Martin Midstream Partners L.P. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The partnership operates four Gulf Coast-focused businesses: terminalling and storage, natural gas services, sulfur services, and marine transportation. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $193.9 | $190.3 | $447.2 | $416.0 |
| Operating income | $10.8 | $10.3 | $34.6 | $34.6 |
| Net income (loss) | $1.0 | $(1.2) | $14.6 | $14.7 |
| Limited partners’ net income (loss) per unit, diluted | $0.03 | $(0.14) | $0.38 | $0.19 |
| Adjusted EBITDA | $33.0 | $41.6 | $79.8 | $90.9 |
| Distributable cash flow | $19.6 | $25.4 | $49.9 | $57.9 |
| Cash from operating activities | Not presented for quarter | Not presented for quarter | $45.8 | $74.8 |
Revenue increased 2% for Q2 and 8% for the first half. Q2 operating income improved modestly, while first-half operating income was essentially unchanged. First-half net income was slightly lower year over year, although limited-partner earnings per unit increased; the partnership’s allocation of income to the general partner, including incentive distributions in 2016 but none in 2017, affects this comparison.
At June 30, total assets were $1.23 billion, total liabilities $891.8 million, and partners’ capital $334.7 million. Long-term debt, net, was $780.4 million. The $664.4 million revolving facility had $414.0 million drawn and $2.4 million of letters of credit; stated borrowing availability was $248.0 million, but covenant-based additional borrowing capacity was approximately $95.9 million. Cash was only $32,000. The partnership reported compliance with debt covenants.
First-half investing cash outflow was $24.4 million, including $19.5 million for the Hondo acquisition; financing cash outflow was $21.3 million. The partnership paid $37.7 million in distributions during the first half. The July 20 declaration set the Q2 distribution at $0.50 per common unit, or $2.00 annualized.
Material changes and operating drivers
- Natural gas services: First-half revenue rose 27% to $229.8 million and operating income rose 29% to $20.8 million, largely reflecting higher NGL prices. Sales volumes fell 7% for the half, and Q2 per-barrel margins declined slightly. WTLPG equity earnings and distributions also declined year over year for the first half.
- Terminalling and storage: First-half operating income fell 79% to $3.2 million. The 2016 sale of Corpus Christi assets reduced service revenue, while higher product sales and costs, increased depreciation, and other mix changes weighed on results. The Hondo terminal acquisition added a new growth project.
- Sulfur services: First-half operating income declined 7% to $18.6 million as lower product prices compressed margins, partly offset by higher sulfur volumes and improved service revenue.
- Marine transportation: First-half operating income turned positive at $0.7 million versus a loss of $8.7 million in 2016. The prior period included a $4.1 million goodwill impairment and a $1.6 million loss on disposal; current-period revenue remained lower amid weak fleet utilization and excess marine-equipment supply.
- Operating cash flow declined 39% year over year, including an $18.6 million unfavorable working-capital variance, less favorable derivative cash settlements, and lower WTLPG distributions. Adjusted EBITDA and distributable cash flow also decreased.
Outlook, risks and unusual items
- Management said operating cash flow and borrowing capacity were expected to fund 2017 working-capital needs and anticipated maintenance capital expenditures. It also said it had reduced planned growth spending and was controlling expenditures to preserve liquidity. No specific earnings or cash-flow guidance was provided.
- The Hondo asphalt terminal was expected to reach substantial completion around August 31, 2017. The partnership expected to spend up to $8.6 million to complete construction; Martin Resource Management is responsible for completion costs above that amount. Management cited expected annual cash flow of approximately $5.0 million under long-term agreements with the affiliate.
- Variable-rate debt creates interest-rate exposure: management estimated that a 100-basis-point rate increase would raise annual interest expense and reduce net income by approximately $4.1 million. The revolver’s weighted-average rate was 3.97% at quarter-end; no interest-rate derivatives were outstanding.
- NGL commodity-price exposure is partly hedged: outstanding swaps covered 128,000 barrels settling July–December 2017. All outstanding positions were with affiliate Martin Energy Trading; derivative fair value was a $0.1 million asset.
- Related-party dependence is material. Martin Resource Management controls the general partner, provides personnel and services, and accounted for approximately 13% of Q2 revenue and 11% of first-half revenue. The partnership also reimburses it for direct and allocated overhead costs and conducts other commercial transactions with it.
- A Railroad Commission of Texas proceeding challenges WTLPG rate increases; a decision was expected near year-end 2017. A Louisiana lease dispute had a September 2017 trial date, and potential damages were not determinable. A customer indemnity dispute was administratively closed but could be reopened. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Non-core assets totaling $13.8 million remained classified as held for sale. There was no goodwill impairment in 2017; the prior-year comparison included marine impairment and disposal charges.
- The partnership early adopted the simplified goodwill impairment guidance effective January 1, 2017. It was evaluating the effects of the new revenue-recognition standard expected to take effect January 1, 2018.
Important facts for investors to verify
- Whether the reduced distributable cash flow and operating cash flow support the $0.50 quarterly distribution, particularly after maintenance spending and debt service.
- Revolver covenant headroom and the distinction between $248.0 million of nominal availability and approximately $95.9 million of covenant-based borrowing capacity.
- Progress, completion costs, contractual support, and realized cash flows from the Hondo terminal acquisition.
- Effects of commodity prices, NGL margins, marine-fleet utilization, and the pending WTLPG rate case on future performance.
- Terms and economics of affiliate transactions, including service reimbursements, affiliate customer revenue, and the affiliate-counterparty commodity swaps.
- Potential outcomes of the disclosed legal matters and any changes in assets held for sale.