Martin Midstream Partners L.P. — Q2 2015 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2015. The partnership operates terminalling and storage, natural gas services, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $251.1m | $403.3m | $556.5m | $888.1m |
| Operating income | $19.6m | $18.0m | $44.3m | $42.5m |
| Operating margin | 7.8% | 4.5% | 8.0% | 4.8% |
| Net income (loss) | $11.0m | $(1.0)m | $28.2m | $10.8m |
| Limited partners’ net income (loss) per unit | $0.19 | $(0.03) | $0.56 | $0.38 |
| Adjusted EBITDA (non-GAAP) | $45.0m | $32.8m | $95.4m | $71.9m |
| Distributable cash flow (non-GAAP) | $31.9m | $20.1m | $69.0m | $41.8m |
Cash flow and capital: For the six months, operating cash flow was $104.1m, investing activities provided $12.2m (including $41.3m from the sale of floating storage assets), and financing activities used $116.3m. Capital expenditures and plant turnaround costs totaled $33.5m. Cash was $24,000 at June 30, 2015, versus $42,000 at year-end 2014.
Debt and liquidity: Long-term debt, net, was $840.2m at June 30, down from $888.9m at December 31, 2014. The $900m revolving facility had $450m drawn and $1.6m in letters of credit; although nominal undrawn capacity was $448.4m, the partnership estimated covenant-based additional borrowing capacity of approximately $110.6m. The revolver’s weighted-average rate was 2.94%; senior notes bear 7.25% interest and mature in 2021. A 1 percentage-point increase in rates on unhedged floating-rate debt was estimated to raise annual interest expense by about $4.5m.
Material changes versus prior comparable periods
- Revenue fell 38% in Q2 and 37% for the first half, largely reflecting lower natural gas/NGL and product sales prices and volumes. The 2015 periods include Cardinal Gas Storage, acquired in August 2014; its services revenue and higher depreciation and operating costs affect comparability.
- Despite lower revenue, operating income rose 9% in Q2 and 4% for the first half. Net income improved substantially, while the 2014 Q2 comparison included a $7.8m debt prepayment premium and a loss from discontinued operations.
- Natural gas services operating income increased to $8.8m in Q2 and $17.2m for the first half, including acquired Cardinal operations. Terminalling and storage operating income declined to $6.1m in Q2 and $13.9m for the first half, with lower blending and packaging volumes and higher operating expenses. Sulfur services income declined; marine transportation returned to operating profitability in Q2.
- Working-capital movements contributed to the first-half operating cash flow increase: management cited a $49.8m favorable year-over-year working-capital variance. The sale of six LPG pressure barges generated $41.3m, used to reduce revolver borrowings.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and borrowing capacity were expected to fund 2015 working capital, planned capital projects, maintenance spending, and scheduled debt payments; additional funds could be needed for future capital requirements. The filing provides no specific earnings or revenue guidance.
- On July 23, 2015, the partnership declared a Q2 distribution of $0.8125 per common unit, or $3.25 annualized, payable August 14. First-half distributable cash flow of $69.0m was modestly above cash distributions paid of $66.6m.
- The June 2015 credit amendment allows up to $25m of unit and/or senior-note repurchases, subject to liquidity, leverage, and other conditions. A $200m interest-rate swap was entered into effective July 2, 2015; it is not accounted for as a hedge, so fair-value changes will affect earnings.
- Commodity prices influence product revenues and costs; the partnership reported no commodity derivatives outstanding in the first half. Seasonality affects NGL and fertilizer demand, and hurricanes could disrupt terminal and marine operations.
- Related-party exposure is significant: Martin Resource Management controls the general partner, supplies services, and accounted for approximately 13% of Q2 revenue and 11% of first-half revenue. The partnership also reimburses it for direct and allocated expenses.
- A Louisiana lease-related lawsuit was served July 17, 2015. The partnership had planned $1.6m of property work in 2015, intends to defend the claim, and said potential damages could not yet be determined. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Martin Resource Management is to reimburse $750,000 quarterly for four quarters beginning Q2 2015 because Cardinal missed specified financial targets; up to $4.5m of further reimbursement may be due in 2016 if conditions are not met, which the partnership had not determined. Management reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether lower product volumes and commodity prices continue to pressure revenue, and whether improved operating margins persist.
- Current borrowing capacity under the revolver’s covenants, leverage and interest-coverage compliance, and the impact of variable rates and the new swap.
- Cash generation and distribution coverage after accounting for working-capital variability, capital spending, and required debt service.
- Cardinal’s performance relative to the reimbursement agreement’s 2016 conditions, and the related-party terms, costs, and revenue concentration.
- The outcome and potential cost of the Louisiana lease litigation, which was unresolved when filed.