Martin Midstream Partners LP (MMLP) 2009 Q4 法說會逐字稿

Good morning. Welcome to the Martin Midstream Partners fourth-quarter 2009 investors conference call. This call is being recorded. At this time, I would like to turn the call over to Bob Bondurant, Chief Financial Officer.

Thank you, Javon. And to let everyone know who else is on the call today, we have Ruben Martin, Chief Executive Officer and Chairman of the Board; Wes Martin, Vice President of Business Development; and Joe McCreery, Vice President of Finance and Head of Investor Relations.

Before we get started with the financial and operational results for the fourth 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 unitholders. 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 principles and use certain non-GAAP financial measures within the meanings of the SEC Regulation G, such as distributable cash flow, DCF, and earnings before interest, taxes, depreciation, amortization, 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.

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. It should not be considered in isolation as an indicator of our performance.

We also included in our press release issued yesterday a reconciliation of distributable cash flow to the most comparable GAAP financial measure. Both our earnings press release and our 10-K are available at our website, www.Martinmidstream.com.

Before I begin with my discussion of our fourth-quarter performance, I want to point out the financial statement reporting impact in this year's 10-K or acquisition of the Cross naphthenic lube refining assets from our general partner.

In November 2009, the partnership acquired the refining assets of Cross Oil Refining & Marketing, Inc., referred to from here on as Cross, from Martin Resource Management Corporation, our general partner, for consideration consisting of the issuance of approximately 800,000 common units at a price of $27.96 per common unit and approximately 809,000 subordinated units at a price of $25.16 per subordinate unit resulting in total consideration of approximately $45 million.

Additionally, our general partner contributed $900,000 in cash to the partnership in conjunction with the issuance in order to maintain its 2% general partner interest. The partnership accounted for the Cross acquisition as a transfer of net assets between entities under common control pursuant to the provisions of FASB Accounting Standards [Codification] 850. The Cross refining assets were recorded at $33 million, which represents the amounts reflected in our general partner's historical consolidated financial statements.

ASC 850 also requires that all income statements be revised to include the results of the acquired assets as of the date of common control. Accordingly, the partnership's historical financial statements have been recast for periods subsequent to December 31 of 2006. Our general partner acquired Cross in November 2006. However, the activity for the Cross was owned by our general partner during 2006 was not considered significant to the partnership's consolidated financial statements and thus not included.

As a result of this accounting rule, our 2007, 2008, and 2009 financial results are being reported to assume that the partnership owned the naphthenic refinery assets during this period.

On a segment basis, the effects of these recast financial statements show up in our Terminalling segment. In our 2009 10-K, we have provided on page 50 a reconciliation from the actual results of our partnership to the recast results as if the partnership owned Cross for the entire years of 2007, 2008, and 2009. This reconciliation is important when one considers the actual performance of the partnership or seeks comparative year-over-year analysis.

Also I would like to point out the results of Cross that were recast into our historical financials were based on the actual results of the refinery including volumes and margin sold. The marketing and inventory risks that were not transferred to Martin Midstream Partners were recast into the financials.

Another way to say it is the financial results of Cross recast into our financials were not based on our throughput contract going forward, which will add at least an incremental $10 million of cash flow in 2010. Therefore I must exclude the recast financial effects of Cross my operational discussions that I will now begin.

As with other MLPs, we believe the most important measure of our performance is distributable cash flow. I want to deviate a little bit from my script here and comment on our earnings press release yesterday, on page 12 the DCF table, could be on the initial (inaudible) a little confusing. The columns on the left or the three months and the year ending are the comparable numbers to prior periods to report. Those were the actual results of Martin Midstream Partners.

And in the column in the middle, Cross asset results, are additive to get to what was -- ties to the 10-K. So again, the key columns are the historical Martin Midstream Partners LP.

So based on that, our distributable cash flow for the fourth quarter was $12.4 million, a distribution coverage of 1.05 times and for the year, our distribution coverage was 1.04 times.

Based upon our current $0.75 quarterly distribution and yesterday's close price of $32.03, our LP units are currently yielding 9.4%.

Now I would like to discuss our fourth-quarter performance by segment, again not including any recast financial information from the Cross transaction.

