Martin Midstream Partners LP (MMLP) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners fourth-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to CFO, Bob Bondurant. You may begin.

Thank you, Leanne. And to let everyone know who is on the call today, we have Ruben Martin, our CEO; Joe McCreery, VP of Finance of Head of Investor Relations; and Wes Martin, VP of Corporate Development. Before we get started with the financial and operational results for the fourth quarter and the year, I need to make this disclaimer.

Certain statements made during this conference call may be forward-looking statements, related to financial forecast, 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 meanings of SEC Regulation G, such as distributable cash flow or DCF, and earnings before interest tax depreciation 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 reporting results, and it can be a meaningful measure 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 measures.

Also included is our annual adjusted EBITDA comparison to guidance. Our earnings press release in our 10-K, which was also filed yesterday, are available at our website, martinmidstream.com. Before I speak on both our fourth-quarter and our annual performance, I'm going to turn the discussion over to Joe, who will speak on our recently-announced Hondo Asphalt Terminal drop-down acquisition, and our related financing plan.

Thanks, Bob, good morning, everyone. We are going to slightly amend the call sequences this morning, as I will start with the overview of Hondo Asphalt Terminal acquisition we announced in yesterday's press release. The partnership has entered into a definitive agreement to acquire the terminal for Martin Resource Management, for an all-in purchase price of $36 million, including remaining capital expenditures of $8.6 million.

Through a long-term asphalt throughput agreement with MRMC, we expect to generate approximately $5 million in annualized EBITDA. This attractive drop-down purchase price multiple allows the partnership to acquire the terminal on an accretive basis, restoring modest growth.

By way of background, Hondo, Texas is located approximately 40 miles west of San Antonio. It is ideally situated to capture the growing demographics of south-central Texas. Our facility is strategically located near multiple aggregate quarries, and numerous hot mix plants.

With regards to the asset specifically, Hondo is approximately 70% constructed. Asphalt for the facility will be supplied by rail, from both [PADD 2] and [PADD 3] refineries.

Once completed, the facility will have storage capacity of approximately 178,000 barrels, or 32,000 tons, along with processing and blending capabilities. Final completion is expected in the late second quarter of 2017, and MRMC's long-term throughput agreement commences July 1.

Asphalt storage operations began earlier this month as MRMC is already able to utilize the storage facility and capacity. The terminal will further benefit from MRMC and MMLP's extensive asphalt [internalling] handling capabilities. To fund the acquisition, after market closed yesterday, we launched in price in equity offering of about 2.6 million common units.

Given the relative size of this offering, we believe this overall transaction will be both accretive and delevering in nature. The drop-down is scheduled to close commensurate with the equity mid-next week. I will pass to Bob.

Thanks, Joe. Now, I would like to discuss our fourth-quarter performance compared to the third quarter, and also discuss our annual performance compared to our guidance.

For the fourth quarter, we had adjusted EBITDA of $52.3 million, compared to $33.3 million in our seasonally weakest quarter, the third quarter. Our distributable cash flow for the fourth quarter was $35.8 million, which provided a quarterly distribution coverage of 1.98 times. This distribution coverage ratio for the quarter was the strongest quarterly coverage in the 14-year history of MMLP.

For the year, we had adjusted EBITDA of $176.6 million, compared to the beginning of the year guidance of $183.6 million, a shortfall of $7 million. However, given effect to the previously disclosed tariff reduction, and correspondingly we reduced forecasted distribution from West Texas LPG, our beginning-of-the-year guidance would have been reduced by approximately $7 million, the amount of our shortfall.

Now, by segment, I would like to discuss our fourth-quarter operating performance, and also our annual performance compared to guidance. In our natural gas services segment, our fourth-quarter adjusted EBITDA was $28.1 million, compared to $14.6 million in the third quarter. Included in our natural gas services segment, was an adjustment of $3.8 million in unrealized mark-to-market losses in the fourth quarter, and $0.7 million in unrealized mark-to-market gains in the third quarter.

