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| MMLP > SEC Filings for MMLP > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-2009
Quarterly Report
• Natural gas services;
• Marine transportation services for petroleum products and by-products; and
• Sulfur and sulfur-based products gathering, processing, marketing, manufacturing and distribution.
The petroleum products and by-products we collect, transport, store and
market are produced primarily by major and independent oil and gas companies who
often turn to third parties, such as us, for the transportation and disposition
of these products. In addition to these major and independent oil and gas
companies, our primary customers include independent refiners, large chemical
companies, fertilizer manufacturers and other wholesale purchasers of these
products. We operate primarily in the Gulf Coast region of the United States.
This region is a major hub for petroleum refining, natural gas gathering and
processing and support services for the exploration and production industry.
We were formed in 2002 by Martin Resource Management, a privately-held
company whose initial predecessor was incorporated in 1951 as a supplier of
products and services to drilling rig contractors. Since then, Martin Resource
Management has expanded its operations through acquisitions and internal
expansion initiatives as its management identified and capitalized on the needs
of producers and purchasers of hydrocarbon products and by-products and other
bulk liquids. Martin Resource Management owns an approximate 34.9% limited
partnership interest in us. Furthermore, it owns and controls our general
partner, which owns a 2.0% general partner interest in us and all of our
incentive distribution rights.
Martin Resource Management has operated our business for several years.
Martin Resource Management began operating our natural gas services business in
the 1950s and our sulfur business in the 1960s. It began our marine
transportation business in the late 1980s. It entered into our fertilizer and
terminalling and storage businesses in the early 1990s. In recent years, Martin
Resource Management has increased the size of our asset base through expansions
and strategic acquisitions.
Subsequent Events
In April 2009, we sold our terminalling lubricants inventory at our full
service and lubricant terminals to Martin Resource Management for $ 4.9 million,
the carrying value of the inventory at the date of the transfer. Effective
April 1, 2009, certain lubricant revenues and cost of products sold will be
excluded from our financial statements. The purpose of this transaction is to
transfer products that generate non-qualifying revenues to Martin Resource
Management and to replace them with qualifying throughput service revenues.
Lubricants related to our June 2007 acquisition of Mega Lubricants Inc. will
remain in our financial statements due to their qualifying nature. We anticipate
that we will execute a terminalling services agreement with Martin Resource
Management whereby a throughput fee will be charged to Martin Resource
Management for the handling of the transferred lubricants.
On April 30, 2009, we sold the assets comprising the Mont Belvieu railcar
unloading facility to Enterprise Products Operating LLC, which yielded net
proceeds from the sale in the amount of $19.6 million. The disposition is
comprised of property, plant and equipment and allocated goodwill with a
carrying value of approximately $10.4 million at March 31, 2009. A portion of
the property, plant and equipment is under construction and the Partnership
expects to make additional expenditures which will increase the carrying value
of the disposed assets by approximately $4.0 million. We will receive an
additional $3.5 million upon completion of the construction project. We must pay
down the outstanding revolving loans under our credit facility with the net cash
proceeds from this sale of assets. The amount paid down will be available for
future borrowings under the revolving credit facility.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based on the historical consolidated and condensed financial
statements included elsewhere herein. We prepared these financial statements in
conformity with generally accepted accounting principles. The preparation of
these financial statements required us to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. We based our estimates on historical experience and on
various other assumptions we believe to be reasonable under the circumstances.
Our results may differ from these estimates. Currently, we believe that our
accounting policies do not require us to make estimates using assumptions about
matters that are highly uncertain. However, we have described below the critical
accounting policies that we believe could impact our consolidated and condensed
financial statements most significantly.
You should also read Note 1, "General" in Notes to Consolidated and
Condensed Financial Statements contained in this quarterly report and the
"Significant Accounting Policies" note in the consolidated financial statements
included in our annual report on Form 10-K for the year ended December 31, 2008
filed with the SEC on March 4, 2009 in conjunction with this Management's
Discussion and Analysis of Financial Condition and Results of Operations. Some
of the more significant estimates in these financial statements include the
amount of the allowance for doubtful accounts receivable and the determination
of the fair value of our reporting units under SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142").
