Martin Midstream Partners LP (MMLP) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Martin Midstream third-quarter 2010 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

And I announce for today's conference Bob Bondurant, Chief Financial Officer. Please begin, sir.

Thank you, Tyrone, and to let everyone know who else is on the call today, we have Ruben Martin, our 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 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. 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, or DCF, and earnings before interest, taxes, depreciation, and amortization, or EBITDA.

We use these measures because we believe it provides you of our financial information with meaningful comparisons between current results and prior reported results, and it could 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 for nonoperating 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 third-quarter 10-Q are available at our website, www.MartinMidstream.com.

Now, I'd like to discuss our third-quarter performance. For the third quarter of 2010, we had net income of $4.6 million, or $0.19 per limited partner unit. In the third quarter, because of certain commodity and interest-rate hedges that did not qualify for hedge accounting, our net earnings were positively impacted by $0.9 million, or $0.05 per limited partner unit.

So disregarding this net non-cash positive impact to our financials, our earnings would've been $3.7 million, or $0.14 per limited partner unit.

As with other MLPs, we believe the most important measure of our performance is distributable cash flow. Our distributable cash flow for the third quarter was $16.2 million, a distribution coverage of 1.11 times, and for the nine months of 2010, our distribution coverage was 1.04 times.

Based upon our current $0.75 quarterly distribution and yesterday's close price of $34.31, our LP units are currently yielding 8.7%.

Now, I'd like to discuss our third-quarter performance by segment compared with the second 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 $8.7 million in the third quarter, compared to $8.5 million in the second quarter.

Although our specialty terminal cash flow was slightly down from $5.4 million in the second quarter to $5.2 million in the third quarter, our marine shore bases cash flow increased from $3.1 million in the second quarter to $3.5 million in the third quarter.

Our marine shore base cash flow increase was primarily driven by the acquisition of the Pascagoula, Mississippi, and Theodore, Alabama, terminals from our general partner. These terminals added about $300,000 of cash flow in the third quarter. We acquired these assets from our general partner in August for $11.7 million.

We believe on an annual basis these assets should contribute approximately $1.8 million of EBITDA to MMLP.

With this dropdown transaction, all the Martin-related marine shore bases are now owned by MMLP.

In our Natural Gas Services segment, we had operating income of $400,000 in the third quarter, compared to a negative $300,000 in the second quarter. In the third quarter, we had a $14,000 non-cash commodity hedging mark-to-market loss, compared to a $0.5 million non-cash mark-to-market gain in the second quarter. So excluding the non-cash mark-to-market adjustments, we had an operating income of $400,000 in the third quarter, compared to an $800,000 operating loss in the second 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. Also, Waskom owns 100% of Waskom Midstream, which is the acquisition Waskom Gas Processing made in January of this year.

For the third quarter, our cash flow generated from the unconsolidated entities was $5.4 million, compared to $3.7 million in the second 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 third quarter was $7 million, compared to $4.1 million in the second quarter.

During the third quarter, our average processing volume at the Waskom plant was 298 million cubic feet per day, compared to 281 million cubic feet per day in the second quarter. As a result of this continuing volume growth, our Board this week approved an expansion of the Waskom plant from nameplate processing capacity of 285 million a day to 320 million a day.

Waskom's current processing contract mix is 43% of liquids, 38% fee-based, 18% percent of proceeds, and less than 1% keep whole. A year ago, 34% of our processing contracts were fee-based, but 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 48% of our remaining 2010 volumes hedged, 23% of our 2011 volumes hedged, and 8% of our 2012 volumes hedged. For 2011, when factoring in our hedged volumes, $1 change in natural gas pricing affects our cash flow $40,000 per month. A $10 change in oil pricing affects our cash flow $110,000 per month.

Our third-quarter increase of $2.9 million in cash flow in this segment, compared to the second quarter, was primarily a result of increased distributions of $1.7 million from our unconsolidated entities and an increase of $1.2 million from our wholesale of natural gas liquids margin business, as we were able to expand our wholesale margins in the third quarter when compared to second quarter.

During the third quarter, our unconsolidated entities' cash distributions to MMLP increased as there had been a buildup of retained earnings of $1.2 million from these unconsolidated entities during the first six months of 2010.

In our Sulfur Services segment, our cash flow was $0.8 million in the third quarter, compared to $6.3 million in the second quarter. Our cash flow in the fertilizer side of the business was $2.1 million in the third quarter, compared to $4.3 million in the second quarter. This decrease in cash flow was expected and is a normal seasonal decline as fertilizer demand declines in the third quarter as compared to the second.

