Martin Midstream Partners L.P. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. 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 position
- Q2 revenue: $418.9, up 17% from $358.2 a year earlier. Operating income was $16.7, down 18%; operating margin was approximately 4.0%, versus 5.7%. Net loss was $1.0, compared with net income of $9.1; limited-partner loss per unit was $0.03, versus income of $0.33.
- First-half revenue: $916.0, up 16% from $791.9. Operating income declined 13% to $40.6; operating margin was approximately 4.4%, versus 5.9%. Net income fell 58% to $10.8 from $25.7; limited-partner earnings per unit were $0.38, versus $0.95.
- Cash flow: First-half operating cash flow was $20.9, down from $72.4, primarily due to an unfavorable $53.6 working-capital variance and timing of customer receipts. Investing cash outflow was $179.0, including the WTLPG investment; financing cash inflow was $144.2. Cash fell $13.8 to $2.7.
- Distributable cash flow: $19.2 for Q2 versus $20.6 in Q2 2013; $40.7 for the first half versus $49.5. These are non-GAAP measures defined by the partnership.
- Debt and liquidity: Long-term debt was $692.2 at June 30: $290.0 drawn on the revolving facility and $402.2 of 2021 senior notes, including premium. The facility was expanded to $900.0; $599.4 remained nominally available after borrowings and letters of credit, but the partnership said covenant-based borrowing capacity was approximately $90.0. Current assets were $298.7 and current liabilities $169.8.
- Capital spending: First-half expansion capital expenditures were $32.3, maintenance capital expenditures $9.0, and plant turnaround costs $3.9.
Changes versus prior comparable periods
- Natural gas services drove much of the revenue increase: first-half segment revenue rose 30%, mainly from 34% higher NGL sales volumes, associated with colder winter weather and a fuller year in the Louisiana butane market. Operating income increased only 6%.
- Terminalling and storage first-half revenue rose 5%, but segment operating income fell 7%, reflecting higher operating and depreciation costs and lower lubricant volumes amid increased price competition.
- Sulfur services first-half revenue declined 11% as product prices fell; segment operating income decreased 3%. Marine transportation operating income fell 90% to $0.3 for the first half, with offshore utilization affected by shipyard inspections and maintenance and Q2 repairs and maintenance costs elevated.
- Operating cash flow was substantially lower, while cash investing outflow increased, chiefly because of the WTLPG investment. First-half interest expense rose 14% to $22.9.
Transactions, outlook, risks, and unusual items
- In May, the partnership paid approximately $134.4 for a 20% interest in West Texas LPG Pipeline L.P. (WTLPG), a roughly 2,300-mile NGL pipeline system. The preliminary purchase allocation included approximately $96.0 of excess over its share of underlying net assets; final allocation was expected by year-end 2014. The partnership also acquired NGL storage assets from its affiliate for $7.4.
- In April, it issued $150.0 of additional 7.25% notes due 2021 and redeemed all $175.0 of 8.875% notes due 2018. The redemption generated a $7.8 prepayment premium and approximately $3.9 of non-cash write-offs of debt issuance costs and discount, weighing on Q2 results.
- Management said operating cash flow and borrowing capacity should fund working capital, anticipated 2014 maintenance spending, scheduled debt payments, and current projects; it also expected higher expansion capital spending over the next two years. No numeric earnings or distribution-growth guidance was provided.
- On July 24, the partnership declared a Q2 distribution of $0.7925 per common unit, or $3.17 annualized, payable August 14 to unitholders of record August 7.
- Interest-rate exposure includes $290.0 of variable-rate revolver borrowings at June 30; management estimated a 1 percentage-point rate increase would add approximately $2.9 of annual interest expense on that balance. The partnership also had $200.0 of fixed-to-variable swaps on the 2021 notes. Commodity derivatives were not outstanding at June 30.
- Credit-facility covenants constrain leverage, investments, distributions, and other actions; quarterly distributions are permitted only if no default exists. Management reported no material change to previously disclosed risk factors. Ordinary-course legal matters were not expected to have a material adverse effect, and no material environmental costs were reported.
- Martin Resource Management controls the general partner, owns approximately 16.6% of common units, supplies management and services, and is a significant customer and supplier. Related-party transactions and expense allocations are therefore important to monitor.
Important facts for investors to verify
- Whether working-capital movements and customer collection timing normalize, and whether operating cash flow supports distributions and planned spending.
- Actual covenant headroom and borrowing availability, particularly against the reported approximately $90.0 of covenant-based capacity and the partnership’s expansion plans.
- WTLPG’s final purchase-price allocation, ongoing equity earnings, and realized contribution to cash distributions.
- Whether marine utilization and repair costs improve, and whether terminalling volume competition and sulfur pricing continue to pressure segment results.
- Related-party expense allocations, commercial terms, and governance oversight, as well as the sustainability of the declared distribution relative to distributable cash flow.