These derivative instruments are used to hedge our NGL inventory. Also included in adjusted EBITDA, was $1.4 million in distributions from West Texas LPG in the fourth quarter and $1.8 million in distributions from West Texas LPG in the third quarter.

The significant seasonal increase in cash flow between quarters of $13.5 million for our natural gas services segment was primarily from our butane logistics business. As a reminder, we build butane inventory for our refinery customers in the second and third quarters, and then sell these customers butane in the fourth and first quarters of the year. We primarily use our North Louisiana underground storage facility, which is serviced by truck and rail, to facilitate our logistics services for these refinery customers.

Now for the year, our natural gas services adjusted EBITDA was $78.7 million, compared to the beginning-of-the-year guidance of $84.2 million, a shortfall of $5.5 million. This shortfall is primarily attributable to our reduced distributions from West Texas LPG. We have forecasted to receive approximately $14.4 million, but warned midyear that EBITDA would be reduced by approximately $7 million.

As we've discussed in previous earnings calls, the Railroad Commission of Texas issued an order in March of 2016 to have West Texas LPG revert back to lower tariff rates in place at June 30 of 2015. This was in response to complaints regarding new tariff rates from certain shippers on the pipeline.

A hearing on the merits is scheduled in front of the Hearings Examiner for the week of March 27, 2017. So, in giving effect to the tariff reductions, the segment actually outperformed full-year guidance by $1.4 million.

Now, looking for the first quarter of 2017, we should have another exceptional quarter in our natural gas services segment. Thanks to our inventory levels and related carrying costs, we expect will have another strong performance from our refinery butane logistics business in the first quarter. Refiners are continuing to demand butane for blending into gasoline, as they [put] pressure, rules remain relaxed until April 1.

We also expect consistent cash flow performance from Cardinal Gas Storage through its firm storage contracts, and from continued incremental revenue generated by its interruptible services. Now in our terminalling and storage segment, our fourth-quarter adjusted EBITDA was $16.7 million, compared to $17.1 million in the third quarter. The primary cost for the reduction of cash flow between periods was from our packaged lubricant business, as we experienced a 20% decline in volume sold, and a 10% decline in margins.

However, the fourth quarter is always the weakest quarter in our packaged lubricant business, and we expect improvement in cash flow from this business in the first quarter, relative to the fourth quarter. Also in our terminalling and storage segment in the fourth quarter, we took a non-cash impairment charge of $15.3 million, primarily for refinery projects that are no longer economically viable. However, some of the equipment related to these projects have value to interested parties, and we've reported the estimated remaining value on the balance sheet as assets held for sale.

The ultimate cash collective for these assets held for sale will be used to pay down our revolving credit facility. Offsetting these impairment charges was a gain of $35 million, primarily from the previously reported sale of our Corpus Christi terminal assets. This gain is recorded in other operating income in the terminalling and storage segment.

Now, for the year, our terminalling and storage had adjusted EBITDA of $69.5 million, compared to our guidance of $72 million. The primary [miss to] guidance was from our lubricant packaging business, which missed forecast by $3.6 million, as a result of reduced volumes sales, and reduced margins, as a result of weaker customer demand. We have recently seen this trend continue for packaged lubricants, so we have expanded our reach into the packaged grease market, and feel we can grow the cash flow of this business as a result of our expansion into these new grease markets.

Looking toward the first quarter of 2017, we will no longer have cash flow from our recently-sold Corpus Christi terminal assets, which accounted for adjusted EBITDA of $2.2 million in the fourth quarter. However, we will see consistent cash flow from our specialty and shore-based terminals, and should see stronger performance from our packaged lubricant business, as we come out of its seasonally weakest fourth quarter.

