Business context and reporting period
Martin Midstream Partners L.P. filed this Form 10-K for the fiscal year ended December 31, 2016. The partnership operates Gulf Coast-focused terminalling and storage, natural gas services, sulfur services, and marine transportation businesses. It has no employees; Martin Resource Management (MRM) supplies personnel and controls the general partner. MRM held 17.7% of the partnership’s common units.
Financial performance and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $827.4 million | $1,036.8 million | Down 20% |
| Operating income | $72.7 million | $70.2 million | Up 4% |
| Net income | $31.7 million | $38.4 million | Down 18% |
| Net income per limited partner unit | $0.65 | $0.62 | Up $0.03 |
| Cash from operating activities | $110.8 million | $182.6 million | Down 39% |
| Adjusted EBITDA | $176.6 million | $188.3 million | Down 6% |
| Distributable cash flow | $113.7 million | $133.9 million | Down 15% |
Reported operating income included a $37.3 million gain on the Corpus Christi asset sale. Results also included $27.0 million of long-lived asset impairments and a $4.1 million goodwill impairment. Consequently, the increase in reported operating income does not reflect underlying operating improvement.
At year-end, total assets were $1.246 billion and long-term debt, net, was $808.1 million, versus $1.380 billion and $865.0 million, respectively, in 2015. Debt comprised $443.0 million drawn on the revolving facility and $373.8 million principal of 7.25% senior notes due 2021. Cash was only $15,000; current assets were $194.0 million and current liabilities $117.6 million. Operating cash flow declined substantially, partly due to working-capital movements.
The revolving facility was amended in April 2016: capacity fell from $700.0 million to $664.4 million and maturity extended to March 2020. At year-end, $220.1 million of capacity remained after borrowings and letters of credit, but covenant-based borrowing availability was approximately $55.5 million. The partnership reported covenant compliance. Its 3.76% weighted-average facility rate means a 100-basis-point rise in rates would increase annual interest expense by about $4.4 million.
Capital expenditures and refinery turnaround costs totaled $38.3 million in 2016, down from $68.7 million. Cash distributions paid were $118.2 million. Quarterly per-unit distributions were reduced from $0.8125 to $0.50 for the third and fourth quarters; the fourth-quarter payment was made in February 2017. The declared fourth-quarter rate equals $2.00 annualized.
Material changes versus prior comparable period
- Lower commodity prices and reduced activity contributed to lower product revenues and volumes. Natural gas services revenue fell 25%, although segment operating income was broadly flat; NGL volumes fell 34%.
- Terminalling and storage revenue decreased 10%. Lower lubricant sales, lower shore-based throughput, and the December sale of Corpus Christi assets affected results. Its segment operating income rose to $44.1 million, helped by the asset-sale gain.
- Sulfur services revenue fell 17%, while segment operating income was nearly flat at $26.8 million; prices and volumes declined, partly offset by lower costs and improved margin per ton.
- Marine transportation revenue fell 25% and the segment recorded a $19.9 million operating loss, compared with $4.6 million operating income in 2015. Management cited excess inland barge supply, lower utilization and rates; impairments included $11.7 million of long-lived assets and $4.1 million of goodwill.
- Equity earnings from WTLPG fell 48% to $4.7 million, and distributions from WTLPG fell 33% to $7.5 million, reflecting lower transportation rates and higher repairs and maintenance.
- The $107.0 million gross Corpus Christi sale, plus reimbursement of certain costs, generated approximately $93.3 million net proceeds after expenses and other adjustments; proceeds reduced revolving borrowings.
Outlook, risks, contingencies and unusual items
Management emphasized preserving liquidity, controlling costs, improving utilization and reducing planned growth capital spending. It expected operating cash flow and available facility capacity to fund 2017 working capital and anticipated maintenance capital needs. No quantified earnings or cash-flow guidance was provided.
Key exposures include sustained weak commodity prices and reduced drilling, marine vessel oversupply and rate pressure, customer and product concentration, weather and Gulf Coast operating disruptions, environmental and safety regulation, and variable-rate debt. A majority of cash flow is described as fee-based, but some businesses remain exposed to volume, commodity-price, seasonal and utilization changes.
WTLPG shippers challenged a 2015 rate increase. The Texas Railroad Commission directed that pre-increase rates remain in effect during the proceeding; a hearing was scheduled for March 2017. The filing also describes a lease dispute and a customer’s demand for defense and indemnity in multiple motor-oil marketing lawsuits; the partnership said potential exposure was not clear. Management did not expect ordinary-course legal matters, in aggregate, to materially affect financial position, results or liquidity.
Asset retirement obligations rose to $16.4 million after a $14.4 million revision to estimated obligations. Environmental costs were not material in 2016, but future compliance, remediation or spill costs could be significant and may not be recoverable from customers. The partnership’s distribution capacity is constrained by cash generation, debt service, reserves and credit-facility restrictions.
After year-end, the partnership agreed to acquire the Hondo, Texas asphalt terminal from MRM for $27.4 million and expected to spend a further $8.6 million to complete construction. MRM is obligated to fund completion costs above that amount. The filing estimates approximately $5.0 million annual cash flow from long-term MRM contracts. MRM also agreed to repay the $15.0 million MET note receivable plus accrued interest.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow stabilize, and whether the reduced $0.50 quarterly distribution is sustainable under debt covenants and capital needs.
- Actual covenant headroom and borrowing availability, alongside the partnership’s debt maturities, interest expense and refinancing options.
- Marine fleet utilization, day rates and asset rationalization outcomes, and the assumptions underlying recorded impairments.
- The final outcome and financial effect of the WTLPG rate case and the disclosed litigation and indemnity matters.
- Whether the Hondo acquisition closes, reaches completion on budget, and generates the forecast cash flow under related-party contracts.
- The financial terms and governance review of MRM transactions: MRM accounted for about 13% of 2016 revenue and 11% of product costs, and supplied personnel and services under agreements with no monetary limit on reimbursement of direct expenses.