Derivatives
In accordance with Statement of Financial Accounting Standards No. 133
("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities,
all derivatives and hedging instruments are included on the balance sheet as an
asset or liability measured at fair value and changes in fair value are
recognized currently in earnings unless specific hedge accounting criteria are
met. If a derivative qualifies for hedge accounting, changes in the fair value
can be offset against the change in the fair value of the hedged item through
earnings or recognized in other comprehensive income until such time as the
hedged item is recognized in earnings. Our hedging policy allows us to use hedge
accounting for financial transactions that are designated as hedges. Derivative
instruments not designated as hedges or hedges that become ineffective are being
marked to market with all market value adjustments being recorded in the
consolidated statements of operations. As of March 31, 2009, we have designated
a portion of our derivative instruments as qualifying cash flow hedges. Fair
value changes for these hedges have been recorded in other comprehensive income
as a component of partners' capital.
Product Exchanges
We enter into product exchange agreements with third parties whereby we
agree to exchange natural gas liquids ("NGLs") and sulfur with third parties. We
record the balance of exchange products due to other companies under these
agreements at quoted market product prices and the balance of exchange products
due from other companies at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Revenue Recognition
Revenue for our four operating segments is recognized as follows:
Terminalling and storage - Revenue is recognized for storage contracts
based on the contracted monthly tank fixed fee. For throughput contracts,
revenue is recognized based on the volume moved through our terminals at the
contracted rate. When lubricants and drilling fluids are sold by truck, revenue
is recognized upon delivering product to the customers as title to the product
transfers when the customer physically receives the product.
Natural gas services - Natural gas gathering and processing revenues are
recognized when title passes or service is performed. NGL distribution revenue
is recognized when product is delivered by truck to our NGL customers, which
occurs when the customer physically receives the product. When product is sold
in storage, or by pipeline, we recognize NGL distribution revenue when the
customer receives the product from either the storage facility or pipeline.
Marine transportation - Revenue is recognized for contracted trips upon
completion of the particular trip. For time charters, revenue is recognized
based on a per day rate.
Sulfur services - Revenue is recognized when the customer takes title to
the product at our plant or the customer facility.
Equity Method Investments
We use the equity method of accounting for investments in unconsolidated
entities where the ability to exercise significant influence over such entities
exists. Investments in unconsolidated entities consist of capital contributions
and advances plus our share of accumulated earnings as of the entities' latest
fiscal year-ends, less capital withdrawals and distributions. Investments in
excess of the underlying net assets of equity method investees, specifically
identifiable to property, plant and equipment, are amortized over the useful
life of the related assets. Excess investment representing equity method
goodwill is not amortized but is evaluated for impairment, annually. Under the
provisions SFAS No. 142, Goodwill and Other Intangible Assets, this goodwill is
not subject to amortization and is accounted for as a component of the
investment. Equity method investments are subject to impairment under the
provisions of Accounting Principles Board ("APB") Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock. No portion of the net
income from these entities is included in our operating income.
We own an unconsolidated 50% of the ownership interests in Waskom Gas
Processing Company ("Waskom"), Matagorda Offshore Gathering System
("Matagorda"), Panther Interstate Pipeline Energy LLC ("PIPE") and a 20%
ownership interest in a partnership which owns the lease rights to Bosque County
Pipeline ("BCP"). Each of these interests is accounted for under the equity
method of accounting. The lease contract with respect to BCP provides for
termination in June 2009 and an extension of the lease is not currently
contemplated. This interest is accounted for by the equity method of accounting.
Goodwill
Goodwill is subject to a fair-value based impairment test on an annual
basis. We are required to identify our reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets. We are required to
determine the fair value of each reporting unit and compare it to the carrying
amount of the reporting unit. To the extent the carrying amount of a reporting
unit exceeds the fair value of the reporting unit, we would be required to
perform the second step of the impairment test, as this is an indication that
the reporting unit goodwill may be impaired.
All four of our "reporting units", terminalling, marine transportation,
natural gas services and sulfur services, contain goodwill.
As of December 31, 2008, we determined fair value in each reporting unit
based on a multiple of current annual cash flows. This multiple was derived from
our experience with actual acquisitions and dispositions and our valuation of
recent potential acquisitions and dispositions.
Environmental Liabilities
We have historically not experienced circumstances requiring us to account
for environmental remediation obligations. If such circumstances arise, we would
estimate remediation obligations utilizing a remediation feasibility study and
any other related environmental studies that we may elect to perform. We would
record changes to our estimated environmental liability as circumstances change
or events occur, such as the issuance of revised orders by governmental bodies
or court or other judicial orders and our evaluation of the likelihood and
amount of the related eventual liability.