Now, moving to our sulfur services segment, our fourth-quarter adjusted EBITDA was $8.7 million, compared to $2.5 million in the third quarter. Our fertilizer business had an increase in adjusted EBITDA of $5.4 million, and our pure sulfur byproduct business had an increase in adjusted EBITDA of $0.8 million. As you may recall, we had our ammonia sulfate plant down for turnaround the entire third quarter, which negatively impacted third-quarter performance.

This plant was fully operational in the fourth quarter, which positively impacted fourth-quarter performance when compared to the third quarter. Our pure sulfur byproduct business increase in cash flow was primarily a result of reduced marine operating expenses, which were unusually high in the third quarter. For the year, our sulfur services segment had adjusted EBITDA of $35.1 million, compared to guidance of $29.3 million.

Our fertilizer business exceeded forecast by $3.7 million, and our pure sulfur byproduct business exceeded forecast by $1.3 million. The recent maintenance capital investments we've made in our fertilizer business the last few years translated to reduced maintenance cost in 2016, helping us to exceed our fertilizer guidance. Our pure sulfur byproduct side of business saw increased volume in reduced expenses in our prilling operations, helping this business line to also exceed guidance.

Looking toward the first quarter, we should see an increase in our fertilizer cash flow, as demand for fertilizer will increase in the first quarter relative to the fourth quarter due to the start of the agricultural planting season. The first-quarter performance of our pure sulfur byproduct business should be similar to the fourth quarter.

Now, to marine transportation segment. We had adjusted EBITDA in the fourth quarter of $2.5 million, compared to $2.4 million in the third quarter. We maintained approximately 90% utilization of our inland equipment for both the third and fourth quarter, and rates were consistent between periods, as well.

Additionally, we have continued to lay up and sell our older offshore and inland marine equipment, and as a result, took an impairment charge of $11.7 million in this segment in the fourth quarter. After the impairment charge, we have reclassified the remaining value of these impaired assets to assets held for sale on the balance sheet. We will use the cash raised from these marine asset sales to pay down our revolving credit facility.

During the first quarter of 2017, one inland tug and one offshore tow have been sold. Annual expense savings from the sale of these assets should be approximately $1 million.

Now, for the year, our marine transportation segment had adjusted EBITDA of $8.1 million, compared to guidance of $14.2 million. The primary reason for this guidance miss was the weak inland barge market, which has been driven by the oversupply of tank barges. This has led refiners to shifting from longer-term contracts to shorter-term contracts, and also spot market contracts at reduced rates.

Because of these market conditions, we continue to shrink our fleet of older inland equipment to reduce our fixed cost, and to position ourselves as a stronger marine carrier when the market rebounds. Looking toward the first quarter, we anticipate our marine transportation cash flow to be similar to the fourth quarter, as we continue to navigate our way through these soft inland market conditions.

Finally, our partnership's unallocated SG&A cost, excluding non-cash unit compensation expense was $3.9 million in the fourth quarter, compared to $4 million in the third quarter. Our maintenance capital expenditures and turnaround costs for the fourth quarter was $4.8 million, and were $19.2 million for the year, in line with our range of guidance.

For the overall partnership looking toward the first quarter, we should see continued strong performance from our two primary seasonal business lines, our butane logistics business, and our fertilizer business. As a result, we should again have very strong DCF coverage in the first quarter, and should see continued deleveraging of the business, as well. Now I would like to turn the call back over to Joe, to discuss our balance sheet as related to leverage ratios.

Thanks again, Bob. I am going to walk through the debt components of our balance sheet and our bank ratios at year end.

On December 31, 2016, the partnership's balance sheet reflected total long-term funded debt of approximately $808 million. Our balance sheet funded debt is shown before unamortized debt issuance and unamortized issuance premiums as actual funded at outstanding was $817 million. Reconciling this amount at year end, our revolving credit facility balance was $443 million (inaudible) of our senior unsecured notes was $374 million.

