Martin Midstream Partners(MMLP) - 2022 Q4 - Annual Report

PART I Business The company is a publicly traded limited partnership providing midstream energy services across four segments in the U.S. Gulf Coast Overview The company operates four primary fee-based midstream business lines in the U.S. Gulf Coast, with its sponsor MRMC holding significant ownership * The company's four primary business lines are: Terminalling, processing, storage and packaging; Land and marine transportation; Sulfur and sulfur-based products; and Natural Gas Liquids (NGL) marketing and distribution[16] * A significant amount of cash flow is generated from fee-based businesses, with sponsor Martin Resource Management Corporation (MRMC) assuming significant working capital demands and margin risk[17] * As of December 31, 2022, MRMC owned 15.7% of the Partnership's common units and indirectly owns 100% of the general partner, MMGP[18] Primary Business Segments The company's operations are divided into four segments: Terminalling and Storage, Transportation, Sulfur Services, and Natural Gas Liquids, each with specialized assets and services Segment Asset Overview | Segment | Key Assets/Operations | | :--- | :--- | | Terminalling and Storage | 14 marine shore-based terminals, 13 specialty terminals, 2.7 million barrels aggregate storage capacity | | Transportation | ~700 trucks, ~1,200 tank trailers, 27 inland marine tank barges, 15 inland push boats | | Sulfur Services | Integrated system for processing, manufacturing, marketing, and distributing sulfur and sulfur-based fertilizers | | Natural Gas Liquids | Marketing, distribution, and transportation of NGLs with ~2.2 million barrels of underground storage capacity | Significant Recent Developments Recent strategic actions include debt refinancing, exiting the butane optimization business, and a joint venture for electronic level sulfuric acid production * In February 2023, the company issued $400.0 million of 11.50% senior secured second lien notes due 2028 to refinance existing debt and amend its credit facility, extending maturity to 2027[23] * Announced the exit of its butane optimization business in January 2023 to transition to a fee-based butane logistics model, aiming to eliminate commodity risk and reduce working capital[24] * Entered a joint venture to produce electronic level sulfuric acid (ELSA) for the semiconductor industry, expecting to fund approximately $20.0 million in related capital expenditures in 2023 and 2024[26] Our Growth Strategy and Competitive Strengths The company's growth strategy focuses on strategic alliances and organic expansion, leveraging its Gulf Coast assets, specialized equipment, and fee-based contracts * Growth strategy is centered on establishing strategic alliances, attracting new customers, expanding services to existing customers, and pursuing organic growth projects[30] * Competitive strengths include strategically located assets near Gulf Coast refineries, specialized equipment for handling products like molten sulfur and asphalt, and a strong industry reputation[29][30][31] * A significant amount of cash flow is generated from fee-based contracts, many with minimum fee arrangements, which reduces cash flow volatility[32] Our Relationship with Martin Resource Management Corporation The Partnership has a critical relationship with its sponsor, MRMC, which owns the general partner and provides all personnel, involving significant financial and commercial transactions * MRMC owns 15.7% of outstanding limited partner units and 100% of the general partner, directing the Partnership's business operations[93] * The Partnership has no employees and relies on MRMC employees to conduct its business and operate its assets[94] Financial Relationship with MRMC (FY 2022) | Transaction Type | Amount/Percentage | Direction | | :--- | :--- | :--- | | Reimbursements to MRMC | | | | Direct Costs & Expenses | $161.6 million | MMLP to MRMC | | Indirect G&A Expenses | $13.5 million | MMLP to MRMC | | Commercial Transactions | | | | Purchases from MRMC | 17% of MMLP's total costs | MMLP to MRMC | | Sales to MRMC | 9% of MMLP's total revenues | MRMC to MMLP | Environmental and Regulatory Matters Operations are subject to extensive environmental and safety regulations, including climate change risks and specific rules for marine and trucking transportation * Operations are subject to numerous environmental laws (e.g., CERCLA, RCRA, Clean Air Act, Clean Water Act) that can impose significant compliance costs and liabilities for pollution[109] * Climate change presents regulatory risks from potential GHG emission restrictions and physical risks from severe weather, which could damage facilities and disrupt operations[116][117][118] * Marine transportation is subject to the Jones Act, requiring U.S.