Martin Midstream Partners LP (MMLP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Martin Midstream second-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Bob Bondurant, Chief Financial Officer of Martin Midstream Partners. Sir, you may begin.

Thank you, Devin. Let everyone know who is on the call today we have Ruben Martin, CEO and Chairman of the Board; Wes Martin, Vice President of Business Development; and Joe McCreery, VP of Finance and Head of Investor Relations.

Before we get started with the financial and operational results for the second 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 and 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 and 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 second-quarter 10-Q are available at our website, www.martinmidstream.com.

Now I would like to discuss our second-quarter performance. For the second quarter of 2010, we had operating income of $9.1 million compared to $16 million in the second quarter of '09. However, last year's second quarter had a $5.1 million gain on the sale of our railcar unloading facility. Also, SEC accounting rules required us to recast 2009 financial statements as if MMLP owned the Cross refinery in 2009.

Also, these 2009 recast Cross numbers were not reflective of the actual throughput contract that was negotiated as part of our November 2009 acquisition, but were recast as if MMLP owned Cross as a margin business and not a throughput fee business. The affect of these recast number positively impacted second-quarter 2009 operating income by $4.9 million.

Also, for the second quarter 2010, we had a positive non-cash mark-to-market commodity adjustment of $0.5 million compared to a non-cash mark-to-market commodity charge of $1.9 million in the second quarter of '09. So when one factors out all the just described second-quarter noise affecting operating income, comparative second-quarter operating income for 2010 would have been $8.7 million compared to $7.9 million for '09.

Additionally, our equity in earnings of unconsolidated entities for the second quarter of 2010 was $2.3 million compared to $1 million for the same quarter in '09. So adjusted operating income, plus equity and earnings of unconsolidated entities for the second quarter of 2010 was $11 million compared to $8.9 million for the second quarter of '09, an increase of $2.1 million.

As with other MLPs, we believe the most important measure of our performance is distributable cash flow. Our distributable cash flow for the second quarter was $14.8 million, which is a distribution coverage of 1.02 times. Based upon our current $0.75 quarterly distribution and yesterday's close price of $32.91, our LP units are currently yielding 9.1%.

Now I'd like to discuss our second-quarter performance by segment in comparison with the first quarter. In our Terminalling segment, our cash flow, which is defined as operating income, plus depreciation and amortization, but excluding any gain on sale of assets, was $8.5 million in the second quarter compared to $7.3 million in the first quarter. Our [specialty] Terminalling cash flow increased from $4.4 million to $5.4 million, primarily due to reduced operating costs at the Cross refinery. For the second quarter, Cross contributed $3.3 million of cash flow compared to $2.2 million in the first quarter.

We also had a $200,000 increase in cash flow from our marine shore-based terminals in the second quarter. The marine shore-based terminals contributed $3.1 million of cash flow in the second quarter compared to $2.9 million of cash flow in the first quarter. This increase was primarily driven by increased diesel volume, which was throughput at our marine shore bases.

In our Natural Gas Services segment, we had operating income of a negative $300,000 in the second quarter compared to $2.3 million in the first quarter. In the second quarter, we had an approximate $0.5 million non-cash commodity hedging mark-to-market gain compared to a $100,000 non-cash mark-to-market loss in the first quarter. So excluding non-cash mark-to-market adjustments, we had an operating loss of $800,000 in the second quarter compared to an operating profit of $2.3 million in the first quarter.

Complementing our Natural Gas Services is our cash flow from our unconsolidated entities, which is primarily our 50% owned and operating interest in the Waskom gas processing plant. Also, Waskom owns 100% of Waskom Midstream, which is the acquisition Waskom Gas Processing made in January of this year.

For the second quarter, our cash flow generated from the unconsolidated entities was $3.7 million compared to $3.4 million in the first 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 second quarter was $4.1 million compared to $6.9 million in the first quarter.

During the second quarter, our average processing volume at the Waskom plant was 281 million cubic feet per day compared to 247 million cubic feet per day in the first quarter. The nameplate capacity of our plant is 285 million a day and in the month of July, we average 297 million cubic feet per day of inland gas into our plant. So far in August, we have had over 300 million cubic feet per day coming to our plant.

