Martin Midstream Partners L.P. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. The partnership operates four Gulf Coast-focused businesses: natural gas services, terminalling and storage, sulfur services, and marine transportation. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Revenue: $284.2, up 12.2% from $253.3. Natural gas services revenue rose 23%, principally on higher NGL sales volumes and prices; sulfur services revenue declined 11%.
- Profit and margins: Operating income was $24.1 versus $23.7. Net income was $12.8 versus $13.6, and limited-partner diluted earnings per unit were $0.32 versus $0.36. Net margin declined to approximately 4.5% from 5.4%.
- Cash generation: Operating cash flow was $55.4 versus $56.5. Adjusted EBITDA was $44.7 versus $46.8, and distributable cash flow was $26.7 versus $30.3.
- Capital spending: Capital expenditures were $13.0, including $6.0 of maintenance and $7.0 of expansion spending; Q1 2017 spending was $9.3, including $1.4 of turnaround costs.
- Debt and interest: Long-term debt, net, was $795.1 at quarter-end, down from $812.6 at December 31, 2017. The balance included $428.0 outstanding on the revolving facility and approximately $372.7 of 7.25% senior notes due 2021. Net interest expense increased 16% to $12.7.
- Liquidity: Cash was $0.2. The partnership reported $222.0 of nominal revolving-facility availability after borrowings and letters of credit, but said covenant-based borrowing capacity was approximately $98.3. It reported compliance with debt covenants at quarter-end.
- Distribution: On April 19, the partnership declared a Q1 distribution of $0.50 per common unit, equivalent to $2.00 annualized, payable May 15, 2018.
Material changes versus Q1 2017
- NGL product sales volumes increased 22.5%, but natural gas services margin per barrel fell 27.5% as average costs rose faster than sales prices; segment operating income decreased 3%.
- Sulfur segment operating income fell 33%, reflecting lower product volumes and weaker per-ton margins.
- Terminalling and storage moved from an operating loss of $0.9 to income of $3.6, helped by higher lubricant sales and lower depreciation and operating costs.
- Marine transportation operating income declined 16%, with lower inland fleet utilization linked to regulatory downtime and idle equipment.
- Interest expense rose $1.8, including higher revolving-facility interest and the absence of $0.6 of affiliate-note interest income recorded in Q1 2017.
- Investing cash outflow decreased to $17.0 from $25.9, largely because Q1 2017 included an acquisition. Financing cash outflow increased to $38.2 from $30.6, in part because Q1 2017 included common-unit issuance proceeds.
Outlook, risks and unusual items
- Outlook and liquidity: Management said operating cash flow and borrowing capacity were expected to cover 2018 working-capital needs and anticipated maintenance capital expenditures. It also said it had reduced planned growth spending and was controlling expenditures to preserve liquidity. No quantified earnings or full-year guidance was provided.
- WTLPG expansion: The 20%-owned joint venture planned an approximately $200 million NGL pipeline expansion into the Delaware Basin, supported by long-term volume dedications of up to 40,000 barrels per day and expected to enter service in Q3 2018. The credit-facility amendment was intended in part to accommodate growth spending associated with the project.
- Credit amendment: The February 2018 amendment temporarily raised maximum leverage limits to 5.75x for Q1 and Q2 2018, stepping down thereafter. It also created an inventory-financing sublimit within existing commitments, with seasonal limits of $10 million from March through June and up to $75 million at other times. The amendment reduced the maximum senior leverage ratio to 3.25x.
- Rate and commodity exposure: A 100-basis-point increase in floating rates was estimated to raise annual interest expense by approximately $4.3 million. NGL swaps covered 50,000 barrels settling May–June 2018; a $0.10 change in expected settlement prices was estimated to change net income by approximately $0.2 million.
- Related-party dependence: Martin Resource Management controls the general partner, supplies personnel and services, and is a significant customer and supplier. It accounted for approximately 9% of Q1 revenue; the partnership reimbursed it $32.4 million for direct costs and expenses during the quarter.
- Contingencies and unusual items: Asset-retirement obligations increased by $4.8 due to revised removal-cost and useful-life estimates. A Texas rate dispute involving WTLPG was remanded for additional evidence, with a hearing scheduled for September 2018. In a separate customer indemnification dispute, the partnership said potential exposure, if any, could not then be determined. Management did not expect ordinary-course legal matters in aggregate to have a material adverse effect.
- Accounting and controls: The partnership adopted ASC 606 on January 1, 2018, with no significant change in revenue-recognition timing identified. Management reported disclosure controls were effective; newly implemented ERP functions were to undergo effectiveness testing during 2018.
Important facts for investors to verify
- Actual covenant headroom and borrowing capacity as leverage limits step down, particularly given the difference between nominal facility availability and the reported $98.3 million covenant-based capacity.
- Progress, funding requirements, and expected timing and returns of the WTLPG expansion, including the partnership’s share of future capital contributions.
- Whether NGL sales margins recover after the Q1 decline and whether sulfur volumes and margins improve.
- Cash generation and distribution coverage, given Q1 distributable cash flow of $26.7 million and cash distributions paid of $19.6 million.
- Developments in the WTLPG rate case, customer indemnification dispute, and asset-retirement cost estimates.
- Related-party transaction terms, reimbursements, and continued reliance on Martin Resource Management for operations and customers.