-built, owned, and manned vessels for domestic trade, which increases operating costs compared to foreign-flagged competitors[125] Risk Factors The company faces business, operational, environmental, relationship, investment, and tax risks that could materially affect its financial condition and distributions * Business Risks: Significant indebtedness, restrictions in debt instruments limiting distributions, dependence on offshore E&P activity, counterparty credit risk, and potential for asset impairment[133][141][145] * Operational & Environmental Risks: Adverse weather (hurricanes, storms), potential for uninsured liabilities from accidents or spills, compliance costs with environmental laws, and risks associated with climate change regulations and physical impacts[133][165][182] * Relationship Risks: Potential conflicts of interest with parent Martin Resource Management Corporation, which controls the general partner and may favor its own interests[134][229] * Investment & Tax Risks: Limited unitholder voting rights, potential for the IRS to treat the partnership as a corporation for tax purposes, and the possibility that unitholders may be required to pay taxes on income even without receiving cash distributions[134][136][211][234] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC * None[264] Properties The company believes it holds satisfactory title to its assets, with no material adverse effects expected from unobtained consents or existing encumbrances * A detailed description of the company's properties is located in "Item 1. Business"[265] * The company believes it has satisfactory title to its assets and that any unobtained third-party consents, permits, or existing encumbrances will not materially and adversely affect business operations[266] Legal Proceedings The company is involved in ordinary course legal proceedings, but management does not anticipate a material adverse impact on its financial position * The company is subject to legal proceedings in the ordinary course of business but does not expect them to have a material adverse impact[267] * A detailed description of legal proceedings is available in Note 19 to the consolidated financial statements[267] Mine Safety Disclosures This item is not applicable to the company * Not applicable[268] PART II Market for Our Common Equity, Related Unitholder Matters and Issuer Purchases of Equity Securities Common units trade on NASDAQ under MMLP, with a policy to distribute available cash quarterly, subject to debt covenants * Common units are traded on NASDAQ under the symbol "MMLP"[271] * The partnership's policy is to distribute all available cash within 45 days after the end of each quarter, subject to debt covenants and the general partner's discretion to establish cash reserves[272] * A quarterly cash distribution of $0.005 per common unit for Q4 2022 was declared on January 23, 2023, and paid on February 14, 2023[273] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, liquidity, and capital resources, highlighting debt refinancing and segment-specific operating results Results of Operations Total revenues increased to $1.019 billion in 2022, but operating income decreased, driven by a significant rise in Transportation and a decline in Natural Gas Liquids Operating Income (Loss) by Segment (after eliminations) | Segment | 2022 (in thousands) | 2021 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Terminalling and storage | $14,893 | $10,785 | $4,108 | | Natural gas liquids | $(1,853) | $38,098 | $(39,951) | | Sulfur services | $34,146 | $32,972 | $1,174 | | Transportation | $20,991 | $(8,446) | $29,437 | | Total Operating Income | $51,263 | $57,280 | $(6,017) | * The Transportation segment's operating income increased by $29.4 million year-over-year, primarily due to higher utilization, increased transportation rates, and a 25% increase in land transportation load count[316][317] * The Natural Gas Liquids segment experienced a significant decline in operating income, driven by a 58% decrease in margin per barrel ($3.15/bbl) despite higher market prices[326][327] Non-GAAP Financial Measures The company uses non-GAAP metrics like Adjusted EBITDA, Distributable Cash Flow, and Adjusted Free Cash Flow to evaluate performance Key Non-GAAP Financial Metrics | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $114,880 | $114,542 | | Distributable Cash Flow | $37,934 | $44,630 | | Adjusted Free Cash Flow | $30,772 | $37,218 | Liquidity and Capital Resources Liquidity is primarily from operations and credit facility, with net cash from operations decreasing in 2022 and debt refinanced post-year-end * Net cash provided by operating activities decreased by 55% to $16.1 million in 2022 from $35.7 million in 2021, primarily due to lower operating