Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated and condensed financial statements and the notes thereto included elsewhere in this quarterly report.
Overview
We are a publicly traded limited partnership with a diverse set of operations focused primarily in the U.S. Gulf Coast region. Our four primary business lines include:
• Terminalling, processing, storage and packaging services for petroleum products and by-products including the refining of naphthenic crude oil;
• Land and marine transportation services for petroleum products and by-products, chemicals, and specialty products;
• Sulfur and sulfur-based products processing, manufacturing, marketing, and distribution; and
• NGL marketing, distribution, and transportation services.
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, and other wholesale purchasers of these products. We operate primarily in the U.S. Gulf Coast region. 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 Corporation, 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 Corporation has expanded its operations through acquisitions and internal expansion initiatives as its management identified and capitalized on the needs of producers and purchasers of petroleum products and by-products and other bulk liquids. Martin Resource Management Corporation is an important supplier and customer of ours. As of September 30, 2020, Martin Resource Management Corporation owned 15.7% of our total outstanding common limited partner units. Furthermore, Martin Resource Management Corporation controls Martin Midstream GP LLC ("MMGP"), our general partner, by virtue of its 51% voting interest in MMGP Holdings, LLC ("Holdings"), the sole member of MMGP. MMGP owns a 2.0% general partner interest in us and all of our incentive distribution rights. Martin Resource Management Corporation directs our business operations through its ownership interests in and control of our general partner.
We entered into an omnibus agreement dated November 1, 2002, with Martin Resource Management Corporation (the "Omnibus Agreement") that governs, among other things, potential competition and indemnification obligations among the parties to the agreement, related party transactions, the provision of general administration and support services by Martin Resource Management Corporation and our use of certain of Martin Resource Management Corporation’s trade names and trademarks. Under the terms of the Omnibus Agreement, the employees of Martin Resource Management Corporation are responsible for conducting our business and operating our assets.
Martin Resource Management Corporation has operated our business since 2002. Martin Resource Management Corporation began operating our NGL business in the 1950s and our sulfur business in the 1960s. It began our land transportation business in the early 1980s and our marine transportation business in the late 1980s. It entered into our fertilizer and terminalling and storage businesses in the early 1990s.
Significant Recent Developments
Exchange Offer and Cash Tender Offer
On August 12, 2020, we successfully completed our previously announced Exchange Offer and consent solicitation to certain eligible holders of our 2021 Notes and separate but related Cash Tender Offer and consent solicitation to certain other
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holders of our 2021 Notes. Please see Note 6 in Part I of this Form 10-Q for more information about the Exchange Offer and related transactions.
COVID-19
The Partnership continues to prioritize the health and safety of our employees, the businesses we serve, and the communities where we live and work. To support the safety of all of our employees and operations, precautionary measures were implemented to prevent the COVID-19 virus from spreading in our workplace or the locations we serve, including suspending non-essential travel, limiting the number of employees attending meetings, reducing the number of people at our locations at any one time, monitoring the health of all employees, and implementing work-from-home initiatives for all eligible employees. Further, we continue to provide awareness training for all of our drivers, vessel crews, blending operators and other affected personnel regarding preventative measures in or around our docks, vessels, and trucks and locations to which they are delivering. Our communication lines are open 24/7 for the environmental health and safety division, land and marine logistics, and sales and marketing teams.
Due to the economic impacts of the COVID-19 pandemic, the markets have experienced a decline in oil prices in response to oil demand concerns. These concerns were further exacerbated by the price war among members of OPEC and other non-OPEC producer nations during the first quarter 2020 and global storage considerations. Travel restrictions and stay-at-home orders implemented by governments in many regions and countries across the globe, including the United States, have greatly impacted the demand for refined products resulting in a significant reduction in refinery utilization. The COVID-19 pandemic has impacted our 2020 performance to date. The impact of this outbreak started in February and continued through the third quarter, during which time we have seen unfavorable trends in certain key metrics across several of our business lines compared to recent periods.
We expect to continue to experience the adverse impacts of COVID-19 on our business throughout the remainder of 2020 as a result of an expected continued reduction in refined product demand across the industries we serve. While the Gulf Coast Region where the majority of our refinery services is focused has reopened their economies, the increase in COVID-19 cases and the impact on refinery utilization due to demand destruction is not clear. As we look forward in our Terminalling and Storage segment, we continue to expect minimal impact on the storage component of this business due to minimum volume commitment contracts. However, downside risk remains in our packaged lubricant and grease businesses due to reduced demand from our oil and gas production customers and our construction customers. In our Transportation segment, reduced demand for refined products and chemicals is expected to continue to impact our marine and land transportation businesses. In our Natural Gas Liquids segment, our butane optimization business could be impacted by reduced butane production out of third-party refineries as they run at lower utilization rates during the economic shutdown. Looking forward in our Sulfur Services segment, we believe our molten sulfur business will not be affected as we are paid a monthly logistics fee by our primary customer. However, we continue to believe there will be reduced overall sulfur volumes from third-party refineries, which will negatively impact our prilling volume, reducing our operating fee revenue. We expect, however, to continue to receive our reservation fees regardless of the amount of sulfur volume processed through our prillers.
The extent to which the duration and severity of the pandemic impacts our business, results of operations, and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted at this time. Accordingly, the full impact of COVID-19 will not be reflected in our results of operations and overall financial performance until future periods. In an effort to conserve capital in the near-term, we are actively considering, planning and executing expense reduction initiatives and have elected to defer certain maintenance and growth capital expenditures until 2021.
Management also assessed the extent to which the current macroeconomic events brought about by COVID-19 and significant declines in refined product demand impacted the valuation of expected credit losses on accounts receivable and certain inventory items or resulted in modifications to any significant contracts. Ultimately the results of these assessments did not have a material impact on our results as of September 30, 2020.
Subsequent Events
Quarterly Distribution. On October 21, 2020, we declared a quarterly cash distribution of $0.005 per common unit for the third quarter of 2020, or $0.020 per common unit on an annualized basis, which will be paid on November 13, 2020 to unitholders of record as of November 6, 2020.
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Critical Accounting Policies and Estimates
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 United States generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires 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 base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. We routinely evaluate these estimates, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Our results may differ from these estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Changes in these estimates could materially affect our financial position, results of operations or cash flows. See the "Critical Accounting Policies and Estimates" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements included within our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020.
Our Relationship with Martin Resource Management Corporation
Martin Resource Management Corporation is engaged in the following principal business activities:
• distributing fuel oil, asphalt, marine fuel and other liquids;
• providing marine bunkering and other shore-based marine services in Texas, Louisiana, Mississippi, Alabama, and Florida;
• operating a crude oil gathering business in Stephens, Arkansas;
• providing crude oil gathering, refining, and marketing services of base oils, asphalt, and distillate products in Smackover, Arkansas;
• providing crude oil marketing and transportation from the well head to the end market;
• operating an environmental consulting company;
• supplying employees and services for the operation of our business; and
• operating, solely for our account, the asphalt facilities in each of Hondo, South Houston and Port Neches, Texas and Omaha, Nebraska.
