e424b5
The
information in this preliminary prospectus and the accompanying
prospectus is not complete and may not be changed. This
preliminary prospectus supplement and the accompanying
prospectus are not an offer to sell these securities, and we are
not soliciting offers to buy these securities, in any state
where the offer or sale is not permitted.
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Filed pursuant to Rule 424(b)(5)
Registration No. 333-148146
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PRELIMINARY
PROSPECTUS SUPPLEMENT
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SUBJECT TO COMPLETION
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FEBRUARY 2, 2010
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(To
Prospectus dated January 3, 2008)
1,650,000
Common Units
Representing Limited Partner Interests
Martin
Midstream Partners L.P.
We are offering 1,650,000 common units representing limited
partner interests. Our common units are listed on the Nasdaq
Global Select Market under the symbol MMLP. The last
reported sale price of our common units on the Nasdaq Global
Select Market on February 1, 2010 was $33.95 per
common unit.
Investing in our common units involves risks. See Risk
factors beginning on
page S-12
of this prospectus supplement and on page 3 of the
accompanying prospectus.
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Per common
unit
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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The underwriters may also purchase up to an additional 247,500
common units from us at the public offering price, less the
underwriting discount, within 30 days from the date of this
prospectus supplement to cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus are truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the common units on or about
February , 2010.
Joint
Book-Running Managers
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UBS
Investment Bank |
RBC Capital Markets |
Wells Fargo Securities |
Co-Managers
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Morgan
Keegan & Company, Inc. |
Stifel
Nicolaus |
The date of this
prospectus supplement is February , 2010
TABLE OF
CONTENTS
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Prospectus Supplement
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Prospectus
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This document is in two parts. The first part is the prospectus
supplement, which describes the specific terms of this offering
and also adds to and updates information contained in the
accompanying prospectus and the documents incorporated by
reference into this prospectus supplement and the accompanying
prospectus. The second part is the accompanying prospectus,
which gives more general information about securities we may
offer from time to time. To the extent the information contained
in this prospectus supplement differs or varies from the
information contained in the accompanying prospectus, the
information in this prospectus supplement controls. Before you
invest in our common units, you should carefully read this
prospectus supplement, along with the accompanying prospectus,
in addition to the information contained in the documents we
refer to under the heading Where You Can Find More
Information in this prospectus supplement and the
accompanying prospectus.
You should rely only on the information contained or
incorporated by reference in this prospectus supplement, the
accompanying prospectus or any free writing
prospectus we may authorize to be delivered to you.
Neither we nor the underwriters have authorized anyone to
provide you with additional or different information. If anyone
provides you with different or inconsistent information, you
should not rely on it. This prospectus supplement is not an
offer to sell or a solicitation of an offer to buy our common
units in any jurisdiction where such offer or any sale would be
unlawful. You should not assume that the information contained
in this prospectus supplement, the accompanying prospectus or
any free writing prospectus is accurate as of any date other
than the dates shown in these documents or any information that
we have incorporated by reference is accurate as of any date
other than the date of the document incorporated by reference.
Our business, financial condition, results of operations and
prospects may have changed since such dates. If any statement in
one of these documents is inconsistent with a statement in
another document having a later datefor example, a
document incorporated by reference in this prospectus supplement
or the accompanying prospectusthe statement in the
document having the later date modifies or supersedes the
earlier statement.
Summary
This summary highlights information contained elsewhere in
this prospectus supplement and the accompanying prospectus. It
does not contain all of the information you should consider
before making an investment decision. You should read the entire
prospectus supplement, the accompanying prospectus, the
documents incorporated by reference and the other information to
which we refer for a more complete understanding of this
offering. Please read the sections entitled Risk
factors on
page S-12
of this prospectus supplement and page 3 of the
accompanying prospectus for more information about important
factors that you should consider before buying our common units
in this offering. Unless we indicate otherwise, the information
presented in this prospectus supplement assumes that the
underwriters option to purchase additional common units is
not exercised. References in this prospectus supplement to
Martin Midstream Partners L.P., the
Partnership, we, ours,
us or like terms refer to Martin Midstream Partners
L.P. and its consolidated subsidiaries. References in this
prospectus supplement to Martin Resource Management
refer to Martin Resource Management Corporation and its
consolidated subsidiaries.
MARTIN MIDSTREAM
PARTNERS L.P.
We are a publicly traded limited partnership with a diverse set
of operations focused primarily in the United States Gulf Coast
region. Our primary business segments can be generally described
as follows:
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Terminalling and Storage. We own or operate 17
marine terminal facilities and seven inland terminal facilities
located in the United States Gulf Coast region that provide
storage, processing and handling services for producers and
suppliers of petroleum products and by-products, lubricants and
other liquids, including the refining of various grades and
quantities of naphthenic lubricants and related products. We
also provide land rental to oil and gas companies along with
storage and handling services for lubricants and fuel oil. We
provide these terminalling and storage services on a fee basis
primarily under long-term contracts.
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Natural Gas Services. Through our acquisitions
of Prism Gas Systems I, L.P. (Prism Gas) and
Woodlawn Pipeline Co., Inc. (Woodlawn), we have
ownership interests in over 674 miles of gathering and
transmission pipelines located in the natural gas producing
regions of East Texas, Northwest Louisiana, the Texas Gulf Coast
and offshore Texas and federal waters in the Gulf of Mexico as
well as a 285 MMcfd capacity natural gas processing plant
located in East Texas. In addition to our natural gas gathering
and processing business, we distribute natural gas liquids or,
NGLs. We purchase NGLs primarily from natural gas
processors. We store NGLs in our supply and storage facilities
for resale to propane retailers, refineries and industrial NGL
users in Texas and the Southeastern United States. We own an NGL
pipeline which spans approximately 200 miles running from
Kilgore to Beaumont, Texas. We own three NGL supply and storage
facilities with an aggregate above ground storage capacity of
approximately 3,000 barrels and we lease approximately
2.2 million barrels of underground storage capacity for
NGLs.
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Marine Transportation. We own a fleet of 40
inland marine tank barges, 18 inland push boats and four
offshore tug barge units that transport petroleum products and
by-products primarily in the United States Gulf Coast region. We
provide these transportation services on a fee basis primarily
under annual contracts. In addition, our marine segment manages
our sulfur segments marine assets which includes one
additional offshore tug barge unit, two inland marine tank
barges and one inland push boat.
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Sulfur Services. We process and distribute
sulfur predominately produced by oil refineries primarily
located in the United States Gulf Coast region. We process
molten sulfur into prilled, or pelletized, sulfur under both
fee-based volume contracts and buy/sell contracts at our
facilities in Port of Stockton, California and Beaumont, Texas.
We own and operate six sulfur-based fertilizer production plants
and one emulsified sulfur blending plant that manufacture
primarily sulfur-based fertilizer products for wholesale
distributors and industrial users. These plants are located in
Illinois, Texas
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and Utah. In October 2007, we completed the construction of a
sulfuric acid production plant in Plainview, Texas which
processes molten sulfur into sulfuric acid.
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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, fertilizer manufacturers and other wholesale
purchasers of these products. We operate primarily in the Gulf
Coast region of the United States. This region is a major hub
for petroleum refining, natural gas gathering and processing and
support services for the exploration and production industry.
RECENT
DEVELOPMENTS
Amendments to
Credit Agreement
On December 21, 2009, we entered into a Fourth Amendment
(the Fourth Amendment) to the Second Amended and
Restated Credit Agreement (the Credit Agreement),
among Martin Operating Partnership L.P., a wholly-owned
subsidiary of ours (the Operating Partnership), as
borrower, the Partnership and certain of our subsidiaries,, as
guarantors and the financial institutions parties thereto. The
Fourth Amendment modified our existing Credit Agreement to,
among other things, (1) increase the total commitments of
the lenders thereunder to approximately $335.67 million,
(2) extend the maturity date of amounts outstanding under
the Credit Agreement from November 10, 2010 to
November 9, 2012, (3) increase the applicable interest
rate margin and fees payable to the lenders under the Credit
Agreement, (4) amend the financial covenants and certain
other covenants under the Credit Agreement, (5) eliminate
the requirement that we make annual prepayments of the term
loans outstanding under the Credit Agreement with excess cash
flow, and (6) limit asset dispositions to $25 million
per fiscal year.
On January 13, 2010, we entered into a Fifth Amendment (the
Fifth Amendment) to the Credit Agreement. The Fifth
Amendment modified the Credit Agreement to, among other things,
(1) permit us to invest up to $25 million in our joint
ventures and (2) limit our ability to make annual capital
expenditures in excess of $30 million, provided that we
maintain $45 million of available borrowing capacity under
the Credit Agreement.
Cross
Acquisition
On November 25, 2009, we closed a transaction with Martin
Resource Management and Cross Refining & Marketing,
Inc. (Cross), a wholly owned subsidiary of Martin
Resource Management, in which we acquired certain specialty
lubricants processing assets (Assets) from Cross for
total consideration of $45.0 million (the
Contribution). As consideration for the
Contribution, we issued 804,721 of our common units and 889,444
subordinated units to Martin Resource Management at a price of
$27.96 and $25.16 per limited partner unit, respectively. The
common units will be entitled to receive distributions beginning
in February 2010, while the subordinated units will have no
distribution rights until the second anniversary of closing of
the Contribution. At the end of such second anniversary, the
subordinated units will automatically convert to common units,
having the same distribution rights as existing common units. In
connection with the Contribution, our general partner made a
capital contribution of $0.9 million to us in order to
maintain its 2% general partner interest in us.
In connection with the closing of the Contribution, we and
Martin Resource Management entered into a long-term, fee for
services-based Tolling Agreement whereby Martin Resource
Management agreed to pay us for the processing of its crude oil
into finished products, including naphthenic lubricants,
distillates, asphalt and other intermediate cuts. Under the
Tolling Agreement, Martin Resource Management has generally
agreed to refine a minimum of 6,500 barrels per day of
crude oil at the refinery at a price of $4.00 per barrel. Any
additional barrels will be refined at a price of $4.28 per
barrel. In addition, Martin Resource Management has agreed to
pay a monthly reservation fee of
S-2
$1.3 million and a periodic fuel surcharge fee based on
certain parameters specified in the Tolling Agreement. All of
these fees (other than the fuel surcharge) are subject to
escalation annually based upon the greater of 3% or the increase
in the Consumer Price Index for a specified annual period. In
addition, every three years, the parties can negotiate an upward
or downward adjustment in the fees subject to their mutual
agreement. The Tolling Agreement has a 12 year term,
subject to certain termination rights specified therein. Martin
Resource Management will continue to market and distribute all
finished products under the Cross brand name. In addition,
Martin Resource Management will continue to own and operate the
Cross packaging business.
Investment by
Martin Resource Management
On November 25, 2009, we closed a private equity sale with
Martin Resource Management, under which Martin Resource
Management invested $20.0 million in cash in the
Partnership in exchange for 714,285 of our common units (the
Investment). In connection with the Investment, our
general partner made a capital contribution to us of
$0.4 million in order to maintain its 2% general partner
interest in us. Proceeds from the Investment were used to repay
borrowings under our credit facility.
Fourth Quarter
2009 Distribution
On January 21, 2010, we declared a quarterly cash
distribution of $0.75 per common unit for the fourth quarter of
2009, or $3.00 per common unit on an annualized basis, to be
paid on February 12, 2010 to unitholders of record as of
February 5, 2010. Purchasers of common units in this
offering will not participate in the fourth quarter distribution
to be paid on February 12, 2010.
BUSINESS
STRATEGY
The key components of our business strategy are to:
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Pursue Organic Growth Projects. We continually
evaluate economically attractive organic expansion opportunities
in new or existing areas of operation that will allow us to
leverage our existing market position, increase the
distributable cash flow from our existing assets through
improved utilization and efficiency, and leverage our existing
customer base.
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Pursue Internal Organic Growth by Attracting New Customers
and Expanding Services Provided to Existing Customers. We
seek to identify and pursue opportunities to expand our customer
base across all of our business segments. We generally begin a
relationship with a customer by transporting or marketing a
limited range of products and services. We believe expanding our
customer base and our service and product offerings to existing
customers is the most efficient and cost effective method of
achieving organic growth in revenues and cash flow. We believe
significant opportunities exist to expand our customer base and
provide additional services and products to existing customers.
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Pursue Strategic Acquisitions. We monitor the
marketplace to identify and pursue accretive acquisitions that
expand the services and products we offer or that expand our
geographic presence. After acquiring other businesses, we will
attempt to utilize our industry knowledge, network of customers
and suppliers and strategic asset base to operate the acquired
businesses more efficiently and competitively, thereby
increasing revenues and cash flow. We believe that our
diversified base of operations provides multiple platforms for
strategic growth through acquisitions.
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Pursue Strategic Alliances. Many of our larger
customers are establishing strategic alliances with midstream
service providers such as us to address logistical and
transportation problems or achieve operational synergies. These
strategic alliances are typically structured differently than
our regular commercial relationships, with the goal that such
alliances would expand our business relationships with our
customers and suppliers. We intend to pursue strategic alliances
with customers in the future.
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Expand Geographically. We work to identify and
assess other attractive geographic markets for our services and
products based on the market dynamics and the cost associated
with penetration of such
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markets. We typically enter a new market through an acquisition
or by securing at least one major customer or supplier and then
dedicating or purchasing assets for operation in the new market.
Once in a new territory, we seek to expand our operations within
this new territory both by targeting new customers and by
selling additional services and products to our original
customers in the territory.
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COMPETITIVE
STRENGTHS
We believe we are well positioned to execute our business
strategy because of the following competitive strengths:
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Asset Base and Integrated Distribution
Network. We operate a diversified asset base
that, together with the services provided by Martin Resource
Management, enables us to offer our customers an integrated
distribution network consisting of transportation, terminalling
and midstream logistical services while minimizing our
dependence on the availability and pricing of services provided
by third parties. Our integrated distribution network enables us
to provide customers a complementary portfolio of
transportation, terminalling, distribution and other midstream
services for petroleum products and by-products.
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Strategically Located Assets. We believe we
are one of the largest providers of shore bases and one of the
largest lubricant distributors and marketers in the United
States Gulf Coast region. In addition, we are one of the largest
operators of marine service terminals in the United States Gulf
Coast region providing broad geographic coverage and
distribution capability of our products and services to our
customers. Our natural gas gathering and processing assets are
focused in areas that have continued to experience high levels
of drilling activity and natural gas production.
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Specialized Transportation Equipment and Storage
Facilities. We have the assets and expertise to handle and
transport certain petroleum products and by-products with unique
requirements for transportation and storage, such as molten
sulfur and asphalt. For example, we own facilities and resources
to transport molten sulfur and asphalt, which must be maintained
at temperatures between approximately 275 and 350 degrees
Fahrenheit to remain in liquid form. We believe these
capabilities help us enhance relationships with our customers by
offering them services to handle their unique product
requirements.
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Ability to Grow Our Natural Gas Gathering and Processing
Services. We believe that, with our Prism Gas assets, we
have opportunities for organic growth in our natural gas
gathering and processing operations through increasing
fractionation capacity, pipeline expansions, new pipeline
construction and bolt-on acquisitions. We believe Prisms
assets are well situated in the Haynesville Shale which is one
of the four largest U.S. shale deposits.
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Experienced Management Team and Operational
Expertise. Members of our executive management
team and the heads of our principal business lines have, on
average, more than 30 years of experience in the industries
in which we operate. Further, these individuals have been
employed by Martin Resource Management, on average, for more
than 18 years. Our management team has a successful track
record of creating internal growth and completing acquisitions.
We believe our management teams experience and familiarity
with our industry and businesses are important assets that
assist us in implementing our business strategies.
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Strong Industry Reputation and Established Relationships with
Suppliers and Customers. We believe we have established a
reputation in our industry as a reliable and cost-effective
supplier of services to our customers and have a track record of
safe, efficient operation of our facilities. Our management has
also established long-term relationships with many of our
suppliers and customers. We believe we benefit from our
managements reputation and track record, and from these
long-term relationships.
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OUR RELATIONSHIP
WITH MARTIN RESOURCE MANAGEMENT
We were formed in 2002 by Martin Resource Management, a
privately-held company whose initial predecessor was
incorporated in 1951 as a supplier of products and services to
drilling rig contractors.
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Since then, Martin Resource Management has expanded its
operations through acquisitions and internal expansion
initiatives as its management identified and capitalized on the
needs of producers and purchasers of hydrocarbon products and
by-products and other bulk liquids. Following this offering,
Martin Resource Management will own an approximate 40% limited
partnership interest in us. Furthermore, it owns and controls
our general partner, which owns a 2.0% general partner interest
and all of our incentive distribution rights.
EXISTING
LITIGATION AT MARTIN RESOURCE MANAGEMENT
On May 2, 2008, we received a copy of a petition filed in
the District Court of Gregg County, Texas (the
Court) by Scott D. Martin (the
Plaintiff) against Ruben S. Martin, III (the
Defendant) with respect to certain matters relating
to Martin Resource Management. The Plaintiff and the Defendant
are executive officers of Martin Resource Management and our
general partner, the Defendant is a director of both Martin
Resource Management and our general partner, and the Plaintiff
is a director of Martin Resource Management. The lawsuit alleged
that the Defendant breached a settlement agreement with the
Plaintiff concerning certain Martin Resource Management matters
and that the Defendant breached fiduciary duties allegedly owed
to the Plaintiff in connection with their respective ownership
and other positions with Martin Resource Management. Prior to
the trial of this lawsuit, the Plaintiff dropped his claims
against the Defendant relating to the breach of fiduciary duty
allegations. We are not a party to the lawsuit and the lawsuit
does not assert any claims (i) against us,
(ii) concerning our governance or operations or
(iii) against the Defendant with respect to his service as
an officer or director of our general partner.
In May 2009, the lawsuit went to trial and on June 18,
2009, the Court entered a judgment (the Judgment)
with respect to the lawsuit as further described below. In
connection with the Judgment, the Defendant has advised us that
he has filed a motion for new trial, a motion for judgment
notwithstanding the verdict and a notice of appeal. In addition,
on June 22, 2009, the Plaintiff filed a notice of appeal
with the Court indicating his intent to appeal the Judgment. The
Defendant has further advised us that on June 30, 2009 he
posted a cash deposit in lieu of a bond and the judge has ruled
that as a result of such deposit, the enforcement of any of the
provisions in the Judgment is stayed until the matter is
resolved on appeal. Accordingly, during the pendancy of the
appeal process, no change in the makeup of the Martin Resource
Management Board of Directors is expected.
The Judgment awarded the Plaintiff monetary damages in the
approximate amount of $3.2 million, attorneys fees of
approximately $1.6 million and interest. In addition, the
Judgment grants specific performance and provides that the
Defendant is to (i) transfer one share of his Martin
Resource Management common stock to the Plaintiff,
(ii) take such actions, including the voting of any Martin
Resource Management shares which the Defendant owns, controls or
otherwise has the power to vote, as are necessary to change the
composition of the Board of Directors of Martin Resource
Management from a five-person board, currently consisting of the
Defendant and the Plaintiff as well as Wes Skelton, Don
Neumeyer, and Bob Bondurant (executive officers of Martin
Resource Management and the Partnership), to a four-person board
to consist of the Defendant and his designee and the Plaintiff
and his designee, and (iii) take such actions as are
necessary to change the trustees of the Martin Resource
Management Employee Stock Ownership Trust (the MRMC ESOP
Trust), currently consisting of the Defendant, the
Plaintiff and Wes Skelton, to just the Defendant and the
Plaintiff. The Judgment is directed solely at the Defendant and
is not binding on any other officer, director or shareholder of
Martin Resource Management or any trustee of a trust owning
Martin Resource Management shares. The Judgment with respect to
(ii) above will terminate on February 17, 2010, and
with respect to (iii) above on the 30th day after the
election by the Martin Resource Management shareholders of the
first successor Martin Resource Management board after
February 17, 2010. However, any enforcement of the Judgment
is stayed pending resolution of the appeal relating to it.
On September 5, 2008, the Plaintiff and one of his
affiliated partnerships (the SDM Plaintiffs), on
behalf of themselves and derivatively on behalf of Martin
Resource Management, filed suit in a Harris County, Texas
district court against Martin Resource Management, the
Defendant, Robert Bondurant,
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Donald R. Neumeyer and Wesley Skelton, in their capacities as
directors of Martin Resource Management (the MRMC Director
Defendants), as well as 35 other officers and employees of
Martin Resource Management (the Other MRMC
Defendants). In addition to their respective positions
with Martin Resource Management, Robert Bondurant, Donald
Neumeyer and Wesley Skelton are officers of our general partner.
We are not a party to this lawsuit, and it does not assert any
claims (i) against us, (ii) concerning our governance
or operations or (iii) against the MRMC Director Defendants
or other MRMC Defendants with respect to their service to us.
The SDM Plaintiffs allege, among other things, that the MRMC
Director Defendants have breached their fiduciary duties owed to
Martin Resource Management and the SDM Plaintiffs, entrenched
their control of Martin Resource Management and diluted the
ownership position of the SDM Plaintiffs and certain other
minority shareholders in Martin Resource Management, and engaged
in acts of unjust enrichment, excessive compensation, waste,
fraud and conspiracy with respect to Martin Resource Management.
The SDM Plaintiffs seek, among other things, to rescind the June
2008 issuance by Martin Resource Management of shares of its
common stock under its 2007 Long-Term Incentive Plan to the
Other MRMC Defendants, remove the MRMC Director Defendants as
officers and directors of Martin Resource Management, prohibit
the Defendant, Wesley Skelton and Robert Bondurant from serving
as trustees of the MRMC Employee Stock Ownership Plan, and place
all of the Martin Resource Management common shares owned or
controlled by the Defendant in a constructive trust that
prohibits him from voting those shares. The SDM Plaintiffs have
amended their Petition to eliminate their claims regarding
rescission of the issue by Martin Resource Management of shares
of its common stock to the MRMC Employee Stock Ownership Plan.
The case was abated in July 2009 during the pendency of a
mandamus proceeding in the Texas Supreme Court. The Supreme
Court denied mandamus relief on November 20, 2009.
The lawsuits described above are in addition to (i) a
separate lawsuit filed in July 2008 in a Gregg County, Texas
district court by the daughters of the Defendant against the
Plaintiff, both individually and in his capacity as trustee of
the Ruben S. Martin, III Dynasty Trust, which suit alleges,
among other things, that the Plaintiff has engaged in
self-dealing in his capacity as a trustee under the trust, which
holds shares of Martin Resource Management common stock, and has
breached his fiduciary duties owed to the plaintiffs, and who
are beneficiaries of such trust, and (ii) a separate
lawsuit filed in October 2008 in the United States District
Court for the Eastern District of Texas by Angela Jones
Alexander against the Defendant and Karen Yost in their
capacities as a former trustee and a trustee, respectively, of
the R.S. Martin Jr. Children Trust No. One (f/b/o
Angela Santi Jones), which holds shares of Martin Resource
Management common stock, which suit alleges, among other things
that the Defendant and Karen Yost breached fiduciary duties owed
to the plaintiff, who is the beneficiary of such trust, and
seeks to remove Karen Yost as the trustee of such trust. With
respect to the lawsuit described in (i) above,we have been
informed that the Plaintiff has resigned as a trustee of the
Ruben S. Martin, III Dynasty Trust. With respect to the
lawsuit described in (ii) above, Angela Jones Alexander has
amended her claims to include her grandmother, Margaret Martin,
as a party. With respect to the lawsuit referenced in
(i) above, the case was tried in October 2009 and the jury
returned a verdict in favor of the Defendants daughters
against the Plaintiff in the amount of $4.9 million. On
December 22, 2009, the court entered a judgment, reflecting
an amount consistent with the verdict, and additionally awarded
attorneys fees and interest. On January 7, 2010, the
court modified its original judgment and awarded the
Defendants daughters approximately $2.7 million in
damages, including interest and attorneys fees. We believe
that the Plaintiff plans to appeal the judgment.
