Martin Midstream Partners L.P. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The partnership operates Gulf Coast-focused terminalling and storage, natural gas services, sulfur services, and marine transportation businesses. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $292.9 | $260.1 | $602.3 | $513.0 |
| Operating income | $16.7 | $10.2 | $32.7 | $23.6 |
| Income from continuing operations | $5.2 | $5.7 | $14.0 | $10.6 |
| Net income, including discontinued operations | $7.2 | $8.8 | $17.7 | $16.1 |
| Limited-partner earnings per unit | $0.25 | $0.37 | $0.64 | $0.67 |
- Operating margin on reported revenue was approximately 5.7% in Q2 2012, versus 3.9% in Q2 2011.
- Six-month cash from operating activities was $17.1 million, including $10.2 million from continuing operations; the comparable 2011 amounts were $30.1 million and $20.4 million. Investing activities used $63.8 million, while financing activities provided $46.5 million. Cash ended at $0.1 million.
- Capital expenditures for continuing operations were $45.6 million in the first half, including $43.3 million of expansion spending and $2.3 million of maintenance spending.
- At June 30, total debt and capital leases were approximately $453.2 million: $274.0 million drawn on the revolving facility, $173.2 million of senior notes net of discount, and $5.9 million of leases. The $400 million facility had approximately $125.9 million available, including letters of credit. The facility’s weighted-average rate was 3.35%.
- Total partners’ capital was $357.1 million. The January 2012 common-unit offering generated $91.4 million net proceeds, used to reduce debt; the partnership also redeemed $25 million of senior notes in May and incurred a $2.2 million prepayment premium.
Changes versus the prior comparable period
- Q2 revenue rose 13% and operating income rose 64%; first-half revenue rose 17% and operating income rose 39%. Net income increased for the first half but declined in Q2, partly reflecting lower discontinued-operation income and higher financing costs.
- Terminating and storage operating income improved to $5.0 million in Q2 from $3.1 million, and sulfur services income rose to $12.3 million from $10.1 million. Marine transportation returned to $2.2 million of operating income from a $1.0 million loss, with stronger offshore utilization.
- Natural gas services remained slightly loss-making in Q2; higher NGL sales volumes increased revenue, but lower prices and reduced per-barrel margins limited profitability. Equity-method results also declined after a Redbird base-gas adjustment.
- Interest expense increased to $8.3 million for Q2 from $4.4 million, and to $15.5 million for the first half from $12.8 million. The filing attributes much of the increase to the termination of interest-rate swaps in 2011, which had reduced prior-year expense.
Outlook, risks, and unusual items
- Prism asset sale: On July 31, 2012, the partnership completed the sale of East Texas and Northwest Louisiana gathering and processing assets, including its 50% Waskom interest, to CenterPoint for approximately $275 million, subject to transaction costs and purchase-price adjustments. A separate $2 million sale of interests in Matagorda and PIPE was expected to close in Q3 2012. Management expected sale proceeds to reduce debt. The sold operations are presented as discontinued operations, and related assets were classified as held for sale at June 30.
- Management said industry conditions remained challenging, citing weaker drilling activity, uncertainty around Gulf of Mexico permitting and safety requirements, and reduced marine demand tied to refinery production. It identified growth investment mainly in terminalling and sulfur services, while emphasizing liquidity, utilization, and cost control. The filing gives no specific earnings or distribution guidance.
- Risks include commodity-price and floating-rate exposure, weather and seasonality, customer credit, and reliance on the revolving facility and capital markets. A 1% increase in rates on June 30 floating-rate debt was estimated to raise annual interest expense by $2.7 million; the filing separately reports only $39 million drawn on the facility as of August 3, after the asset sale.
- Related-party dependence is significant: Martin Resource Management controls the general partner, provides personnel and services, and owns approximately 28.5% of limited-partner units. The partnership reports no material environmental costs in the periods presented and says it has no off-balance-sheet financing arrangements.
- The partnership received demands from a former director for indemnification of legal fees and damages and filed suit seeking a declaratory judgment on its obligations. Management says ordinary-course proceedings are not expected to materially affect the partnership; several disclosed disputes concern Martin Resource Management rather than the partnership directly.
- Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. The filing reports no material change to the prior annual report’s risk factors.
Important facts for investors to verify
- Final proceeds, adjustments, and debt reduction from the CenterPoint transaction, and the completion and proceeds of the separate Matagorda/PIPE sale.
- Post-sale operating results and cash generation after removal of Prism operations, including the effect on distributions and leverage.
- Whether NGL margins, sulfur profitability, and marine utilization remain at levels supporting operating-income growth.
- Compliance with credit-facility covenants and availability after the asset-sale-related debt repayment; the filing does not provide a clear post-sale cash balance.
- Outcome of the indemnification dispute and any further developments in the related-party litigation and governance matters.