We are and will continue to be closely affiliated with Martin Resource Management Corporation as a result of the following relationships.
Ownership
Martin Resource Management Corporation owns approximately 15.7% of the outstanding limited partner units. In addition, Martin Resource Management Corporation controls MMGP, our general partner, by virtue of its 51% voting interest in Holdings, the sole member of MMGP. MMGP owns a 2% general partner interest in us and all of our incentive distribution rights.
Management
Martin Resource Management Corporation directs our business operations through its ownership interests in and control of our general partner. We benefit from our relationship with Martin Resource Management Corporation through access to a significant pool of management expertise and established relationships throughout the energy industry. We do not have employees. Martin Resource Management Corporation employees are responsible for conducting our business and operating our assets on our behalf.
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Related Party Agreements
The Omnibus Agreement requires us to reimburse Martin Resource Management Corporation 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 Corporation for $29.9 million of direct costs and expenses for the three months ended September 30, 2020 compared to $34.8 million for the three months ended September 30, 2019. We reimbursed Martin Resource Management Corporation for $94.5 million of direct costs and expenses for the nine months ended September 30, 2020 compared to $105.4 million for the nine months ended September 30, 2019. There is no monetary limitation on the amount we are required to reimburse Martin Resource Management Corporation for direct expenses.
In addition to the direct expenses, under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. For the three months ended September 30, 2020 and 2019, the conflicts committee of the board of directors of the general partner of the Partnership (the "Conflicts Committee") approved reimbursement amounts of $4.2 million and $4.2 million, respectively. In each of the nine months ended September 30, 2020 and 2019, the Conflicts Committee approved reimbursement amounts of $12.5 million and $12.6 million, respectively. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually. These indirect expenses covered the centralized corporate functions Martin Resource Management Corporation provides for us, such as accounting, treasury, clerical, engineering, legal, billing, information technology, administration of insurance, general office expenses and employee benefit plans and other general corporate overhead functions we share with Martin R esource Management Corporation’s retained businesses. The Omnibus Agreement also contains significant non-compete provisions and indemnity obligations. Martin Resource Management Corporation also licenses certain of its trademarks and trade names to us under the Omnibus Agreement.
These additional agreements include, but are not limited to, a master transportation services agreement, marine transportation agreements, terminal services agreements, a tolling agreement, and a sulfuric acid sales agency agreement. Pursuant to the terms of the Omnibus Agreement, we are prohibited from entering into certain material agreements with Martin Resource Management Corporation without the approval of the Conflicts Committee.
For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management Corporation, please refer to "Item 13. Certain Relationships and Related Transactions, and Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020.
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 Corporation. In the aggregate, the impact of related party transactions included in total costs and expenses accounted for approximately 23% and 23% of our total costs and expenses during the three months ended September 30, 2020 and 2019, respectively. In the aggregate, the impact of related party transactions included in total costs and expenses accounted for approximately 23% and 20% of our total costs and expenses during the nine months ended September 30, 2020 and 2019, respectively.
Correspondingly, Martin Resource Management Corporation is one of our significant customers. Our sales to Martin Resource Management Corporation accounted for approximately 14% and 14% of our total revenues for the three months ended September 30, 2020 and 2019, respectively. Our sales to Martin Resource Management Corporation accounted for approximately 13% and 12% of our total revenues for both the nine months ended September 30, 2020 and 2019, respectively.
For a more comprehensive discussion concerning the agreements that we have entered into with Martin Resource Management Corporation, please refer to "Item 13. Certain Relationships and Related Transactions, and Director Independence" set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020.
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 of our general partner 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
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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.
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How We Evaluate Our Operations
Our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with U.S. GAAP to analyze our performance. These include: (1) net income before interest expense, income tax expense, and depreciation and amortization ("EBITDA"), (2) adjusted EBITDA and (3) distributable cash flow. Our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow, and as key components of our internal financial reporting. We believe investors benefit from having access to the same financial measures that our management uses.
EBITDA and Adjusted EBITDA . Certain items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing an entity's financial performance, such as cost of capital and historical costs of depreciable assets. We have included information concerning EBITDA and adjusted EBITDA because they provide investors and management with additional information to better understand the following: financial performance of our assets without regard to financing methods, capital structure or historical cost basis; our operating performance and return on capital as compared to those of other similarly situated entities; and the viability of acquisitions and capital expenditure projects. Our method of computing adjusted EBITDA may not be the same method used to compute similar measures reported by other entities. The economic substance behind our use of adjusted EBITDA is to measure the ability of our assets to generate cash sufficient to pay interest costs, support our indebtedness and make distributions to our unit holders.
Distributable Cash Flow . Distributable cash flow is a significant performance measure used by our management and by external users of our financial statements, such as investors, commercial banks and research analysts, to compare basic cash flows generated by us to the cash distributions we expect to pay our unitholders. Distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates. Distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit of such an entity is generally determined by the unit's yield, which in turn is based on the amount of cash distributions the entity pays to a unitholder.
EBITDA, adjusted EBITDA and distributable cash flow should not be considered alternatives to, or more meaningful than, net income, cash flows from operating activities, or any other measure presented in accordance with U.S. GAAP. Our method of computing these measures may not be the same method used to compute similar measures reported by other entities.
Reconciliation of Non-GAAP Financial Measures
The following table reconciles the non-GAAP financial measurements used by management to our most directly comparable GAAP measures for the three and nine months ended September 30, 2020 and 2019.
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Reconciliation of EBITDA, Adjusted EBITDA, and Distributable Cash Flow
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands) (in thousands)
Net income (loss) $ (10,819) $ 13,250 $ (4,207) $ (181,588)
Less: Loss from discontinued operations, net of income taxes
— — — 179,466
Income (loss) from continuing operations (10,819) 13,250 (4,207) (2,122)
Adjustments:
Interest expense, net 12,943 11,973 32,245 40,630
Income tax expense 373 237 1,510 1,572
Depreciation and amortization 15,276 15,009 45,858 44,997
EBITDA from Continuing Operations 17,773 40,469 75,406 85,077
Adjustments:
(Gain) loss on sale of property, plant and equipment, net (22) (16,302) 153 (13,949)
Gain on involuntary conversion of property, plant and equipment (4,522) — (4,522) —
Unrealized mark-to-market on commodity derivatives 393 (2,602) (276) (529)
Transaction costs associated with acquisitions — — — 224
Non-cash insurance related accruals — — 250 500
Lower of cost or market adjustments 35 104 370 407
Loss on exchange of senior unsecured notes 8,516 — 8,516 —
Gain on repurchase of senior unsecured notes — — (3,484) —
Unit-based compensation 361 349 1,070 1,064
Adjusted EBITDA from Continuing Operations 22,534 22,018 77,483 72,794
Adjustments:
Interest expense, net (12,943) (11,973) (32,245) (40,630)
Income tax expense (373) (237) (1,510) (1,572)
Amortization of debt premium (38) (77) (191) (230)
Amortization of deferred debt issuance costs 1,683 1,080 2,674 3,558
Deferred income tax expense 184 244 1,202 1,100
Payments for plant turnaround costs (406) (375) (637) (5,117)
Maintenance capital expenditures (2,576) (2,389) (7,882) (8,876)
Distributable Cash Flow from Continuing Operations $ 8,065 $ 8,291 $ 38,894 $ 21,027
Loss from discontinued operations, net of income taxes $ — $ — $ — $ (179,466)
Adjustments:
Depreciation and amortization — — — 8,161
EBITDA from Discontinued Operations — — — (171,305)
Loss on sale of property, plant and equipment, net — — — 178,781
Non-cash insurance related accruals — — — 3,213
EBITDA and Adjusted EBITDA from Discontinued Operations — — — 10,689
Maintenance capital expenditures — — — (912)
Distributable Cash Flow from Discontinued Operations $ — $ — $ — $ 9,777
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Results of Operations
The results of operations for the three and nine months ended September 30, 2020 and 2019 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 and nine months ended September 30, 2020 and 2019. The results of operations for these interim periods are not necessarily indicative of the results of operations which might be expected for the entire year.
