Business Context and Reporting Period
Company: Kimbell Royalty Partners, LP
Filing Type: Form 8-K (Current Report)
Date of Report: September 24, 2018 (Earliest event reported: September 23, 2018)
Context: The filing details the effective date of a "check-the-box" election changing the Partnership's federal income tax status from a pass-through entity to a taxable entity. Concurrently, the Partnership completed a Recapitalization Transaction involving the exchange of Common Units for Class B Units and Operating Company (OpCo) Units, and amended its governing agreements.
Key Financial Metrics and Capital Structure
This filing does not report standard financial performance metrics such as revenue, profit, cash flow, or margins. It focuses on capital structure changes and equity transactions.
- Unit Exchange: Haymaker Holders and the Kimbell Art Foundation exchanged 10,000,000 and 2,953,258 Common Units, respectively, for an equal number of Class B Units and OpCo Units.
- Ownership Post-Transaction: The Partnership owns approximately 51.7% of outstanding OpCo Units. Haymaker Holders own 37.3%, and the Foundation owns 11.0%.
- Class B Contribution: Holders of Class B Units must pay $0.05 per unit to the Partnership as additional consideration.
- Distribution Rights: Class B Unit holders are entitled to cash distributions equal to 2% per quarter on their Class B Contribution, subordinate to Series A Preferred Units but senior to Common Units.
- Incentive Plan: The Long-Term Incentive Plan (LTIP) was amended to increase eligible Common Units by 2,500,000, bringing the total to 4,541,600 units.
Material Changes Versus Prior Period
- Tax Status: Effective September 24, 2018, the Partnership is now taxed as a corporation for federal income tax purposes, whereas it was previously a pass-through entity.
- Operating Structure: The royalty and minerals business is now conducted through Kimbell Royalty Operating, LLC (OpCo), which is taxed as a partnership. The Partnership acts as the managing member of OpCo.
- Equity Composition: Introduction of Class B Units and OpCo Units, altering the capital structure from a single class of Common Units.
- Merger Transaction: On September 24, 2018, Merging Companies (affiliates of Series A Preferred Unit purchasers) merged into a Partnership subsidiary. Existing 70,991 Series A Preferred Units were retired and reissued to affiliates, resulting in no net change to the total number of units or beneficial ownership.
Guidance, Outlook, and Risks
Management Commentary and Outlook: The new structure is anticipated to provide significant benefits, including operational effectiveness, flexibility in acquisition and disposition transactional planning, and income tax efficiency. The transactions, excluding the Tax Election, are not expected to be taxable to the Partnership.
Risks and Contingencies:
- Regulatory Restrictions: The Exchange Agreement stipulates that no party has the right to exchange OpCo Units if the Partnership determines such an exchange would be prohibited by applicable law or regulation.
- Transfer Restrictions: The First Amended and Restated Company Agreement imposes additional transfer restrictions on OpCo Units.
- Emerging Growth Company Status: The registrant is an emerging growth company and has elected not to use the extended transition period for complying with new or revised financial accounting standards.
Important Facts for Investor Verification
- Verify the effective date of the Tax Election (September 24, 2018) and its impact on future tax liabilities and distribution calculations.
- Confirm the ownership percentages of the Partnership (51.7%), Haymaker Holders (37.3%), and the Foundation (11.0%) in the Operating Company.
- Review the terms of the Exchange Agreement regarding the right of Haymaker Holders and the Foundation to tender OpCo Units and Class B Units for redemption in exchange for Common Units or cash.
- Understand the distribution priority: Series A Preferred Units > Class B Units (2% quarterly on contribution) > Common Units.
- Note the increase in the LTIP pool to 4,541,600 Common Units and the remaining availability for grant (approx. 4,034,846).