Martin Midstream Partners LP (MMLP) 2008 Q4 法說會逐字稿

Good morning and welcome to the Martin Midstream Partners fourth quarter 2008 year end earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Bob Bondurant, Chief Financial Officer for Martin Midstream Partners. Thank you, Mr. Bondurant, you may begin.

Thank you, Everett. And to let everyone know who is on the call today, we have Ruben Martin, Chief Executive Officer and Director of the Company. Wes Martin, Vice President of Business Development, and Joe [McQueary], Vice President of Finance. Before we get started with my business comments, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performances and our ability to make distributions to unit holders.

The words anticipate, estimate, expect and similar expressions are intended to be among the statements that identify forward-looking statements made during the call. We report our financial results in accordance with generally accepted accounting principals and use certain non-GAAP financial measures within the meanings of SEC Regulation G, such as distributable cash flow and 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 availability to pay distributions.

Distributable cash flow should not be considered an alternative to cash flow from operating activities. Furthermore, distributable cash flow is not a measure of financial performance or liquidity under GAAP and should not be considered in isolation as an indicator of our performance. We've also included in our press releasee issued yesterday, a reconciliation of distributable cash flow to the most comparable GAAP financial measure. With our earnings press release and our 2008 10-K are available at our website, www.MartinMidstream.com.

With that out of the way, I would like to comment on our fourth quarter performance. For the fourth quarter, we had net income of $16.7 million or $1.08 per limited partner unit. In the fourth quarter, because of certain commodity and interest rate hedges that did not qualify for hedge accounting, our net earnings were positively impacted by $800,000 or $0.06 per limited partner unit. Without this positive net nonimpact cash to our financials, our earnings would have approximated $15.9 million or $1.02 per limited partner unit.

As with other MLPs, the most important measure of our performance is distributable cash flow. Our distributable cash flow for the fourth quarter was $19 million, a distribution coverage of 1.6 times. For the year, our distributable cash cash flow was $59 million. This distributable cash flow provided a distribution coverage of 1.3 times for the year, the highest in our company's history.

We increased cash distributions paid in 2008 to $2.91 per limited partner unit which represents an approximately 12% increase when compared to 2007. However, due to the collapse of financial markets and corresponding lack of access to new capital, we kept our cash distribution flat at $0.75 per unit per quarter. This decision was based upon current economic conditions and also for preservation of capital. Based upon our current $0.75 quarterly distribution and yesterday's closed price of $16.61, we are currently yielding 18.1%.

Now I would like to discuss our fourth quarter performance by segment, comparing that performance to the third quarter. I would like to lead off with a discussion of our sulfur services segment as it had an extraordinarily strong performance in the fourth quarter. In this segment, our cash flow which is defined as operating income, plus depreciation and amortization, was $16.7 million in the fourth quarter, compared to $8.1 million in the third quarter, a 106% increase. Although our volumes decreased 6%, our margins increased 81%.

Sulfur prices fell $467 per ton in the fourth quarter. The price decrease was positive for us due to the contract structure with our largest sulfur customer where in a portion of any quarter, we bill this customer the previous quarter sulfur price which provides us improved margins when prices are falling. Of course when prices are rising which happened in the first three quarters of 2008, our margins were negatively impacted. Sulfur fell another $150 per ton in the first quarter of 2009 which is beneficial to this contract. However, the volume sold to this customer will be less than the fourth quarter so forecasted cash flow for the first quarter will be significantly reduced when compared to the fourth quarter.

In our terminalling and storage segment, our cash flow was $6.7 million in the fourth quarter, compared to $5.2 million in the third quarter. The third quarter was negatively impacted by $1.5 million hurricane deductible charge. If that charge was added back in the third quarter, our cash flow would have been $6.7 million, meaning our fourth quarter was flat when compared to the third quarter.

