MMLP

Business Context and Reporting Period

Company: Martin Midstream Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A publicly traded limited partnership focused on the U.S. Gulf Coast region with four primary business lines: terminalling and storage, natural gas services, sulfur services, and marine transportation. The Partnership is controlled by Martin Resource Management Corporation, which owns approximately 35.5% of the limited partnership units and the general partner.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 23% ($36.5 million) for the three months ended September 30, 2010, compared to the same period in 2009. For the nine-month period, revenues increased 41% ($189.4 million). This growth was driven primarily by higher volumes and prices in the Natural Gas Services and Sulfur Services segments.
• Operating Income Decline (YTD): Despite revenue growth, operating income for the nine months ended September 30, 2010, decreased 18% ($5.5 million) compared to the prior year. This was largely due to increased interest expense and lower margins in certain commodity trading activities.
• Net Income Decline: Net income for the nine months ended September 30, 2010, dropped significantly to $9.5 million from $20.2 million in the prior year period. Key factors included a $3.85 million termination fee for interest rate swaps and increased interest costs from new Senior Notes issued in March 2010.
• Segment Performance:
  • Natural Gas Services: Revenues increased 48% YTD due to higher volumes and prices, though operating income decreased 47% due to margin compression.
  • Sulfur Services: Revenues increased 87% YTD driven by a 62% increase in average sales prices, though operating income remained relatively flat.
  • Marine Transportation: Operating income increased 88% YTD due to improved fleet utilization.

Guidance, Outlook, and Risks

• Liquidity and Capital Resources: The Partnership strengthened its liquidity position in 2010 through a $200 million private placement of Senior Notes (8.875% due 2018) and two equity offerings totaling approximately $78.6 million in net proceeds. As of September 30, 2010, the Partnership had $164.9 million available under its revolving credit facility.
• Debt Structure: The Partnership amended its credit facility in March 2010, converting term loans to revolving loans and extending the maturity to March 2013. It also terminated all interest rate swaps on its revolving credit facility in March 2010, incurring a $3.85 million fee, leaving the facility exposed to variable interest rates.
• Market Risks:
  • Commodity Prices: Results are materially impacted by fluctuations in crude oil, natural gas, and NGL prices. The Partnership hedges approximately 48% of its 2010 commodity risk and 16% of its 2011 risk.
  • Regulatory Environment: Enhanced safety regulations and inspection requirements following the Deepwater Horizon incident in the Gulf of Mexico create uncertainty regarding the pace of drilling permits and operations, potentially affecting demand for terminalling and marine services.
• Legal Proceedings: The Partnership is not a party to significant litigation involving its parent company, Martin Resource Management, though ongoing disputes between Martin family members regarding control of the parent company are noted. A U.S. Coast Guard investigation regarding a potential pollution violation was closed with no penalties asserted.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the amended credit facility covenants, specifically the leverage ratio (max 4.50:1) and interest coverage ratio (min 3.00:1), given the recent increase in debt load.
• Interest Rate Exposure: Confirm the impact of the terminated interest rate swaps on future interest expense, as the revolving credit facility is now fully exposed to variable LIBOR rates.
• Related Party Transactions: Review the Omnibus Agreement terms regarding the reimbursement of indirect general and administrative expenses to Martin Resource Management, which totaled $2.6 million for the nine-month period.
• Commodity Hedging: Assess the effectiveness of current hedging strategies given the volatility in natural gas and NGL prices and the reduction in hedging coverage for 2011.
• Equity Dilution: Monitor the impact of future equity offerings on the General Partner's 2% interest and the Incentive Distribution Rights (IDRs), which accelerate the General Partner's share of distributions at higher payout levels.