On the pure sulfur side of the Sulfur Services segment, cash flow was a negative $1.3 million, compared to a positive $2 million in the second quarter. The decrease was caused by a $50 drop in the price of molten sulfur at Tampa in the third quarter. This price drop resulted in compressed margins in the third quarter. That is the bad news.

The good news is that the price increased $65 per ton in the fourth quarter, so we should experience above-normal margins in the fourth quarter.

In our Marine Transportation segment, we had cash flow of $8 million in the third quarter, compared to $4.7 million in the second quarter, an increase of $3.3 million. $2.4 million of the increase in cash flow was from the offshore side of the business. This offshore piece of the Marine Transportation business was unusually strong as we experienced 100% utilization in the third quarter.

This full utilization was the result of having two offshore vessels fully employed doing work in the Gulf of Mexico for the BP oil spill cleanup. Both of these vessels continue to be employed in this service.

The inland side of the business experienced a cash flow increase of $900,000 in the third quarter, compared to the second. Our inland utilization increased to approximately 95%.

We have also experienced an increase in our average day rate in the third quarter, which supports our belief that inland day rates reached a floor earlier this year.

So to summarize third-quarter activity, Terminalling, Natural Gas Services, and Marine Transportation cash flow was up a combined $6.4 million, offset by Sulfur Services, which was down $5.5 million. Also, unallocated SG&A expense was up $300,000 in the third quarter when compared to the second.

Now I would like to turn the call over to Joe McCreery, who will speak about our liquidity and capital resources and some of our newly planned growth project.

Thanks, Bob. Let's start by walking through the debt components of the partnership's balance sheet. I'll then highlight our capital markets' activities and discuss some of our growth opportunities.

On September 30, 2010, the partnership had total funded debt of approximately $313 million. This consisted of approximately $197 million of our senior unsecured notes, $113 million drawn under our $275 million revolving credit facility, and approximately $6 million of capitalized leases. Thus, the partnership's available liquidity on September 30 was approximately $162 million.

For the quarter ended September 30, our bank-compliant leverage ratios, as defined by senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.33 times and 3.59 times, respectively. Additionally, our bank-compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 3.52 times.

Looking at our balance sheet, our total debt to total capitalization was 52.7%, up slightly when compared to the June 30, 2010, quarter.

In all, at September 30, 2010, the partnership was in full compliance with all bank covenants, financial or otherwise.

Now, I would like to discuss our capital markets' activities for the September quarter. In August, the partnership issued 1 million units through a follow-on offering in the public equity market. The proceeds raised from this offering of approximately $28 million were used explicitly for the purpose of redeeming an equal number of units owned by our privately-held parent and owner of our general partner, Martin Resource Management Corporation.

This non-dilutive, non-accretive issuance was simply an efficient way for MRMC to monetize a small percentage of its LP ownership position. From the unitholders' perspective, MRMC remains fully committed to the partnership and continues to own approximately 35% LP interests in addition to the general partner.

The proceeds from this, in effect, MRMC monetization helped strengthen the MRMC balance sheet as it prepares for a pending refinance of its credit facility. As previously indicated, MMLP and its unitholders were reimbursed by MRMC for all costs and fees associated with the offering.

Finally, we believe MMLP and its unitholders have benefited by noticeably increased daily trading volume since the offering.

Next, in response to market opportunities, MMLP entered into two separate interest rate hedges during the quarter. The net effect of hedges swapped, approximately one-half of our bond proceeds, or $100 million back to floating rates of interest. We anticipate that these hedges will positively impact our distributable cash flow by approximately $2 million annually, given the current rate environment. These hedges are not cash flow hedges, and thus their mark-to-market performance will impact our P&L.

Now let's shift to opportunities on the horizon. As Bob mentioned earlier while discussing our Natural Gas Services segment, our Board of Directors recently approved two organic growth projects at our Waskom gas processing facility.

The first project is an expansion of the facility's capacity up to 320 million cubic feet per day, an increase of 35 million. Waskom's strategic location and competitively-advantaged fractionation capabilities render gas supply from the region available to the facility in excess of its current capacity, and although we've seen an increase of Haynesville shale gas into our system, our expansion rationale is focused primarily on what we believe to be additional Cotton Valley Wells based on the drilling permits we are seeing.

