Martin Midstream Partners L.P. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 4, 2013. The partnership provides terminalling and storage, natural gas services, sulfur products and marine transportation, primarily in the U.S. Gulf Coast. Comparatives were retrospectively revised for assets acquired from affiliates under common control; Prism gathering and processing operations are presented as discontinued operations.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,490.4 million | $1,242.5 million |
| Operating income | $73.8 million | $47.4 million |
| Income from continuing operations | $37.1 million | $13.4 million |
| Income from discontinued operations, net | $64.9 million | $9.4 million |
| Net income | $102.0 million | $22.8 million |
| Operating cash flow | $32.7 million | $91.4 million |
| Capital expenditures | $94.7 million | $78.5 million |
| Long-term debt and capital leases, including current portion | $478.2 million | $460.2 million |
Revenue increased about 20% and operating income about 56%. Operating margin was approximately 5.0%, versus 3.8%. Net income included a $61.8 million gain on the Prism asset sale; continuing-operations income is a more representative view of ongoing performance. Operating cash flow declined substantially, principally due to working-capital use, including higher receivables as natural gas services revenue grew.
At year-end, cash was $5.2 million; current assets were $314.9 million against current liabilities of $178.5 million. The revolving facility had $296.0 million drawn and approximately $103.9 million available; the partnership reported compliance with its financial covenants. The facility’s weighted-average rate was 3.58%. The 8.875% senior notes had $173.4 million carrying value and mature in 2018.
Period comparison and operating segments
- Terminalling and storage: Segment revenue rose 14% to $322.2 million and operating income increased 30% to $27.9 million, reflecting new projects and acquired lubricant blending and packaging operations.
- Natural gas services: Revenue increased 35% to $825.5 million and operating income more than doubled to $13.9 million. NGL volumes rose 54%, while average sales price fell 12%; management reported a 24% increase in margin per barrel.
- Sulfur services: Revenue declined 5% to $261.6 million, while operating income grew 35% to $37.3 million, principally as costs fell faster than revenue and margin per ton improved. Volumes declined, in part following conversion of a buy/sell contract to fee-based handling.
- Marine transportation: Revenue increased 6% to $88.8 million and operating income rose to $6.8 million from $0.7 million. Offshore demand and lower SG&A helped; higher fuel, repair and compensation costs partly offset gains.
- Fourth quarter: Revenue was $454.1 million, operating income $18.6 million and net income $6.7 million, versus $347.2 million, $11.4 million and $3.0 million, respectively, in Q4 2011. Q4 2012 limited-partner earnings were $0.27 per unit.
Transactions, outlook, risks and other notable items
- Sold Prism natural gas gathering and processing assets to CenterPoint in July 2012 for net proceeds of $273.3 million; the sale generated the principal gain included in discontinued operations. Related assets were liquidated or sold, including additional interests for $1.5 million.
- Acquired the remaining Redbird interests for $150.0 million and specialty lubricant blending and packaging assets from affiliate Cross for approximately $122.7 million. Acquired Talen’s Marine & Fuel on December 31 for $103.4 million and sold specified working-capital assets to affiliate MES for $56.0 million.
- Issued common units twice in 2012, raising $194.2 million net in total; proceeds were used to reduce debt. The general partner agreed to forego the next $18.0 million of incentive distributions; $3.4 million had been foregone by March 4, 2013.
- Management planned higher growth capital spending over the following two years, mainly in terminalling and storage and natural gas services, citing Eagle Ford infrastructure demand. It expected operating cash flow, cash balances and borrowing capacity to fund 2013 working capital, maintenance spending and scheduled debt payments.
- After year-end, issued $250 million of 7.25% senior unsecured notes due 2021, receiving about $245.1 million net, primarily to repay revolver borrowings; also bought six LPG pressure barges and two push boats for approximately $50.8 million, funded with revolver borrowings. Declared a Q4 distribution of $0.77 per unit, paid in February 2013.
- Key risks include working-capital and commodity-price volatility, seasonal demand, Gulf Coast storms, marine accidents and environmental obligations, competitive pressure, refinancing and covenant limits, and reliance on Martin Resource Management for staff, services and commercial relationships. Related-party reimbursements are material and direct reimbursements have no stated monetary cap; affiliate transactions and control present potential conflicts.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Investor verification priorities
- Separate recurring earnings and cash generation from the $61.8 million Prism disposal gain and other discontinued-operation results; assess the post-sale earnings base.
- Reconcile reported cash flow with working-capital movements, especially receivables, and test whether operating cash flow supports distributions and planned capital spending.
- Review leverage, covenant headroom, borrowing availability and the effect of the 2021 notes, vessel purchase and subsequent debt repayments on financing costs and liquidity.
- Evaluate acquisition returns and integration, including Redbird/Cardinal project timing and contracted storage capacity, Talen’s contribution, and the affiliate lubricant asset purchase accounting.
- Assess distribution coverage and sustainability, including the $0.77 quarterly distribution, unit dilution from offerings and the temporary IDR waiver.
- Examine affiliate dependence, reimbursement allocations, customer concentration and governance protections; Martin Resource Management held about 19.2% of common units and controlled the general partner.