As a result of this volume growth, we are beginning to analyze an expansion of the plant to 320 million cubic feet per day. This would be the last cheap expansion of the facility before we would have fractionation issues. We are currently analyzing this potential expansion.

Waskom's current processing contract mix is 43% percent of liquids, 38% fee-based, 18% percent of proceeds and less than 1% keepwhole. A year ago, 34% of our processing contracts were fee-based, so we continue to make efforts to increase our percentage of fee-based processing contracts in order to reduce our commodity price exposure in this business. We currently have 46% of our 2010 volumes hedged and 15% of our 2011 volumes hedged. For the next 12 months, when factoring in our hedge volumes, a $1 change in natural gas pricing affects our cash flow $50,000, I said $50,000 per month and a $10 change in oil pricing affects our cash flow $100,000 per month.

The second-quarter decrease of $2.8 million in cash flow in this segment compared to the first quarter was primarily a result of our wholesale natural gas liquids business. This piece of the Natural Gas Services business was down $3.2 million in EBITDA for the first quarter compared to the second quarter. This was primarily driven by reduced wholesale propane demand. This reduced demand was expected as we transition from winter and early spring weather to summer weather.

In our Sulfur Services segment, our cash flow was $6.3 million in the second quarter compared to $4.5 million in the first quarter. Our cash flow in the fertilizer side of the Sulfur Services segment was $4.3 million, a $1.4 million increase over the first quarter. During the second quarter, our sulfuric acid plant ran 95% of the time and its average production was 380 tons per day. We are also on schedule to complete our cogeneration unit by the end of the year. This should help us to eliminate the power supply interruption issues, which can be quite devastating to our sulfuric acid production plant.

We are also on schedule to complete our $5 million ammonium sulfate crystallizer plant at Plainview by the end of this year as well. This plant will allow us to upgrade lower-value fertilizer product streams into higher-value fertilizer products. We anticipate the cash flow from this investment to be at a three to four multiple of that investment.

We also just received notice of a 1000 ton mag amp order this year. We had not forecast for this order to occur and are very pleased to win this business in 2010. The production run should begin in September and be sold in October. This is very good news as September is typically a very slow month in the fertilizer business and the order will allow us to run during a normally slow production month. Also, this product yields much higher margins than our normal fertilizer products.

On the pure sulfur side of the Sulfur Services segment, cash flow was $2 million in the second quarter compared to $1.6 million in the first quarter. This increase was the result of having all of our sulfur marine assets being fully utilized in the second quarter compared to the first quarter. In the first quarter, we had a scheduled marine drydocking occur, which negatively impacted utilization.

In our Marine Transportation segment, we had cash flow of $4.7 million compared to $3.9 million in the first quarter. This increase was primarily due to a cash flow increase of $1.1 million on the inland side of the business. The increase in cash flow on the inland side was primarily driven by increased utilization of our inland fleet.

Also, we believe our inland marine day rates have floored and we believe there may be some slight upward pressure on them. There has been an overall tightening of the inland marine assets due to the BP oil spill and an increase in refinery utilization. This certainly helped the inland side of the business in the second quarter.

Our offshore cash flow was down $300,000 in the second quarter compared to the first. This was the result of two offshore tows, which were underutilized during the first part of the second quarter. However, beginning in June, both of these spot market tows began to work under a 30-day evergreen charter doing cleanup work for the BP oil spill. Both tows are continuing to work in the cleanup efforts.

So to summarize second-quarter activity, Terminalling, Sulfur Services and Marine Transportation cash flow was up a combined $3.8 million, offset by Natural Gas Services, which was down $2.8 million. Also, unallocated SG&A expense was down $600,000 in the first quarter compared to the second quarter.

Finally, our maintenance capital expenditures for the second quarter were $1.3 million and have been $2.3 million for the first six months of 2010. Now I would like to turn the call over to Joe McCreery who will speak about our liquidity and capital resources and our planned drop-down acquisition and organic growth projects.