results and unfavorable changes in working capital[335] Contractual Obligations as of Dec 31, 2022 | Type of Obligation | Total Obligation (in thousands) | | :--- | :--- | | Credit facility | $171,000 | | 11.5% senior secured notes, due 2025 | $291,381 | | 10.0% senior secured notes, due 2024 | $53,750 | | Operating leases | $45,756 | | Total (including others) | $642,114 | * Subsequent to year-end, on February 8, 2023, the company amended its credit facility, extending the maturity to February 8, 2027, and reducing commitments from $275.0 million to $200.0 million (with further scheduled reductions)[342] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to commodity price and interest rate risks, with a 100 basis point rate increase impacting annual interest expense by $1.7 million * The company is exposed to commodity price risk but had no outstanding commodity derivative positions as of December 31, 2022[377][378] * The company is exposed to interest rate risk on its variable-rate credit facility; a 100 basis point increase in rates would result in an approximate $1.7 million increase in annual interest expense[379] Financial Statements and Supplementary Data This section includes audited consolidated financial statements and KPMG's unqualified opinion, noting a critical audit matter regarding long-lived asset recoverability Report of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on the financial statements and internal controls, identifying long-lived asset recoverability as a critical audit matter * KPMG LLP issued an unqualified opinion, stating the financial statements are presented fairly in all material respects in conformity with U.S. GAAP[384] * KPMG LLP also issued an unqualified opinion on the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2022[385][395] * A critical audit matter was identified regarding the evaluation of the recoverability of certain long-lived assets in the transportation segment, specifically noting the subjective nature of forecasting future revenue[390] Consolidated Financial Statements The financial statements show total assets of $598.9 million, a net loss of $10.3 million in 2022, and net cash from operations of $16.1 million Consolidated Balance Sheet Data (as of Dec 31) | Account (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Current Assets | $211,127 | $173,688 | | Property, plant and equipment, net | $319,290 | $345,470 | | Total Assets | $598,851 | $579,861 | | Total Current Liabilities | $110,925 | $104,087 | | Long-term debt, net | $512,871 | $498,871 | | Total Liabilities | $658,296 | $627,898 | | Total Partners' Capital (Deficit) | $(59,445) | $(48,037) | Consolidated Statement of Operations Data (Year Ended Dec 31) | Account (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenues | $1,018,878 | $882,431 | $672,142 | | Operating Income | $51,263 | $57,280 | $46,502 | | Interest Expense, net | $(53,665) | $(54,107) | $(46,210) | | Net Loss | $(10,334) | $(211) | $(6,771) | Notes to Consolidated Financial Statements Notes detail accounting policies, segment information, debt, and related party transactions, including the butane optimization exit and 2023 debt refinancing * Note 4: The Partnership announced its exit from the butane optimization business, expected in Q2 2023, to shift to a fee-based logistics model. It also closed on the sale of its Stockton Sulfur Terminal for net proceeds of approximately $5.25 million in October 2022[461][462] * Note 12: Details the extensive relationship with Martin Resource Management Corporation (MRMC), which owns the general partner. The Partnership reimbursed MRMC $13.5 million for indirect expenses in 2022. MRMC is also a major customer and supplier[505][513] * Note 14 & Subsequent Events: As of Dec 31, 2022, long-term debt included a $171 million credit facility balance and senior notes. In February 2023, the company issued $400 million in new 2028 notes to refinance the existing 2024 and 2025 notes and amended its credit facility, extending the maturity to 2027[542][593] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting or financial disclosure matters * None[595] Controls and Procedures Management and KPMG LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 * Management concluded that disclosure controls and procedures were effective as of December 31, 2022[596] * Management concluded that internal control over financial reporting was effective as of December 31, 2022. This assessment was audited by KPMG LLP, which concurred[599] Other Information The company reports no other information for this item * None[601] PART III Directors, Executive Officers and Corporate Governance The Partnership is managed by its general partner, with independent directors on key committees, and all operational personnel