Martin Midstream Partners L.P. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited financial statements; dollar amounts below are in millions unless noted. The partnership operates primarily on the U.S. Gulf Coast across terminalling and storage, transportation, sulfur services, and natural gas liquids (NGLs). Comparative 2018 figures were recast to include Martin Transport, Inc. (MTI) as if owned for those periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $177.9 | $234.0 | $605.3 | $752.9 |
| Operating income | $25.5 | $5.4 | $40.1 | $30.7 |
| Net income (loss) | $13.3 | $42.6 | $(181.6) | $53.1 |
| Continuing-operations net income (loss) | $13.3 | $(7.9) | $(2.1) | $(9.4) |
| Adjusted EBITDA from continuing operations | $22.0 | $22.9 | $72.8 | $81.7 |
| Distributable cash flow from continuing operations | $8.3 | $4.4 | $21.0 | $27.8 |
Reported Q3 operating income included a $16.2 million gain on the East Texas Pipeline sale. Nine-month net loss mainly reflects a $178.8 million loss on the Natural Gas Storage Assets sale, reported in discontinued operations. Q3 continuing-operations earnings were $0.33 per limited partner unit; nine-month continuing-operations loss was $0.05 per unit.
- Cash flow: Nine-month operating cash flow was $25.6 million, including $17.8 million from continuing operations and $7.8 million from discontinued operations. Investing cash flow was $175.8 million, including substantial divestiture proceeds; financing cash outflow was $199.9 million. Cash ended at $1.8 million.
- Debt and liquidity: September 30 long-term debt, net, was $606.3 million. The revolving facility had $237.8 million outstanding, $26.1 million in letters of credit, and $136.1 million of nominal availability; the partnership said covenant-based borrowing capacity was approximately $19.7 million. The $373.3 million net carrying value of 7.25% senior notes is due February 2021. The facility’s weighted-average rate was 5.56%.
- Balance sheet: Total assets were $691.1 million and partners’ capital was a $33.4 million deficit, versus $1,073.6 million of assets and $288.4 million of positive capital at year-end 2018. Cash was $1.8 million; inventories were $96.0 million.
- Distribution: The partnership declared $0.25 per common unit for Q3, or $1.00 annualized, payable November 14, 2019. Nine-month cash distributions paid were $39.3 million, compared with $21.0 million of continuing-operations distributable cash flow.
Material changes and operating trends
- Total Q3 revenue fell 24% year over year, largely reflecting lower NGL product prices and reduced sulfur and terminalling/storage product sales. NGL revenue fell 40% in Q3 and 33% for the nine months; the filing attributes this principally to lower market prices, with nine-month sales volumes also down 10%.
- Q3 NGL segment operating income included the $16.2 million pipeline-sale gain. Excluding that gain, reported segment operating income would have been $3.5 million. Sulfur services operating income declined 91% in Q3 and 35% year to date, with lower product prices and weaker year-to-date volumes. Terminalling and storage operating income improved 18% in Q3 and 36% year to date despite lower revenue.
- Transportation revenue rose 5% year to date, and segment operating income rose 14%; management cited higher inland utilization and rates, partly offset by lower land miles and increased costs.
- Adjusted EBITDA from continuing operations decreased 4% for Q3 and 11% year to date. Continuing-operations distributable cash flow decreased 24% year to date.
- The partnership sold its approximately 50-billion-cubic-foot Natural Gas Storage business in June for $210.1 million net proceeds and the East Texas Pipeline in August for $17.5 million. Proceeds were used to repay revolving borrowings. The storage divestiture is treated as discontinued operations and represents a strategic shift.
- MTI was acquired from the controlling sponsor on January 2, 2019. Cash consideration was $126.1 million, including the working-capital adjustment and net of finance lease obligations assumed; the agreement also includes a possible $10 million earn-out. As a common-control transaction, the purchase-price excess over historical carrying value reduced partners’ capital by $102.4 million.
Outlook, risks, and contingencies
- Management said operating cash flow and borrowing capacity should fund working capital and anticipated 2019 maintenance capital expenditures, and expected covenant compliance for the next 12 months. The filing does not provide numerical earnings or cash-flow guidance.
- The July 2019 amendment extended the $400 million revolver’s maturity to August 2023, but it accelerates maturity to August 2020 if the 2021 senior notes are not refinanced in a permitted manner by August 19, 2020. The notes’ refinancing is therefore a key liquidity consideration.
- Commodity-price and interest-rate exposure remain material. The partnership had NGL hedges covering 1.029 million barrels settling October 2019–February 2020; it estimated a $0.10 settlement-price change could affect net income by about $4.3 million. A 100-basis-point rate increase on unhedged floating debt was estimated to increase annual interest expense by about $2.4 million.
- Management identified ordinary-course legal matters as not expected to materially adversely affect the partnership overall. A customer dispute concerning defense and indemnity for motor-oil marketing litigation remains unresolved; potential exposure, if any, could not be determined. The insurer denied the customer’s related claim.
- Martin Resource Management Corporation controls the general partner, owns about 15.7% of common units, supplies services, and is a significant customer and counterparty. Sponsor sales represented approximately 14% of Q3 revenue and 12% of nine-month revenue. Management cautions that overhead allocations involve judgments and that alternative methods could increase allocated expense.
- The partnership reported effective disclosure controls and no material change in internal controls during the quarter. It reported no material change to the risk factors in its 2018 Form 10-K.
Investor verification priorities
- Confirm the refinancing plan and timing for the $373.3 million net carrying value of 2021 notes, including the revolver’s August 2020 acceleration condition and actual covenant-based borrowing capacity.
- Assess whether continuing-operations cash generation can support distributions: year-to-date distributable cash flow was below cash distributions paid, while reported cash was $1.8 million.
- Separate recurring operating performance from the $16.2 million pipeline gain and the $178.8 million discontinued-operation storage disposal loss when comparing periods.
- Track recovery in NGL and sulfur margins, sales volumes, transportation utilization, and the effects of the storage divestiture on future results.
- Review related-party economics, overhead reimbursements, sponsor customer concentration, and the unresolved indemnity dispute.