Thanks, Bob. I would now like to walk you through the right side of the partnership's balance sheet, discuss our liquidity, financial condition and the growth opportunities. On June 30, 2010, the partnership had total funded debt of approximately $303 million. This consisted of approximately $197 million of senior unsecured notes, an even $100 million drawn on our $275 million revolving credit facility and approximately $6 million of capitalized leases. Thus, the partnership's available liquidity on June 30 was approximately $175 million.

For the quarter ended, our bank-compliant leverage ratios defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA were 1.24 times and 3.55 times respectively. Additionally, our bank-compliant interest coverage ratio as defined by adjusted EBITDA to consolidated interest expense was 3.6 times.

Looking at the balance sheet, our total debt to total capitalization was 50.5%, up slightly when compared to the March 2010 quarter ended. In all, at June 30, the partnership was in full compliance with all bank covenants, financial or otherwise.

As we mentioned on last quarter's call, the partnership's strengthened its balance sheet and improved upon its liquidity position during the first quarter of 2010. These capital structure enhancements have put us in a favorable position to return to growth. We mentioned on that call that approximately $75 million of organic growth projects had been identified. We are pleased to report that more than half of those, approximately $40 million, have been approved by the partnership's Board of Directors and are now underway. These projects represent low-cost multiples in a range of four to seven times cash flow and are entirely fee-based in nature. Approved capital spends were primarily in the Storage and Terminalling segment and the Sulfur Services segment and we expect this incremental cash flow by the middle of 2011 in most cases.

That being said, additional robust opportunities remain in both those segments, as well as our Natural Gas Services segment, as Bob mentioned, and those evaluations are ongoing.

In addition to our organic growth, yesterday, the partnership was pleased to announce an acquisition via asset drop-down of two shore-based marine terminals to be purchased from Martin Resource Management Corporation, the privately held owner of our general partner. We had estimated these new assets will add approximately $1.25 million of distributable cash flow on an annual basis.

Now let's look at cash flow generation. And similar to what I did last quarter, let's take a minute and walk through our internal EBITDA reconciliation construction for the benefit of those on the call. Again, this is how we calculate EBITDA, which as Bob alluded to in his opening remarks, is a non-GAAP financial measure we use to determine cash flow.

Because of the impact from unconsolidated affiliates, namely our Waskom joint venture equally owned with CenterPoint Energy, it is helpful to utilize both the second-quarter Form 10-Q and the distributable cash flow reconciliation table at the back of our quarterly press release. (technical difficulty) operating income, which was $9.102 million for the second quarter, then we add depreciation and amortization, which was $9.986 million for the quarter. Next, we add distribution equivalents from unconsolidated entities, which can be found on the DCF reconciliation in the press release, which was $1.415 million for the quarter. Finally, we add invested cash and unconsolidated entities, which can also be found in the DCF reconciliation table in the press release and was $2.270 million for the second quarter.

The sum of these four items, $22.773 million, is our internal EBITDA number for the second quarter of 2010. Using the same methodology, the partnership has generated $43.738 million for the first six months of 2010. We hope you find this reconciliation helpful.

This concludes the prepared remarks this morning. Devin, we would now like to open the call for questions and answers. Thank you.

(Operator Instructions). Emily Wang, Raymond James.

Hi, good morning, guys. Can you guys talk about the two shore-based terminals that you just acquired from MRMC, what kind of product will they be handling and then are there any sort of long-term contracts associated with them?

Ruben?

Did you say Ruben?

Yes.

Yes, these shore bases are two shore bases that we have owned for several years now and that we had just never dropped into the existing business model of all of our other shore bases that we purchased several years ago. It will have the similar minimum throughputs, mainly from diesel fuel sales from the parent company from the GP diesel fuel sales through the terminal. And we have raised the minimum throughput level from 90 million gallons to 105 million gallons to adjust the minimum throughput for those shore bases, which should not be a problem to be met. So it really drops in. It is doing the same service business for offshore drilling for the shelf, both shallow and deepwater, out of those two terminals at Theodore, Alabama and Pascagoula, Mississippi.

Okay. And so the minimum throughput, is there a contract on that or is it just forever?

Yes, there is a contract with the general partner who handles all the purchases and the resales of the diesel fuel since it is a nonqualifying event. But as it throughputs through, then it pays the partnership for throughput fees. And so it is basically exactly what we are doing on all the other shore bases that we have through Louisiana and Texas.

