(The following statement was released by the rating agency) Overview
-- U.S. midstream energy partnership Martin Midstream Partners L.P. (Martin) has closed on two acquisitions with Martin Resource Management Corp. (MRMC), owner of its general partner, for $272 million.
-- At the same time, Martin announced that MRMC has settled its ongoing Harris County litigation, which has been a credit overhang.
-- We are revising the outlook on Martin to negative from stable. At the same time, we are affirming our 'B+' corporate credit rating on Martin and our 'B' issue-level rating on its senior unsecured notes.
-- The negative outlook reflects our opinion that Martin's business profile has weakened due to meaningful development and recontracting risk surrounding the natural gas storage assets, which could lead to high financial leverage, in the 4.7x area, in 2013.
Rating Action On Oct. 3, 2012, Standard & Poor's Ratings Services revised its outlook on Martin Midstream Partners L.P. (Martin) to negative from stable. We also affirmed our 'B+' corporate credit rating on Martin and our 'B' issue-level rating on its senior unsecured notes. As of June 30, 2012, Martin had $453 million of total reported debt.
The negative outlook reflects our opinion that Martin's business profile has weakened due to meaningful development and recontracting risk surrounding the natural gas storage assets, which outweigh the benefits of Martin Resource Management Corp.'s (MRMC; owner of Martin's general partnership, not rated) Harris County litigation settlement. Martin purchased MRMC's remaining interests in Redbird Gas Storage LLC (pro forma for the transaction, Martinowns 38.1% of Redbird) an entity formed in 2011 to invest in Cardinal Gas Storage Partners. Cardinal is a joint venture that develops, constructs, operates, and manages natural gas storage facilities (its current asset base consists of Arcadia, Perryville, and Cadeville natural gas storage projects). While Martin's economic interest in Cardinal is only 38%, the partnership is responsible for approximately 100% of Cadeville's and 41% of Perryville and Arcadia's capital expenditures requirements going forward. Furthermore, Cardinal's project-financed nature traps cash at the operating level and precludes Martin from receiving upstream dividends until the debt is refinanced, which presents execution risk. A key credit consideration, in our opinion, is Martin's ability to secure favorable storage rates on uncontracted capacity (15 bcf) while funding its organic expansion plans ($60 million to $80 million over the next two years) in a balanced manner.
Martin is also acquiring certain specialty lubricant product packaging assets ("Packaging") from MRMC. Packaging distributes around 40 million gallons annually of proprietary and private-label lubricant products. Packaging sources around 20% of its supply from its co-located Cross refinery and the remainder from third party suppliers. Packaging's margins can be volatile--usually ranging between $0.30 to $0.50 per gallon--and are mostly influenced by the price of crude oil.
Under our base-case forecast, we assume Packaging realizes a gross profit margin of $0.40-$0.45 cents per gallon and a 5% growth in total volumes to about 72,000 gallons per day. In terms of Cardinal, we assume conservative storage rates because we expect low natural gas prices and narrow basis spreads to continue to drive poor storage economics. Finally, we assume Martin will not receive upstream dividends from the project financed Cardinal assets until year-end 2013. This translates into aggressive financial measures, with debt to EBITDA of 4.7x and EBITDA to interest of about 3.0x in 2013. In addition, we forecast low distribution coverage-below 1.0x-over the next 12 months which leaves little room for operational underperformance.
In our analysis, we also consider MRMC and Martin's consolidated credit measures. MRMC has an approximate 24%limited and general partnership interest in Martin. MRMC, which we estimate could account for 30% to 35% of Martin's 2012 EBITDA, provides transportation, marketing, and logistical services for various petroleum and specialized products. MRMC takes far greater direct price exposure compared with Martin, including exposure to the Cross refinery asset, which could lead to more volatile cash flows. We believe consolidated financial leverage will be high, ranging between 5.5x and 5.8x by the end of 2013.
Standard & Poor's rating on Martin reflects the partnership's "weak" business risk profile and "aggressive" financial risk profile under our criteria. Martin's small size, dependency on a few key assets, volume risk in the terminal and storage segment, and some commodity price exposure characterize the weak business risk profile. The aggressive financial risk profile incorporates Martin's current financial metrics, its business interactions with its parent, and the master limited partnership (MLP) structure. Martin's diverse business lines, largely fee-based revenue streams, and expertise handling certain specialty products partially offset these risks.
