Martin Midstream Partners LP (MMLP) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners LP Third Quarter 2014 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Bob Bondurant. Sir, the floor is yours.

Thank you, Nicholas. And to let everyone know who is on the call today, we have Ruben Martin, our President and Chief Executive Officer, Joe McCreery, our Vice President of Finance, and he's also the head of Investor Relations, and Wes Martin, our VP of Corporate Development.

Before we get started with the financial and operational results for the third quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecasts, future performance, and our ability to make distributions to unit holders. We report our financial results in accordance with generally accepted accounting principles, and use certain non-GAAP financial measures within the meaning of SEC Regulation G, such as distributable cash flow or DCF, and earnings before interest, taxes, depreciation, and amortization, or EBITDA, and we also use adjusted EBITDA. We use these measures because we believe it provides users of our financial information with meaningful comparisons between current results and prior reported results, and can be a meaningful of the partnership's cash available to pay distributions.

We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our website, www.martinmidstream.com.

Now I would like to discuss our third quarter performance. For the third quarter we had adjusted EBITDA of $33.7 million, compared to $31.9 million in the second quarter of 2014. Our distributable cash flow, or DCF, for the third quarter was $19.3 million, a distribution coverage of 0.78 times based on the distributions we paid in the third quarter. This coverage ratio does not include any IDR payments to the general partner, as we have suspended IDR payments until a cumulative suspension of $21 million is met. At September 30, 2014 our cumulative suspension amount was $17 million.

When reviewing our income statement please note that our earnings were negatively impacted by two non-cash charges. When we acquired the controlling interest in Cardinal Gas Storage by purchasing the remaining 57.8% ownership for $120 million, we had to analyze our carrying value against the fair value of the 42.2% we already owned. Since we paid $120 million for 57.8%, the implied value of our existing 42.2% was $87.6 million. We were carrying this 42.2% interest at $117.7 million, so we experienced a non-cash write-down of $30.1 million, which negatively affected our net income.

Also offsetting our earnings in our marine transportation segment, we had one older offshore tug barge tow unit that had not generated revenue for the last few quarters, so we took an impairment charge of $3.4 million against these assets.

Now I would like to discuss our third quarter cash flow by segment compared to the second quarter of 2014. In the terminalling segment our third quarter EBITDA, which is defined as operating income plus depreciation and amortization but excluding any gain or loss on sale of assets, was $15.5 million in the third quarter compared to $18.5 million in the second quarter.

Our specialty terminals EBITDA was $11.1 million in the third, compared to $13.6 million in the second quarter. This decrease was primarily driven by a decrease in cash flow at our Corpus Christi crude terminal. Although our throughput volume was up 4%, we experienced a decrease in our throughput rate per barrel to our customer, as cumulative throughput volume exceeded a contractual threshold causing a decrease in throughput rates going forward.

Partially offsetting the decline in our Corpus Christi crude terminal cash flow was a $0.6 million increase in our lubricant packaging business cash flow. We began to realize the benefit of lower cost paraffinic lubricant supply as we began to eliminate higher cost naphthenic lubricant product out of our supply chain. We should see stability in our cash flow in this business going forward as we continue to migrate toward 100% paraffinic lubricant supply.

On the shore-based side of the terminal business, EBITDA was $4.4 million in the third quarter, compared to $4.9 million in the second quarter. This decrease was driven by reduced lubricant volume sold at our shore bases as a result of reduced demand from Blue Water Shipping customers, primarily in the month in August. However, since then volume has returned to normal levels.

Now looking toward the fourth quarter, we should see an improvement in our terminalling segment cash flow as we continue to see a volume throughput increase at our Corpus Christi crude terminal. We should also continue to experience lower cost paraffinic lubricant supply in our lubricant packaging business.

