Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Significant Recent Developments
Sale of Mega Lubricants.
On December 22, 2020, we entered into an asset purchase and sale agreement to sell Mega Lubricants to Stone Oil for $22.4 million. Mega Lubricants is engaged in the business of blending, manufacturing and delivering various marine application lubricants, sub-sea specialty fluids, and proprietary developed commercial and industrial products. The transaction closed on December 22, 2020. The proceeds from the transaction were used to reduce outstanding borrowings under our revolving credit facility.
Exchange Offer and Cash Tender Offer
On August 12, 2020, we successfully completed our 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 holders of our 2021 Notes. Please see Note 15 in Part II of this Form 10-K for more information about the exchange offer and related transactions.
COVID-19
COVID-19 surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. 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 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 of 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, which has impacted our 2020 performance. This impact started in February of 2020 and continued through the end of the year, during which time we have seen unfavorable trends in certain key metrics across several of our business lines compared to historical periods. The
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significant reduction in refinery utilization as a result of reduced refined products demand significantly impacted our Transportation and NGL segments. As the volume of products produced or purchased by refineries has been reduced, demand for our services has decreased.
Looking forward, we expect to continue to experience some adverse impacts of COVID-19 in our transportation segment during the first half of 2021 but we believe that refinery utilization will continue to increase in the second half of 2021 as a result of widespread vaccinations, government stimulus, and a rebounding economy. This should ultimately improve refined product demand as people get back to work and begin traveling again. We expect this will positively impact our transportation segment as demand for our services improves.
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. 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 December 31, 2020.
Subsequent Events
Retirement of 2021 Notes. On February 15, 2021, our 2021 Notes matured and we retired the outstanding balance of $28.8 million using our revolving credit facility.
Quarterly Distribution. On January 25, 2021, we declared a quarterly cash distribution of $0.005 per common unit for the fourth quarter of 2020, or $0.02 per common unit on an annualized basis, which was paid on February 12, 2021 to unitholders of record as of February 5, 2021.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on the historical consolidated financial statements included elsewhere herein. We prepared these financial statements in conformity with United States generally accepted accounting principles ("U.S. GAAP" or "GAAP"). 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. 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. You should also read Note 2, "Significant Accounting Policies" in Notes to Consolidated Financial Statements. The following table evaluates the potential impact of estimates utilized during the periods ended December 31, 2020 and 2019:
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Description Judgments and Uncertainties Effect if Actual Results Differ from Estimates and Assumptions
Impairment of Long-Lived Assets
We periodically evaluate whether the carrying value of long-lived assets has been impaired when circumstances indicate the carrying value of the assets may not be recoverable. These evaluations are based on undiscounted cash flow projections over the remaining useful life of the asset. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows. Any impairment loss is measured as the excess of the asset's carrying value over its fair value. Our impairment analyses require management to use judgment in estimating future cash flows and useful lives, as well as assessing the probability of different outcomes. Applying this impairment review methodology, we recorded an impairment charge of $3.1 million and $1.3 million in our Terminalling and Storage and Transportation segments, respectively, during the year ended December 31, 2020. No impairment of long-lived assets was recorded during the years ended December 31, 2019 or 2018.
Impairment of Goodwill
Goodwill is subject to a fair-value based
impairment test on an annual basis, or more frequently if events or changes in circumstances indicate that the fair value of any of our reporting units is less than its carrying amount. When assessing the recoverability of goodwill , we may first assess qualitative factors in determining
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative assessment is not required. If an initial qualitative assessment indicates that it is more likely than not the carrying amount exceeds the fair value of a reporting unit, a quantitative analysis will be performed. We may also elect to bypass the qualitative assessment and proceed directly to a quantitative analysis depending on the facts and circumstances. As part of the quantitative evaluation, we determine fair value using accepted valuation techniques, including discounted cash flow, the guideline public company method and the guideline transaction method. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates. We conduct impairment testing using present economic conditions, as well as future expectations. Applying this impairment review methodology, we considered the impact that COVID-19 had on our cash flows and the value our unit price during 2020 and elected to bypass the qualitative assessment and perform a quantitative assessment. Based upon the most recent annual review as of August 31, 2020, no goodwill impairment exists within our reporting units for the year ended December 31, 2020. No goodwill impairment was recorded during the years ended December 31, 2019 or 2018.