Thus, our total available liquidity on December 31, was $221 million, based on our $664 million revolving credit facility. For the quarter year ended December 31, 2016, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA, and total indebtedness to adjusted EBITDA, were 2.66 times and 4.91 times, respectively. As mentioned in the earnings release, this represents an improvement of approximately 30 basis points, compared to our September 30, third-quarter ended level.

Reduced working capital through NGL inventory reduction and improved quarter-to-quarter cash flow, as Bob highlighted, drove the leverage improvement. As anticipated, we were able to achieve full-year cash flow guidance from our butane business in calendar 2016. That said, our [effective] butane season continues, and looking ahead to the first quarter, we anticipate further inventory reduction in a favorable price environment, thus further reducing working capital-related debt and generating cash flow.

Our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 4.16 times. Looking at the balance sheet, total debt to total capitalization on December 31, was 72.4%, an improvement of approximately 2% from the third quarter. Again, reflecting the working capital decreases in our businesses during the fourth quarter.

In all, on December 31, 2016, the partnership was in full compliance with all banking covenants, financial or otherwise. And finally, before we move to Q&A, I have one administrative note this morning.

MMLP will host its annual Analyst and Investor Day the afternoon of Thursday, March 23, in Dallas, Texas. All of those on the call are welcome to attend. And for further details and registration, please visit our website.

Leanne, this concludes our prepared remarks this morning. We would now like to open up our lines for question and answers. Thank you.

(Operator Instructions)

Our first question comes from James Spicer, Wells Fargo, your line is open.

Good morning, this is Mark (inaudible), calling in for James Spicer. A couple of quick questions. Given that your bonds are now trading above par and are callable, wondering what your thoughts are on [refinancing].

Mark, this is Joe, good morning. We have noticed certainly the uptick in our bonds in the price behavior, and certainly as the market has tightened. We are also very aware of a very frothy bond market currently. So, there seems to be a pretty receptive market.

That said, I think our call date was yesterday, to your point. We continue to evaluate those and look at it from a long-term perspective. The moving parts are our capital structure.

One of the luxuries, I would say, of having a robust coverage ratio is the ability to do things in the capital structure, such as term-out debt through the bond market. We are continually evaluating those, and working with advisers to do so.

Okay, thank you. Second question. Could you please provide some more detail on potential growth projects for 2017 and also 2017 CapEx?

This is Wes. In terms of just amount of CapEx that we are looking at for 2017, we've got currently in the hopper, if you will, not necessarily budgeted at this point in time, but let's call it up to $20 million of growth CapEx. I think as it relates to specifics on that, we will be able to provide a little bit more color in late March, but the focus of that investment as we sit here today is really on two different segments; the natural gas storage piece of it in the natural gas services segment, and the terminalling and storage segment, as well.

And as it relates to funding of those CapEx issues or investments, if you will, we don't see any need to access the equity market as we sit here today to do that. We have got excess coverage, excess distributable cash flow that we can use to fund those investments. But as we sit here today, that is where we sit, and we will provide additional guidance or commentary on that at our Investor Day presentation.

Okay, thank you very much.

Our next question comes from Ethan Bellamy with Baird. Your line is open.

Good morning guys, nice quarter. What was the volume on the West Texas LPG in the quarter? What is your outlook for volumes for the rest of the year, given the Permian mania?

The volume of West Texas LPG in the fourth quarter was $183 million a day, or excuse me, 183,000 barrels a day. Outlook, that has been stable, but there are customers talking to us to add to the volume flow, so, we think it will strengthen as we move through the year.

Part of the reduction of that number down to 183,000 was a result of freeze-offs as cold weather hit. First quarter is always our lowest volume quarter, because of that reason.

And looking out, let's say to 2018 or beyond, do you see a need to expand capacity in the future, given how much drill CapEx is going out there?

This is Wes, I will comment on that and turn it over to Ruben or Bob. As we sit here today, given the sort of location of our pipe and the total current capacity, the pipe is essentially a 240,000-barrel-a-day pipe. So, we would have to see pretty material improvements across that system, particularly out of the west side of the system, if you will, to go and spend additional capital, because we do have the capacity on the line.