Allowance for Doubtful Accounts
In evaluating the collectability of our accounts receivable, we assess a
number of factors, including a specific customer's ability to meet its financial
obligations to us, the length of time the receivable has been past due and
historical collection experience. Based on these assessments, we record specific
and general reserves for bad debts to reduce the related receivables to the
amount we ultimately expect to collect from customers.
Asset Retirement Obligation
We recognize and measure our asset and conditional asset retirement
obligations and the associated asset retirement cost upon acquisition of the
related asset and based upon the estimate of the cost to settle the obligation
at its anticipated future date. The obligation is accreted to its estimated
future value and the asset retirement cost is depreciated over the estimated
life of the asset.
Our Relationship with Martin Resource Management
Martin Resource Management is engaged in the following principal business
activities:
• providing land transportation of various liquids using a fleet of trucks
and road vehicles and road trailers;
• distributing fuel oil, asphalt, sulfuric acid, marine fuel and other liquids;
• providing marine bunkering and other shore-based marine services in Alabama, Louisiana, Mississippi and Texas;
• operating a small crude oil gathering business in Stephens, Arkansas;
• operating a lube oil processing facility in Smackover, Arkansas;
• operating an underground NGL storage facility in Arcadia, Louisiana;
• supplying employees and services for the operation of our business;
• operating, for its account and our account, the docks, roads, loading and unloading facilities and other common use facilities or access routes at our Stanolind terminal;
• operating, solely for our account, the asphalt facilities in Omaha, Nebraska.
We are and will continue to be closely affiliated with Martin Resource Management as a result of the following relationships.
Ownership
Martin Resource Management owns an approximate 34.9% limited partnership
interest and a 2% general partnership interest in us and all of our incentive
distribution rights.
Management
Martin Resource Management directs our business operations through its
ownership and control of our general partner. We benefit from our relationship
with Martin Resource Management through access to a significant pool of
management expertise and established relationships throughout the energy
industry. We do not have employees. Martin Resource Management employees are
responsible for conducting our business and operating our assets on our behalf.
Related Party Agreements
We are a party to an omnibus agreement with Martin Resource Management. The
omnibus agreement requires us to reimburse Martin Resource Management for all
direct expenses it incurs or payments it makes on our behalf or in connection
with the operation of our business. We reimbursed Martin Resource Management for
$14.2 million of direct costs and expenses for the three months ended March 31,
2009 compared to $17.2 million for the three months ended March 31, 2008. There
is no monetary limitation on the amount we are required to reimburse Martin
Resource Management for direct expenses.
In addition to the direct expenses, under the omnibus agreement, the
reimbursement amount that we are required to pay to Martin Resource Management
with respect to indirect general and administrative and corporate overhead
expenses was capped at $2.0 million. This cap expired on November 1, 2007.
Effective October 1, 2008 through September 30, 2009, the Conflicts Committee of
our general partner approved an annual reimbursement amount for indirect
expenses of $3.5 million. We reimbursed Martin Resource Management for $0.9 and
$0.7 million of indirect expenses for the three months ended March 31, 2009 and
2008. These indirect expenses covered the centralized corporate functions Martin
Resource Management provides for us, such as accounting, treasury, clerical
billing, information technology, administration of insurance, general office
expenses and employee benefit plans and other general corporate overhead
functions we share with Martin Resource Management retained businesses. The
omnibus agreement also contains significant non-compete provisions and indemnity
obligations. Martin Resource Management also licenses certain of its trademarks
and trade names to us under the omnibus agreement.
In addition to the omnibus agreement, we and Martin Resource Management
have entered into various other agreements that are not the result of
arm's-length negotiations and consequently may not be as favorable to us as they
might have been if we had negotiated them with unaffiliated third parties. The
agreements include, but are not limited to, a motor carrier agreement, a
terminal services agreement, a marine transportation agreement, a product
storage agreement, a product supply agreement, a throughput agreement, and a
Purchaser Use Easement, Ingress-Egress Easement and Utility Facilities Easement.
Pursuant to the terms of the omnibus agreement, we are prohibited from entering
into certain material agreements with Martin Resource Management without the
approval of the conflicts committee of our general partner's board of directors.
For a more comprehensive discussion concerning the omnibus agreement and
the other agreements that we have entered into with Martin Resource Management,
please refer to "Item 13. Certain Relationships and Related Transactions -
Agreements" set forth in our annual report on Form 10-K for the year ended
December 31, 2008 filed with the SEC on March 4, 2009.
