Martin Midstream Partners LP (MMLP) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Martin Midstream Partners L.P. Fourth Quarter 2017 Earnings Conference Call Webcast.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Bob Bondurant, please go ahead.

Thank you, Emily. To let everyone know who's on the call today, we have Ruben Martin, our CEO; Joe McCreery, our VP of Finance and Head of Investor Relations; and Scott Southard, our Vice President of Commercial 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 relating to financial forecast, future performance and our ability to make distributions to unitholders.

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 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 reported results, and it can be a meaningful measure of the Partnership's cash available to pay distribution. We also included in our press release issued yesterday, a reconciliation of EBITDA, adjusted EBITDA, distributable cash flow and quarterly adjusted EBITDA guidance to the most comparable GAAP financial measure. Earnings press release is available on our website, martinmidstream.com.

Now I'd like to discuss our fourth quarter performance compared to the third quarter, and also discuss our fourth quarter and annual performance compared to our guidance.

For the fourth quarter, we had adjusted EBITDA of $49.3 million compared to $27.1 million in the third quarter. Our distributable cash flow for the fourth quarter was $31.2 million, which provided a quarterly distribution coverage of 1.59x. For the year, our distributable cash flow was $91.1 million, which provided an annual distribution coverage ratio of 1.18x.

For the fourth quarter, our adjusted EBITDA of $49.3 million compared to guidance of $48.2 million. And for the year, our actual adjusted EBITDA of $156.2 million compared to guidance of $157.4 million, a slight difference to annual guidance of $1.2 million.

Now by segment, I would like to discuss our fourth quarter operating performance compared against the prior quarter, and also discuss our operating performance compared to our segment guidance for the quarter and for the year.

In our Natural Gas Services segment, our fourth quarter adjusted EBITDA was $29.7 million compared to $14.5 million in the third quarter. There were unrealized noncash mark-to-market losses of $3.8 million in our Natural Gas Services segment in the fourth quarter compared to no unrealized mark-to-market gains or losses in the third quarter. These derivative instruments are used to hedge our NGL inventory.

The mark-to-market adjustments affect our reported net income but have no impact to adjusted EBITDA. Also included in adjusted EBITDA was $1.2 million in distributions from West Texas LPG in the fourth quarter compared to $1.7 million in distributions from West Texas LPG in the third quarter. The significant portion of the increase in cash flow between quarters for our Natural Gas Services segment was primarily from our butane logistics business.

In the fourth quarter, our butane logistics business continued selling its spring and summer seasonal build of inventory in order to adequately supply our customers' demand, which began in the fourth quarter. Butane sales will also carry over to the first quarter of 2018. As a result of selling a significant portion of our butane inventory, our cash flow from our butane logistics business increased $13.5 million between quarters. As we continue to liquidate our butane inventory, we will also continue to pay down our revolving credit facility.

Now compared to our fourth quarter guidance, our Natural Gas Services segment was right on forecast, although there were variances in different businesses within this segment. Our butane logistics business exceeded guidance by $1.6 million as our per gallon margin was greater than forecasted. Also, Cardinal Gas Storage exceeded forecast by $0.6 million due to stronger interruptible revenue than forecasted. And also our propane business exceeded forecast by $0.4 million due to colder weather than forecasted.

Partially offsetting the performance in these 3 areas was the underperformance of our legacy NGL business and a shortfall in our forecasted distribution from West Texas LPG.

Our legacy NGL business missed forecast by $0.8 million, primarily as a result of reduced NGL volumes. In addition to this shortfall, our distribution from West Texas LPG missed forecast by $1.8 million. We had anticipated resolution from the Texas Railroad Commission on West Texas LPG's dispute over market tariff rates by mid-2017, but this did not happen and still has not happened, resulting in our missed distribution forecast from West Texas LPG.

Now compared to our annual guidance, our Natural Gas Services segment missed our forecast by $1.1 million, as we realized $75.8 million of adjusted EBITDA compared to guidance of $76.9 million.