Our consolidated and condensed results of operations are presented on a comparative basis below. There are certain items of income and expense which we do not allocate on a segment basis. These items, including interest expense and indirect selling, general and administrative expenses, are discussed following the comparative discussion of our results within each segment.
Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Three Months Ended September 30, 2020 (in thousands)
Terminalling and storage $ 48,188 $ (1,823) $ 46,365 $ 6,975 $ (549) $ 6,426
Transportation 35,712 (3,774) 31,938 1,127 (3,800) (2,673)
Sulfur services 21,880 — 21,880 5,580 1,535 7,115
Natural gas liquids 52,350 — 52,350 1,854 2,814 4,668
Indirect selling, general and administrative
— — — (4,523) — (4,523)
Total $ 158,130 $ (5,597) $ 152,533 $ 11,013 $ — $ 11,013
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Three Months Ended September 30, 2019 (in thousands)
Terminalling and storage $ 55,376 $ (1,630) $ 53,746 $ 5,576 $ (183) $ 5,393
Transportation 44,631 (4,420) 40,211 4,446 (4,446) —
Sulfur services 23,072 — 23,072 291 2,093 2,384
Natural gas liquids 60,871 — 60,871 19,663 2,536 22,199
Indirect selling, general and administrative
— — — (4,515) — (4,515)
Total $ 183,950 $ (6,050) $ 177,900 $ 25,461 $ — $ 25,461
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Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Nine Months Ended September 30, 2020 (in thousands)
Terminalling and storage $ 146,298 $ (5,091) $ 141,207 $ 11,356 $ (1,203) $ 10,153
Transportation 116,145 (13,781) 102,364 4,071 (13,843) (9,772)
Sulfur services 83,636 (13) 83,623 24,261 5,526 29,787
Natural gas liquids 164,865 (5) 164,860 8,141 9,520 17,661
Indirect selling, general and administrative
— — — (13,256) — (13,256)
Total $ 510,944 $ (18,890) $ 492,054 $ 34,573 $ — $ 34,573
Operating Revenues Intersegment Revenues Eliminations Operating Revenues
after Eliminations Operating Income (Loss) Operating Income (Loss) Intersegment Eliminations Operating
Income (Loss)
after
Eliminations
Nine Months Ended September 30, 2019 (in thousands)
Terminalling and storage $ 165,619 $ (4,954) $ 160,665 $ 15,062 $ (600) $ 14,462
Transportation 137,050 (17,723) 119,327 11,290 (17,799) (6,509)
Sulfur services 90,521 — 90,521 9,394 6,898 16,292
Natural gas liquids 234,743 — 234,743 18,012 11,501 29,513
Indirect selling, general and administrative
— — — (13,681) — (13,681)
Total $ 627,933 $ (22,677) $ 605,256 $ 40,077 $ — $ 40,077
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Terminalling and Storage Segment
Comparative Results of Operations for the Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30, Variance Percent Change
2020 2019
(In thousands, except BBL per day)
Revenues:
Services $ 22,512 $ 22,806 $ (294) (1) %
Products 25,676 32,570 (6,894) (21) %
Total revenues 48,188 55,376 (7,188) (13) %
Cost of products sold 20,381 27,439 (7,058) (26) %
Operating expenses 12,064 12,947 (883) (7) %
Selling, general and administrative expenses 1,537 1,724 (187) (11) %
Depreciation and amortization 7,294 7,690 (396) (5) %
6,912 5,576 1,336 24 %
Other operating income, net 1 — 1
Gain on involuntary conversion of property, plant and equipment 62 — 62
Operating income $ 6,975 $ 5,576 $ 1,399 25 %
Shore-based throughput volumes (guaranteed minimum) (gallons) 20,000 20,000 — — %
Smackover refinery throughput volumes (guaranteed minimum BBL per day) 6,500 6,500 — — %
Services revenues. Services revenues decreased $0.3 million, of which $1.1 million was primarily a result of expiring capital recovery fees at our Smackover refinery and decreased fees related to a crude pipeline gathering rate adjustment. Offsetting this decrease, a $0.5 million increase at our shore-based terminals was primarily a result of $1.0 million in contract termination fees and $0.2 million in space rental income, offset by decreased throughput revenue of $0.6 million. In addition, an increase of $0.3 million was a result of increased throughput revenue at our specialty terminals.
Products revenues. A 4% decrease in sales volumes combined with a 13% decrease in average sales price at our blending and packaging facilities resulted in a $4.4 million decrease to products revenues. In addition, a 30% decrease in sales volumes combined with a 10% decrease in average sales price at our shore-based terminals resulted in a $2.5 million decrease to products revenues.
Cost of products sold. A 4% decrease in sales volumes combined with a 20% decrease in average cost per gallon at our blending and packaging facilities resulted in a $4.8 million decrease in cost of products sold. In addition, a 30% decrease in sales volumes combined with a 10% decrease in average cost per gallon at our shore-based terminals resulted in a $2.3 million decrease in cost of products sold.
Operating expenses. Operating expenses decreased $0.9 million as a result of decreased compensation expense of $0.5 million, repairs and maintenance of $0.2 million, $0.1 million in wharfage fees, and outside services of $0.1 million.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased $0.2 million primarily as a result of decreased professional fees.
Depreciation and amortization. The decrease in depreciation and amortization is the result of assets becoming fully depreciated.
Other operating income, net. Other operating income, net represents gains and losses from the disposition of property, plant and equipment.
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Gain on involuntary conversion of property, plant and equipment. The $0.1 million gain is due to insurance proceeds received related to structural damage of terminalling assets during a weather incident at our Neches Terminal in May of 2019.
