Business context and reporting period
Martin Midstream Partners L.P. is a Gulf Coast-focused master limited partnership providing terminalling and storage, natural gas services, sulfur products and marine transportation. Most cash flow is generated from fee-based customer contracts. This Form 10-K reports the fiscal year ended December 31, 2011; quarterly figures below compare fourth-quarter 2011 with fourth-quarter 2010.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1,237.1 million | $912.1 million |
| Operating income | $39.7 million | $40.2 million |
| Net income | $24.3 million | $16.0 million |
| Net income per limited partner unit | $0.92 | $0.63 |
| Operating cash flow | $86.9 million | $37.5 million |
| Investing cash flow | $(167.3) million | $(76.7) million |
| Financing cash flow | $69.4 million | $44.6 million |
| Total debt and capital leases, year-end | $460.2 million | $374.0 million |
Revenue rose about 36%, but operating income was essentially flat and net income increased about 52%. Operating margin was approximately 3.2% in 2011 versus 4.4% in 2010; net margin was approximately 2.0% versus 1.8%. Revenue growth mainly reflected higher NGL and sulfur commodity prices, greater volumes and acquired assets, rather than a comparable increase in operating income. Lower interest expense—$24.5 million versus $33.7 million—helped lift net income.
Fourth-quarter 2011 revenue was $345.5 million, operating income $7.5 million and net income $2.9 million, compared with $262.1 million, $15.8 million and $6.5 million, respectively, in fourth-quarter 2010. Quarterly net income per unit was $0.06 versus $0.30.
At year-end, cash was $0.3 million; current assets were $231.1 million and current liabilities $195.3 million. The revolving facility had $250.0 million drawn and approximately $124.9 million of remaining availability under its $375 million commitment. Debt included $197.8 million of 8.875% senior notes due 2018. The partnership reported compliance with its credit-facility covenants at December 31, 2011. Cash decreased $11.1 million during the year.
Segment developments
- Terminalling and storage: segment operating income after eliminations declined to $13.1 million from $14.3 million. 2011 revenue growth included newly acquired terminals and conversion of customer arrangements to buy/sell contracts.
- Natural gas services: segment operating income after eliminations increased to $7.4 million from $5.6 million. NGL sales volume rose 8%, while average NGL price increased 27%; natural gas volume and average price declined. Waskom inlet throughput averaged 269 MMcfd versus 281 MMcfd.
- Sulfur services: segment operating income after eliminations increased to $34.6 million from $20.2 million, reflecting stronger prices and higher gross margin per ton. Other income included a $1.4 million rail-agreement termination payment and $0.7 million of Hurricane Ike business-interruption recoveries.
- Marine transportation: the segment moved to an operating loss after eliminations of $6.5 million from income of $6.5 million. Lower offshore fleet utilization and higher fuel, towing, repair and labor costs weighed on results.
Material changes, outlook and risks
- In January 2011, the partnership acquired Gulf Coast terminalling assets from Martin Resource Management for $36.5 million. In May, it invested approximately $59.3 million in Redbird Gas Storage, an affiliate-related investment in a natural-gas-storage venture. Both transactions were funded through borrowings.
- A February 2011 public unit offering generated $70.3 million net, principally used to repay revolving debt. In January 2012, a further offering generated $91.4 million net, all used to reduce debt. The credit facility was amended and expanded, and its maturity extended to April 2016.
- Management said it intended to increase growth capital spending over the following two years, primarily in terminalling and storage and sulfur services, while emphasizing liquidity, asset utilization and cost control. It cited developing activity in the Eagle Ford shale. No specific earnings or distribution-growth guidance is provided.
- The fourth-quarter 2011 distribution was declared at $0.7625 per common unit, or $3.05 annualized. The subordinated units held indirectly by Martin Resource Management converted one-for-one to common units in November 2011.
- Key risks include commodity-price and interest-rate exposure, regional concentration and severe weather, lower drilling or offshore activity, environmental and safety requirements, and reliance on Martin Resource Management for personnel, services, suppliers and customers. Martin Resource Management-related transactions and reimbursements are significant and may not be arm’s-length. Pending litigation concerning Martin Resource Management’s ownership and management is not against the partnership but could affect access to capital or credit.
- A tank fire at the Stanolind terminal in September 2011 caused a $443,000 insurance deductible expense; management reported that physical damage and recovery costs were otherwise covered. The partnership received a $2.8 million benefit on termination of interest-rate swaps. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the 2011 capital-expenditure classification: the selected financial data reports $10.9 million maintenance and $63.0 million expansion, while the MD&A narrative appears to reverse those labels. Total property and equipment spending was approximately $74.0 million.
- Review the credit agreement’s leverage, interest-coverage and distribution restrictions, as well as the effect of increased debt and subsequent equity proceeds used for repayment.
- Assess the quality and sustainability of earnings growth: commodity-driven revenue increased substantially while operating income was flat, and fourth-quarter net income fell year over year.
- Examine concentration and related-party exposure, including major customers, affiliate sales and purchases, uncapped reimbursement of direct expenses, and the Redbird investment.
- Track marine fleet utilization and costs, drilling and offshore permitting activity, Waskom volumes, and progress and returns on planned growth projects.