Martin Midstream Partners L.P. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited. The Partnership operates Gulf Coast-focused terminalling and storage, natural gas services, sulfur services, and marine transportation businesses. Comparisons below are to the same 2011 periods; Prism asset results are classified as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue from continuing operations | $317.9 million | $287.6 million | $920.2 million | $800.6 million |
| Operating income | $14.9 million | $7.7 million | $47.6 million | $31.3 million |
| Income from continuing operations | $8.8 million | $3.1 million | $22.8 million | $13.8 million |
| Net income, including discontinued operations | $72.4 million | $5.4 million | $90.1 million | $21.5 million |
| Basic net income per limited partner unit | $3.07 | $0.20 | $3.73 | $0.87 |
| Cash from operating activities | Not presented by quarter | $(18.0) million | $57.8 million |
- Q3 revenue rose about 11% and operating income about 94%. Operating income as a share of revenue was approximately 4.7%, versus 2.7% in Q3 2011. For the nine-month periods, the comparable ratios were approximately 5.2% and 3.9%.
- Net income growth was principally driven by the Prism asset sale: discontinued operations included a $62.3 million gain in Q3 2012. Continuing-operations income is a better indicator of ongoing reported earnings.
- Segment operating income improved in Q3 across terminalling and storage, natural gas services, sulfur services, and marine transportation. For the first nine months, sulfur services and terminalling and storage were the largest contributors to the increase. Natural gas services benefited from higher NGL volumes, while lower average prices partly offset that volume growth.
- Nine-month cash used in continuing operating activities was $18.1 million, compared with $45.6 million provided in 2011; total operating cash flow was negative $18.0 million. Working-capital movements included a $38.6 million inventory increase and a $27.8 million increase in amounts due from affiliates.
- Total investing cash flow was positive $187.7 million, including $271.2 million from discontinued investing activities, primarily the Prism sale. Continuing capital expenditures were $63.0 million, of which $59.4 million was expansion spending. Financing activities used $170.0 million, including $547.0 million in debt repayments, partly offset by $349.0 million of borrowing and $91.4 million of equity-offering proceeds. Cash declined to $27,000 from $266,000 at year-end 2011.
- At September 30, total debt and capital leases were $256.2 million, including $77.0 million drawn on the $400 million revolving facility; approximately $322.9 million remained available, net of letters of credit. The facility’s weighted-average interest rate was reported as 3.35% in the market-risk discussion. A 1 percentage-point rate increase on the September 30 floating-rate balance was estimated to raise annual interest expense by approximately $3.6 million.
Material changes, outlook, and risks
- On July 31, 2012, the Partnership sold its East Texas and Northwest Louisiana natural gas gathering and processing assets, including its 50% operating interest in Waskom, for net cash proceeds of $273.3 million. The sale reduced debt and led to discontinued-operations presentation; the Partnership also sold its Matagorda and PIPE interests in September for $1.5 million.
- After quarter-end, the Partnership acquired specialty lubricant packaging assets from an affiliate for $121.8 million cash, including approximately $36.8 million of working capital, and acquired the remaining Redbird Class A interests for $150.0 million. Both were funded with revolver borrowings and are common-control transactions requiring retrospective revision of historical financial statements. At November 5, the Partnership reported $355.0 million outstanding under its credit facility.
- Management said it expected operating cash flow, cash balances, and revolver capacity to fund current projects, maintenance spending, and scheduled 2013 debt payments. It planned to increase growth capital spending over the next two years, primarily in terminalling and storage and sulfur services. The filing provides no quantified earnings or distribution guidance.
- The General Partner agreed after quarter-end to forgo its next $18 million of incentive distributions. The October 2 settlement of Martin family and shareholder disputes resolved the litigation described in the filing; Martin Resource Management transferred 1.5 million Partnership units to KCM, LLC.
- Management cited challenging industry conditions, including drilling activity and uncertainty over Gulf of Mexico permitting, while noting stronger market activity in terminalling and offshore marine transportation. Key exposures include floating interest rates, commodity prices, seasonal demand for NGLs and fertilizer, fuel and operating costs, and reliance on affiliate-provided services and transactions. The filing reports no material change to previously disclosed risk factors and no material environmental costs during the periods.
Most important facts for investors to verify
- Separate continuing results from the one-time Prism sale gain when assessing earnings and per-unit results.
- Review the actual post-acquisition debt, borrowing availability, covenant headroom, and interest burden following the $271.8 million of affiliate acquisitions.
- Assess why continuing operating cash flow was negative despite higher operating income, including inventory and affiliate receivable movements.
- Review the retrospective financial-statement revisions and acquired businesses’ historical results, purchase accounting, and related-party terms.
- Monitor NGL volumes and margins, sulfur volumes and pricing, marine fleet utilization and costs, capital spending, and the effect of the incentive-distribution waiver on future distributions.