Our Relationship with Martin Resource Management Corporation
Martin Resource Management Corporation directs our business operations through its ownership and control of our general partner and under the Omnibus Agreement. In addition to the direct expenses payable to Martin Resource Management Corporation under the Omnibus Agreement, we are required to reimburse Martin Resource Management Corporation for indirect general and administrative and corporate overhead expenses. For the years ended December 31, 2020, 2019 and 2018, the board of directors of our general partner approved reimbursement amounts of $16.4 million, $16.7 million and $16.4 million, respectively, reflecting our allocable share of such expenses. The board of directors of our general partner will review and approve future adjustments in the reimbursement amount for indirect expenses, if any, annually.
We are required 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. Martin Resource Management Corporation also licenses certain of its trademarks and trade names to us under the Omnibus Agreement.
We are both an important supplier to and customer of Martin Resource Management Corporation. All of these services and goods are purchased and sold pursuant to the terms of a number of agreements between us and Martin Resource Management Corporation. For a more comprehensive discussion concerning the Omnibus Agreement and the other agreements that we have entered into with Martin Resource Management Corporation, please see "Item 13. Certain Relationships and Related Transactions, and Director Independence."
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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 historic 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.
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 years ended December 31, 2020, 2019, and 2018, which represents EBITDA, Adjusted EBITDA and Distributable Cash Flow from continuing operations.
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Reconciliation of EBITDA, Adjusted EBITDA, and Distributable Cash Flow
Year Ended December 31,
2020 2019 2018
(in thousands)
Net income (loss) $ (6,771) $ (174,946) $ 55,655
Less: (Income) loss from discontinued operations, net of income taxes — 179,466 (63,486)
Income (loss) from continuing operations (6,771) 4,520 (7,831)
Adjustments:
Interest expense 46,210 51,690 52,349
Income tax expense 1,736 1,900 577
Depreciation and amortization 61,462 60,060 61,484
EBITDA from Continuing Operations 102,637 118,170 106,579
Adjustments:
Gain on sale of property, plant and equipment (9,788) (13,332) (1,041)
Gain on involuntary conversion of property, plant and equipment (4,907) — —
Gain on retirement of senior unsecured notes (3,484) — —
Loss on exchange of senior unsecured notes 8,817 — —
Unrealized mark-to-market on commodity derivatives (460) 671 (76)
Non-cash insurance related accruals 250 500 —
Lower of cost or market adjustments 370 633 —
Unit-based compensation 1,422 1,424 1,224
Transaction costs associated with acquisitions — 224 465
Adjusted EBITDA from Continuing Operations 94,857 108,290 107,151
Adjustments:
Interest expense (46,210) (51,690) (52,349)
Income tax expense (1,736) (1,900) (577)
Amortization of deferred debt issuance costs 3,422 4,041 3,445
Amortization of debt premium (191) (306) (306)
Deferred income taxes 1,169 1,360 208
Payments for plant turnaround costs (1,478) (5,677) (1,893)
Maintenance capital expenditures (10,138) (12,368) (19,553)
Distributable Cash Flow from Continuing Operations $ 39,695 $ 41,750 $ 36,126
Income (loss) from discontinued operations, net of income taxes $ — $ (179,466) $ 63,486
Adjustments:
Depreciation and amortization $ — $ 8,161 $ 18,795
EBITDA from Discontinued Operations $ — $ (171,305) $ 82,281
Equity in earnings of unconsolidated entities $ — $ — $ (3,382)
Distributions from unconsolidated entities $ — $ — $ 3,500
Gain on disposition of Investment in WTLPG $ — $ — $ (48,564)
Loss on sale of property, plant and equipment, net $ — $ 178,781 $ 824
Non-cash insurance related accruals $ — $ 3,213 $ —
Adjusted EBITDA from Discontinued Operations $ — $ 10,689 $ 34,659
Maintenance capital expenditures $ — $ (912) $ (1,952)
Distributable Cash Flow from Discontinued Operations $ — $ 9,777 $ 32,707
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Results of Operations
The results of operations for the years ended December 31, 2020, 2019, and 2018 have been derived from our consolidated financial statements. Discussions of the year ended December 31, 2018 that are not included in this Annual Report on Form 10-K and year-to-year comparisons of the year ended December 31, 2019 and the year ended December 31, 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and the Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
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.
Our consolidated 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 after the comparative discussion of our results within each segment.
The Natural Gas Liquids segment information below excludes the discontinued operations of the Natural Gas Storage Assets and WTLPG partnership interests disposed of on June 28, 2019 and July 31, 2018, respectively, for the years ended December 31, 2019 and 2018. See Item 8, Note 5.
