $596.5 | $492.1 |
| Operating income | $8.2 | $11.0 | $31.5 | $34.6 |
| Net loss | $(6.9) | $(10.8) | $(11.0) | $(4.2) |
| Net loss per limited partner unit | $(0.17) | $(0.27) | $(0.28) | $(0.11) |
| Adjusted EBITDA | $21.5 | $22.5 | $74.9 | $77.5 |
| Distributable cash flow | $5.2 | $8.1 | $25.3 | $38.9 |
| Adjusted free cash flow | $3.8 | $5.3 | $19.4 | $25.0 |
Revenue rose 38% in Q3 and 21% year to date, largely on higher NGL and sulfur product prices. Operating income declined despite the revenue growth; operating margin was approximately 3.9% in Q3 versus 7.2% a year earlier, and 5.3% year to date versus 7.0%. Higher interest expense also weighed on results: $14.1 million in Q3 and $40.4 million year to date, up 9% and 25%, respectively. The year-to-date comparison also reflects prior-year gains from insurance/property recoveries and debt transactions.
For the first nine months, cash used in operations was $12.4 million, versus $19.2 million provided in 2020. Management attributed the decline mainly to an unfavorable $30.4 million working-capital variance, including a seasonal build in butane inventory. Investing cash outflow was $13.6 million; financing provided $27.9 million. Cash ended at $6.8 million.
Financial position, liquidity and distributions
- At September 30, total assets were $614.2 million, total liabilities $678.4 million, and partners’ capital was a deficit of $64.2 million. Current assets were $201.2 million and current liabilities $107.5 million.
- Long-term debt, net of issuance costs, was $547.1 million. This included $208.5 million drawn on the revolving facility and secured notes due 2024 and 2025. The revolver matures August 2023 and bears a variable rate; its stated weighted-average rate was 5.00%.
- The $275 million revolving facility had $28.2 million of letters of credit. Reported unused capacity was $38.3 million, but covenant-adjusted additional borrowing ability was approximately $26.0 million. The partnership reported compliance with covenants and expected compliance for the next 12 months.
- The July 2021 credit amendment reduced facility commitments and imposed tighter leverage and interest-coverage tests. Quarterly distributions above $0.005 per unit are restricted unless the specified leverage condition is met.
- After quarter-end, the partnership declared a Q3 cash distribution of $0.005 per common unit, or $0.020 annualized.
Changes, outlook and risks
- Segments: Q3 transportation revenue increased 19% and operating income improved to $0.4 million from a loss; land transportation rates and fuel surcharges helped, while marine activity remained weaker. Sulfur-services operating income rose to $4.5 million in Q3 on higher prices, but fell 38% year to date, partly because 2020 included substantial insurance and asset-disposition gains. NGL revenue increased sharply with commodity prices, but volumes fell 17% in Q3 and 18% year to date. Terminalling and storage operating income declined 36% in Q3.
- Operating conditions: Winter Storm Uri disrupted refinery activity and affected transportation and sulfur operations; the Smackover refinery was down about nine days. Hurricane Ida caused no material operating impact or damage; expected restoration costs were approximately $0.2 million.
- COVID-19: Management expected some continuing adverse effect on marine transportation, while anticipating improving refinery utilization and demand. It cautioned that prolonged or severe impacts, including variants, could adversely affect results, cash flows, financing access, inventory valuation, receivables, and asset values. No material effect on reported results was identified as of September 30.
- Commodity and rate exposure: NGL hedges covered 400,000 barrels settling in Q4 2021 and had a $5.1 million current liability and $6.0 million unrealized loss in accumulated other comprehensive loss. Management estimated a $0.10 change in expected settlement prices would affect net income by about $1.7 million. A 100-basis-point increase in floating rates was estimated to raise annual interest expense by about $2.1 million.
- Other matters: Related-party transactions are significant; Martin Resource Management Corporation controls the general partner, supplies management and services, and was responsible for about 10% of revenue year to date. A customer-related defense and indemnity dispute remains unresolved; potential exposure was not estimable if the matter proceeds. Management did not identify material changes to the risk factors in its 2020 Form 10-K and gave no specific earnings guidance in this filing.
Investor verification priorities
- Confirm the drivers and durability of operating cash use, especially inventory and other working-capital movements.
- Monitor covenant headroom, covenant-adjusted borrowing capacity, refinancing needs, and the facility’s August 2023 maturity.
- Assess whether segment margins and cash generation can support debt service and the current distribution.
- Review NGL price exposure, hedge settlements, and sensitivity to floating interest rates.
- Evaluate continuing marine-transportation impacts from COVID-19 and the status and potential exposure of the customer indemnity dispute.