Martin Midstream Partners L.P.
Q3 2014 Earnings Call Transcript

Published: 2 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners LP Third Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will be having a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I'd now like to turn the call over to Mr. Bob Bondurant. Sir, the floor is yours.

[Bob Bondurant:]

Thank you, Nicholas. And let everyone knows on the call today, we have Ruben Martin, our President and Chief Executive Officer; Joe McCreery, our Vice President of Finance and he is also the Head of Investor Relations; and Wes Martin, our VP of Corporate Development. Before we get started with the financial and operational results for the third quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unit holders. We report our financial results in accordance with Generally Accepted Accounting Principles, and use certain non-GAAP financial measures within the meanings of the SEC Regulation G, such as distributed cash flow, or DCF; and earnings before interest, taxes, depreciation, and amortization, or EBITDA; and we also use adjusted EBITDA. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and it can be a meaningful measure of the Partnership's cash available to pay distributions. We also include in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our Web site, www.martinmidstream.com. Now I would like to discuss our third quarter performance. For the third quarter, we had adjusted EBITDA of $33.7 million compared to $31.9 million in the second quarter of 2014. Our distributable cash flow, or DCF, for the third quarter was $19.3 million, a distribution coverage of 0.78x based on the distributions we paid in the third quarter. This coverage ratio does not include any IDR payments to the General Partner as we have suspended IDR payments until a cumulative suspension of $21 million is met. At September 30, 2014, our cumulative suspension amount was $17 million. In reviewing our income statement, please note that our earnings were negatively impacted by two non-cash charges. When we acquired the controlling interest in Cardinal Gas Storage by purchasing the remaining 57.8% ownership for $120 million, we had to analyze our carrying value against the fair value of the 42.2% we already own. Since we paid a $120 million for 57.8%, the implied value of our existing 42.2% was $87.6 million. We were carrying this 42.2% interest at $117.7 million, so we experienced a non-cash write-down of $30.1 million which negatively affected our net income. Also offsetting our earnings in our marine transportation segment, we had one order offshore tug/barge tow unit that had not generated revenue for the last few quarters. So we took an impairment charge of $3.4 million against these assets. Now, I would like to discuss our third quarter cash flow by segment compared to the second quarter of 2014. In the terminalling segment, our third quarter EBITDA, which is defined as operating income, plus depreciation and amortization, but excluding any gain or loss on sale of assets was $15.5 million in the third quarter compared to $18.5 million in the second quarter. Our specialty terminals EBITDA was $11.1 million in the third compared to $13.6 million in the second quarter. This decrease was primarily driven by decrease in cash flow at our Corpus Christi crude terminal. Although our throughput volume was up 4% we experienced a decrease in our throughput rate per barrel to our customer as cumulative throughput volume exceeded our contractual threshold causing a decrease in throughput rates going forward. Partially offsetting this decline our Corpus Christi crude terminal cash flow was $0.6 million increase in our lubricant packaging business gas flow. We began to realize the benefit of lower cost paraffinic lubricant supply as we began to eliminate higher cost naphthenic lubricant product out of our supply chain. We should see stability in our cash flow in this business going forward as we continue to migrate toward a 100% paraffinic lubricant supply. On the shore-based side of the terminal business, EBITDA was $4.4 million in the third quarter compared to $4.9 million in the second quarter. This decrease was driven by reduced lubricant volume sold at our shore bases as a result of reduced demand from Blue Water Shipping customers primarily in the month of August. However, since then volume has returned to normal levels. Now looking toward the fourth quarter, we should see an improvement in our terminal segment cash flow as we continue to see a volume throughput increase of our Corpus Christi crude terminal. We should also continue to experience lower cost paraffinic lubricant supply in our lubricant packaging business. Now, moving to our natural gas services segment, our cash flow was $9.1 million in the third quarter compared to $5.5 million in the second quarter. Again, a $2.3 million of this cash flow increase was a September performance of Cardinal Gas Storage which we now own 100% as of the end of August. The $2.3 million cash flow from Cardinal in September was lower than normal as there were 1.1 million of one-time severance cost incurred during the month. Also, Cardinal's EBITDA for July and August was $7.8 million, so excluding this severance cost, Cardinal standalone EBITDA for the quarter would have been $11.2 million which is right in line with our annual cash flow forecast of $40 million to $45 million for Cardinal. The remaining