The following table sets forth our operating revenues and operating income by segment for the years ended December 31, 2020, 2019, and 2018.
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Operating Revenues Revenues
Intersegment Eliminations Operating Revenues
after Eliminations Operating Income (loss) Operating Income Intersegment Eliminations Operating
Income (loss)
after
Eliminations
(In thousands)
Year Ended December 31, 2020:
Terminalling and storage $ 191,041 $ (6,877) $ 184,164 $ 23,969 $ (1,816) $ 22,153
Natural gas liquids 247,484 (5) 247,479 9,660 12,444 22,104
Sulfur services 108,020 (13) 108,007 29,001 7,255 36,256
Transportation 150,285 (17,793) 132,492 1,781 (17,883) (16,102)
Indirect selling, general and administrative
— — — (17,909) — (17,909)
Total $ 696,830 $ (24,688) $ 672,142 $ 46,502 $ — $ 46,502
Year Ended December 31, 2019:
Terminalling and storage $ 216,313 $ (6,659) $ 209,654 $ 17,670 $ (938) $ 16,732
Natural gas liquids 366,502 — 366,502 27,596 16,424 44,020
Sulfur services 111,340 — 111,340 13,989 8,732 22,721
Transportation 183,740 (24,118) 159,622 16,830 (24,218) (7,388)
Indirect selling, general and administrative
— — — (17,981) — (17,981)
Total $ 877,895 $ (30,777) $ 847,118 $ 58,104 $ — $ 58,104
Year Ended December 31, 2018:
Terminalling and storage $ 247,840 $ (6,400) $ 241,440 $ 17,820 $ (280) $ 17,540
Natural gas liquids 496,026 (19) 496,007 13,152 18,429 31,581
Sulfur services 132,536 — 132,536 17,216 10,181 27,397
Transportation 178,163 (28,042) 150,121 14,770 (28,330) (13,560)
Indirect selling, general and administrative
— — — (17,901) — (17,901)
Total $ 1,054,565 $ (34,461) $ 1,020,104 $ 45,057 $ — $ 45,057
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Terminalling and Storage Segment
Comparative Results of Operations for the Years Ended December 31, 2020 and 2019
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Revenues:
Services $ 87,661 $ 93,980 $ (6,319) (7)%
Products 103,380 122,333 (18,953) (15)%
Total revenues 191,041 216,313 (25,272) (12)%
Cost of products sold 87,495 107,081 (19,586) (18)%
Operating expenses 50,421 53,279 (2,858) (5)%
Selling, general and administrative expenses 6,159 5,997 162 3%
Depreciation and amortization 29,489 30,952 (1,463) (5)%
17,477 19,004 (1,527) (8)%
Other operating income (loss), net 6,429 (1,334) 7,763 582%
Gain on involuntary conversion of property, plant and equipment 63 — 63
Operating income $ 23,969 $ 17,670 $ 6,299 36%
Shore-based throughput volumes (guaranteed minimum) (gallons) 80,000 80,000 — —%
Smackover refinery throughput volumes (guaranteed minimum BBL per day) 6,500 6,500 — —%
Services revenues. Services revenue decreased $6.3 million, of which $3.8 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, revenue from shore-based terminals decreased $2.1 million primarily due to decreased throughput of $3.2 million and consigned lube revenue of $0.6 million, offset by $1.0 million related to contract termination fees, and $0.8 million in space rental income. Revenue from specialty terminals decreased $0.3 million due to $1.2 million in decreased throughput rates, offset by $0.8 million related to a new contract.
Products revenues. A 22% decrease in lubricant sales volumes combined with a 13% decrease in average sales price at our shore-based terminals resulted in a $10.3 million decrease to products revenues. In addition, a 7% decrease in average sales price combined with a 2% decrease in sales volumes at our blending and packaging facilities resulted in an $8.8 million decrease in products revenues.
Cost of products sold. A 22% decrease in sales volumes combined with a 14% decrease in average cost per gallon at our shore-based terminals resulted in a $9.8 million decrease in cost of products sold. In addition, an 11% decrease in average cost per gallon combined with a 2% decrease in sales volume at our blending and packaging facilities resulted in a $9.7 million decrease in cost of products sold.
Operating expenses. Operating expenses decreased $2.9 million, primarily as a result of decreases in repairs and maintenance of $1.0 million, miscellaneous operating expenses of $0.8, compensation expense of $0.7 million, and professional fees of $0.3 million across our terminals.