On September 24, 2008, Martin Resource Management removed
Plaintiff as a director of the general partner of the
Partnership. Such action was taken as a result of the collective
effect of Plaintiffs then recent activities, which the
Board of Directors of Martin Resource Management determined were
detrimental to both Martin Resource Management and the
Partnership. The Plaintiff does not serve on any committees of
the board of directors of our general partner. The position on
the board of directors of our general partner vacated by the
Plaintiff may be filled in accordance with the existing
procedures for replacement of a departing director utilizing the
Nominations Committee of the board of directors
S-6
of the general partner of the Partnership. This position on the
board of directors has not been filled as of the date of this
prospectus supplement.
OUR EXECUTIVE
OFFICE
Our principal executive offices are located at 4200 Stone Road,
Kilgore, Texas 75662, our phone number is
(903) 983-6200,
and our web site is www.martinmidstream.com. Information
contained on our website is not incorporated by reference into
this prospectus supplement and, you should not consider
information contained on our website as part of this prospectus
supplement.
S-7
ORGANIZATIONAL
STRUCTURE
The diagram below depicts our organizational structure after
giving effect to this offering:
Approximate
Ownership of Martin Midstream Partners L.P.
Upon the Completion of this Offering
|
|
|
|
|
Public Common Units
|
|
|
58.0%
|
|
Martin Resource Managements Common Units
|
|
|
35.3%
|
|
Martin Resource Managements Subordinated Units
|
|
|
4.7%
|
|
General Partner Interest
|
|
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2.0%
|
|
|
|
|
|
|
|
|
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100.0%
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|
|
|
|
|
S-8
The offering
|
|
|
Common units offered to the public |
|
1,650,000 common units. |
|
|
|
1,897,500 common units if the underwriters exercise their
over-allotment option in full. |
|
Exchange listing |
|
Our common units are quoted on the Nasdaq Global Select Market
under the symbol MMLP. |
|
Units outstanding after this offering |
|
17,707,832 common units and 889,444 subordinated units,
representing a 93.3% and 4.7% limited partner interest in us,
respectively; or 17,955,332 common units and 889,444
subordinated units, representing a 93.4% and 4.6% limited
partner interest in us, respectively, if the underwriters
exercise their over-allotment option in full. |
|
Use of proceeds |
|
We will use the net proceeds from this offering, including our
general partners proportionate capital contribution and
after deducting underwriting discounts and estimated offering
expenses, to repay outstanding indebtedness incurred under our
revolving loan facility. Such amounts may be reborrowed and used
to fund both recent acquisitions and expansion capital
expenditures. Please read Use of proceeds. |
|
|
|
Affiliates of certain of the underwriters are lenders under our
revolving loan facility and will receive a portion of the
proceeds from this offering through repayment of indebtedness
under the revolving loan facility. Please read
Underwriting. |
|
Cash distributions |
|
Under our partnership agreement, we must distribute all of our
cash on hand at the end of each quarter, less reserves
established by our general partner. We refer to this cash as
available cash, and we define its meaning in our
partnership agreement. On January 21, 2010, we declared a
quarterly cash distribution of $0.75 per common unit for the
fourth quarter of 2009, or $3.00 per common unit on an
annualized basis, to be paid on February 12, 2010 to
unitholders of record as of February 5, 2010. Purchasers of
common units in this offering will not participate in the fourth
quarter distribution to be paid on February 12, 2010. |
|
Subordination period |
|
The subordination period for our initially issued subordinated
units has ended and all such subordinated units were
automatically converted on a one-for-one basis into common units
of the Partnership on November 14, 2009. |
|
|
|
On November 25, 2009, the Partnership issued 889,444
subordinated units to Martin Resource Management in connection
with the acquisition of certain specialty lubricants processing
assets from Cross. These subordinated units will have no
distribution rights until November 25, 2011, and at such
time will automatically convert to common units, having the same
distribution rights as existing common units. |
|
Limited voting rights |
|
Our general partner manages and operates us. Unlike the holders
of common stock in a corporation, you will have only limited
voting rights on matters affecting our business. You will |
S-9
|
|
|
|
|
have no right to elect our general partner or its officers or
directors. Our general partner may not be removed except by a
vote of the holders of at least
662/3%
of the outstanding units, including units owned by our general
partner and its affiliates, voting together as a single class.
Following this offering, Martin Resource Management will own an
approximate 40% limited partnership interest in us. This
ownership level will enable our general partner and these
affiliates to prevent our general partners involuntary
removal. |
|
Estimated ratio of taxable income to distributions |
|
We estimate that if you hold the common units you purchase in
this offering through December 31, 2012, you will be
allocated, on a cumulative basis, an amount of federal taxable
income for that period that will be approximately 20% or less of
the cash distributed to you with respect to that period. Please
read Material tax considerations in this prospectus
supplement for the basis of this estimate. |
|
Material tax considerations |
|
For a discussion of other material federal income tax
considerations that may be relevant to prospective unitholders
who are individual citizens or residents of the United States,
please read Material tax considerations in this
prospectus supplement and the accompanying prospectus. |
|
Agreement to be bound by the partnership agreement |
|
By purchasing a common unit, you will be bound by all of the
terms of our partnership agreement. Please read The
Partnership Agreement in the accompanying prospectus for
more information. |
|
Risk factors |
|
You should carefully consider the information set forth in the
section of this prospectus supplement and the accompanying
prospectus entitled Risk factors as well as the
other information included in or incorporated by reference in
this prospectus supplement before deciding whether to invest in
our common units. |
S-10
Summary historical
financial data
The following table sets forth summary financial and other
operating data of Martin Midstream Partners L.P. The financial
data for the years ended December 31, 2006, 2007 and 2008
and the nine months ended September 30, 2008 and 2009 are
derived from the audited and unaudited consolidated financial
statements of Martin Midstream Partners L.P. incorporated herein
by reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
|
|
|
|
Years Ended
December 31,
|
|
|
September 30,
|
|
Consolidated
financial data:
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands,
except per share data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
576,384
|
|
|
$
|
765,822
|
|
|
$
|
1,213,958
|
|
|
$
|
985,545
|
|
|
$
|
436,537
|
|
Cost of product sold
|
|
|
459,170
|
|
|
|
618,689
|
|
|
|
1,013,525
|
|
|
|
846,854
|
|
|
|
308,993
|
|
Operating expenses
|
|
|
65,387
|
|
|
|
83,533
|
|
|
|
102,894
|
|
|
|
76,505
|
|
|
|
70,169
|
|
Selling, general, and administrative
|
|
|
10,977
|
|
|
|
11,985
|
|
|
|
16,939
|
|
|
|
10,672
|
|
|
|
12,354
|
|
Depreciation and amortization
|
|
|
17,597
|
|
|
|
23,442
|
|
|
|
31,218
|
|
|
|
22,933
|
|
|
|
25,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
553,131
|
|
|
|
737,649
|
|
|
|
1,164,576
|
|
|
|
956,964
|
|
|
|
417,173
|
|
Other operating income
|
|
|
3,356
|
|
|
|
703
|
|
|
|
209
|
|
|
|
143
|
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
26,609
|
|
|
|
28,876
|
|
|
|
49,591
|
|
|
|
28,724
|
|
|
|
24,562
|
|
Equity in earnings of unconsolidated entities
|
|
|
8,547
|
|
|
|
10,941
|
|
|
|
13,224
|
|
|
|
11,385
|
|
|
|
5,227
|
|
Interest expense
|
|
|
(12,466
|
)
|
|
|
(14,533
|
)
|
|
|
(19,777
|
)
|
|
|
(13,609
|
)
|
|
|
(12,910
|
)
|
Debt prepayment premium
|
|
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
713
|
|
|
|
299
|
|
|
|
483
|
|
|
|
334
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
22,243
|
|
|
|
25,583
|
|
|
|
43,521
|
|
|
|
26,834
|
|
|
|
17,018
|
|
Income taxes
|
|
|
|
|
|
|
(644
|
)
|
|
|
(711
|
)
|
|
|
(753
|
)
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
22,243
|
|
|
$
|
24,939
|
|
|
$
|
42,810
|
|
|
$
|
26,081
|
|
|
$
|
17,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
$
|
1.69
|
|
|
$
|
1.67
|
|
|
$
|
2.72
|
|
|
$
|
1.64
|
|
|
$
|
1.02
|
|
Weighted average limited partner units
|
|
|
12,602,000
|
|
|
|
14,018,799
|
|
|
|
14,529,826
|
|
|
|
14,532,826
|
|
|
|
14,532,826
|
|
Balance Sheet Data (at Period End):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
457,461
|
|
|
$
|
623,577
|
|
|
$
|
668,916
|
|
|
$
|
757,018
|
|
|
$
|
643,646
|
|
Due to affiliates
|
|
|
10,474
|
|
|
|
7,543
|
|
|
|
13,420
|
|
|
|
17,500
|
|
|
|
13,178
|
|
Long-term debt
|
|
|
174,021
|
|
|
|
225,000
|
|
|
|
295,000
|
|
|
|
280,000
|
|
|
|
306,204
|
|
Partners capital (owners equity)
|
|
|
198,525
|
|
|
|
235,848
|
|
|
|
234,714
|
|
|
$
|
226,308
|
|
|
$
|
218,281
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
39,302
|
|
|
$
|
58,017
|
|
|
$
|
79,903
|
|
|
$
|
60,643
|
|
|
$
|
40,212
|
|
Investing activities
|
|
|
(95,098
|
)
|
|
|
(127,103
|
)
|
|
|
(100,184
|
)
|
|
|
(78,753
|
)
|
|
|
(10,144
|
)
|
Financing activities
|
|
|
52,991
|
|
|
|
69,896
|
|
|
|
24,151
|
|
|
|
21,016
|
|
|
|
(32,127
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance capital expenditures
|
|
|
12,391
|
|
|
|
10,342
|
|
|
|
16,528
|
|
|
|
9,965
|
|
|
|
6,682
|
|
Expansion capital expenditures
|
|
|
78,267
|
|
|
|
107,892
|
|
|
|
84,424
|
|
|
|
68,203
|
|
|
|
32,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
90,658
|
|
|
$
|
118,234
|
|
|
$
|
100,952
|
|
|
$
|
78,168
|
|
|
$
|
39,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common unit (paid with respect to
period)
|
|
$
|
2.44
|
|
|
$
|
2.60
|
|
|
$
|
2.91
|
|
|
$
|
2.16
|
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-11
Risk factors
An investment in our common units involves
risk. You should carefully read the risk factors
below as well as the risk factors included under the caption
Risk Factors beginning on page 3 of the
accompanying prospectus and the risk factors discussed in
Item 1A of our 2008 Annual Report on
Form 10-K
filed with the Securities and Exchange Commission, or SEC, on
March 4, 2009 and of our Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, filed with the
SEC on November 4, 2009, which are incorporated by
reference herein. Limited partner interests are inherently
different from the capital stock of a corporation, although many
of the business risks to which we are subject are similar to
those that would be faced by a corporation engaged in a business
similar to ours. If any of the following risks were actually to
occur, our business, financial condition or results of
operations could be materially adversely affected. In this case,
we might not be able to pay distributions on our common units,
the trading price of our common units could decline and
unitholders could lose all or part of their investment. These
risk factors should be read in conjunction with the other
detailed information concerning us set forth herein.
RISKS RELATING TO
EXISTING LITIGATION AT MARTIN RESOURCE MANAGEMENT
Existing
litigation between Ruben Martin and Scott Martin and related
parties concerning the ownership, management and operation of
Martin Resource Management, the owner of our General Partner,
could adversely effect us.
As disclosed elsewhere in this prospectus supplement, there are
several pending lawsuits between Ruben Martin, the President,
Chief Executive Officer and member of the board of directors of
our General Partner, and Scott Martin, who is Ruben
Martins brother, and related parties concerning the
ownership, management and operation of Martin Resource
Management, the owner of our General Partner. We are not a party
to any of those lawsuits and they do not assert any claims
(i) against us, (ii) concerning our governance or
operations or (iii) against our directors, officers or
employees with respect to their service to us. The existence of
those lawsuits, however, including any ultimate outcomes that
might be deemed negative to us or our existing management team,
could adversely effect our ability to access capital markets or
obtain additional credit or negatively impact our business,
results of operations
and/or
ability to make distributions to our unitholders. Any similar
effects from such litigation on Martin Resource Management or
its existing management team could also adversely affect us.
In addition, such litigation, depending on its ultimate outcome,
could also result in changes in the existing boards of directors
and management teams of Martin Resource Management and us. To
the extent that any such adverse circumstances occur, they could
be deemed by our lenders to have a material adverse
effect on us, thereby providing such lenders with an
opportunity to prohibit further borrowings by us under our
credit facility and, depending on the circumstances, assert that
an event of default exists thereunder. If any such event of
default exists and is continuing, then, upon the election of our
lenders, all outstanding amounts due under our credit facility
could be accelerated and could become immediately due and
payable. Similarly, a negative outcome in such litigation could
result in a similar result under the credit facility maintained
by Martin Resource Management. While any such litigation remains
pending, there can be no assurance that the litigation parties
adverse to our existing management team or the existing
management team of Martin Resource Management will not seek to
disrupt, delay or postpone the offering made hereby or any
future attempts by us to access the capital markets.
For a more detailed discussion of the pending litigation
matters, please read Existing Litigation at Martin
Resource Management beginning on
page S-5
of this prospectus supplement.
S-12
Risk
factors
TAX
RISKS
Our tax treatment
depends on our status as a partnership for federal income tax
purposes, as well as our not being subject to a material amount
of entity-level taxation by individual states. The recent
decision of the United States Court of Appeals for the Fifth
Circuit in Tidewater Inc. v. United States creates
some uncertainty whether we will be classified as a partnership
for U.S. federal income tax purposes.
The anticipated after-tax economic benefit of an investment in
us depends largely on our classification as a partnership for
federal income tax purposes. In order for us to be classified as
a partnership for U.S. federal income tax purposes, more
than 90% of our gross income each year must be qualifying
income under Section 7704 of the U.S. Internal
Revenue Code of 1986, as amended (the Internal Revenue
Code). Qualifying income includes income and
gains derived from the transportation, storage, processing and
marketing of crude oil, natural gas and products thereof. Other
types of qualifying income include interest (other than from a
financial business), dividends, gains from the sale of real
property and gains from the sale or other disposition of capital
assets held for the production of income that otherwise
constitutes qualifying income. Thus, qualifying
income includes income from providing marine
transportation services to customers with respect to crude oil,
natural gas and certain products thereof but does not include
rental income from leasing vessels to customers.
The recent decision of the United States Court of Appeals for
the Fifth Circuit in Tidewater Inc. v. United States,
565 F.3d 299 (5th Cir. April 13, 2009) held
that marine time charter agreements are leases that
generate rental income for purposes of a foreign sales
corporation provision of the Code. After the Tidewater
decision, there is some uncertainty regarding the status of
a significant portion of our income as qualifying
income and, thus, whether we are classified as a
partnership for federal income tax purposes. As a result of this
uncertainty, our counsel, Baker Botts L.L.P., is now of the
opinion that we should (as opposed to will) be classified as a
partnership for U.S. federal income tax purposes. Please
read Material tax considerationsPartnership
Status. Additionally, as a result of the Tidewater
decision, we have instructed such counsel to commence the
process of obtaining a private letter ruling from the
U.S. Internal Revenue Service to confirm that gross income
from our marine time charter agreements constitutes
qualifying income under Section 7704 of the
Internal Revenue Code. There can be no assurance that the
U.S. Internal Revenue Service (the IRS) will
issue a favorable private letter ruling to us.
If the income from our marine time charters were not considered
qualifying income, then we would not have satisfied
the qualifying income requirement of
Section 7704 for any year of our existence and,
accordingly, we would be classified as a corporation for federal
income tax purposes. If we were treated as a corporation for
federal income tax purposes, we would owe federal income tax on
our income at the corporate tax rate, which is currently a
maximum of 35%, and would likely owe state income tax at varying
rates, for 2006 through the current tax year. Distributions
would generally be taxed again to unitholders as corporate
distributions and no income, gains, losses, or deductions would
flow through to unitholders. Because a tax would be imposed upon
us as an entity for a period of several years, cash available
for distribution to unitholders would be reduced. Treatment of
us as a corporation would result in a reduction in the
anticipated cash flow and after-tax return to unitholders and
therefore would likely result in a reduction in the value of the
common units.
Moreover, current law may change so as to cause us to be treated
as a corporation for federal income tax purposes or otherwise
subject us to entity-level taxation. At the federal level,
members of Congress have considered substantive changes to the
existing U.S. tax laws that would have affected certain
publicly traded partnerships. Although the legislation
considered would not have appeared to affect our tax treatment,
we are unable to predict whether any such change or other
proposals will ultimately be enacted. Moreover, any modification
to the federal income tax laws and interpretations thereof may
or may not be applied retroactively. Any such changes could
negatively impact the value of an investment
S-13
Risk
factors
in our common units. At the state level, because of widespread
state budget deficits and other reasons, several states are
evaluating ways to subject partnerships to entity-level taxation
through the imposition of state income, franchise and other
forms of taxation. For example, we are required to pay Texas
franchise tax at a maximum effective rate of 0.7% of our gross
income apportioned to Texas in the prior year. Imposition of any
such tax on us by any other state will reduce the cash available
for distribution to you.
Our partnership agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for federal, state or local income
tax purposes, then the minimum quarterly distribution amount and
the target distribution amount will be adjusted to reflect the
impact of that law on us.
S-14
Use of proceeds
We will receive net proceeds of approximately
$ million from the sale of
the 1,650,000 common units offered by this prospectus
supplement, after deducting underwriting discounts and estimated
offering expenses. This amount includes a proportionate capital
contribution from our general partner to maintain its 2% general
partner interest in us. If the underwriter exercises its option
to purchase 247,500 additional common units in full, we expect
to receive additional net proceeds of approximately
$ million. We will use the
net proceeds from this offering to repay outstanding
indebtedness incurred under our revolving loan facility. Such
amounts may be reborrowed and used to fund both recent
acquisitions and expansion capital expenditures.
As of February 1, 2010, we had outstanding borrowings of
approximately $249.6 million under our revolving loan
facility, with a weighted-average interest rate of 7.54%, and of
$67.9 million under our term loan facility, with a
weighted-average interest rate of 4.73%. Borrowings under our
credit facility are secured by substantially all of our assets
and have been incurred primarily to finance historical
acquisitions and expansion capital expenditures, as well as for
general working capital needs from time to time. Our credit
facility matures in November 2012.
Affiliates of certain of the underwriters are lenders under our
revolving loan facility and will receive a portion of the
proceeds from this offering through repayment of indebtedness
under the revolving loan facility. Please read
Underwriting.
S-15
Capitalization
The following table shows our cash and cash equivalents and our
capitalization as of September 30, 2009 on:
|
|
Ø
|
a historical basis;
|
|
Ø
|
as adjusted for the Cross Transaction, the Investment and the
Amendments to the Credit Agreement (See
SummaryRecent Developments); and
|
|
Ø
|
as further adjusted to give effect to: (a) the public
offering of 1,650,000 common units, (b) the increase in our
general partner capital account of approximately
$ million to allow it to
maintain its 2% general partner interest, and (c) the
application of the net proceeds therefrom as set forth under
Use of proceeds.
|
The historical information in the table is derived from and
should be read in conjunction with our historical financial
statements, including the accompanying notes, included in our
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2009, which is
incorporated by reference in this prospectus supplement and the
accompanying prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
As Further
|
|
|
|
Actual
|
|
|
As
Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
5,924
|
|
|
$
|
5,924
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, including current maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving loan
facility(1)
|
|
|
170,000
|
|
|
|
220,802
|
|
|
|
|
|
Term loan facility
|
|
|
130,000
|
|
|
|
67,949
|
|
|
|
67,949
|
|
Other
|
|
|
6,311
|
|
|
|
6,311
|
|
|
|
6,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
306,311
|
|
|
|
295,062
|
|
|
|
|
|
Partners capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders
|
|
|
222,485
|
|
|
|
259,008
|
|
|
|
|
|
Subordinated unitholders
|
|
|
(4,734
|
)
|
|
|
11,700
|
|
|
|
11,700
|
|
General partner
|
|
|
3,595
|
|
|
|
4,919
|
|
|
|
|
|
Accumulated other comprehensive (loss)
|
|
|
(3,065
|
)
|
|
|
(3,065
|
)
|
|
|
(3,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners capital
|
|
|
218,281
|
|
|
|
272,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
524,592
|
|
|
$
|
567,625
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of February 1, 2010, borrowings under our revolving
loan facility were $249.6 million and borrowing under our
term loan facility were $67.9 million. |
S-16
Price range of
common units and distributions
Our common units are quoted on the Nasdaq Global Select Market
under the symbol MMLP. Our common units were
admitted for quotation on November 1, 2002 at an initial
public offering price of $19.00 per common unit.
The following table sets forth, for the periods indicated, the
high and low sales prices per common unit, as reported by the
Nasdaq Global Select Market, and the amount of the cash
distributions declared per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Price
Range
|
|
|
Distributions
|
|
|
|
High
|
|
|
Low
|
|
|
Per
Unit(1)
|
|
|
|
|
Year Ending December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter(2)
|
|
$
|
34.10
|
|
|
$
|
31.36
|
|
|
|
(3
|
)
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
31.95
|
|
|
$
|
25.01
|
|
|
$
|
0.750
|
(4)
|
Third Quarter
|
|
$
|
28.51
|
|
|
$
|
20.25
|
|
|
$
|
0.750
|
|
Second Quarter
|
|
$
|
22.58
|
|
|
$
|
17.23
|
|
|
$
|
0.750
|
|
First Quarter
|
|
$
|
21.84
|
|
|
$
|
13.76
|
|
|
$
|
0.750
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
28.69
|
|
|
$
|
12.00
|
|
|
$
|
0.750
|
|
Third Quarter
|
|
$
|
36.60
|
|
|
$
|
19.00
|
|
|
$
|
0.750
|
|
Second Quarter
|
|
$
|
36.73
|
|
|
$
|
31.32
|
|
|
$
|
0.740
|
|
First Quarter
|
|
$
|
37.67
|
|
|
$
|
30.00
|
|
|
$
|
0.720
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
39.61
|
|
|
$
|
35.01
|
|
|
$
|
0.700
|
|
Third Quarter
|
|
$
|
42.67
|
|
|
$
|
33.34
|
|
|
$
|
0.680
|
|
Second Quarter
|
|
$
|
42.98
|
|
|
$
|
39.02
|
|
|
$
|
0.660
|
|
First Quarter
|
|
$
|
41.23
|
|
|
$
|
32.50
|
|
|
$
|
0.640
|
|
|
|
|
(1) |
|
Distributions are shown for the quarter with respect to which
they were declared. |
|
(2) |
|
Through February 1, 2010. |
|
(3) |
|
Since the first quarter of 2010 has not concluded, a
quarterly cash distribution has not yet been declared for the
first quarter of 2010. |
|
(4) |
|
On January 21, 2010, we declared a quarterly cash
distribution of $0.75 per common unit for the fourth quarter of
2009, or $3.00 per common unit on an annualized basis.
Purchasers of common units in this offering will not participate
in the fourth quarter distribution to be paid on
February 12, 2010. |
S-17
Material tax
considerations
This section discusses the material tax considerations that may
be relevant to prospective unitholders who are individual
citizens or residents of the United States and, unless otherwise
noted in the following discussion, is the opinion of Baker Botts
L.L.P., counsel to our general partner and us, insofar as it
relates to legal conclusions with respect to matters of United
States federal income tax law. This section is based upon
current provisions of the Internal Revenue Code, existing
Treasury regulations and proposed Treasury regulations
promulgated under the Internal Revenue Code (the Treasury
Regulations) and current administrative rulings and court
decisions, all of which are subject to change. Later changes in
these authorities may cause the tax consequences to vary
substantially from the consequences described below. Unless the
context otherwise requires, references in this section to
us or we are references to Martin
Midstream Partners L.P.
The following discussion does not comment on all federal income
tax matters affecting us or the unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application
to corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (IRAs) and other tax-qualified retirement
plans, real estate investment trusts (REITs) or mutual funds.
Accordingly, we urge each prospective unitholder to consult, and
depend on, his own tax advisor in analyzing the federal, state,
local, and foreign tax consequences particular to him of the
ownership or disposition of common units.