In our Terminalling segment, our cash flow, which is defined as operating income plus depreciation, amortization, but excluding any gain on sale of assets was $6.1 million in the fourth quarter compared to $5 million in the third quarter. The increase in cash flow was primarily a result of increased cash flow in our specialty terminals.

Our specialty terminal cash flow increased $1 million primarily due to the throughput fees earned by the Cross refinery assets. We also have experienced increased throughput fees for improved sulfuric acid volumes as strong copper prices have possibly influenced acid demand. We also had a $100,000 increase in cash flow from our marine shore-based terminals in the fourth quarter as we were able to expand our lube margins.

For 2009, our Terminalling cash flow grew to $22.2 million compared to $21.5 million for 2008. For 2010 we believe our Cross assets will add an incremental $10 million to our Terminalling cash flow. Also related to our Terminalling segment, at the end of December we had a net receivable from our insurance carrier for $600,000 which was collected in January 2010. This was the final insurance payment due from our 2008 Hurricane Ike claim mentioned on previous calls.

In our Natural Gas Services segment, we had an operating income of $0.4 million in the fourth quarter compared to $1.7 million in the third quarter. In the fourth quarter, we had an approximate $500,000 non-cash commodity hedging mark-to-market loss compared to a $200,000 non-cash mark-to-market gain in the third quarter. So excluding non-cash mark-to-market adjustments, we had an operating income of $0.9 million in the fourth quarter compared to $1.5 million in the third quarter.

Complementing our Natural Gas Services is our cash flow from our unconsolidated entities, which is primarily our 50% owned operating interest in the Waskom Gas Processing plant. For the fourth quarter, our cash flow generated from these unconsolidated entities was $2.1 million compared to $3.1 million in the third quarter. So excluding the impact of non-cash mark-to-market adjustments, and including our distributions from our unconsolidated entities and adding back depreciation and amortization, our Natural Gas Services cash flow for the fourth quarter was $4.3 million compared to $5.8 million in the third quarter.

During the fourth quarter, our average processing volume at the Waskom plant was 242 million cubic feet per day compared to 255 million cubic feet per day in the third quarter. Process volumes were constrained due to a third-party pipeline interruption. While the third-party pipeline still has some operational issues, volumes to the plant have begun to improve. While we only processed 235 million a day in January, with our acquisition of the Harrison pipeline system in January we have been able to divert gas away from this third party line and get it through ours to Waskom.

As a result, volumes processed through Waskom in February were 261 million cubic feet per day, an 11% improvement over January. Waskom's current processing contract is 45% of liquids, 36% fee-based, 19% proceeds, and less than 1% keep whole. We currently have 50% of our 2010 volumes hedged and 10% of 2011 volumes hedged.

Factoring in our hedge funds, a dollar change in natural gas pricing effects our cash flow $42,000 per month. And a $10 change in oil pricing changes our cash flow $58,000 per month.

One negative issue we experienced in 2009 compared to previous years was a leaning up of our gas processed due to increasing Haynesville Shale production. As a result, the liquids content of our process gas is down about 15% from historical norms. Fortunately two changes in 2010 should help improve our liquid recoveries per MMBTU.

One is our Harrison pipeline system will allow us the opportunity to bifurcate, dry or lean Haynesville gas from wet or rich Cotton Valley gas. This would allow us to bypass Haynesville gas away from the plant, saving incremental processing capacity for wetter Cotton Valley gas.

Also the drilling programs of key producers in our area are forecasting a significant increase in horizontal Cotton Valley drilling in 2010 compared to 2009. The execution of these drilling plans should help to maximize processing capacity at Waskom for the second half of the year, with increased volumes of wet Cotton Valley gas.

Also in the first quarter of 2001, we expect a strong performance from our legacy wholesale propane business as we have experienced record volume sales at very strong margins. In the first quarter, we have experienced a very cold winter in our marketing area, which has driven the increased volume demand in our wholesale propane business. Thank you, global warming.

So based on the current operating conditions I have just described, we expect a significant improvement in cash flow in 2010 from our Natural Gas Services segment when compared to 2009.

