Martin Midstream Partners L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. The partnership operates in terminalling and storage, natural gas services, sulfur services, and marine transportation, primarily in the U.S. Gulf Coast region. Unless stated otherwise, amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $253.3 | $225.6 | Up 12.3% |
| Operating income | $23.7 | $24.3 | Down 2.4% |
| Operating margin | 9.4% | 10.8% | Down 1.4 percentage points |
| Net income | $13.6 | $15.9 | Down 14.6% |
| Limited partners’ net income | $13.3 | $11.7 | Up 13.9% |
| Basic and diluted net income per unit | $0.36 | $0.33 | Up 9.1% |
| Adjusted EBITDA | $46.8 | $49.3 | Down 5.0% |
| Distributable cash flow | $30.3 | $32.5 | Down 6.9% |
| Cash from operating activities | $56.5 | $45.3 | Up 24.8% |
| Capital expenditures and turnaround costs | $9.3 | $15.6 | Down 40.2% |
Revenue growth reflected higher natural gas services product sales, largely from higher NGL prices, and higher sulfur volumes. Lower service revenue, including the effect of the 2016 Corpus Christi asset sale, weighed on results. Natural gas services and sulfur services operating income improved; terminalling and storage moved to an operating loss, and marine transportation improved to operating income.
Operating cash flow increased, aided by a favorable working-capital variance of $15.4 million. Cash used in investing was $25.9 million, including $19.5 million for the Hondo asset acquisition; cash used in financing was $30.6 million. Quarter-end cash was $39,000.
At March 31, total assets were $1.209 billion, total liabilities $855.9 million, and partners’ capital $353.2 million. Long-term debt, net, was $750.7 million, down from $808.1 million at year-end 2016. The $664.4 million revolving facility had $385.0 million drawn and $1.9 million in letters of credit; reported remaining borrowing capacity was $277.5 million, of which approximately $140.5 million was available under financial covenants. The partnership reported compliance with debt covenants.
Material developments and comparison with prior period
- Completed a public offering of 2.99 million common units at $18.00 per unit, raising $51.2 million net; the general partner contributed $1.1 million. Proceeds were used to repay revolving-facility borrowings.
- Acquired Hondo, Texas asphalt terminal assets from Martin Resource Management for $27.4 million. The partnership expects to spend another $8.6 million to complete construction, with substantial completion expected around July 1, 2017. Management expects approximately $5.0 million of annual cash flow under long-term agreements with Martin Resource Management.
- Issued $133.0 million of long-term debt repayments and borrowed $75.0 million during the quarter; the unit offering and other financing items also affected debt and capital.
- The $37.3 million gain from the Corpus Christi asset sale was recorded in 2016, not Q1 2017. The sale reduced year-over-year terminalling and storage service revenue.
- General-partner interest in net income fell to $0.3 million from $4.2 million, including no IDR allocation in Q1 2017 versus $3.9 million in Q1 2016. This contributed to limited-partner earnings per unit increasing despite lower consolidated net income.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and borrowing capacity were expected to fund working-capital needs and anticipated 2017 maintenance capital expenditures. It had reduced planned growth capital spending and was controlling costs to preserve liquidity; no specific full-year earnings guidance was provided.
- On April 20, 2017, the partnership declared a $0.50-per-unit Q1 distribution, equivalent to $2.00 annualized, payable May 15, 2017.
- Commodity-price weakness may reduce producer activity, throughput, NGL volumes, asset utilization, and marine rates. A 100-basis-point rise in floating rates was estimated to increase annual interest expense by approximately $3.9 million. NGL swaps covered 738 barrels settling through December 2017; management stated a $0.10 change in expected settlement prices would not materially affect net income.
- The partnership requested repayment of a $15.0 million affiliate note bearing 15% annual interest. As of April 26, $5.0 million had been repaid, with the remaining $10.0 million expected by June 30, 2017.
- WTLPG rate complaints remain pending before the Texas Railroad Commission; a resolution was expected near year-end 2017. A Louisiana lease dispute had a trial scheduled for July 10, 2017, and potential damages were not ascertainable. A separate customer-indemnity dispute was administratively closed, but could be reopened. Management did not expect ordinary-course legal matters in aggregate to materially affect the partnership.
- Related-party dependence is significant: Martin Resource Management controls the general partner, provides services and employees, and is both a customer and supplier. Sales to the affiliate were approximately 10% of Q1 revenue; the partnership reimbursed $37.5 million of direct costs and expenses during the quarter. Management noted allocations of shared overhead involve judgment.
- The partnership reported effective disclosure controls and no material changes to internal control over financial reporting. It reported no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- Whether the Hondo terminal reaches completion on schedule and achieves the forecast annual cash flow, including the final construction cost and affiliate contract terms.
- Actual covenant-based borrowing availability and compliance as operating results, interest rates, and facility borrowings change.
- Whether the expected affiliate-note repayments are received by June 30, 2017.
- The outcome and financial impact, if any, of the WTLPG rate proceeding and disclosed legal matters.
- How much of revenue and expense depends on Martin Resource Management, and whether affiliate pricing, reimbursements, and governance safeguards remain appropriate.
- The filing reports 38,452,562 common units at March 31 and 38,452,312 units outstanding at April 26; confirm the relevant outstanding-unit count when assessing per-unit measures and distributions.