Martin Midstream Partners L.P. (MMLP) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Martin Midstream Partners, Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Bob Bondurant, Chief Financial Officer. Sir, you may begin.

Thank you, Shanalle, and 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 Wes Martin, our VP of Corporate Development. 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 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 Reg, SEC Reg G, such as distributable cash flow, or DCF, earnings before interest, tax depreciation and amortization or EBITDA, and also 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 distributions. We also included in our press release issued yesterday a reconciliation of EBITDA, adjusted EBITDA, and distributable cash flow to the most comparable GAAP financial measure. Our earnings press release is available at our website, MartinMidstream.com, we also posted a comparison to guidance for the first six months on our website. Now, I would like to discuss our second quarter 2016 performance compared to the first quarter of 2016 and also discuss our first six months adjusted EBITDA compared to our guidance. For the second quarter, we had adjusted EBITDA of $41.6 million, compared to $49.3 million in the first quarter of 2016. Our distributable cash flow for the second quarter was $25.4 million for a distribution coverage of 0.76 times. For the first six months, our distributable cash flow was $57.9 million, for a distribution coverage of 0.87 times. Because of this first six months coverage ratio, our trailing 12-month DCF coverage fell below 1.0 to 0.92 times. While our first six-month distribution coverage was below 1.0 times, our first-half guidance provided for adjusted EBITDA, excluding unallocated SG&A of $101.9 million and we achieved $98.8 million, a 3% shortfall of $3.1 million. The main contribution to the shortfall in our forecasted adjusted EBITDA was our Marine Transportation segment and our distributions from our investment in West Texas LPG. Their combined shortfall compared to first-half guidance was $6 million. Also negatively impacting the first six months of our DCF coverage has been the significant maintenance capital expenditures and turnaround costs we have spent during this period. The total spend in the first six months was $7 million in the first quarter and $5.4 million in the second quarter for a total of $12.4 million in the first six months. The largest components of our maintenance capital expenditures were marine vessel drydockings, including our marine assets carried in our Sulfur segment of $4.6 million, our refinery turnaround and related maintenance projects of $2 million and specialty terminal projects of $2.5 million. Looking toward the second half of the year, we anticipate maintenance capital spending of approximately $6.4 million, meaning our 2016 maintenance capital expenditure spend will be approximately two-thirds in the first half of the year and one-third in the last half of the year. Now I would like to discuss our second-quarter operating performance. I would like to start with our Marine Transportation segment as this has been one of the two main contributors to the underperformance of our partnership’s cash flow for both the second quarter and for the first six months of 2016. Our total marine transportation EBITDA for the second quarter was $0.6 million, and for the first six months 2016 has been $3.1 million. For the first six months, we’ve missed our guidance by $3 million in this segment. The primary reason for this underperformance continues to be increased competition that has resulted from an oversupply of inland marine tank barges. We believe that this supply of inland tank barges grew from approximately 3,100 barges to approximately 3,900 barges between 2011 and the first quarter of 2016. The growth in tank barge supply was primarily driven by the growth in crude oil production, which has now reversed. This excess supply of tank barges has exited the crude oil transportation market and has now entered our primary market of transporting refined products. As a result of this increased competitive environment, refineries have shifted from longer-term contracts to shorter-term contracts and also spot market contracts at pricing for us that on average is down approximately 11% combined with utilization for us that is down approximately 12%. Looking forward to the rest of the year, we anticipate a continued soft market for the inland barge transportation business and we will continue our effort to eliminate any excess fixed costs out of our Marine Transportation System without jeopardizing the safety of our operations. During the second quarter, we sold 10 pieces of non-operating equipment that had trailing-12 month fixed costs of $0.6 million. Finally, because of the recent inland barge transportation market trends and the outlook for the future performance of our marine transportation segment in the second quarter, we took a non-cash charge of the entire amount of goodwill associated with the marine transportation business totaling $4.1 million. Now, in our natural gas services segment, our second-quarter adjusted EBITDA was $13.3 million compared to $22.7 million in the first quarter. Included in our second-quarter natural gas services segment, adjusted EBITDA was $1.3 million in unrealized mark-to-market losses on derivative instruments hedging our NGL inventory and also $1.8 million in distributions from our investment in West Texas LPG. During the first quarter, we had unrealized mark-to-market derivative instrument losses