Now moving to our natural gas services segment, our cash flow was $9.1 million in the third quarter, compared to $5.5 million in the second quarter. Accounting for $2.3 million of this cash flow increase was the September performance of Cardinal Gas Storage, which we now own 100% as of the end of August. The $2.3 cash flow from Cardinal in September was lower than normal, as there were $1.1 million of one-time severance cost incurred during the month. Also, Cardinal's EBITDA for July and August was $7.8 million. So excluding the severance cost, Cardinal's standalone EBITDA for the quarter would have been $11.2 million, which is right in line with our annual cash flow forecast of $40 million to $45 million for Cardinal.

The remaining balance of the cash flow increase in our natural gas services segment was due to an overall 27% increase in our NGL margins.

Now looking toward the fourth quarter, we will see significant improvement in our cash flow in our natural gas services segment due to owning 100% of Cardinal for the full quarter, compared to one month in the third quarter. Also, the cash flow in our refinery butane business and our wholesale propane business should increase due to positive seasonality factors in both the fourth quarter of 2014 and the first quarter of 2015.

With our acquisition of our now controlling 100% interest in Cardinal, we had to perform a preliminary purchase price allocation, which is described in detail in footnote three of our 10-Q filed yesterday. There was a $78 million allocation to intangible assets for above-market gas storage customer contracts, which have an average life of approximately five years. As a result, we will experience a non-cash amortization charge for these contracts over the next five years. This non-cash charge will increase amortization expense in our income statement, but will not affect the $40 million to $45 million of EBITDA which we will be receiving from Cardinal.

Also during the quarter, we received two cash payments related to our 20% interest in West Texas LPG Pipeline. One payment was a distribution from WTLPG of $600,000 for second quarter earnings for our 48 days of ownership. This distribution was reflected in our DCF calculation. We also received a second payment of $501,000 from Atlas Pipeline Partners, the previous owner of our 20% interest in WTLPG. This was due to a post-closing working capital adjustment, so our net investment in WTLPG settled at $133.9 million.

Now in our sulfur services segment, our cash flow was $5.4 million in the third quarter, compared to $11.2 million in the second quarter. On the pure sulfur side of the business, EBITDA was $4.3 million in the third, compared to $5.1 million in the second. This decrease in cash flow was the result of realizing more normalized sulfur margins in the third quarter, when compared to a stronger second quarter sulfur margins.

Our fertilizer EBITDA was $1.1 million in the third quarter, compared to $6.2 million in the second quarter. This decrease in cash flow was the result of the normal seasonal decline of fertilizer demand in the third quarter, which is primarily the harvesting season for farmers.

Looking toward the fourth quarter in the sulfur services segment, we should see cash flow similar to the third quarter for both the sulfur business and the fertilizer business. However, we should see a significant increase in cash flow in the fertilizer business during the first and second quarters of 2015, when we should again experience a significant increase in fertilizer demand from our customers.

In our marine transportation segment, we have EBITDA of $6.3 million in the third quarter, compared to $0.8 million in the second quarter. This increase was the result of full utilization of our marine fleet in the third quarter when compared to the second quarter.

As we previously disclosed, our entire operating offshore fleet experienced required Coast Guard dry-dockings in the first six months of 2014. With that requirement now complete, we should see similar strong cash flow in the fourth quarter as well, as revenues should remain consistent and repair and maintenance costs should be normalized.

Also our Partnership unallocated SG&A costs were $4.5 million in the third quarter, which is our typical quarterly unallocated cost.

Our $15 million preferred stock investment in Martin Energy Trading, an affiliate of our general partner, was converted to a note receivable effective September 1, 2014. As a result, we received a dividend payment of $0.4 million for July and August, and then received $0.2 million of interest income in September. Going forward we should receive interest income of $0.6 million per quarter from this note. So on an annual basis, our adjusted EBITDA would decrease by $2.3 million, but our interest income will increase by the same $2.3 million. So there will be no net change to distributable cash flow from this investment.

On the maintenance capital expenditure side of our DCF calculation, we had maintenance CapEx and turnaround cost totaling $4.4 million for the third quarter, and have had a total of $17.3 million of capitalized maintenance costs for the first nine months. This compares to the previous year's nine-month total of $7.5 million. As we have discussed many times, 2014 has been a heavy maintenance capital expenditure year due to our 45-day refinery turnaround in the first and second quarters, and having to dry-dock our entire operating offshore fleet due to required Coast Guard maintenance.