Comparative Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands, except BBL per day)
Revenues:
Services $ 66,115 $ 70,572 $ (4,457) (6) %
Products 80,183 95,047 (14,864) (16) %
Total revenues 146,298 165,619 (19,321) (12) %
Cost of products sold 68,066 83,213 (15,147) (18) %
Operating expenses 37,269 39,557 (2,288) (6) %
Selling, general and administrative expenses 4,594 4,451 143 3 %
Depreciation and amortization 22,022 23,353 (1,331) (6) %
14,347 15,045 (698) (5) %
Other operating income (loss), net (3,053) 17 (3,070) (18,059) %
Gain on involuntary conversion of property, plant and equipment 62 — 62
Operating income $ 11,356 $ 15,062 $ (3,706) (25) %
Shore-based throughput volumes (guaranteed minimum) (gallons) 60,000 60,000 — — %
Smackover refinery throughput volumes (guaranteed minimum) (BBL per day) 6,500 6,500 — — %
Services revenues. Services revenue decreased $4.5 million, of which $2.8 million was primarily a result of expiring capital recovery fees at our Smackover refinery and decreased fees related to a crude pipeline gathering rate adjustment. In addition, a decrease of $1.3 million was primarily a result of decreased throughput at our shore-based terminals combined with a decrease of $0.3 million as a result of decreased throughput rates at our specialty terminals.
Products revenues. A 16% decrease in sales volumes combined with a 16% decrease in average sales price at our shore-based terminals resulted in a $7.2 million decrease in products revenues. In addition, a 6% decrease in sales volumes combined with a 5% decrease in average sales price at our blending and packaging facilities resulted in a $7.9 million decrease to products revenues.
Cost of products sold. A 16% decrease in sales volumes combined with a 17% decrease in average cost per gallon at our shore-based terminals resulted in a $6.8 million decrease in cost of products sold. In addition, a 6% decrease in sales volumes combined with a 9% decrease in average cost per gallon at our blending and packaging facilities resulted in an $8.5 million decrease in cost of products sold.
Operating expenses. Operating expenses decreased $2.3 million primarily as a result of decreased compensation expense of $0.5 million, utilities of $0.4 million, operating supplies of $0.4 million, chemicals of $0.3 million, professional fees of $0.2 million, and other operating expenses of $0.2 million across our terminals.
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. The decrease in depreciation and amortization is primarily the result of assets becoming fully depreciated.
Other operating income (loss), net. Other operating income (loss), net represents gains and losses from the disposition of property, plant and equipment.
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Gain on involuntary conversion of property, plant and equipment. The $0.1 million gain is due to insurance proceeds received related to structural damage of terminalling assets during a weather incident at our Neches Terminal in May of 2019.
Transportation Segment
Comparative Results of Operations for the Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revenues $ 35,712 $ 44,631 $ (8,919) (20) %
Operating expenses 28,144 34,281 (6,137) (18) %
Selling, general and administrative expenses 2,050 2,177 (127) (6) %
Depreciation and amortization 4,412 3,877 535 14 %
1,106 4,296 (3,190) (74) %
Other operating income, net 21 150 (129) (86) %
Operating income $ 1,127 $ 4,446 $ (3,319) (75) %
Marine Transportation Revenues . Inland revenue decreased $3.5 million, primarily related to decreased utilization and transportation rates. Offshore revenue decreased $0.8 million primarily due to a decrease in transportation rates. Additionally, ancillary revenue (primarily fuel) decreased $0.8 million.
Land Transportation Revenues. Freight revenue decreased $2.0 million. Miles decreased 9%, resulting in a $2.2 million decrease. Offsetting this decrease, transportation rates increased 1%, resulting in a $0.2 million increase. Additionally, fuel surcharge revenue decreased $1.8 million.
Operating expenses . The decrease in operating expenses is primarily a result of decreases in compensation expense of $2.3 million, pass through expenses (primarily fuel) of $1.9 million, repairs and maintenance of $1.1 million, lease expense of $0.3 million, and regulatory taxes and related expenses of $0.3 million.
Selling, general and administrative expenses . Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization . Depreciation and amortization increased as a result of recent capital expenditures offset by asset disposals.
Other operating income, net. Other operating income, net represents gains from the disposition of property, plant and equipment.
Comparative Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revenues $ 116,145 $ 137,050 $ (20,905) (15) %
Operating expenses 91,637 106,058 (14,421) (14) %
Selling, general and administrative expenses 6,243 6,242 1 — %
Depreciation and amortization 13,020 11,225 1,795 16 %
$ 5,245 $ 13,525 $ (8,280) (61) %
Other operating loss, net (1,174) (2,235) 1,061 47 %
Operating income $ 4,071 $ 11,290 $ (7,219) (64) %
Marine Transportation Revenues . Inland revenues decreased $4.8 million, primarily related to a decrease in tows, utilization and transportation rates. In addition, offshore revenue decreased $1.5 million primarily due to a decrease in transportation rates. Additionally, ancillary revenue (primarily fuel) decreased $1.9 million.
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Land Transportation Revenues. Freight revenue decreased $8.1 million primarily due to an 11% decrease in miles. Additionally, fuel surcharge decreased $4.7 million.
Operating expenses . The decrease in operating expenses is primarily a result of decreases in pass through expenses (primarily fuel) of $5.4 million, compensation expense of $5.2 million, repairs and maintenance of $1.9 million, lease expense of $0.9 million, and regulatory taxes and related expenses of $0.5 million.
Selling, general and administrative expenses . Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization . Depreciation and amortization increased as a result of recent capital expenditures, offset by asset disposals.
Other operating loss, net. Other operating loss, net represents losses from the disposition of property, plant and equipment.
Sulfur Services Segment
Comparative Results of Operations for the Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revenues:
Services $ 2,915 $ 2,859 $ 56 2 %
Products 18,965 20,213 (1,248) (6) %
Total revenues 21,880 23,072 (1,192) (5) %
Cost of products sold 14,141 15,807 (1,666) (11) %
Operating expenses 2,501 2,883 (382) (13) %
Selling, general and administrative expenses 1,166 1,260 (94) (7) %
Depreciation and amortization 2,953 2,831 122 4 %
1,119 291 828 285 %
Other operating income (loss), net 1 — 1
Gain on involuntary conversion of property, plant and equipment 4,460 — 4,460
Operating income $ 5,580 $ 291 $ 5,289 1,818 %
Sulfur (long tons) 154 180 (26) (14) %
Fertilizer (long tons) 44 59 (15) (25) %
Total sulfur services volumes (long tons) 198 239 (41) (17) %
Services revenues. Services revenues increased slightly as a result of renegotiation of contract terms effective January 2020.
Products revenues. Products revenues decreased $3.9 million as a result of a 17% decrease in sales volumes, primarily attributable to a 25% decrease in fertilizer volumes. A 13% increase in average sales price resulted in an offsetting $2.7 million increase in products revenues.
Cost of products sold. A 17% decrease in sales volumes decreased our cost of products sold by $2.9 million. An 8% increase in average cost of products sold per ton resulted in an offsetting $1.2 million increase to our cost of products sold. Margin per ton increased $5.93, or 32%.
Operating expenses. Operating expenses decreased $0.4 million. Marine fuel expense, assist tugs, marine repairs and maintenance, and insurance claims each decreased $0.1 million.
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Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization increased as a result of recent capital expenditures.
Gain on involuntary conversion of property, plant and equipment. The $4.5 million gain is due to insurance proceeds received related to structural damage of our ship-loader assets during a weather incident at our Neches Terminal in May of 2019.