balance of the cash flow increase in our natural gas services segment was due to an overall 27% increase in our NGL margins. Now, looking toward the fourth quarter, we will see significant improvement in our cash flow in our natural gas services segment due to owning a 100% of Cardinal for the full quarter compared to one month in the third quarter. Also the cash flow in our refinery butane business and our wholesale propane business should increase due to positive seasonality factors in both the fourth quarter 2014 and the first quarter of 2015. With our acquisition, we are now controlling 100% interest in Cardinal, we had to perform a preliminary purchase price allocation which is described in detail in footnote 3 of our 10-Q filed yesterday. There was a $78 million allocation to intangible assets for above market gas storage customer contracts which have an average life of approximately 5 years. As a result, we will experience a non-cash amortization charge for these contracts over the next five years. This non-cash charge will increase amortization expense in our income statement but will not affect the $40 million to $45 million of EBITDA which we will be receiving from Cardinal. Also during the quarter, we received two cash payments related to our 20% interest in West Texas LPG Pipeline. One payment was a distribution from WT LPG of $600,000 for second quarter earnings for our 48 days of ownership. This distribution was reflected in our DCF calculation. We also received a second payment of $501,000 from Alice Pipeline Partners, the previous owner of our 20% interest in WT LPG. This was due to a post closing working capital adjustment, so our net investment in WT LPG sold at $133.9 million. Now on our sulfur services segment, our cash flow was $5.4 million in the third quarter compared to $11.2 million in the second quarter. On the pure sulfur side of the business, EBITDA was $4.3 million in the third compared to $5.1 million in the second. This decrease in cash flow was a result of realizing more normalized sulfur margins in the third quarter when compared to a stronger second quarter sulfur margins. Our fertilizer EBITDA was $1.1 million in the third quarter compared to $6.2 million in the second quarter. This decrease in cash flow was a result of the normal seasonal decline of fertilizer demand in the third quarter, which is primarily the harvesting season for farmers. Looking toward the fourth quarter in the sulfur services segment, we should see cash flow similar to the third quarter for both the sulfur business and the fertilizer business. However, we should see a significant increase in cash flow in the fertilizer business during the first and second quarters of 2015 when we should again experience a significant increase in fertilizer demand from our customers. In our marine transportation segment, we had EBITDA of $6.3 million in the third quarter compared to $0.8 million in the second quarter. This increase was the result of full utilization of our marine fleet in the third quarter when compared to the second quarter. As we previously disclosed, our entire operating offshore fleet experienced required Coast Guard dry-docking in the first six months of 2014. With that requirement now complete, we should see similar strong cash flow in the fourth quarter as well as revenue should remain consistent, and repair and maintenance cost should be normalized. Also our partnership on allocated SG&A costs were $4.5 million in the third quarter which is our typical quarterly unallocated cost. Our $15 million preferred stock investment in Martin Energy Trading, an affiliate of our General Partner was converted to a note receivable effective September 1, 2014. As a result, we received a dividend payment of $0.4 million for July and August and then received $0.2 million of interest income in September. Going forward, we should receive interest income of $0.6 million per quarter from this note. So on an annual basis, our adjusted EBITDA would decrease by $2.3 million but our interest income will increase by the same $2.3 million. So there will be no net change to distributable cash flow from this investment. On the maintenance capital expenditure side of our DCF calculation, we had maintenance CapEx and turnaround cost totaling $4.4 million for the third quarter and have had a total of $17.3 million of capitalized maintenance cost for the first nine months. This compares to the previous year's nine month total of $7.5 million. As we have discussed many times, 2014 has been a heavy maintenance capital expenditure year due to our 45-day refinery turnaround in the first and second quarters and having to dry-dock our entire operating offshore fleet due to required Cost Guard maintenance. Looking toward the fourth quarter, we believe our maintenance capital expenditures should be reduced and approximate $2 million for the quarter. Finally, overall looking toward the fourth quarter, we should see a significant improvement in our DCF coverage as we realize cash flow from Cardinal for the fourth quarter and we experience anticipated seasonal growth in EBITDA from our other operations in the natural gas services segment. Also, we will have much lower maintenance capital expenditures in the fourth quarter when compared to the rest of the year. Now, I would like to turn the call over to Joe McCreery, who will speak about liquidity, capital resources and recent partnership activities.