Looking toward the fourth quarter, we believe our maintenance capital expenditures should be reduced an approximate $2 million for the quarter.

Finally, overall, looking toward the fourth quarter, we should see a significant improvement in our DCF coverage as we realize cash flow from Cardinal for the full quarter, and we experience anticipated seasonal growth in EBITDA from our other operations in the natural gas services segment. Also we will have much lower maintenance capital expenditures in the fourth quarter when compared to the rest of the year.

Now I would like to turn the call over to Joe McCreery, who will speak about liquidity, capital resources, and recent partnership activities.

Thanks, Bob. I'll start with our normal walkthrough of the debt components of our balance sheet and our bank ratios. I'll then highlight some of the Partnership's financing, growth, and other activities during the quarter.

On September 30, 2014, the Partnership had total long term funded debt of approximately $910 million. This consists of approximately $402 of senior unsecured notes, and $508 million drawn on our $900 million revolving credit facility. Thus, the Partnership's availability on September 30, 2014 was $392 million.

For the third quarter ended 2014, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA, and total indebtedness to adjusted EBITDA, were 2.67 times and 4.78 times respectively. Additionally, our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 3.15 times.

Looking at the balance sheet, our total debt to total capitalization at September 30 was 64.1%. This is a slight improvement compared to the quarter ended June 30, 2014, as a result of the Partnership's multiple equity offerings during the third quarter.

In all, on September 30, the Partnership was in full compliance with all banking covenants, financial or otherwise.

Now reconciling our current revolver balance to the quarter ended September 30, the outstanding amount today is $493 million, and thus the Partnership has available liquidity of $407 million under its credit facility. This current lower revolver balance is attributed to working capital reductions associated with lower inventories in our NGL business.

Now I'd like to highlight the significant acquisition we completed during the third quarter. Back in August, our Redbird Gas Storage subsidiary acquired all the Category A membership interests, approximately 57.8% in Cardinal Gas Storage Partners LLC for total consideration of $120 million from Energy Capital Partners.

Recall that MMLP through Redbird previously owned the other 42.2% of Cardinal, and concurrent with the closing we retired approximately $265 million of project level financings previously in place at various Cardinal developmental subsidiaries. With these payoffs, MMLP can now freely distribute cash flow from the projects to our unit holders. And as Bob mentioned, we expect cash flow in 2015 to be between $40 million and $45 million. The acquisition and the project financing payoffs were funded under our revolving credit facility.

Highlighting one of the key considerations that aided in our investment decision, we believe that the Cardinal acquisition will help reduce the high level of cash flow seasonality MMLP typically experiences during the calendar year. As most are aware, our third quarter is typically the weakest from a cash flow generation perspective. This stems from the normal yearly cycles of both our butane and fertilizer businesses.

We believe the Cardinal acquisition will provide a cash flow smoothing impact. For example, had MMLP owned Cardinal for the entire third quarter of 2014, distributable cash flow would have been positively impacted by approximately $7 million, and our distribution coverage ratio would have been 0.89 times. This pro forma coverage is fully diluted, and that includes the impact of the additional 3.45 million units we issued and the cost of debt associated with closing the transaction.

Next, I'd like to discuss our equity capital raises during the third quarter. In conjunction with the announcement of the Cardinal acquisition, the Partnership completed a private placement of 1.2 million common units to the majority owner of the general partner, Martin Resource Management Corporation. Then later in the quarter, we successfully completed a larger follow-on offering of 3.45 million units. Combined net proceeds from these two offerings were $168 million.

Additionally, on the equity side, we utilized our at-the-market equity issuance program. However, given the choppy market conditions, we only placed the units on six trading days during the third quarter, for net proceeds of $3.5 million.

In aggregate, as of September 30, we've issued approximately $20.6 million in equity offerings under the Partnership's ATM program this year.

