MARTIN MIDSTREAM PARTNERS L.P. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unless otherwise stated, amounts are in millions of dollars. The filing retrospectively includes Martin Transport, Inc. (MTI) in comparative 2018 results; the natural gas storage business is reported as discontinued operations.
Business context and results
The Partnership operates Gulf Coast-focused terminalling and storage, transportation, sulfur services, and natural gas liquids (NGL) businesses. On June 28, it sold its natural gas storage assets, with approximately 50 billion cubic feet of working capacity, to Hartree. The reported $210.1 million of net proceeds, subject to final adjustments, were used to repay revolving-credit borrowings.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $187.3 | $227.2 | $427.4 | $518.9 |
| Operating income | $5.0 | $4.5 | $14.6 | $25.3 |
| Loss from continuing operations | $(10.6) | $(9.5) | $(15.4) | $(1.5) |
| Net income (loss), including discontinued operations | $(191.2) | $(4.5) | $(194.8) | $10.5 |
| Adjusted EBITDA from continuing operations | $25.2 | $22.7 | $50.8 | $58.8 |
| Distributable cash flow from continuing operations | $8.0 | $4.7 | $12.7 | $23.4 |
| Cash provided by operating activities, total | $32.5 | $32.5 | $69.2 |
The net loss includes a $178.8 million loss on the natural gas storage sale. Discontinued operations also contributed a $180.6 million loss in Q2 and a $179.5 million loss for the six-month period; these amounts largely reflect the disposition loss. Continuing-operations results and discontinued-operations results should therefore be considered separately.
Q2 continuing revenue fell 17.5% year over year. The largest pressure was NGL revenue, down 37% in the quarter, as average selling prices fell 24% and volumes declined 16%; NGL segment operating income turned to a $3.4 million loss. For the six months, NGL operating income also turned to a $1.7 million loss from $10.3 million income. Terminalling and storage operating income rose 60% to $4.4 million in Q2, while sulfur services operating income rose 47% to $5.3 million. Transportation revenue increased, but post-elimination segment operating results were negative: $(2.6) million for Q2 and $(6.5) million for six months.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $32.5 million, down from $69.2 million; continuing-operations operating cash flow was $24.7 million versus $45.2 million.
- Investing cash flow was a net inflow of $167.3 million, principally reflecting discontinued-operations asset-sale proceeds. Financing cash flow was a $197.5 million outflow, including debt repayments, distributions, and the MTI acquisition-related capital adjustment. Cash ended the period at $2.5 million.
- June 30 long-term debt, net, was $596.4 million, including $223.2 million net under the revolving facility and $373.2 million of 7.25% senior notes due February 2021. The revolver’s weighted-average rate was 5.65%. Total partners’ capital had become a $37.1 million deficit.
- At June 30, the Partnership reported $225.0 million drawn on the revolver and $26.1 million in letters of credit. Although nominal remaining availability was $248.9 million, covenant-based additional borrowing capacity was approximately $49.8 million. The Partnership stated it was in compliance with debt covenants and expected to remain compliant over the next 12 months.
- On July 18, the revolver was amended: maturity was extended from March 2020 to August 2023 and commitments were reduced from $500 million to $400 million.
Outlook, risks, and other notable items
- Management said operating cash flow and revolver borrowing capacity should fund working capital and anticipated 2019 maintenance capital expenditures. This is not specific earnings or cash-flow guidance; future performance and debt-service capacity remain dependent on operations and applicable risks.
- On July 18, the Partnership declared a $0.25 per-unit quarterly distribution for Q2, equivalent to $1.00 annualized, payable August 14 to holders of record August 7.
- Commodity prices, especially NGL prices, affect revenue and product costs. NGL swaps covering 370,000 barrels were outstanding for July–September 2019; a $0.10 change in expected settlement prices was estimated to affect net income by approximately $1.6 million. A 100-basis-point rise in rates was estimated to increase annual interest expense by approximately $2.3 million.
- The Partnership depends on its controlling affiliate, Martin Resource Management Corporation (MRMC), for management, employees, services, and commercial relationships. MRMC owned approximately 15.7% of common units and controlled the general partner. Related-party sales were approximately 13% of Q2 revenue; the filing also describes significant reimbursements and affiliate transactions.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. In a dispute over a customer’s request for defense and indemnity in motor-oil marketing lawsuits, potential exposure could not be determined if the case is reopened. No material risk-factor changes were reported. Disclosure controls were reported effective.
Important facts for investors to verify
- Final post-closing adjustments to the $210.1 million natural gas storage sale proceeds, and the resulting debt reduction.
- Whether continuing-operations cash flow and distributable cash flow can support debt service, maintenance spending, and the declared distribution.
- Revolver covenant headroom and borrowing availability following the facility amendment, given only approximately $49.8 million of covenant-based capacity at June 30.
- Drivers of NGL margin and volume declines, and whether transportation segment losses after eliminations persist.
- Terms and economics of affiliate arrangements, including direct-cost reimbursements and the MTI acquisition’s $10 million performance-based earn-out.