So, as we sit here today, I don't see any large capital expenditure items. We may have some connections and such to different plants that will roll through that investment. But as it relates to a large-scale expansion, right here as we sit, it is kind of hard to say, but right now we have got to fill up the capacity that we've got on the pipe, as it exists today.

Okay, that makes sense. Turning to gas storage, Cardinal looks pretty solid, and I know that is termed out. The question is, what is the weighted-average-contract life there? Do you have any significant renewals coming up?

And then sort of separately with the rally we saw in gas prices over the winter. Did that change spot-market demand or rates at all? And how do you see rates on gas storage trending, generally?

We recently, to answer your first question on the weighted average life of the contract, we are looking at about a plus or minus four-year weighted average life on those contracts, as we sit today. So, still pretty strong on that from that standpoint. We recently held open seasons at Arcadia, Monroe, for about, I can't remember the total capacity, but it was somewhere in the eight to nine Bcf capacity range.

I would say on the whole, that that process and the outcome of that process was as expected. I will comment that, as it relates to term, linked to the contracts that people were asking for, I think we saw some interesting aspects of that and people wanting to extend terms and go out further, which I think is positive for us in the long run.

We also just launched an open season for Perryville that will be going on over the next month or so. So, as it gets to Investor Day, we will have a little bit more color on where we go there.

I will comment on the current rates. If you look at spreads, spreads have come in, so if you are just looking at intrinsic value on the storage basis, it's not a great market. But I will say again, that the feedback we've gotten from customers, particularly as we are looking into some of this new open season going forward, there is interest in extending contracts and some overall improvements in rates, relative to just looking at intrinsic values.

So, I think that's sort of slightly positive from our perspective, again, the interruptible at our facilities continues to be strong. So, I think overall, as you commented, we are still optimistic on that business, and have seen it be pretty strong here in the last 12 months.

Okay, that's helpful, Wes. And then with respect to the tariff on West Texas LPG, if I heard Joe correctly, we are going to have the Analyst Day four days before that hearing, so I know that will be a question you guys get then.

Can you handicap expected outcome on that, do you feel like you have an extremely solid case? Has anything changed since last time you talked about it?

We believe that the majority of our customers can basically switch to other pipelines if need to, and most all of the other pipelines in the areas that they can switch to have higher tariffs than we do at that time. So, we feel like that in the state of Texas, that market-based type rates are going to continue to prevail. We feel good about it, but until we've actually been through the system and had the hearing, there is no way we can comment on our handicap.

Okay, that's helpful. And then lastly, and I am overstaying my welcome here, but Ruben, I want to ask my one old-man-on-the-mountain question, which is, what's going to happen to the oil market?

Man, it's either going to go up, down, or stay the same. That is pretty much my wisdom from the top of the mountain.

All right, thanks, guys.

Our next question comes from Gabe Moreen, Bank of America Merrill Lynch, your line is open.

Good morning, most of my questions Ethan hit on. Just a quick question in terms of taking capacity out of the barge market.

I'm just wondering where you think we are in that process, and to what extent you are seeing some competitors take capacity out. And broader-picture thoughts, in terms of how much longer there might be to go there?

I don't know the exact length. I think we've got at least another year. We are seeing barges come out of the market, older vessels coming out of the market.

It does feel like the rates have floored, but we don't really see them increasing at this time. But I think we've got at least another year of weaker market rates, and that's generally what we are forecasting when we do roll out our guidance.

I think that's right, Gabe, this is Joe. Further to Bob's point, not knowing with any certainty as to how long this is prolonged, we've been pretty aggressive on cost-cutting, as you can see. That's what we can control and I think that's where we need to focus is to continue to divest of our non-commercial or less commercially viable assets and be very focused on SG&A and OpEx in our system.

