Martin Midstream Partners L.P. — 2014 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2014; this annual filing also reports fourth-quarter results. The partnership operates primarily along the U.S. Gulf Coast in terminalling and storage, natural gas services, sulfur services, and marine transportation. Most services are fee-based, but product sales and parts of the business remain exposed to commodity prices, volumes, weather, and seasonality.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $1,642.1 million | $1,612.7 million |
| Operating income | $67.9 million | $81.5 million |
| Net loss | $11.7 million | $13.4 million |
| Net loss attributable to limited partners | $15.2 million; $0.49 per unit | $13.0 million; $0.50 per unit |
| Operating cash flow | $115.6 million | $112.2 million |
| Adjusted EBITDA | $149.0 million | $135.5 million |
| Distributable cash flow | $94.4 million | $84.5 million |
| Long-term debt | $902.0 million | $658.7 million |
| Cash at year-end | $0.04 million | $16.5 million |
Revenue increased 1.8%, while operating income fell about 16.7%. The reported net loss includes a $30.1 million noncash reduction in the carrying value of the existing Cardinal investment at acquisition, a $7.8 million debt prepayment premium, and discontinued-operations losses. Adjusted EBITDA and distributable cash flow are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or operating cash flow.
Year-end current assets were $287.8 million and current liabilities $163.6 million. The $900 million revolving facility had $500 million drawn and $8.6 million of letters of credit; stated unused availability was $391.4 million, but covenant-based borrowing capacity was approximately $104.2 million. The partnership reported $902.0 million of total debt, including $500.0 million under the revolver and approximately $402.0 million of 7.25% notes due 2021. Its floating-rate debt had a 2.92% weighted-average rate; management estimated a 1 percentage-point rate increase would add about $5 million to annual interest expense.
Material changes versus the prior comparable period
- Natural gas services revenue rose 5% and operating income rose 9%; NGL volumes increased 33%, partly offset by a 23% fall in average selling prices and lower per-barrel margins.
- Terminalling and storage operating income declined 23%, reflecting lower lubricant sales volumes, higher operating costs and depreciation, despite increased service revenue and higher Corpus Christi crude-terminal throughput.
- Sulfur services operating income was nearly flat, down 1%; volumes rose 4%, while lower selling prices reduced margin per ton.
- Marine transportation operating income increased 13% to $10.2 million, but included a $3.4 million impairment of an offshore tow removed from service. Offshore utilization was affected by inspection and maintenance downtime.
- Operating cash flow rose 3%, while investing cash outflow increased to $324.7 million, driven by acquisitions and investment in WTLPG. Financing cash flow was $192.6 million, supported by $331.7 million of net unit proceeds.
- Adjusted EBITDA increased 10% and distributable cash flow increased 12%. Cash distributions paid totaled $97.4 million, compared with $84.6 million in 2013; declared distributions per common unit were $3.18 for 2014, up from $3.11.
Fourth-quarter 2014 revenue was $377.0 million versus $467.1 million in fourth-quarter 2013; operating income was $12.2 million versus $23.4 million. Fourth-quarter net income was $4.4 million versus a $39.3 million net loss, which included the prior-year Cardinal-related impairment. Fourth-quarter 2014 loss from continuing operations was $25.7 million in the third quarter, largely reflecting the Cardinal acquisition remeasurement; fourth-quarter continuing income was $6.7 million.
Outlook, commentary, risks and unusual items
- Management’s stated priorities are liquidity, stable fee-based revenues, improved asset utilization and cost control, plus organic growth and acquisitions. It said operating cash flow and borrowing capacity were expected to fund 2015 working-capital needs and anticipated maintenance capital expenditures; no specific earnings or distribution-growth forecast is provided.
- The partnership acquired the remaining 57.8% of Cardinal for approximately $121.0 million, bringing its ownership to 100%, and acquired a 20% interest in WTLPG for approximately $133.9 million. These transactions were principally funded through the revolver. Cardinal contributed $23.0 million of revenue from acquisition through year-end.
- In 2014, the partnership issued common units through public offerings, a private placement to Martin Resource Management, and an at-the-market program; net proceeds were used to reduce revolver borrowings. It also issued $150 million of 7.25% notes due 2021 and redeemed $175 million of 8.875% notes due 2018, incurring the prepayment premium.
- After year-end, six LPG pressure barges were sold for $41.3 million; proceeds reduced revolver debt. The partnership expected to recognize an approximately $1.5 million gain in first-quarter 2015. The fourth-quarter distribution of $0.8125 per unit was paid February 13, 2015, equal to $3.25 annualized.
- Key risks include substantial leverage and covenant limits on distributions and borrowing; exposure to interest rates, commodity prices, weather and seasonal demand; environmental, marine safety and spill liabilities; competition; customer and counterparty concentration; and reliance on Martin Resource Management for personnel, services and commercial relationships.
- Related-party dependence is material: Martin Resource Management owned 17.7% of common units, controls the general partner, and is both a supplier and customer. It received $183.2 million of reimbursed direct costs in 2014; approved indirect-cost reimbursement was $12.5 million. Related-party sales were about 6% of revenue.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. However, Cardinal—representing approximately $481.0 million of year-end assets and $23.0 million of 2014 revenue—was excluded from management’s and the auditor’s internal-control assessment scope.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. The filing reports no material environmental costs or liabilities incurred in 2014–2012 and no off-balance-sheet financing arrangements.
Most important facts for investors to verify
- Reconcile GAAP losses to adjusted EBITDA and distributable cash flow, including the Cardinal remeasurement, discontinued operations and debt-redemption charges.
- Review covenant calculations and actual headroom: stated revolver availability exceeded the approximately $104.2 million borrowing capacity under the filing’s covenant-based calculation.
- Assess whether cash generation can sustain distributions after maintenance and growth spending, debt service, and any reserves; the partnership ended 2014 with only $42,000 of cash.
- Evaluate the acquired Cardinal assets, storage-contract duration and concentration, Monroe facility performance, and the economics of the WTLPG investment.
- Assess related-party reimbursements, contract terms and governance safeguards, as well as the implications of Cardinal being outside the 2014 internal-control audit scope.