-- 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.
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.
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.
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
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.)
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
Rating Affirmed; Outlook Revised
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
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