[Joe McCreery:]

Thanks Bob. I'll start with our normal walk-through of the debt components of our balance sheet and our bank ratios. I will then highlight some of the Partnership's financing growth and other activities during the quarter. On September 30, 2014, the Partnership had total long-term funded debt of approximately $910 million. This consisted of approximately $402 million of senior unsecured notes, and $508 million drawn on our $900 million revolving credit facility. Thus, the Partnership's availability on September 30, 2014, was $392 million. For the third quarter ended 2014, our bank compliant leverage ratios defined as senior secured indebtedness to adjusted EBITDA, and total indebtedness to adjusted EBITDA were 2.67x and 4.78x respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense was 3.15x. Looking at the balance sheet, our total debt to total capitalization at September 30 was 64.1%, there is a slight improvement compared to the quarter ended June 30, 2014, as a result of the Partnership's multiple equity offerings during the third quarter. In all, on September 30, the partnership was in full compliance of all banking covenants, financial; or otherwise. Now, reconciling our current revolver balance to the quarter ended September 30, the outstanding amount today is $493 million and thus the partnership has available liquidity of $407 million under its credit facility. This current lower revolver balance is attributed to working capital reductions associated with lower inventories in our NGL business. Now, I would like to highlight a significant acquisition we completed during the third quarter. Back in August, our Redbird Gas Storage subsidiary acquired all the category membership interests approximately 57.8% in Cardinal Gas Storage Partners LLC for total consideration of $120 million from Energy Capital Partners. We call that MMLP through Redbird previously owned the other 42.2% of Cardinal and concurrent with the closing, we retired approximately $265 million of project level financings previously in place at various Cardinal developmental subsidiaries. With these pay offs, MMLP can now freely distribute cash flow from the projects to our unit holders. And as Bob mentioned we expect cash flow in 2015 to be between $40 million and $45 million. The acquisition and the project financing pay offs were funded under our revolving credit facility. Highlighting one of the key considerations that aided in our investment decision, we believe that the Cardinal acquisition will help reduce the high level of cash flow seasonality MMLP typically experiences during the calendar year. As most are aware, our third quarter is typically the weakest from a cash flow generation perspective, this stems from the normal yearly cycles of both our butane and fertilizer businesses. We believe the Cardinal acquisition will provide a cash flow smoothing impact. For example, had MMLP owned Cardinal for the entire third quarter of 2014, distributable cash flow would have been positively impacted by approximately $7 million. And our distribution coverage ratio would have been 0.89x. This pro forma coverage is fully diluted and that includes the impact of additional 3.45 million units we issued in the cost of debt associated with closing the transaction. Next, I would like to discuss our equity capital raises during the third quarter. In conjunction with the announcement of the cardinal acquisition, the partnership completed a private placement of 1.2 million common units to the majority owner of the General Partner Martin Resource Management Corporation. Then later in the quarter, we successfully completed a large follow-on offering of 3.45 million units combining that proceeds from these two offerings were $168 million. Additionally, on the equity side, we utilized our at the market equity issuance program, however, given a choppy market conditions the only placed units on six trading days during the third quarter for net proceeds of $3.5 million. In aggregate as of September 30, we issued approximately $20.6 million in equity offerings under the Partnership ATM program this year. As it is typical with our offerings proceeds from the follow-on issuance, the project placement to MRMC and the ATM program where used to pay outside amounts under the partnerships revolving credit facility. Now, I would like to address a few items discussed previously as it pertains to our growth initiatives. First, I would like to provide an update on our previously announced intention to construct a crude condensate splitter in the Corpus Christi market. At this point, we are categorically moving our project to on-hold status as our customers seek stability and approvals necessary to export its proprietary condensate based on previous rulings granted earlier this year. Without clarity on timing and until the approval process plays out, MMLP will not be moving forward. As we said before, MMLP will not spend any hard dollar capital until firm contractual agreement has been executed. Next, I would like to comment on Monday's afternoon announcement by one of the partners whose intension to acquire the remaining 80% of the West Texas LPG Pipeline and other associated assets. As you recall from the second quarter this year, MMLP purchased an effective 20% interest in that asset and we indicated at that time that we saw a significant upside value that can potentially be extracted under different operating parameters and potential capacity expansion scenarios. We are pleased with one of the partners saw a similar value in a system and we are excited to be working with them as joint venture partners. Under our agreement, One Oak will be the operator of the asset and we are very early in the process but as we move forward we will provide insight on pertaining to some of the growth initiatives in capital requirement to the system. Similarly we provide guidance on incremental cash flow as it develops. Nicholas that concludes our prepared remarks this morning, we would now like to open the lines for Q&A.