Cardinal Gas Storage exceeded annual guidance by $3.1 million, primarily as a result of unforecasted interruptible revenues.

Our butane logistics business exceeded our guidance by $2 million as a result of better per gallon margins than were forecasted. Offsetting this positive performance was underperformance in our other 3 business lines in our Natural Gas Services segment.

Our distributions from West Texas LPG were $3.5 million less than forecasted as a result of there being no resolution in our market tariff rate case from the Texas Railroad Commission.

Our legacy NGL business missed forecast by $1.6 million as a result of reduced volume purchased and sold. And finally, our wholesale propane group missed annual guidance by $1.1 million as a result of the warm winter in the first quarter of 2017.

Now moving to our Terminalling and Storage segment, our fourth quarter adjusted EBITDA was $12.3 million, compared to $13.2 million in the third quarter, a decline of $0.9 million. This decline in adjusted EBITDA between periods for the Terminalling segment was primarily due to reduced margins in our packaged lubricant business. Adjusted EBITDA from our packaged lubricant business fell from $2.3 million in the third quarter to $1.6 million in the fourth quarter. Our lubricant supply cost increased during the fourth quarter and due to a lag in our ability to raise prices as a result of competition our margins were reduced. However, we have been able to increase prices and therefore margins beginning in the first quarter of 2018.

Now compared to fourth quarter guidance, our Terminalling and Storage segment missed our forecast by $3.1 million, as we had forecasted $15.4 million of adjusted EBITDA. The majority of the missed guidance was due to increased repair and maintenance cost in our specialty terminal group as a result of the impact of Hurricane Harvey.

And compared to guidance for the year, our Terminalling and Storage segment missed forecast by $4.6 million, as our adjusted EBITDA was $54.5 million compared to guidance of $59.1 million.

The impact from Hurricane Harvey between repair and maintenance cost and missed revenue due to downtime, accounts for the significant majority of the $4.6 million miss to our annual guidance in our Terminalling and Storage segment.

Now on our Sulfur Services segment. Our fourth quarter adjusted EBITDA was $8.7 million compared to $2.6 million in the third quarter. Our fertilizer business had an increase in adjusted EBITDA of $4.4 million between quarters, while our pure sulfur byproducts business adjusted EBITDA increased $1.7 million.

Now as you may recall in the third quarter, we had annual turnarounds at our sulfuric acids and ammonium sulfate plant in Plainview, Texas, and at our ammonium thiosulfate plant in Beaumont, Texas. All 3 plants were fully operational in the fourth quarter aligned from an overall 175% increase in combined production, which drove our manufacturing cost of goods sold down relative to the third quarter through increased fixed cost absorption.

This was the primary reason for the fertilizer cash flow increase in the fourth quarter compared to the third quarter. The increase in the pure sulfur side of the business was primarily because of the production increase in sulfur from key refinery producers, as these producers had significant downtime in the third quarter due to Hurricane Harvey. This led to a significant increase in sulfur tons handled in the fourth quarter compared to the third quarter.

Now compared to the fourth quarter guidance, our Sulfur Services segment exceeded forecast by $3.6 million. Our fertilizer group accounted for $2.6 million of the outperformance as our fertilizer tons sold exceeded forecast by 24%. Also our margin per ton sold was better than forecasted due to improved absorption of fixed manufacturing costs. Our pure sulfur side of the business exceeded guidance by $1 million, primarily due to opportunistic selling of pure sulfur tons.

Now compared to annual guidance, our Sulfur Services segment exceeded forecast by $4.2 million. This strong performance relative to guidance was primarily from our fertilizer business. The fertilizer business exceeded guidance by $3.8 million, primarily as a result of a 22% improvement in margins per ton realized compared to our guidance.

Now moving to Marine Transportation. This segment had adjusted EBITDA in the fourth quarter of $2.2 million compared to $1.1 million in the third quarter. The cash flow from our inland side of business was up $300,000 between quarters as a result of a 12% increase in utilization. In the offshore side of the business, our cash flow increased $0.6 million between quarters as our offshore tow was fully operational during the entire fourth quarter after being in the shipyard during a portion of the third quarter.