In our Sulfur Services segment, our cash flow was $3.6 million in the fourth quarter compared to $2.4 million in the third quarter. We experienced a $1.1 million increase in cash flow on the fertilizer side of the business and a $0.1 million increase in the pure sulfur side of the business. We experienced a 22% increase in demand for our fertilizer products in the fourth quarter as our customers executed their traditional winter fuel program.

Also our fertilizer group margin per ton grew to $23.57 in the fourth quarter, up over 200% when compared to the third quarter. These operating metrics were the primary reason for the increased cash flow in the fourth quarter.

Looking toward 2010, we anticipate both a stronger volume demand year and a stronger pricing year. We are generally indifferent to pricing as both our fertilizer and molten sulfur business operate as a margin-based business and our prilled sulfur business operates as a take or pay or reservation fee business.

However, when the sulfur industry does experience volatility in pricing, we believe we are positioned to take positive advantage of pricing changes through our extensive asset infrastructure of trucks, railcars, inland and offshore barges, strategically located terminals, and geographically diverse prilling facilities. Thus we believe our Sulfur Services segment has come through a trough in 2009 and we anticipate 2010 will provide us an increased cash flow relative to 2009.

In our Marine Transportation segment, we had cash flow of $5.2 million in the fourth quarter compared to $6.1 million in the third quarter, a decrease of $900,000. Our offshore cash flow decreased $0.4 million in the fourth quarter compared to the third quarter. Although we experienced increased utilization and revenue of our offshore fleet in the fourth quarter, we had increased operating expenses primarily consisting of unscheduled repairs and maintenance that more than offset the revenue increases.

Looking toward the first quarter of 2010, our offshore fleet remains fully employed even though one vessel remains in the spot market.

On the inland side of the business, our cash flow was down $0.5 million in the fourth quarter compared to the third quarter. Although the inland fleet has generally stayed fully utilized, our inland tolls in the spot market have experienced downward rate pressure due to weak refinery utilization. In spite of existing weak refinery utilization, we feel that because of our investment in marine equipment over the last three years, we should remain at least 90% utilized on the inland side.

As a result of our net investment in new marine equipment, we anticipate lowering the average age of our fleet from 33 years in 2006 to 19 years by the end of 2010. That fact coupled with our excellent customer service and our ability to haul diverse product should allow us to maintain strong utilization with our inland fleet. Therefore, we believe our risk in 2010 is on the pricing side of the inland business.

We have two inland tolls coming off term contracts that will be repriced in the spot market in 2010. We anticipate a price reduction of 15% to 20% on those two tolls. However, the inland fleet will be approximately 80% under term contract in 2010, which generally provides stronger day rate pricing than the current spot market.

As a result of this modest repricing exposure, we are internally forecasting a slight decrease in cash flow in 2010 compared to the total marine transportation cash flow of $18.8 million in 2009.

So to summarize our fourth-quarter activity, Terminalling and Sulfur Services cash flow were up a combined $2.3 million, offset by Natural Gas Services and Marine Transportation cash flow, which was down by a combined $2.4 million. This cash flow offset amongst our operating segments highlights what we believe is the strength of our partnership, a diverse business segment model which provides for overall cash flow stability.

Finally, our Marine capital expenditures for the fourth quarter were $0.8 million and were only $7.5 million for the year. We have begun to realize an improvement in our Marine Transportation and maintenance capital expenditures as a result of significantly lowering the average age of our fleet.

Looking toward 2010, we feel we have maintenance capital expenditures of approximately $9 million to $10 million. The increase in these costs in 2010 compared to 2009 will come from expenditures that need to be made at some of our marine shore bases and also at the Cross refinery.

Now I would like to turn the call over to Joe McCreery, who will speak about our liquidity, balance sheet, and recent capital markets activity.

Thanks, Bob. I would now like to walk you through the right side of our balance sheet and discuss our liquidity and financial condition.

At December 31, 2009, the partnership had funded debt of approximately $304 million. This consisted of approximately $298 million drawn under our new $336 million senior secured credit facilities plus $6 million of capitalized leases. Thus the partnership's available liquidity at December 31, 2009 was approximately $32 million. This compares favorably to the approximate $19 million of available liquidity under our old $325 million credit facility at September 30, 2009.