of $0.2 million and distributions from West Texas LPG of $2.5 million. The decline in cash flow between our second and first quarter is not unusual due to the seasonality of our NGL business, primarily in our refinery grade butane business and our wholesale propane business. However for the first six months, our posted adjusted EBITDA guidance was $42.6 million, while we only realized actual adjusted EBITDA of $36 million. While Cardinal Gas Storage realized its adjusted EBITDA guidance of $22 million, our guidance shortfall occurred in two areas. Our butane business missed its six-month forecast by $2.5 million as a result of not acquiring spot mix butane supply that had been realized during the second quarter of previous years. This was primarily because the supply of this product was not available from producers as in years past. However, we believe we are well-positioned with our refinery-grade butane inventory volume and its carrying cost at the end of the second quarter. We will continue to build butane inventory in the third quarter at our owned and leased underground storage facilities and continue to hedge our inventory position to protect our margins. Based on this knowledge, we believe we are well-positioned for a strong fourth-quarter cash flow in our butane business when refineries will begin their demand for butane for the gasoline blending, and we believe there is a high likelihood of achieving our full-year guidance in our butane business. The other miss from our natural gas services guidance was our distribution from West Texas LPG. When guidance was given, we had anticipated receiving distributions of $7.2 million for the first six months and we have only received $4.2 million. As we outlined on our previous earnings call, the Railroad Commission of Texas issued an order in March of this year to have West Texas LPG revert back to tariff rates that were in place on June 30, 2015. This issue was in response to complaints regarding new tariff rates from certain shippers on the West Texas LPG pipeline. Currently a hearing before the Railroad Commission has been set for October 19 of this year. Until a final ruling is made on West Texas LPG’s tariff rates, cash distributions from West Texas LPG will remain at levels below our original guidance. Now, moving to the Terminalling segment, our second-quarter adjusted EBITDA was $18.5 million compared to $17.2 million in the first quarter. The increase in adjusted EBITDA in this segment primarily was the result of a $1 million cash flow increase in our packaged lubricant business. Over the last few quarters, we have been focused on improving lubricant margins and squeezing out as much fixed cost as possible and we are finally beginning to realize the positive results of these efforts. In terms of our guidance for the first six months, our Terminalling segment had adjusted EBITDA of $35.7 million compared to our guidance of $34.5 million, an increase over guidance of $1.2 million. Looking toward the remaining six months, we believe this segment should achieve our overall adjusted EBITDA annual guidance, especially with the positive trends in our packaged lubricant business. In our Sulfur Services Segment, we had an outstanding quarter as our second-quarter adjusted EBITDA was $13.1 million compared to $10.8 million in the first quarter. This increase was the result of strong performance in our sulfur-based fertilizer business. Although our fertilizer sales volumes were approximately the same for both periods, we were able to expand margins as our feedstock costs, primarily sulfur, decreased during the quarter and we were generally able to maintain our overall sales prices. In terms of our guidance for the first six months, our Sulfur Services Segment had adjusted EBITDA of $24 million compared to guidance of $18.7 million, an increase over guidance of $5.3 million. Looking toward the last six months, although we are moving into the weaker seasonal quarter for our fertilizer business, we believe we should at least achieve our second-half-of-the-year guidance, which would mean, by the end of the year, our sulfur services segment should at least exceed our annual guidance by the excess achieved in the first half of the year. Our partnership’s unallocated SG&A cost, excluding non-cash unit compensation expense, was $4 million for both quarters, which met our expectations and should remain consistent for the rest of the year. We continue to hold a $15 million note receivable from Martin Energy Trading, an affiliate of our general partner. This investment generates $562,000 of interest income per quarter, which is included in adjusted EBITDA for calculating our bank leverage covenants. So to summarize, while our overall DCF coverage for this first six months was 0.87 times, we only missed adjusted EBITDA guidance by 3% or $3 million, while spending approximately two-thirds of our maintenance capital in the first half of the year. Looking forward, as we all know, our third quarter is our weakest adjusted EBITDA quarter due to the seasonality of our fertilizer business, but we anticipate strong DCF coverage in the fourth quarter as our seasonal butane business in our natural gas services segment would generate significant cash flow. However, current visibility into the inland marine tank barge market for the remainder of the year remains weak. So we believe the marine transportation segment will most likely not achieve its second-half-of-the-year guidance. Now I’d like to turn the call over to Joe McCreery who will speak on our balance sheet, the partnership’s growth and our DCF shortfall.