Now when compared to fourth quarter guidance, our overall Marine Transportation segment exceeded forecast by $0.3 million. Our offshore business exceeded forecast by $0.4 million, primarily due to lower repair and maintenance cost than was forecasted.

And finally, compared to annual guidance, our Marine Transportation segment exceeded forecast by $0.3 million, primarily due to better performance in our offshore business due to reduced repair and maintenance expenses.

Our unallocated SG&A was $3.6 million for the quarter and $15.6 million for the year. This annual cost was exactly what our guidance was for the year. Our maintenance capital expenditures and turnaround costs for the fourth quarter were $5.6 million and were $19.7 million for the year, just slightly below our annual guidance.

During the fourth quarter, we did sell one of our assets held for sale, realizing $6.7 million in net proceeds. We continue to carry $9.6 million in assets held for sale. And we hope to realize the value of these held-for-sale assets in 2018.

For the overall Partnership looking toward the first quarter, in addition to our stable fee-based business lines, we should see continued strong performance from our two primarily seasonal margin-based 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.

Now I would like to turn the call over to Joe to discuss our balance sheet, capital spending, and a few comments regarding West Texas LPG's tariff case in front of the Texas Railroad Commission.

Thanks, Bob. I'll start with a normal walk-through of the debt components of our balance sheet and our bank ratios, then provide a quick review of our fourth quarter and full year capital spending, and finally some insight into our West Texas LPG tariff case currently in front of the Texas Railroad Commission.

On the December 31, the Partnership's balance sheet reflected total long-term funded debt approximately $813 million. Our balance sheet funded debt is shown in our filings before unamortized debt issuance and unamortized issuance premiums as actual funded debt outstanding was $819 million. Reconciling this amount at quarter end, our revolving credit facility balance was $445 million, and the notional amount of our senior unsecured notes was $374 million. Thus, the Partnership's total available liquidity under our revolving credit facility on December 31 was $219 million based on our $664 million revolving credit facility.

For the quarter ended and the year ended December 31, 2017, our bank compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA were 2.78x and 5.11x, respectively. Our bank compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 3.47x. Looking at the balance sheet, total debt to total capitalization on December 31, was 73.2%, essentially flat when compared to the third quarter. In all, at year-end, the Partnership was in full compliance with all banking covenants financial or otherwise.

Now I'd like to discuss our capital spending during the fourth quarter and full year 2017, starting first with our growth capital expenditures. Growth capital spending was higher than guided during the fourth quarter, as we spent approximately $6.9 million. Approximately $2.8 million was attributed to the Martin Marine Transportation segment where we commissioned a new push boat to be constructed at a total cost of approximately $4.5 million. This boat, which will be delivered during the second quarter of this year, will help reduce our overall operating costs as we continue to rationalize our equipment within this segment. Also during the quarter, we spent approximately $2.7 million, finalizing the Hondo Asphalt Terminal in anticipation of this year's winter inventory fill, now underway.

Full year growth capital spending was approximately $43.5 million, of which the Hondo terminal consisted of $35.8 million. At this time, we will be withholding our 2018 growth capital spending estimate until we deliver guidance. But it is safe to say that the previously announced West Texas LPG Pipeline expansion project, of which our 20% ownership interest requires $40 million of committed capital, will be with the overwhelming majority of the growth dollars we spent this year.

Now let's look at maintenance capital expenditures. We spent $5.6 million during the fourth quarter, in line with our revised guided level. Likewise, our full year maintenance capital spending was $19.7 million. Again, on track with the downward revision we provided during the last quarterly earnings call.

Now I would like to discuss the West Texas LPG tariff case. As most are aware, certain shippers file complaints with the Texas Railroad Commission challenging increased rates of West Texas LPG pipeline implemented on July 1, 2015.

