| SUBSEQUENT EVENTS | NOTE 14—SUBSEQUENT EVENTS
The Partnership has evaluated events that occurred subsequent to June 30, 2018 in the preparation of its condensed consolidated financial statements.
Haymaker Acquisition
On July 12, 2018, the Partnership completed the Haymaker Acquisition in a transaction valued at approximately $451.7 million. The purchase price for the Haymaker Acquisition was comprised of (i) cash consideration of approximately $216.8 million, which was reduced by approximately $6.4 million of cash acquired and increased by approximately $5.9 million in capitalized transaction costs for a net amount of approximately $216.3 million (the “Cash Consideration”) and (ii) 10,000,000 common units of the Partnership, valued at approximately $235.4 million based on the closing price of $23.45 on July 12, 2018 (the “Common Unit Consideration”) . The Partnership funded the Cash Consideration with borrowings under the Amended Credit Agreement (as defined below) and net proceeds from the Preferred Unit Transaction (as defined below). The Common Unit Consideration was issued in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemptions set forth in Section 4(a)(2) of the Securities Act. The assets acquired in the Haymaker Acquisition, consist of approximately 5.4 million gross acres and 43,000 net royalty acres.
Voting Agreement s
On July 12, 2018, pursuant to the Haymaker Acquisition, the Partnership entered into (i) a Voting Agreement with Haymaker Minerals and Royalties, LLC (“Haymaker Minerals”) and (ii) a Voting Agreement with EIGF Aggregator III LLC, TE Drilling Aggregator LLC and Haymaker Management, LLC (collectively, the “Haymaker Resources Holders” and the “Voting Agreements”), pursuant to which Haymaker Minerals and the Haymaker Resources Holders have agreed to vote in favor of (A) the Partnership’s proposal to change its U.S. federal income tax status from a partnership to an entity taxable as a corporation and (B) an amendment to the Partnership’s LTIP to increase the number of common units eligible for issuance thereunder, subject to a cap set forth in the Haymaker Acquisition.
The Voting Agreements prohibit Haymaker Minerals and the Haymaker Resources Holders from selling or disposing of common units at any time during the term of the Voting Agreements, subject to certain exceptions. The Voting Agreements terminate on January 8, 2019.
Registration Rights Agreement
On July 12, 2018, pursuant to the terms of the Haymaker Acquisition and the Preferred Purchase Agreement (as defined below), the Partnership entered into a registration rights agreement (the “Registration Rights Agreement”) with Haymaker Minerals, the Haymaker Resources Holders and the Purchasers (as defined below), pursuant to which, among other things, the Partnership has agreed to (i) prepare, file with the SEC and use its reasonable best efforts to cause to become effective within 160 days of the execution of the Registration Rights Agreement, a shelf registration statement (the “Shelf Registration Statement”) with respect to the resale of the common units issued to Haymaker Minerals and the Haymaker Resources Holders and issuable upon conversion of the Series A Preferred Units by the Purchasers (all such common units being “Registrable Securities”) that would permit some or all of the Registrable Securities to be resold in registered transactions, (ii) use its reasonable best efforts to maintain the effectiveness of the Shelf Registration Statement while Haymaker Minerals, the Haymaker Resources Holders, the Purchasers and each of their transferees that hold Registrable Securities are in possession of Registrable Securities and (iii) under certain circumstances, initiate underwritten offerings for the Registrable Securities.
If the Shelf Registration Statement is not effective prior to the 180th day after the execution of the Registration Rights Agreement and, likewise, if a Shelf Registration Statement is not effective prior to the day the Series A Preferred Units are convertible into common units pursuant to the Second Amended and Restated Agreement of Limited Partnership of the Partnership (the “Second Amended and Restated Partnership Agreement”), then Haymaker Minerals, the Haymaker Resources Holders and the Purchasers, as applicable, will be entitled to certain liquidated damages as set forth in the Registration Rights Agreement.
In addition, the Registration Rights Agreement permits Haymaker Minerals, the Haymaker Resources Holders and the Purchasers to request to sell any or all of their Registrable Securities in an underwritten offering that is registered pursuant to a Shelf Registration Statement, subject to certain exceptions, including, among other things, that the gross proceeds from the sale are reasonably expected to exceed $50 million in the aggregate.