Comparative Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revenues:
Services $ 8,744 $ 8,576 $ 168 2 %
Products 74,892 81,945 (7,053) (9) %
Total revenues 83,636 90,521 (6,885) (8) %
Cost of products sold 49,546 61,049 (11,503) (19) %
Operating expenses 8,553 7,835 718 9 %
Selling, general and administrative expenses 3,535 3,689 (154) (4) %
Depreciation and amortization 8,978 8,553 425 5 %
13,024 9,395 3,629 39 %
Other operating income (loss), net 6,777 (1) 6,778 677,800 %
Gain on involuntary conversion of property, plant and equipment 4,460 — 4,460
Operating income $ 24,261 $ 9,394 $ 14,867 158 %
Sulfur (long tons) 503 471 32 7 %
Fertilizer (long tons) 209 214 (5) (2) %
Total sulfur services volumes (long tons) 712 685 27 4 %
Services revenues. Services revenues increased $0.2 million as a result of renegotiation of contract terms effective January 2020.
Products revenues. Products revenue decreased $9.9 million as a result of a 12% decrease in average sales price. A 4% increase in sales volumes, primarily attributable to a 7% increase in sulfur volumes, resulted in an offsetting increase of $2.8 million.
Cost of products sold. A 22% decrease in average cost of products sold per ton reduced cost of products sold by $13.4 million. A 4% increase in sales volumes resulted in an offsetting increase in cost of products sold of $1.9 million. Margin per ton increased $5.09, or 17%.
Operating expenses. Operating expenses increased as a result of a $0.3 million increase in insurance premiums and claims, a $0.4 million increase in outside towing, and a $0.2 million increase in harbor and agency fees. Offsetting was a decrease of $0.1 million in both marine fuel and assist tugs.
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization increased as a result of recent capital expenditures.
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Other operating income (loss), net. Other operating income, net increased $2.7 million as a result of business interruption recoveries related to downtime associated with the Neches ship-loader insurance claim received in the first quarter of 2020. An additional $4.1 million increase is related to a net gain from the disposition of property, plant and equipment.
Gain on involuntary conversion of property, plant and equipment. The $4.5 million gain is due to insurance proceeds received related to structural damage of our ship-loader assets during a weather incident at our Neches Terminal in May of 2019.
Natural Gas Liquids Segment
Comparative Results of Operations for the Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Products Revenues $ 52,350 $ 60,871 $ (8,521) (14) %
Cost of products sold 47,723 54,273 (6,550) (12) %
Operating expenses 1,039 1,624 (585) (36) %
Selling, general and administrative expenses 1,117 852 265 31 %
Depreciation and amortization 617 611 6 1 %
1,854 3,511 (1,657) (47) %
Other operating income, net — 16,152 (16,152) (100) %
Operating income $ 1,854 $ 19,663 $ (17,809) (91) %
NGL sales volumes (Bbls) 2,572 1,905 667 35 %
Products Revenues. Our average sales price per barrel decreased $11.60, or 36%, resulting in a decrease to revenues of $22.1 million. The decrease in average sales price per barrel was a result of a decrease in market prices. Sales volumes increased 35%, increasing revenues by $13.6 million.
Cost of products sold . Our average cost per barrel decreased $9.94, or 35%, decreasing cost of products sold by $18.9 million. The decrease in average cost per barrel was a result of a decrease in market prices. The increase in sales volume of 35% resulted in a $12.4 million increase to cost of products sold. Our margins decreased $1.67 per barrel, or $2.0 million during the period.
Operating expenses . Operating expenses decreased $0.6 million related to the divestiture of assets and the elimination of the associated expenses.
Selling, general and administrative expenses . Selling, general and administrative expenses increased primarily due to increased compensation expense.
Depreciation and amortization. Depreciation and amortization remained relatively consistent.
Other operating income, net. Other operating income, net represents gains and losses from the disposition of property, plant and equipment.
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Comparative Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Products Revenues $ 164,865 $ 234,743 $ (69,878) (30) %
Cost of products sold 148,562 222,974 (74,412) (33) %
Operating expenses 3,128 5,010 (1,882) (38) %
Selling, general and administrative expenses 3,194 3,049 145 5 %
Depreciation and amortization 1,838 1,866 (28) (2) %
8,143 1,844 6,299 342 %
Other operating income (loss), net (2) 16,168 (16,170) (100) %
Operating income $ 8,141 $ 18,012 $ (9,871) (55) %
NGL sales volumes (Bbls) 6,952 6,269 683 11 %
Products Revenues. Our average sales price per barrel decreased $13.73, or 37%, resulting in a decrease to revenues of $86.1 million. The decrease in average sales price per barrel was a result of a decrease in market prices. Sales volumes increased 11%, increasing revenues by $16.2 million.
Cost of products sold . Our average cost per barrel decreased $14.20, or 40%, decreasing cost of products sold by $89.0 million. The decrease in average cost per barrel was a result of a decrease in market prices. The increase in sales volume of 11% resulted in a $14.6 million increase to cost of products sold. Our margins increased $0.47 per barrel, or $4.5 million, during the period.
Operating expenses . Operating expenses decreased $1.9 million related to the divestiture of assets and the elimination of the associated expenses.
Selling, general and administrative expenses . Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization remained relatively consistent.
Other operating income (loss), net. Other operating income, net represents gains and losses from the disposition of property, plant and equipment.
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Interest Expense, Net
Comparative Components of Interest Expense, Net for the Three Months Ended September 30, 2020 and 2019
Three Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revolving loan facility $ 2,200 $ 3,566 $ (1,366) (38) %
Senior notes 8,528 6,851 1,677 24 %
Amortization of deferred debt issuance costs 1,683 1,080 603 56 %
Amortization of debt discount (38) (77) 39 51 %
Other 526 390 136 35 %
Finance leases 61 164 (103) (63) %
Capitalized interest (17) — (17)
Interest income — (1) 1 100 %
Total interest expense, net $ 12,943 $ 11,973 $ 970 8
Comparative Components of Interest Expense, Net for the Nine Months Ended September 30, 2020 and 2019
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Revolving loan facility $ 6,364 $ 15,356 $ (8,992) (59) %
Senior notes 21,738 20,175 1,563 8 %
Amortization of deferred debt issuance costs 2,674 3,558 (884) (25) %
Amortization of debt premium (191) (230) 39 17 %
Other 1,426 1,331 95 7 %
Finance leases 260 533 (273) (51) %
Capitalized interest (26) (2) (24) (1,200) %
Interest income — (91) 91 100 %
Total interest expense, net $ 32,245 $ 40,630 $ (8,385) (21) %
Indirect Selling, General and Administrative Expenses
Three Months Ended September 30, Variance Percent Change Nine Months Ended September 30, Variance Percent Change
2020 2019 2020 2019
(In thousands) (In thousands)
Indirect selling, general and administrative expenses
$ 4,523 $ 4,515 $ 8 — % $ 13,256 $ 13,681 $ (425) (3) %
Indirect selling, general and administrative expenses remained consistent for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Indirect selling, general and administrative expenses decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to transaction expenses incurred in the first quarter of 2019 related to the acquisition of MTI of $0.2 million and decreased professional fees of $0.2 million.