Thanks, Bob. I’ll start with our normal walkthrough of the debt components of our balance sheet and our bank ratios. I’ll then given an update on the growth initiatives of the partnership, followed by some insight as to the partnership’s current performance and our distribution shortfall. On June 30, 2016, the partnership’s balance sheet reflected total long-term debt of approximately $874 million. Our balance sheet funded debt is shown before unamortized debt issuance and unamortized issuance premiums as actual funded debt outstanding was $889 million. Reconciling this amount at quarter-end, our revolving credit facility balance was $515 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 June 30 was $149 million based on our $664 million revolving credit facility. For the quarter ended June 30, 2016, our bank compliant leverage ratios defined as senior secured indebtedness to adjusted EBITDA and total indebtedness to adjusted EBITDA were 2.76 times and 4.76 times respectively. Our total leverage increased by approximately 14 basis points from the March 31 level. Our leverage increase is typical given the seasonal working capital swings we normally experience during the second and third quarters, pertaining in large part to our butane business. During the second quarter of 2016, we aggressively purchased and stored butane awaiting future sales this coming winter. Our June 30, inventory storage levels were approximately 53% of our projected annual level, so working capital and our respective leverage were higher than anticipated at quarter-end. Our bank compliant interest coverage ratio defined as adjusted EBITDA to consolidated interest expense was 4.48 times. Looking at the balance sheet, total debt to total capitalization at June 30 was 71.8% about 3% higher than the first quarter, again reflecting the working capital increases across our businesses. In all, on June 30, 2016, the partnership was in full compliance of all banking covenants, financial or otherwise. Next, I would like to discuss the growth initiatives and capital spending of the partnership. First, let me provide a brief update on our Hondo South Texas asphalt terminal under construction and being developed at MRMC. Significant progress has been made and we remain on track to be completed by summer of 2017. That said, MRMC expects inbound operational capability during the fourth quarter this year as receipt of inbound winter fill should be available and achievable in December this year. We continue to believe that the Hondo terminal remains a likely asset to be dropped into the partnership. Similarly, we feel that the asphalt and its respective handling represent a growth platform for MMLP. With respect to the partnership’s organic growth capital expenditures, year-to-date, we have spent approximately $12 million. Looking forward, we believe expenditures will be reduced to approximately $8 million during the second half of 2016. Thus, our revised full-year projected total of $20 million represents a reduction of approximately 31% from the original growth CapEx guidance of $29 million given in March. Now I’d like to address our view of MMLP’s distribution coverage shortfall and general partner support. As Bob mentioned, we entered the third quarter approximately 3% behind our adjusted EBITDA cash flow guidance, and we’ve spent the majority of our maintenance capital expenditures in the first half of the year. Although our coverage ratio was weaker than anticipated in the second quarter, we expect improved performance during the second half of 2016, particularly in the fourth quarter. For this reason, our general partners chose not to relinquish any of their incentive distribution rights at this time. We expect our general partners will continue assessing IDR support on a quarterly basis. That said, we do forecast distributable cash flow improvement during the second half of 2016, again, particularly in the fourth quarter after our seasonally weaker third quarter. This cash flow improvement is based on our projected outperformance in our butane business, continued positive trends in our lubricant and grease businesses, as well as continued strength in fertilizer in the fourth quarter. We anticipate the owners of a general partner making a decision at that point as to the IDR support based on full-year 2016 results. As we alluded to in our press release yesterday, given current operational performance and longer-term outlook for MMLP, we recognize that growth is extremely difficult given our elevated cost of capital. Although we are unable to disclose specifics at this point in time, management is focused on multiple initiatives to improve our leverage profile and distribution coverage ratio both near and long term. At this point, it is premature to disclose specific details; however, we look forward to providing an update as these initiatives come to fruition prior to year-end. And, Shanalle, this concludes our prepared remarks this morning. We’d like to open the lines for questions and answers.

