TEXT-S&P revises Martin Midstream outlook to stable from negative
Overview -- U.S. midstream energy partnership Martin Midstream Partners' (Martin) announced its intent to sell the majority of its natural gas gathering and processing assets to a subsidiary of CenterPoint Energy Inc. (BBB+/Stable/A-2) for $275 million. We expect the partnership to pay down its revolving credit facility with proceeds from the transaction, resulting in pro forma leverage of around 2.4x. -- As a result of Martin's improved financial profile, we are affirming our 'B+' corporate credit rating and revising the outlook to stable from negative. We are also affirming our 'B' issue-level rating on its senior unsecured notes and the '5' recovery rating remains unchanged. -- The stable outlook reflects our view that Martin will maintain adequate liquidity and leverage in the 4x area, and will derive relatively stable cash flow from a largely fee-based contract mix. Rating Action On June 19, 2012, Standard & Poor's Services revised its outlook on Martin Midstream Partners L.P. (Martin) to stable from negative. We also affirmed our 'B+' corporate credit rating on the partnership and our 'B' issue-level rating on its senior unsecured notes. As of March 31, 2012, Martin had $434 million of total reported debt. Rationale Martin announced its intent to sell the majority of its natural gas services assets, including its East Texas gathering and processing assets and its 50% operating interest in the Waskom Gas Processing Co. (a subsidiary of CenterPoint Energy Inc. (BBB+/Stable/A-2) already owns the remaining 50%) to an indirect, wholly owned subsidiary of CenterPoint Energy for $275 million. As a result of the transaction, we expect leverage to improve because the company will use proceeds from the sale to pay down borrowings under the revolving credit facility. Pro forma for the transaction, we expect the partnership to have a debt to EBITDA ratio of around 2.4x and EBITDA interest coverage of 4x. While these measures are conservative for the rating, we expect leverage to gradually increase to about 4x as management pursues growth opportunities over the next 12 to 24 months. In addition, we expect distribution coverage to be less than 1x over the next few quarters due to lower cash flow attributed to the divestiture, which leaves little cushion if one of Martin's business segments underperforms. In our analysis, we also consider Martin Resource Management Corp.'s (MRMC; not rated) and Martin's consolidated credit measures. We believe consolidated financial leverage will range between 3.5x and 4x by the end of 2012. Standard & Poor's rating on Martin reflects the partnership's "weak" business risk profile and "aggressive" financial risk profile. 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. Our ratings also factor in Martin's relationship with its general partner MRMC, where there is ongoing litigation that includes senior executives. Although Martin is not a party to the lawsuits, the outcome of the litigation could pressure ratings if we believe the resolution will harm Martin's credit quality. MRMC has a 30% 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. In our view, the transaction modestly improves Martin's business risk profile due to the volume and commodity risk inherent in the gathering and processing business that makes it difficult to forecast future cash flows. Martin's main business lines consist of terminaling and storage, sulfur services, natural gas services, and marine transportation. With the sale of certain assets to CenterPoint, the natural gas services segment will primarily consist of its natural gas liquids wholesale and natural gas storage operations. In general, we view natural gas storage as having a weak business risk profile mainly due to development and geologic risk. Growing exposure to this asset class may increase Martin's risk of funding commitments, possibly stretching the partnership's leverage measures. We assume the natural-gas services segment will account for 10% to 15% of 2012 EBITDA. 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 could account 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 could account for 30% to 35% of 2012 EBITDA. MRMC markets sulfuric acid produced at a Martin-owned facility to third parties, the proceeds of which are included in this segment's 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, because some inland contracts that are rolling off will have lower rates. We assume this segment will represent 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 five years. Liquidity We consider Martin's liquidity to be adequate under our corporate liquidity methodology (see "Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers," published July 2, 2010). Although our assumed liquidity sources exceed uses by about 1.6x during the next 12 months, other factors--such as the partnership's ability to absorb high-impact, low-probability events without refinancing, and its ability to maintain covenant compliance even with a 20% decline in EBITDA--keep our liquidity assessment in the adequate category. Sources of liquidity include funds from operations of $60 million and revolving credit facility availability of about $300 million. Key uses include capital spending of $150 million and distributions of about $70 million. The credit facility, which Martin increased in May 2012 to $400 million from $375 million, 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 March 31, 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 $175 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. (See Martin's latest recovery report, published on May 30, 2012.) Outlook We are unlikely to raise the rating in the intermediate term due to Martin's limited scale, including its EBITDA concentration with parent MRMC. We could lower the rating if one or more of the partnership's business segments underperform, or if an acquisition weakens the financial profile, resulting in a total debt to EBITDA ratio of more than 4.5x. 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, or if the ultimate outcome of litigation at MRMC harms Martin's credit quality. Related Criteria And Research -- Key Credit Factors: Criteria For Rating The Global Midstream Energy Industry, April 18, 2012 -- Rating Criteria For U.S. Midstream Energy Companies, Dec. 18, 2008 Ratings List Rating Affirmed; Outlook Revised To From Martin Midstream Partners L.P. Corp. credit rating B+/Stable/-- B+/Negative/-- Rating Affirmed; Recovery Rating Unchanged Martin Midstream Partners L.P. Senior unsecured debt B Recovery rating 5 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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