For the first quarter of 2009, we have seen a slight decrease in fuel volumes running through our shore-based terminals so I believe cash flow from this segment will be slightly down in the first quarter. This volume decrease is a result of some of our shore-based competitors coming back online after being down for hurricane Ike. Also, there has been a slight decline in off-shore drilling activity working out of our shore bases.

In our natural gas services segment, we had operating income of $1.2 million in the fourth quarter, compared to $4.7 million in the third quarter. In the fourth quarter, we had a $3.4 million noncash mark-to-market benefit compared, to a $6.6 million noncash mark-to-market benefit in the third quarter. Complementing our natural gas services is our cash flow from our unconsolidated entities which is primarily our 50% owned Washington gas processing plant.

For the fourth quarter, our cash flow generated from these unconsolidated entities was $2.6 million, compared to $3.5 million in the third quarter. So without the impact of the noncash mark-to-market benefits plus our distributions from our unconsolidated entities, our natural gas services cash flow for the fourth quarter was $1.4 million, compared to $2.6 million in the third quarter. Negatively impacting the natural gas services cash flow was the approximate 50% decline of NGL pricing that occurred in the fourth quarter. This had a large negative impact to our wholesale propane business.

Due to generally accepted accounting principals, we were forced to write down inventories to the lower of cost of market at year-end. This negatively impacted our fourth quarter by approximately $2.7 million. Fortunately, we have sales contracts for this inventory in the first quarter at much higher prices than what we are carrying that propane inventory for. So, we should recover the inventory write down that occurred in the fourth quarter.

Washington's current contract mix is 45% percent of liquids, 39% fee-based, 16% percent of proceeds, and less than 1% [key hole]. We currently have 47% of 2009 volumes hedged, 21% of 2010 volumes hedged. We unwound our 2011 hedges which represented only 10% of that year's volume hedged, and received a cash payment of $1.9 million in the fourth quarter. For 2009, a $1.00 change in natural gas pricing affects our cash flow of $50,000 per month and a $10.00 change in crude oil pricing changes our cash flow approximately $120,000 per month.

Looking forward to the first quarter, our plant inland buys will be similar to the fourth quarter. Currently, we are processing 270 million cubic feet per day at our Washington plant. However processing volumes in January and February were down a bit so we should average approximately 250 million cubic feet per day for the first quarter.

Also in the first quarter, we expect our wholesale propane business to improve when compared to the fourth quarter, due to deliveries of propane at higher values than our year-end inventory carrying costs. Also regarding our competitive position in the east Texas gas processing market, we continue to be the only gas plant in our market area that has full fractionation capability, giving us a competitive advantage to other gas plants in the area.

In our marine transportation segment, we had operating cash flow of $4.9 million in the fourth quarter, compared to $5.7 million in the third quarter. The decrease in cash flow was driven by a fourth quarter increase in marine SG&A costs. The increase was primarily driven by a bad debt charge, relating to a shipyard that was destroyed by hurricane Ike and a subsequent bankruptcy filing by that same shipyard. We had advanced payments to that shipyard for tug construction and because of the bankruptcy filing, we took a bad debt charge in the fourth quarter. Excluding this unusual charge, our marine operating cash flow would have been $6.2 million for the fourth quarter, a $500,000 increase over the third quarter.

Looking forward to the first quarter of 2009, our fleet remains highly utilized. And other than downtime surrounding scheduled Coast Guard mandated dry dockings, we foresee continued high utilization rates throughout 2009. Looking toward 2009, our internal forecast shows our cash flow contribution by segment to be approximately the same or roughly 25% per segment between all four segments. We continue to believe this diversity of cash flow is a unique strength in these challenging economic times and positively differentiates us from other single line of business master limited partnerships.

Now I would like to discuss our liquidity and capital resources. At December 31, 2008, we had $295 million drawn against our $325 million credit facility. Our debt to total capitalization at the end of the year was 56%. And our bank facilities rolling 12-months leverage ratio, defined as total debt to EBITDA was 3.18 to 1.

