Business context and reporting period
Martin Midstream Partners L.P. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Its four businesses are terminalling and storage, natural gas services, sulfur services, and marine transportation, primarily in the U.S. Gulf Coast region. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $358.2 | $333.8 | $791.9 | $682.2 |
| Operating income | $20.3 | $19.2 | $46.6 | $39.0 |
| Net income | $9.1 | $10.0 | $25.7 | $22.5 |
| Limited partners’ net income | $8.9 | $5.6 | $25.1 | $14.6 |
| Basic net income per unit | $0.33 | $0.25 | $0.95 | $0.64 |
| Adjusted EBITDA | $33.8 | $30.4 | $72.5 | $61.6 |
| Distributable cash flow | $20.6 | $19.0 | $49.5 | $40.0 |
- Operating margin was approximately 5.7% in Q2 2013 versus 5.8% in Q2 2012; for the six-month periods it was approximately 5.9% versus 5.7%.
- Six-month cash from operating activities was $72.4, including $81.1 from continuing operations and $8.7 used by discontinued operations. Investing used $116.1; financing provided $38.6. Cash declined $5.1 to just $0.017 at June 30.
- At June 30, total debt and capital leases were $568.2, including $136.0 outstanding on the revolving facility. The facility’s $600.0 capacity left $463.9 available after $0.1 of letters of credit. Current assets were $257.1 and current liabilities $147.2.
- Debt included $250.0 of 7.25% senior notes due 2021, $173.5 carrying value of 8.875% notes due 2018, and variable-rate revolver borrowings. The revolver’s weighted-average rate was 2.97% at June 30; unhedged floating-rate debt exposed the Partnership to interest-rate changes.
Changes versus prior comparable periods
- Revenue rose 7% in Q2 and 16% for the first half. Operating income increased 6% and 20%, respectively. Q2 net income declined year over year because 2012 included $2.0 of discontinued-operation income; continuing-operations income improved from $8.0 to $9.1. First-half continuing income increased from $18.8 to $25.7.
- Natural gas services operating income improved to $4.6 in Q2 from a $0.4 loss and to $12.7 for the first half from $2.4. Higher NGL volumes, including Louisiana butane activity, lifted sales; lower commodity prices partly offset the volume effect.
- Terminalling and storage operating income increased 18% in Q2 and 31% for the first half, supported by Corpus Christi terminal services and acquired Talen’s operations. Sulfur services operating income fell 28% in Q2 and 24% for the first half, primarily as a major customer shifted from buy/sell to fee-based handling, reducing reported volumes. Marine transportation Q2 operating income fell 33%, while first-half income increased 92%; vessel repairs and Talen’s-related costs affected results.
- Interest expense rose 24% in Q2 and 21% for the first half. Management attributed the increase principally to higher average borrowing costs following the February 2013 notes issuance and repayment of revolver borrowings.
- Comparisons reflect retrospectively revised 2012 results for common-control acquisitions, including Redbird interests and blending and packaging assets, and classify the sold Prism assets as discontinued operations.
Outlook, management commentary, risks and unusual items
- Management reported access to capital markets and stated current projects were expected to be funded by operating cash flow, cash balances, and revolver capacity. It anticipated increased growth capital spending over the next two years, mainly in terminalling and storage and natural gas services. No quantified full-year earnings or cash-flow guidance was provided.
- On July 25, 2013, the Partnership declared a $0.78 per-unit Q2 cash distribution, or $3.12 annualized, payable August 14 to unitholders of record August 7.
- Notable investments included the $50.8 purchase of six LPG pressure barges and two push boats, the $12.2 acquisition of NL Grease, and a $15.0 investment in preferred interests of Martin Energy Trading. These and other investments contributed to borrowing and investing requirements.
- Liquidity and debt-service capacity depend on operating performance and continued access to financing. A 1% rate increase on June 30 unhedged floating-rate debt was estimated to increase annual interest expense by about $1.5. The Partnership reported no material change in Form 10-K risk factors, no material environmental costs, and ordinary-course legal matters not expected by management to have a material adverse effect.
- Martin Resource Management controls the general partner, owns about 19.1% of common units, and is a significant customer, supplier, service provider, and source of allocated overhead. Management noted that expense allocation involves judgment and other allocation methods could increase Partnership expenses.
- The Partnership reported effective disclosure controls and no material adverse changes in internal control over financial reporting. The filing text does not provide a clear current leverage-ratio value.
Key facts for investors to verify
- Whether operating cash generation and the $463.9 of reported revolver availability adequately support planned growth spending, distributions, and debt service, given the very low period-end cash balance.
- How much reported revenue growth and earnings improvement is attributable to acquired assets, volume changes, or sustainable fee-based operations versus commodity prices and timing.
- Progress and final purchase-price allocations for NL Grease and Talen’s, and the performance and funding needs of unconsolidated investments, particularly Redbird and Cardinal.
- Exposure to related-party transactions, including the terms and review of reimbursements, service agreements, and the general partner’s control and incentive distribution rights.
- Compliance with credit-facility covenants and sensitivity to floating interest rates; confirm current borrowings and rates after quarter-end.