Martin Resource Management Corporation allocates to us a portion of its indirect selling, general and administrative expenses for services such as accounting, legal, treasury, clerical, billing, information technology, administration of insurance, engineering, general office expense and employee benefit plans and other general corporate overhead functions we share with Martin Resource Management Corporation retained businesses. This allocation is based on the percentage of time spent by Martin Resource Management Corporation personnel that provide such centralized services. GAAP also permits other methods for
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allocation of these expenses, such as basing the allocation on the percentage of revenues contributed by a segment. The allocation of these expenses between Martin Resource Management Corporation and us is subject to a number of judgments and estimates, regardless of the method used. We can provide no assurances that our method of allocation, in the past or in the future, is or will be the most accurate or appropriate method of allocation for these expenses. Other methods could result in a higher allocation of selling, general and administrative expense to us, which would reduce our net income.
Under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. The Conflicts Committee of our general partner approved the following reimbursement amounts during the three and nine months ended September 30, 2020 and 2019:
Three Months Ended September 30, Variance Percent Change Nine Months Ended September 30, Variance Percent Change
2020 2019 2020 2019
(In thousands) (In thousands)
Conflicts Committee approved reimbursement amount
$ 4,103 $ 4,164 $ (61) (1) % $ 12,364 $ 12,492 $ (128) (1) %
The amounts reflected above represent our allocable share of such expenses. The Conflicts Committee will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.
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Liquidity and Capital Resources
General
Our primary sources of liquidity to meet operating expenses, service our indebtedness, fund capital expenditures and pay distributions to our unitholders have historically been cash flows generated by our operations, borrowings under our revolving credit facility and access to debt and equity capital markets, both public and private. Set forth below is a description of our cash flows for the periods indicated.
Cash Flows - Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The following table details the cash flow changes between the nine months ended September 30, 2020 and 2019:
Nine Months Ended September 30, Variance Percent Change
2020 2019
(In thousands)
Net cash provided by (used in):
Operating activities $ 19,150 $ 25,619 $ (6,469) (25) %
Investing activities (12,747) 175,824 (188,571) (107) %
Financing activities (7,397) (199,941) 192,544 96 %
Net increase (decrease) in cash and cash equivalents $ (994) $ 1,502 $ (2,496) (166) %
Net cash provided by operating activities. The decrease in net cash provided by operating activities for the nine months ended September 30, 2020 includes a $7.8 million decrease in net cash received from discontinued operating activities, a decrease in operating results of $2.1 million, an unfavorable variance in working capital of $2.2 million, and an unfavorable variance in other non-current assets and liabilities of $0.1 million. Offsetting this decrease was and a $5.7 million increase in other non-cash charges.
Net cash provided by (used in) investing activities. Net cash provided by (used in) investing activities for the nine months ended September 30, 2020 decreased $188.6 million. Cash received from discontinued investing activities decreased $209.2 million. Net proceeds from the sale of property, plant and equipment decreased $13.9 million offset by $7.2 million in proceeds received from the involuntary conversion of property, plant and equipment. A decrease in cash used of $3.6 million resulted from higher payments for capital expenditures and plant turnaround costs in 2019 as well as a decrease of $23.7 million in cash used resulting from assets acquired from MTI in January of 2019.
Net cash used in financing activities. Net cash used in financing activities for the nine months ended September 30, 2020 decreased primarily as a result of a $102.4 million decrease in cash used related to excess purchase price over the carrying value of acquired assets in common control transactions during 2019. Additionally, net payments of long-term borrowings decreased $54.7 million and cash distributions paid decreased $34.1 million. Costs associated with our credit facility decreased $0.7 million.
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Total Contractual Obligations
A summary of our total contractual cash obligations as of September 30, 2020, is as follows:
Payments due by period
Type of Obligation Total
Obligation Less than
One Year 1-3
Years 3-5
Years Due
Thereafter
Revolving credit facility $ 205,000 $ — $ — $ 205,000 $ —
7.25% senior unsecured notes, due 2021 28,790 28,790 — — —
11.5% senior secured notes, due 2025 291,970 — — 291,970 —
10.0% senior secured notes, due 2024 53,750 — — 53,750 —
Throughput commitment 10,487 6,244 4,243 — —
Operating leases 27,492 8,603 9,975 2,845 6,069
Finance lease obligations 3,537 3,189 348 — —
Interest payable on finance lease obligations 70 57 13 — —
Interest payable on fixed long-term debt obligations 167,445 39,735 77,903 49,807 —
Total contractual cash obligations $ 788,541 $ 86,618 $ 92,482 $ 603,372 $ 6,069
The interest payable under our credit facility is not reflected in the above table because such amounts depend on the outstanding balances and interest rates, which vary from time to time.
Letters of Credit . At September 30, 2020, we had outstanding irrevocable letters of credit in the amount of $17.4 million, which were issued under our revolving credit facility.
Off Balance Sheet Arrangements. We do not have any off-balance sheet financing arrangements.
Description of Our Indebtedness
Revolving Credit Facility
At September 30, 2020, we maintained a $300.0 million revolving credit facility, after giving effect to the Credit Facility Amendment. The revolving credit facility matures on August 31, 2023. Please see Note 6 in Part I of this Form 10-Q for more information about the Credit Facility Amendment.
As of September 30, 2020, we had $205.0 million outstanding under the revolving credit facility and $17.4 million of outstanding irrevocable letters of credit, leaving a maximum amount available to be borrowed under our credit facility for future revolving credit borrowings and letters of credit of $77.6 million. After giving effect to our then current borrowings, outstanding letters of credit and the financial covenants contained in our revolving credit facility, we had the ability to borrow approximately $77.6 million in additional amounts thereunder as of September 30, 2020.
The revolving credit facility is used for ongoing working capital needs and general partnership purposes, and to finance permitted investments, acquisitions and capital expenditures. During the nine months ended September 30, 2020, the level of outstanding draws on our credit facility has ranged from a low of $170.0 million to a high of $223.0 million.
The credit facility is guaranteed by substantially all of our subsidiaries. Obligations under the credit facility are secured by first priority liens on substantially all of our assets and those of the guarantors, including, without limitation, inventory, accounts receivable, bank accounts, marine vessels, equipment, fixed assets and the interests in our subsidiaries.
We may prepay all amounts outstanding under the credit facility at any time without premium or penalty (other than customary LIBOR breakage costs), subject to certain notice requirements. The credit facility requires mandatory prepayments of amounts outstanding thereunder with excess cash (as defined in the revolving credit facility) that exceeds $25.0 million and the net proceeds of certain asset sales, equity issuances and debt incurrences. If we sell assets and receive net cash proceeds in excess of $25.0 million, the commitments of the lenders under the revolving credit facility will be reduced by $25.0 million.