[Operator:]

(Operator Instructions) And our first question comes from the line of Gabe Moreen with Bank of America. Your line is now open. Please proceed with your question.

[Gabe Moreen:]

Hi, good morning, guys.

[Joe McCreery:]

Good morning.

[Ruben Martin:]

Good morning Gabe.

[Gabe Moreen:]

Following up on Joe's comments on the One Oak transaction, I guess curious as to whether kind of you'd endorse that doubling of EBITDA within the timeframe that they put out there, and also in their press release I don't think they mentioned explicitly rate tariff changes. I was wondering if you saw that as part of the driver of growth that they—either they laid out or are you still going forward for that asset?

[Joe McCreery:]

Yes, let me start on our risk in China. And I think I would categorically that's their number not ours, doubling the cash flow. We certainly see the value in the uplift but with respect to the tariffs, I mean I think that something that we saw but I'm not going to speak for them on that. So what we are going to do is get together on it Gabe and it's very early obviously with this announcement and moving forward just see what types of projects specifically we are talking about here. But doubling is a – that's a One Oak number not a Martin number. I'm just going to leave it at that.

[Gabe Moreen:]

Fair enough. And then I guess as a follow-up to that, did you guys, given the much higher multiple One Oak paid for their stake than you did a couple of months ago, did you at all contemplate monetizing your 20% as part of the transaction, or is that off the table given how much you like this asset?

[Ruben Martin:]

This is Ruben. We like the asset like what One Okay say it and we also liked the fact that One Oak ended up with pipe. And so we are looking forward to the things that we are going to be doing in that. I hope the 17 is a good day maybe even sooner to start process is going to try to increase that cash flow. Again, we are going to do what's best interest of the shareholders. If something ever came up that we were able to work that would positively influence the company and help us and help One Oak. And we have to get some things going together then we are open for anything.

[Gabe Moreen:]

Great. Thanks. And last one for me is just given the comments around the condensate splitter, can you just talk about kind of what your latest thoughts are for 2015 growth CapEx, and what might be in there?

[Wes Martin:]

This is Wes. Actually Gabe we are right in the middle of our budgeting process right now. So we don't really have a firm number that we can go out to the market with – I will say that in terms of if you did remove the splitter off the table, I think in terms of what we see is probably in the $50 million to $100 million range of various growth projects. At this point in time, but again, we are right in the middle of the budgeting process haven't had a chance to get with all the managers yet to see what they have got on tap. So we will have a little bit more detail on that here shortly. But, right now we can't give a definitive firm number at this point.

[Gabe Moreen:]

Got it. Thanks Wes. Thanks everyone.