Thanks, maybe just turning to a couple of questions on the activities at the private company. One, is this an update on the commodities marketing business, how that is going? Whether you are expanding, staying the same or whatnot, and also in terms of any other asset development activities upstairs?

It has been pretty much business as usual at [MRMC] for 2016, let's call it, with respect to some good markets in our byproduct lines, which is our sulfuric acid and our asphalt businesses. Those are somewhat (inaudible) crude in nature, more on the downstream side. So, those had nice years.

Some of our other businesses were a little more challenge, but nonetheless, we continue to move forward. I think from an asset-development perspective, there are some ideas that are out there that can dovetail, some things that Wes was talking about, and perhaps we can give you a little further detail at the Analyst Day, All in all, we continue to move forward.

I will just add that I believe that when you look at all the ancillary businesses that we have, even not in the MMLP, like our trucking business, and some of our truck types of businesses, we are seeing an increase. We do feel like it is slower, we are seeing slight increases in the business. We are seeing it in truck sales through east Texas.

We've seen a lot of things that are positive, so I believe that like our marine business, we have probably seen the floor. Whether or not it's going to be a massive uptick anytime soon, no way to answer. But I do believe we have seen the floor, and we are seeing some optimism in some of the volumes in some of the margins and so forth that we've seen out there.

We still have a long way to go. But it is at least on the up rise, instead of continuing to decrease.

Got it, thanks, guys.

Thank you.

And next question comes from Selman Akyol with Stifel, your line is open.

Thank you. I've got most everything. I guess just one quick question.

In terms of the assets held for sale, how long do you think that's going to take to actually be realized and how is that whole process going? In terms of managing the balance sheet.

I would say on the assets held for sale and the terminalling segment of -- we are under contract, the company looking at it has to make a decision, an option decision by the end of this month. So, I am cautiously optimistic we will liquidate that in the first quarter. And on the marine asset side, like I said, we sold one offshore tow and one inland tug.

We have, I believe, four other inland tugs and two inland barges for sale. Really no visibility on that. Hopefully, we will sell those throughout the year this year.

All right, thanks very much.

You're welcome.

(Operator Instructions)

We do have a question from Charles Marshall with Capital One, your line is open.

Good morning, guys. Congrats on the strong quarter.

Thank you.

As I think about modeling out 2017, relative to 2016, and understandably there's a lot of moving parts here, and I'm sure you will give a lot more color and official guidance in March. But how do you think 2017 shakes out relative to 2016 on an adjusted EBITDA basis?

Are you guys thinking slightly down to kind of flattish? Can you give us any trajectory of how we should be thinking about 2017 with all of these moving parts?

Yes, Chuck, this is Wes. I will give you a couple of comments. I think we had indicated to the markets back in October from a distributable cash flow coverage basis that we were looking at something in the [1.2] range.

That continues to be the case for 2017, even post this equity offering. Again, the drop-down multiple and economics here look pretty attractive for MMLP. So, as we sit on a DCF-coverage basis, we are still looking at, call it 1.2 times for 2017.

On an adjusted-EBITDA basis, I think if you look at what we did last year and adjust for pulling out the Corpus Christi crude terminal asset for that EBITDA that was associated with that was about, I think $11 million or $12 million plus or minus. So, that would get you back to, call it $160 million to $165 million range. Somewhere in that general range, I would say probably $150 million to $160 million, sorry, $155 million to $160 million is what we are going to ultimately come out with.

And then to that number that Wes just described, we believe there's some upside with the positive West Texas LPG rolling.

I don't think the years are too dissimilar making the adjustments that Wes alluded to. I think in Hondo, kicking out Corpus, and to Bob's comment, with West Texas kind of in the 7%, 8% run rate, which is nothing but upside pending the Railroad Commission outcome.

That's great, guys, thanks for the color. As you guys continue to remove some of the older fleets within the marine business, can you talk about if you have any sort of planned dry dockings scheduled for 2017? Where we should expect that to land in terms of what quarter.

