Martin Midstream Partners L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited financial statements; dollar amounts below are in millions unless noted. The Partnership operates terminalling and storage, natural gas services, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $390.0 | $359.6 | $1,306.0 | $1,151.5 |
| Operating income | $12.0 | $12.2 | $52.6 | $58.9 |
| Net income (loss) | $(26.9) | $0.2 | $(16.1) | $25.9 |
| Limited partners’ net income (loss) per unit | $(0.82) | $0.01 | $(0.54) | $0.95 |
| Adjusted EBITDA | $33.7 | $26.8 | $104.4 | $99.4 |
| Distributable cash flow | $19.3 | $13.3 | $58.9 | $62.8 |
Revenue rose 8% in Q3 and 13% for the nine-month period. Operating margin, calculated as operating income divided by revenue, was approximately 3.1% in Q3 versus 3.4% a year earlier, and 4.0% for nine months versus 5.1%. The reported net losses principally reflect unusual charges described below. Adjusted EBITDA and distributable cash flow are non-GAAP measures.
- Cash flow: Nine-month operating cash flow was $53.0, down from $62.2. Investing used $296.5, including the $134.4 WTLPG investment; financing provided $229.9, including $331.6 of net common-unit issuance proceeds. Cash declined $13.5 to $3.0.
- Balance sheet and debt: At September 30, total assets were $1,588.7, current assets $289.0, and current liabilities $165.2 (current ratio approximately 1.75). Long-term debt was $910.1, up from $658.7 at year-end 2013. Debt comprised $508.0 drawn on the revolving facility and $402.1 of 2021 notes, including premium.
- Liquidity: The revolving facility was expanded to $900.0. After $508.0 drawn and $10.6 of letters of credit, stated undrawn capacity was $381.4; the Partnership said covenant-based borrowing capacity was approximately $80.5. Management expected operating cash flow and borrowing capacity to meet 2014 working-capital, maintenance-capital, and scheduled-debt needs, subject to risks and operating performance.
- Distributions: Cash distributions paid in the first nine months totaled $68.0, compared with $58.9 of distributable cash flow. On October 23, the Partnership declared a $0.8125-per-unit quarterly distribution, stated as $3.25 annualized, payable November 14 to holders of record November 7.
Material changes and business developments
- Natural gas services revenue increased 25% for the nine months, while segment operating income rose 15%, reflecting higher NGL sales volumes and the addition of Cardinal storage operations. The Partnership acquired the remaining 57.8% of Cardinal on August 29 for approximately $120.0 cash and assumed control; it also acquired a 20% interest in WTLPG for approximately $134.4 in May.
- Terminalling and storage nine-month operating income fell 11%, mainly amid lower lubricant blending and packaging volumes from increased competition, despite higher service revenue. Sulfur services operating income increased 11% for nine months on improved margins. Marine transportation operating income fell 88%, including an asset impairment and reduced offshore utilization.
- Common units increased to 35.35 million from 26.63 million at year-end, following public offerings, a private placement to Martin Resource Management, and at-the-market issuances. Proceeds were used to reduce revolving-credit borrowings.
- The Partnership redeemed $175.0 of 8.875% notes due 2018 and issued an additional $150.0 of 7.25% notes due 2021. It recorded a $7.8 debt-prepayment premium and expensed debt issuance costs and discount related to the redemption.
Outlook, commentary, risks and unusual items
- Management said it planned to increase expansion capital expenditures across its business platforms over the next two years. It did not provide quantified earnings, revenue, or cash-flow guidance in the supplied filing text.
- Q3 net income included a $30.1 noncash reduction in the carrying value of the previously held Cardinal investment arising from the acquisition. The Partnership also recorded a $3.4 impairment for an offshore tow; the filing links it to the asset’s ability to generate cash flows in recent quarters.
- Market exposures include commodity prices, floating interest rates, and seasonal demand for NGLs and fertilizers. A 1% increase in rates on unhedged floating-rate debt was estimated to raise annual interest expense by about $5.1. The Partnership held natural-gas call options for 3.63 million MMBtu at a $4.50/MMBtu strike, settling in January and February 2015.
- Martin Resource Management controls the general partner and provides services under related-party agreements. Related-party transactions represented approximately 7% of revenue in Q3; the Partnership also reimburses direct expenses without a stated monetary cap. The filing identifies allocation estimates and governance/conflict review as matters investors may wish to assess.
- Credit-facility covenants restrict, among other things, borrowing, acquisitions, investments, distributions, and capital expenditures; distributions are permitted only while no default exists. Management cited dependence on future operating performance and access to capital markets. Seasonal weather, commodity and input-cost changes, and operational or regulatory disruptions are additional risks.
- Management stated ordinary-course legal matters were not expected to have a material adverse effect; no material environmental costs were reported for the period. The filing reported no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
- Subsequent events included Cardinal’s merger into Redbird on October 27, 2014 (renamed Cardinal), and October interest-rate swap terminations producing $3.3 of benefits to be recorded in Q4.
Most important facts for investors to verify
- Whether Cardinal and WTLPG deliver the earnings and cash flows assumed in the acquisition rationale, and the final purchase-price allocations.
- Available borrowing capacity under covenant tests, compliance with leverage and interest-coverage requirements, and the effect of debt-funded growth on interest costs.
- Whether distributable cash flow can support the declared distribution, given nine-month distributions exceeded reported distributable cash flow.
- The causes and persistence of weaker terminalling and marine segment performance, including competition, offshore utilization, and the tow impairment.
- The extent, terms, and oversight of related-party transactions and expense allocations, as well as dilution from common-unit issuance.
- The final accounting and Q4 earnings impact of swap settlements and other subsequent events.