Martin Midstream Partners L.P. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; interim financial statements are unaudited. The Partnership operates four Gulf Coast-focused businesses: terminalling and storage, natural gas services, sulfur services, and marine transportation. Comparative 2012 figures were retrospectively adjusted for the Redbird interests and blending and packaging assets acquired from affiliates; Prism assets sold in 2012 are classified as discontinued operations.
Key financial results
Amounts below are in millions of dollars except per-unit data and ratios.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $433.7 | $348.3 | +24% |
| Operating income | $26.4 | $19.8 | +33% |
| Net income | $16.6 | $12.5 | +33% |
| Net income attributable to limited partners per unit | $0.61 | $0.39 | Up $0.22 |
| Cash from operating activities | $65.4 | $0.1 | Up $65.3 |
- Operating margin was approximately 6.1%, versus 5.7% a year earlier. Net margin was approximately 3.8%, versus 3.6%.
- Continuing operations generated $74.1 million of operating cash, but discontinued operations used $8.7 million. The year-over-year operating cash improvement reflected working-capital movements, including lower receivables and inventories.
- Investing activities used $85.7 million, including $50.8 million for six LPG pressure barges and two push boats and $24.4 million of contributions to unconsolidated entities. Financing activities provided $15.2 million. Cash fell $5.1 million to $47,000 at quarter-end.
Balance sheet, debt and liquidity
- At March 31, total assets were $1.036 billion, total liabilities $682.4 million, and partners’ capital $353.9 million. Current assets of $255.4 million exceeded current liabilities of $160.9 million; the current ratio was approximately 1.59, down from 1.76 at year-end 2012.
- Total debt and capital lease obligations were $523.2 million, including $91.0 million drawn on the revolving facility, $423.5 million of senior notes net of discount, a $2.9 million bank note, and $5.8 million of leases. Total obligations were up from $478.2 million at December 31, 2012.
- The Partnership issued $250 million of 7.25% senior notes due 2021 in February and used most net proceeds to repay revolving borrowings. In March, it expanded its revolving facility from $400 million to $600 million and extended maturity to March 2018. At quarter-end, approximately $508.9 million remained available, including letters of credit.
- Revolver borrowings carried a 4.75% weighted-average rate at quarter-end and were unhedged; management estimated a 1-percentage-point rate increase would add about $1.1 million of annual interest expense. Interest expense for the quarter rose 18% to $9.1 million.
Material changes and management commentary
- Natural gas services revenue rose 51% and segment operating income increased from $2.8 million to $8.1 million. Higher NGL volumes, largely from entering the Louisiana butane market in 2012, outweighed lower average prices; management cited improved per-barrel margins.
- Terminalling and storage operating income increased 44% to $10.7 million, supported by the Corpus Christi terminal, refinery tolling and Talen’s operations. Product revenue declined amid lower volumes and prices, including refinery downtime for boiler repairs.
- Sulfur services operating income fell 20% to $10.0 million. Revenue declined 6%, primarily as a major customer’s buy/sell contract converted to a fee-based handling contract and volumes fell.
- Marine transportation returned to operating income of $1.5 million from a $0.6 million loss, with acquired Talen’s operations and stronger offshore demand contributing.
- Management said it intends to prioritize liquidity, fee-based revenue, asset utilization and cost control, and plans to increase growth capital spending over the next two years, principally in terminalling and storage and natural gas services. It expected operating cash flow and available revolver capacity to cover 2013 working capital needs, scheduled debt payments and anticipated maintenance capital expenditures. No earnings or cash-flow guidance was provided.
- For Q1 2013, expansion and maintenance capital spending was $13.0 million and $1.7 million, respectively. On April 25, the Partnership declared a $0.775 per-unit quarterly distribution, or $3.10 annualized, payable May 15.
Risks, related parties and unusual items
- Martin Resource Management controls the general partner, owns about 19.1% of common units, and provides management and operating services. The Partnership reimbursed it $44.8 million in direct costs and expenses during the quarter and $2.7 million of allocated indirect costs. Related-party sales represented about 6% of revenue. These relationships, allocation judgments and ongoing transactions merit attention.
- Credit agreements impose leverage, senior leverage and interest-coverage covenants, as well as restrictions on distributions, debt, investments and capital spending. The filing provides covenant thresholds but does not state the actual leverage or coverage ratios.
- Management identified seasonality in NGL and fertilizer demand and exposure to floating interest rates, fuel and other input costs, weather events, and operational risks. Commodity derivatives had been settled following the 2012 Prism asset sale; the filing says the Partnership was not then exposed to commodity-price market risk.
- Ordinary-course legal claims were not expected by management to have a material adverse effect; no material environmental costs were reported. Management reported effective disclosure controls and no material change in internal control over financial reporting. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether higher NGL volumes and margins persist, and how much of reported revenue growth translates into durable operating cash and distributable cash.
- Actual covenant headroom and leverage measures, debt-service capacity, and the effect of floating-rate exposure and future borrowing needs.
- The economics and integration of the Talen’s and marine-equipment acquisitions, plus the return and funding requirements of Redbird, Cardinal and other unconsolidated investments.
- The sustainability of the $0.775 quarterly distribution given quarter-end cash of only $47,000, capital spending plans and reliance on operating cash and credit availability.
- Related-party reimbursements, service agreements and governance protections, including the basis for cost allocations and transaction approvals.