I think it is a light year this year. I'm looking and trying to find the table here. [1.5] million is all this year.

And to be frank, I'm not sure which quarter that is. I think it might be in the second quarter, but I'm not sure.

Got it. And I guess switching over to gas storage. Are you guys evaluating, and depending on how [you] open season shakeout and re-contracting efforts, but is there any plans, or at least contemplating at all about possibly converting under these [dry dense coverings] over to NGL use? Is that something that's on the table for discussions, depending on where these open seasons check out?

This is Wes, I will comment, and then Ruben, if you have additional commentary. At this point in time, we are not. If you think of our system, and we have 50 Bcf-plus, two of those are reservoir, two are salt bone storage, and those salt bone storage caverns are pretty massive in terms of the Perryville.

We've got 8.5 Bcf cavern there, and at Arcadia we have, I think, 15 plus or minus Bcf there. We do have -- some of those are smaller caverns and should the opportunity arise, we would look at that. But as it sits today, I'm not aware of us making any decisions basis converting those at this point in time.

Some of the optimism in that business with some of the numbers that we're hearing going into the next year or so are a little bit better. Right now, it would not be economical to make those conversion, especially in our locations.

We are not in the locations that would be conducive to owning wells that large for our NGLs. We have NGLs that are associated with it in North Louisiana, we have a lot of NGL storage there and we have plenty. So, I do not see conversions at this time.

Last one for me. Just as it relates to potential re-contracting rates, as you're seeing maybe some improvements there.

That is relative to, call it $0.035 to $0.04 market rates that some of those facilities, Arcadia-Monroe, is that right? That's the baseline floor you would say for re-contracting -- ?

Right, I won't comment on specific facilities. But I think on the whole, if you aggregated those two capacities, I think that is roughly -- that's where the intrinsic value is, plus a little bit of extrinsic value, so that's a fair comparison. It may not be exact, but --

We wouldn't re-contract long term at those rates.

Right.

We would keep that short term, because we are seeing better things coming in for long term.

Got it, guys, thank you.

And next question comes from Mike Gyure with Janney, your line is open.

Good morning, can you touch maybe a little bit more on the lubricants business? I know you took some impairment there, and just maybe how you see that business fitting in the grand scheme of things over the next year or two.

The impairment charge was a real estate asset we had for sale in Kansas City. Wasn't significant, really wasn't from the business itself, it was more of a real estate value.

It has been a competitive market on the packaged lubricant side. There is generally, I would say, oversupply in that market. Where there is a niche for us, though, is in the grease market.

Grease is basically lubricant and you add soap to it to make grease. And we have over the course of the last two to three years have doubled the cash flow in that business roughly on the grease side. So that's where we are going to focus.

The packaged lubricant was impacted by the fall in the energy markets. We had a big customer base that was demanding from those markets. We are guardedly optimistic that that is going to improve as the energy space continues to strengthen, as crude firms up at these levels.

So yes, it has been disappointing the last two or three years. But we do see some visibility of some increasing cash flow going forward.

Okay, and then on the note receivable that you are going to collect, it looks like potentially here in the first or second quarter. I assume the proceeds for that are going to be used to pay down debt? Or maybe if not --

Pure debt paydown. Yes, Sir.

It's spread out, significantly.

Great, thank you very much.

I am not showing any further questions at this time. I would now like to turn the call back over to Ruben Martin for any further remarks.

Thank you, and we are pretty proud of our record EBITDA and our distributable cash flow coverage of 1.98 times in that quarter, and we have got Hondo drop-down, which I think could go into some other areas that will further enhance that business, good capital rate. Joe did a great job on that.

We are going into 2017 with strong momentum, and looking forward to 2017, and I do feel like that we have seen the floor in a lot of different businesses, all throughout our areas, and we are looking forward to 2017. And we thank everybody for being on the call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.

You may all disconnect. Everyone, have a great day.