The complainants requested that the increased rate be suspended until the Railroad Commission determine appropriate new rates. On March 8th, 2016, contrary to the recommendation of the Administrative Law Judge handling the matter, the Railroad Commission issued an order directing that the West Texas LPG rates in effect prior to July 1, 2015, would be the lawful rates for the duration of this case unless changed by the Railroad Commission.

A hearing on the merits was held before hearings examiner during the week of March 27, 2017, at which the facts of this matter were fully developed. The hearing's examiner subsequently issued a proposal for decision on September 29, 2017. This proposal for decision found a competitive market exists both geographically and functionally and that no shippers on West Texas LPG's system are in a purely captive market. On December 5 of 2017, this matter was considered by the Railroad Commission and one of the commissioners requested additional time to review the materials related to the matter, thereby delaying its consideration until the next Railroad Commission meeting on January 23, 2018. In our opinion, this creates yet a further unnecessary delay as this matter has already been pending for over 2 years.

At the January meeting, Commissioner Ryan Sitton strongly agreed with the findings of the hearing's examiner, that a competitive market does exist and the case should be dismissed. Despite such findings, 2 other Commissioners requested a further market study to be developed for the limited purpose of admitting and considering additional relevant evidence regarding the competition in relevant markets. This act further delays the resolution on this matter.

As you expect, this additional delay is extremely frustrating to us as we believe, like, Commissioner Sitton, the record contains all necessary information for the Railroad Commission to rule in favor of West Texas LPG. We also believe this matter has the potential to become a precedent-setting rate case in the State of Texas and as such will be hard-fought both politically and legally without any certainty as to the timing of resolution.

Specific to our case, we know that several pipeline owners have put forward amicus briefs in favor of our position. Those entities include Enterprise Products Partners, Energy Transfer Partners, Magellan Midstream Partners, Williams, and Howard Energy Partners.

Now lastly, this morning, in lieu of hosting an Analyst/Investor Day meeting this year, we will be issuing our 2018 full year cash flow guidance next Wednesday, February 21, after market close. We hope all interested parties will join us on the conference call, as we walk through the projected cash flow for each of our segments by asset and give guidance on our capital spending for 2018.

More information regarding the conference call can be found on our website.

Emily, this does include our prepared remarks this morning. We would now like to open the lines for questions and answers.

(Operator Instructions)

And our first question comes from the line of Matt Schmid from Stephens.

Good. Well, Bob touched on it a little bit, but clearly the butane logistics business has been strong and maybe could you just provide a little additional color about just how the business and spot demand has been trending in the first quarter of this year?

Yes, it's been a little bit behind due to some weather and some disruptions in the high storm and the things that we had come through with some weather. So that kind of got us a little bit behind, but we still expect first quarter to be on budget.

Okay, great. And...

I'll just add that it's becoming extremely difficult for transportation and things like that and its -- so our transportation network and everything that we have there concerning trucks has really helped us relative to a lot of other people in the business. So it continues to be a strong good business.

Okay, great. And just moving to West Texas LPG. I mean, obviously, the tariff case is ongoing. But maybe could you just provide a little color about the lower fourth quarter distribution and just it being down sequentially?

Yes, this is Bob, I'll take that question. It was the West Texas LPG distribution committee for lack of a better word had some big property tax bill that came in January. The business cash flow like normal, but they said, "We need to hold some cash and reserve to pay property taxes." So that was why the holdback happened. And we did a regional forecast, if you remember, we have forecasted 2 things, we did not forecast for that holdback, number one. And number two was, we had forecasted beginning in the third quarter '17, increased rates as we thought the resolution of the issue in front of the Railroad Commission would have been -- would have occurred. So thanks, we'll get -- should get back to normal again, kind of a -- we'll see a preview next week of our guidance. I will -- well, we are talking about this, say, we are not and our guidance is going to give any increase in -- or resolution of the rate case. I guess we have been disappointed in the -- how it's evolved over time. So we're not going to do that. So when we give guidance next week, I just wanted you to know that, that we factored that into the equation or did not factor any increases.

Your next question comes from the line of Tom Murphy from Raymond James.

