Martin Midstream Partners L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Unless otherwise stated, financial amounts below are in millions of dollars. The Partnership operates in four segments: terminalling and storage, natural gas services, sulfur services, and marine transportation, primarily in the U.S. Gulf Coast region.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $292.2 | $211.9 | $575.2 | $454.6 |
| Operating income | $10.6 | $9.1 | $24.1 | $16.7 |
| Net income | $8.8 | $3.1 | $16.1 | $4.8 |
| Net income per limited partner unit | $0.37 | $0.10 | $0.67 | $0.14 |
| Operating margin, approximate | 3.6% | 4.3% | 4.2% | 3.7% |
- Q2 revenue rose 38% and six-month revenue rose 27%. Six-month operating income increased 44%, while net income more than tripled from the comparatively low prior-year period.
- Higher sulfur product prices and volumes, increased NGL selling prices, acquired terminalling assets, and the start of a new sulfur-services contract contributed to growth. Sulfur-services operating income increased to $10.1 million in Q2 from $4.5 million; marine transportation shifted to an operating loss of $1.0 million from income of $1.5 million.
- Interest expense was $4.4 million in Q2 versus $8.2 million, and $12.8 million for six months versus $16.2 million. Lower expense reflected interest-rate swap effects and, for the six-month comparison, the prior-year swap termination costs. Q2 2011 included a $3.2 million reduction in interest expense related to swaps.
- Six-month operating cash flow was $30.1 million, up from $15.0 million. Investing activities used $113.6 million, including $30.2 million for property and equipment, $16.8 million for acquisitions, and a $59.3 million investment in Redbird Gas Storage. Financing activities provided $72.2 million. Cash declined from $11.4 million at year-end to $0.1 million.
- At June 30, total debt and capital leases were $429.6 million: $197.6 million in 8.875% senior notes, $219.0 million drawn on the revolving facility, $6.9 million of notes payable, and $6.1 million in capital leases. Revolver availability was $130.9 million. Current assets were $202.0 million and current liabilities $147.4 million.
Material changes and notable items
- In February 2011, the Partnership issued 1.875 million common units for net proceeds of $70.3 million and used $65.5 million to repay revolving debt. The offering increased weighted-average limited partner units year over year.
- The April credit-facility amendment increased capacity from $275 million to $350 million, extended maturity to April 15, 2016, and revised pricing and covenants. The Partnership reported compliance with its financial covenants at June 30.
- The Partnership acquired 13 shore-based marine terminals, a specialty terminal and related assets from its sponsor for $36.5 million. A finalized purchase-price allocation resulted in a $19.7 million reduction to property, plant and equipment and partners’ capital; first-quarter depreciation was retrospectively reduced by $0.2 million.
- On May 31, the Partnership acquired all Class B interests in Redbird for approximately $59.3 million, funded with revolver borrowings. Redbird is an equity-method investment in a natural-gas-storage venture with Martin Resource Management.
- Other unusual items included a $0.7 million loss on disposal of terminal assets, partly offset by insurance recoveries, and $0.7 million of Hurricane Ike business-interruption insurance recoveries in sulfur services.
Outlook, risks and contingencies
- Management gave no numerical earnings, cash-flow, or distribution guidance. It said its near-term focus was liquidity, asset utilization and cost control, with a goal of increasing growth capital spending over the next two years, primarily in terminalling and storage. Management believed current projects could be funded from operating cash flow, cash balances and revolver capacity, while noting future capital needs may require additional funds.
- Management cited reduced gas-producer drilling in its operating areas, continuing uncertainty and enhanced requirements for Gulf of Mexico drilling permits, and weak marine transportation demand and excess vessel capacity. Commodity prices, weather, fuel and other input costs, and interest rates are additional risks.
- All $219 million drawn on the revolving facility was floating-rate debt and unhedged at June 30; a 1 percentage-point rate increase was estimated to reduce annual net income by about $2.3 million. Commodity hedges covered an estimated 47% of exposure by volume for 2011 and 35% for 2012; hedge ineffectiveness can increase earnings volatility.
- Martin Resource Management controls the general partner and owns approximately 32.2% of limited partnership units, and provides services and conducts substantial business with the Partnership. Management noted that direct expense reimbursements are not subject to a monetary cap. This creates related-party and governance considerations.
- The Partnership reported ordinary-course claims and litigation involving Martin Resource Management and related individuals; the Partnership is not a party to the principal described disputes, and management did not expect the matters to materially harm the Partnership. The Texas Supreme Court denied review of one dispute on June 17, 2011; rehearing was denied August 5. The filing reported no material change in previously disclosed risk factors and no material environmental costs in the quarter.
- Subsequent event: On August 5, 2011, the Partnership terminated $100 million of interest-rate swaps tied to its senior notes and received $2.8 million.
Important facts for investors to verify
- Whether the revenue and earnings improvement is sustainable, particularly given commodity-price effects, the new sulfur contract, acquisitions and insurance recoveries; monitor the lower Q2 operating margin and marine segment losses.
- Cash conversion and funding needs: operating cash flow was below property-and-equipment spending alone, cash was only $0.1 million at quarter-end, and investment and acquisition spending was substantial.
- Revolver utilization, covenant headroom, refinancing risk and the effect of floating rates; confirm the subsequent $2.8 million swap-termination receipt and related accounting in later filings.
- Returns and funding requirements for Redbird and other equity-method investments, as well as the final accounting and operating performance of the acquired terminal assets.
- Related-party transaction terms, reimbursement allocations, sponsor influence and the effect of any outstanding litigation on Martin Resource Management or the Partnership.