Martin Midstream Partners L.P. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The partnership operates natural gas services, terminalling and storage, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $219.0 | $193.1 | $719.8 | $640.4 |
| Operating income (loss), continuing operations | $3.5 | $(4.4) | $33.3 | $30.3 |
| Loss from continuing operations | $(9.7) | $(17.0) | $(6.7) | $(4.1) |
| Net income (loss), including discontinued operations | $39.4 | $(16.3) | $45.0 | $(1.7) |
| Adjusted EBITDA | $25.4 | $25.5 | $96.8 | $102.9 |
| Distributable cash flow | $6.9 | $8.3 | $41.6 | $55.8 |
Q3 revenue rose 13.4%; nine-month revenue rose 12.4%. Nine-month operating income increased about 10%, while continuing-operations losses widened, chiefly reflecting higher interest expense. Nine-month net income includes a $48.6 million gain on the WTLPG sale; it should not be viewed as recurring earnings. Q3 and nine-month limited partner earnings per unit were $1.00 and $1.13, respectively, including discontinued operations.
- Cash flow: Nine-month operating cash flow was $32.5 million, including $29.3 million from continuing operations. Capital expenditures and turnaround costs were $29.2 million. Investing cash flow was $146.1 million, largely due to sale proceeds; financing cash outflow was $175.5 million.
- Distribution: Cash distributions paid in the first nine months totaled $58.8 million, exceeding reported distributable cash flow by approximately $17.2 million. The partnership declared a Q3 distribution of $0.50 per unit, or $2.00 annualized.
- Balance sheet and liquidity: At September 30, cash was $3.2 million, total assets $1.10 billion, and total partners’ capital $284.9 million. Long-term debt, net, was $698.7 million, versus $812.6 million at year-end 2017. The filing reports $330.0 million drawn on the revolver and $26.3 million of letters of credit; although stated facility availability was $308.1 million, borrowing capacity based on then-current covenant calculations was approximately $40.3 million. The partnership reported compliance with debt covenants.
- Interest: Revolver borrowings carried a 5.19% weighted-average rate. Nine-month net interest expense increased 14% to $39.6 million.
Material changes and operating drivers
- On July 31, 2018, the partnership sold its 20% non-operating interest in West Texas LPG Pipeline L.P. (WTLPG) to ONEOK. Net cash proceeds were $193.7 million and were used to repay revolving debt. The sale was treated as a strategic shift, with WTLPG results presented as discontinued operations for both comparison periods.
- Natural gas services revenue rose, largely due to higher NGL prices, but segment operating income fell 30% for the first nine months as costs rose faster than sales; management cited a 30% decline in per-barrel margins. Q3 segment operating results were a $0.7 million loss.
- Terminalling and storage returned to operating income, compared with a prior-year loss that included hurricane repairs and asset-retirement accruals. Higher lubricant sales contributed to revenue growth.
- Nine-month sulfur services operating income declined 25%. A one-time $2.9 million negative inventory adjustment related to new 3D stockpile-measurement technology affected cost of products sold.
- Marine transportation recorded positive operating income for the nine months, compared with approximately break-even results in the prior-year period.
- Comparative 2017 expense classifications were revised for an immaterial reclassification between operating expenses and cost of products sold. Adoption of the new revenue standard did not produce significant changes in revenue-recognition timing.
Outlook, risks and contingencies
- Management said operating cash flow and revolver borrowing capacity should fund working capital and anticipated 2019 maintenance capital expenditures. No numerical earnings or cash-flow guidance was provided.
- On October 22, 2018, the partnership agreed to acquire Martin Transport, Inc. from its sponsor for $135 million plus a $10 million earn-out, subject to adjustments. Closing was expected in January 2019. This is a related-party transaction.
- The July 2018 revolver amendment set maximum leverage covenant levels of 5.25x total indebtedness to EBITDA and 3.50x senior secured indebtedness to EBITDA; the interest coverage covenant remained 2.50x. Despite stated covenant compliance, borrowing capacity was materially below nominal facility availability.
- Commodity and rate exposure remain relevant. A $0.10 change in expected settlement prices on NGL swaps was estimated to affect net income by about $2.0 million; a 100-basis-point increase in floating rates was estimated to increase annual interest expense by about $3.3 million. The partnership had $3.0 million of commodity derivative liabilities and no outstanding interest-rate derivatives.
- Management identified no material change to the risks in its latest Form 10-K. It said ordinary-course legal matters were not expected to materially affect financial position, results, or liquidity; one customer indemnification dispute remained unresolved, with exposure not then determinable if the case were reopened.
- The partnership expects the lease-accounting standard effective January 1, 2019 to have a material balance-sheet impact, principally through recognition of right-of-use assets and lease liabilities. Management also disclosed upward revisions of $4.8 million to asset-retirement obligations during the first nine months.
Investor facts to verify
- How much recurring cash flow and distribution coverage remain after excluding WTLPG sale proceeds and the disposal gain?
- Whether covenant-based borrowing capacity improves, and how debt service and the $0.50 quarterly distribution are supported by continuing operations.
- The financing, closing conditions, final consideration, and expected contribution of the related-party Martin Transport acquisition.
- Whether NGL margins, storage re-contracting rates, and sulfur volumes or margins recover, and the effect of commodity prices and interest rates.