Except as described in Partnership Status below, no
ruling has been or will be requested from the IRS regarding any
matter affecting us or prospective unitholders. Instead, we will
rely on opinions of Baker Botts L.L.P. Unlike a ruling, an
opinion of counsel represents only that counsels best
legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made herein may not be
sustained by a court if contested by the IRS. Any contest of
this sort with the IRS may materially and adversely impact the
market for our common units and the prices at which common units
trade. In addition, the costs of any contest with the IRS,
principally legal, accounting and related fees, will result in a
reduction in cash available for distribution to our unitholders
and our general partner and thus will be borne indirectly by our
unitholders and our general partner. Furthermore, the tax
treatment of us, or of an investment in us, may be significantly
modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be
retroactively applied.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinions of Baker Botts L.L.P. and are
based on the accuracy of the representations made by us.
For the reasons described below, Baker Botts L.L.P. has not
rendered an opinion with respect to the following specific
federal income tax issues:
|
|
Ø
|
the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (Please see
Tax Consequences of Unit OwnershipTreatment of
Short Sales);
|
|
Ø
|
whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (Please see
Disposition of Common UnitsAllocations Between
Transferors and Transferees); and
|
|
Ø
|
whether our method for depreciating Section 743 adjustments
is sustainable in certain cases (Please see Tax
Consequences of Unit OwnershipSection 754
Election).
|
Moreover, for the reasons described below, Baker Botts L.L.P. is
rendering its opinion that we should (as opposed to will) be
classified as a partnership and the Operating Partnership should
be disregarded as an entity separate from us for federal income
tax purposes.
S-18
Material tax
considerations
Partnership
status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable to the
partnership or to the partner unless the amount of cash
distributed to him is in excess of the partners adjusted
basis in his partnership interest.
In general, entities with multiple owners which are formed as
state law limited partnerships are classified as partnerships
for federal income tax purposes provided that they do not elect
to be taxed as corporations. However, Section 7704 of the
Internal Revenue Code provides that publicly traded partnerships
will, as a general rule, be taxed as corporations. However, an
exception, referred to as the Qualifying Income
Exception, exists with respect to publicly traded
partnerships of which 90% or more of the gross income for every
taxable year consists of qualifying income.
Qualifying income includes income and gains derived from the
transportation, storage, processing and marketing of crude oil,
natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of capital assets held for the
production of income that otherwise constitutes qualifying
income. Qualifying income does not include rental income from
leasing personal property.
A recent decision of the United States Court of Appeals for the
Fifth Circuit in Tidewater Inc. v. United States,
565 F.3d 299 (5th Cir. Apr. 13, 2009), held that
marine time charter agreements are leases that
generate rental income (rather than transportation services
income) for purposes of a foreign sales corporation provision of
the Internal Revenue Code. Although the Tidewater case
was not decided under Section 7704 of the Internal Revenue
Code, the opinion in the case creates some risk that the income
from our marine time charter agreements is rental income and,
therefore, is not qualifying income under
Section 7704 of the Internal Revenue Code. However, the
courts ruling in Tidewater was contrary to the
position of the IRS in that case, and it is currently uncertain
whether the IRS will follow the marine time charter analysis in
Tidewater for purposes of making qualifying
income determinations under Section 7704 of the
Internal Revenue Code. Moreover, the courts ruling in
Tidewater relies on a provision of the Internal Revenue
Code (Section 7701(e)) which, by its terms, is not directly
applicable to qualifying income determinations under
Section 7704 of the Internal Revenue Code.
After taking into account the decision in the Tidewater
case and the other items discussed in the preceding
paragraph, Baker Botts L.L.P. has rendered its opinion that,
based upon the Internal Revenue Code, its regulations, published
revenue rulings and court decisions, and the representations and
estimate described below, we should (as opposed to will) be
classified as a partnership and the Operating Partnership should
be disregarded as an entity separate from us for federal income
tax purposes.
In rendering its opinion, Baker Botts L.L.P. has relied on
factual representations made by us and our general partner and
on an estimate prepared by us that less than 7% of our gross
income for 2010 will not be qualifying income; however, this
estimate could change from time to time. The factual
representations made by us and our general partner upon which
Baker Botts L.L.P. has relied are:
(a) Neither we nor the Operating Partnership has
elected or will elect to be treated as a corporation;
(b) For each taxable year, more than 90% of our gross
income has been and will be income that Baker Botts L.L.P. has
opined or will opine is qualifying income within the
meaning of Section 7704(d) of the Internal Revenue Code; and
S-19
Material tax
considerations
(c) Each hedging transaction that we treat as
resulting in qualifying income has been and will be
appropriately identified as a hedging transaction pursuant to
applicable Treasury Regulations, and has been and will be
associated with oil, gas, or products thereof that are held or
to be held by us in activities that Baker Botts L.L.P. has
opined or will opine result in qualifying income.
We believe that these representations have been true in the past
and expect that these representations will be true in the future.
Because of the uncertainty resulting from the decision in the
Tidewater case, we have instructed our tax counsel to
commence the process of obtaining a private letter ruling from
the IRS to confirm that gross income from our marine time
charter agreements constitutes qualifying income
under Section 7704 of the Internal Revenue Code. There can
be no assurance that the IRS will issue a favorable private
letter ruling.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts), we will be treated as if
we had transferred all of our assets, subject to liabilities, to
a newly formed corporation, on the first day of the year in
which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock
to the unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal
income tax purposes.
If we were treated as an association taxable as a corporation in
any taxable year, either as a result of a failure to meet the
Qualifying Income Exception or otherwise, our items of income,
gain, loss and deduction would be reflected only on our tax
return rather than being passed through to the unitholders, and
we would owe federal income tax on our income at the corporate
tax rate, which is currently a maximum of 35%, and would likely
owe state income tax at varying rates, for 2006 through the
current tax year. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income,
to the extent of our current or accumulated earnings and
profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a reduction in the anticipated cash
flow and after-tax return to unitholders and therefore would
likely result in a reduction of the value of the units.
Moreover, if, because of the Tidewater decision, we were
deemed to have failed to have met the Qualifying Income
Exception, a tax would be imposed upon us as an entity for a
period of several years and, as a result, cash available for
distribution to unitholders would be reduced.
The discussion below is based on Baker Botts L.L.P.s
opinion that we should be classified as a partnership for
federal income tax purposes.
LIMITED PARTNER
STATUS
Unitholders who have become limited partners of Martin Midstream
Partners L.P. will be treated as partners of Martin Midstream
Partners L.P. for federal income tax purposes. Also, unitholders
whose common units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common
units will be treated as our partners for federal income tax
purposes. A beneficial owner of common units whose units have
been transferred to a short seller to complete a short sale
would appear to lose his status as a partner with respect to
those units for federal income tax purposes. Please see
Tax Consequences of Unit OwnershipTreatment of
Short Sales.
S-20
Material tax
considerations
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore appear to be fully taxable as ordinary income.
These holders are urged to consult their own tax advisors with
respect to their tax consequences of holding common units in
Martin Midstream Partners L.P.
The references to unitholders in the discussion that
follows assume that a unitholder is treated as one of our
partners for federal income tax purposes.
TAX CONSEQUENCES
OF UNIT OWNERSHIP
Flow-Through of
Taxable Income
We do not pay any federal income tax. Instead, each
unitholder will be required to report on his income tax return
his share of our income, gains, losses and deductions without
regard to whether corresponding cash distributions are received
by him. Consequently, we may allocate income to a unitholder
even if he has not received a cash distribution. Each unitholder
will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending
with or within his taxable year. Our taxable year ends on
December 31.
Treatment of
Distributions
Distributions by us to a unitholder generally will not be
taxable to the unitholder for federal income tax purposes,
except to the extent the amount of any such cash distribution
exceeds his tax basis in his common units immediately before the
distribution. Our cash distributions in excess of a
unitholders tax basis generally will be considered to be
gain from the sale or exchange of our common units, taxable in
accordance with the rules described under
Disposition of Common Units. Any reduction in
a unitholders share of our liabilities for which no
partner, including the general partner, bears the economic risk
of loss, known as nonrecourse liabilities, will be
treated as a distribution by us of cash to that unitholder. To
the extent our distributions cause a unitholders at
risk amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years.
Please see Limitations on Deductibility of
Losses.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture,
and/or
substantially appreciated inventory items, both as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, he will be
treated as having been distributed his proportionate share of
the Section 751 Assets and then having exchanged those
assets with us in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange
will generally result in the unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis (generally zero) for the share of
Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable
Income to Distributions
We estimate that if you purchase common units in this offering
and own them through the record date for the distribution for
the fourth calendar quarter of 2012, then you will be allocated,
on a cumulative basis, an amount of federal taxable income for
that period that will be less than 20% of the cash distributed
to you with respect to that period. These estimates are based
upon the assumption that our available cash for distribution
will be sufficient for us to make quarterly distributions of
$0.675 per unit
S-21
Material tax
considerations
to the holders of our common units, and other assumptions with
respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory,
competitive and political uncertainties beyond our control.
Further, the estimates are based on current tax law and certain
tax reporting positions that we have adopted with which the
Internal Revenue Service could disagree. Accordingly, we cannot
assure you that the estimates will be correct. The actual
percentage of taxable income to distributions could be higher or
lower, and any differences could be material and could
materially affect the value of the common units. For example,
the ratio of taxable income to distributions to a purchaser of
common units in this offering will be higher, and perhaps
substantially higher, than our estimate with respect to the
period described above if:
|
|
Ø
|
gross income from operations exceeds the amount required to
maintain the current distribution amount on all units, yet we
only distribute the current distribution amount on all units; or
|
|
Ø
|
we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
|
Basis of Common
Units
A unitholders initial tax basis for his common units will
be the amount he paid for our common units plus his share of our
nonrecourse liabilities. That basis will be increased by his
share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased, but not
below zero, by distributions from us, by the unitholders
share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures
that are not deductible in computing taxable income and are not
required to be capitalized. A unitholder will have no share of
our debt that is recourse to our general partner, but will have
a share, generally based on his share of profits, of our
nonrecourse liabilities. Please see Disposition of
Common UnitsRecognition of Gain or Loss.
Limitations on
Deductibility of Losses
The deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder, estate, trust, or corporate unitholder
(if more than 50% of the value of the corporate
unitholders stock is owned directly or indirectly by or
for five or fewer individuals or some tax-exempt organizations),
to the amount for which the unitholder is considered to be
at risk with respect to our activities, if that is
less than his tax basis. A unitholder subject to these
limitations must recapture losses deducted in previous years to
the extent that distributions cause his
at-risk
amount to be less than zero at the end of any taxable year.
Losses disallowed to a unitholder or recaptured as a result of
these limitations will carry forward and will be allowable as a
deduction to the extent that his at-risk amount is subsequently
increased, provided such losses do not exceed such
unitholders tax basis in his common units. Upon the
taxable disposition of a unit, any gain recognized by a
unitholder can be offset by losses that were previously
suspended by the at-risk limitation but may not be offset by
losses suspended by the basis limitation. Any loss previously
suspended by the at-risk limitation in excess of that gain would
no longer be utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by (i) any portion of that basis representing
amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and
(ii) any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholders at-risk amount will increase
or decrease as the tax basis of
S-22
Material tax
considerations
the unitholders units increases or decreases, other than
tax basis increases or decreases attributable to increases or
decreases in his share of our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely-held
corporations and personal service corporations can deduct losses
from passive activities, which are generally trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, any passive losses we generate will
only be available to offset our passive income generated in the
future and will not be available to offset income from other
passive activities or investments, including our investments or
investments in other publicly traded partnerships, or salary or
active business income. Passive losses that are not deductible
because they exceed a unitholders share of income we
generate may be deducted in full when he disposes of his entire
investment in us in a fully taxable transaction with an
unrelated party. The passive loss limitations are applied after
other applicable limitations on deductions, including the
at-risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on
Interest Deductions
The deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment or qualified
dividend income. The IRS has indicated that the net passive
income earned by a publicly traded partnership will be treated
as investment income to its unitholders. In addition, the
unitholders share of our portfolio income will be treated
as investment income.
Entity-Level Collections
If we are required or elect under applicable law to pay any
federal, state, local or foreign income tax on behalf of any
unitholder or our general partner or any former unitholder, we
are authorized to pay those taxes from our funds. That payment,
if made, will be treated as a distribution of cash to the
partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined,
we are authorized to treat the payment as a distribution to all
current unitholders. We are authorized to amend our partnership
agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of units and to adjust later
distributions, so that after giving effect to these
distributions, the priority and characterization of
distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner
would be required to file a claim in order to obtain a credit or
refund.
S-23
Material tax
considerations
Allocation of
Income, Gain, Loss and Deduction
In general, if we have a net profit, our items of income, gain,
loss and deduction will be allocated among the general partner
and the unitholders in accordance with their percentage
interests in us. At any time that distributions are made to the
common units in excess of distributions to certain other classes
of units, or incentive distributions are made to the general
partner, gross income will be allocated to the recipients to the
extent of these excess distributions or incentive distributions.
If we have a net loss for the entire year, that loss generally
will be allocated first to the general partner and the
unitholders in accordance with their percentage interests in us
to the extent of their positive capital accounts and, second, to
the general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for (i) any difference between the tax
basis and fair market value of our assets at the time of an
offering and (ii) any difference between the tax basis and
fair market value of any assets contributed to us that exists at
the time of such contribution (the assets described in
clauses (i) and (ii) are together referred to in this
discussion as the Contributed Property). The effect
of these allocations, referred to as Section 704(c)
Allocations, to a unitholder purchasing common units from us in
an offering will be essentially the same as if the tax bases of
our assets were equal to their fair market values at the time of
such offering. In the event we issue additional common units or
engage in certain other transactions in the future, we will make
reverse Section 704(c) Allocations, similar to
the Section 704(c) Allocations described above, to all
holders of partnership interests immediately prior to such
issuance or other transactions to account for the difference
between the book basis for purposes of maintaining
capital accounts and the fair market value of all property held
by us at the time of such issuance or future transaction. In
addition, items of recapture income will be allocated to the
extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in
order to minimize the recognition of ordinary income by some
unitholders. Finally, although we do not expect that our
operations will result in the creation of negative capital
accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and
manner as is needed to eliminate the negative balance as quickly
as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property,
referred to in this discussion as the Book-Tax
Disparity, will generally be given effect for federal
income tax purposes in determining a partners share of an
item of income, gain, loss or deduction only if the allocation
has substantial economic effect. In any other case, a
partners share of an item will be determined on the basis
of his interest in us, which will be determined by taking into
account all the facts and circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interests of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Baker Botts L.L.P. is of the opinion that, with the exception of
those issues specified in Section 754
Election and Disposition of Common
UnitsAllocations Between Transferors and Transferees
on which Baker Botts L.L.P. has not rendered an opinion,
allocations under our partnership agreement will be given effect
for federal income tax purposes in determining a partners
share of an item of income, gain, loss or deduction.
S-24
Material tax
considerations
Treatment of
Short Sales
A unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of those units. If so, he would no longer be
treated for tax purposes as a partner with respect to those
units during the period of the loan and may recognize gain or
loss from the disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Baker Botts L.L.P. has not rendered an opinion regarding the tax
treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units; therefore,
unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller
are urged to modify any applicable brokerage account agreements
to prohibit their brokers from borrowing and loaning their
units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership
interests. Please also read Disposition of Common
UnitsRecognition of Gain or Loss.
Alternative
Minimum Tax
Each unitholder will be required to take into account his
distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. We do not
expect to generate significant tax preference items or
adjustments. Prospective unitholders are urged to consult with
their tax advisors as to the impact of an investment in units on
their liability for the alternative minimum tax.
Tax
Rates
Under current law, the highest marginal U.S. federal income
tax rate applicable to ordinary income of individuals is 35% and
the highest marginal U.S. federal income tax rate
applicable to long-term capital gains (generally, capital gains
on certain assets held for more than 12 months) of
individuals is 15%. However, absent new legislation extending
the current rates, beginning January 1, 2011, the highest
marginal U.S. federal income tax rate applicable to
ordinary income and long-term capital gains of individuals will
increase to 39.6% and 20%, respectively. Moreover, these rates
are subject to change by new legislation at any time.
Section 754
Election
We have made the election permitted by Section 754 of the
Internal Revenue Code. That election is irrevocable without the
consent of the IRS. The election will generally permit us to
adjust a common unit purchasers tax basis in our assets
(inside basis) under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This
election does not apply to a person who purchases common units
directly from us. The Section 743(b) adjustment belongs to
the purchaser and not to other unitholders. For purposes of this
discussion, a unitholders inside basis in our assets will
be considered to have two components: (1) his share of our
tax basis in our assets (common basis) and
(2) his Section 743(b) adjustment to that basis.
Where the remedial allocation method is adopted (which we have
generally adopted as to all of our properties), the Treasury
Regulations under Section 743 of the Internal Revenue Code
require a portion of the Section 743(b) adjustment that is
attributable to recovery property under Section 168 of the
Internal Revenue Code whose book basis is in excess of its tax
basis to be depreciated over the remaining cost recovery period
for the Section 704(c) built-in gain. Under Treasury
S-25
Material tax
considerations
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, the general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these and any
other Treasury Regulations.
Although Baker Botts L.L.P. is unable to opine as to the
validity of this approach because there is no direct or indirect
controlling authority on this issue, we intend to depreciate the
portion of a Section 743(b) adjustment attributable to
unrealized appreciation in the value of Contributed Property, to
the extent of any unamortized Book-Tax Disparity, using a rate
of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the
propertys unamortized Book-Tax Disparity, or treat that
portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury Regulation
Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please see
Uniformity of Units. A unitholders tax
basis for his common units is reduced by his share of our
deductions (whether or not such deductions were claimed on an
individuals income tax return) so that any position we
take that understates deductions will overstate the common
unitholders basis in his common units, which may cause the
unitholder to understate gain or overstate loss on any sale of
such units. Please see Disposition of Common
UnitsRecognition of Gain or Loss. The IRS may
challenge our position with respect to depreciating or
amortizing the Section 743(b) adjustment we take to
preserve the uniformity of the units. If such a challenge were
sustained, the gain from the sale of units might be increased
without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation deductions and his share of any
gain or loss on a sale of our assets would be less. Conversely,
a Section 754 election is disadvantageous if the
transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial built-in
loss immediately after the transfer, or if we distribute
property and have a substantial basis reduction. Generally a
built-in loss or a basis reduction is substantial if it exceeds
$250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally nonamortizable or amortizable over a longer period of
time or under a less accelerated method than our tangible
assets. We cannot assure you that the determinations we make
will not be successfully challenged by the IRS and that the
deductions resulting from them will not be reduced or disallowed
altogether. Should the
S-26
Material tax
considerations
IRS require a different basis adjustment to be made, and should,
in our opinion, the expense of compliance exceed the benefit of
the election, we may seek permission from the IRS to revoke our
Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than
he would have been allocated had the election not been revoked.
Tax Treatment of
Operations
Accounting Method and Taxable Year. We use the year ending
December 31 as our taxable year and the accrual method of
accounting for federal income tax purposes. Each unitholder will
be required to include in income his share of our income, gain,
loss and deduction for our taxable year ending within or with
his taxable year. In addition, a unitholder who has a taxable
year ending on a date other than December 31 and who disposes of
all of his units following the close of our taxable year but
before the close of his taxable year must include his share of
our income, gain, loss and deduction in income for his taxable
year, with the result that he will be required to include in
income for his taxable year his share of more than one year of
our income, gain, loss and deduction. Please see
Disposition of Common UnitsAllocations Between
Transferors and Transferees.
Tax Basis,
Depreciation and Amortization
The tax basis of our assets will be used for purposes of
computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between
the fair market value of our assets and their tax basis
immediately prior to an offering will be borne by our
unitholders holding interests in us prior to any such offering.
Please see Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets subject
to these allowances are placed in service. We may not be
entitled to amortization deductions with respect to certain
goodwill conveyed to us in future transactions or held at the
time of any future offering. Property we subsequently acquire or
construct may be depreciated using accelerated methods permitted
by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please see
Tax Consequences of Unit OwnershipAllocation
of Income, Gain, Loss and Deduction and
Disposition of Common UnitsRecognition of Gain
or Loss.
The costs we incur in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax
Basis of Our Properties
The federal income tax consequences of the ownership and
disposition of units will depend in part on our estimates of the
relative fair market values, and determination of the initial
tax bases, of our assets. Although we may from time to time
consult with professional appraisers regarding valuation
matters, we will make many of the relative fair market value
estimates ourselves. These estimates of value and determinations
of basis are subject to challenge and will not be binding on the
IRS or the courts. If the
S-27
Material tax
considerations
estimates of fair market value or determinations of basis are
later found to be incorrect, the character and amount of items
of income, gain, loss or deductions previously reported by
unitholders might change, and unitholders might be required to
adjust their tax liability for prior years and incur interest
and penalties with respect to those adjustments.
DISPOSITION OF
COMMON UNITS
Recognition of
Gain or Loss
Gain or loss will be recognized on a sale of units equal to the
difference between the amount realized and the unitholders
tax basis for the units sold. A unitholders amount
realized will be measured by the sum of the cash or the fair
market value of other property received by him plus his share of
our nonrecourse liabilities. Because the amount realized
includes a unitholders share of our nonrecourse
liabilities, the gain recognized on the sale of units could
result in a tax liability in excess of any cash received from
the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of
units held for more than twelve months will generally be taxed
at a maximum U.S. federal income tax rate of 15% through
December 31, 2010 and 20% thereafter (absent new
legislation extending or adjusting the current rate). However, a
portion, which will likely be substantial, of this gain or loss
will be separately computed and taxed as ordinary income or loss
under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation
recapture or other unrealized receivables or to
inventory items we own. The term unrealized
receivables includes potential recapture items, including
depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of
a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize
both ordinary income and a capital loss upon a sale of units.
Net capital losses may offset capital gains and no more than
$3,000 of ordinary income, in the case of individuals, and may
only be used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling discussed
above, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, he may
designate specific common units sold for purposes of determining
the holding period of units transferred. A unitholder electing
to use the actual holding period of common units transferred
must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder
considering the purchase of additional units or a sale of common
units purchased in separate transactions is urged to consult his
tax advisor as to the possible consequences of this ruling and
application of the Treasury Regulations.
S-28
Material tax
considerations
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations
Between Transferors and Transferees
In general, our taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be
subsequently apportioned among the unitholders in proportion to
the number of units owned by each of them as of the opening of
the applicable exchange on the first business day of the month,
which we refer to below as the Allocation Date.
However, gain or loss realized on a sale or other disposition of
our assets other than in the ordinary course of business will be
allocated among the unitholders on the Allocation Date in the
month in which that gain or loss is recognized. As a result, a
unitholder transferring units may be allocated income, gain,
loss and deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations. Recently,
however, the Department of the Treasury and the IRS issued
proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a
similar monthly simplifying convention to allocate tax items
among transferor and transferee unitholders, although such tax
items must be prorated on a daily basis. Existing publicly
traded partnerships are entitled to rely on these proposed
Treasury Regulations; however, they are not binding on the IRS
and are subject to change until final Treasury Regulations are
issued. Accordingly, Baker Botts L.L.P. is unable to opine on
the validity of this method of allocating income and deductions
between transferor and transferee unitholders. If this method is
not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among the
unitholders. We are authorized to revise our method of
allocation between transferor and transferee unitholders, as
well as unitholders whose interests vary during a taxable year,
to conform to a method permitted under future Treasury
Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification
Requirements
A unitholder who sells any of his units is generally required to
notify us in writing of that sale within 30 days after the
sale (or, if earlier, January 15 of the year following the
sale). A purchaser of units who purchases units from another
unitholder is also generally required to notify us in writing of
that purchase within 30 days after the purchase. Upon
receiving such notifications, we are required to notify
S-29
Material tax
considerations
the IRS of that transaction and to furnish specified information
to the transferor and transferee. Failure to notify us of a
purchase may, in some cases, lead to the imposition of
penalties. However, these reporting requirements do not apply to
a sale by an individual who is a citizen of the United States
and who effects the sale or exchange through a broker who
satisfies such requirements.