Selling, general and administrative expenses. Selling, general and administrative expenses increased primarily as a result of an increase in legal expenses.
Depreciation and amortization. The decrease in depreciation and amortization is due to the disposition of assets at several closed shore-based facilities, offset by recent capital expenditures.
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 on involuntary conversion of property, plant and equipment 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 Years Ended December 31, 2020 and 2019
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Revenues $ 150,285 $ 183,740 $ (33,455) (18)%
Operating expenses 122,064 141,713 (19,649) (14)%
Selling, general and administrative expenses 8,245 8,199 46 1%
Depreciation and amortization 17,505 15,307 2,198 14%
2,471 18,521 (16,050) (87)%
Other operating loss, net (690) (1,691) 1,001 59%
Operating income $ 1,781 $ 16,830 $ (15,049) (89)%
Marine Transportation Revenues . Inland revenues decreased $11.2 million, primarily related to a decrease in tows, transportation rates and utilization. In addition, offshore revenue decreased $2.4 million due to a decrease in transportation rates and utilization. Revenue was also impacted by a decrease in pass-through revenue (primarily fuel) of $3.3 million.
Land Transportation Revenues. An 11% decrease in miles of product transported resulted in a decrease to freight revenue of $11.5 million. Transportation rates increased 2% resulting in an offsetting increase of $1.5 million. Additionally, fuel surcharge revenue decreased $6.6 million.
Operating expenses . The decrease in operating expenses is primarily a result of decreased pass through expenses (primarily fuel) of $8.5 million, compensation expense of $8.1 million, repairs and maintenance of $2.1 million, and outside services of $0.7 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 (loss), net. Other operating loss represents losses from the disposition of property, plant and equipment.
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Sulfur Services Segment
Comparative Results of Operations for the Years Ended December 31, 2020 and 2019
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Revenues:
Services $ 11,659 $ 11,434 $ 225 2%
Products 96,361 99,906 (3,545) (4)%
Total revenues 108,020 111,340 (3,320) (3)%
Cost of products sold 62,920 71,806 (8,886) (12)%
Operating expenses 10,891 10,639 252 2%
Selling, general and administrative expenses 4,791 4,784 7 —%
Depreciation and amortization 12,012 11,332 680 6%
17,406 12,779 4,627 36%
Other operating income, net 6,751 1,210 5,541 458%
Gain on involuntary conversion of property, plant and equipment 4,844 — 4,844
Operating income $ 29,001 $ 13,989 $ 15,012 107%
Sulfur (long tons) 642.0 665.0 (23.0) (3)%
Fertilizer (long tons) 275.0 260.0 15.0 6%
Sulfur services volumes (long tons) 917.0 925.0 (8.0) (1)%
Services Revenues. Services revenues increased slightly as a result of a contractually prescribed, index-based fee adjustment.
Products Revenues. Products revenues decreased $2.7 million as a result of a 3% decline in average sulfur services sales prices. Products revenues decreased an additional $0.8 million due to a 1% decrease in sales volumes, primarily related to a 3% decr ease in sulfur volumes.
Cost of products sold. A 12% decline in product cost impacted cost of products sold by $8.3 million, resulting from a decrease in commodity prices. A 1% decrease in sales volumes resulted in an additional decrease in cost of products sold of $0.5 million. Margin per to n increased $6.09, or 20%.
Operating expenses. Our operating expenses increased $0.4 million due to insurance claims and $0.4 million due to outside towing. Offsetting were decreases in marine fuel and lube of $0.3 million, assist tugs of $0.1 million and repairs and maintenance of $0.1 million.
Selling, general and administrative expenses. Selling, general and administrative expenses remained relatively consistent.
Depreciation and amortization. Depreciation and amortization expense increased $0.7 million as a result of recent capital expenditures.
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 $4.8 million gain is primarily 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.
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Natural Gas Liquids Segment
Comparative Results of Operations for the Years Ended December 31, 2020 and 2019
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Products Revenues $ 247,484 $ 366,502 (119,018) (32)%
Cost of products sold 228,345 341,800 (113,455) (33)%
Operating expenses 3,008 6,300 (3,292) (52)%
Selling, general and administrative expenses 4,013 4,739 (726) (15)%
Depreciation and amortization 2,456 2,469 (13) (1)%
9,662 11,194 (1,532) (14)%
Other operating income (loss), net (2) 16,402 (16,404) (100)%
Operating income $ 9,660 $ 27,596 $ (17,936) (65)%
NGLs Volumes (barrels) 9,231 9,820 (589) (6)%
Products Revenues. Our NGL average sales price per barrel decreased $10.51, or 28%, resulting in a decrease to products revenues of $103.2 million. The decrease in average sales price per barrel was a result of a decrease in market prices. Product sales volumes decreased 6%, decreasing revenues $15.8 million.
