Martin Midstream Partners L.P. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015, compared with the same 2014 periods. The partnership operates four Gulf Coast-focused businesses: terminalling and storage, natural gas services, sulfur services, and marine transportation. Unless noted, figures below are in millions of dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $226.0 | $377.1 | $782.5 | $1,265.2 |
| Operating income | $12.0 | $13.2 | $56.4 | $55.7 |
| Net income (loss) | $3.3 | $(26.9) | $31.5 | $(16.1) |
| Limited partners’ income (loss) | $(0.6) | $(26.3) | $19.1 | $(15.7) |
| Basic limited-partner earnings (loss) per unit | $(0.02) | $(0.82) | $0.54 | $(0.54) |
| Adjusted EBITDA | $41.4 | $34.5 | $136.8 | $106.4 |
| Distributable cash flow | $29.1 | $19.1 | $98.1 | $60.9 |
Operating margin was approximately 5.3% in Q3 2015 versus 3.5% in Q3 2014, and 7.2% for the first nine months versus 4.4% a year earlier. These ratios are calculated from reported operating income and revenue.
- Cash flow: Nine-month operating cash flow was $113.0 million, up from $53.0 million. Investing activities provided $1.4 million, versus $296.5 million used in 2014; 2015 included $41.3 million of proceeds from the sale of floating storage barges. Financing activities used $114.4 million, including $99.9 million of distributions. Cash ended at just $13,000.
- Capital spending: Nine-month capital expenditures and turnaround costs were $46.3 million, down from $62.5 million.
- Debt and liquidity: Long-term debt, net, was $876.4 million at September 30, down from $888.9 million at year-end 2014. Debt comprised $500.0 million drawn on the revolving facility and $381.8 million of 7.25% senior notes, net. The $700 million revolver had $198.4 million of nominal unused capacity after letters of credit, but covenant-based borrowing availability was approximately $70.7 million. The partnership reported compliance with debt covenants.
- Distribution: After quarter-end, the partnership declared a Q3 distribution of $0.8125 per common unit, or $3.25 annualized, payable November 13, 2015. The GP distribution was expected to be $4.6 million, including $3.9 million in incentive distributions.
Material changes and management commentary
- Revenue fell 40% in Q3 and 38% for the nine-month period. The main drivers were lower NGL and other product prices, lower sales volumes, and reduced product sales; comparisons also reflect the prior-year acquisition of Cardinal and changing consolidation periods.
- Natural gas services Q3 revenue declined 53%, while segment operating income fell 28% to $5.5 million. Lower NGL prices and an 11% decline in sales volumes reduced product revenue; management reported a 47% decline in segment margins per barrel.
- Terminalling and storage Q3 revenue declined 15%, largely from reduced blending and packaging volumes amid increased price competition; segment operating income increased 40% to $8.8 million. Marine transportation Q3 operating income was a loss of $0.9 million, reflecting lower fleet utilization, regulatory downtime, and asset disposal losses. Sulfur services Q3 operating income increased 6% despite lower product revenue, as costs also declined.
- Management said it was focused on liquidity, fee-based revenues, asset utilization, and cost control. It expected operating cash flow and borrowing capacity to fund 2015 working capital, maintenance capital, debt service, and current capital projects, while noting future capital needs could require additional funds. No specific earnings or distribution growth guidance was provided.
- The partnership sold six LPG pressure barges for $41.3 million in February 2015 and used the proceeds to reduce revolver borrowings. In August it reduced revolver commitments from $900 million to $700 million, expecting annual commitment-fee savings of about $1 million. In September it repurchased $16.1 million of senior notes, recording a $0.7 million gain.
Risks, contingencies, and unusual items
- Commodity and interest-rate exposure remain relevant. NGL swaps covered approximately 0.3 million barrels through March 2016; a $0.10 change in expected settlement price was estimated to affect net income by about $1.3 million. A 1% increase in rates on unhedged floating-rate debt was estimated to increase annual interest expense by about $5.0 million.
- A Louisiana lease dispute alleges failure to perform property work. The partnership had planned approximately $1.6 million of work in 2015, intends to defend the case, and said potential damages could not yet be determined. Management did not expect ordinary-course legal matters, in aggregate, to materially affect the partnership.
- Martin Resource Management controls the general partner, provides personnel and services, and is a significant customer and supplier. Related-party sales were approximately 10% of Q3 revenue and 11% of nine-month revenue. The partnership has no employees and reimburses the affiliate for direct costs without a monetary cap, as well as approved indirect costs.
- Management reported no material change in the risk factors from the 2014 Form 10-K. It also reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Other notable items: the 2014 comparison included a $30.1 million reduction in the carrying value of the then-existing Cardinal investment and a $3.4 million marine asset impairment; neither was recorded in 2015. The partnership was assessing goodwill as of August 31, 2015, with preliminary results indicating no impairment.
Investor verification points
- Verify the partnership’s covenant headroom and actual borrowing availability: reported unused revolver capacity was $198.4 million, but covenant-based borrowing availability was only about $70.7 million.
- Assess whether distributable cash flow of $29.1 million in Q3 and $98.1 million year to date supports distributions, including the $0.8125 per-unit quarterly distribution and GP incentive distributions.
- Track NGL pricing, sales volumes, and margins, plus marine fleet utilization and refinery maintenance downtime, which affected segment results.
- Review related-party dependence, cost reimbursements, affiliate customer concentration, and the terms and collectability of the $15 million MET note receivable, bearing 15% interest.
- Monitor the Louisiana lease litigation and any potential 2016 purchase-price reimbursements tied to Cardinal financial targets; the filing says conditions for up to $4.5 million of 2016 reimbursements had not been determined.