Constructive
Termination
We will be considered to have been terminated for tax purposes
if there are sales or exchanges that, in the aggregate,
constitute 50% or more of the total interests in our capital and
profits within a twelve-month period. For purposes of measuring
whether the 50% threshold is reached, multiple sales of the same
interest are counted only once. A constructive termination
results in the closing of our taxable year for all unitholders.
In the case of a unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of our
taxable year may result in more than twelve months of our
taxable income or loss being includable in his taxable income
for the year of termination. A constructive termination
occurring on a date other than December 31 will result in us
filing two tax returns (and could result in common unitholders
receiving two Schedules K-1) for one fiscal year and the cost of
the preparation of these returns will be borne by all common
unitholders. We would be required to make new tax elections
after a termination, including a new election under
Section 754 of the Internal Revenue Code, and a termination
would result in a deferral of our deductions for depreciation. A
termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or
subject us to, any tax legislation enacted before the
termination. The IRS has announced recently that it plans to
issue guidance regarding the treatment of constructive
terminations of publicly traded partnerships such as us. Any
such guidance may change the application of the rules discussed
above and may affect the tax treatment of a unitholder.
UNIFORMITY OF
UNITS
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please see Tax Consequences of Unit
OwnershipSection 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as nonamortizable, to the
extent attributable to property the common basis of which is not
amortizable, consistent with the regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. Please see Tax Consequences of Unit
OwnershipSection 754 Election. To the extent
that the Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax
Disparity, we will apply the rules described in the Treasury
Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation
and amortization position under which all purchasers acquiring
units in the same month would receive depreciation and
amortization deductions, whether attributable to a common basis
or Section 743(b) adjustment, based upon the same
applicable methods and lives as if they had purchased a direct
interest in our property. If this position is adopted, it may
result in lower annual depreciation and amortization deductions
than would otherwise be allowable to some unitholders and risk
the loss of depreciation and amortization deductions not taken
in the year that
S-30
Material tax
considerations
these deductions are otherwise allowable. This position will not
be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of
additional deductions. Please see Disposition of
Common UnitsRecognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by tax-qualified retirement plans, other
tax-exempt organizations, non-resident aliens, foreign
corporations and other
non-U.S. persons
raises issues unique to those investors and, as described below,
may have substantially adverse tax consequences to them. If you
are a tax-exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units.
Most other organizations exempt from federal income tax,
including IRAs and other tax-qualified retirement plans, are
subject to federal income tax on unrelated business taxable
income. Virtually all of our income allocated to a unitholder
that is a tax-exempt organization will be unrelated business
taxable income and will be taxable to it.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, cash distributions to
non-U.S. unitholders
will be subject to withholding at the highest applicable
effective tax rates. Each
non-U.S. unitholder
must obtain a taxpayer identification number from the IRS and
submit that number to our transfer agent on a
Form W-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which is effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
A foreign unitholder who sells or otherwise disposes of a common
unit will be subject to U.S. federal income tax on gain
realized from the sale or disposition of that unit to the extent
the gain is effectively connected with a U.S. trade or
business of the foreign unitholder. Under a ruling published by
the IRS, a unitholders gain is considered to be
effectively connected income to the extent such gain is
attributable to assets of Martin Midstream Partners L.P. which
are used in the conduct of a U.S. trade or business. In
this regard, substantially all of our assets are used in the
conduct of a U.S. trade or business. Moreover, under the
Foreign Investment in Real Property Tax Act, a foreign common
unitholder generally will be subject to U.S. federal income
tax upon the sale or disposition of a common unit if (i) he
owned (directly or constructively applying certain attribution
rules) more than 5% of our common units at any time during the
five-year period ending on the date of such disposition and
(ii) 50% or more of the fair market value of all of our
assets consisted of U.S. real property interests at any
time during the shorter of the period during which such
unitholder held the common units or the
S-31
Material tax
considerations
5-year
period ending on the date of disposition. Currently, more than
50% of our assets consist of U.S. real property interests
and we do not expect that to change in the foreseeable future.
Therefore, foreign unitholders likely will be subject to federal
income tax on gain from the sale or disposition of their units.
ADMINISTRATIVE
MATTERS
Information
Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days
after the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders
share of income, gain, loss and deduction. We cannot assure you
that those positions will in all cases yield a result that
conforms to the requirements of the Internal Revenue Code,
Treasury Regulations or administrative interpretations of the
IRS. Neither we nor Baker Botts L.L.P. can assure prospective
unitholders that the IRS will not successfully contend in court
that those positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. Our partnership agreement names our general partner as
our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax
Matters Partner can extend the statute of limitations for
assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the
IRS unless that unitholder elects, by filing a statement with
the IRS, not to give that authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review, by which all
the unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee
Reporting
Persons who hold an interest in us as a nominee for another
person are required to furnish to us:
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the name, address and taxpayer identification number of the
beneficial owner and the nominee;
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whether the beneficial owner is:
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(1) a person that is not a United States person;
S-32
Material tax
considerations
(2) a foreign government, an international
organization or any wholly owned agency or instrumentality of
either of the foregoing; or
(3) a tax-exempt entity;
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the amount and description of common units held, acquired or
transferred for the beneficial owner; and
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specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales.
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Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up
to a maximum of $100,000 per calendar year, is imposed by the
Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of
the units with the information furnished to us.
Accuracy-Related
Penalties
An additional tax equal to 20% of the amount of any portion of
an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or
regulations, substantial understatements of income tax and
substantial valuation misstatements, is imposed by the Internal
Revenue Code. No penalty will be imposed, however, for any
portion of an underpayment if it is shown that there was a
reasonable cause for that portion and that the taxpayer acted in
good faith regarding that portion.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to
penalty generally is reduced if any portion is attributable to a
position adopted on the return:
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for which there is, or was, substantial authority; or
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as to which there is a reasonable basis and the pertinent facts
of that position are disclosed on the return.
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If any item of income, gain, loss or deduction included in the
distributive shares of unitholders might result in that kind of
an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to tax shelters, which we do not believe includes us
or any of our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the
value of any property, or the tax basis of any property, claimed
on a tax return is 150% or more of the amount determined to be
the correct amount of the valuation or tax basis, (b) the
price for any property or services (or for the use of property)
claimed on any such return with respect to any transaction
between persons described in Internal Revenue Code
Section 482 is 200% or more (or 50% or less) of the amount
determined under Section 482 to be the correct amount of
such price, or (c) the net Internal Revenue Code
Section 482 transfer price adjustment for the taxable year
exceeds the lesser of $5 million or 10% of the
taxpayers gross receipts. No penalty is imposed unless the
portion of the underpayment attributable to a substantial
valuation misstatement exceeds $5,000 ($10,000 for most
corporations). The penalty is increased to 40% in the event of a
gross valuation misstatement. We do not anticipate making any
valuation misstatements.
S-33
Material tax
considerations
Reportable
Transactions
If we were to engage in a reportable transaction, we
(and possibly you and others) would be required to make a
detailed disclosure of the transaction to the IRS. A transaction
may be a reportable transaction based upon any of several
factors, including the fact that it is a type of tax avoidance
transaction publicly identified by the IRS as a listed
transaction or that it produces certain kinds of losses
for partnerships, individuals, S corporations, and trusts
in excess of $2 million in any single year, or
$4 million in any combination of six successive tax years.
Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and
possibly your tax return) would be audited by the IRS. Please
see Information Returns and Audit Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related Penalties,
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability, and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
STATE, LOCAL,
FOREIGN AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you may be subject to other
taxes, such as state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder should
consider their potential impact on his investment in us. We
currently own property and do business in Alabama, Arkansas,
California, Georgia, Florida, Illinois, Louisiana, Mississippi,
Nebraska, Texas and Utah. Moreover, we may also own property or
do business in other jurisdictions in the future. Although you
may not be required to file a return and pay taxes in some
jurisdictions because your income from that jurisdiction falls
below the filing and payment requirement, you might be required
to file income tax returns and to pay income taxes in other
jurisdictions in which we do business or own property, now or in
the future, and may be subject to penalties for failure to
comply with those requirements. In some jurisdictions, tax
losses may not produce a tax benefit in the year incurred and
may not be available to offset income in subsequent taxable
years. Some jurisdictions may require us, or we may elect, to
withhold a percentage of income from amounts to be distributed
to a unitholder who is not a resident of the jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholders income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to
unitholders for purposes of determining the amounts distributed
by us. Please see Tax Consequences of Unit
OwnershipEntity-Level Collections. Based on
current law and our estimate of our future operations, the
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate the
legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns, that may be required of him. Baker Botts L.L.P. has not
rendered an opinion on the state, local or foreign tax
consequences of an investment in us.
S-34
Investment in us by
benefit plans
An equity investment in us by a benefit plan may
raise certain issues under the U.S. Employee Retirement
Income Security Act of 1974, as amended (ERISA), and
the Internal Revenue Code. Certain of these issues are described
below. No attempt is made in this summary to describe issues
that may arise under federal, state or local laws that are not
preempted by ERISA (for example, any federal, state or local
laws applicable to governmental plans or other benefit plans
excluded from coverage under ERISA). In addition, this summary
does not discuss the laws of any country other than the United
States. Prospective investors that may be subject to any such
laws should therefore consult their professional advisors with
regard to such laws.
BENEFIT
PLANS
ERISA and the Internal Revenue Code regulate benefit
plans, which are broadly defined in Section 3(3) of
ERISA as employee benefit plans and
Section 4975(e)(1) of the Internal Revenue Code as
plans. For purposes of this summary, the term
benefit plan includes, but is not limited to,
qualified pension, profit-sharing, and stock bonus plans
established by an employer or employer organization (also
referred to herein as qualified retirement plans) and IRAs.
FIDUCIARIES
ERISA and the Internal Revenue Code impose certain duties on
persons who are fiduciaries of such benefit plans and prohibit
certain transactions involving the assets of such benefit plans
and their fiduciaries or certain parties with an interest in the
benefit plans. Under ERISA and the Internal Revenue Code, any
person who (a) exercises discretionary authority or control
over the management of the benefit plan or exercises any
authority or control over the management or disposition of the
assets of the benefit plan, (b) renders investment advice
to the benefit plan for a fee or other compensation,
(c) has discretionary authority or responsibility in the
administration of the benefit plan, or (d) otherwise is
designated to carry out the foregoing, generally is considered
to be a fiduciary of the benefit plan.
Duties of a
fiduciary
Under ERISA, a benefit plan fiduciary is required to discharge
its duties with respect to such benefit plan solely in the
interest of participants and beneficiaries of the benefit plan,
and for the exclusive purpose of (a) providing benefits to
participants and beneficiaries, and (b) defraying
reasonable expenses of the benefit plan. Such duties must be
discharged with such care, skill, prudence, and diligence under
the circumstances then prevailing as a prudent person acting in
like capacity and familiar with such matters would use in the
conduct of an enterprise of a similar character and with similar
aims. A fiduciary must also (a) diversify the investments
of the benefit plan so as to minimize the risk of large losses,
unless under the circumstances it is clearly prudent not to do
so, and (b) invest assets of the benefit plan in accordance
with the documents and instruments governing the benefit plan to
the extent such documents and instruments are consistent with
the provisions of ERISA.
In considering an investment of a portion of the assets of any
benefit plan in us, a benefit plan fiduciary must discharge its
duties in accordance with ERISA and the Internal Revenue Code.
Such duties include, but are not limited to, determining, in
light of the risk factors inherent in an investment in us,
whether the investment is in accordance with the documents and
instruments governing the benefit plan and the applicable
provisions of ERISA or the Internal Revenue Code. For instance,
the benefit plan fiduciary should consider whether the
investment is permitted by the applicable plan documents and
governing instruments and would be considered as prudent under
ERISA and whether the benefit plan will satisfy ERISAs
diversification rules after the investment is made (the
fiduciary rules of ERISA generally do not
S-35
Investment in us
by benefit plans
apply to IRAs but IRAs are subject to the prohibited transaction
rules described below and those rules should be evaluated in
connection with any contemplated investment in us by an IRA). In
addition, a benefit plan fiduciary should consider whether the
investment will result in the recognition of unrelated business
taxable income by the benefit plan, and the effect such
recognition would have on the benefit plans after tax
investment return.
PROHIBITED
TRANSACTIONS
A prohibited transaction is defined to include most
transactions involving plan assets, including
(without limitation) the direct or indirect sale of property,
lending of money, and provision of services, between a benefit
plan and certain persons who have specified relationships with
the benefit plan (such persons being a party in
interest,
and/or
disqualified person, as described below). Acts of
self-dealing by fiduciaries also constitute prohibited
transactions. Unless an statutory, individual or class exemption
is available, the Internal Revenue Code imposes an excise tax on
such prohibited transactions and may result in a loss of
tax-exempt status with respect to an IRA. Accordingly, absent an
exemption, a fiduciary of a benefit plan should not invest the
assets of any benefit plan in us if our general partner or any
of its affiliates is a fiduciary or other party in
interest (as defined in ERISA) or disqualified
person (as defined in the Internal Revenue Code) with
respect to the benefit plan.
PLAN
ASSETS
Fiduciary responsibilities and prohibited transaction
restrictions generally apply with respect to the assets of a
benefit plan, as well as any entity whose assets include such
benefit plans assets. The U.S. Department of Labor
has promulgated regulations, 29 C.F.R.
Section 2510.3-101
as modified by Section 3(42) of ERISA (the Plan Asset
Regulations), which identify a benefit plans assets
when a benefit plan invests in an entity. Under the Plan Asset
Regulations, if a benefit plan (or an entity whose assets
include such benefit plans assets, collectively, a
benefit plan investor within the meaning of the Plan
Asset Regulations) invests in us, unless an exception applies,
the benefit plans assets will include its interest in us
and will also include our underlying assets.
There are four exceptions to the rule treating an entitys
underlying assets as plan assets. Generally, if a benefit plan
invests in an entity, then such benefit plans assets will
include its equity investment in the entity but will not include
the entitys underlying assets, so long as the entity is
one:
(a) whose security is a publicly offered security
(i.e., the equity interests are held by 100 or more investors
independent of the issuer and each other, freely transferable
within the meaning of the Plan Asset Regulations and registered
under certain provisions of the federal securities laws);
(b) whose security is registered under the Investment
Company Act of 1940;
(c) which is an operating company, including a
venture capital operating company or a real
estate operating company (i.e., an entity primarily
engaged in production of a product or service other than the
investment of capital (i.e., an active business), an entity that
primarily invests in such active businesses or invests certain
real estate that is managed or developed); or
(d) in which equity participation by benefit plan
investors is not significant (i.e., benefit plan
investors hold less than 25% of the total value of each class of
equity interests in the entity).
It is expected that our common units will constitute
publicly-offered securities, within the meaning of
(a) immediately above. Thus, it is expected that our
underlying assets generally will not be considered as plan
assets under the Plan Assets Regulation.
S-36
Investment in us
by benefit plans
PLAN ASSET
CONSEQUENCES
If our underlying assets were to be deemed to be as plan
assets, then, among other things, (a) the prudence
and other fiduciary responsibility standards of ERISA would
apply to our operations and (b) certain transactions in
which we might seek to engage could constitute or involve
prohibited transactions under ERISA and the Internal
Revenue Code. If a prohibited transaction occurs for which no
exemption is available, the general partner and any other
fiduciary that has engaged in the prohibited transaction could
be required (a) to restore to the benefit plan any profit
realized on the transaction and (b) to reimburse the
benefit plan for any losses suffered by the benefit plan as a
result of the transaction. In addition, each disqualified person
(within the meaning of Section 4975 of the Internal Revenue
Code) involved could be subject to an excise tax equal to 15% of
the amount involved in the prohibited transaction for each year
(or portion of the year) the transaction continues and, unless
the transaction is corrected (e.g., unwound) within statutorily
required periods, to an additional tax of 100% of the amount
involved (such taxes are referred to as prohibited
transaction excise taxes). Benefit plan fiduciaries who
decide to invest in us could, under certain circumstances, be
liable for prohibited transactions or other violations as a
result of their investment in us or as co-fiduciaries for
actions taken by or on behalf of us or our general partner
and/or its
affiliates. With respect to IRAs, the occurrence of a prohibited
transaction involving the individual who established the IRA, or
his or her beneficiaries, would cause the IRA to lose its
tax-exempt status. In addition, to the extent someone other than
the IRA owner or beneficiary engaged in such prohibited
transaction, such person could be subject to prohibited
transaction excise taxes. The foregoing discussion is not
comprehensive and other significant adverse results could also
arise.
All potential investors should consult with their own legal
counsel concerning the potential impact of ERISA and the
Internal Revenue Code to such potential investor prior to making
an investment in us. A benefit plan fiduciary can be personally
liable for (a) losses incurred by a benefit plan resulting
from a breach of fiduciary duties, (b) a civil penalty,
which may be imposed by the U.S. Department of Labor, of as
much as 20% of any amount recovered by the benefit plan, and
(c) to the extent the benefit plan fiduciary is also a
disqualified person within the meaning of Section 4975 of
the Internal Revenue Code, prohibited transaction excise taxes.
Accordingly, before proceeding with an investment in us, a
benefit plan fiduciary, taking into account the facts and
circumstances of such benefit plan, should consider any
applicable fiduciary standards and any prohibitions imposed
against certain transactions under ERISA or the Internal Revenue
Code, and the permissibility of such investment under the
governing documents of the benefit plan. Thus, taking into
consideration the information contained herein, the benefit plan
fiduciary should give special attention to (a) the Plan
Asset Regulations and the impact of such regulations upon the
benefit plan fiduciarys decision to invest in us,
(b) the prudence of an investment in us, and
(c) otherwise applicable provisions of ERISA and the
Internal Revenue Code, considering all facts and circumstances
of the investment which the benefit plan fiduciary knows or
should know are relevant to the investment or a series or
program of investments of which an investment we are a part.
Our general partner and counsel to the general partner make
no representations with respect to whether an investment in us
would be a suitable investment within any benefit plans
particular investment portfolio.
S-37
Underwriting
We are offering our common units described in this prospectus
supplement through the underwriters named below. UBS Securities
LLC, RBC Capital Markets Corporation and Wells Fargo Securities,
LLC are acting as the representatives of the underwriters.
Subject to the terms and conditions of an underwriting
agreement, each of the underwriters has severally agreed to
purchase the number of common units listed next to its name in
the following table:
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Underwriter
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Number of common
units
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UBS Securities LLC
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RBC Capital Markets Corporation
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Wells Fargo Securities, LLC
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Morgan Keegan & Company, Inc.
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Stifel Nicolaus & Company, Incorporated
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Total
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1,650,000
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The underwriting agreement provides that the underwriters must
buy all of the common units if they buy any of them. However,
the underwriters are not required to take or pay for the common
units covered by the underwriters option to purchase
additional common units described below. The conditions
contained in the underwriting agreement include the condition
that all the representations and warranties made by us and our
affiliates to the underwriters are true, that there has been no
material adverse change in the condition of us and that we
deliver to the underwriters customary closing documents.
Our common units and the common units to be sold upon the
exercise of the underwriters option to purchase additional
common units, if any, are offered subject to a number of
conditions, including:
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receipt and acceptance of our common units by the underwriters,
and
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the underwriters right to reject orders in whole or in
part.
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We have been advised by the representative that the underwriters
intend to make a market in our common units, but that they are
not obligated to do so and may discontinue making a market at
any time without notice.
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectuses electronically.
OPTION TO
PURCHASE ADDITIONAL COMMON UNITS
We have granted the underwriters an option to buy up to an
aggregate 247,500 additional common units. The underwriters have
30 days from the date of this prospectus to exercise this
option. If the underwriters exercise this option, they will each
purchase additional common units approximately in proportion to
the amounts specified in the table above.
COMMISSIONS AND
DISCOUNTS
Common units sold by the underwriters to the public will
initially be offered at the offering price set forth on the
cover of this prospectus supplement. Any common units sold by
the underwriters to securities dealers may be sold at a discount
of up to $ per common unit from
the offering price. If all the common units are not sold at the
offering price, the representatives may change the offering
price and the other selling terms. Sales of common units made
outside of the United States may be made by affiliates of the
underwriters. Upon execution of the underwriting agreement, the
underwriters will be obligated to purchase the common units at
the prices and upon the terms stated therein, and, as a
S-38
Underwriting
result, will thereafter bear any risk associated with changing
the offering price to the public or other selling terms.
The following table shows the per unit and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters option to purchase up to an additional
247,500 units.
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No
exercise
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Full
exercise
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Per Unit
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Total
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We estimate that the total expenses of this offering payable by
us, excluding the underwriting discounts and commissions, will
be approximately $0.4 million.
INDEMNIFICATION
We, our general partner, our operating subsidiaries and the
general partner of our operating partnership have agreed to
indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as
amended, and to contribute to payments that may be required to
be made in respect of these liabilities.
LOCK-UP
AGREEMENTS
Martin Resource Management, certain of its subsidiaries and the
directors and certain of the executive officers of our general
partner have entered into
lock-up
agreements with the underwriters. Under these agreements, each
of the these persons may not, without the prior written approval
of the representatives, offer, sell, contract to sell, pledge or
otherwise dispose of or hedge our common units or securities
convertible into or exchangeable for our common units, enter
into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the
common units, make any demand for or exercise any right or file
or cause to be filed a registration statement with respect to
the registration of any common units or securities convertible,
exercisable or exchangeable into common units or publicly
disclose the intention to do any of the foregoing. These
restrictions will be in effect for a period of 90 days
after the date of this prospectus supplement. The restrictions
described in this paragraph do not apply to, among other things,
the sale of units to the underwriters pursuant to the
underwriting agreement, grants of restricted common units or
options to acquire restricted common units pursuant to our long
term incentive plan or the issuance of common units pursuant to
distribution reinvestments under a plan maintained by Martin
Resource Management.
At any time and without public notice, the representatives may
in their discretion, release all or some of the securities from
these
lock-up
agreements.
PRICE
STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common units including:
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stabilizing transactions;
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short sales;
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purchases to cover positions created by short sales;
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imposition of penalty bids; and
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syndicate covering transactions.
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Underwriting
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common units while this offering is in progress.
These transactions may also include making short sales of our
common units, which involves the sale by the underwriters of a
greater number of common units than they are required to
purchase in this offering, and purchasing common units on the
open market to cover positions created by short sales. Short
sales may be covered shorts, which are short
positions in an amount not greater than the underwriters
option to purchase additional common units referred to above, or
may be naked shorts, which are short positions in
excess of that amount.
The underwriters may close out any covered short position by
either exercising their option to purchase additional common
units, in whole or in part, or by purchasing common units in the
open market. In making this determination, the underwriters will
consider, among other things, the price of common units
available for purchase in the open market as compared to the
price at which they may purchase common units through their
option to purchase additional common units.
Naked short sales are in excess of the underwriters option
to purchase additional common units. The underwriters must close
out any naked short position by purchasing common units in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the common units in the open market
that could adversely affect investors who purchased in this
offering.
LISTING
Our common units are listed on the Nasdaq Global Select Market
under the symbol MMLP.
ELECTRONIC
DISTRIBUTION
A prospectus supplement in electronic format may be made
available by one or more of the underwriters or their
affiliates. The representatives may agree to allocate a number
of common units to underwriters for sale to their online
brokerage account holders. The representatives will allocate
common units to underwriters that may make Internet
distributions on the same basis as other allocations. In
addition, common units may be sold by the underwriters to
securities dealers who resell common units to online brokerage
account holders.
Other than the prospectus supplement in electronic format, the
information on any underwriters web site and any
information contained in any other web site maintained by an
underwriter is not part of the prospectus supplement or the
registration statement of which this prospectus supplement forms
a part, has not been approved
and/or
endorsed by us or any underwriter in its capacity as an
underwriter and should not be relied upon by investors.
RELATIONSHIPS
WITH UNDERWRITERS
Some of the underwriters and their affiliates have performed
investment banking, commercial banking and advisory services for
us and our affiliates from time to time for which they have
received customary fees and expenses. The underwriters and their
affiliates may, from time to time in the future, engage in
transactions with and perform services for us and our affiliates
in the ordinary course of their business.