For the year ended December 31, 2009, our bank compliant leverage ratio as defined by consolidated secured indebtedness to consolidated adjusted EBITDA was 3.6 times. Additionally, our bank compliant interest coverage ratio as defined by adjusted EBITDA to consolidated interest expense was 4.6 times. Finally, our total debt to total capitalization was 53.5% on December 31 and the partnership was in full compliance with all covenants, financial or otherwise.

During the fourth quarter 2009, our liquidity position improved significantly based primarily on two specific transactions. First as we reported and announced on our third-quarter conference call in November, the partnership completed the drop-down of the Cross oil lubricant processing assets from our general partner, Martin Resource Management Corporation. Concurrent with that drop down, the partnership sold $20 million of common equity units, also to our general partner.

This issuance of equity provided additional liquidity and perhaps more importantly provided for ample delivering of the partnership's balance sheet in anticipation of our pending refinancing.

After the Cross drop-down transaction and equity infusion, our focus immediately shifted to the refinancing of our credit facilities. Successfully on December 21, 2009, the partnership closed and upsized amended credit facility package with a syndicate of lenders led by Wells Fargo securities. This new facility replaced the previous $325 million agreement whose commitments were scheduled to insure this November. As mentioned, our new facility was upsized to $336 million and is now scheduled to mature November 2012. Our new credit facilities are governed by similar financial covenants as the previous agreement.

In association with our refinancing, our borrowed rate of interest increased from LIBOR plus 200 to LIBOR plus 450 basis points. This substantial increase was due primarily to the conditions we encountered in the credit markets as opposed to market conditions prevalent when our previous agreement was put in place in late 2005. As all the partnership's indebtedness is floating rate, we have entered into multiple hedging arrangements to swap this debt to fixed rates of interest.

Most of these hedges were put in place several years ago and due to the subsequent drop in rates are now largely out of the money. At December 31, 2009, we marked a net loss of $5.3 million on our hedges in place. However, there may be a silver lining to this dark cloud. Currently low LIBOR levels have helped minimize the additional cash interest expense impact of paying our new higher margin on the recently refinanced credit facilities.

It should be noted also that several of these hedges will mature between now and our previous scheduled maturity date of November 10, 2010. Should LIBOR remain at or near its current low levels, we expect our overall cost of borrowing on our credit facility to decrease throughout 2010 as our out of the money hedges roll off.

For comparative purposes, our net rate of borrowing on our new credit facility given effect to all hedges in place at December 31, 2009 was 7.32%. This would be compared to 6.48% at December 31, 2008.

Now let me update on a couple of additional items that have transpired since year-end. Thus far in 2010, we have continued to improve upon our liquidity position. On February 8, we closed a $1.65 million common unit offering priced at $32.35. Including our general partner's 2% owners contribution, we raised approximately $51.7 million. This is the first time since May 2007 that the partnership has issued equity through a public follow-on offering. We were very pleased with our execution and the price we received from our syndicate led by UBS Investment Bank.

The pro forma effect of this equity raise as we calculate for our bank compliance certificate reduces the partnership's leverage to 3.2 times debt to EBITDA.

Finally and subsequent to our equity issuance, last week on February 25 we added a lender to our senior secured credit facilities via our accordion option. This brings our total bank commitments to the partnership under that agreement to $350 million. As of March 4, 2010, we had approximately $277 million drawn, rendering the partnership with current available liquidity of approximately $73 million.

As you can appreciate, this is a vast improvement from where the partnership stood just one quarter ago. We believe our recharged balance sheet and our improved liquidity position allows us return to strategic growth both organically and through potential acquisitions.

Javon, this concludes our prepared remarks this morning. We would now like to open the lines for a question-and-answer session.

(Operator Instructions) Darren Horowitz, Raymond James.

Good morning. Bob, we are also kind of wondering what's going on with the global warming here in Houston. A couple quick questions for you. First around Waskom, can you quantify the benefit that you think the Harrison pipeline is going to give you specifically in terms of better optimizing Waskom?