Based on that leverage ratio, our interest rate is LIBOR plugs 200. Of our total debt outstanding, we have fixed $235 million of our bank facility through interest rate hedges at an average interest rate of 4.44%. When added to the applicable margin of 200 basis points, our hedge rate is 6.44%.

Our maintenance capital expenditures for the fourth quarter were $5.1 million. Looking forward to 2009, we anticipate maintenance capital expenditures of approximately $9 million to $11 million. The 2009 maintenance capital expenditure plan is front-end loaded as approximately 70% of our maintenance CapEx budget is forecasted to be spent in the first half of the year. We spent the approximately $84 million of growth CapEx this year.

Looking forward to 2009, our growth CapEx will be significantly reduced as we are only completing existing projects that are in process or are under contract and must be completed. A significant portion of these new assets are marine vessels that will come out of the shipyard in August and September. We are in the process of evaluating leasing opportunities with financial providers for these new marine vessels in order to preserve capital availability under our bank facility.

We have also made progress in our plans to sell certain nonstrategic assets. The sale of these nonstrategic assets will create additional liquidity for us and it will allow us to bridge the gap to a better capital markets environment. We should have more clarity on these nonstrategic asset sales over the next two months. This concludes my formal comments. Operator, please hope the phone lines for questions

Thank you, sir. (Operator Instructions). Our first question is from the line of Darren Horowitz with Raymond James. Please proceed with your question.

Good morning, guys. Bob, on the 2009 growth CapEx program, can you quantify exactly how much is going to be reduced year-over-year and more specifically detail what projects have been cut?

Basically, what's in our forecast roughly for 2009 is approximately $30 million. However, the leasing opportunities will allow us to be able to finance probably $25 million of that. That would not come into our bank facility. That is where it stands right now.

Okay. Switching gears over to the assets that you're looking to sell. I think last quarter on the call, you were talking about marketing two tugs and you hoped to achieve about $25 million. Can you give us a little more clarity on that? Are there any more nonstrategic assets that you are considering selling at this point in time and can you give us a sense of what the market is for those assets?

Yes. In addition to the two tugs and two barges, actually it was really two tows and they are both off shore, that is still in process. We should have clarity on one of those here in the next 30 to 60 days and the other one is in the fourth quarter. There is also a nonstrategic terminal that we are in negotiations with potential buyer, and we're very close to some resolution on that. The cash generated on that would be approximately $24 million.

Okay. And then just one big picture question for Ruben. When you're looking at the comp value what are you hearing from [producers] as it sits today? Are rigs being laid down to the pace that we hear rumblings throughout the channel or are you guys seeing something different?

No, I think you have seen a pretty good laydown in the rigs. It -- we have got to be getting close to the bottom of the laydown. You're just seeing the new technology on the horizontal drilling and everything is really taking up the slack on a lot of the comp value. I don't know that you've seen a big change in production. I think that a lot of it is just now working through the system, as we have seen with some of the major producers here recently that are saying that they are just not going to produce at some of these levels.

I think we will continue to see some deterioration in the total gas supply coming out of the area, but there is still a lot of plans for a lot of big pipes running in and out of this area. As Bob said, since we have a fractionator and everything -- we're basically last man standing in this areas as far as processing and economics go. We're not totally too distraught concerning some of the things that are happening here through east Texas. I have seen gas here at $0.80 before and people were drilling it. I think you will continue to see east Texas as a very prolific area for production.

Thanks, guys. I appreciate it.

Thank you, ladies and gentlemen. Our next question comes from the line of Sean Wells with RBC Capital Markets. Please proceed with your question.

Good morning, guys. Hey, in the last call I think you mentioned about a processing pullback in your business footprint for natural gas services. I was wondering if you guys had seen any more of that recently?

When you say a processing pullback, what exactly do you mean?

There were plans for various expansions in your -- in and around your business footprint and so I was wondering if you had seen any more of that recently?