On July 30, 2018, the Partnership filed a registration statement on Form S-3 (the “Form S-3”) to satisfy, in part, certain rights and obligations under the Registration Rights Agreement. The Form S-3 registers (i) the offer and sale by the Partnership of up to an aggregate of $200,000,000 of its securities and (ii) the offer and resale of up to an aggregate of 15,945,946 of the Partnership’s common units by the holders of Registrable Securities named therein. As of the date of filing of this report, the Form S-3 had not yet been declared effective by the SEC.
Transition Services Agreement
On July 12, 2018, pursuant to the Haymaker Acquisition, the Partnership entered into a Transition Services Agreement with Haymaker Services, LLC (“Haymaker Services” and the “Transition Services Agreement”). Pursuant to the Transition Services Agreement, Haymaker Services will provide certain administrative services and accounting assistance on a transitional basis for total compensation of approximately $2.3 million through December 31, 2018, at which point, the Transition Services Agreement will terminate.
Amendment to the Existing Credit Agreement
On July 12, 2018, in connection with the Haymaker Acquisition, the Partnership entered into an amendment (the “Credit Agreement Amendment”) to the Partnership’s existing Credit Agreement, dated as of January 11, 2017 (the “Existing Credit Agreement” and, the Existing Credit Agreement as amended by the Credit Agreement Amendment, the “Amended Credit Agreement”), by and among the Partnership, certain subsidiaries of the Partnership as guarantors, Frost Bank, as administrative agent, and the other lenders party thereto. The Credit Agreement Amendment increased commitments under the Amended Credit Agreement from $50 million to $200 million. Under the Amended Credit Agreement, availability under the facility will equal the lesser of the aggregate maximum commitments of the lenders and the borrowing base. The initial borrowing base under the Amended Credit Agreement was set at $200 million. The Amended Credit Agreement permits aggregate commitments under the facility to be increased to $500 million, subject to the satisfaction of certain conditions and the procurement of additional commitments from new or existing lenders.
The Credit Agreement Amendment amends the Existing Credit Agreement to provide for, among other things, (i) the addition of the subsidiaries the Partnership acquired in the Haymaker Acquisition, as well as Kimbell Royalty Operating, LLC (“OpCo”), as guarantors under the Amended Credit Agreement, (ii) limitations on the Partnership’s ability to incur certain debt or issue preferred equity (other than 110,000 Series A Preferred Units representing limited partner interests in the Partnership, (iii) limitations on redemptions of the Series A Preferred Units and the ability of the Partnership and the restricted subsidiaries of the Partnership to make distributions and other restricted payments, in each case, unless certain conditions are satisfied, (iv) increased limitations on the Partnership’s ability to dispose of certain assets or encumber certain assets, (v) a decrease in the applicable margin under the Existing Credit Agreement, which varies based upon the level of borrowing base usage, by 0.25% for each applicable level as set forth in the Amended Credit Agreement, such that the applicable margin will range from 1.00% to 2.00% in the case of ABR Loans (as defined in the Amended Credit Agreement) and 2.00% to 3.00% in the case of LIBOR Loans (as defined in the Amended Credit Agreement) and (vi) the addition of certain restrictions on the Partnership’s and OpCo’s ability to take certain actions or amend their organizational documents. Additionally, the Credit Agreement Amendment permits certain transactions to effect the intended change of the Partnership’s U.S. federal income tax status from a pass-through partnership to an entity taxable as a corporation by means of a “check-the-box” election and to effect an “up-C” structure, including allowing for all assets and liabilities of the Partnership to be transferred to OpCo and for OpCo to become a non-wholly owned subsidiary guarantor.
Preferred Purchase Agreement
On May 28, 2018, the Partnership entered into a Series A Preferred Unit Purchase Agreement (the “Preferred Purchase Agreement”) with certain affiliates of Apollo Capital Management, L.P. (collectively, the “Purchasers”) to issue and sell the Series A Preferred Units. The Series A Preferred Units were offered in a private placement (the “Preferred Unit Transaction”) exempt from the registration requirements of the Securities Act in reliance on the exemptions set forth in Section 4(a)(2) of the Securities Act. The Preferred Unit Transaction closed on July 12, 2018, with the Series A Preferred Units being issued and sold for a cash purchase price of $1,000 per Series A Preferred Unit, resulting in gross proceeds to the Partnership of $110 million.