One thing that it did is when we had the third-party problem that we encountered that was feeding our plant, we were able to bypass the third-party with that facility and continue to feed the plant with gas that would have been on the other system that we were able to move to the Harrison system. So when you look at it from that standpoint, it was a big help.

The other thing is again as we see our gas liquids ratio drop from about 2.2 gallons, I think it was at 15% below that to about 1.9 to 2 gallons, a lot of it has to do -- we are taking up a lot of our capacity at the plant with drier Haynesville Shale gas. And so what we are trying to do is to separate those two and so that when things kick back up and we move back up, we will be able to substitute in the wetter Cotton Valley gas with more -- to offset the Haynesville gas, which can use up capacity.

And as we say, we've seen several of our suppliers, several of our dedicated acreages coming back in with Cotton Valley horizontals, which are very prolific too. It also -- it added fee-based gas processing to it. So you took 2 million more this year of fee-based gas. Next year it will be 4 million as we hook up some new connections and so forth. So it's a situation that allowed us to not only expand the plant with more gas processing through the wetter gas, but it also kept some gas in our plant that we were worried about losing if we had lost the system to another company, it kept gas that stayed in our system. So it was a positive from several different aspects.

Okay, Ruben, just to add a little bit more color to that latter point that you mentioned on the horizontal Cotton Valley drilling picking back up, can you give us a sense in the second half of this year as to the type of run rate that you expect through Waskom?

This is Bob. The plant capacity is 285 and our projection is that we actually running through a little bit more than that. That's the nameplate capacity, so it's going to be -- it should be full in the second half of the year.

Thanks, guys. I appreciate it.

Ron Londe, Wells Fargo.

Thanks. Rubin, if you could, can you give us some insight into the dynamics that are going on in the sulfur business right now and what your outlook is going into 2010?

Yes, we've seen it -- of course, we have seen it within 18 months, two years -- we've seen it up at $600 a ton. We've seen it down to zero dollars a ton at Tampa within that period, which means the refineries in Houston were writing a check for $30, $40 a ton to get rid of the product. Now we've seen it go back to a fairly tight market at this point in time, say back to $90 at Tampa and we expect another increase in the next quarter.

And a lot of it has to do of course as we've seen with refinery utilization, there's a lot less of the molten sulfur that was coming into the market as I think refiners were trying to run as much lighter, sweeter crudes that they could and with the utilization down of course there was less sulfur in the market. We've seen that pick up in the last couple of weeks as you have seen. I know everybody's seen the gasoline crude crack has substantially come up. And so I think we've seen some utilization. We've kind of seen the sulfur come back to that standpoint but still it's a tight market.

When you look at it worldwide, one of the products that of course comes from sulfur is sulfuric acid and sulfuric acid is a good indicator of economic conditions in certain countries and around the world, and we have seen it get extremely tight. We've seen sulfuric acid cargoes go from zero to negative numbers to back up in the 70s to $150 a ton on sulfuric acid.

So there's been a real swing in all of these types of commodities. So I guess the good news is we have seen it come back up. Our position in the market theoretically doesn't hurt us on either way. We feel positive about what our position is with the sulfur and the good news is, you know, we had that lag contract that I think we've talked about on the other calls that helped us when it came down last year. If you remember the fourth quarter of '08, remember we had that big gain and that was when it dropped from 600 down.

The good news, that contract is no more after June, and so we've matched up the purchase side and we've matched up the sell side to a direct. We don't have any lag, and so while we won't see the big ups if it comes back down, we won't see any downs as the market moves up.

And we see sulfur and some of these other commodities as -- you've seen copper back to 340. It has just been -- it's a situation that we are seeing these commodities come back, so our position in sulfur right now is very good, very steady. We are seeing our volumes increase and we've still got some good contracts that are kicking in for prilling services over the next couple of years.

On the terminalling side, are you seeing any volatility at all through to refinery runs?

No, we really haven't. Most of our tankage is set out at regular fee-based type numbers. We haven't seen a big fluctuation in those kind of things.