Cost of products sold . Our average cost per barrel decreased $10.07, or 29%, decreasing cost of products sold by $98.9 million. The decrease in average cost per barrel was a result of a decrease in market prices. The decrease in sales volume of 6% resulted in a $14.6 million decrease to cost of products sold. Our margins decreased $0.44 per barrel, or 18% during the period.
Operating expenses . Operating expenses decreased $2.3 million related to the divestiture of assets and the elimination of the associated expenses. In addition, operating expenses decreased $1.0 million related to the settlement of an insurance claim for less than anticipated.
Selling, general and administrative expenses . Selling, general and administrative expenses decreased $0.7 million as a result of decreased compensation expense.
Other operating income (loss), net. Other operating income (loss), net represents the gains associated with the disposition of the East Texas Pipeline in 2019.
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Interest Expense
Comparative Components of Interest Expense, Net for the Years Ended December 31, 2020 and 2019
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Revolving credit facility $ 8,719 $ 18,550 $ (9,831) (53)%
7.250% senior unsecured notes 16,969 27,101 (10,132) (37)%
11.5% senior secured notes 13,151 — 13,151
10.0% senior secured notes 2,105 — 2,105
Amortization of deferred debt issuance costs 3,422 4,041 (619) (15)%
Amortization of debt premium (191) (306) 115 38%
Other 1,787 1,728 59 3%
Finance leases 291 672 (381) (57)%
Capitalized interest (43) (5) (38) (760)%
Interest income — (91) 91 100%
Total interest expense, net $ 46,210 $ 51,690 $ (5,480) (11)%
Indirect Selling, General and Administrative Expenses
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Indirect selling, general and administrative expenses $ 17,909 $ 17,981 $ (72) —%
Indirect selling, general and administrative expenses remained consistent from 2019 to 2020.
Martin Resource Management Corporation allocates to us a portion of its indirect selling, general and administrative expenses for services 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 Resource Management Corporation's 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 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 board of directors of our general partner approved the following reimbursement amounts:
Year Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Board approved reimbursement amount $ 16,410 $ 16,657 $ (247) (1)%
The amounts reflected above represent our allocable share of such expenses. The board of directors of our general partner 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, pay distributions to our unitholders and fund capital expenditures 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 - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table details the cash flow changes between the years ended December 31, 2020 and 2019:
Years Ended December 31, Variance Percent Change
2020 2019
(In thousands)
Net cash provided by (used in):
Operating activities $ 64,785 $ 75,815 $ (11,030) (15)%
Investing activities 2,604 174,828 (172,224) (99)%
Financing activities (65,287) (248,087) 182,800 74%
Net decrease in cash and cash equivalents $ 2,102 $ 2,556 $ (454) (18)%
Net cash provided by operating activities. The decrease in net cash provided by operating activities for the year ended December 31, 2020 includes a $7.8 million decrease in net cash received from discontinued operating activities, a decrease in operating results of $11.3 million, and an unfavorable variance in other non-current assets and liabilities of $0.9 million. An additional $6.0 million decrease in other non-cash charges was primarily due to a $4.9 million gain on involuntary conversion of property, plant and equipment. Offsetting this decrease was a favorable variance in working capital of $15.0 million.
Net cash provided by investing activities. Net cash provided by investing activities for the year ended December 31, 2020 decreased $172.2 million. Cash received from discontinued investing activities decreased $209.2 million. Offsetting such decrease, net proceeds from the sale of property, plant and equipment increased $4.5 million and proceeds received from the involuntary conversion of property, plant and equipment increased $2.5 million. A decrease in cash used of $6.2 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 year ended December 31, 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 $35.3 million and cash distributions paid decreased $43.8 million. Offsetting such decrease, costs associated with our credit facility increased $0.6 million.