Affiliates of UBS Securities LLC, RBC Capital Markets
Corporation, Wells Fargo Securities, LLC and Morgan
Keegan & Company, Inc. are lenders under our revolving
loan facility. These affiliates will receive their respective
share of any repayment by us of amounts outstanding under our
revolving loan facility from the proceeds of this offering.
Because the Financial Industry Regulatory Authority
(FINRA) views our common units as interests in a
direct participation program, this offering is being made in
compliance with FINRA Rule 2310.
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Underwriting
Investor suitability with respect to the common units will be
judged similarly to the suitability with respect to other
securities that are listed for trading on a national securities
exchange.
FOREIGN SELLING
RESTRICTIONS
European Economic
Area
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive (each, a
Relevant Member State), with effect from, and
including, the date on which the Prospectus Directive is
implemented in that Relevant Member State (the Relevant
Implementation Date), an offer to the public of our
securities which are the subject of the offering contemplated by
this prospectus may not be made in that Relevant Member State,
except that, with effect from, and including, the Relevant
Implementation Date, an offer to the public in that Relevant
Member State of our securities may be made at any time under the
following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State:
a) to legal entities which are authorized or
regulated to operate in the financial markets, or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in our securities;
b) to any legal entity which has two or more of:
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
c) to fewer than 100 natural or legal persons (other
than qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representative for
any such offer; or
d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive provided that no
such offer of our securities shall result in a requirement for
the publication by us or any underwriter or agent of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
As used above, the expression offered to the public
in relation to any of our securities in any Relevant Member
State means the communication in any form and by any means of
sufficient information on the terms of the offer and our
securities to be offered so as to enable an investor to decide
to purchase or subscribe for our securities, as the same may be
varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each Relevant
Member State.
The EEA selling restriction is in addition to any other selling
restrictions set out in this prospectus.
Germany
Notice to the
Residents of Germany
This document has not been prepared in accordance with the
requirements for a securities or sales prospectus under the
German Securities Prospectus Act
(Wertpapierprospektgesetz), the German Sales Prospectus
Act (Verkaufsprospektgesetz), or the German Investment
Act (Investmentgesetz). Neither the German Federal
Financial Services Supervisory Authority (Bundesanstalt
für Finanzdienstleistungsaufsicht BaFin)
nor any other German authority has been notified of the
intention to distribute the units in Germany. Consequently, the
units may not be distributed in Germany by way of public
offering, public advertisement or in any similar manner AND THIS
DOCUMENT AND ANY OTHER DOCUMENT RELATING TO THE OFFERING, AS
WELL AS INFORMATION OR STATEMENTS CONTAINED THEREIN, MAY NOT BE
SUPPLIED TO THE PUBLIC IN GERMANY OR USED IN CONNECTION WITH ANY
OFFER FOR SUBSCRIPTION OF THE
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Underwriting
UNITS TO THE PUBLIC IN GERMANY OR ANY OTHER MEANS OF PUBLIC
MARKETING. The units are being offered and sold in Germany only
to qualified investors which are referred to in Section 3,
paragraph 2 no. 1, in connection with Section 2,
no. 6, of the German Securities Prospectus Act,
Section 8f paragraph 2 no. 4 of the German Sales
Prospectus Act, and in Section 2 paragraph 11 sentence
2 no. 1 of the German Investment Act. This document is
strictly for use of the person who has received it. It may not
be forwarded to other persons or published in Germany.
Switzerland
The units may not be publicly offered, distributed or
re-distributed on a professional basis in or from Switzerland
and neither this document nor any other solicitation for
investments in the shares may be communicated or distributed in
Switzerland in any way that could constitute a public offering
within the meaning of Articles 1156/652a of the Swiss Code
of Obligations (CO). This document may not be
copied, reproduced, distributed or passed on to others without
the Offerors prior written consent. This document is not a
prospectus within the meaning of Articles 1156/652a CO and
the shares will not be listed on the SIX Swiss Exchange.
Therefore, this document may not comply with the disclosure
standards of the CO
and/or the
listing rules (including any prospectus schemes) of the SIX
Swiss Exchange. In addition, it cannot be excluded that the
Offeror could qualify as a foreign collective investment scheme
pursuant to Article 119 para. 2 Swiss Federal Act on
Collective Investment Schemes (CISA). The units will
not be licensed for public distribution in and from Switzerland.
Therefore, the units may only be offered and sold to so-called
qualified investors in accordance with the private
placement exemptions pursuant to applicable Swiss law (in
particular, Article 10 para. 3 CISA and Article 6 of
the implementing ordinance to the CISA). The Offeror has not
been licensed and is not subject to the supervision of the Swiss
Financial Market Supervisory Authority (FINMA).
Therefore, investors in the shares do not benefit from the
specific investor protection provided by CISA and the
supervision of the FINMA.
United
Kingdom
This prospectus is only being distributed to and is only
directed at: (1) persons who are outside the United
Kingdom; (2) investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the Order);
or (3) high net worth companies, and other persons to whom
it may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
falling within (1)-(3) together being referred to as
relevant persons). The units are only available to,
and any invitation, offer or agreement to subscribe, purchase or
otherwise acquire such units will be engaged in only with,
relevant persons. Any person who is not a relevant person should
not act or rely on this prospectus or any of its contents.
S-42
Legal matters
The validity of the common units will be passed upon for us by
Baker Botts L.L.P., Dallas, Texas. Certain legal matters in
connection with the common units offered hereby will be passed
upon for the underwriters by Vinson & Elkins L.L.P.,
Houston, Texas.
Experts
The following financial statements and managements
assessment have been incorporated in this prospectus supplement
by reference in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, incorporated by
reference herein, and upon the authority of said firm as experts
in accounting and auditing: (i) the consolidated financial
statements of Martin Midstream Partners L.P. and subsidiaries as
of December 31, 2008 and 2007, and for each of the years in
the three year period ended December 31, 2008, and
managements assessment of the effectiveness of internal
control over financial reporting as of December 31, 2008,
(ii) the balance sheet of Martin Midstream GP LLC, our
general partner, as of December 31, 2008 and 2007, and
(iii) the financial statements of Waskom Gas Processing
Company, one of our unconsolidated entities, as of and for the
years ended December 31, 2008 and 2007, and for each of the
years in the three year period ended December 31, 2008.
Where you can find
more information
We file periodic reports and other information with the SEC. You
may read and copy this information, for a copying fee, at the
SECs public reference room at 100 F Street, NE,
Washington, DC 20549. We encourage you to call the SEC at
1-800-SEC-0330
for more information about its public reference room. Our SEC
filings are also available to the public from commercial
document retrieval services and at the web site maintained by
the SEC at
http://www.sec.gov.
Information about us is also available to the public from our
website at
http://www.martinmidstream.com.
Information contained on our website is not incorporated by
reference into this prospectus supplement and, you should not
consider information contained on our website as part of this
prospectus supplement.
This prospectus supplement is part of a registration statement
we have filed with the SEC relating to the securities we may
offer. As permitted by SEC rules, this prospectus supplement
does not contain all of the information we have included in the
registration statement and the accompanying exhibits and
schedules we file with the SEC. You should read the registration
statement and the exhibits and schedules for more information
about us and our securities. The registration statement,
exhibits and schedules are available at the SECs public
reference room or through its web site.
You may also obtain a copy of our filings with the SEC, at no
cost, by writing or telephoning us at the following address:
Martin Midstream Partners L.P.
4200 Stone Road
Kilgore, Texas 75662
Attention: Joe McCreery
Telephone:
(903) 983-6200
The SEC allows us to incorporate by reference into
this prospectus supplement and the accompanying prospectus the
information we have filed with the SEC. This means that we can
disclose important information to you without actually including
the specific information in this prospectus supplement and the
accompanying prospectus by referring you to other documents
filed separately with the SEC. These other documents contain
important information about us, our financial condition and
results of operations. The information incorporated by reference
is an important part of this prospectus
S-43
supplement and the accompanying prospectus. Information that we
file later with the SEC will automatically update and may
replace information in this prospectus supplement and the
accompanying prospectus and information previously filed with
the SEC.
We incorporate by reference in this prospectus supplement the
documents listed below (excluding any portions thereof that are
deemed to be furnished and not filed):
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our annual report on
Form 10-K
for the year ended December 31, 2008 filed with the SEC on
March 4, 2009;
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our quarterly reports on
Form 10-Q
for the quarters ended March 31, 2009 filed with the SEC on
May 6, 2009, June 30, 2009 filed with the SEC on
August 5, 2009 and September 30, 2009 filed with the
SEC on November 4, 2009;
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our current reports on
Form 8-K
or 8-K/A
(excluding any portions thereof that may be deemed to be
furnished and not filed) filed June 30, 2009,
August 5, 2009, November 16, 2009, December 1,
2009, December 23, 2009, January 19, 2010 and
January 29, 2010;
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the description of our common units in our registration
statement on
Form 8-A
(File
No. 1-02801862)
filed pursuant to the Securities Exchange Act of 1934 on
October 29, 2002; and
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all documents filed by us under Sections 13(a), 13(c), 14
or l5(d) of the Securities Exchange Act of 1934 between the date
of this prospectus and the termination of the registration
statement.
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You may obtain any of the documents incorporated by reference in
this prospectus supplement from the SEC through the SECs
web site at the address provided above. You may also obtain a
copy of any of the documents incorporated by reference in this
prospectus, at no cost, by writing or telephoning us at the
following address:
Martin Midstream Partners L.P.
4200 Stone Road
Kilgore, Texas 75662
Attention: Joe McCreery
Telephone:
(903) 983-6200
You should rely only on the information incorporated by
reference or provided in this prospectus supplement and the
accompany prospectus. If information in incorporated documents
conflicts with information in this prospectus supplement or the
accompanying prospectus you should rely on the most recent
information. If information in an incorporated document
conflicts with information in another incorporated document, you
should rely on the most recent incorporated document. You should
not assume that the information in this prospectus supplement,
the accompanying prospectus or any document incorporated by
reference is accurate as of any date other than the date of
those documents. We have not authorized anyone else to provide
you with any information.
Cautionary
statements regarding forward-looking statements
Statements included in this prospectus supplement or the
accompanying prospectus that are not historical facts (including
any statements concerning plans and objectives of management for
future operations or economic performance, or assumptions or
forecasts related thereto), are forward-looking statements.
These statements can be identified by the use of forward-looking
terminology including forecast, may,
believe, will, expect,
anticipate, estimate,
continue or other similar words. These statements
discuss future expectations, contain projections of results of
operations or of financial condition or state other
forward-looking information. We and our
representatives may from time to time make other oral or written
statements that are also forward-looking statements.
These forward-looking statements are made based upon
managements current plans, expectations, estimates,
assumptions and beliefs concerning future events impacting us
and therefore involve a
S-44
number of risks and uncertainties. We caution that
forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied
in the forward-looking statements.
Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those
expressed or implied by these forward-looking statements for a
number of important reasons, including those discussed under
Risk factors and elsewhere in this prospectus
supplement or the accompanying prospectus.
S-45
PROSPECTUS
$400,000,000
Martin Midstream Partners
L.P.
COMMON UNITS
DEBT SECURITIES
Martin Operating Partnership
L.P.
DEBT SECURITIES
The following securities may be offered under this prospectus:
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Common units representing limited partner interests in Martin
Midstream Partners L.P.;
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Debt securities of Martin Midstream Partners L.P.; and
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Debt securities of Martin Operating Partnership L.P.
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The aggregate initial offering price of the securities that we
offer by this prospectus will not exceed $400,000,000. We will
offer the securities in amounts, at prices and on terms to be
determined by market conditions at the time of our offerings.
This prospectus describes only the general terms of these
securities and the general manner in which we will offer these
securities. The specific terms of any securities we offer will
be included in a supplement to this prospectus. The prospectus
supplement will describe the specific manner in which we will
offer the securities and also may add, update or change
information contained in this prospectus. The common units are
traded on the Nasdaq National Market under the symbol
MMLP.
You should read this prospectus and the prospectus supplement
carefully before you invest in any of our securities. This
prospectus may not be used to consummate sales of our securities
unless it is accompanied by a prospectus supplement.
Investing in our securities involves risk. You should
carefully consider the risk factors described under Risk
Factors beginning on page 3 of this prospectus before
you make any investment in our securities.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined whether this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is January 3, 2008
TABLE OF
CONTENTS
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ABOUT THIS PROSPECTUS
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MARTIN MIDSTREAM PARTNERS L.P.
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RISK FACTORS
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FORWARD-LOOKING STATEMENTS
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USE OF PROCEEDS
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RATIO OF EARNINGS TO FIXED CHARGES
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DESCRIPTION OF THE DEBT SECURITIES
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DESCRIPTION OF THE COMMON UNITS
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CASH DISTRIBUTION POLICY
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THE PARTNERSHIP AGREEMENT
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MATERIAL TAX CONSIDERATIONS
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INVESTMENT IN US BY EMPLOYEE BENEFIT PLANS
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PLAN OF DISTRIBUTION
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LEGAL MATTERS
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EXPERTS
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WHERE YOU CAN FIND MORE INFORMATION
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INCORPORATION BY REFERENCE
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You should rely only on the information contained in this
prospectus, any prospectus supplement and the documents we have
incorporated by reference. We have not authorized anyone else to
give you different information. We are not offering these
securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the
date on the front of those documents. We will disclose any
material changes in our affairs in an amendment to this
prospectus, a prospectus supplement or a future filing with the
Securities and Exchange Commission incorporated by reference in
this prospectus.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement on
Form S-3
that we have filed with the Securities and Exchange Commission
using a shelf registration process. Under this shelf
registration process, we may sell, in one or more offerings, up
to $400,000,000 in total aggregate initial offering price of
securities described in this prospectus. This prospectus
provides you with a general description of Martin Midstream
Partners L.P., Martin Operating Partnership L.P. and the
securities offered under this prospectus.
Each time we sell securities under this prospectus, we will
provide a prospectus supplement that will contain specific
information about the terms of that offering and the securities
being offered. The prospectus supplement also may add to, update
or change information in this prospectus. If there is any
inconsistency between the information in this prospectus and any
prospectus supplement, you should rely on the information in the
prospectus supplement. You should read carefully this
prospectus, any prospectus supplement and the additional
information described below under the heading Where You
Can Find More Information.
As used in this prospectus, Martin Midstream
Partners, we, us, and
our and similar terms mean Martin Midstream Partners
L.P., and, unless the context requires otherwise, our operating
partnership, Martin Operating Partnership L.P. References to
Martin Midstream Partners Predecessor,
we, ours, us, or like terms
when used in a historical context for periods prior to November
2002 refer to the assets and operations of Martin Resource
Management Corporations businesses that were contributed
to us in connection with the closing of our initial public
offering in November 2002. References in this prospectus to
Martin Operating Partnership refer to our operating
partnership, Martin Operating Partnership L.P. References in
this prospectus to Martin Resource Management refer
to Martin Resource Management Corporation and its direct and
indirect consolidated and unconsolidated subsidiaries.
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MARTIN
MIDSTREAM PARTNERS L.P.
We are a publicly traded limited partnership with a diverse set
of operations focused primarily in the United States Gulf
Coast region. Our five primary business lines include:
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Terminalling and storage services for petroleum products and
by-products
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Natural gas services
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Marine transportation services for petroleum products and
by-products
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Sulfur gathering, processing and distribution
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Fertilizer manufacturing and distribution
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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, fertilizer manufacturers and other wholesale
purchasers of these products. We operate primarily in the Gulf
Coast region of the United States. This region is a major hub
for petroleum refining, natural gas gathering and processing and
support services for the exploration and production industry.
Primary
Business Segments
Our primary business segments can be generally described as
follows:
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Terminalling and Storage. We own or operate 17
marine terminal facilities and four inland terminal facilities
located in the United States Gulf Coast region that provide
storage and handling services for producers and suppliers of
petroleum products and by-products, lubricants and other
liquids. We also provide land rental to oil and gas companies
along with storage and handling services for lubricants and fuel
oil.
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Natural Gas Services. We have ownership
interests in over 500 miles of natural gas gathering
pipelines located in the natural gas producing regions of
Central and East Texas, Northwest Louisiana, the Texas Gulf
Coast and offshore Texas and federal waters in the Gulf of
Mexico as well as 210 million cubic feet per day
(MMcfd) of natural gas processing capacity in East
Texas which is currently being expanded to 280 MMcfd. In
addition, we distribute natural gas liquids (NGLs).
We purchase NGLs primarily from natural gas processors. We store
NGLs in our supply and storage facilities for resale to propane
retailers, refineries and industrial NGL users in Texas and the
Southeastern United States. We own three NGL supply and storage
facilities with an aggregate above ground storage capacity of
approximately 132,000 gallons and we lease approximately
72 million gallons of underground storage capacity for NGLs.
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Marine Transportation. We own a fleet of 37
inland marine tank barges, 16 inland push boats and four
offshore tug barge units that transport petroleum products and
by-products primarily in the United States Gulf Coast region. We
provide these transportation services on a fee basis primarily
under annual contracts. In addition, our marine segment manages
our sulfur segments marine assets.
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Sulfur. We gather, process and distribute
sulfur predominately produced by oil refineries primarily
located in the United States Gulf Coast region. We process
molten sulfur into prilled, or pelletized, sulfur under both
fee-based volume contracts and buy/sell contracts at our
facilities in Port of Stockton, California and our Neches
terminal in Beaumont, Texas.
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Fertilizer. We own and operate six fertilizer
production plants and one emulsified sulfur blending plant that
manufacture primarily sulfur-based fertilizer products for
wholesale distributors and industrial users. These plants are
located in Illinois, Texas and Utah.
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Our principal executive offices are located at 4200 Stone Road,
Kilgore, Texas 75662, our phone number is
(903) 983-6200,
and our web site is www.martinmidstream.com.
1
Recent
Developments
On May 2, 2007, we acquired the outstanding stock of
Woodlawn Pipeline Company, Inc. (Woodlawn), a
natural gas gathering and processing company with integrated
gathering and processing assets in East Texas for
$30.6 million. In addition, we purchased a compressor for
$0.4 million from an affiliate of the selling parties. In
conjunction with this transaction, we also acquired a pipeline
that delivers residue gas from the Woodlawn processing plant to
the Texas Eastern Transmission pipeline system for
$2.1 million. The business will be included in our Natural
Gas Services segment.
Our
Relationship with Martin Resource Management
We were formed in 2002 by Martin Resource Management, 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
has expanded its operations through acquisitions and internal
expansion initiatives as its management identified and
capitalized on the needs of producers and purchasers of
hydrocarbon products and by-products and other bulk liquids.
Martin Resource Management owns an approximate 35.4% limited
partnership interest in us. Furthermore, it owns and controls
our general partner, which owns a 2.0% general partner interest
and incentive distribution rights in us. Martin Resource
Management directs our business operations through its ownership
and control of our general partner. In addition, under the terms
of an omnibus agreement with Martin Resource Management, the
employees of Martin Resource Management are responsible for
conducting our business and operating our assets. Martin
Resource Management is also an important supplier and customer
of ours.
THE
GUARANTORS
Martin Midstream Partners will unconditionally guarantee any
series of debt securities of Martin Operating Partnership
offered by this prospectus, as set forth in a related prospectus
supplement. If a series of debt securities of Martin Midstream
Partners is guaranteed, Martin Operating Partnership will
unconditionally guarantee such series of debt securities of
Martin Midstream Partners offered by this prospectus, as set
forth in a related prospectus supplement. As used in this
prospectus, the term Guarantor means, Martin
Midstream Partners in its role as guarantor of the debt
securities of Martin Operating Partnership or Martin Operating
Partnership in its role as guarantor of the debt securities of
Martin Midstream Partners.
2
RISK
FACTORS
Limited partner interests are inherently different from the
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a business similar to ours.
You should carefully consider the following risk factors
together with all of the other information included in this
prospectus in evaluating an investment in our common units. If
any of the following risks were actually to occur, our business,
financial condition or results of operations could be materially
adversely affected. In this case, we might not be able to pay
distributions on our common units or make principal or interest
payments on our debt securities, the trading price of our common
units or our debt securities could decline and you could lose
all or part of your investment.
Risks
Relating to Our Business
Important factors that could cause actual results to differ
materially from our expectations include, but are not limited
to, the risks set forth below. The risks described below should
not be considered to be comprehensive and all-inclusive.
Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations,
financial condition and results of operations. If any events
occur that give rise to the following risks, our business,
financial condition, or results of operations could be
materially and adversely affected, and as a result, the trading
price of our common units or our debt securities could be
materially and adversely impacted. Many of such factors are
beyond our ability to control or predict. Investors are
cautioned not to put undue reliance on forward-looking
statements.
We may
not have sufficient cash after the establishment of cash
reserves and payment of our general partners expenses to
enable us to pay distributions to our unitholders or make
principal or interest payments on our debt
securities.
We may not have sufficient available cash each quarter in the
future to pay the minimum quarterly distribution on all our
units or make principal or interest payments on our debt
securities. Under the terms of our partnership agreement, we
must pay our general partners expenses and set aside any
cash reserve amounts before making a distribution to our
unitholders. The amount of cash we can distribute on our common
units or use to make principal or interest payments on our debt
securities principally depends upon the amount of net cash
generated from our operations, which will fluctuate from quarter
to quarter based on, among other things:
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the costs of acquisitions, if any;
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the prices of petroleum products and by-products;
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fluctuations in our working capital;
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the level of capital expenditures we make;
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restrictions contained in our debt instruments and our debt
service requirements;
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our ability to make working capital borrowings under our credit
facility; and
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the amount, if any, of cash reserves established by our general
partner in its discretion.
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You should also be aware that the amount of cash we have
available for distribution depends primarily on our cash flow,
including cash flow from working capital borrowings, and not
solely on profitability, which will be affected by non-cash
items. In addition, our general partner determines the amount
and timing of asset purchases and sales, capital expenditures,
borrowings, issuances of additional partnership securities and
the establishment of reserves, each of which can affect the
amount of cash available for distribution to our unitholders. As
a result, we may make cash distributions or make principal or
interest payments on our debt securities during periods when we
record losses and may not make cash distributions or may not
make principal and interest payments on our debt securities
during periods when we record net income.
3
Adverse
weather conditions, including droughts, hurricanes, tropical
storms and other severe weather, could reduce our results of
operations and ability to make distributions to our unitholders
or make principal and interest payments on our debt
securities.
Our distribution network and operations are primarily
concentrated in the Gulf Coast region and along the Mississippi
River inland waterway. Weather in these regions is sometimes
severe (including tropical storms and hurricanes) and can be a
major factor in our day-to-day operations. Our marine
transportation operations can be significantly delayed, impaired
or postponed by adverse weather conditions, such as fog in the
winter and spring months, and certain river conditions.
Additionally, our terminalling and storage and marine
transportation operations and our assets in the Gulf of Mexico,
including our barges, push boats, tugboats and terminals, can be
adversely impacted or damaged by hurricanes, tropical storms,
tidal waves or other related events. Demand for our lubricants
and the diesel fuel we throughput in our terminalling and
storage segment can be affected if offshore drilling operations
are disrupted by weather in the Gulf of Mexico.
National weather conditions have a substantial impact on the
demand for our products. Unusually warm weather during the
winter months can cause a significant decrease in the demand for
NGL products, fuel oil and gasoline. Likewise, extreme weather
conditions (either wet or dry) can decrease the demand for
fertilizer. For example, an unusually wet spring can delay
planting of seeds, which can leave insufficient time to apply
fertilizer at the planting stage. Conversely, drought conditions
can kill or severely stunt the growth of crops, thus eliminating
the need to nurture plants with fertilizer. Any of these or
similar conditions could result in a decline in our net income
and cash flow, which would reduce our ability to make
distributions to our unitholders or make principal and interest
payments on our debt securities.
If we
incur material liabilities that are not fully covered by
insurance, such as liabilities resulting from accidents on
rivers or at sea, spills, fires or explosions, our results of
operations and ability to make distributions to our unitholders
or make principal and interest payments on our debt securities
could be adversely affected.
