Martin Midstream Partners L.P. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; quarterly figures include the fourth quarter. The Partnership operates Gulf Coast-focused terminalling and storage, natural gas services, sulfur services, and marine transportation businesses.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $946.1 million | $827.4 million |
| Operating income | $59.8 million | $72.7 million |
| Net income | $17.1 million | $31.7 million |
| Net income per limited partner unit | $0.44 | $0.65 |
| Adjusted EBITDA | $156.2 million | $176.6 million |
| Distributable cash flow | $91.1 million | $113.7 million |
| Cash from operating activities | $67.5 million | $110.8 million |
| Long-term debt | $812.6 million | $808.1 million |
Revenue increased 14%, mainly reflecting higher NGL prices and sales volumes. Operating income declined 18%; 2016 benefited from a $33.4 million gain on asset sales, while 2017 included $2.2 million of long-lived asset impairments. Net margin was approximately 1.8%, versus 3.8% in 2016. Adjusted EBITDA fell 12% and distributable cash flow fell 20%.
Operating cash flow declined 39%, including a $29.6 million unfavorable working-capital variance. Year-end cash was only $27,000. Current assets were $242.7 million and current liabilities $134.4 million, including $97.3 million of inventory and $107.2 million of receivables. The Partnership had $445.0 million drawn on its $664.4 million revolver and $14.4 million of letters of credit; although nominal remaining capacity was $205.0 million, covenant-based borrowing capacity was approximately $7.1 million. It reported covenant compliance, but leverage was near the facility limit.
Debt comprised the variable-rate revolving facility and $372.6 million carrying value of 7.25% senior notes due 2021. The revolver’s weighted-average interest rate was 4.55%; management estimated that a 100-basis-point rate increase would add approximately $4.5 million of annual interest expense.
Segment results and material changes
- Natural gas services: Segment operating income rose to $51.7 million from $41.4 million. NGL sales volumes increased 10% and average selling prices increased 31%; higher product costs absorbed much of the revenue growth.
- Terminalling and storage: Operating income after eliminations was $0.6 million, compared with $40.7 million. The prior year included a $37.3 million gain on the Corpus Christi asset sale; 2017 also had lower Corpus Christi activity and Hurricane Harvey impacts.
- Sulfur services: Operating income was $23.2 million, slightly below $23.4 million. Lower average product prices more than offset modest volume growth.
- Marine transportation: Operating income after eliminations improved to $1.7 million from a $16.0 million loss, but revenue fell 15%. Management cited reduced rates and fleet utilization amid excess Gulf Coast marine equipment supply.
- Fourth quarter: Revenue was $305.7 million, operating income $29.7 million, and net income $18.8 million, compared with $236.9 million, $28.9 million, and $17.9 million, respectively, in fourth-quarter 2016.
Outlook, risks, and unusual items
- Management expected operating cash flow and borrowing capacity to fund 2018 working capital and maintenance capital needs, while reducing planned growth spending to preserve liquidity. No specific earnings guidance was provided.
- The common-unit distribution was $0.50 per quarter in each 2017 quarter, or $2.00 annualized. The quarterly distribution schedule shows 2016 payments of $0.8125 for the first two quarters and $0.50 for the last two; distributions therefore declined on that comparison. However, selected financial data report 2016 cash distributions of $2.94 per unit, a figure that does not match the quarterly schedule and merits reconciliation.
- Hurricane Harvey damaged terminals in the Terminalling and Storage and Sulfur Services segments. The Partnership reported $3.8 million of repairs and improvements, a further $0.7 million repair accrual, and an estimated $1.1 million reduction in net income and cash flow; damage did not exceed insurance deductibles.
- The Hondo asphalt terminal was acquired from an affiliate for $27.4 million, with $8.6 million spent to complete construction. Management expected approximately $5.0 million in annual cash flow under long-term affiliate agreements.
- WTLPG planned an approximately $200 million Delaware Basin pipeline expansion, targeted for service in the third quarter of 2018 and supported by long-term volume commitments. The Partnership owns 20% of the joint venture.
- Shippers’ challenge to WTLPG’s 2015 rate increase remained unresolved; in January 2018, the Texas Railroad Commission remanded the matter for additional evidence on competition.
- Other key risks include high leverage and limited covenant headroom, variable-rate debt, seasonal NGL and fertilizer demand, commodity and weather exposure, environmental and marine liabilities, and reliance on Martin Resource Management. The affiliate controls the general partner, supplies personnel, and is a significant customer and supplier; the Partnership reimbursed it $129.5 million in direct costs and $16.4 million in approved indirect expenses during 2017.
- The 2017 Tax Cuts and Jobs Act’s future effects had not been fully analyzed. A lubricants customer’s lawsuits raised a disputed defense-and-indemnity demand; the Partnership said potential exposure, if any, could not be determined. Management did not expect ordinary-course legal matters in aggregate to materially affect the Partnership.
Important facts for investors to verify
- Reconcile the 2016 per-unit distribution figure in selected financial data with the quarterly distribution schedule.
- Review covenant calculations, available revolver capacity, and the Partnership’s plan to improve leverage after seasonal NGL inventory sales.
- Track operating cash flow, working-capital needs, distributable cash flow, and distribution coverage as the reduced distribution and capital-spending plan continue.
- Monitor the WTLPG rate complaint and expansion costs, timing, committed volumes, and expected contribution to Partnership cash flow.
- Assess related-party pricing, reimbursements, customer concentration, and the Hondo terminal’s actual performance against management’s cash-flow expectation.
- Check subsequent filings for updates on the customer indemnity dispute, tax-law effects, and any further asset impairments or dispositions.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of year-end 2017.