[Operator:]

Our next question comes from the line of Darren Horowitz with Raymond James. Your line is now open. Please proceed with your question.

[Darren Horowitz:]

Good morning guys. Just one question for me. Ruben, with One Oak now involved in the 80% ownership of this asset, does that change the way that you guys were thinking about, like, the acres that you had at the Neches facility, or last quarter we spent a little bit of time talking about that underutilized dock, and maybe the opportunity for hydrocarbon export. I'm just wondering if you're thinking about things differently, and to Wes' point, I realize you're in the process of going through what 2015 CapEx looks like. But just qualitatively, does anything change the way that you're thinking about development of either Neches or the Beaumont area, or some of that other acreage that you have, or that barge capacity at Stanley?

[Ruben Martin:]

Yes. We have continually wanted to develop Neches, by the way Neches is a town in Mississippi. But, yes, the answer to your question is, it does influence that I truly believe that there is some good fits here. It fit our Beaumont facility. We have – as we said before, we have an additional 90 acres in Beaumont that we closed a few months ago. It's given us a plenty of room. We are working on expanding the facilities there not only from the dock space standpoint but from other activities in the – at that facility. So the answer to your question is, yes, we believe it does enhance and it does increase the possibilities that we will be able to do some things there that are going to further enhance and grow the partnership for the things that you talked about.

[Darren Horowitz:]

Okay. Would it be fair to assume that with the splitter now on hold, that maybe it might make some sense for you guys to consider moving further upstream with regard to stabilize your vapor control condensate, and maybe that being more of an opportunity to move those hydrocarbons across the dock?

[Ruben Martin:]

Yes. We have that's what really changed and the whole situation is that when people started talking about the splitters. And then you get into the situation as what exactly are we talking about. And if you are talking about some of the stabilization units, splitters, the question is how deep you go and when is the government going to come out, when it comes to trying to exactly define what is exportable and what's not. And I think that it's kind of put a lot of people on hold. As I say, it's like they threw a hand grenade right in the middle when everybody is trying to make decisions and changed a lot of people decisions. So I think everybody is trying to evaluate exactly where they are going on the situation. We do know, for sure there is going to have to be more tankage, there is going to have to be more dock space. So all of these things are in play and we are currently talking about expansion on all of those levels. Question is, what type of stabilization or fractionation is it going to take to export the condensate or export the different products for the condensate.

[Darren Horowitz:]

Hypothetically, is any of that in that $50 million to $100 million of capital spend that Wes threw out for 2015?

[Ruben Martin:]

No. It's really not. We have already got on the books and looked at least $50 million worth of new projects that are there and looking at it probably another 100 that are out there that would be started. The thing is nowadays whenever you do start a project it takes so long when it comes to permitting and construction and all of these things. We are not as compared to what it used to do years go. So all of these types of projects are carryovers and as they start they go forward and they spread out over several years. But, we know that we have currently demanding the Corpus for an additional 0.5 million barrels maybe as much as a million barrels of new storage in Corpus. And it takes new docks to start getting those kind of barrels across the docks and into the market. So there is a lot of – there is still a lot of activity down there and we are hoping to see with some of the things happened in the market that a lot of activity will move north up into the Beaumont area too.

[Darren Horowitz:]

Okay. I appreciate it. Thank you.

[Operator:]

(Operator Instructions) And speakers I'm not showing any further questions in the queue at this time.

[Joe McCreery:]

Okay. We want to thank everybody for calling in and dialing in to get information concerning our company. And as we all know the third quarter for our company is the seasonal down for the entire company. We have had a real good recovery concerning marine transportation with all of the dry-docks and everything that had happened in the first half of the year. Our fourth quarter outlook is good. We expect good cash flows from West Texas LPG and from the Cardinal Gas Storage to kick in finally and continue to help us. But, fourth quarter looks good. 2014, we have increased our distribution. It's the best year for our distribution growth since 2009. And we like the trend. We like the way things are going. And there is a lot of activity and there is a lot going on down here. So we appreciate everybody's time and thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a good day everyone.