Along with our joint venture partner CenterPoint Energy, total cost of the project expansion is expected to be approximately $14 million, thus $7 million to MMLP. The project requires virtually no additional operating costs and, based on projected incremental EBITDA, can be completed for an approximate cost of 5.1 times.

The second project approved, also at Waskom, is the addition of a natural gas liquids rail rack. The primary drivers of this transaction include an improved netback on rail liquid gases and a reduced dependence on local markets. Rail access gives us ability to put our product into markets potentially most lucrative or more lucrative than our regional area.

As an example, we see products such as natural gas [leaving] from our plant satisfying Canadian demand. Additionally, we know that existing liquid customers would prefer to have less dependency on our trucked-in supply. We anticipate the rail terminal would provide stable fee-based cash flows in addition to potential price improvement on individual liquid products. Martin's 50% portion of that project is anticipated to be $6.5 million, or approximately 5.5 times projected EBITDA.

Finally, as Bob also mentioned, during the quarter the partnership completed its previously-announced dropdown of two shore-based terminals from MRMC. We estimate these new assets will add approximately $1.2 million of distributable cash flow on an annual basis, and as Bob said, both are off to a good start operationally and for the partnership.

Now let's look at our third-quarter cash flow generation. Similar to what I've done in the past, let's take a minute and walk through our internal EBITDA reconciliation for the benefit of those on the phone this morning. 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 our cash flow.

Because of the impact from unconsolidated affiliates, again namely our Waskom joint venture with CenterPoint Energy, it is necessary to utilize both the third-quarter Form 10-Q and the distributable cash flow reconciliation table at the back of yesterday's press release.

So as we calculate EBITDA, we start with operating income, which was $7,703,000 for the quarter. Then, we add depreciation and amortization, which was $10,175,000 for the quarter. Next, we add distribution equivalents from unconsolidated entities, which can be found in our DCF reconciliation and was $4,683,000 for the quarter. Finally, we add invested cash from unconsolidated entities, again found in a reconciliation in the press release of $711,000 for the quarter.

The sum of those four items, $23,272,000, is our internal EBITDA number for the third quarter of 2010. Using the same methodology, the partnership has generated $67,011,000 in EBITDA for the first nine months in 2010. Again, we hope you find this reconciliation helpful.

This concludes our prepared remarks this morning. Tyrone, we would like to open the lines up for a question-and-answer session.

(Operator Instructions). Darren Horowitz, Raymond James & Associates.

Just a couple of quick questions. First, within the marine side of the business, on the offshore side, how long are those two vessels going to continue working for BP?

And then, secondly, on the inland side, can you just give us a little bit more color and maybe quantify the magnitude that you've seen day rates change?

Darren, this is Ruben. It looks like -- as it's winding down, we're in the process of cleaning the vessels out. We are under charter until they are completely clean enough to go back into their original service that they were in. So we expect at least probably another 30 days or so, but sometime during the fourth quarter they will go off charter.

We -- as the inland side of the business, as we've said, we have seen that floored. We've seen the markets come up slightly from the floor and we think we'll continue to rise here as we go forward.

We've seen in that marine business, too, we've seen the results of our new-build program that we've talked about for the last few years coming into effect. We're seeing our maintenance capital expenditures drop significantly and we have a lot of good new equipment over there ready for this market as it continues to rise back up.

Okay. Ruben, if you put all the pieces together, and you kind of normalize as we get through the fourth quarter when those two boats are going to be off work with BP, is around $20 million, plus or minus, the expected revenue run rate?

Probably a little bit higher than that. We do have some targeted business that we are working on for some of those vessels.

Then if I could, just an update on the refinery upgrade across -- you did mention it in the prepared commentary, but I think it was supposed to be somewhere around an $18 million aggregate cost at around a seven times multiple. And I was just curious as to how everything is progressing there, the new vacuum tower and the improved efficiencies that you hope to gain, especially with higher lube demand.

Darren, this is Wes. Actually, we're still sort of finalizing the engineering of that whole project right now, so we're still in the planning phase, if you will. Again, it was approved by the Board, so we are still moving forward with that.

Sort of lead time on that project is anywhere from 12 to 18 months. So, we've still got a good period of time before we put that thing into service.

And Wes, if you were to aggregate everything that you guys have on the table right now, I think the previous target was around $75 million of organic projects that had been identified and about $40 million approved by the Board. You've obviously approved a couple more expansions and efficiency gains at Waskom. So, is what's been approved by the Board closer to around $50 million now?

Yes. That's right. And the Waskom expansion, obviously, would add to that sort of overall total.

