Martin Midstream Partners L.P. — Q3 2017 Form 10-Q
Business context and reporting period. The partnership operates four Gulf Coast-focused businesses: terminalling and storage, natural gas services, sulfur services, and marine transportation. This unaudited filing covers the three and nine months ended September 30, 2017, compared with the same 2016 periods. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $193.1 | $174.5 | $640.4 | $590.5 |
| Operating income (loss) | $(4.5) | $9.2 | $30.1 | $43.8 |
| Net income (loss) | $(16.3) | $(0.9) | $(1.7) | $13.8 |
| Limited partner net income (loss) per unit | $(0.42) | $(0.03) | $(0.04) | $0.16 |
| Adjusted EBITDA | $27.1 | $33.3 | $106.9 | $124.2 |
| Distributable cash flow | $9.9 | $19.9 | $59.8 | $77.9 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $27.6 | $61.7 |
Q3 revenue increased 10.7%, but the partnership swung to an operating loss and recorded a substantially larger net loss. For the nine-month period, revenue rose 8.4% while operating income fell about 31%; net results moved from income to a small loss. The filing reports no consolidated margin percentage.
At September 30, 2017, cash was $0.015 million, current assets were $225.9 million, current liabilities were $110.8 million, and net long-term debt was $830.0 million. Partners’ capital was $298.9 million. The partnership reported $463.0 million drawn on its $664.4 million revolving facility and $12.4 million of letters of credit. Although stated unused facility capacity was $189.0 million, covenant-based additional borrowing capacity was only about $8.9 million; management said the leverage calculation was near the facility maximum. The partnership reported compliance with debt covenants.
Nine-month investing cash outflow was $35.6 million, including $19.5 million for the Hondo terminal acquisition. Financing cash inflow was $8.0 million, including $51.1 million net proceeds from the February unit offering; distributions paid were $57.3 million. Inventories increased by $48.0 million, a significant operating cash use. Nine-month capital expenditures and turnaround costs totaled $31.1 million.
Material changes and operating drivers
- Natural gas services: Nine-month segment operating income increased to $27.3 million from $22.5 million, supported by higher NGL prices and slightly higher sales volumes. Q3 operating income was essentially flat at $6.5 million; higher product sales were largely offset by higher product costs, and management reported lower Q3 per-barrel margins.
- Terminalling and storage: Nine-month segment operating results deteriorated to a $5.9 million loss from $19.8 million income. The prior-year comparison included Corpus Christi assets sold in December 2016; the 2017 period also had higher asset-retirement-obligation expense and hurricane repairs. Q3 segment loss was $7.0 million versus $5.7 million income.
- Sulfur services: Nine-month operating income declined to $16.5 million from $17.5 million, reflecting lower product prices and margin per ton, partly offset by higher volumes. Q3 operating income improved to $0.6 million from $0.2 million.
- Marine transportation: Nine-month operating loss narrowed to $2.9 million from $5.5 million, but Q3 operating results weakened to a $0.7 million loss from $0.2 million income. Management cited lower transportation rates and utilization amid excess marine-equipment supply in the Gulf Coast market.
- WTLPG investment: Nine-month equity earnings declined 29% to $2.5 million and distributions fell 31% to $4.2 million. The partnership owns a 20% interest.
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 had reduced planned growth capital spending to preserve liquidity. No specific full-year earnings or cash-flow guidance is provided in the filing.
- Management expected leverage to improve in Q4 as seasonal NGL inventory built during Q2 and Q3 was sold. This is important given the limited covenant-based borrowing headroom reported at quarter-end.
- Hurricane Harvey damaged terminals in the Terminalling and Storage and Sulfur Services businesses. The partnership recorded $1.0 million of repairs, accrued $3.7 million for estimated repairs, and wrote off $0.2 million of damaged assets. It expected no insurance recovery because damage was below applicable deductibles and estimated lost net income and cash flow of approximately $1.1 million.
- The partnership acquired Hondo asphalt terminal assets from its controlling affiliate for $27.4 million and expected to spend $8.6 million to complete construction. Construction was substantially complete at quarter-end; management expected long-term affiliate contracts to support about $5.0 million of annual cash flow. The affiliate is responsible for completion costs above $8.6 million, if any.
- Asset-retirement obligations were revised upward by $5.8 million during the first nine months. The partnership also settled a Louisiana lease dispute in September 2017; settlement amounts were accrued as asset-retirement obligations.
- WTLPG shipper complaints over a 2015 rate increase remain pending before the Texas Railroad Commission. A hearings examiner issued a Proposal for Decision on September 29, 2017, scheduled for Commission consideration in December 2017.
- A customer’s demand for defense and indemnity in connection with motor-oil marketing lawsuits remains disputed. The related declaratory-judgment case was administratively closed; the partnership said potential exposure, if any, could not then be determined.
- Variable-rate debt exposes the partnership to higher interest expense: management estimated a 100-basis-point rate increase would add about $4.6 million of annual interest expense. The partnership declared a Q3 distribution of $0.50 per common unit, or $2.00 annualized, payable November 14, 2017.
- Related-party concentration and governance merit attention: Martin Resource Management controls the general partner, owns about 16.3% of common units, supplies services, and accounted for approximately 12% of nine-month revenue. The partnership has no employees of its own and reimburses the affiliate for direct and allocated costs.
Most important facts for investors to verify
- Whether Q4 NGL inventory sales improve operating cash flow and leverage enough to restore meaningful covenant borrowing capacity.
- Actual Hurricane Harvey repair costs, operational recovery, and the final impact on segment results and cash flow.
- The Railroad Commission’s decision on WTLPG rates and any resulting effect on equity earnings and distributions.
- Hondo terminal completion, contract performance, and realization of the stated approximately $5.0 million annual cash-flow expectation.
- Whether distributions remain supported by recurring distributable cash flow, which was materially lower year over year in the first nine months.
- Developments in the unresolved customer indemnity matter and the costs and terms of ongoing related-party arrangements.