And how long is that contract?

I am not sure. It is an ongoing contract. Does anybody know?

Yes, it kind of comes in under our existing agreement. We are just modifying our existing agreement from 90 million gallons to 105 million gallons because that is over the whole system. So it is an ongoing multiyear contract. I don't know the specific end date, but the contract has been in existence since we acquired the other marine shore bases in 2003.

Okay. Switching gears, can we look at the Waskom expansion that you guys kind of talked about? What exactly would that expansion involve and preliminarily how much do you think it would cost?

Yes, I'll take that. The expansion -- with all this volume coming online and we have got contracts with certain producers to even bring more volume to the plant, we are looking at a couple things. The opportunity to bypass some of the dryer Haynesville gas, bypass the plant and -- or bifurcate it and then also to expand the plant from 285 to 320. Basically, the rough guess of the cost is about -- at a 100% basis -- is about $12 million for the expansion, of which $6 million would be to us.

Okay. And then switching gears, for interest expense, I noticed that we were expecting kind of like a $5 million run rate and again, this quarter, interest was a little bit higher at $8 million from --

Yes, there are a couple pieces in there that are non-cash. We had old hedge contracts mark to market that we retired when we did the high-yield deal and paid them off. And they are amortizing through the life of what those contracts were originally set up for. So there is approximately $1 million of non-cash mark-to-market charge in that interest cost and then also there was a deferred debt cost of $1.2 million -- excuse me -- $1.3 million non-cash amortization of [peak] fees, etc. that we paid for all the various refinancings and high yield we have done. So the net cash that was spent was $5.9 million; cash interest was $5.9 million.

Okay. And so I guess going forward if it is going to be amortized, do you think that interest expense -- I mean (multiple speakers)

Well, the amortized piece, that 900 -- excuse me -- that $1 million has probably one quarter, one quarter and about a month to go, so about four months and then the deferred debt charge of $1.3 million, that should be consistent. But again, those are non-cash charges.

Okay. And so the actual cash is about $5.9 million?

Correct.

Okay, great. That is all I have. Thank you so much.

John Edwards, Morgan, Keegan & Co.

Yes, good morning, everybody. Just on the $40 million of approved projects, where do you expect those to -- what segments do you expect those to do -- or how do you expect those to allocate to the segments?

Yes, this is Wes Martin. I will take that one. On the roughly $40 million that Joe mentioned, roughly about $18 million of that is a new vacuum tower at the Cross refinery that we are going ahead with construction on. That is about an 18-month project and in terms of multiple to -- the MLP, we are looking at roughly a seven multiple. We think it is going to be a little bit better than that, but in terms of sort of base case scenario, we think it is going to be about a seven multiple.

So half of that is really going to the refinery. And just a little bit more picture, clearer picture as to what we are doing there, we are essentially putting in a new vacuum tower, which would ultimately improve the efficiency at the refinery and result in higher lube yields, which are higher-margin, more favorable market demand products and a reduction in asphalt yield that comes out of that refinery, which is obviously a negative margin, lower demand product, if you will.

In addition to the $18 million with the vacuum tower, we have also got about $6 million going to a couple of new tugs to pair up with some new barges that we have got coming into service in the fourth quarter of this year and that cost is roughly $6 million to $7 million. And then the kind of makeup of that is -- the difference between the $40 million and the kind of $25 million to $30 million that we have outlined before is a bunch of smaller projects, kind of in the $2 million to $5 million or $6 million range. And so we are not going to go into detail specifically as to what those are, but hopefully that will give you a better picture as to where most of the money is going.

Okay, great. Thank you very much. That is all I had.

(Operator Instructions). James Spicer, Wells Fargo Securities.

Hi, good morning. Just a couple questions. On your CapEx, how much of the $40 million will be spent in 2010 versus 2011?