Indebtedness under the credit facility bears interest at our option at the Eurodollar Rate (the British Bankers Association LIBOR Rate) plus an applicable margin, with a floor for LIBOR of 1%) or the Base Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day Eurodollar Rate plus 1.0%, or the administrative agent’s prime rate) plus an
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applicable margin. We pay a per annum fee on all letters of credit issued under the credit facility, and we pay a commitment fee per annum on the unused revolving credit availability under the credit facility. The letter of credit fee, the commitment fee and the applicable margins for our interest rate vary quarterly based on our Total Leverage Ratio (as defined in the Credit Facility Amendment, being generally computed as the ratio of total funded debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) and are as follows as of September 30, 2020:
Leverage Ratio
Base Rate Loans Eurodollar
Rate
Loans Letters of Credit
Less than 3.00 to 1.00 1.75 % 2.75 % 2.75 %
Greater than or equal to 3.00 to 1.00 and less than 3.50 to 1.00 2.00 % 3.00 % 3.00 %
Greater than or equal to 3.50 to 1.00 and less than 4.00 to 1.00 2.25 % 3.25 % 3.25 %
Greater than or equal to 4.00 to 1.00 and less than 4.50 to 1.00 2.50 % 3.50 % 3.50 %
Greater than or equal to 4.50 to 1.00 and less than 5.00 to 1.00 2.75 % 3.75 % 3.75 %
Greater than or equal to 5.00 to 1.00 3.00 % 4.00 % 4.00 %
At September 30, 2020, the applicable margin for revolving loans that are LIBOR loans ranges from 2.75% to 4.00%, with a 1% floor for LIBOR, and the applicable margin for revolving loans that are base prime rate loans ranges from 1.75% to 3.00%. The applicable margin for LIBOR borrowings at September 30, 2020 is 3.75%.
The credit facility includes financial covenants that are tested on a quarterly basis, based on the rolling four quarter period that ends on the last day of each fiscal quarter.
In addition, the credit facility contains various covenants, which, among other things, limit our and our subsidiaries’ ability to: (i) grant or assume liens; (ii) make investments (including investments in our joint ventures) and acquisitions; (iii) enter into certain types of hedging agreements; (iv) incur or assume indebtedness; (v) sell, transfer, assign or convey assets; (vi) repurchase our equity, make distributions (including a limit on our ability to make quarterly distributions to unitholders in excess of $0.005 per unit unless our Total Leverage Ratio (as defined in the Credit Facility Amendment) is below 3.75:1:00) and certain other restricted payments; (vii) change the nature of our business; (viii) engage in transactions with affiliates; (ix) enter into certain burdensome agreements; (x) make certain amendments to the Omnibus Agreement and our material agreements; (xi) make capital expenditures; and (xii) permit our joint ventures to incur indebtedness or grant certain liens.
The credit facility contains customary events of default, including, without limitation: (i) failure to pay any principal, interest, fees, expenses or other amounts when due; (ii) failure to meet the quarterly financial covenants; (iii) failure to observe any other agreement, obligation, or covenant in the credit facility or any related loan document, subject to cure periods for certain failures; (iv) the failure of any representation or warranty to be materially true and correct when made; (v) our, or any of our subsidiaries’ default under other indebtedness that exceeds a threshold amount; (vi) bankruptcy or other insolvency events involving us or any of our subsidiaries; (vii) judgments against us or any of our subsidiaries, in excess of a threshold amount; (viii) certain ERISA events involving us or any of our subsidiaries, in excess of a threshold amount; (ix) a change in control (as defined in the credit facility); and (x) the invalidity of any of the loan documents or the failure of any of the collateral documents to create a lien on the collateral.
The credit facility also contains certain default provisions relating to Martin Resource Management Corporation. If Martin Resource Management Corporation no longer controls our general partner, the lenders under the credit facility may declare all amounts outstanding thereunder immediately due and payable. In addition, an event of default by Martin Resource Management Corporation under its credit facility could independently result in an event of default under our credit facility if it is deemed to have a material adverse effect on us.
If an event of default relating to bankruptcy or other insolvency events occurs with respect to us or any of our subsidiaries, all indebtedness under our credit facility will immediately become due and payable. If any other event of default exists under our credit facility, the lenders may terminate their commitments to lend us money, accelerate the maturity of the indebtedness outstanding under the credit facility and exercise other rights and remedies. In addition, if any event of default exists under our credit facility, the lenders may commence foreclosure or other actions against the collateral.
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2025 Senior Notes and Indenture
General
The 2025 Notes were issued to eligible holders that participated in the Exchange Offer pursuant to an indenture, dated as of August 12, 2020 (the "2025 Notes Indenture"), among the Issuers, the guarantors party thereto, U.S. Bank National Association, as trustee, and U.S. Bank National Association as collateral trustee.
The 2025 Notes are guaranteed on a full, joint and several basis by each of the Partnership’s existing domestic restricted subsidiaries (other than Finance Corp. and Talen’s Marine & Fuel, LLC) (the "Guarantors") and will be guaranteed in the future by any domestic restricted subsidiaries, in each case, if and so long as such entity guarantees (or is an obligor with respect to) any other indebtedness for borrowed money of either the Issuers or any Guarantor. The 2025 Notes and the guarantees thereof are secured on a third-priority basis by a lien on substantially all assets of the Issuers and the Guarantors, subject to the terms of an intercreditor agreement (the "Intercreditor Agreement") and certain other exceptions.
The 2025 Notes and the guarantees thereof are, pursuant to the Intercreditor Agreement, secured by third-priority liens and thus are effectively junior to any obligations under the Credit Facility, which are secured on a "first-lien" basis, and effectively junior to any obligations under the 2024 Notes Indenture (as defined below), which are secured on a "second-lien" basis, in each case, to the extent of the value of the collateral securing such first-lien obligations, second-lien obligations and third-lien obligations. The 2025 Notes and the guarantees thereof rank effectively senior to all of the Partnership’s existing and future unsecured indebtedness (including the 2021 Notes) to the extent of the value of the collateral securing the 2025 Notes and such guarantees.
Maturity and Interest
The 2025 Notes will mature on February 28, 2025. Interest on the 2025 Notes accrues at a rate of 11.50% per annum and is payable semi-annually in cash in arrears on February 15 and August 15 of each year, commencing on February 15, 2021.
Redemption
At any time prior to August 12, 2022, the Issuers may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2025 Notes issued under the 2025 Notes Indenture at a redemption price of 111.5% of the principal amount of the 2025 Notes, plus accrued and unpaid interest to the redemption date, with an amount of cash equal to the net cash proceeds of certain equity offerings. On or after August 12, 2022, the Issuers may redeem all or part of the 2025 Notes at redemption prices equal to 100%, plus accrued and unpaid interest up to, but not including, the redemption date. In addition, at any time prior to August 12, 2022, the Issuers may redeem all or a part of the 2025 Notes at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed plus a make-whole premium, plus accrued and unpaid interest up to, but not including, the redemption date.
Also, if at any time the Total Leverage Ratio (as defined in the Credit Facility Amendment) is greater than 3.75:1:00, Issuers will use 25% of any excess cash flow (as defined in the 2025 Notes Indenture) to make an offer to all holders of the 2025 Notes to purchase the 2025 Notes at 100% of the principal amount thereof; provided, however, the Issuers, in their sole discretion, can allocate up to 100% of excess cash flow to offer to repurchase the 2025 Notes at 100% of the principal amount thereof, subject to restrictions in the revolving credit facility on prepaying junior debt.