provided by MRMC * The Partnership is managed by its general partner, Martin Midstream GP LLC. All operational personnel are employees of Martin Resource Management Corporation[604][608] * The board of the general partner has standing Conflicts, Audit, Compensation, and Nominating committees, each composed of independent directors: James M. Collingsworth, C. Scott Massey, and Byron R. Kelley[605][606][607] Key Executive Officers | Name | Position with the General Partner | | :--- | :--- | | Ruben S. Martin | Chairman of the Board of Directors | | Robert D. Bondurant | President and Chief Executive Officer and Director | | Randall L. Tauscher | Executive Vice President and Chief Operating Officer | | Chris H. Booth | Executive Vice President, Chief Legal Officer, General Counsel and Secretary | | Sharon L. Taylor | Executive Vice President and Chief Financial Officer | Executive Compensation Executive officers are compensated by MRMC, with the Partnership reimbursing allocated costs, including base salary, cash awards, and long-term incentives * The Partnership has no employees; executive officers are employed and compensated by Martin Resource Management Corporation (MRMC), and the Partnership reimburses MRMC for an allocated portion of these costs[629] Summary Compensation Table (2022 Allocated to MMLP) | Name and Principal Position | Salary | Discretionary Annual Awards | Phantom Unit Awards (Grant Date Value) | Total Compensation | | :--- | :--- | :--- | :--- | :--- | | Robert D. Bondurant, President and CEO | $575,000 | $775,000 | $243,250 | $1,593,250 | | Randall L. Tauscher, EVP and COO | $367,500 | $— | $217,000 | $584,500 | | Sharon L. Taylor, EVP and CFO | $189,000 | $— | $185,500 | $374,500 | | Chris H. Booth, EVP, General Counsel | $252,000 | $— | $185,500 | $437,500 | | Scot A. Shoup, SVP of Operations | $365,750 | $— | $92,750 | $458,500 | * Long-term incentive compensation is provided through the 2021 Phantom Unit Plan (cash-settled) and the 2017 Restricted Unit Plan (equity-settled)[647][652] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Significant beneficial owners include Invesco (18.5%), MRMC ESOP Trust (15.7%), and Ruben S. Martin (23.9%), with all directors and executive officers owning 25.5% Beneficial Ownership of Common Units (as of March 2, 2023) | Name of Beneficial Owner | Common Units Beneficially Owned | Percentage of Common Units | | :--- | :--- | :--- | | Invesco Ltd. | 7,216,779 | 18.5% | | MRMC ESOP Trust | 6,114,532 | 15.7% | | Senterfitt Holdings Inc. | 3,025,445 | 7.8% | | Ruben S. Martin | 9,290,016 | 23.9% | | All directors and executive officers as a group | 9,928,390 | 25.5% | * The MRMC ESOP Trust is the controlling shareholder of Martin Resource Management Corporation, owning 89.38% of its voting common stock[694] Certain Relationships and Related Transactions, and Director Independence This section details significant related party transactions with MRMC, governed by agreements like the Omnibus Agreement, and approved by the Conflicts Committee * The Omnibus Agreement governs services provided by MRMC, reimbursement of direct and indirect expenses, and non-competition clauses. The Partnership reimbursed MRMC $13.5 million for indirect expenses in 2022[701][706] * Other key agreements include a Master Transportation Services Agreement with MTI (a subsidiary), various terminal services agreements, and marine transportation and fuel agreements with MRMC affiliates[711][714][716] * The Partnership has a tolling agreement with Cross Oil Refining and Marketing, Inc. (an MRMC subsidiary) for its Smackover refinery, which includes a minimum processing volume of 6,500 barrels per day[718] * Material related party transactions are reviewed and approved by the Conflicts Committee of the board of directors to ensure they are fair and reasonable to the Partnership[725] Principal Accounting Fees and Services KPMG LLP served as the independent auditor, with total fees of $1.333 million in 2022, primarily for audit services, all pre-approved by the Audit Committee Fees Paid to KPMG LLP | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $1,238,000 | $1,060,000 | | Tax fees | $95,100 | $107,000 | | All other fees | $— | $7,000 | | Total fees | $1,333,100 | $1,174,000 | * All audit and non-audit services provided by KPMG LLP were pre-approved by the Audit Committee[727] PART IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including organizational documents, debt indentures, and required certifications * Financial statements are located in Part II, Item 8 of the report[731] * An index of exhibits is provided, listing key corporate and operational agreements, debt instruments, and required certifications[733] Form 10-K Summary This item is not applicable to the company * Not applicable[736]