I would also add that we are in the process of our 2011 budgeting process and I think -- that will be finalized probably towards the middle of December, and once we sort of have that fully in place than we should have additional projects and additional CapEx to announce.

Selman Akyol, Stifel Nicolaus.

In terms of just going back to Waskom for a minute, when do you expect to have those expansion completed by?

This is Wes. It's slated for about a late fourth quarter of next year. So, call it late November, early December.

Great. And then, also, in terms of the price increase for sulfur up to $65. Can you just talk a little bit about the tonnage there you expect to see? Is it equivalent to what we saw in the third quarter? Or can you remind us on the seasonality for that?

Well, we expect the -- the Sulfur Services segment is really very dependent upon the production out of the refineries, and in the third quarter, we did have a significant outage at several of the refineries as they went down for some turnarounds and maintenance and so forth. So, we saw our inventories and so forth drop down.

We expect that to be back to normal in the fourth quarter, and so we should see our profits in that segment go back to our normal run rates. And again, it's combined with the fertilizer segment, and so as you wind down the fertilizer segment, it will start picking back up, of course, in January as we start getting into the spring fertilizer season.

But it was kind of a situation in the third quarter to where we had supply interruptions of significant amounts. And that helped add to the problem of the deal, and the $65 increase is just due to strong demand. The fertilizer business is very strong. We've seen commodity prices that I'm sure that you are all aware of products -- cotton and so forth -- that have increased dramatically.

We're seeing good commodity prices adding to this fertilizer business, so we've just seen a very, very strong demand, and we expect to have some increase there due to some inventory that we have on the ground, which is around 20,000 tons or so that we had in storage awaiting a move.

James Vasser, Wells Fargo Securities.

I think you have answered a few of my questions, but just to continue on the sulfur business. The volatility in prices just seems a little bit unusual. Is this something that you've seen in the past or was it just pretty anomalous in this quarter?

It's been an unusual year and I think that a lot of it is attributed to the sweet/sour crack spreads and some of the crack spreads that you've seen at the major refineries, and some of them have gone to sweeter crudes because the discount on the sour crudes has not been as dramatic as we've seen in the past.

So you've seen a certain amount of it there. You've seen a lot of turnarounds. Refineries, a lot of times, have a tendency to go in the turnarounds when the crack spreads are not good. So, we've just seen an interruption, and then with that, with the strong demand in the fertilizer business, it's just been a situation that the supply has not kept up with the demand in this country, and so we saw the $65 bump again.

China is buying a substantial amount of sulfur right now, and so we've just seen an increase in the price and could see another one before it tops out.

I also noticed you had a pretty big increase in working capital this quarter. Can you just speak to what that was from?

Generally we have a build going from the second quarter to third quarter as we start heading into the winter propane demand season.

So, the demand is low in those summer months, and so you build a bit of inventory. However, we hedge our position on that in the fact that we go out and presell our dealers, so as we build our inventory, we are simultaneously entering into sales contracts at fixed volumes and fix margins in the future. So, that's what's happening.

Then finally, just on CapEx for the remainder of the year, can you -- would this increase in approved CapEx and identified CapEx, it would seem that you might have a big jump up here in the fourth quarter. Is that accurate?

On the maintenance side, I would say we have probably a $2 million to $2.5 million kind of fourth-quarter number that's kind of been forecast, and on the growth side, I'll let Wes speak to that.

On the growth side, just for the fourth quarter, we have -- we are putting our granulated that we previously discussed. That's coming into service, so there would be some dollars coming in on that.

A lot of these projects really aren't going to kick off in terms of spending with respect to the expansion at Waskom, and then again, the vacuum tower, really won't start to hit until the first quarter of next year. So, fourth quarter, I don't expect to see a huge bump up, excluding any sort of acquisition, just on the organic growth CapEx side.

Ron Londe, Wells Fargo Securities.

I have a couple of questions. Number one, at Waskom, the processing margins you touched on, in the direction in which you are going to more fee-based contracts, can you give us a feel about what producers are saying and how much pushback you're getting and how -- the degree of difficulty in moving forward with getting more fee-based processing agreements?

I think that the trend, obviously, is, as we've seen, is more towards fee-based, and depending upon the particular zone that the product is produced in, like we said the Haynesville Shale is substantially drier than, say, a Cotton Valley, so obviously we like to see a Cotton Valley which increases the need for them to process the gas and extract value out of the liquids that are in the gas.