Our operations are subject to the operating hazards and risks
incidental to terminalling and storage, marine transportation
and the distribution of petroleum products and by-products and
other industrial products. These hazards and risks, many of
which are beyond our control, include:
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accidents on rivers or at sea and other hazards that could
result in releases, spills and other environmental damages,
personal injuries, loss of life and suspension of operations;
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leakage of NGLs and other petroleum products and by-products;
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fires and explosions;
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damage to transportation, terminalling and storage facilities,
and surrounding properties caused by natural disasters; and
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terrorist attacks or sabotage.
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Our insurance coverage may not be adequate to protect us from
all material expenses related to potential future claims for
personal injury and property damage, including various legal
proceedings and litigation resulting from these hazards and
risks. If we incur material liabilities that are not covered by
insurance, our operating results, cash flow and ability to make
distributions to our unitholders or to make principal and
interest payments on our debt securities could be adversely
affected.
Changes in the insurance markets attributable to the
September 11, 2001 terrorist attacks, and their aftermath,
may make some types of insurance more difficult or expensive for
us to obtain. In addition, changes in the insurance markets
attributable to the effects of Hurricanes Katrina and Rita, and
their aftermath, may make some types of insurance more difficult
or expensive for us to obtain. As a result, we may be unable to
secure the levels and types of insurance we would otherwise have
secured prior to such events. Moreover, the insurance that may
be available to us may be significantly more expensive than our
existing insurance coverage.
4
The
price volatility of petroleum products and by-products can
reduce our results of operations and ability to make
distributions to our unitholders or to make principal and
interest payments on our debt securities.
We purchase petroleum products and by-products such as molten
sulfur, sulfur derivatives and NGLs, and sell these products to
wholesale and bulk customers and to other end users. Since the
closing of the Tesoro Marine asset acquisition, we and our
affiliates also distribute and market lubricants. We also
generate revenues through the terminalling and storage of
certain products for third parties. The price and market value
of petroleum products and by-products can be volatile. Our
revenues have been adversely affected by this volatility during
periods of decreasing prices because of the reduction in the
value and resale price of our inventory. Future price volatility
could have an adverse impact on our results of operations, cash
flow and ability to make distributions to our unitholders or to
make principal and interest payments on our debt securities.
Increasing
energy prices could adversely affect our results of
operations.
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 our results of operations including
net income and cash flows. We cannot assure unitholders or debt
security holders that we will be able to pass along increased
operating expenses to our customers.
Restrictions
in our credit facility may prevent us from making distributions
to our unitholders or to make principal and interest payments on
our debt securities.
The payment of principal and interest on our indebtedness
reduces the cash available for distribution to our unitholders.
In addition, we are prohibited by our credit facility from
making cash distributions during an event of default or if the
payment of a distribution would cause an event of default
thereunder. Our leverage and various limitations in our credit
facility may reduce our ability to incur additional debt, engage
in certain transactions and capitalize on acquisition or other
business opportunities that could increase cash flows and
distributions to our unitholders.
If we
do not have sufficient capital resources for acquisitions or
opportunities for expansion, our growth will be
limited.
We intend to explore acquisition opportunities in order to
expand our operations and increase our profitability. We may
finance acquisitions through public and private financing, or we
may use our limited partner interests for all or a portion of
the consideration to be paid in acquisitions. Distributions of
cash with respect to these equity securities or limited partner
interests may reduce the amount of cash available for
distribution to our unitholders or to make principal and
interest payments on our debt securities. In addition, in the
event our limited partner interests do not maintain a sufficient
valuation, or potential acquisition candidates are unwilling to
accept our limited partner interests as all or part of the
consideration, we may be required to use our cash resources, if
available, or rely on other financing arrangements to pursue
acquisitions. If we use funds from operations, other cash
resources or increased borrowings for an acquisition, the
acquisition could adversely impact our ability to make
distributions to our unitholders or to make principal and
interest payments on our debt securities. Additionally, if we do
not have sufficient capital resources or are not able to obtain
financing on terms acceptable to us for acquisitions, our
ability to implement our growth strategies may be adversely
impacted.
Our
recent and future acquisitions may not be successful, may
substantially increase our indebtedness and contingent
liabilities, and may create integration
difficulties.
As part of our business strategy, we intend to acquire
businesses or assets we believe complement our existing
operations. We may not be able to successfully integrate recent
or any future acquisitions into our existing operations or
achieve the desired profitability from such acquisitions. These
acquisitions may require substantial
5
capital expenditures and the incurrence of additional
indebtedness. If we make acquisitions, our capitalization and
results of operations may change significantly. Further, any
acquisition could result in:
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post-closing discovery of material undisclosed liabilities of
the acquired business or assets;
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the unexpected loss of key employees or customers from the
acquired businesses;
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difficulties resulting from our integration of the operations,
systems and management of the acquired business; and
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an unexpected diversion of our managements attention from
other operations.
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If recent or any future acquisitions are unsuccessful or result
in unanticipated events or if we are unable to successfully
integrate acquisitions into our existing operations, such
acquisitions could adversely affect our results of operations,
cash flow and ability to make distributions to our unitholders
or to make principal and interest payments on our debt
securities.
Demand
for our terminalling and storage services is substantially
dependent on the level of offshore oil and gas exploration,
development and production activity.
The level of offshore oil and gas exploration, development and
production activity historically has been volatile and is likely
to continue to be so in the future. The level of activity is
subject to large fluctuations in response to relatively minor
changes in a variety of factors that are beyond our control,
including:
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prevailing oil and natural gas prices and expectations about
future prices and price volatility;
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the cost of offshore exploration for, and production and
transportation of, oil and natural gas;
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worldwide demand for oil and natural gas;
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consolidation of oil and gas and oil service companies operating
offshore;
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availability and rate of discovery of new oil and natural gas
reserves in offshore areas;
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local and international political and economic conditions and
policies;
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technological advances affecting energy production and
consumption;
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weather conditions;
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environmental regulation; and
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the ability of oil and gas companies to generate or otherwise
obtain funds for exploration and production.
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We expect levels of offshore oil and gas exploration,
development and production activity to continue to be volatile
and affect demand for our terminalling and storage services.
Our
natural gas services and fertilizer businesses are seasonal and
could cause our revenues to vary.
The demand for NGLs and natural gas is highest in the winter.
Therefore, revenue from our natural gas services business is
higher in the winter than in other seasons. Our fertilizer
business experiences an increase in demand during the spring,
which increases the revenue generated by this business line in
this period compared to other periods. The seasonality of the
revenue from these business lines may cause our results of
operations to vary on a quarter to quarter basis and thus could
cause our cash available for distributions or payments on our
debt securities to fluctuate from period to period.
The
highly competitive nature of our industry could adversely affect
our results of operations and ability to make distributions to
our unitholders or to make principal and interest payments on
our debt securities.
We operate in a highly competitive marketplace in each of our
primary business segments. Most of our competitors in each
segment are larger companies with greater financial and other
resources than we possess. We
6
may lose customers and future business opportunities to our
competitors and any such losses could adversely affect our
results of operations and ability to make distributions to our
unitholders or to make principal and interest payments on our
debt securities.
Our
business is subject to compliance with environmental laws and
regulations that may expose us to significant costs and
liabilities and adversely affect our results of operations and
ability to make distributions to our unitholders or to make
principal and interest payments on our debt
securities.
Our business is subject to federal, state and local
environmental laws and regulations governing the discharge of
materials into the environment or otherwise relating to
protection of human health, natural resources and the
environment. These laws and regulations may impose numerous
obligations that are applicable to our operations, such as
requiring the acquisition of permits to conduct regulated
activities; restricting the manner in which we can release
materials into the environment; requiring remedial activities or
capital expenditures to mitigate pollution from former of
current operations; and imposing substantial liabilities on us
for pollution resulting from our operations. Numerous
governmental authorities, such as the U.S. Environmental
Protection Agency and analogous state agencies, have the power
to enforce compliance with these laws and regulations and the
permits issued under them, oftentimes requiring difficult and
costly actions. Many environmental laws and regulations can
impose joint and several strict liability, and any failure to
comply with environmental laws, regulations and permits may
result in the assessment of administrative, civil, and criminal
penalties, the imposition of investigatory and remedial
obligations, and, in some circumstances, the issuance of
injunctions that can limit or prohibit our operations. The clear
trend in environmental regulation is to place more restrictions
and limitations on activities that may affect the environment,
and, thus, any changes in environmental laws and regulations
that result in more stringent and costly waste handling,
storage, transport, disposal, or remediation requirements could
have a material adverse effect on our operations and financial
position.
The
loss or insufficient attention of key personnel could negatively
impact our results of operations and ability to make
distributions to our unitholders or to make principal and
interest payments on our debt securities. Additionally, if
neither Ruben Martin nor Scott Martin is the chief executive
officer of our general partner, amounts we owe under our credit
facility may become immediately due and payable.
Our success is largely dependent upon the continued services of
members of the senior management team of Martin Resource
Management. Those senior executive officers have significant
experience in our businesses and have developed strong
relationships with a broad range of industry participants. The
loss of any of these executives could have a material adverse
effect on our relationships with these industry participants,
our results of operations and our ability to make distributions
to our unitholders or to make principal and interest payments on
our debt securities. Additionally, if neither Ruben Martin nor
Scott Martin is the chief executive officer of our general
partner, the lender under our credit facility could declare
amounts outstanding thereunder immediately due and payable. If
such event occurs, our results of operations and our ability to
make distributions to our unitholders or to make principal and
interest payments on our debt securities could be negatively
impacted.
We do not have employees. We rely solely on officers and
employees of Martin Resource Management to operate and manage
our business. Martin Resource Management operates businesses and
conducts activities of its own in which we have no economic
interest. There could be competition for the time and effort of
the officers and employees who provide services to our general
partner. If these officers and employees do not or cannot devote
sufficient attention to the management and operation of our
business, our results of operation and ability to make
distributions to our unitholders or to make principal and
interest payments on our debt securities may be reduced.
Our
loss of significant commercial relationships with Martin
Resource Management could adversely impact our results of
operations and ability to make distributions to our unitholders
or to make principal and interest payments on our debt
securities.
Martin Resource Management provides us with various services and
products pursuant to various commercial contracts. The loss of
any of these services and products provided by Martin Resource
Management could have a material adverse impact on our results
of operations, cash flow and ability to make distributions to
our unitholders or to make principal and interest payments on
our debt securities. Additionally, we provide terminalling and
storage
7
and marine transportation services to Martin Resource Management
to support its businesses under various commercial contracts.
The loss of Martin Resource Management as a customer could have
a material adverse impact on our results of operations, cash
flow and ability to make distributions to our unitholders or to
make principal and interest payments on our debt securities.
Our
business would be adversely affected if operations at our
transportation, terminalling and storage and distribution
facilities experienced significant interruptions. Our business
would also be adversely affected if the operations of our
customers and suppliers experienced significant
interruptions.
Our operations are dependent upon our terminalling and storage
facilities and various means of transportation. We are also
dependent upon the uninterrupted operations of certain
facilities owned or operated by our suppliers and customers. Any
significant interruption at these facilities or inability to
transport products to or from these facilities or to or from our
customers for any reason would adversely affect our results of
operations, cash flow and ability to make distributions to our
unitholders or to make principal and interest payments on our
debt securities. Operations at our facilities and at the
facilities owned or operated by our suppliers and customers
could be partially or completely shut down, temporarily or
permanently, as the result of any number of circumstances that
are not within our control, such as:
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catastrophic events, including hurricanes;
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environmental remediation;
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labor difficulties; and
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disruptions in the supply of our products to our facilities or
means of transportation.
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Additionally, terrorist attacks and acts of sabotage could
target oil and gas production facilities, refineries, processing
plants, terminals and other infrastructure facilities. Any
significant interruptions at our facilities, facilities owned or
operated by our suppliers or customers, or in the oil and gas
industry as a whole caused by such attacks or acts could have a
material adverse affect on our results of operations, cash flow
and ability to make distributions to our unitholders or to make
principal and interest payments on our debt securities.
Our
marine transportation business would be adversely affected if we
do not satisfy the requirements of the Jones Act, or if the
Jones Act were modified or eliminated.
The Jones Act is a federal law that restricts domestic marine
transportation in the United States to vessels built and
registered in the United States. Furthermore, the Jones Act
requires that the vessels be manned and owned by United States
citizens. If we fail to comply with these requirements, our
vessels lose their eligibility to engage in coastwise trade
within United States domestic waters.
The requirements that our vessels be United States built and
manned by United States citizens, the crewing requirements and
material requirements of the Coast Guard and the application of
United States labor and tax laws significantly increase the
costs of United States flagged vessels when compared with
foreign flag vessels. During the past several years, certain
interest groups have lobbied Congress to repeal the Jones Act to
facilitate foreign flag competition for trades and cargoes
reserved for United States flagged vessels under the Jones Act
and cargo preference laws. If the Jones Act were to be modified
to permit foreign competition that would not be subject to the
same United States government imposed costs, we may need to
lower the prices we charge for our services in order to compete
with foreign competitors, which would adversely affect our cash
flow and ability to make distributions to our unitholders or to
make principal and interest payments on our debt securities.
Following Hurricane Katrina and again after Hurricane Rita,
emergency suspensions of the Jones Act were effectuated by the
United States government. The last suspension ended on
October 24, 2005. Future suspensions of the Jones Act or
other similar actions could result in similar consequences.
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Our
marine transportation business would be adversely affected if
the United States Government purchases or requisitions any of
our vessels under the Merchant Marine Act.
We are subject to the Merchant Marine Act of 1936, which
provides that, upon proclamation by the President of the United
States of a national emergency or a threat to the national
security, the United States Secretary of Transportation may
requisition or purchase any vessel or other watercraft owned by
United States citizens (including us, provided that we are
considered a United States citizen for this purpose). If one of
our push boats, tugboats or tank barges were purchased or
requisitioned by the United States government under this law, we
would be entitled to be paid the fair market value of the vessel
in the case of a purchase or, in the case of a requisition, the
fair market value of charter hire. However, if one of our push
boats or tugboats is requisitioned or purchased and its
associated tank barge is left idle, we would not be entitled to
receive any compensation for the lost revenues resulting from
the idled barge. We also would not be entitled to be compensated
for any consequential damages we suffer as a result of the
requisition or purchase of any of our push boats, tugboats or
tank barges. If any of our vessels are purchased or
requisitioned for an extended period of time by the United
States government, such transactions could have a material
adverse affect on our results of operations, cash flow and
ability to make distributions to our unitholders or to make
principal and interest payments on our debt securities.
Regulations
affecting the domestic tank vessel industry may limit our
ability to do business, increase our costs and adversely impact
our results of operations and ability to make distributions to
our unitholders or to make principal and interest payments on
our debt securities.
The U.S. Oil Pollution Act of 1990, or OPA 90, provides for
the phase out of single-hull vessels and the phase-in of the
exclusive operation of double-hull tank vessels in
U.S. waters. Under OPA 90, substantially all tank vessels
that do not have double hulls will be phased out by 2015 and
will not be permitted to enter U.S. ports or trade in
U.S. waters. The phase out dates vary based on the age of
the vessel and other factors. All but one of our offshore tank
barges are double-hull vessels and have no phase out date. We
have 13 single-hull barges that will be phased out of the
petroleum product trade by the year 2015. The phase out of these
single-hull vessels in accordance with OPA 90 may require
us to make substantial capital expenditures, which could
adversely affect our operations and market position and reduce
our cash available for distribution or to make principal and
interest payments on our debt securities.
Risks
Relating to Prism Gas
A
decline in the volume of natural gas and NGLs delivered to our
facilities could adversely affect our results of operations,
cash flows and financial condition.
Our profitability could be materially impacted by a decline in
the volume of natural gas and NGLs transported, gathered or
processed at our facilities. A material decrease in natural gas
production, as a result of depressed commodity prices, a
decrease in exploration and development activities or otherwise,
could result in a decline in the volume of natural gas and NGLs
handled by our facilities.
The natural gas and NGLs available to our facilities will be
derived from reserves produced from existing wells. These
reserves naturally decline over time. To offset this natural
decline, our facilities will need access to additional reserves.
Our
profitability is dependent upon prices and market demand for
natural gas and NGLs, which are beyond our control and have been
volatile.
We are subject to significant risks due to fluctuations in
commodity prices. These risks relate primarily to: (1) the
purchase of certain volumes of natural gas at a price that is a
percentage of a relevant index; and (2) certain processing
contracts for Prism Gas whereby we are exposed to natural gas
and NGL commodity price risks.
The margins we realize from purchasing and selling a portion of
the natural gas that we transport through our pipeline systems
decrease in periods of low natural gas prices because our gross
margins are based on a percentage of the index price. For the
years ended December 31, 2006 and 2005, Prism Gas purchased
approximately 40% and
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54%, respectively, of our gas at a percentage of relevant index.
Accordingly, a decline in the price of natural gas could have an
adverse impact on our results of operations.
In the past, the prices of natural gas and NGLs have been
extremely volatile and we expect this volatility to continue.
For example, in 2005, the spot price of Henry Hub natural gas
ranged from a high of $15.39 per MMBtu to a low of $5.50 per
MMBtu. From January 1, 2006 through December 31, 2006,
the same price ranged from $11.23 per MMBtu to $4.75 per
MMBtu.
We may not be successful in balancing our purchases and sales.
In addition, a producer could fail to deliver contracted volumes
or deliver in excess of contracted volumes, or a consumer could
purchase less than contracted volumes. Any of these actions
could cause our purchases and sales not to be balanced. If our
purchases and sales are not balanced, we will face increased
exposure to commodity price risks and could have increased
volatility in our operating income.
The markets and prices for residue gas and NGLs depend upon
factors beyond our control. These factors include demand for
oil, natural gas and NGLs, which fluctuate with changes in
market and economic conditions and other factors, including:
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the impact of weather on the demand for oil and natural gas;
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the level of domestic oil and natural gas production;
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the level of domestic industrial and manufacturing activity;
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the availability of imported oil and natural gas;
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actions taken by foreign oil and gas producing nations;
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the availability of local, intrastate and interstate
transportation systems;
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the availability and marketing of competitive fuels;
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the impact of energy conservation efforts; and
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the extent of governmental regulation and taxation.
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Our
hedging activities may have a material adverse effect on our
earnings, profitability, cash flows and financial
condition.
As of December 31, 2006, Prism Gas had hedged approximately
60%, 45% and 14% of its commodity risk by volume for 2007, 2008
and 2009, respectively. Based on estimated volumes, as of
September 31, 2007, Prism Gas had hedged approximately 50%,
50%, 22% and 16% of its commodity risk by volume for 2007, 2008,
2009 and 2010, respectively. These hedging arrangements are in
the form of swaps for crude oil, natural gas and ethane. We
anticipate entering into additional hedges in 2007 and beyond to
further reduce our exposure to commodity price movements. The
intent of these arrangements is to reduce the volatility in our
cash flows resulting from fluctuations in commodity prices.
We entered into these derivative transactions with an investment
grade subsidiary of a major oil company and investment grade
banks. While we anticipate that future derivative transactions
will be entered into with investment grade counterparties, and
that we will actively monitor the credit rating of such
counterparties, it is nevertheless possible that losses will
result from counterparty credit risk in the future.
Management will continue to evaluate whether to enter into any
new hedging arrangements, but there can be no assurance that we
will enter into any new hedging arrangements or that our future
hedging arrangements will be on terms similar to our existing
hedging arrangements. Also, we may seek in the future to further
limit our exposure to changes in natural gas, NGL and condensate
commodity prices and we may seek to limit our exposure to
changes in interest rates by using financial derivative
instruments and other hedging mechanisms from time to time. To
the extent we hedge our commodity price and interest rate risk,
we may forego the benefits we would otherwise experience if
commodity prices or interest rates were to change in our favor.
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Despite our hedging program, we remain exposed to risks
associated with fluctuations in commodity prices. The extent of
our commodity price risk is related largely to the effectiveness
and scope of our hedging activities. For example, the derivative
instruments we utilize are based on posted market prices, which
may differ significantly from the actual natural gas, NGL and
condensate prices that we realize in our operations.
Furthermore, we have entered into derivative transactions
related to only a portion of the volume of our expected natural
gas supply and production of NGLs and condensate from our
processing plants. As a result, we will continue to have direct
commodity price risk to the unhedged portion. Our actual future
production may be significantly higher or lower than we
estimated at the time we entered into the derivative
transactions for that period. If the actual amount is higher
than we estimated, we will have greater commodity price risk
than we intended. If the actual amount is lower than the amount
that is subject to our derivative financial instruments, we
might be forced to satisfy all or a portion of our derivative
transactions without the benefit of the cash flow from our sale
of the underlying physical commodity, resulting in a reduction
of our liquidity.
As a result of these factors, our hedging activities may not be
as effective as we intend in reducing the volatility of our cash
flows, and in certain circumstances may actually increase the
volatility of our cash flows. In addition, even though our
management monitors our hedging activities, these activities can
result in substantial losses. Such losses could occur under
various circumstances, including if a counterparty does not
perform its obligations under the applicable hedging
arrangement, the hedging arrangement is imperfect or
ineffective, or our hedging policies and procedures are not
properly followed or do not perform as planned. We cannot assure
our unitholders that the steps we take to monitor our hedging
activities will detect and prevent violations of our risk
management policies and procedures, particularly if deception or
other intentional misconduct is involved.
We
typically do not obtain independent evaluations of natural gas
reserves dedicated to our gathering and pipeline systems;
therefore, volumes of natural gas on our systems in the future
could be less than we anticipate.
We make internal evaluations of natural gas reserves based on
publicly available information. However, we typically do not
obtain independent evaluations of natural gas reserves connected
to our systems due to the unwillingness of producers to provide
reserve information as well as the cost of such evaluations to
verify publicly available information. Accordingly, we do not
have independent estimates of total reserves dedicated to our
systems or the anticipated life of such reserves. If the total
reserves or estimated life of the reserves connected to our
gathering systems are less than we anticipate and we are unable
to secure additional sources of natural gas, then the volumes of
natural gas on our systems in the future could be less than we
anticipate. A decline in the volumes of natural gas on our
systems could have a material adverse effect on our business,
results of operations, financial condition and our ability to
make cash distributions to our unitholders or to make principal
and interest payments on our debt securities.
We
depend on certain natural gas producer customers for a
significant portion of our supply of natural gas and NGLs. The
loss of any of these customers could result in a decline in our
volumes, revenues and cash available for distribution to our
unitholders or to make principal and interest payments on our
debt securities.
We rely on certain natural gas producer customers for a
significant portion of our natural gas and NGL supply. While
some of these customers are subject to long-term contracts, we
may be unable to negotiate extensions or replacements of these
contracts on favorable terms, if at all. The loss of all or even
a portion of the natural gas volumes supplied by these
customers, as a result of competition or otherwise, could have a
material adverse effect on our business, results of operations
and financial condition, unless we were able to acquire
comparable volumes from other sources.
We may
not successfully balance our purchases and sales of natural gas,
which would increase our exposure to commodity price
risks.
We purchase from producers and other customers a significant
amount of the natural gas that flows through our natural gas
gathering, processing and transportation systems for resale to
third parties, including natural gas marketers and end-users. We
may not be successful in balancing our purchases and sales. A
producer or supplier
11
could fail to deliver contracted volumes or deliver in excess of
contracted volumes, or a purchaser could purchase less than
contracted volumes. Any of these actions could cause our
purchases and sales to be unbalanced. While we attempt to
balance our purchases and sales, if our purchases and sales are
unbalanced, we will face increased exposure to commodity price
risks and could have increased volatility in our operating
income and cash flows.
If
third-party pipelines and other facilities interconnected to our
natural gas and NGL pipelines and facilities become unavailable
to transport or produce natural gas and NGLs, our revenues and
cash available for distribution to our unitholders or to make
principal and interest payments on our debt securities could be
adversely affected.
We depend upon third party pipelines and other facilities that
provide delivery options to and from our pipelines and
facilities for the benefit of our customers. Since we do not own
or operate any of these pipelines or other facilities, their
continuing operation is not within our control. If any of these
third-party pipelines and other facilities become unavailable to
transport or produce natural gas and NGLs, our revenues and cash
available for distribution to our unitholders or to make
principal and interest payments on our debt securities could be
adversely affected.
