MARTIN MIDSTREAM PARTNERS L.P. quarterly report, Q3 FY2011

Business context and reporting period

Martin Midstream Partners L.P. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The partnership operates primarily on the U.S. Gulf Coast in terminalling and storage, natural gas services, sulfur services, and marine transportation. Unless noted otherwise, financial amounts below are in U.S. dollars.

Financial performance and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Revenue	$316.3m	$195.4m	$891.6m	$650.0m
Operating income	$8.1m	$7.7m	$32.2m	$24.4m
Net income	$5.4m	$4.6m	$21.5m	$9.5m
Net income per limited partner unit, diluted	$0.20	$0.19	$0.87	$0.33

Revenue increased 62% in Q3 and 37% year to date. Higher NGL and sulfur prices, higher NGL sales volumes, new sulfur-service revenue, and terminalling assets acquired in 2011 were key contributors.
Calculated operating margin was approximately 2.6% in Q3 2011 versus 3.9% in Q3 2010, and 3.6% for the first nine months versus 3.7%. Calculated net margin for the nine-month periods was approximately 2.4% versus 1.5%.
Operating cash flow was $57.8m for the first nine months, up from $42.5m. Investing used $135.3m, compared with $36.1m, including $49.6m of property and equipment spending and $59.3m invested in Redbird. Financing provided $66.4m versus $6.4m.
Cash was $0.3m at September 30, down from $11.4m at December 31, 2010. Current assets were $220.1m and current liabilities $175.1m.
Debt and capital lease obligations totaled $440.4m, including $230.0m outstanding on the revolver, $200.0m principal of 8.875% senior notes due 2018, a $6.6m note payable, and $6.1m of capital leases. Revolver availability was $119.9m; the facility’s weighted-average rate was 2.91%. The filing reports compliance with credit-facility covenants.
Cash distributions paid totaled $48.0m in the first nine months. The February 2011 common-unit offering generated $70.3m net proceeds, and the partnership used approximately $65.0m to repay revolver borrowings.

Material changes and operating trends

Sulfur services operating income rose to $22.4m for the first nine months from $6.9m, reflecting higher sulfur product prices and volumes, a new service contract, and other operating income that included a rail-agreement termination payment and insurance recoveries.
Natural gas services operating income increased to $5.7m from $2.4m year to date, despite lower natural gas prices and volumes; NGL prices and volumes supported results. Equity earnings from unconsolidated entities declined to $7.0m from $7.5m, largely because Waskom was shut down for an expansion.
Marine transportation operating income fell to $0.5m from $7.2m year to date. Lower offshore fleet utilization, including dry docking and weaker demand, and higher fuel, towing, repair, and labor costs weighed on performance.
Terminating and storage operating income declined to $10.2m from $12.5m year to date, as higher revenue was offset by costs associated with acquired assets, product costs, and other operating items.
Long-term debt and capital lease obligations increased from $374.0m at year-end 2010 to $440.4m at September 30, 2011. Investment in unconsolidated entities increased from $98.2m to $163.4m.

Outlook, commentary, risks, and unusual items

Management gave no specific earnings or distribution guidance in the provided filing text. It said current capital projects were expected to be funded with operating cash flow, cash balances, and revolver capacity, while future capital needs could require additional funding. It expects to increase growth capital spending, primarily in terminalling and storage and sulfur services.
Management cited reduced drilling by some gas producers, uncertainty and delays in Gulf of Mexico permitting and safety requirements, and weaker marine demand and excess equipment capacity. It also noted improving activity in certain areas, including the Eagle Ford shale.
In August, the partnership terminated $100m notional of interest-rate swaps and received $2.8m in termination fees, which contributed to lower reported interest expense. All $260m of revolver borrowings reported as outstanding on November 4 were unhedged floating-rate debt; a 1% rate increase was estimated to add about $2.6m in annual interest expense.
A fire damaged a tank at the Stanolind Terminal. The filing says physical damage and related recovery costs were insured subject to a $443,000 deductible, which was expensed; the destroyed tank stored a Martin Resource Management-owned product.
Martin Resource Management controls the general partner and owned approximately 32.2% of limited partnership units at September 30. Related-party dealings include asset acquisitions, services, expense reimbursements, and customer and supplier relationships. A parent-company shareholder lawsuit was set for trial in February 2012; the partnership said it was not a party and did not believe the matters would materially affect it.
Commodity prices, interest rates, counterparty performance, weather, customer credit, and the utilization of marine and gas assets remain risks. Management reported effective disclosure controls and no material changes in internal control over financial reporting; the filing said there were no material changes to previously disclosed risk factors.

Important facts for investors to verify

Whether higher commodity prices and sulfur-related items are translating into sustained underlying margins and cash generation.
Marine fleet utilization, repair and fuel costs, and the progress and economics of the Waskom expansion.
Liquidity after substantial investing outflows, planned growth spending, and the partnership’s capacity to fund distributions while meeting debt obligations.
Exposure to unhedged floating-rate borrowings, covenant headroom, and the impact of the scheduled increase in the revolver margin in January 2012.
Terms, oversight, and financial effects of related-party transactions and the partnership’s reliance on Martin Resource Management.
Insurance proceeds and replacement costs for the Stanolind tank, and the outcome of disclosed parent-company litigation.