Martin's main business lines consist of terminaling and storage, sulfur services, natural gas services, and marine transportation.
-- We believe Martin's Gulf Coast terminal and storage assets provide relatively stable cash flows from a mostly fee-based contract mix. We view the partnership's specialized inland terminals, which handle products such as molten sulfur and asphalt, as partially offsetting competition from larger industry peers. Although there is volume risk, which could lead to lower fee-based revenue, most of the contracts contain minimum fee arrangements that lower volumes do not affect. We assume this segment accounts for 40% to 45% of 2012 EBITDA.
-- In sulfur services, Martin maintains a good competitive position as relatively few competitors have similar handling capability. Martin transports molten sulfur produced by oil refineries on a margin basis, and processes molten sulfur into pellets for use in producing fertilizers and industrial chemicals, primarily through take-or-pay and fee-based contracts. Although a decline in refinery utilization or the demand for fertilizers could reduce this segment's cash flow, Martin's contract mix and logistics assets largely mitigate cash flow from the potential effects of volatile sulfur prices. We assume the sulfur services segment accounts for 30% to 35% of 2012 EBITDA.
-- Cash flow in the marine transportation segment is vulnerable to pressure from low spot rates resulting from weak refinery use and to recontracting risk. We assume this segment represents 10% to 15% of EBITDA in 2012. Martin's fleet of inland and offshore barges primarily facilitates the movement of a diverse set of products--including fuel oil, gasoline, sulfur, and asphalt--mainly to company-owned terminals under fee-based contracts that range from one to ten years.
-- With the recent sale of certain assets to CenterPoint Energy Inc., the natural gas services segment primarily consists of its natural gas liquids wholesale and natural gas storage operations, which we assume accounts for 10% to 15% of 2012 EBITDA.
We characterize Martin's liquidity as "adequate" under our criteria, with sources exceeding uses by roughly 1.2x during the next 12 months. Sources of liquidity include funds from operations (FFO) of $90 million and revolving credit facility availability of about $50 million. Key uses include committed growth and maintenance capital spending of $40 million and distributions of about $70 million.
The credit facility, which Martin increased to $400 million from $375 million in May 2012, requires that Martin maintain minimum interest coverage of 2.75x, senior leverage (senior debt to EBITDA) of less than 3.25x, and maximum leverage (total debt to EBITDA) of 5x. As of June 30, 2012, Martin was in compliance with these covenants, and we expect the partnership to remain so in 2012.
Recovery analysis The rating on Martin's $200 million senior unsecured debt issue is 'B', and the recovery rating is '5', indicating our expectation that lenders would receive modest (10% to 30%) recovery if a payment default occurs. (For the recovery analysis see the recovery report on Martin published on May 30, 2012.)
The negative outlook reflects Martin's increased exposure to the natural gas storage business and our concern that recontracting and construction risk could lead to weak financial metrics for a sustained period of time. We currently forecast debt to EBITDA of 4.7x in 2013, but recognize that results will be influenced by industry conditions and the partnership's ability to successfully execute on its strategy. We could lower the rating if we believe that Martin appears unlikely to lower debt to EBITDA to below 4.5x on a sustained basis. We could also lower the rating if MRMC's credit quality weakens, which could result in consolidated leverage of more than 5.5x and could pressure Martin's cash flow. We could revise the outlook to stable if we gain greater visibility on the partnership's ability to maintain financial leverage in the 4.0x to 4.5x and 5.0x to 5.5x range on a stand-alone and consolidated basis, respectively.
Related Criteria And Research -- " =
7254245&rev_id=10&sid=977736&sind=A&", April 18, 2012
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5153969&rev_id=3&sid=977736&sind=A&", Dec. 18, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Martin Midstream Partners L.P.
Corporate Credit Rating B+/Negative/-- B+/Stable/--
Ratings Affirmed; Recovery Rating Unchanged
Martin Midstream Partners L.P.
Senior Unsecured B Recovery Rating 5
Martin Midstream Finance Corp.
Senior Unsecured B Recovery Rating 5
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