Certain Covenants and Events of Default
The 2025 Notes Indenture contains customary covenants restricting the Partnership’s ability and the ability of its restricted subsidiaries to: (i) pay distributions on, purchase or redeem its common units or purchase or redeem its subordinated debt; (ii) incur or guarantee additional indebtedness or issue certain kinds of preferred equity securities; (iii) create or incur certain liens securing indebtedness; (iv) sell assets, including dispositions of the collateral securing the 2025 Notes; (v) consolidate, merge or transfer all or substantially all of its assets; (vi) enter into transactions with affiliates; and (vii) enter into agreements that restrict distributions or other payments from its restricted subsidiaries to the Partnership. The 2025 Notes Indenture also contains customary events of default and acceleration provisions relating to such events of default, which provide that upon an event of default under the 2025 Notes Indenture, U.S. Bank National Association, as trustee, or the holders of at least 25% in aggregate principal amount of the then outstanding 2025 Notes may declare all of the 2025 Notes to be due and payable immediately and subject to the terms of the Intercreditor Agreement, foreclose upon the collateral for the 2025 Notes.
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2024 Senior Notes and Indenture
General
The 2024 Notes were issued to eligible holders that participated in the Exchange Offer pursuant to an indenture, dated as of August 12, 2020 (the "2024 Notes Indenture"), among the Issuers, the guarantors party thereto, U.S. Bank National Association, as trustee, and U.S. Bank National Association as collateral trustee.
The 2024 Notes are guaranteed on a full, joint and several basis by the Guarantors and will be guaranteed in the future by any domestic restricted subsidiaries, in each case, if and so long as such entity guarantees (or is an obligor with respect to) any other indebtedness for borrowed money of either the Issuers or any Guarantor. The 2024 Notes and the guarantees thereof are secured on a second-priority basis by a lien on substantially all assets of the Issuers and the Guarantors, subject to the terms of the Intercreditor Agreement and certain other exceptions.
The 2024 Notes and the guarantees thereof are, pursuant to the Intercreditor Agreement, secured by second-priority liens and thus are effectively junior to any obligations under the Credit Facility, which are secured on a "first-lien" basis, and are effectively senior to the obligations under the 2025 Notes Indenture, which are secured on a "third-lien" basis, in each case, to the extent of the value of the collateral securing such first-lien, second-lien obligations and third-lien obligations. The 2024 Notes and the guarantees thereof rank effectively senior to all of the Issuers’ existing and unsecured indebtedness (including the 2021 Notes) to the extent of the value of the collateral securing the 2024 Notes and such guarantees.
Maturity and Interest
The 2024 Notes will mature on February 29, 2024. Interest on the 2024 Notes accrues at a rate of 10.00% per annum and will be payable semi-annually in cash in arrears on February 15 and August 15 of each year, commencing on February 15, 2021.
Redemption
At any time prior to August 12, 2021, the Issuers may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2024 Notes issued under the 2024 Notes Indenture at a redemption price of 110% of the principal amount of the 2024 Notes, plus accrued and unpaid interest to the redemption date, with an amount of cash equal to the net cash proceeds of certain equity offerings. On or after August 12, 2021, the Issuers may redeem all or part of the 2024 Notes at redemption prices (expressed as percentages of the principal amount) equal to (i) 102% for the twelve-month period beginning on August 12, 2021; (ii) 101% for the twelve-month period beginning on August 12, 2022 and (iii) 100% at any time thereafter, plus accrued and unpaid interest up to, but not including, the redemption date. In addition, at any time prior to August 12, 2021, the Issuers may redeem all or a part of the 2024 Notes at a redemption price equal to 100% of the principal amount of the 2024 Notes to be redeemed plus a make-whole premium, plus accrued and unpaid interest up to, but not including, the redemption date.
Certain Covenants and Events of Default
The 2024 Notes Indenture contains covenants that are substantially the same as those contained in the 2025 Notes Indenture described above.
2021 Senior Notes
For a description of our 7.25% senior unsecured notes due 2021, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Description of Our Long-Term Debt" in our Annual Report on Form 10-K for the year ended December 31, 2019, as amended. In connection with the completion of the Exchange Offer and consent solicitation to certain eligible holders of the 2021 Notes, on August 12, 2020, we entered into a supplemental indenture to eliminate substantially all of the restrictive covenants in the indenture governing the 2021 Notes.
Capital Resources and Liquidity
Historically, we have generally satisfied our working capital requirements and funded our debt service obligations and capital expenditures with cash generated from operations and borrowings under our revolving credit facility.
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At September 30, 2020, we had cash and cash equivalents of $1.9 million and available borrowing capacity of $77.6 million under our revolving credit facility with $205.0 million of borrowings outstanding. Our revolving credit facility matures on August 31, 2023
We expect that our primary sources of liquidity to meet operating expenses, service our indebtedness, pay distributions to our unitholders and fund capital expenditures will be provided by cash flows generated by our operations, borrowings under our revolving credit facility and access to the debt and equity capital markets. Our ability to generate cash from operations will depend upon our future operating performance, which is subject to certain risks. For a discussion of such risks, please read "Item 1A. Risk Factors" of our Form 10-K for the year ended December 31, 2019, filed with the SEC on February 14, 2020, as updated and supplemented in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarters ended March 31, 2020 and June 30, 2020, and as may be further updated and supplemented from time to time in our future Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, due to the covenants in our revolving credit facility, our financial and operating performance impacts the amount we are permitted to borrow under that facility.
We are in compliance with all debt covenants as of September 30, 2020 and expect to be in compliance for the next twelve months.
Interest Rate Risk
We are subject to interest rate risk on our credit facility due to the variable interest rate and may enter into interest rate swaps to reduce this variable rate risk.
Seasonality
A substantial portion of our revenues is dependent on sales prices of products, particularly NGLs and fertilizers, which fluctuate in part based on winter and spring weather conditions. The demand for NGLs is strongest during the winter heating season and the refinery blending season. The demand for fertilizers is strongest during the early spring planting season. However, our Terminalling and Storage and Transportation business segments and the molten sulfur business are typically not impacted by seasonal fluctuations and a significant portion of our net income is derived from our Terminalling and Storage, Sulfur Services and Transportation business segments. Further, extraordinary weather events, such as hurricanes, have in the past, and could in the future, impact our Terminalling and Storage and Transportation business segments.
Impact of Inflation
Inflation did not have a material impact on our results of operations for the nine months ended September 30, 2020 or 2019. Although the impact of inflation has been insignificant in recent years, it is still a factor in the U.S. economy and may increase the cost to acquire or replace property, plant and equipment. It may also increase the costs of labor and supplies. In the future, increasing energy prices could adversely affect our results of operations. Diesel fuel, natural gas, chemicals and other supplies are recorded in operating expenses. An increase in price of these products would increase our operating expenses which could adversely affect net income. We cannot provide assurance that we will be able to pass along increased operating expenses to our customers.
Environmental Matters
Our operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. We incurred no material environmental costs, liabilities or expenditures to mitigate or eliminate environmental contamination during the nine months ended September 30, 2020 or 2019.
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