Martin Midstream Partners L.P. — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. The partnership operates in terminalling and storage, natural gas services, sulfur services, and marine transportation, primarily in the U.S. Gulf Coast region. Financial amounts below are in millions, except per-unit data.
Financial performance and liquidity
- Revenue: $497.0, up 14.6% from $433.7. Natural gas services revenue rose 29%, mainly from higher NGL sales volumes during colder weather; sulfur services revenue fell 23%, reflecting lower prices and volumes.
- Operating income: $23.9, down from $26.4; operating margin was approximately 4.8%, versus 6.1% in Q1 2013. Higher terminalling and storage costs and weaker sulfur results offset natural gas and marine transportation gains.
- Net income: $11.8, down from $16.6. Limited partners’ net income was $11.5; basic and diluted net income per unit were $0.43, versus $0.61.
- Cash flow: Operating cash flow was $36.5, versus $65.4. Management attributed the decrease primarily to a $34.5 unfavorable working-capital variance, including timing of customer receipts. Investing cash use was $17.1; financing cash use was $31.6. Cash declined $12.2 to $4.4.
- Non-GAAP measures: EBITDA was $37.5, compared with $37.9; adjusted EBITDA was $38.8, versus $38.7. Distributable cash flow was $21.5, down from $28.9, primarily reflecting lower operating cash flow and higher maintenance capital expenditures.
- Capital spending: Total capital expenditures and turnaround costs were $23.6, compared with $14.7, including $17.1 of expansion, $4.3 of maintenance, and $2.2 of plant turnaround costs.
- Balance sheet: Total assets were $1,067.6 and partners’ capital was $256.1 at quarter-end. Current assets were $257.8 and current liabilities $165.8; cash was $4.4.
- Debt and liquidity: Long-term debt was $643.8 at March 31, comprising $220.0 drawn on the revolving facility and senior notes. The facility’s maximum capacity had been increased to $637.5; after $8.6 of letters of credit, stated availability was $408.9, though management estimated covenant-based borrowing capacity at approximately $86.7. The facility’s weighted-average interest rate was 3.16%.
Changes versus Q1 2013
- Natural gas services operating income increased to $8.6 from $8.1, while NGL sales volumes increased 34%; management noted that per-barrel margins declined $0.23.
- Sulfur services operating income decreased to $9.2 from $10.0 as product prices fell 20% and volumes fell 5%; margin per ton declined 4%.
- Terminalling and storage operating income decreased 15% to $9.0. Smackover refinery throughput fell 51%, partly offset by higher Corpus Christi crude-terminal throughput and lubricant sales volumes.
- Marine transportation operating income rose 29% to $1.9 despite lower total revenue, primarily due to lower operating expenses.
- Interest expense increased 26% to $11.5, including higher revolving-facility and 7.25% note interest. Indirect selling, general and administrative expense rose 24% to $4.9.
Outlook, significant events, and risks
- Management said it expects operating cash flow and borrowing capacity to fund 2014 working capital needs, anticipated maintenance spending, and scheduled debt payments. It plans increased expansion spending over the next two years, primarily in terminalling and storage and natural gas services; no specific earnings guidance was provided.
- On April 1, 2014, the partnership issued an additional $150.0 of 7.25% senior notes due 2021 and redeemed all $175.0 of 8.875% notes due 2018. The redemption incurred a $7.8 prepayment premium; a further $3.9 non-cash write-off of debt issuance costs and discount was expected. These are post-quarter events.
- Two interest-rate swaps with an aggregate notional amount of $200.0 became effective April 1, 2014. No commodity or interest-rate derivatives were outstanding during Q1.
- On April 23, the partnership declared a Q1 distribution of $0.7875 per common unit, or $3.15 annualized, payable May 15 to unitholders of record May 5.
- Key exposures include commodity prices, weather-driven NGL and fertilizer demand, floating-rate debt, and facility covenant limits. Management highlighted significant related-party arrangements: Martin Resource Management controls the general partner, provides personnel and services, and is both a supplier and customer. Legal matters and environmental costs were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the lower distributable cash flow and operating cash flow were temporary, particularly given working-capital timing and higher maintenance spending.
- Post-quarter debt balances, interest costs, and covenant headroom following the note issuance, redemption, and increase in revolving borrowings.
- Whether natural gas services volume gains and sulfur services profitability can be sustained as weather, commodity prices, and per-unit margins change.
- How planned expansion capital spending will be funded and whether it generates sufficient incremental cash flow to support distributions.
- The terms and economics of related-party reimbursements and transactions, and the continuing effect of the general partner’s control.