Martin Midstream Partners L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The partnership operates terminalling and storage, natural gas services, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $305.4 | $484.8 |
| Operating income | $24.7 | $24.5 |
| Continuing-operations income | $16.0 | $12.4 |
| Net income | $17.2 | $11.8 |
| Limited partners’ income per unit, basic | $0.37 | $0.43 |
| Operating cash flow | $46.7 | $36.5 |
| Adjusted EBITDA | $50.4 | $39.0 |
| Distributable cash flow | $37.1 | $21.7 |
Revenue fell 37% year over year, while operating income was nearly flat. Operating margin was approximately 8.1%, compared with 5.1% in Q1 2014; the comparison is affected by the changed business mix and acquisition activity. Net income includes $1.2 million from discontinued operations, including a $1.5 million gain on sale of assets.
Cash and cash equivalents were $0.04 million at quarter-end. Long-term debt, net, was $849.4 million; this includes a $451.7 million net carrying value for the revolving facility and $397.6 million net carrying value of senior notes. The revolver had $460.0 million outstanding, a 2.93% weighted-average rate, and $8.6 million of letters of credit. Although stated remaining facility availability was $431.4 million, covenant-based additional borrowing capacity was approximately $139.2 million. Partners’ capital was $470.0 million.
Operating cash flow increased 28%. Investing cash flow was positive $26.9 million, principally reflecting $41.3 million of proceeds from the sale of the floating storage assets; financing cash outflow was $73.6 million, including $33.2 million of distributions and net debt repayments. Capital expenditures, maintenance capital and turnaround costs totaled $19.3 million. Management’s non-GAAP distributable cash flow was $37.1 million.
Changes versus the prior comparable period
- Natural gas liquids product revenue declined substantially as lower market prices and lower sales volumes reduced reported revenue. Natural gas services revenue was also affected by the 2014 Cardinal acquisition, which added $16.5 million of storage services revenue in Q1 2015.
- Natural gas services revenue declined 49% to $162.8 million, but operating income decreased only 9% to $8.4 million. Management attributed the lower product revenue chiefly to a 45% decrease in average NGL selling prices and an 18% volume decline.
- Terminalling and storage operating income declined 13% to $7.9 million, reflecting lower blending and packaging volumes amid increased price competition. Marine transportation operating income rose 89% to $3.7 million, while sulfur services operating income increased 4% to $9.6 million.
- Depreciation and amortization rose to $22.7 million from $13.6 million, primarily due to Cardinal and capital investment. Equity earnings from unconsolidated entities improved to $1.7 million, mainly from WTLPG, acquired in 2014.
- Basic limited-partner income per unit decreased to $0.37 from $0.43 despite higher total net income; weighted-average units increased to 35.3 million from 26.6 million, and income allocation to the general partner increased, including incentive distributions.
Outlook, risks and notable items
- Outlook: No formal earnings guidance is provided. Management said operating cash flow and revolver capacity were expected to fund 2015 working capital needs, anticipated maintenance capital expenditures, and scheduled debt payments. The partnership declared a Q1 distribution of $0.8125 per common unit, equivalent to $3.25 annualized, payable May 15, 2015.
- Asset sale: On February 12, 2015, the partnership sold six LPG pressure barges for $41.3 million and used the proceeds to reduce revolver borrowings. The assets’ results are presented as discontinued operations.
- Interest-rate exposure: A 1 percentage-point increase in rates on unhedged floating-rate debt would increase annual interest expense by approximately $4.6 million. No commodity derivatives were outstanding during the quarter. Interest-rate swaption premiums of $0.625 million were recognized as a reduction of interest expense.
- Debt and covenants: The secured revolver is subject to leverage and interest-coverage tests and restrictive covenants; distributions are permitted only while no default exists. Management’s estimated covenant-based borrowing headroom was materially below nominal unused facility capacity.
- Related parties: Martin Resource Management controls the general partner, owns approximately 17.7% of common units, supplies management and services, and is a significant customer and supplier. Related-party sales were approximately $28.8 million, about 9% of revenue; direct cost reimbursements and expense allocations are also material.
- Other matters: Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material change in risk factors from the 2014 Form 10-K. It also disclosed quarterly Cardinal-related purchase-price reimbursements of $0.75 million for four quarters beginning Q2 2015, with possible additional reimbursements in 2016 dependent on conditions. Disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether NGL prices, volumes, and blending and packaging competition continue to pressure segment revenue and margins.
- Actual covenant ratios and borrowing capacity, and the partnership’s ability to service debt while funding distributions and capital needs.
- Distribution coverage and sustainability, including the effects of incentive distribution rights and higher unit count.
- Cardinal storage performance, WTLPG earnings and distributions, and any required purchase-price reimbursements.
- Exposure to Martin Resource Management, including related-party pricing, reimbursements, customer concentration, and governance protections.