As is typical with our offerings, proceeds from the follow-on issuance, the private placement to MRMC, and the ATM program were used to pay outstanding amounts under the Partnership's revolving credit facility.

Now I'd like to address a few items discussed previously as it pertains to our growth initiatives. First, I'd like to provide an update on our previously announced intention to construct a crude condensate splitter in the Corpus Christi markets. At this point, we're categorically moving our project to on-hold status, as our customers seek the ability and approvals necessary to export his proprietary condensate based on previous rulings granted earlier this year.

Without clarity on timing, and until the approval process plays out, MMLP will not be moving forward. As we said before, MMLP will not spend any hard dollar capital until a firm contractual agreement has been executed.

Next, I'd like to comment on Monday afternoon's announcement by one of the partners of its intention to acquire the remaining 80% of the West Texas LPG Pipeline and other associated assets. As you will recall from the second quarter this year, MMLP purchased an effective 20% interest in that asset, and we indicated at the time that we saw a significant upside value that could potentially be extracted under different operating parameters and potential capacity expansion scenarios.

We are pleased that one of the partners saw similar value in the system, and we're excited to be working with them as joint venture partners. Under our agreement, One Oak will be the operator of the asset, and we're very early in the process. But as we move forward, we'll provide insight pertaining to some of the growth initiatives and capital requirements of the system. Similarly, we will provide guidance on incremental cash flow as it develops.

Nicholas, that concludes our prepared remarks this morning. We'd now like to open the lines for Q and A.

(Operator Instructions) Gabe Moreen, Bank of America.

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

Yes, let me start on our risk in China, and I think I would say categorically that's their number, not ours, the doubling of cash flow. We certainly see the value and the uplift. But with respect to the tariffs, I mean I think that's something that we saw, but I'm not going to speak for them on that.

So what we're going to do is get together on it, Gabe, and it's very early, obviously, with this announcement and moving forward just see what types of projects specifically we're talking about here. But that doubling is--that's a One Oak number, not a Martin number. I'm just going to leave it at that.

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

This is Ruben. No, we like the asset. I like what One Oak said, and we also like the fact that One Oak ended up with the pipe. And so we're looking forward to the things that we're going to be doing in that. I hope the 17 is a good date, maybe even sooner, to start processes going to try to increase that cash flow.

Again, we're going to do what's the best interest of the shareholders. If something ever came up that we were able to work that would positively influence the Company and help us and help One Oak and we could get some things going together, then we're open for anything.

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

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

Got it. Thanks, Wes. Thanks, everyone.

Darren Horowitz, Raymond James.

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

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

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

Yes. We have--that's what really changed in the whole situation, is that when people started talking about the splitters and then you get into the situation that what exactly are we talking about. And if you're talking about some of the stabilization units, splitters, the question is how deep do you go and where's the government going to come out when it comes to trying to exactly define what is exportable and what's not. And I think that it's kind of put a lot of people on hold. As I say, it's like they threw a hand grenade right in the middle of when everybody's trying to make decisions and changed a lot of people's decisions.

So I think everybody is trying to evaluate exactly where they're going on this situation. We do know for sure there's going to have to be more tankage. There's going to have to be more dock space. So all of these things are in play, and we are currently talking about expansion on all of those levels. The question is at what type of stabilization or fractionation is it going to take to export the condensate or export the different products for the condensate.

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

No. It's really not. We've already got on the books, and looked at, at least $50 million worth of new projects that are there. And we're looking at probably another $100 million that are out there that would be started. The thing is nowadays, whenever you do start a project, it takes so long when it comes to permitting and construction and all of these things that we're not--as compared to what it used to do years ago. So all of these types of projects are carry-overs, and as they start, they go forward and they spread out over several years. But we know that we have currently demand in Corpus for an additional 500,000 barrels, maybe as much as 1 million barrels of new storage in Corpus. And it takes new docks to start getting those kind of barrels across the docks and into the markets. So there's still a lot of activity down there, and we're hoping to see with some of the things happening in the market that a lot of activity will move north up into the Beaumont area, too.

Okay. I appreciate it. Thank you.

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

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

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