Martin Midstream Partners L.P. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts below are in millions of dollars unless stated otherwise. The partnership operates natural gas services, terminalling and storage, sulfur services, and marine transportation businesses, primarily in the U.S. Gulf Coast region.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $216.6 | $193.9 | $500.8 | $447.2 |
| Operating income | $5.5 | $10.8 | $29.6 | $34.6 |
| Net income (loss) | $(7.2) | $1.0 | $5.6 | $14.6 |
| Net income (loss) per limited partner unit | $(0.18) | $0.03 | $0.14 | $0.38 |
| Operating cash flow | Not separately provided for the quarter | $58.5 | $45.8 | |
| Adjusted EBITDA | $29.4 | $33.0 | $74.2 | $79.8 |
| Distributable cash flow | $11.0 | $19.6 | $37.6 | $49.9 |
Q2 revenue increased about 12%, principally as higher natural gas liquids product sales and lubricant sales lifted reported revenue. Profitability weakened: operating margin was approximately 2.5%, versus 5.6% a year earlier, and the partnership recorded a quarterly net loss. For the first half, revenue rose about 12%, but operating income fell about 15% and distributable cash flow declined about 25%. Higher product prices and volumes increased both sales and costs; margin pressure, higher interest expense, and a one-time sulfur inventory adjustment contributed to lower results. The filing reports a $3.9 million Q2 and $2.9 million first-half negative sulfur inventory adjustment associated with new stockpile measurement technology.
Segment trends: First-half terminalling and storage operating income improved to $4.5 million from $1.2 million, while natural gas services operating income was $21.1 million versus $22.7 million. Sulfur services fell to $10.0 million from $17.1 million, including the inventory adjustment and weaker per-ton margins. Marine transportation operating income increased to $2.5 million from $2.4 million despite reduced inland fleet utilization from regulatory downtime.
Cash, debt and liquidity
- At June 30, cash was $0.6 million, current assets $209.3 million and current liabilities $111.3 million; working capital was approximately $98.0 million. Cash was minimal, and operating cash flow benefited from favorable working-capital movements.
- Long-term debt, net, was $831.9 million, up from $812.6 million at year-end 2017. Debt comprised $459.1 million outstanding under the revolving facility and $372.8 million of 7.25% senior notes due 2021. The revolver’s weighted-average rate was 5.09%; first-half net interest expense increased 19% to $26.5 million.
- The partnership reported actual leverage of 5.46x at June 30 and stated it was compliant with debt covenants. Although stated facility availability was $176.7 million after borrowings and letters of credit, covenant-based additional borrowing capacity was approximately $20.6 million. Outstanding letters of credit were $23.8 million.
- First-half investing cash use was $36.0 million, including $12.6 million of contributions to WTLPG. Capital expenditures were $21.3 million. Financing cash use was $21.9 million, including $39.2 million of distributions paid.
Outlook, material developments and risks
- WTLPG sale: After quarter-end, the partnership agreed to sell its 20% non-operating interest in West Texas LPG Pipeline to ONEOK for $195.0 million, with expected net proceeds of approximately $193.7 million to repay revolver borrowings. Management estimated pro forma leverage of 4.36x versus 5.46x actual and a $24.2 million reduction in forecast remaining-2018 capital expenditures. Completion is not assured. The related amended facility terms, subject to closing, set total-debt-to-EBITDA and senior-secured-debt-to-EBITDA covenant limits at 5.25x and 3.50x, respectively.
- Distribution: A $0.50 per-unit Q2 cash distribution was declared July 19, payable August 14, 2018; the stated annualized rate is $2.00 per unit. The filing provides no formal earnings guidance. Management said operating cash flow and borrowing capacity should fund working capital and anticipated maintenance capital expenditures, and expected covenant compliance for the following 12 months.
- Credit terms and risks: A February 2018 credit amendment temporarily increased leverage covenant limits and added an inventory-financing sublimit within the existing facility. The business is exposed to variable-rate debt, commodity price movements, seasonality, weather events, and operating and regulatory risks. A 100-basis-point interest-rate increase was estimated to add about $4.6 million of annual interest expense; a $0.10 change in expected settlement prices for hedged NGL contracts was estimated to change net income by about $1.5 million.
- Contingencies and unusual items: A Texas Railroad Commission proceeding concerning WTLPG rate increases was remanded for additional evidence, with a hearing scheduled for October 2018. The partnership disputes a customer’s demand for defense and indemnity in litigation and said potential exposure could not be determined if its declaratory-judgment case is reopened. Management does not expect ordinary-course claims, in aggregate, to materially adversely affect the partnership. Asset-retirement obligations were revised upward by $4.8 million in the first half. No material environmental costs were reported.
- Governance and accounting: Martin Resource Management controls the general partner and is a significant customer, supplier and service provider; its sales represented about 12% of Q2 revenue and 10% of first-half revenue. The partnership adopted the new revenue standard in 2018 with no significant identified change in revenue timing. Management reported effective disclosure controls; ERP implementation and testing of new system controls remained in progress.
Key facts for investors to verify
- Whether and when the WTLPG sale closes, final net proceeds, debt reduction, and resulting leverage and covenant headroom.
- Whether lower distributable cash flow and the $0.50 quarterly distribution are sustainable given debt service and limited covenant-based borrowing capacity.
- Underlying segment margins after separating commodity-price effects, sulfur inventory adjustments, and working-capital movements.
- Outcome and financial implications of the WTLPG rate proceeding and the disputed customer indemnification claim.
- Related-party transaction terms and the progress and control testing of the ERP implementation.