The
industry in which we operate is highly competitive, and
increased competitive pressure could adversely affect our
business and operating results.
We compete with similar enterprises in our respective areas of
operation. Some of our competitors are large oil, natural gas
and petrochemical companies that have greater financial
resources and access to supplies of natural gas and NGLs than we
do. Some of these competitors may expand or construct gathering,
processing and transportation systems that would create
additional competition for the services we provide to our
customers. In addition, our customers who are significant
producers of natural gas may develop their own gathering,
processing and transportation systems in lieu of using ours.
Likewise, our customers who produce NGLs may develop their own
systems to transport NGLs in lieu of using ours. Our ability to
renew or replace existing contracts with our customers at rates
sufficient to maintain current revenues and cash flows could be
adversely affected by the activities of our competitors and our
customers. All of these competitive pressures could have a
material adverse effect on our business, results of operations,
financial condition and ability to make cash distributions to
our unitholders or to make principal and interest payments on
our debt securities.
A
change in the jurisdictional characterization of some of our
assets by federal, state or local regulatory agencies or a
change in policy by those agencies may result in increased
regulation of our assets, which may cause our revenues to
decline and operating expenses to increase.
We believe that our natural gas gathering operations meet the
tests the Federal Energy Regulatory Commission, or FERC, uses to
establish a pipelines status as a gatherer exempt from
FERC regulation under the Natural Gas Act of 1938, or NGA, but
FERC regulation still affects these businesses and the markets
for products derived from these businesses. FERCs policies
and practices across the range of its oil and natural gas
regulatory activities, including, for example, its policies on
open access transportation, ratemaking, capacity release and
market center promotion, indirectly affect intrastate markets.
In recent years, FERC has pursued pro-competitive policies in
its regulation of interstate oil and natural gas pipelines.
However, we cannot assure our unitholders that FERC will
continue this approach as it considers matters such as pipeline
rates and rules and policies that may affect rights of access to
oil and natural gas transportation capacity. In addition, the
distinction between FERC-regulated transmission services and
federally unregulated gathering services has been the subject of
regular litigation, so, in such a circumstance, the
classification and regulation of some of our gathering
facilities and intrastate transportation pipelines may be
subject to change based on future determinations by FERC and the
courts.
Other state and local regulations also affect our business. Our
gathering lines are subject to ratable take and common purchaser
statutes in Louisiana and Texas. Ratable take statutes generally
require gatherers to take, without undue discrimination, oil or
natural gas production that may be tendered to the gatherer for
handling. Similarly, common purchaser statutes generally require
gatherers to purchase without undue discrimination as to source
of supply or producer. These statutes restrict our right as an
owner of gathering facilities to decide with whom we contract to
purchase or transport oil or natural gas. Federal law leaves any
economic regulation of natural gas
12
gathering to the states. The states in which we operate have
adopted complaint-based regulation of oil and natural gas
gathering activities, which allows oil and natural gas producers
and shippers to file complaints with state regulators in an
effort to resolve grievances relating to oil and natural gas
gathering access and rate discrimination. Other state
regulations may not directly regulate our business, but may
nonetheless affect the availability of natural gas for purchase,
processing and sale, including state regulation of production
rates and maximum daily production allowable from gas wells.
While our gathering lines currently are subject to limited state
regulation, there is a risk that state laws will be changed,
which may give producers a stronger basis to challenge the
rates, terms and conditions of a gathering line providing
transportation service.
Panther
Interstate Pipeline Energy, LLC is also subject to regulation by
FERC with respect to issues other than ratemaking.
Under the NGA, FERC has the authority to regulate natural gas
companies, such as Panther Interstate Pipeline Energy, LLC with
respect to: rates, terms and conditions of service; the types of
services Panther Interstate Pipeline Energy, LLC may provide to
its customers; the construction of new facilities; the
acquisition, extension, expansion or abandonment of services or
facilities; the maintenance and retention of accounts and
records; and relationships of affiliated companies involved in
all aspects of the natural gas and energy business. FERCs
actions in any of these areas or modifications to its current
regulations could impair Panther Interstate Pipeline Energy,
LLCs ability to compete for business, the costs it incurs
to operate, or the acquisition or construction of new facilities.
We may
incur significant costs and liabilities resulting from pipeline
integrity programs and related repairs.
Pursuant to the Pipeline Safety Improvement Act of 2002, the
United States Department of Transportation, or DOT, has adopted
regulations requiring pipeline operators to develop integrity
management programs for transportation pipelines located where a
leak or rupture could do the most harm in high consequence
areas. The regulations require operators to:
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perform ongoing assessments of pipeline integrity;
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identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
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improve data collection, integration and analysis;
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repair and remediate the pipeline as necessary; and
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implement preventive and mitigating actions.
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We currently estimate that we will incur costs of less than
$1.0 million between 2006 and 2010 to implement pipeline
integrity management program testing along certain segments of
our natural gas and NGL pipelines. This does not include the
costs, if any, of any repair, remediation, preventative or
mitigating actions that may be determined to he necessary as a
result of the testing program, which costs could be substantial.
We do
not own all of the land on which our pipelines and facilities
are located, which could disrupt our operations.
We do not own all of the land on which our pipelines and
facilities have been constructed, and we are therefore subject
to the possibility of more onerous terms
and/or
increased costs to retain necessary land use if we do not have
valid rights of way or if such rights of way lapse or terminate.
We obtain the rights to construct and operate our pipelines on
land owned by third parties and governmental agencies for a
specific period of time. Our loss of these rights, through our
inability to renew right-of-way contracts or otherwise, could
have a material adverse effect on our business, results of
operations and financial condition and our ability to make cash
distributions to our unitholders or to make principal and
interest payments on our debt securities.
13
Risks
Relating to an Investment in Us
Units
available for future sales by us or our affiliates could have an
adverse impact on the price of our common units or on any
trading market that may develop.
Martin Resource Management and its subsidiaries currently hold
1,701,346 subordinated units and 3,483,471 common units. All of
the subordinated units will convert into common units at the end
of the subordination period and some may convert earlier.
Common units are generally be freely transferable without
restriction or further registration under the Securities Act,
except that any common units held by an affiliate of
ours may not be resold publicly except in compliance with the
registration requirements of the Securities Act of 1933, as
amended (the Securities Act) or under an exemption
under Rule 144 or otherwise.
Our partnership agreement provides that, after the subordination
period, we may issue an unlimited number of limited partner
interests of any type without a vote of the unitholders. During
the subordination period, our general partner, without the
approval of our unitholders, may cause us to issue up to
1,500,000 additional common units. Our general partner may also
cause us to issue an unlimited number of additional common units
or other equity securities of equal rank with the common units,
without unitholder approval, in a number of circumstances such
as:
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the issuance of common units in additional public offerings or
in connection with acquisitions that increase cash flow from
operations on a pro forma, per unit basis;
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the conversion of subordinated units into common units;
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the conversion of units of equal rank with the common units into
common units under some circumstances; or
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the conversion of our general partners general partner
interest in us and its incentive distribution rights into common
units as a result of the withdrawal of our general partner.
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Our partnership agreement does not restrict our ability to issue
equity securities ranking junior to the common units at any
time. Any issuance of additional common units or other equity
securities would result in a corresponding decrease in the
proportionate ownership interest in us represented by, and could
adversely affect the cash distributions to and market price of,
common units then outstanding.
Under our partnership agreement, our general partner and its
affiliates have the right to cause us to register under the
Securities Act and applicable state securities laws the offer
and sale of any units that they hold. Subject to the terms and
conditions of our partnership agreement, these registration
rights allow the general partner and its affiliates or their
assignees holding any units to require registration of any of
these units and to include any of these units in a registration
by us of other units, including units offered by us or by any
unitholder. Our general partner will continue to have these
registration rights for two years following its withdrawal or
removal as a general partner. In connection with any
registration of this kind, we will indemnify each unitholder
participating in the registration and its officers, directors,
and controlling persons from and against any liabilities under
the Securities Act or any applicable state securities laws
arising from the registration statement or prospectus. Except as
described below, the general partner and its affiliates may sell
their units in private transactions at any time, subject to
compliance with applicable laws. Our general partner and its
affiliates, with our concurrence, have granted comparable
registration rights to their bank group to which their
partnership units have been pledged.
The sale of any common or subordinated units could have an
adverse impact on the price of the common units or on any
trading market that may develop.
Unitholders
have less power to elect or remove management of our general
partner than holders of common stock in a corporation. Common
unitholders will not have sufficient voting power to elect or
remove our general partner without the consent of Martin
Resource Management.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and therefore limited ability to influence
managements decisions regarding our business. Unitholders
did not elect our general partner or its directors and will have
no right to elect our general partner or its directors on an
annual or other continuing basis. Martin Resource Management
elects the directors of our general
14
partner. Although our general partner has a fiduciary duty to
manage our partnership in a manner beneficial to us and our
unitholders, the directors of our general partner also have a
fiduciary duty to manage our general partner in a manner
beneficial to Martin Resource Management and its shareholders.
If unitholders are dissatisfied with the performance of our
general partner, they will have a limited ability to remove our
general partner. Our general partner generally may not be
removed except upon the vote of the holders of at least
662/3%
of the outstanding units voting together as a single class.
Because our general partner and its affiliates, including Martin
Resource Management, control 35.7% of our outstanding limited
partnership units, our general partner initially cannot be
removed without the consent of it and its affiliates.
If our general partner is removed without cause during the
subordination period and units held by our general partner and
its affiliates are not voted in favor of removal, all remaining
subordinated units will automatically be converted into common
units and any existing arrearages on the common units will be
extinguished. A removal under these circumstances would
adversely affect the common units by prematurely eliminating
their contractual right to distributions and liquidation
preference over the subordinated units, which preferences would
otherwise have continued until we had met certain distribution
and performance tests. Cause is narrowly defined to mean that a
court of competent jurisdiction has entered a final,
non-appealable judgment finding our general partner liable for
actual fraud, gross negligence or willful or wanton misconduct
in its capacity as our general partner. Cause does not include
most cases of charges of poor management of our business, so the
removal of our general partner because of the unitholders
dissatisfaction with our general partners performance in
managing our partnership will most likely result in the
termination of the subordination period.
Unitholders voting rights are further restricted by our
partnership agreement provision prohibiting any units held by a
person owning 20% or more of any class of units then
outstanding, other than our general partner, its affiliates,
their transferees and persons who acquired such units with the
prior approval of our general partners directors, from
voting on any matter. In addition, our partnership agreement
contains provisions limiting the ability of unitholders to call
meetings or to acquire information about our operations, as well
as other provisions limiting the unitholders ability to
influence the manner or direction of management.
As a result of these provisions, it will be more difficult for a
third party to acquire our partnership without first negotiating
the acquisition with our general partner. Consequently, it is
unlikely the trading price of our common units will ever reflect
a takeover premium.
Our
general partners discretion in determining the level of
our cash reserves may adversely affect our ability to make cash
distributions to our unitholders or to make principal and
interest payments on our debt securities.
Our partnership agreement requires our general partner to deduct
from operating surplus cash reserves it determines in its
reasonable discretion to be necessary to fund our future
operating expenditures. In addition, our partnership agreement
permits our general partner to reduce available cash by
establishing cash reserves for the proper conduct of our
business, to comply with applicable law or agreements to which
we are a party or to provide funds for future distributions to
partners. These cash reserves will affect the amount of cash
available for distribution to our unitholders or to make
principal and interest payments on our debt securities.
Unitholders
may not have limited liability if a court finds that we have not
complied with applicable statutes or that unitholder action
constitutes control of our business.
The limitations on the liability of holders of limited partner
interests for the obligations of a limited partnership have not
been clearly established in some states. The holder of one of
our common units could be held liable in some circumstances for
our obligations to the same extent as a general partner if a
court were to determine that:
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we had been conducting business in any state without compliance
with the applicable limited partnership statute; or
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the right or the exercise of the right by our unitholders as a
group to remove or replace our general partner, to approve some
amendments to our partnership agreement, or to take other action
under our partnership agreement constituted participation in the
control of our business.
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Our general partner generally has unlimited liability for our
obligations, such as our debts and environmental liabilities,
except for our contractual obligations that are expressly made
without recourse to our general partner. In addition, under some
circumstances, a unitholder may be liable to us for the amount
of a distribution for a period of nine years from the date of
the distribution.
Our
partnership agreement contains provisions that reduce the
remedies available to unitholders for actions that might
otherwise constitute a breach of fiduciary duty by our general
partner.
Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner to the unitholders. Our
partnership agreement also restricts the remedies available to
unitholders for actions that would otherwise constitute breaches
of our general partners fiduciary duties. For example, our
partnership agreement:
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permits our general partner to make a number of decisions in its
sole discretion. This entitles our general partner
to consider only the interests and factors that it desires, and
it has no duty or obligation to give any consideration to any
interest of, or factors affecting, us, our affiliates or any
limited partner;
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provides that our general partner is entitled to make other
decisions in its reasonable discretion which may
reduce the obligations to which our general partner would
otherwise be held;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not involving a required vote of
unitholders must be fair and reasonable to us and
that, in determining whether a transaction or resolution is
fair and reasonable, our general partner may
consider the interests of all parties involved, including its
own; and
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for errors of judgment or for any acts or
omissions if our general partner and those other persons acted
in good faith.
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Unitholders are treated as having consented to the various
actions contemplated in our partnership agreement and conflicts
of interest that might otherwise be considered a breach of
fiduciary duties under applicable state law.
We may
issue additional common units without unitholder approval, which
would dilute unitholder ownership interests.
During the subordination period, our general partner, without
the approval of our unitholders, may cause us to issue up to
1,500,000 additional common units. Our general partner may also
cause us to issue an unlimited number of additional common units
or other equity securities of equal rank with the common units,
without unitholder approval, in a number of circumstances such
as:
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the issuance of common units in additional public offerings or
in connection with acquisitions that increase cash flow from
operations on a pro forma, per unit basis;
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the conversion of subordinated units into common units;
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the conversion of units of equal rank with the common units into
common units under some circumstances; or
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the conversion of our general partners general partner
interest in us and its incentive distribution rights into common
units as a result of the withdrawal of our general partner.
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After the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of
our unitholders. Our partnership agreement does not give our
unitholders the right to approve our issuance of equity
securities ranking junior to the common units at any time.
On each of November 14, 2005, 2006 and 2007, 850,672 of our
subordinated units owned by Martin Resource Management and its
subsidiaries converted into common units on a one for one basis
following our distribution of available cash on such date.
Additional conversion of our outstanding subordinated units will
occur following our quarterly distributions of available cash
provided that certain distribution thresholds are met by us.
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The issuance of additional common units or other equity
securities of equal or senior rank will have the following
effects:
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our unitholders proportionate ownership interest in us
will decrease;
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the amount of cash available for distribution on a per unit
basis may decrease;
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because a lower percentage of total outstanding units will be
subordinated units, the risk that a shortfall in the payment of
the minimum quarterly distribution will be borne by our common
unitholders will increase;
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the relative voting strength of each previously outstanding unit
will diminish;
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the market price of the common units may decline; and
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the ratio of taxable income to distributions may increase.
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The
control of our general partner may be transferred to a third
party, and that party could replace our current management team,
without unitholder consent. Additionally, if Martin Resource
Management no longer controls our general partner, amounts we
owe under our credit facility may become immediately due and
payable.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, there is no restriction in our partnership
agreement on the ability of the owner of our general partner to
transfer its ownership interest in our general partner to a
third party. A new owner of our general partner could replace
the directors and officers of our general partner with its own
designees and to control the decisions taken by our general
partner. Martin Resource Management and its affiliates have
pledged their interests in our general partner and us to their
bank group. If, at any time, Martin Resource Management no
longer controls our general partner, the lenders under our
credit facility may declare all amounts outstanding thereunder
immediately due and payable. If such event occurs, we may be
required to refinance our debt on unfavorable terms, which could
negatively impact our results of operations and our ability to
make distribution to our unitholders or to make principal and
interest payments on our debt securities.
Our
general partner has a limited call right that may require
unitholders to sell their common units at an undesirable time or
price.
If at any time our general partner and its affiliates own more
than 80% of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the remaining common units held by unaffiliated persons at a
price not less than the then-current market price. As a result,
unitholders may be required to sell their common units at an
undesirable time or price and may not receive any return on
their investment. Unitholders may also incur a tax liability
upon a sale of their units. No provision in our partnership
agreement, or in any other agreement we have with our general
partner or Martin Resource Management, prohibits our general
partner or its affiliates from acquiring more than 80% of our
common units. For additional information about this call right
and unitholders potential tax liability, please read
Tax Risks Tax gain or loss on the disposition
of our common units could be different than expected.
Our
common units have a limited trading volume compared to other
publicly traded securities.
Our common units are quoted on the NASDAQ National Market under
the symbol MMLP. However, daily trading volumes for
our common units are, and may continue to be, relatively small
compared to many other securities quoted on the NASDAQ National
Market. The price of our common units may, therefore, be
volatile.
Failure
to achieve and maintain effective internal controls in
accordance with Section 404 of the
Sarbanes-Oxley
Act could have a material adverse effect on our unit
price.
In order to comply with Section 404 of the Sarbanes-Oxley
Act, we periodically document and test our internal control
procedures. Section 404 of the Sarbanes-Oxley Act requires
annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our
independent auditors addressing these assessments. During the
course of our testing we may identify deficiencies which we may
not be able to
17
address in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of
Section 404. In addition, if we fail to maintain the
adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not
be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act.
Failure to achieve and maintain an effective internal control
environment could have a material adverse effect on the price of
our common units or debt securities.
Risks
Relating to Our Relationship with Martin Resource
Management
Cash
reimbursements due to Martin Resource Management may be
substantial and will reduce our cash available for distribution
to our unitholders or to make principal and interest payments on
our debt securities.
Under our omnibus agreement with Martin Resource Management,
Martin Resource Management provides us with corporate staff and
support services on behalf of our general partner that are
substantially identical in nature and quality to the services it
conducted for our business prior to our formation. The omnibus
agreement requires us to reimburse Martin Resource Management
for the costs and expenses it incurs in rendering these
services, including an overhead allocation to us of Martin
Resource Managements indirect general and administrative
expenses from its corporate allocation pool. These payments may
be substantial. Payments to Martin Resource Management will
reduce the amount of available cash for distribution to our
unitholders or to make principal and interest payments on our
debt securities.
Martin
Resource Management has conflicts of interest and limited
fiduciary responsibilities, which may permit it to favor
its own interests to the detriment of our
unitholders.
Martin Resource Management owns an approximate 35.7% limited
partnership interest in us. Furthermore, it owns and controls
our general partner, which owns a 2.0% general partner interest
and incentive distribution rights in us. Conflicts of interest
may arise between Martin Resource Management and our general
partner, on the one hand, and our unitholders, on the other
hand. As a result of these conflicts, our general partner may
favor its own interests and the interests of Martin Resource
Management over the interests of our unitholders. Potential
conflicts of interest between us, Martin Resource Management and
our general partner could occur in many of our day-to-day
operations including, among others, the following situations:
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Officers of Martin Resource Management who provide services to
us also devote significant time to the businesses of Martin
Resource Management and are compensated by Martin Resource
Management for that time.
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Neither our partnership agreement nor any other agreement
requires Martin Resource Management to pursue a business
strategy that favors us or utilizes our assets or services.
Martin Resource Managements directors and officers have a
fiduciary duty to make these decisions in the best interests of
the shareholders of Martin Resource Management without regard to
the best interests of the unitholders.
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Martin Resource Management may engage in limited competition
with us.
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Our general partner is allowed to take into account the
interests of parties other than us, such as Martin Resource
Management, in resolving conflicts of interest, which has the
effect of reducing its fiduciary duty to our unitholders.
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Under our partnership agreement, our general partner may limit
its liability and reduce its fiduciary duties, while also
restricting the remedies available to our unitholders for
actions that, without the limitations and reductions, might
constitute breaches of fiduciary duty. As a result of purchasing
units, our unitholders will be treated as having consented to
some actions and conflicts of interest that, without such
consent, might otherwise constitute a breach of fiduciary or
other duties under applicable state law.
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Our general partner determines which costs incurred by Martin
Resource Management are reimbursable by us.
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Our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered on terms that are fair and reasonable to us or from
entering into additional contractual arrangements with any of
these entities on our behalf.
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Our general partner controls the enforcement of obligations owed
to us by Martin Resource Management.
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Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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The audit committee of our general partner retains our
independent auditors.
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In some instances, our general partner may cause us to borrow
funds to permit us to pay cash distributions, even if the
purpose or effect of the borrowing is to make a distribution on
the subordinated units, to make incentive distributions or to
accelerate the expiration of the subordination period.
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Our general partner has broad discretion to establish financial
reserves for the proper conduct of our business. These reserves
also will affect the amount of cash available for distribution.
Our general partner may establish reserves for distribution on
the subordinated units, but only if those reserves will not
prevent us from distributing the full minimum quarterly
distribution, plus any arrearages, on the common units for the
following four quarters.
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Martin
Resource Management and its affiliates may engage in limited
competition with us.
Martin Resource Management and its affiliates may engage in
limited competition with us. If Martin Resource Management does
engage in competition with us, we may lose customers or business
opportunities, which could have an adverse impact on our results
of operations, cash flow and ability to make distributions to
our unitholders or to make principal and interest payments on
our debt securities.
Tax
Risks
You should read Material Tax Considerations for a
full discussion of the expected material federal income tax
considerations of owning and disposing of common units.
The
IRS could treat us as a corporation for tax purposes, which
would substantially reduce the cash available for distribution
to unitholders.
The anticipated after-tax economic benefit of an investment in
us depends largely on our classification as a partnership for
federal income tax purposes. We have not requested, and do not
plan to request, a ruling from the Internal Revenue Service, or
IRS, on this or any other matter affecting us.
If we were treated as a corporation for federal income tax
purposes, we would pay tax on our income at corporate rates,
which is currently a maximum of 35%, and would likely pay state
income tax at various rates. Distributions to unitholders would
generally be taxed again to them as corporate distributions, and
no income, gains, losses or deductions would flow through to
unitholders. Because a tax would be imposed upon us as a
corporation, the cash available for distribution to unitholders
would be substantially reduced. Treatment of us as a corporation
would result in a material reduction in the anticipated cash
flow and after-tax return to our unitholders and therefore would
likely result in a substantial reduction in the value of the
common units.
Current law may change so as to cause us to be taxable as a
corporation for federal income tax purposes or otherwise subject
us to entity-level taxation. Our partnership agreement provides
that if a law is enacted or existing law is modified or
interpreted in a manner that subjects us to taxation as a
corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, then the
minimum quarterly distribution amount and the target
distribution amount will be adjusted to reflect the impact of
that law on us.
19
A
successful IRS contest of the federal income tax positions we
take may adversely affect the market for our common units and
the costs of any contest will be borne by our unitholders, debt
security holders and our general partner.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for federal income tax purposes or
any other matter affecting us. The IRS may adopt positions that
differ from our counsels conclusions. It may be necessary
to resort to administrative or court proceedings to sustain some
or all of our counsels conclusions or the positions we
take. A court may not agree with some or all our counsels
conclusions or the positions we take. Any contest with the IRS
may materially and adversely impact the market for our common
units and the prices at which they trade. In addition, the costs
of any contest with the IRS will be borne directly or indirectly
by all of our unitholders, debt security holders and our general
partner.
Unitholders
may be required to pay taxes on income from us even if they do
not receive any cash distributions from us.
Unitholders may be required to pay federal income taxes and, in
some cases, state, local and foreign income taxes on their share
of our taxable income even if they receive no cash distributions
from us. Unitholders may not receive cash distributions from us
equal to their share of our taxable income or even the tax
liability that results from the taxation of their share of our
taxable income.
Tax
gain or loss on the disposition of our common units could be
different than expected.
If our unitholders sell their common units, they will recognize
gain or loss equal to the difference between the amount realized
and their tax basis in those common units. Prior distributions
in excess of the total net taxable income unitholders were
allocated for a common unit, which decreased unitholder tax
basis in that common unit, will, in effect, become taxable
income to our unitholders if the common unit is sold at a price
greater than their tax basis in that common unit, even if the
price they receive is less than their original cost. A
substantial portion of the amount realized, whether or not
representing gain, may be ordinary income to our unitholders.