The Series A Preferred Units pay a 7% distribution rate and are convertible by the Purchasers after two years at a 30% discount to the issue price, subject to certain conditions. The Partnership may redeem the Series A Preferred Units at any time at a redemption price that is the greater of 1.2 times the invested capital.
Board Rights Agreement
On July 12, 2018, pursuant to the Preferred Purchase Agreement, the Partnership, the General Partner, and Kimbell GP Holdings, LLC entered into a Board Representation and Observation Agreement (the “Board Rights Agreement”) with the Purchasers. Pursuant to the Board Rights Agreement, the Partnership granted holders of the Series A Preferred Units board observer rights beginning three years after the closing of the Preferred Unit Transaction, and board appointment rights beginning four years after the closing of the Preferred Unit Transaction and in the case of events of default with respect to the Series A Preferred Units.
Recapitalization Agreement
Derivative Transactions
On July 12, 2018, the Partnership entered into additional oil and natural gas commodity derivative agreements with Frost Bank for the years ending December 31, 2018, 2019 and through the six months ending June 30, 2020. The commodity derivative contracts consist of fixed price swaps, under which the Partnership receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume. The Partnership hedges its daily production based on the amount of debt and/or preferred equity as a percent of its enterprise value. Prior to the Haymaker Acquisition, this amount constituted approximately 10% of daily oil and natural gas production. Following the closing of the Haymaker Acquisition, the Partnership hedged daily oil and natural gas production of approximately 30% of our post-acquisition production. The additional oil and natural gas commodity derivative agreements represent the Partnership’s mitigation of the inherent commodity price risk associated with the oil and natural gas production from the properties acquired in the Haymaker Acquisition.
Tax Election and Restructuring
In preparation for the Restructuring (as defined below), the Partnership formed and contributed all of its assets and liabilities to Kimbell Royalty Operating, LLC, the Partnership’s wholly owned subsidiary (the “Operating Company”). F urther, on July 24, 2018, the Partnership entered into a Recapitalization Agreement, dated as of July 24, 2018, by and among Haymaker Minerals & Royalties, LLC, Haymaker Management, LLC and certain affiliates of Haymaker Resources, LP (each of the preceding entities, the “Haymaker Holders”), Haymaker Resources, LP, the Kimbell Art Foundation, the Partnership, our general partner and the Operating Company, pursuant to which (i) the Partnership’s equity interest in the Operating Company will be recapitalized into 13,886,204 newly issued common units of the Operating Company (“OpCo Common Units”) and 110,000 newly issued Series A Cumulative Convertible Preferred Units of the Operating Company (“OpCo Series A Preferred Units”), (ii) the Haymaker Holders and the Kimbell Art Foundation will deliver and assign to the Partnership the 10,000,000 and 2,953,258 common units they own, respectively, in exchange for (a) 10,000,000 and 2,953,258 newly issued Class B common units representing limited partner interests in the Partnership (the “Class B Units”), respectively, and (b) 10,000,000 and 2,953,258 newly issued OpCo Common Units, respectively, and (iii) the Partnership will amend and restate the limited liability company agreement of the Operating Company (the “Operating Company Agreement”) to reflect these transactions (collectively, the “Restructuring”). At the consummation of the Restructuring, the Partnership will enter into an exchange agreement with the Haymaker Holders, the Kimbell Art Foundation, the Partnership’s general partner and the Operating Company granting the Haymaker Holders and the Kimbell Art Foundation the right to exchange their OpCo Common Units and Class B Units for common units.
On July 26, 2018, the Partnership filed a preliminary information statement on Schedule 14C with the SEC (the “Information Statement”) related to the amendment and restatement of the partnership agreement in connection with the Partnership’s decision to change its United States federal income tax status from a pass-through “partnership” to an entity taxable as a “corporation” by means of a “check-the-box” election (the “Tax Election,” and, together with the Restructuring and related transactions described in the Information Statement, the “Up-C Transaction”) and an amendment to its LTIP. Pursuant to Rule 14c-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the written consent will become effective on or after the date that is 20 calendar days following the date that the definitive information statement on Schedule 14C is first sent or given to the Partnership’s unitholders. |