Commercial
We have been and anticipate that we will continue to be both a significant
customer and supplier of products and services offered by Martin Resource
Management. Our motor carrier agreement with Martin Resource Management provides
us with access to Martin Resource Management's fleet of road vehicles and road
trailers to provide land transportation in the areas served by Martin Resource
Management. Our ability to utilize Martin Resource Management's land
transportation operations is currently a key component of our integrated
distribution network.
We also use the underground storage facilities owned by Martin Resource
Management in our natural gas services operations. We lease an underground
storage facility from Martin Resource Management in Arcadia, Louisiana with a
storage capacity of 2.0 million barrels. Our use of this storage facility gives
us greater flexibility in our operations by allowing us to store a sufficient
supply of product during times of decreased demand for use when demand
increases.
In the aggregate, our purchases of land transportation services, NGL
storage services, sulfuric acid and lube oil product purchases and sulfur
services payroll reimbursements from Martin Resource Management accounted for
approximately 12% and 9% of our total cost of products sold during the three
months ended March 31, 2009 and 2008, respectively. We also purchase marine fuel
from Martin Resource Management, which we account for as an operating expense.
Correspondingly, Martin Resource Management is one of our significant
customers. It primarily uses our terminalling, marine transportation and NGL
distribution services for its operations. We provide terminalling and storage
services under a terminal services agreement. We provide marine transportation
services to Martin Resource Management under a charter agreement on a
spot-contract basis at applicable market rates. Our sales to Martin Resource
Management accounted for approximately 7% and 5% of our total revenues for the
three months ended March 31, 2009 and 2008, respectively. We provide
terminalling and storage and marine transportation services to Midstream Fuel
and Midstream Fuel provides terminal services to us to handle lubricants,
greases and drilling fluids.
For a more comprehensive discussion concerning the agreements that we have
entered into with Martin Resource Management, please refer to "Item 13. Certain
Relationships and Related Transactions - Agreements" set forth in our annual
report on Form 10-K for the year ended December 31, 2008 filed with the SEC on
March 4, 2009.
Approval and Review of Related Party Transactions
If we contemplate entering into a transaction, other than a routine or in
the ordinary course of business transaction, in which a related person will have
a direct or indirect material interest, the proposed transaction is submitted
for consideration to the board of directors of our general partner or to our
management, as appropriate. If the board of directors is involved in the
approval process, it determines whether to refer the matter to the Conflicts
Committee of our general partner's board of directors, as constituted under our
limited partnership agreement. If a matter is referred to the Conflicts
Committee, it obtains information regarding the proposed transaction from
management and determines whether to engage independent legal counsel or an
independent financial advisor to advise the members of the committee regarding
the transaction. If the Conflicts Committee retains such counsel or financial
advisor, it considers such advice and, in the case of a financial advisor, such
advisor's opinion as to whether the transaction is fair and reasonable to us and
to our unitholders.
Results of Operations
The results of operations for the three months ended March 31, 2009 and
2008 have been derived from our consolidated and condensed financial statements.
We evaluate segment performance on the basis of operating income, which is
derived by subtracting cost of products sold, operating expenses, selling,
general and administrative expenses, and depreciation and amortization expense
from revenues. The following table sets forth our operating revenues and
operating income by segment for the three months ended March 31, 2009 and 2008.
The results of operations for the first three months of the year are not
necessarily indicative of the results of operations which might be expected for
the entire year.
Operating Operating Operating
Revenues Revenues Income Income (loss)
Operating Intersegment after Operating Intersegment after
Revenues Eliminations Eliminations Income (loss) Eliminations Eliminations
(In thousands)
Three months ended March 31, 2009
Terminalling and storage $ 24,204 $ (1,086 ) $ 23,118 $ 2,590 $ (807 ) $ 1,783
Natural gas services 90,866 - 90,866 2,481 270 2,751
Marine transportation 17,243 (907 ) 16,336 1,725 (862 ) 863
Sulfur services 26,586 - 26,586 1,894 1,399 3,293
Indirect selling, general and administrative - - - (1,463 ) - (1,463 )
Total $ 158,899 $ (1,993 ) $ 156,906 $ 7,227 $ - $ 7,227
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Operating Operating Operating
Revenues Revenues Income Income (loss)
Operating Intersegment after Operating Intersegment after
Revenues Eliminations Eliminations Income (loss) Eliminations Eliminations
(In thousands)
. . .
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