Yes, this is Wes again. For the marine equipment, the $6 million, that will be spent primarily all in this year. The vacuum tower, that is an 18-month project, so I would say a little bit of it is probably front-end loaded, but then after the first, call it, I would say $5 million or $6 million, then you would amortize the rest kind of over that 18-month period. So I would say half of it maybe would be done by the end of this year or maybe a little less than half with the remainder to be made up in 2011. And then on the other projects, most of those would be spent this year. Most of the remaining dollars will be spent this year.

Okay. So what does that bring the total remaining CapEx budget for 2010 to?

Yes, we're still looking at up to, and we haven't really announced this, but we looked at, as we have -- I think we have indicated $75 million kind of what we were looking at. We have -- with the $40 million that we just talked about and there's really $35 million outstanding, then there is probably another $5 million to $10 million of projects that aren't even in that $75 million that we are currently looking at. So I would say you are about halfway there.

Okay. So sorry, that's $75 million for full-year 2010?

Yes, I think that's right.

Okay. And that also includes maintenance as well?

No, that is growth CapEx.

Okay, good. I was wondering if you could just comment briefly on what, if any, impact the Gulf of Mexico spill fallout has had on your business and if you see any sort of long-term effects there.

Yes, this is Ruben. We have tried to analyze this as we have gone along and looked at it and of course in the short run due to the BP leases for our vessels and so forth, the short run has probably been positive. In the long run, of course, the moratorium that is out there right now, we do believe that in the long run, due to the importance of the deepwater drilling and the things that are happening out there, that it will be reinstated.

Now we are not naive enough to believe that there is going to be some additional safety requirements and there is going to be a lot of additional plans and things that are going to have to happen in that business, which could help us in the long run because we believe that with some of the staging and some of the equipment that is going to have to be staged and emergency relief type equipment is going to be staged, they will have to stage them at our shore bases and things like that. So in the long run, you're going to have more safety requirements; we realize that. But we do believe there is going to be more need for our types of services.

And you have to remember a lot of things are happening out there. There is still production going on. We still have a lot of production platforms and so forth that we help take care of. So that business is ongoing. We do believe the shallow water, a larger part of our business is shallow water drilling on the shelf. We believe that will continue. There has been a slowdown in some of those areas simply due to the spill, but we believe that will come back.

So overall, we are optimistic enough to believe that, with the importance of that volume, as you well see as the kind of production that the offshore and the deepwater is capable of, that it has to be produced and it will be produced. It is just a question of new safety requirements and new things.

So in the long run, we don't see a large effect and again, we have a minimum throughput, diesel fuel throughput. We have not hit that. This year, we are ahead of that, so we look for that to continue on. So long term, we see very minimal, if not some positive coming out of this whole BP fiasco.

Okay, that's helpful. Thank you. And then the last question, the two vessels that you have working in the cleanup efforts currently, what kind of rates are you getting on those vessels compared to what you would get in the spot market and what kind of a lift might you get in the second quarter -- or sorry, in the third quarter assuming that those vessels stay active?

I think they are slightly better than what we have realized in the spot market, but they are actually below what we have seen in the spot market historically. So I believe they are rates that are right in line with what we have had, not slightly above recently because of the slowdown. Long term, when those go off charter depending on the markets and when they come back, we are seeing refinery utilization come back up. So we are optimistic that they can be put back to work in the spot market and we are working on some things that could do so. But they have been working sporadically for the last six months on and off and then of course then full time with the BP thing.

But in the long run, they go back to a spot market. They are not probably part of our long-term strategy in the marine business, but it is something that we work with and live with now and we have seen them when they are very active and very good and then we have seen them when they are not. So it is not a lot different than what we have been working with over the last few years with these two vessels.

Okay, got it. Thank you very much.

Thank you. I am showing no further questions at this time, sir.

Well, with that, this is Ruben. I want to thank everyone on the call for their interest in Martin Midstream. As your company enters our ninth year of operation as a public MLP and you have to remember our general partner has had almost 60 years in business as a private company and we continue to be optimistic about our future. Our internal projects over the next 18 months will start producing cash flow and it utilizes the recent bond placement. We have two new Board members that came onboard at our last board meeting, Joe Averett and Hank Still. They bring many years of experience to our Company and we are looking forward to utilizing their expertise at our Board meetings and to help us run this Company and with that, we appreciate everybody's time. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect.