Martin Midstream Partners L.P. (MMLP) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners' Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Bob Bondurant, Chief Financial Officer. Please go ahead.

Thank you, Charlotte. I have a hard time with that name as well. I'll let everyone know who else is on the call today. We have Joe McCreery, VP of Finance and Head of Investor Relations; and Wes Martin, Vice President of Corporate Development. Ruben Martin, our CEO, is on business development and could not make the call and he sends his regrets. Before we get started with the financial and operational results for the second quarter, I need to make this disclaimer. Certain statements made during this conference call may be forward-looking statements relating to financial forecast, future performance and our ability to make distributions to unitholders. We report our financial results in accordance with GAAP and use certain non-GAAP financial measures within the meanings of SEC Regulation G, such as distributable cash flow, DCF, and earnings before interest, taxes, depreciation and amortization or 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 our partnership's cash available to pay distributions. DCF should not be considered an alternative to cash flow from operating activities. Furthermore, our DCF 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 EBITDA, adjusted EBITDA and DCF 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 second quarter performance. For the second quarter, we had net income of $9.1 million compared to $16.6 million for the first quarter, and adjusted EBITDA of $33.8 million compared to $38.7 million in the first quarter. This quarterly decrease was primarily driven by normal seasonality in our butane and fertilizer businesses. Also, our second quarter adjusted EBITDA of $33.8 million compared to last year's second quarter adjusted EBITDA of $30.4 million. And for the first 6 months, our adjusted EBITDA was $72.5 million compared to adjusted EBITDA of $61.6 million from a year ago, a growth of 18%. The increase in both of these adjusted EBITDA metrics reflect the benefit of our continued growth capital investments. Now as with other MLPs, we believe the most important measure of performance is distributable cash flow. Our DCF for the second quarter was $20.6 million, a distribution coverage of 0.98x. For the 6 months ending June 30, 2013, our DCF was $49.5 million, a distribution coverage of 1.18x. This coverage ratio does not include any IDR payments to the general partner, as we have suspended IDR payments until a cumulative suspension of $18 million is met. At June 30, 2013, our cumulative suspension amount was $5.4 million. Now, I would like to discuss our second quarter cash flow by segment compared to the first quarter. In the Terminalling segment, our second quarter cash flow, which is defined as operating income plus depreciation and amortization, but excluding any gain or loss on sale of assets, was $16.1 million in the second quarter compared to $17.7 million in the first quarter. Our Specialty Terminals cash flow was $11.9 million in the second quarter, compared to $12.5 million in the first quarter, and our marine shore-based cash flow was $4.1 million in the second quarter compared to $5.1 million in the first quarter. Our marine shore-based cash flow was down $1 million, primarily on the operating expense side, as we are bringing recently acquired talents, assets up to Martin quality standards. This process should be completed sometime in the third quarter. As a result, we believe our operating expense, specifically our maintenance cost, will improve in the third and fourth quarters relative to the second. Additionally, our cash flow was down $800,000 at the Smackover refinery when compared to the first quarter, and down $1.8 million against our second quarter forecast. The refinery, again, experienced unexpected downtime related to boiler tube issues, which cost operating repair expense to increase and cost throughput volumes and revenue to decrease. We believe that we finally have these boiler tube issues behind us, as we have been running at full capacity for the last 96 days. As a result, the refinery cash flow should improve between $1.5 million to $2 million in the third quarter when compared to the second. Our Corpus Christi crude terminal continues to have strong cash flow. However, our customers' ships had to share a dock with others, so there is inefficiency in the ship loading operation which reduces throughput volume. We plan to have a new dock in operation by the first quarter, which should increase quarterly cash flow on our existing 6 crude tanks by at least $500,000 per quarter. In addition, we are in the process of building 3 new crude tanks which will come online by the second quarter of 2014. These new tanks will accommodate additional Eagle Ford crude provided by our customer. Looking toward the third quarter, we believe we will have a significant terminal cash flow increase coming from normal operations at the Smackover refinery and reduced operating cost at our shore based terminals. We also will have additional cash flow coming from our NL Grease acquisition we closed in mid-June. Joe will speak about that acquisition in a moment. Now in our Sulfur Services segment, our cash flow was $10.8 million in the second quarter compared to $12 million in the first quarter. Our cash flow in the fertilizer side of the Sulfur Services business was $7.2 million in the second quarter compared to $9.6 million in the first quarter. The decrease in cash flow was driven by a 32% decrease in volume sold, offset by an 11% increase in margins. The decline in volume reflects the seasonality of the fertilizer business between the first and second quarters. Due to seasonality, we expect the third quarter fertilizer cash flow to be less than the second, with an expected seasonal cash flow increase in the fourth quarter. On the pure sulfur side of the business, our cash flow was $3.6 million in the second quarter compared to $2.4 million in the first quarter. The increase in the second quarter, when compared to the first, was primarily driven by increased volumes from refineries, as they came off of their first quarter turnarounds. The cash flow in the second quarter is more reflective of our expectations in the pure sulfur side of the business for the third and fourth quarters. In our Natural Gas Services segment, we had cash flow of $5.1 million in the second quarter compared to $8.4 million in the first quarter. Overall, volumes were down 19%, primarily in our refinery-grade butane business, as refineries transitioned away from butane demand due to regulatory blending requirements that begin every year on April 1. Looking toward the third quarter, we should see a slight decline in cash flow from the second quarter, followed by a significant increase in the fourth quarter, as refinery demand for butanes kicks back in. In our Marine Transportation segment, we had cash flow of $3.7 million in both the first and second quarter, as both the offshore and inland side of the business remained flat. However, for the first half of the year, we have performed all of our scheduled inland regulatory dry dockings, so we will experience an increase in cash flow on the inland side of the business. As a result, our third and fourth quarter cash flow from our Marine Transportation segment should be significantly higher than the first 2 quarters. In addition to our 4 business segments, we own 100% of Redbird Gas Storage, which now owns a 42.2% Class A interest in Cardinal Gas Storage and a fully diluted 32 -- 39.2% interest in Cardinal. For the second quarter, we had distributions from Cardinal of $0.8 million compared to $0.5 million in the first quarter. For the third and fourth quarter, we anticipate receiving a distribution of $0.2 million. Also, we have made a $15 million preferred stock investment at an affiliate of our General Partner. This affiliate, known as Martin Energy Trading, is in the business of natural gas optimization. Again, this is at the private GP level. Our second quarter distribution from this investment was $0.6 million and should be the same quarterly distribution going forward. Finally, our unallocated SG&A was $3.5 million in second quarter compared to $3.9 million in the first quarter. For the second quarter, we had maintenance CapEx and turnaround cost of $2.8 million and have had a $4.5 million total for the year. For all of 2013, we continue to forecast approximately $13 million in total maintenance and turnaround cost. Now I would like to turn the call over to Joe McCreery, who will speak about liquidity, capital resources and our recent NL Grease acquisition.

Thanks, Bob. I'll start with a normal walk-through of the debt components of the balance sheet and our bank ratios. I'll then highlight our acquisition, our growth developments during the quarter, followed by a walk-through of our Redbird Gas Storage investment. At June 30, 2013, the Partnership had total funded debt of approximately $565 million. This consisted of approximately $424 million of senior unsecured notes, approximately $136 million drawn under our $600 million revolving credit facility, and approximately $9 million of capitalized lease obligations and other long-term notes payable. Thus, the Partnership's available liquidity on June 30 was $464 million. For the second quarter of 2013, our bank-compliant leverage ratios, defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA, were 1.02x and 3.99x, respectively. Additionally, our bank-compliant interest coverage ratio, as defined by adjusted EBITDA to consolidated interest expense, was 4.03x. Looking at the balance sheet, our total funded debt to total capitalization was 62.3%. This is slightly higher than the quarter ended March 31, as a result of funding a small acquisition during the quarter and increased seasonal working capital levels. In all, at June 30, the Partnership was in full compliance with all banking covenants, financial or otherwise. Reconciling from the second quarter end, as of yesterday, July 31, our revolver balance remain unchanged with $136 million borrowed under our credit facility, and thus, available liquidity of $464 million. Now moving onto our acquisition, some growth updates, as well as a review of our Redbird investment. As we alluded to in previous calls, we believe our Martin Lubricants business will be an exceptional growth platform, given our business model and a highly fragmented nature of the industry. As previously announced during the quarter, we were able to source and close on one such opportunity through the acquisition of the assets of NL Grease, LLC for approximately $12.2 million. NL Grease is a Kansas City, Missouri-based manufacturer of base greases which are sold to private label, commercial and industrial users. We expect cash flow from the acquisition of approximately $1.2 million during 2013 and approximately $2.5 million annually going forward. Also during the quarter, we entered into a firm contract with a major integrated oil company to secure all 300,000 barrels of new capacity being added to the Partnership's port of Corpus Christi crude oil terminal. This will bring our total crude oil capacity at the terminal to 900,000 barrels and provide our customer with access to 2 different docks, which alleviate any dock congestion, allowing for increased volumes through the terminal. This new capacity is scheduled to come online late first quarter 2014. As the Partnership made just one small acquisition during the quarter, I thought I would take this opportunity to provide an update on the Partnership's investment in Redbird Gas Storage, as 2 critical in-service milestones were reached during the second quarter of 2013. First, the basics. I want to remind everyone that Cardinal Gas Storage is a joint venture between MMLP-owned Redbird Gas Storage and Energy Capital Partners, that is focused on the development, construction and operational management of natural gas storage facilities in North Louisiana and Mississippi. Cardinal owns 4 natural gas storage projects in various stages of operation and development. During May of 2013, Cardinal Gas Storage announced that 2 of its natural gas storage development projects had commenced service. Both Perryville gas storage and Cadeville gas storage facilities were completed on time and under budget, with both facilities under long-term contracts for the full amount of their working gas capacity. Cadeville, a depleted reservoir located in North Louisiana near the Perryville Hub, has approximately 17 Bcf of working gas capacity currently in operation. Perryville, a salt dome cavern, also located in North Louisiana near the Perryville Hub, has approximately 8 Bcf of working gas capacity currently in service. Next recall the Cardinal's Arcadia, Perryville and Cadeville projects all have non-recourse to MMLP project financings in place. These debt arrangements require free cash flow sweeps when the projects are operational, which amortize the outstanding indebtedness and prohibit distributions to the sponsors. For this reason, Cardinal has not historically made distributions to its members with respect to these developmental projects. Without a refinancing of the project level indebtedness, MMLP assumes no material distributions from these projects that will occur in 2013 or 2014. Our current plan with Cardinal management calls for refinancing the project debt into a consolidated financing structure which will allow for sponsored distributions early next year. Thus, we expect to receive distributions from those projects beginning first quarter 2015. As we've indicated, at June 30, 2013, MMLP's fully-diluted interest in Cardinal Gas Storage, through its Redbird A and B equity interest, was 39.2%. Charlotte, this concludes our prepared remarks this morning. We'd like to open the lines for question to answers. Thank you.

[Operator Instructions] Our first question comes from the line of Darren Horowitz from Raymond James. Darren Horowitz - Raymond James & Associates, Inc., Research Division: I just have a couple of quick questions on the growth CapEx outlook. If you could just kind of tell me if I'm thinking about this the right way. I remember that at the beginning of the year, you guys were forecasting somewhere between $120 million and $140 million of growth CapEx, and I recognized that a lot of the focus was around the Terminalling and Storage aspects of the business. You were thinking about Cross, both from the packaging of the refining side. But as you think about the back half of the year, how do you view additional development at Corpus, possibly even more capacity at Cross? And if you could just give me the status as to how much CapEx you've spent to date and how much you expect over the next 2 quarters, that would be helpful.

Darren, this is Wes. I'll walk you through a quick reconciliation, if that will be helpful. As you've mentioned, I think in the first conference call this year, back in February, we indicated a growth CapEx budget of approximately $120 million to $140 million. We spent, I think at the time we told you guys, we were spending $50 million, plus or minus, on the LPG barges, so that leaves you with approximately $70 million to $90 million. I know barges are really an acquisition, but in terms of what we communicated in the market, that was really a growth CapEx expenditure, if you will. We’ve spent another $60 million, plus or minus, between additional investments, both in equity contributions to Cardinal, as well as the MET investment that Bob mentioned and then also an additional $30 million there. So $120 million to $140 million initially, less the $50 million, less the $60 million, that leaves us with a total anywhere from $10 million to, let's call it, $40 million of growth CapEx remaining for this year. What we see right now with respect to the -- specifically the Corpus Christi tank terminal, we are about -- probably about $10 million of expenditures related to that this year. Some of that will carry obviously into 2014 as well. And then we have another $10 million to $20 million of general opportunities, if you will, that are identified in the budget, if you will, but they're $10 million to $20 million on that. So we're at the higher side of the $140 million when we look at all of the sort of stuff we've spent today, as well as what we've got on the docket. With respect to going forward, you mentioned the Cross, expansion at Cross and additional investment there as well as at Corpus. We are looking at multiple opportunities to do just that. Nothing has been approved by the board yet, but we plan some time and call it the next 6 months to bring a significant amount of capital expenditure, growth capital expenditure plans to the board to seek their approval. So nothing definitive yet with respect to those. So can't necessarily give you guidance 2014. But I would say, if we do get approval on those, it would be significantly in excess of the $100 million to $120 million range at this point.

And our next question comes from the line of James Spicer from Wells Fargo.

I was wondering if you could provide a little bit more detail on the Martin Energy Trading investment? And how much that was, whether you anticipate making additional investments in the future? And just a little bit more on exactly what that entity does.

Sure, James, this is Joe. Martin Energy Trading is an MRMC subsidiary that seeks to sort of optimize, as we indicated. Some of the volatility makes sense, if there is any, in the natural gas storage world. And what we've sort of done with that entity is funded it with an investment of mop of $15 million. You'll see that when the Q is filed next week. And I don't think we're going to fund anymore. We have a special carve out in our credit facility that allows for that investment, James, and I don't think that we're going to do anything more with that going forward. But nonetheless, it was -- part of the seed capital that we put in place so that MET, Martin Energy Trading, could go out and achieve its own capital structure, which it has done. It has its own credit facility that is nonrecourse to the MRMC credit facility. But really, we think that going forward, there's going to be a lot more opportunities. And really, from starting a natural gas trading entity perspective, we thought this is a good time that we could come into the business, given some of the proximity that we have to the -- for some of the assets through affiliates, and really maximize an opportunity with minimal capital, sort of skin in the game going forward. So we're going to look to continue to fund that from the MRMC perspective, and I don't anticipate any additional funding through MMLP.

And I would also add to that, to Joe's point. It's a preferred stock investment, so typical structure there. And it's -- and the coupon on that is 15%. James Spicer - Wells Fargo & Company: So are those optimization activities related to the storage facilities, the Cardinal storage facility? Or is this just sort of either sort of general outside third-party market optimization?

It's currently a third-party market optimization. But clearly, as those Cardinal projects come online, and they have during the quarter as we alluded to, Cardinal could be a customer of MET. They're currently not, but at some point in the future, that could be the case.

And he actually meant MET would be a customer of Cardinal.

I'm sorry, yes.

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

Just on the lubricant opportunity. I know you said that the market's fairly highly fragmented. Just wondering if you could expand on the opportunities set there? Are the opportunities in the range of what you did with NL Grease? Are there larger opportunities? How are you kind of going about targeting some of those?

Yes, this is Wes. I'll take that. What we liked about NL Grease was that, obviously, as it's in the name, it's a naphthenic-based grease business, which obviously ties in nicely to what we're producing at the Cross refinery. We see -- we've identified a couple more opportunities with respect to that one in particular, that we'd like to go out and do on a negotiated basis. That opportunity is significantly larger than the NL Grease opportunity. I can't really give you more guidance other than that. But there are several opportunities out there, 1 or 2 that we're looking hard at right now. But beyond that, I really can't give you any more guidance.

[Operator Instructions] Our next question comes from the line of Michael Gaiden from Robert W. Baird.

I just also wanted to follow up on Cardinal. Could you please frame for us any hurdles to refinancing this project debt? And relatedly, is there any way that you could frame the potential cash flows that you might expect to receive starting in 2015?

Yes. I'll take the financing question and I'll pass to Wes as far as cash flow going forward. But Michael, as we've said, I think where we want to be on the refinancing, is probably start that process this year. I'm guessing that it concludes early next year. But what we have is a situation where the project financings that are in place at Arcadia, Perryville and Cadeville are now all converted to amortizing term loans. And so as we think about this going to a Cardinal-level consolidated financing, we need to be in a position that we have a leverage that's tolerable to the lenders, yet provides for distributions to the sponsors. So we're kind of in that limbo right now, where, in theory, if we went straight to the bank market, we might be at a leverage ratio or leverage point that's a little too high to allow for such distribution. So even though we haven't commenced the bank refinancing, we are amortizing and have sustained down those project finance term loans at this point, and we'll alleviate kind of the higher leverage levels as we get into the structure. But again, we're not forecasting any measured cash flow until the first quarter of 2015.

And with respect to the guidance, if you will, that you're asking for 2015 and beyond, I think it's obviously heavily dependent upon the financing structure and the outcome of that. But also with respect to clearly whatever -- one's point of view as with respect to storage rates going forward, I will say that if you stress test the model with respect to where storage rates today and take all of the uncontracted capacity and put it at those rates, what you end up with, in terms of distribution, is up to us, is in the $15 million to $20 million range. Again, that makes a lot of assumptions with respect to how the financing works. But that's sort of a current-case scenario in taking the uncontracted capacity and putting it, what I would call, current market rates. So obviously, I think, given what's going to happen between now and 2015, things could obviously meaningfully change and be on the higher end to maybe even potentially higher than the $20 million. But that's really sort of a current-case scenario, if you will, and also, once again, heavily depending upon the financing assumptions that you use.

Great. Can I ask one follow-up on Corpus Christi? Congratulations on your additional 300,000-barrel contract. Can you talk about on visibility, to increase those volumes potentially as we go through 2014? And are there any natural capacity constraints that you think that you could run up to -- run up against at Corpus Christi?

Sure. So at Corpus, where we are now, at 600,000, really, we're having issues on docking wharfage constraints more so than the actual terminal itself. And so the project, as we announced, also includes a new dock, which alleviates some of the congestion associated with that dock activities. I think going forward, there are other opportunities there that are not dissimilar in nature. But for the time being, I think 900,000 barrels would fully satisfy and commit that particular location.

And I'll make a general comment on activity. In the first quarter, our volumes through the terminal were probably -- I'm doing the math in my head, 20% higher than they were in the second quarter. But the second quarter had issues at the dock with fertilizer ships and things of that nature, fertilizer being very active in the second quarter, typically. Those have gone away. We are now back up in the third quarter to the same volumes we did in the first. But I would say, if you had the dock space out, our volumes would be probably at least 25% to 30% higher with the existing operation, based upon what our customers told us. And then with the new tanks, it could be, let's see, probably another 20% above that.

[Operator Instructions] And at this time, I'm not showing any further questions.

Well, I appreciate everybody calling in. Just big picture, generally. The second and third quarter, as you know, it ticks a little bit down from our stronger first and fourth quarter. So our coverage is being down in second quarter. We're not unexpected and we have great, as Wes and Joe have outlined, great growth prospects, and we continue to see growth from organic growth. And we also see a strong acquisition market, very favorable, a lot of deal flow, deal flow that we like to play in, which is kind of off-the-radar and niche-type acquisitions. And so with that, we continue to see a strong outlook for the Partnership. Again, thanks, everyone, for calling in.

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