Thank you. [Operator Instructions] Our first question comes from the line of Matt Schmid of Stephens. Your line is open. Please go ahead.

Hi, good morning, guys.

Good morning, Matt.

Good morning.

Bob touched on it at the end of his comments about marine transportation visibility. Just what have the trends been in the third quarter and are there any signs of a bottom in rates, or just really how bad do you think it can get?

I will take that. This is Bob. We are seeing a slight downward pressure still on some of the rates. We had felt like they had floored in the second quarter, but we’ve heard some numbers that they have some contracts have been put out at maybe 3% or 4% lower than what were current existing. So we have not seen that personally in our numbers, but we have heard some competition lowering some pricing. So therefore, that leads us to our conclusion that it’s going to remain weak at least through the rest of this year.

Okay, great. Thank you. And – obviously, growth is a little bit challenged right now as you all look at the cost of capital, but maybe just longer term could you talk a little bit about potential growth opportunities, maybe growth opportunities at Beaumont? I saw the Exxon announcement this week of an expansion at the refinery there and just what kind of opportunities that you all would like to take on in the future.

Yes. This is Ruben. We saw that and we’ve been aware of that particular potential announcement for several, several months now. We have 96 acres at Beaumont right next door to the ExxonMobil refinery there. We, of course, back a few years ago when we took that property over, we got good rail accessibility. We’ve got a lot of good land. We’ve got deepwater docks. We’ve got all the bells and whistles to provide the services that we are hoping that Exxon might need, and so we are looking at a few items down there already. But I think Exxon, once they get their needs and objectives in line of what they are going to need concerning dock space, those kinds of things, but we have several projects that we had looked at before that were all put on hold when things collapsed in the oil business. But we are already a big customer of Exxon. We’ve taken all of the sulfur out of that. We do a lot of different products in and out and it all goes through – a lot of it goes through our terminal right there next door to them. So you can throw a rock and hit them from our terminal. So with 96 available acres and a lot of rail, we are looking forward to that one.

Great. I appreciate the color. Thank you.

Thank you. And our next question comes from the line of Shneur Gershuni of UBS. Your line is open. Please go ahead.

Yeah I think that is me. Just a couple of questions here. Just first on the inland barge issue, obviously, there’s a lot of competition in the market right now. Do you have any sense of what the age of the fleet is domestically? Are there a bunch that could be retiring at some point soon, or is this something that’s going to persist until we see a recovery in the crude market that would take some of the fleet back out of the marketplace?

If you could just put a picture in your head, if you graphed it from the left to the right from youngest to oldest, it is in the shape of a V-curve, if you will. And I don’t know the specific numbers, but over the life over a 35-year to 40-year period, of those 3,900 barges, approximately I would say, these are rough numbers, about…

I think it was 600 or 700 that came out of the crude oil business and hit our market. So you are seeing people evaluate and go through and they are retiring where we can and where the market can. So you are going to see come out. Now whether it’s enough to turn this thing around, I think it’s going to take a little combination of barge retirement and an increase in the market volume-wise.

Okay. I was just wondering if we can expand on the strategic review comments. If I understood your goals correctly, I was just maybe wondering if you can first sort of maybe lay out – because I realize there’s not a lot that you can say – but is there a coverage target or a leverage target that you would view as an ideal place to be once you complete whatever path your strategic review takes you to? Is it you want to get to a 4 times leverage, you want to get to a 1.15 coverage? Can you give us some color with respect to the goals that you are looking to get to as a result of this strategic review?

Shneur, this is Joe and I will start on the leverage side of the balance sheet side if you will with respect to leverage on a go-forward basis. We think 4 times is a good target for us from a growth perspective going forward, so that’s what we are seeking to achieve. Obviously, we are 4.7 this quarter and kind of trending the wrong way, vis-a-vis going into the third quarter where we’ve got additional working capital expenses, so we know that leverage will likely creep up again, but I would say 4 times is our target.

