Martin Midstream Partners L.P. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unless otherwise noted, financial amounts below are in millions of dollars. The Partnership operates in terminalling and storage, natural gas services, sulfur services, and marine transportation, primarily in the U.S. Gulf Coast region.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Revenue | $359.6 | $354.1 | $1,151.5 | $1,036.3 |
| Operating income | $12.2 | $16.2 | $58.9 | $55.2 |
| Operating margin | 3.4% | 4.6% | 5.1% | 5.3% |
| Continuing-operations income | $0.2 | $8.6 | $25.9 | $27.4 |
| Net income | $0.2 | $72.2 | $25.9 | $94.7 |
| Limited-partner earnings per unit, continuing operations | $0.01 | $0.44 | $0.95 | $0.94 |
| Adjusted EBITDA | $26.8 | $27.7 | $99.4 | $89.3 |
| Distributable cash flow | $13.3 | $19.6 | $62.8 | $59.7 |
Q3 revenue increased 1.6%, while operating income declined about 25%; interest expense rose 63% to $11.1 million. Nine-month revenue increased 11.1%, operating income rose 6.6%, and adjusted EBITDA grew 11.3%. The large 2012 net-income comparison reflects the prior-year Prism asset sale: discontinued operations contributed $63.6 million in Q3 and $67.3 million for the nine-month period in 2012. Those gains did not recur in 2013.
Cash provided by operating activities was $62.2 million for the first nine months, versus cash used of $9.5 million a year earlier; continuing operations provided $70.8 million, partly offset by $8.7 million used in discontinued operations. Investing activities used $167.1 million, including $73.9 million for acquisitions and $68.6 million for property and equipment. Financing activities provided $99.8 million. Cash ended the period at $45,000.
At September 30, current assets were $286.5 million and current liabilities $149.2 million (current ratio approximately 1.9). Total debt and capital lease obligations were $651.2 million, up from $478.2 million at year-end 2012. This included $219.0 million drawn on the revolving facility and $423.6 million of senior notes, net of discount. The $600 million facility had $380.9 million available, including letters of credit, and a 3.13% weighted-average rate at quarter-end. Most debt was secured revolving borrowings or fixed-rate notes; the filing reports $214 million outstanding on the revolver as of November 4.
Material changes and operating drivers
- Natural gas services: Nine-month segment revenue rose 24% and operating income rose 225%, largely reflecting higher NGL volumes, including entry into the Louisiana butane market in 2012. Q3 margins also benefited from improved Louisiana butane market conditions.
- Terminalling and storage: Nine-month segment revenue increased 4% and operating income 23%, driven by Corpus Christi terminal and Talen’s contributions. Higher operating costs and depreciation partly offset growth.
- Sulfur services: Nine-month segment revenue declined 14% and operating income 36%. Lower product volumes, fertilizer pricing and production downtime from plant turnarounds pressured results; Q3 operating income fell 88% year over year.
- Marine transportation: Nine-month revenue rose 14% and operating income 72%, primarily from the Talen’s and Florida Marine assets acquired since the prior-year period.
- Acquisitions during 2013 included LPG pressure barges and push boats for approximately $50.8 million, NL Grease assets for $12.1 million, a sulfur facility for $4.1 million, and two barges for $7.1 million. These were funded with revolver borrowings.
Outlook, risks, and other notable matters
- Management said it plans to increase expansion capital expenditures over the next two years, primarily in terminalling and storage and natural gas services. It expects current projects to be funded by operating cash flow, cash balances, and available revolver capacity, while noting future capital needs may require additional funding. No specific earnings or distribution guidance was provided.
- The Partnership declared a Q3 cash distribution of $0.7825 per common unit, or $3.13 annualized, payable November 14, 2013 to holders of record November 7.
- Interest-rate exposure is material: the filing estimates that a 1% rise in rates on quarter-end unhedged floating-rate debt would increase annual interest expense by approximately $2.2 million. The revolver margin for existing LIBOR borrowings was scheduled to rise from 2.50% to 3.00% effective January 1, 2014.
- Commodity prices affect NGL and fertilizer revenues and margins; fertilizer demand is seasonal, and hurricanes or other extraordinary weather could affect terminals and marine operations. Management cited cost inflation and the possibility it may not be able to pass higher costs to customers.
- Related-party dependence is significant. Martin Resource Management controls the general partner, owns approximately 19.1% of common units, supplies personnel and services, and is both a customer and supplier. Related-party sales were about 7% of revenue in the periods shown; direct expense reimbursements have no monetary cap.
- Cardinal/Redbird results included $1.8 million of the Partnership’s share of one-time project incentive and severance charges. The Partnership sold its 50% Caliber investment for $750,000 on November 1, 2013.
- Management said ordinary-course legal matters were not expected to have a material adverse effect; no material environmental costs were reported. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material internal-control changes reported.
Most important facts for investors to verify
- Whether operating cash flow and distributable cash flow can support the declared distribution, planned expansion spending, and debt service.
- Revolver utilization, covenant headroom, rate increases, and the effect of higher interest rates on earnings and liquidity.
- Whether sulfur/fertilizer margins and production recover after weak pricing, lower volumes, and plant turnaround downtime.
- Acquisition performance and integration, including Talen’s, Florida Marine assets, NL Grease, and the sulfur facility.
- Related-party pricing, reimbursements, governance safeguards, and the impact of Alinda’s 49% non-controlling voting interest in the general partner holding company.
- Comparability of year-over-year results: 2012 figures were retrospectively adjusted for common-control acquisitions and include the one-time Prism sale gain in discontinued operations.