TEXT-S&P revises Martin Midstream outlook to stable from negative

Tue Jun 19, 2012 11:48am EDT

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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