Is there a target for coverage?

Yes. This is Wes. I will say right now, given I guess the performance that we’ve seen in the first half of 2016, some of the question marks, if you will, that continue to be around the marine business. I think in the short term where we are, we don’t see a path, if you will, for 2016 to get to 1 times coverage and I don’t think our original guidance based upon sort of the numbers that we’ve put out back at the original analyst day even got us there. I would say longer term in terms of a distribution coverage target, if you will, I think the overarching goal here is to lower our cost of capital. I think the precedent out in the market is fairly – and this is potentially a new paradigm, if you will – I hate to use that word, but I can’t think of anything better right now – with respect to MMLPs and that is a higher coverage target being coupled with a growth plan, if you will, or a comprehensive plan is an important factor. And so as we look at that longer term with the target of and the hope and goal of lowering our cost of capital, we think that the coverage needs to be 1.15 or greater. And I think there’s an argument to be had that it needs to be even higher than that.

So if I think about your comments and frankly both of you have been very helpful, probably more than I expected, but if I think about your twin goals or triple goals here really, lower cost of capital, lower leverage, higher coverage, it sort of seems that your options are fairly limited in terms of what you can do because like an asset sale will help you on the leverage side, but hurts you on – potentially hurts you on the coverage side. Same would happen with equity issuances and so forth. So it seems like you are basically headed towards a distribution cut with a combination of waivers. I was wondering if, since it seems fairly straightforward, is there a range that you are thinking about? We’ve seen several MLPs cut distributions and actually see positive equity performance if people feel that the cost of capital has been reset and there’s a very clear direct path going forward, or is it something that you are thinking about of merging the general partner into the LP? Is that what the kind of complicating process is? I was wondering if you can address it along those paths.

This is Wes. I will take that. And there’s a couple of different questions in there and so let me take a step back and I’d say, obviously, we are well aware of the impact of changes in distribution policy [ph] on the value to the LP unitholders. As you guys know, we are 18% plus or minus of the LP’s, and I think it goes without saying that we don’t take those decisions lightly. I think we believe that making a decision like that needs to be well thought out and warranted based upon both historical, financial performance, as well as expected future performance. And I think there’s a third leg to that stool, if you will, that I can get into in a moment, but I think when we look at what’s happened from a historical basis, and this is just taking a step back – as a reminder, we covered our distribution in 2015. We are at 0.92 times coverage, as Bob mentioned, on a trailing 12 months for June 30, 2016, so we have seen some DCF decline, particularly in the last six months. But let’s talk about what makes up that decline. First is WTLPG. That underperformed relative to 2015 given the Railroad Commission ruling to the tune of about $3 million in the first six months of 2016, or $6 million on an annual basis. I think, second, when you look at the butanes business, that was negatively impacted by the lower mixed butane spot supply volumes. That was an estimated impact of about $2 million to $3 million in the second quarter. And then lastly the marine business, as we mentioned multiple times, that significantly struggled. So setting aside the accelerated maintenance CapEx in the first half of 2016, those are the significant contributing factors to the DCF decline in the first six months this year. So that as a backdrop, looking ahead and how we see those as ahead as part of the overall distribution policy and setting that policy. With regard to WTLPG, as we discussed, there’s a hearing scheduled for mid-October. We don’t know the final ruling date of that and we are not certain of the outcome of that hearing, but our position on those rates has not changed. I think we were clear in terms of that on the last conference call. We believe that the higher rates are allowed and justifiable and as such, we believe that as we move to clarity on those rates that the WTLPG, while challenged in the short run, should materially increase as we get clarity. On the butane side, Bob mentioned looking ahead to the fourth quarter. We feel good about our 2016 guidance. I think the only question mark from an operational perspective as we sit here today is the marine business. So I think all of that is to say that while the second quarter was disappointing and the first half was slightly below EBITDA budget, management and the Board felt that in and of itself is not enough in a vacuum, if you will, to drive a decision cut at this time. And then we talked about – I alluded to the third leg, and the third is the intangibles and that’s I think what you referenced in terms of the strategic reviews that are going on internally. Those are less concrete. Sometimes we can’t talk about them, divestitures, acquisitions, GP involvement, other similar efforts, and I can’t get into specifics on your question about collapsing GP or those kinds of things. But all of those considerations are included in the process of our Board setting the distribution policy, and as we mentioned before, as we sit here today, we don’t see a clear path to fully covering our distribution in 2016. If marine headwinds continue along with some deterioration in some of our other business, our Board is going to take the appropriate action with respect to that policy and those longer-term goals, as we mentioned to you, of trying to get to those increased coverage levels I think is key to that effort. But, again, we are committed to these initiatives and we are trying to put ourselves in the best position to improve both leverage and coverage. And as you guys know and everybody else on this call knows, trying to do those things together at the same time is difficult, but our ultimate goal here is to put the partnership in a better position to grow long-term through lower cost of capital. And in response to the distribution cut – right-sizing, if you will, that may ultimately be part of the plan, but it will be part of a comprehensive plan and it’s not going to be the only plan. So other than giving you those general comments, again, as Joe mentioned, as we look forward, we look to provide additional clarity to the market as some of those initiatives crystallize, but right now we’ve got to be limited to those kind of comments.