We're seeing that a lot of people are holding their leases and drilling up. We are still seeing a certain amount of drilling activity in the area, even at these prices. We've gotten budgets for next year. We are very conservative on what we've got, but again, you have to remember is that with the only fractionator in east Texas, as we've said before and I know you've heard before, it is the best mousetrap, and so we are seeing people continually to come to us.

We've have good markets for our ethane, good markets for our other liquids out of that plant, which is a high purity propane, which gives us an edge over everybody else that's selling any propane.

So, there are still Cotton Valley horizontals being permitted. They come in very good, too. We've seen a lot of this activity lately. It's not like it was, obviously, two, three years ago. But again, I think that our location and our fractionation keeps us full when the others may see a certain decline in their volumes. Does that answer your question, Ron?

Yes. Also, a while back you talk about adding a priller to your facility in the sulfur area. I wonder where that stood, and you also talked about putting in a spoon, I believe, loading facility also down there. Have you gone forward with that or where does it stand now?

We are actually in the process of building the priller now. The priller will be online in the first quarter.

We actually have another technology that we're working on, too, that will be hopefully online in the fourth quarter of this year, by December, which is a granulator and it's a different type of prilling that we are working through and trying to compare the technologies of the two.

So, we will be online. We will start billing additional service fees or reservation fees for sulfur in the first quarter, which will add to it. But the priller that you're talking about, and the spoon and all of that, all of those are part of the upgrade that we are building now for operation early in 2011.

And the spoon wasn't a new loading facility. It was an improvement of the existing loading facility -- ship loading facility.

It will allow us to take smaller vessels in there, so -- in the trade, and sometimes with the smaller vessels, we're able to provide our customers with some better pricing that they may get, so it's just an overall improvement of the system.

(Operator Instructions). Sean Wells, RBC Capital Markets.

You guys just mentioned that for maintenance CapEx in the fourth quarter, you're expecting between $2 million to $2.5 million. I'm just wondering, based on your earlier guidance, I thought you guys were guiding to between $9 million and $10 million. What happened to that guidance? Why is it lower than what you guys previously expected?

We had forecast in some potential marine activity that just hasn't come to pass. We haven't needed to do it, and I think as the year developed, we've kind of refined that number, and so at the end of this year, we'll be about $6 million to $6.5 million instead of kind of $8 million to $9 million-ish.

I'd just add to that that from our single skin [barge ditch], as Bob said, we had some maintenance CapEx on the books planned that ultimately we're not going to have to do, and part of that is the fact that we've been selling a lot of our single skins, and as I understand it now, we should be out of our single skins completely by the end of this year. So, no more single skins will be on our books.

And so, that means that the amount that you had expected this year is not going to be deferred to next year, right?

Yes, a piece of it, exactly, will not be deferred. That's correct. It's been eliminated.

And the other thing has to do with interest expense. You brought it down by, like, $2 million for this quarter, and I'm wondering, is that number that we are seeing that's right around $6 million, is that a number that we can use going forward or is that going to move a little bit? I know you guys got some hedges in place now.

Yes. Part of that interest expense -- just so you know, buried in that number, you had -- in this quarter, you've got non-cash amortization of deferred debt costs, which is on the DCF table which I'm looking up right now, which is about $1 million a quarter.

So buried in that number is a non-cash charge of $1 million. I think the absolute cash interest expense run rate is about -- in my mind, it's about $22 million of where the debt is today. Does that sound right, Wes?

Yes.

But then as we add these projects, obviously our debt balances will increase, so that will slowly increase over time.

Thank you, and I'm showing no further questions or comments at this time. I would like to turn the conference over to management for any closing remarks.

Great. Thanks, Tyrone. This is Ruben, and I think where we ended up we were very pleased with our partnership's third-quarter performance.

And I know you guys have heard this many, many times, but the diversity of our operations really helped our coverages in the third quarter, and we're very proud of the 1.11 coverage that we had. Of course, marine transportation was very strong, and we are looking for a better return on the investment on that whole operation as we go forward with our new assets, updated fleet, and, of course, increasing day rates that we've seen in the last few months.

So, we have a lot of organic growth initiatives that are progressing and we're pleased to now include multiple projects for our Natural Gas Services. I see a lot of potential acquisitions that we have on the horizon to enhance our growth. So, right now, we're seeing a lot of things both internally and externally as far as growth at the Company [goes].

And so, as always, we appreciate you investing in our Company and we appreciate you taking the time today to call in. Thank you.

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