Business Context and Reporting Period
This Form 8-K Current Report, filed on November 24, 2009, by Martin Midstream Partners L.P. (the "Partnership"), details the closing of significant transactions on November 25, 2009. The Partnership, incorporated in Delaware, is engaged in midstream energy operations. The report focuses on the acquisition of specialty lubricants processing assets and a concurrent capital investment by its general partner's parent company, Martin Resource Management Corporation ("MRMC").
Key Financial Metrics and Transaction Details
- Asset Acquisition: The Partnership acquired specialty lubricants processing assets from Cross Oil Refining & Marketing, Inc. ("Cross") for total consideration of $45.0 million.
- Equity Issuance for Assets: In exchange for the assets, the Partnership issued 804,721 common units to Cross and 889,444 subordinated units to MRMC. The common units were priced at $27.96 per unit, while subordinated units were priced at $25.16 per unit.
- Cash Investment: MRMC invested $20.0 million in cash in exchange for 714,285 newly issued common units at a price of $28.00 per unit.
- General Partner Contribution: The general partner contributed $0.9 million in connection with the asset acquisition and $0.4 million in connection with the cash investment to maintain its 2% general partner interest.
- Debt Repayment: Proceeds from the $20.0 million cash investment are designated to repay a portion of the Partnership's indebtedness under its credit facility.
Material Changes and Agreements
The filing reports the execution of several material definitive agreements effective November 25, 2009:
- Contribution Agreement: An Amended and Restated Contribution Agreement finalized the transfer of assets from Cross to the Partnership. Subordinated units issued to MRMC have no distribution rights for two years, after which they convert one-for-one to common units.
- Tolling Agreement: A 12-year fee-for-services agreement was entered into where Cross pays the Partnership to process crude oil. Key terms include a minimum volume of 6,500 barrels per day at $4.00 per barrel, with additional barrels at $4.28 per barrel. Cross also pays a monthly reservation fee of $1.3 million. Fees are subject to annual escalation based on the greater of 3% or the Consumer Price Index.
- Omnibus Agreement Amendment: Amendment No. 1 was executed to allow the Partnership to provide products and services related to the new assets to MRMC under the existing Omnibus Agreement.
- Partnership Agreement Amendment: The Second Amended and Restated Agreement of Limited Partnership was executed to reflect the creation of the subordinated unit class.
Outlook, Risks, and Related Party Transactions
The transactions involve significant related party dealings. MRMC owns approximately 43.9% of the Partnership's limited partnership interest and all incentive distribution rights. Cross is a wholly-owned subsidiary of MRMC. The issuance of units was completed in reliance on Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering.
The Tolling Agreement provides a long-term revenue stream but includes termination rights and periodic fee renegotiation every three years. The subordinated units issued to MRMC delay distribution rights for two years, impacting immediate cash flow distribution to that specific class of units.
Investor Verification Checklist
- Verify the exact number of subordinated units issued (889,444) versus the initial agreement (894,134) and the impact of the proration.
- Confirm the specific terms of the "fuel surcharge fee" mentioned in the Tolling Agreement, as the filing states it is based on parameters specified in the agreement but does not detail them.
- Review the full text of the Amended and Restated Contribution Agreement (Exhibit 10.1) and Tolling Agreement (Exhibit 10.2) for termination clauses and performance guarantees.
- Assess the impact of the $20.0 million debt repayment on the Partnership's remaining leverage and liquidity ratios.
- Monitor the conversion date of the subordinated units (second anniversary of closing) for potential dilution effects on existing common unit holders.