That’s great. Very helpful, guys. Really appreciate the color. Thank you.

Thank you. And our next question comes from the line Gabe Moreen of Bank of America Merrill Lynch. Your line is open. Please go ahead.

Hi, good morning, everyone. Most of my questions have been answered, but just two quick ones for me. On the butane business and acquiring that mixed butanes and stuff from the refiners, can you maybe talk a little bit more about the dynamics as to what happened there in terms of the supply not being there and I guess the confidence that that would come back? Has that market just gotten more competitive, or just curious the dynamic there?

Now Gabe, this is Ruben. Really you have to remember refinery ransoms [ph] and refinery crude oil slates now have changed dramatically from year-to-year, and one slot of times when refineries change, those crude oil slates, you see less butanes, or they may have some uses internally for those butanes. So a lot of the things we do we have a good basic business year in, year out when it comes to our logistics handling of all of those products as refineries excess in the summer and take it back in the winter and it’s handled with rail and truck and pipeline in a lot of different ways. What basically happened was some of our customers had different crude oil changes and so forth and we did not realize an extraordinary volume in product that we had experienced the year before. So it wasn’t due to competition or different things like that. It was strictly availability of material and the needs of material as they became available in the marketplace. So, no, we do the business with the same people year-after-year and handle their products. So just sometimes the dynamics change due to circumstances that are outside our control.

Thanks, Ruben. And then switching gears to nat gas storage. Could you just, you talked about some of the interruptible upside. Nat gas prices have moved up, but it also looks like there’s a pretty healthy contango. Can you just talk about I guess contracting discussions that you are having around some of the different facilities, whether pricing has moved up at all to the point where you might want to strike some longer-term deals here?

Yes, this is Wes, take that Gabe. I think when you look at the spreads, spreads have come back in from last quarter where they were. Last quarter, I think as you mentioned natural gas prices went up and from a spread perspective as you look into the winter season, this upcoming winter season than if you even look out a year before, that near-term rise, if you will, in gas prices compressed some of those spreads. So I think on the – if we were to have to go out and contract storage rates today based upon where we most recently recontracted rates, call it in October of last year, they would be similar rates. So don’t see a lot of what I would call spread-dependent change in contract rates that we would expect. I will say, however, that longer term as you look at with some of these LNG projects that are going on and some recent discussions we’ve had with some customers, we do see some longer-term demand let’s call it post-2017 where guys are coming to us asking us to put together long-term contracted proposals that are at rates that I would say are significantly better than what the spreads would indicate as of today. So on the one hand, spreads have compressed a little bit. We believe that as we move closer to the winter season those things might change as you get through the storage year. Some of the storage dynamics might change, but as it sits today, short-term rates, if we had to recontract today, would be relatively flat and I think as we look out into the future, call it 2017 and beyond, we feel a little bit better about recontract rates at that point – rates at that point in time. I will also add that, again, from a contract roll-off standpoint, our next big contracts that roll off are at Perryville in the summer of 2018, the next big tranche there, so again we are somewhat insulated from the near-term exposure on rates.