From the West Texas LPG expansion, I was curious if you had any color to add on financing assumptions? And if the timing thoughts were consistent with what you guys said last quarter?

Yes, Tom, thanks. This is Joe. I'll take the question. From our perspective, a couple of things: one, we are certainly moving forward with the project as we are -- laid it out last quarter. We certainly like the expansion and the opportunity it presents. And so from that perspective, what we're doing is working with our senior vendors on a plan to effectively assist in the funding of that, and we'll lay that out next week on our guidance call. But as I mentioned, with respect to our $40 million of capital which is required there, it's pretty front-end loaded about $25 million to that $40 million is coming due here we'll spend in the first 2 quarters of calendar 2018. So we're working with the banks on that, and we will provide that resolution next week.

Our next question comes from the line of Mike Gyure from Janney.

Yes. Can you guys talk a little bit about the Terminalling and Storage segment, and kind of the hurricane costs? And if there is anything else to do there, maybe even on the recovery side of things, how's that working out?

Yes. So big picture of the impact over the course of Q3 and Q4 was approximately about -- between repair and maintenance costs, maintenance capital expenditures that hit our DCF line and then also lost revenue, primarily in the sulfur business because refiners were down, and we couldn't get volumes in the third quarter, really, in the month of September. The total impact was about $5.5 million, spread over those 2 quarters. And then there are probably about $200,000 or $300,000 left to spend, I think, in Q1.

Okay, great. And then maybe can you talk a little bit about maybe your expectations, maybe this is for next week about kind of the upcoming asphalt season and what you're seeing there at this point?

Yes, we'll discuss it then, but it feels much better than it did a year ago. I'll just leave it at that.

Yes. This is Joe. I'll just add. We'll have -- Mike, we'll have the benefit, of course, of Hondo for the full season, as I mentioned in the prepared remarks, truly benefiting from the full winter fill season now and then of course, the application season in the spring and summer of next -- of this year. So we're in pretty good shape, but we'll talk about that next week.

Our next question comes from the line of TJ Schultz from RBC Capital Markets.

Just on the rate case, what -- so when is the next Railroad Commission meeting? And as you could just expand a little bit on what that 2 members exactly wanted to study after the January -- I guess January 23 meeting that caused us latest delay and kind of what's your expecting?

Sure. This is Scott Southard. On January 23, when the case was remanded back to the ALJ, what they were looking forward was just additional market information to really prove up the competition for the market. The next meeting is set for February 27. We're not sure if we get on that agenda or not. In the meantime, West Texas has filed a motion for reconsideration and asked for some interim rate relief. That is yet to be considered by the Railroad Commission. So we're waiting for some feedback on that as well.

Okay. So when do you know if you're on that February 27 docket?

It would be about 7 days before the meeting. So in the next week or so.

And, TJ, I'll just add. We're not anticipating any resolution here anytime soon. As Bob mentioned, kind of sneak peek on the guidance. There's no resolution factored into the financials for 2018. So from our perspective, we're still a ways away here.

Okay. Understood. And then, can you just remind me just moving on, Cardinal, you've got some contracts to come up. Just remind me kind of what's due to come up to recontract this year and your expectation on cash flow impact?

Yes. Again, we'll get into further detail next week on our guidance. But we do have contracts rolling over at Perryville. I think the total of approximately [8Bs] I believe. And those, obviously, will be contacted at lower rates than what exists today. So there will be a reduced cash flow impact beginning in July of 2018. And we'll lay that out, and you'll be able to see those numbers in our quarterly guidance next week.

Our next question comes from the line of Kyle May from Capital One Securities.

One quick one on the West Texas LPG distribution. Can you talk about any tax impacts from that in the fourth quarter?

Tax as -- when you're saying that, you're saying because of the tax law changed?

Right.

There were no impacts from that. No.

Okay. And what about going forward?

I -- yes, it's a pass-through entity, so we don't expect there'll be an impact from tax law changes at West Texas LPG.