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Total Contractual Obligations
A summary of our total contractual obligations as of December 31, 2020 is as follows (dollars in thousands):
Payments due by period
Type of Obligation Total
Obligation Less than
One Year 1-3
Years 3-5
Years Due
Thereafter
Revolving credit facility $ 148,000 $ — $ 148,000 $ — $ —
7.25% senior unsecured notes, due 2021 28,790 28,790 — — —
10.0% senior secured notes, due 2024 53,750 — — 53,750 —
11.5% senior secured notes, due 2025 291,970 — — 291,970 —
Throughput commitment 9,711 6,439 3,272 — —
Operating leases 26,379 8,445 9,266 2,838 5,830
Finance lease obligations 2,996 2,707 289 — —
Interest payable on finance lease obligations 35 26 9 — —
Interest payable on fixed long-term debt obligations 157,633 39,213 77,903 40,517 —
Total contractual cash obligations $ 719,264 $ 85,620 $ 238,739 $ 389,075 $ 5,830
The interest payable under our revolving 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.
Letter of Credit . At December 31, 2020, we had outstanding irrevocable letters of credit in the amount of $16.7 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 December 31, 2020, we maintained a $300.0 million revolving credit facility which matures on August 31, 2023. On July 8, 2020, the Partnership amended its revolving credit facility to, among other things, permit the Exchange Offer. Please see Note 16 in Part II of this Form 10-K for more information about the July 8, 2020 amendment to our revolving credit facility ("the Credit Facility Amendment")..
As of December 31, 2020, we had $148.0 million outstanding under the revolving credit facility and $16.7 million of outstanding irrevocable letters of credit, leaving a maximum available to be borrowed under our credit facility for future revolving credit borrowings and letters of credit of $135.3 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 $20.5 million in additional amounts thereunder as of December 31, 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 year ended December 31, 2020, the outstanding balance of our revolving credit facility has ranged from a low of $148.0 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 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 (LIBOR), with a floor for LIBOR of 1%, plus an applicable margin, or the Base Rate (the highest of the Federal Funds Rate plus 0.50%, the 30-day
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Eurodollar Rate plus 1.0%, or the administrative agent’s prime rate) plus an 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 commitments 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 December 31, 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 %
The applicable margin for LIBOR borrowings at December 31, 2020 is 3.75%, with a 1% floor for LIBOR.
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; and (xi) 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 Secured Notes and Indenture
General
Pursuant to the Exchange Offer, we and Martin Midstream Finance Corp., our wholly owned subsidiary (collectively the "Issuers") issued $292.0 million in aggregate principal amount of the Issuers’ 11.50% senior secured second lien notes due 2025 (the "2025 Notes"), 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 Martin Midstream Finance Corp. and Talen’s Marine & Fuel, LLC) 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 our 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 our existing and future unsecured indebtedness 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 the end of any fiscal year (commencing with the fiscal year ending December 31, 2021) the Total Leverage Ratio (as defined in the Credit Facility Amendment) is greater than 3.75:1:00, the Issuers will use 25% of any excess annual 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
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and payable immediately and, subject to the terms of the Intercreditor Agreement, foreclose upon the collateral for the 2025 Notes.
2024 Senior Secured Notes and Indenture
General
Pursuant to the rights offering in connection with the Exchange Offer, the Issuers issued $53.8 million aggregate principal amount of the Issuers’ 10.00% senior secured 1.5 lien notes due 2024 (the "2024 Notes"). 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 of the 2025 Notes 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 future unsecured indebtedness 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 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, 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 and Indenture
The Issuers entered into an Indenture, dated as of February 11, 2013. among the Issuers, certain subsidiary guarantors and Wells Fargo Bank, National Association, as trustee, under which the Issuers issued $400.0 million in aggregate principal amount of their 7.25% senior unsecured notes due 2021 (the "2021 Notes"). In 2015, we repurchased on the open market and subsequently retired an aggregate $26.2 million of our outstanding 2021 Notes. In 2020, we repurchased on the open market and subsequently retired an aggregate $9.3 million of our outstanding 2021 Notes. On August 12, 2020, we completed the Exchange Offer and Cash Tender Offer. 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
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substantially all of the restrictive covenants in the indenture governing the 2021 Notes. On February 15, 2021, our 2021 Notes matured and we retired the outstanding balance of $28.8 million using proceeds from our revolving credit facility.
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.
At December 31, 2020, we had cash and cash equivalents of $5.0 million and available borrowing capacity of $20.5 million under our revolving credit facility with $148.0 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 this Form 10-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.
The Partnership is in compliance with all debt covenants as of December 31, 2020 and expects 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, Sulfur Services, and Transportation business segments.
Impact of Inflation
Inflation did not have a material impact on our results of operations in 2020, 2019 or 2018. 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 2020, 2019 or 2018.
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