Most of our terminalling contracts, on the specialty side of the business, it's all take or pay, no volume throughput kind of stuff. On the shore-based side, we have seen our volumes. The shore-based side works for the general partner. But we have some minimum volumes of 90 million gallons a year of throughput. In 2009, the volumes were below that, so the general partner had to cover that shortfall.

We have seen beginning in February a significant increase in our volumes through our shore-based terminals though. So we are seeing the market change a bit on that. So I think we are forecasting probably to hit the minimums, but based on the volumes going in February, there's a chance we could be better than the minimums on our shore-based side.

Of course, our shore-based activity is very correlated to the offshore oil and gas drilling in the Gulf of Mexico.

From the standpoint of the Cross refinery, have you made a decision about putting capital into it and kind of the timing?

We have some very modest projects of gross side that's probably totals $3 million or so that are less than 4 multiples. We are evaluating other projects that could be more significant, but its very early stages of analysis.

Okay, thanks.

(Operator Instructions) Mark Easterbrook, RBC Capital Markets.

Good morning. A quick question on -- you mentioned the drilling in the Cotton Valley might improve. Could you put some numbers around that? Do you have maybe a particular number of rigs that might be coming into the area? Any kind of details on that front?

No, I really don't have a total number of rigs, but I know that -- like I said, one of our suppliers to the plant had zero last year and they scheduled --

-- They said they are going to do 10, but in our model, we only used half of that. They were planning 10 horizontal Cotton Valleys. That's one large producer. We won't use their name but -- and that is a symptomatic of what's happening with other producers in the area too.

Okay. And then you mentioned I think some tolls that were coming up for renewal, I think two of them. Do you see those to go back onto a long-term rate structure or into the spot market?

here is what is happening. Most of our marine vessels are employed by generally majors, I will say, maybe not integrated but majors refineries. What's happening is the refineries need the vessels but I think in their organizations, they can't term up for any length of time. I think they have a corporate mandate not to term up things at this time. So what's happening is they are coming off term contracts but staying employed with that same refinery but under spot contracts. So the equipment is staying employed. Obviously the market conditions on pricing are less than what we termed up contracts two or three years ago.

I think what will happen like anything, they are overreacting I believe on those majors on the terming idea. And what will happen is the market will get tight again and they will all scramble for term as the pricing comes up.

You have to remember, if you are talking about a toll that's getting $6,000, $7,000 a day, if you get a 10 per center 15% drop, you're talking about $700,000, $800,000 a day tops on that toll. So when you look at our overall cash flow and again the diverse nature of our partnership, the overall hit to the partnership is not that dramatic.

Okay, thanks for the color.

(Operator Instructions) Sir, I'm showing no further questions from the queue.

Yes, I'm going to emphasize before Rubin closes the call, everybody, I hope everybody understood the impact of the Cross in the numbers and again, page 50 has a reconciliation so as you analyze the numbers you need to account for that. Also the DCF table. If you have any questions, if you are confused at all, please call me or Joe or Wes Martin and we will walk you through that.

With that, I'll turn it over to Rubin.

Thank you again. I know that you guys are hearing this for the last year since we formed, but the diverse nature of our partnership really helped us out in the difficult times that we came through here in 2009.

When you look at -- we had several -- a couple of segments up, a couple of segments down. Parts of our business were flat. But we are seeing an upturn in the business and it's really unlikely that we see a downturn in all of them at the same time. I've been doing this for a long time and I haven't ever seen that. The best part is when they all get cooking at the same time.

So we are also encouraged by our improved liquidity. Joe has done a great job getting us -- getting that situation improved and our position and a much stronger balance sheet. The good thing that it really helps us on is we have a lot of -- several -- a lot of smaller internal organic type projects that we had been delaying, bases that liquidity from last year. This loosens up for a lot of good, small projects. I'm talking projects in the $3 million to $5 billion range that have two, three multiples on them. So those are the kind of projects that we are going to really concentrate on here in the next few months as we go into 2010 and into 2011 as things get better on our particular side of the balance sheet and our cash flow.

So with that, I appreciate everybody's time. We appreciate everybody. If you've got questions about that, I know that it was kind of a difficult time. I know that coming through the recast of the financials was very difficult, but we got there and we are looking forward to the next few years. Thank you for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.