Okay, great. And one quick one, you were talking earlier about funding the West Texas LPG with -- or working with lenders to fund that. Can you maybe expand on maybe consideration of what you're looking at is that covenant waivers or something else of that nature?

Yes. I think we'll have a couple of structural elementals within our revolving credit facility, Kyle. This is Joe. And that's certainly one of the things kind of giving us some leeway within the revolving credit facility, almost treating it like an acquisition. As you may be aware, we have a springing covenant clause that is receptive to acquisition activities from M&As. And so we're going to get kind of favorable treatment from this construction project and process, almost treating it as if it weren't acquisition. And then another structural element, which will describe with respect to the revolving credit facility next week that will also help in the build-out.

Okay, great. And last one, if I can squeeze in, can you maybe walk through the assets that are listed on the balance sheet is still for sale?

Yes, one is at our refinery in South Arkansas. It's a hydrotreater that is for sale, and in the balance are some older marine assets, I don't know the exact number, but it's a handful of barges and tugs that have not created any revenue. None of these assets have created revenue in the last few years. So that's what those are.

Yes. I just to make a point on the hydrotreater in Arkansas. It was never -- we had purchased it out of a used equipment type of business and then planned on putting it in, and we found a better way to increase our hydrogen production up there that we didn't need it. So it's an asset for sale. It's never been used. And it's the same thing with the marine equipment. They're not generating any revenue. And they are actually having expense with keeping them laid up, so that's one of the reasons we've got them on the market.

Kyle, this is Joe. Our 10-K will be filed tomorrow after market close. Give you a weekend reading in event of the guidance call, but you'll have more clarity there. So just look for that tomorrow.

Our next question comes from the line of Lin Shen from Hite.

I just want to ask that recently there are a lot of discussions of IMO 2020. It means that the refiner review would be required to produce less sulfur products. I'm just wondering should this going to be a good for your sulfur volume -- for sulfur business or kind of a negative for your business?

It doesn't make a change. We've already solved that problem. We have a minimal amount of sulfur in our crude oil. And what we do have, we have enough hydrogen treated. We make an ultra-low sulfur diesel that is acceptable into the marketplace. And our lubricants are -- passed all of those particular tests. And so as far as the impact -- it's at the refinery, but as far as the impact on everything else, we expect the sulfur volumes to stay about the same. We don't look for a big increase due to that, because a lot of them have solved their problems already. But if we didn't see a big downfall when we expected the refineries a few years ago to go to the sweeter crudes. So we are seeing appropriately the same amount of sulfur, it's up slightly probably from where it had been in the past. But we don't expect much change.

And our last question comes from the line of [Jordan Stevens] from (inaudible).

Just wanted to -- and once again assess maybe something for next week guidance. But obviously, the call price on your bonds stepped down today. I just wanted to understand if you were still thinking of doing anything on kind of that part of the capital structure as you are thinking about West Texas LPG in the rest of the year?

Jordan, yes. This is Joe. I'll take the question. I wish we could -- I wish you could have asked 2 weeks ago. I think we would had a much easier answer for you. Obviously, the markets have not been cooperating with respect to a backup in yields vis-à-vis where we think we could issue something on an accretive DCF nature, and so we're very, very keen on watching. We understand that the notes are callable today [101, Spot 8]. And so from our perspective, we would like to do something, if you could make accretive on a DCF basis, as I said. But we're watching it very closely and continue to do so. But we'll provide a little more insight on that next week. But really, kind of market providing, I think, it's reasonable to assume that we would do something. But again, I think, we've kind of backed up maybe 40 or 50 basis points during the last kind of 10 days that has made that a little more difficult for us.

And there are no further questions at this time. I would like to turn the call back over to the Ruben Martin for closing remarks.

I want to thank everybody for interest in our company, and we appreciate the questions and everybody dialing in. We enjoyed a good strong fourth quarter and good coverages for the fourth quarter, which gave us good coverages for the year. Next week, we'll give the detailed cash flow guidance for the next year. And with that, I want to thank everybody for again dialing in.

That concludes today's conference call. You may now disconnect.