You couldn't see a whole lot more than what was already announced because pretty much every new project in the area was pretty much cancelled. I think it was around five plants that were basically cancelled throughout the area so yes. As far as all of the competitors in this area that had plans on the drawing board, they have pretty much all been cancelled.

Okay. Moving over to sulfur services, I noticed on the volumes for especially sulfur, they were down this quarter noticeably. Can you -- I understand that the performance of the segment was pushed up by margins, but why were the volumes so low?

A lot of the volumes in those things -- a lot of our producers went totally to prilling their sulfur for export to try to get it out for export because the domestic consumers just didn't exist. It probably lowered the volumes throughout our total system, because a lot of these guys went straight to the priller which probably -- it doesn't show up in our volumes, our purchase and resales of sulfur because we're just providing the service to do it. We're generating revenue even though the volumes may be down because we're not buying and selling the sulfur.

And a lot of it just had to do with looking for different homes because the consumers just were not consuming and so we had to cut back suppliers. Suppliers were trying to cut back, find alternatives. It was a very difficult time. It has actually leveled back out at this point in time and we should see those volumes maintained and get steady again because the consumption has actually come back. And other than turnarounds in refineries and so forth, production should be back to normal levels for the rest of the year.

Okay. One last question and that has to do with maintenance capital expense for this quarter. I think you guys were guiding around $3.5 million, and it came out to be about $5.1 million. I was just wondering why that was steeper this quarter than expected.

It was on the marine transportation side. They just had -- bottom line, they underforecasted what they thought some of their drydocks were going to cost. They cost a little more than what was anticipated. Fortunately for us, we have been on a two-year really big spend on maintenance CapEx in the marine business. That has basically almost been completed. For example, of our $15 million in maintenance CapEx this year, roughly $10 million of it was in marine. We are forecasting only $5 million in marine next year because we have done a massive overhaul of the system and that has basically completed now.

With the addition of new vessels as well.

Yes, that's correct.

Reduced the maintenance CapEx going forward.

That is correct, that is correct. New vessels coming online will help that situation as well.

Okay. Thanks a lot. I appreciate the insight. Thanks.

Thank you,. Ladies and gentlemen our next question comes from the line of Jeff Morgan with Wachovia. Please proceed with your question.

Thanks. Good morning,. Most of my questions have been answered already, but one quick question. What are you guys seeing from a refinery utilization trend in your areas and is that having any impact on your different businesses?

The refinery utilization in our area is mainly Gulf Coast and obviously we have seen refinery utilization at some historic lows. Most of the tows that we have now are out on full-day charter. We get paid whether they are moving or not. We have seen some of the people trying to sublet their tows and so forth through the area.

But overall the volumes, even in refinery utilization as it comes down sometimes in the areas where we deal which is the asphalt and some of the harder to handle products, you don't see a big reduction in that overall amount volume compared to the market. We have not seen a big turn-down in our business due to refinery utilization. Hopefully, the refinery utilization is getting close to the bottom. I think it is around what, 84% or so? Low 80s? Which is historic lows and we still seem to be very busy.

Okay. Great. That's all I had. Thanks.

Thank you. One moment please while we poll for any further questions. Thank you, but we have no further questions at this time. I would like to turn the floor back to management.

Okay. Thank you, guys, for calling in today. We were very proud of our fourth quarter with our strongest quarter ever in these times and the distribution coverage was good in these very difficult times. I believe we really benefit from the diversity in our company. It has added something -- I think we have been touting this diversity from the time that we went public in 2002. I believe it is finally coming around to where it really makes a difference in comparing us to the other MLPs.

We have got a -- our managers have really been working hard to cut our capital expenditures, reduce our cash and -- to maintain our cash to reduce our capital expenditures and cut our growth capital expenditures to a bare minimum to maintain this cash. A lot of discipline; we're working very hard to keep this thing going. We have got some good flexibility going forward where we stand right now so we feel good about 2009, and hope to continue with these good quarters.

I appreciate everybody's time calling in and we will see you next time. Thank you,.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.