Thanks, Wes.

Yes.

Thank you. [Operator Instructions] And our next question comes from the line Lin Shen of HITE. Your line is now open. Please go ahead.

Hi, thank you for taking the questions. So a lot of the recovery that you are talking about is in the fourth quarter and you talked about strong fertilizer in the fourth quarter and strong butane in the fourth quarter and I guess particularly on the butane side where it’s a little bit of a disappointment year to date and it seems like it would be hard to predict conditions in the fourth quarter. What gives you the confidence that a quarter that is still two months away from starting, that the conditions are likely to be so much better? What are you seeing in the market today that gives you that confidence?

This is Bob. I will take that. It’s basically we’ve hedged our inventory positions, so we know what our laid-in cost is and we know what our ultimate sales price is.

And I will just add, we do have access to a little more storage this season than we have in the past and I think that’s key from the standpoint of accessing barrels right now in the summer months. We will have a working capital impact, as I discussed earlier, but clearly we have the ability to store more barrels, effectively sell more barrels in the wintertime.

Got it. And so you are confident that the macro demand trends right now will support the volume side of that prediction also?

Yes. I think – this is Ruben. When you look at the macro demands and so forth, it really gets into the gasoline pool and all of the needs there and we don’t see that declining significantly. If anything, I think due to pricing and so forth, you may actually anticipate some growth in that sector, so it really is year-to-year and not real dependent upon pricing or anything.

Gasolines are going to demand butane to put in their gasoline pool in both fourth and first quarter. It’s part of their business model.

Got it. So I guess if I look at the business – I’m just putting the big pieces together – that marine is going to continue to be challenged, so maybe that’s I guess in a relatively worst case $7 million or $8 million hit to your EBITDA, but – on a full-year basis – but then fertilizer is going to be better. Butane you are going to make up the miss here over time. And so, in aggregate, I guess it seems like the overall EBITDA miss here on your base guidance of $183 million is really, given some of the visibility you have, is quite likely to be less than 5% by the end of the year. Am I – and most of that is going to be driven by potentially West Texas LPG and again that’s assuming the case doesn’t go your way. Am I thinking about that right?

You are thinking about that right. Generally that miss – you are pretty accurate, and it all boils down to marine and then West Texas LPG. Marine…

Right.

And there is – we believe the Railroad Commission historically has been supportive of market rates, I will just remind everybody again. And there’s multiple pipelines coming out of the Permian Basin heading to Belvieu. We are one of five or six. It’s a competitive market and we are still if not the lowest price, one of the lowest priced depending on location of our tariff rates. So we still believe we will get a favorable ruling there. And the question is, if that does occur, will the Railroad Commission allow us to go back and collect what we’ve missed. So there is a possibility to catch that cash flow up. I can’t guarantee it. I really don’t know, but we will position ourselves to try and recapture that as well.

Got it. But at least on a run rate basis, it sounds like there’s every reason to believe that this thing will be reinstated, and I think you mentioned on the last call also that there was – you had shippers that actually had filed in support of the rates?

I think what we said is we’ve had subsequent shippers come online.

Online.

And give us support on our position, correct.

And they’ve hooked up to our line at the higher rates, so there’s contractual market transactions we can point to that support the rates because we had customer sign-up at that pricing.

Got it. And then on the strategic review, so a lot of them talk about the most obvious thing to do, cutting the distribution, but you are clearly very hesitant to do that and very supportive of it overall. I guess what are other levers that are being thought about? Are there other levers that would prevent a distribution cut that could realistically be executed?

