Business context and reporting period
Martin Midstream Partners L.P. filed its Form 10-K for the fiscal year ended December 31, 2018. The partnership operates Gulf Coast-focused terminalling and storage, NGL distribution and natural gas storage, sulfur services, and marine transportation businesses. Its results include a fourth-quarter comparison and reflect the WTLPG interest sale as discontinued operations.
Financial and operating results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $972.7 million | $946.1 million |
| Operating income | $44.8 million | $60.0 million |
| Continuing-operations income (loss) | $(7.6) million | $13.0 million |
| Net income | $44.1 million | $17.1 million |
| Net income per limited partner unit | $1.11 | $0.44 |
| Adjusted EBITDA | $123.7 million | $151.0 million |
| Distributable cash flow (continuing operations) | $51.0 million | $85.9 million |
| Cash from operating activities | $90.7 million | $67.5 million |
| Capital expenditures and turnaround costs | $39.0 million | $41.3 million |
Revenue increased 2.8%, but operating income fell 25% and adjusted EBITDA fell 18%. The continuing-operations loss reflects lower operating results and higher interest expense, which rose 9% to $52.0 million. Reported net income was boosted by a $51.7 million gain on the WTLPG sale, included in discontinued operations; continuing operations therefore remained loss-making. Fourth-quarter 2018 revenue was $252.8 million, operating income $11.5 million, and net loss $0.9 million, compared with revenue of $305.7 million, operating income of $29.7 million, and net income of $18.8 million in fourth-quarter 2017.
Segment operating income after intersegment eliminations was $13.7 million for terminalling and storage (up from $0.6 million), $28.6 million for natural gas services (down from $51.8 million), $14.3 million for sulfur services (down from $23.2 million), and $6.1 million for marine transportation (up from $1.7 million). Natural gas product margins narrowed as costs per barrel rose faster than sales prices; sulfur volumes and per-ton margins also declined.
Debt, liquidity, and distributions
- At year-end, long-term debt, net, was $656.5 million, comprising $283.5 million under the revolving facility and approximately $373.0 million of 7.25% senior notes due 2021. Cash was $0.2 million; current assets were $194.0 million and current liabilities $101.5 million.
- The $664.4 million revolving facility had $287.0 million drawn and $16.9 million of letters of credit. Although stated remaining facility availability was $360.5 million, covenant-based additional borrowing capacity was only about $25.8 million. The partnership reported compliance with covenants at year-end and expected to remain compliant over the next 12 months.
- Revised facility covenants included maximum total-debt-to-EBITDA of 5.25x, senior-secured-debt-to-EBITDA of 3.50x, and minimum interest coverage of 2.50x. The filing does not provide a clear year-end actual ratio for these covenant tests.
- Variable-rate debt carried a 5.24% weighted-average rate. Management estimated a 100-basis-point rate increase would raise annual interest expense by about $2.9 million.
- The partnership declared a fourth-quarter distribution of $0.50 per common unit, or $2.00 annualized, unchanged from 2017. FY 2018 distributable cash flow was below the $78.4 million of cash distributions paid; the filing reports DCF from continuing operations and distributions are affected by reserves and other factors.
Material changes, outlook, and risks
- In July 2018, the partnership sold its 20% WTLPG interest for $193.7 million net of transaction costs and used the proceeds to repay revolver borrowings. The sale generated the $48.6 million gain reported in discontinued operations; WTLPG earnings will not recur after the divestiture.
- Effective January 1, 2019, the partnership acquired Martin Transport, Inc. from its controlling affiliate for a stated $135.0 million purchase price, subject to a $10.0 million performance earn-out. The reported closing cash consideration was $126.1 million after working-capital adjustment and assumed capital leases. The acquisition adds trucking operations and 23 terminals.
- Management said it reduced planned growth capital expenditures to preserve liquidity and expected operating cash flow and borrowing capacity to cover working capital and anticipated maintenance capital expenditures in 2019. The filing provides no specific earnings or cash-flow guidance.
- Key risks include limited covenant borrowing headroom, significant debt and upcoming 2020 revolver and 2021 note maturities, variable interest rates, commodity-price and margin volatility, seasonal demand, and Gulf Coast exposure to hurricanes and other severe weather. The business also depends on its controlling affiliate for management, staff, services, and commercial relationships; affiliate sales represented about 10% of 2018 revenue.
- Ordinary-course legal matters were not believed by management to be material in aggregate. The filing also describes an unresolved lubricants-related indemnity dispute for which exposure could not be determined. The WTLPG financial-statement appendix reports a remanded customer lawsuit with an asserted claim of about $11 million and says potential exposure could be material; WTLPG was sold in 2018, so investors should verify any continuing Partnership exposure.
- KPMG gave unqualified opinions on the consolidated financial statements and internal controls. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether distributable cash flow can recover sufficiently to support the current distribution, given the FY 2018 shortfall relative to distributions paid.
- Actual covenant ratios and practical borrowing headroom, plus refinancing plans for the revolving facility and 2021 notes.
- The acquired Martin Transport business’s contribution to earnings and cash flow, integration costs, working-capital needs, and potential earn-out payment.
- Underlying recurring performance excluding the WTLPG sale gain and discontinued operations.
- Exposure to controlling-affiliate transactions, major customers and counterparties, and any continuing obligations related to the WTLPG litigation.