Well, also – this is Wes. With respect to the previous commentary where we had talked about asset sales, I think it’s safe to say that those efforts continue in addition to some additional efforts that we’ve been developing over the last few months, but in terms of giving specifics at this point in time as to all the different levers that we are looking at, we are just not in a position to do so. But again I think as we said in our press release – and there are a lot of moving parts as I’m sure you can imagine both from the GP side, you got GP support from MMRC and potentially Alinda as well. You’ve got assets that could potentially be part of a transaction or some sort of – there’s all kinds of different things that could happen. We are trying to find what I would say is the most effective and the best for the long-term LP unitholders. But at this point in time, we are just not in a position yet to give any additional clarity on that front. We’d like to, but we just can’t at this point.

And I guess when you do have the clarity, will your plan be to have it be one announcement that addresses all the levers you’re pulling so that we can get a – rip the Band-Aid off and see the full plan or is it going to be?

That is the ideal situation, yes.

Okay. Great. Appreciate it and honestly I will say for myself I’m a little surprised at how negative the reaction is here given some of the one-time nature of what you are doing and even if you were to take the most direct route and cut your distribution to $2.50 you are still yielding more than 10% at the current price and you have plenty of coverage there. So appreciate the effort and hopefully the markets will appreciate it as well.

Thank you.

Thanks.

Thank you. And our next question comes from the line Charles Marshall of Capital One. Your line is now open. Please go ahead.

Yes. Good morning, everyone.

Good morning.

Good morning, Charles.

I think most of my questions have been asked and answered, so really just a minor question here. On Corpus Christi, so those volumes are now tracking below the mins in 2Q, and recognizing that there’s an inverse waterfall relationship between the margins and volumes associated with the Shell contract, but can you give us your outlook on the second half of 2016 volumes expected on the terminal?

My comment is based upon our knowledge today, they will stay at below 85,000 barrels a day, which is our minimum.

Okay. Thanks for that. And then for the West Texas LPG pipeline, what were the volumes in the second quarter?

I don’t have the exact number. This is Wes, I don’t have the exact number. But I know…

It’s approximately 210, I believe.

Yes, that’s just about where we are, slightly trending up, got some positive things going on that front, but, yes, it’s about 210,000 barrels as we speak.

Got it. Thank you. I guess just one last one, so really appreciate all the discussion on the strategic updates and your disclosures and all that. I guess just looking maybe a little bit bigger picture here and assuming you come out of whatever update with a much healthier balance sheet, much lower cost of capital. I know there’s some asset to the limit that you are potentially looking at, but I guess looking at your core business right now with the partnership, do you think there’s enough growth organically to remain in sort of these niche business lines? Or absent what you’ve talked about already with Exxon at Beaumont and the asphalt terminal, what else could you potentially be looking at bigger picture maybe to diversify your portfolio in more the mainstream, midstream type assets? Are there things that you’d like to own that you don’t own today that you’d like to add to your portfolio and really accelerate the growth for the partnership?

Yes. This is Ruben. The answer is yes, there are some things out there. We like the asphalt business, which we are currently in. That business has been good and steady in the last few years. We could see some growth and add-ons there over and above what we are even talking about today that we are developing at MRMC. We’ve actually targeted a place for a plant concerning the fertilizer business and a potential new plant there. So most of the things we are targeting are internal type growth and internal stuff and not necessarily out purchasing new assets, which we still believe are pretty pricey compared to our costs, still pretty pricey. But we can develop internally. We’ve got a good system. We’ve got a good diversity of assets that gives us a look at a lot of different things that other people are not necessarily interested in. So no, we are constantly looking – everybody does – and we are still targeting. We are not giving up on the internal growth just because of the things that are happening today.

All right. Thanks for that color. That’s it for me.

Thank you. And I’m showing no further questions at this time. I would now like to turn the call over to management for closing remarks.

Okay, yes. This is Ruben. I think as we close out this call, we do expect improvement in the second half and for all the reasons that we’ve talked about with the question and answer – all good questions and so forth, but you have to remember that we have good assets. We’ve got a good diversity of assets. We have a seasonal type of businesses that we have to live with, so all of these things we are looking forward to the future. Everybody’s got to be just a little bit patient with us as we go into the future, but we have a lot of good strategic initiatives that we are working on within the Company and we expect to consummate these things between now and end of the first quarter of next year. So with that, we appreciate everybody’s time and we appreciate your patience. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.