Should the IRS successfully contest some positions we take, our
unitholders could recognize more gain on the sale of units than
would be the case under those positions, without the benefit of
decreased income in prior years. In addition, if our unitholders
sell their units, they may incur a tax liability in excess of
the amount of cash they receive from the sale.
Tax-exempt
entities and foreign persons face unique tax issues from owning
common units that may result in adverse tax consequences to
them.
Investment in common units by tax-exempt entities, such as
individual retirement accounts (known as IRAs), and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations exempt from federal income
tax, including individual retirement accounts and other
retirement plans, will be unrelated business income and will be
taxable to them. Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest effective
tax rate applicable to individuals, and
non-U.S. persons
will be required to file federal income tax returns and pay tax
on their share of our taxable income.
We
treat a purchaser of our common units as having the same tax
benefits without regard to the sellers identity. The IRS
may challenge this treatment, which could adversely affect the
value of the common units.
Because we cannot match transferors and transferees of common
units and because of other reasons, we have adopted depreciation
positions that may not conform to all aspects of the Treasury
regulations. Please read Material Tax
Considerations Tax Consequences of Unit
Ownership Section 754 Election. A successful
IRS challenge to those positions could adversely affect the
amount of tax benefits available to our unitholders. It also
could affect the timing of these tax benefits or the amount of
gain from the sale of common units and could have a negative
impact on the value of our common units or result in audit
adjustments to our unit holders tax returns. read
Material Tax Considerations Uniformity of
Units for an further discussion of the effect of, and
reasons for, the depreciation and amortization positions we will
adopt.
20
Unitholders
may be subject to state, local and foreign taxes and return
filing requirements as a result of investing in our common
units.
In addition to federal income taxes, unitholders may be subject
to other taxes, such as state, local and foreign income taxes,
unincorporated business taxes and estate, inheritance, or
intangible taxes that are imposed by the various jurisdictions
in which we do business or own property. Unitholders may be
required to file state, local and foreign income tax returns and
pay state and local income taxes in some or all of the various
jurisdictions in which we do business or own property and may be
subject to penalties for failure to comply with those
requirements. We own property and conduct business in Alabama,
Arkansas, California, Georgia, Florida, Illinois, Louisiana,
Mississippi, Texas and Utah. We may do business or own property
in other states or foreign countries in the future. It is the
unitholders responsibility to file all federal, state,
local and foreign tax returns. Our counsel has not rendered an
opinion on the state, local or foreign tax consequences of an
investment in our common units.
Risks
Relating to the Debt Securities
Martin
Midstream Partners is a holding company and we conduct our
operations through our subsidiary, Martin Operating Partnership,
and depend on cash flow from Martin Operating Partnership to
service any of our debt obligations.
Martin Midstream Partners conducts all of its operations through
its subsidiary, Martin Operating Partnership, and owns no
significant assets other than the limited partnership interests
in Martin Operating Partnership and ownership of membership
interests in Martin Operating GP LLC, the general partner of
Martin Operating Partnership. Therefore, our ability, and the
ability of Martin Operating Partnership, to make required
payments on any debt securities issued will depend on the
performance of Martin Operating Partnership and its ability to
make required payments
and/or to
distribute funds to us. The ability of this subsidiary to make
required payments
and/or make
such distributions may be restricted by, among other things, its
debt agreements and applicable state partnership laws and other
laws and regulations. Under our debt agreements, Martin
Operating Partnership is prohibited from making a distribution
to us that would result in a default in such debt agreements.
Furthermore, applicable state partnership laws restrict Martin
Operating Partnership from making distributions to us that would
result in its insolvency. If we or Martin Operating Partnership
are unable to obtain the funds necessary to pay the principal
amount at maturity of our debt securities, we may be required to
adopt one or more alternatives, such as a refinancing of the
debt securities. We cannot assure you that we would be able to
so refinance our debt securities.
Your
right to receive payments on our debt securities is unsecured
and will be effectively subordinated to our existing and future
secured indebtedness.
Any debt securities, including any guarantees, issued by Martin
Midstream Partners or Martin Operating Partnership will be
effectively subordinated to the claims of our secured creditors.
In the event of the insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of
Martin Midstream Partners or Martin Operating Partnership,
secured creditors would generally have the right to be paid in
full before any distribution is made to the holders of our debt
securities. As of December 31, 2007, Martin Midstream
Partners had outstanding approximately $174.1 million o f
secured indebtedness. As of September 30, 2007, Martin
Midstream Partners had outstanding approximately
$210.0 million of secured indebtedness.
A
guarantee by Martin Midstream Partners or Martin Operating
Partnership could be deemed to be a fraudulent conveyance under
certain circumstances, and a court may try to subordinate or
void such guarantee.
Under federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a guarantee by Martin Midstream
Partners or Martin Operating Partnership could be voided, or
claims in respect of a guarantee could be subordinated to all
other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by
its guarantee, received less than reasonably equivalent fair
value or fair consideration for the incurrence of such
guarantee, and
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was insolvent or rendered insolvent by reason of such incurrence;
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was engaged in a business or transaction for which the
guarantors remaining assets constituted unreasonably small
capital; or
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intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they mature.
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In addition, any payment by that guarantor pursuant to its
guarantee could be voided and required to be returned to the
guarantor, or to a fund for the benefit of the creditors of the
guarantor. The measures of insolvency for purposes of these
fraudulent transfer laws will vary depending upon the law
applied in any proceeding to determine whether a fraudulent
transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
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the sum of its assets, including contingent liabilities, were
greater than the fair saleable value of all of its assets;
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the present fair saleable value of its assets were less than the
amount that would be required to pay its procurable liability,
including contingent liabilities, on its existing debts, as they
become absolute or mature; or
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it could not pay its debts as they become due.
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Martin
Midstream Partners and Martin Operating Partnership are required
to distribute all of their available cash to their partners and
are not required to accumulate cash for the purpose of meeting
their future obligations to holders of our debt securities,
which may limit the cash available to service those debt
securities.
The partnership agreements of Martin Midstream Partners and
Martin Operating Partnership require us to distribute all of our
available cash each fiscal quarter to our partners. Available
cash is generally defined to mean all cash on hand at the end of
the quarter, plus certain working capital borrowings after the
end of the quarter, less reserves established by the general
partner in its sole discretion to provide for the proper conduct
of our business (including reserves for future capital
expenditures), to comply with applicable law or agreements,
including debt agreements, or to provide funds for future
distributions to partners. Depending on the timing and amount of
the cash distributions to our partners and because we are not
required to accumulate cash for the purpose of meeting
obligations to holders of any debt securities, such
distributions could significantly reduce the cash available to
us in subsequent periods to make payments on any debt securities.
FORWARD-LOOKING
STATEMENTS
Statements included in this prospectus, the accompanying
prospectus supplement and the documents we incorporate by
reference that are not historical facts (including any
statements concerning plans and objectives of management for
future operations or economic performance, or assumptions or
forecasts related thereto), are forward-looking statements.
These statements can be identified by the use of forward-looking
terminology including forecast, may,
believe, will, expect,
anticipate, estimate,
continue or other similar words. These statements
discuss future expectations, contain projections of results of
operations or of financial condition or state other
forward-looking information. We and our
representatives may from time to time make other oral or written
statements that are also forward-looking statements.
These forward-looking statements are made based upon
managements current plans, expectations, estimates,
assumptions and beliefs concerning future events impacting us
and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and
that actual results could differ materially from those expressed
or implied in the forward-looking statements.
Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those
expressed or implied by these forward-looking statements for a
number of important reasons, including those discussed under
Risk Factors and elsewhere in this prospectus, the
accompanying prospectus supplement and the documents we
incorporate by reference herein.
22
USE OF
PROCEEDS
Unless we specify otherwise in any prospectus supplement, we
will use the net proceeds (after the payment of offering
expenses and underwriting discounts and commissions) from the
sale of securities offered hereby for general partnership
purposes, which may include, among other things:
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paying or refinancing all or a portion of our indebtedness
outstanding at the time, including indebtedness incurred in
connection with acquisitions; and
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funding working capital, capital expenditures or acquisitions.
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The actual application of proceeds from the sale of any
particular offering of securities using this prospectus will be
described in the applicable prospectus supplement relating to
such offering. The precise amount and timing of the application
of these proceeds will depend upon our funding requirements and
the availability and cost of other funds.
RATIO OF
EARNINGS TO FIXED CHARGES
The table below sets forth the ratio of earnings to fixed
charges of Martin Midstream Partners and Martin Midstream
Partners Predecessor on a consolidated basis for the periods
indicated. The ratio of earnings to fixed charges is presented
below for the period from January 1, 2002 through
November 5, 2002, for the years ending December 31,
2002, 2003, 2004, 2005 and 2006, and for the period from
January 1, 2007 through September 30, 2007.
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Year Ended December 31,
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Martin Midstream
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Partners Predecessor
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Martin Midstream Partners L.P.
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Period
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Period
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Period
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from
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from
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from
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January 1,
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November 6,
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January 1,
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2002
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2002
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2007
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through
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through
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through
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November 5,
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December 31,
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September 30,
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2002
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2002
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2003
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2004
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2005
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2006
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2007
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Ratio of Earnings to Fixed Charges
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1.78x
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8.29x
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5.97x
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3.81x
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2.46x
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2.19x
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2.16x
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For these ratios, earnings is the amount resulting
from adding the following items:
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pre-tax income from continuing operations, before minority
interest and equity in earnings of unconsolidated partnership;
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distributed income of equity investments; and
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fixed charges.
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The term fixed charges means the sum of the
following:
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interest expense;
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amortized debt issuance costs; and
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estimated interest element of rentals.
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DESCRIPTION
OF THE DEBT SECURITIES
Martin Midstream Partners may issue senior debt securities under
an indenture between Martin Midstream Partners, as issuer,
Martin Operating Partnership, as the Guarantor, if applicable,
and a trustee that we will name in the related prospectus
supplement. We refer to this indenture as the Martin
Midstream Partners senior indenture. Martin Midstream
Partners may also issue subordinated debt securities under an
indenture to be entered into among Martin Midstream Partners,
Martin Operating Partnership, as the Guarantor, if applicable,
and a trustee that we will name in the related prospectus
supplement. We refer to this indenture as the Martin
Midstream Partners subordinated indenture.
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Martin Operating Partnership may issue senior debt securities
under an indenture among Martin Operating Partnership, as
issuer, Martin Midstream Partners, as the Guarantor, and a
trustee that we will name in the related prospectus supplement.
We refer to this indenture as the Martin Operating
Partnership senior indenture. Martin Operating Partnership
may also issue subordinated debt securities under an indenture
to be entered into among Martin Operating Partnership, Martin
Midstream Partners, as the Guarantor, and a trustee that we will
name in the related prospectus supplement. We refer to this
indenture as the Martin Operating Partnership subordinated
indenture.
We refer to the Martin Midstream Partners senior indenture, the
Martin Operating Partnership senior indenture, the Martin
Midstream Partners subordinated indenture and the Martin
Operating Partnership subordinated indenture collectively as the
indentures. The debt securities will be governed by
the provisions of the related indenture and those made part of
the indenture by reference to the Trust Indenture Act of
1939.
We have summarized material provisions of the indentures, the
debt securities and the guarantees below. This summary is not
complete. We have filed the form of senior indentures and the
form of subordinated indentures with the SEC as exhibits to the
registration statement of which this prospectus forms a part,
and you should read the indentures for provisions that may be
important to you.
Unless the context otherwise requires, references in this
Description of the Debt Securities to
we, us and our mean Martin
Midstream Partners and Martin Operating Partnership and
references herein to an indenture refer to the
particular indenture under which we issue a series of debt
securities.
Provisions
Applicable to Each Indenture
General. Any series of debt securities:
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will be general obligations of the issuer;
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will be general obligations of the Guarantor if they are
guaranteed by the Guarantor; and
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may be subordinated to the Senior Indebtedness of Martin
Midstream Partners and Martin Operating Partnership.
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The indentures do not limit the amount of debt securities that
may be issued under any indenture, and do not limit the amount
of other indebtedness or securities that we may issue. We may
issue debt securities under the indentures from time to time in
one or more series, each in an amount authorized prior to
issuance.
No indenture contains any covenants or other provisions designed
to protect holders of the debt securities in the event we
participate in a highly leveraged transaction or upon a change
of control. The indentures also do not contain provisions that
give holders the right to require us to repurchase their
securities in the event of a decline in our credit ratings for
any reason, including as a result of a takeover,
recapitalization or similar restructuring or otherwise.
Terms. We will prepare a prospectus supplement
and either a supplemental indenture, or authorizing resolutions
of the board of directors of our general partner, accompanied by
an officers certificate, relating to any series of debt
securities that we offer, which will include specific terms
relating to some or all of the following:
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whether the debt securities will be senior or subordinated debt
securities;
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the form and title of the debt securities of that series;
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whether the debt securities will be secured or not;
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the total principal amount of the debt securities of that series;
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whether the debt securities will be issued in individual
certificates to each holder or in the form of temporary or
permanent global securities held by a depositary on behalf of
holders;
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the date or dates on which the principal of and any premium on
the debt securities of that series will be payable;
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any interest rate which the debt securities of that series will
bear, the date from which interest will accrue, interest payment
dates and record dates for interest payments;
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any right to extend or defer the interest payment periods and
the duration of the extension;
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whether and under what circumstances any additional amounts with
respect to the debt securities will be payable;
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whether the debt securities are entitled to the benefit of any
guarantee by any Guarantor;
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the place or places where payments on the debt securities of
that series will be payable;
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any provisions for optional redemption or early repayment;
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any provisions that would require the redemption, purchase or
repayment of debt securities;
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the denominations in which the debt securities will be issued;
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whether payments on the debt securities will be payable in
foreign currency or currency units or another form and whether
payments will be payable by reference to any index or formula;
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the portion of the principal amount of debt securities that will
be payable if the maturity is accelerated, if other than the
entire principal amount;
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any additional means of defeasance of the debt securities, any
additional conditions or limitations to defeasance of the debt
securities or any changes to those conditions or limitations;
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any changes or additions to the events of default or covenants
described in this prospectus;
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any restrictions or other provisions relating to the transfer or
exchange of debt securities;
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any terms for the conversion or exchange of the debt securities
for our other securities or securities of any other entity;
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any changes to the subordination provisions for the subordinated
debt securities; and
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any other terms of the debt securities of that series.
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This description of debt securities will be deemed modified,
amended or supplemented by any description of any series of debt
securities set forth in a prospectus supplement related to that
series.
We may sell the debt securities at a discount, which may be
substantial, below their stated principal amount. These debt
securities may bear no interest or interest at a rate that at
the time of issuance is below market rates. If we sell these
debt securities, we will describe in the prospectus supplement
any material United States federal income tax consequences and
other special considerations.
If we sell any of the debt securities for any foreign currency
or currency unit or if payments on the debt securities are
payable in any foreign currency or currency unit, we will
describe in the prospectus supplement the restrictions,
elections, tax consequences, specific terms and other
information relating to those debt securities and the foreign
currency or currency unit.
Guarantee of Martin Midstream Partners. Martin
Midstream Partners will fully, irrevocably and unconditionally
guarantee on an unsecured basis all series of debt securities of
Martin Operating Partnership, and may execute a notation of
guarantee as further evidence of its guarantee. The applicable
prospectus supplement will describe the terms of any such
guarantee by Martin Midstream Partners.
Martin Midstream Partners guarantee of the senior debt
securities will be Martin Midstream Partners unsecured and
unsubordinated general obligation, and will rank on a parity
with all of Martin Midstream Partners other unsecured and
unsubordinated indebtedness. Martin Midstream Partners
guarantee of the subordinated debt securities will be Martin
Midstream Partners unsecured general obligation and will
be subordinated to all of Martin Midstream Partners
other unsecured and unsubordinated indebtedness.
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Guarantee of Martin Operating
Partnership. Martin Operating Partnership may
fully, irrevocably and unconditionally guarantee on an unsecured
basis all series of debt securities of Martin Midstream Partners
and may execute a notation of guarantee as further evidence of
such guarantee. The applicable prospectus supplement will
describe the terms of any such guarantee by Martin Operating
Partnership.
If a series of senior debt securities of Martin Midstream
Partners is guaranteed, Martin Operating Partnerships
guarantee of the senior debt securities will be Martin Operating
Partnerships unsecured and unsubordinated general
obligation, and will rank on a parity with all of Martin
Operating Partnerships other unsecured and unsubordinated
indebtedness. If a series of subordinated debt securities of
Martin Midstream Partners is guaranteed, Martin Operating
Partnerships guarantee of the subordinated debt securities
will be Martin Operating Partnerships unsecured general
obligation and will be subordinated to all of Martin Operating
Partnerships other unsecured and unsubordinated
indebtedness.
The obligations of each Guarantor under its guarantee of the
debt securities will be limited to the maximum amount that will
not result in the obligations of the Guarantor under the
guarantee constituting a fraudulent conveyance or fraudulent
transfer under federal or state law, after giving effect to:
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all other contingent and fixed liabilities of the
Guarantor; and
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any collections from or payments made by or on behalf of any
other Guarantor in respect of the obligations of the Guarantor
under its guarantee.
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The guarantee of any Guarantor may be released under certain
circumstances. If we exercise our legal or covenant defeasance
option with respect to debt securities of a particular series as
described below in Defeasance, then any
Guarantor will be released with respect to that series. Further,
if no default has occurred and is continuing under the
indentures, and to the extent not otherwise prohibited by the
indentures, a Guarantor will be unconditionally released and
discharged from the guarantee:
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automatically upon any sale, exchange or transfer, whether by
way of merger or otherwise, to any person that is not our
affiliate, of all of our direct or indirect limited partnership
or other equity interests in the Guarantor;
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automatically upon the merger of the Guarantor into us or the
liquidation and dissolution of the Guarantor; or
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following delivery of a written notice by us to the trustee,
upon the release of all guarantees by the Guarantor of any debt
of ours for borrowed money for a purchase money obligation or
for a guarantee of either, except for any series of debt
securities.
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Consolidation, Merger and Sale of Assets. Each
of Martin Midstream Partners and Martin Operating Partnership
has agreed, however, that it will not consolidate with or merge
into any entity (other than Martin Midstream Partners,
Martin Operating Partnership or their subsidiaries, as
applicable) or lease, transfer or dispose of all or
substantially all of its assets to any entity (other than Martin
Midstream Partners, Martin Operating Partnership or their
subsidiaries, as applicable) unless:
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it is the continuing entity; or
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if it is not the continuing entity, the resulting entity or
transferee is organized and existing under the laws of any
United States jurisdiction and assumes the performance of its
covenants and obligations under the indentures; and
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in either case, immediately after giving effect to the
transaction, no default or event of default would occur and be
continuing or would result from the transaction.
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Upon any such consolidation, merger or asset lease, transfer or
disposition involving Martin Midstream Partners or Martin
Operating Partnership, the resulting entity or transferee will
be substituted for Martin Midstream Partners or Martin Operating
Partnership, as applicable, under the applicable indenture and
debt securities. In the case of an asset transfer or disposition
other than a lease, Martin Midstream Partners or Martin
Operating Partnership, as applicable, will be released from the
applicable indenture.
26
Events of Default. Unless we inform you
otherwise in the applicable prospectus supplement, the following
are events of default with respect to a series of debt
securities:
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failure to pay interest on that series of debt securities when
due that continue for 30 days;
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default in the payment of principal of or premium, if any, on
any debt securities of that series when due at its stated
maturity, upon redemption, upon required repurchase or otherwise;
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default in the payment of any sinking fund payment on any debt
securities of that series when due;
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failure by the issuer or, if the series of debt securities is
guaranteed by the Guarantor, by such Guarantor, to comply for
60 days with the other agreements contained in the
indentures, any supplement to the indentures or any board
resolution authorizing the issuance of that series after written
notice by the trustee or by the holders of at least 25% in
principal amount of the outstanding debt securities issued under
that indenture that are affected by that failure;
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certain events of bankruptcy, insolvency or reorganization of
the issuer or, if the series of debt securities is guaranteed by
the Guarantor, of the Guarantor;
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if the series is guaranteed by the Guarantor,
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any of the guarantees ceases to be in full force and effect,
except as otherwise provided in the indentures;
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any of the guarantees is declared null and void in a judicial
proceeding; or
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the Guarantor denies or disaffirms its obligations under the
indentures or its guarantee; and
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any other event of default provided for in that series of debt
securities.
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A default under one series of debt securities will not
necessarily be a default under another series. The trustee may
withhold notice to the holders of the debt securities of any
default or event of default (except in any payment on the debt
securities) if the trustee considers it in the interest of the
holders of the debt securities to do so.
If an event of default for any series of debt securities occurs
and is continuing, the trustee or the holders of at least 25% in
principal amount of the outstanding debt securities of the
series affected by the default (or, in some cases, 25% in
principal amount of all debt securities issued under the
applicable indenture that are affected, voting as one class) may
declare the principal of and all accrued and unpaid interest on
those debt securities to be due and payable. If an event of
default relating to certain events of bankruptcy, insolvency or
reorganization occurs, the principal of and interest on all the
debt securities issued under the applicable indenture will
become immediately due and payable without any action on the
part of the trustee or any holder. The holders of a majority in
principal amount of the outstanding debt securities of the
series affected by the default (or, in some cases, of all debt
securities issued under the applicable indenture that are
affected, voting as one class) may in some cases rescind this
accelerated payment requirement.
A holder of a debt security of any series issued under each
indenture may pursue any remedy under that indenture only if:
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the holder gives the trustee written notice of a continuing
event of default for that series;
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the holders of at least 25% in principal amount of the
outstanding debt securities of that series make a written
request to the trustee to pursue the remedy;
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the holders offer to the trustee indemnity satisfactory to the
trustee;
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the trustee fails to act for a period of 60 days after
receipt of the request and offer of indemnity; and
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during that
60-day
period, the holders of a majority in principal amount of the
debt securities of that series do not give the trustee a
direction inconsistent with the request.
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This provision does not, however, affect the right of a holder
of a debt security to sue for enforcement of any overdue payment.
27
In most cases, holders of a majority in principal amount of the
outstanding debt securities of a series (or of all debt
securities issued under the applicable indenture that are
affected, voting as one class) may direct the time, method and
place of:
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conducting any proceeding for any remedy available to the
trustee; and
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exercising any trust or power conferred upon the trustee
relating to or arising as a result of an event of default.
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The issuer is required to file each year with the trustee a
written statement as to its compliance with the covenants
contained in the applicable indenture.
Modification and Waiver. Each indenture may be
amended or supplemented if the holders of a majority in
principal amount of the outstanding debt securities of all
series issued under that indenture that are affected by the
amendment or supplement (acting as one class) consent to it.
Without the consent of the holder of each debt security
affected, however, no modification may:
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reduce the amount of debt securities whose holders must consent
to an amendment, a supplement or a waiver;
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reduce the rate of or change the time for payment of interest on
the debt security;
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reduce the principal of the debt security or change its stated
maturity;
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reduce any premium payable on the redemption of the debt
security or change the time at which the debt security may or
must be redeemed;
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change any obligation to pay additional amounts on the debt
security;
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make payments on the debt security payable in currency other
than as originally stated in the debt security;
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impair the holders right to institute suit for the
enforcement of any payment on or with respect to the debt
security;
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make any change in the percentage of principal amount of debt
securities necessary to waive compliance with certain provisions
of the indenture or to make any change in the provision related
to modification;
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modify the provisions relating to the subordination of any
subordinated debt security in a manner adverse to the holder of
that security;
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waive a continuing default or event of default regarding any
payment on the debt securities; or
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release the Guarantor, or modify the guarantee of the Guarantor
in any manner adverse to the holders.
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Each indenture may be amended or supplemented or any provision
of that indenture may be waived without the consent of any
holders of debt securities issued under that indenture:
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to cure any ambiguity, omission, defect or inconsistency;
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to provide for the assumption of the issuers obligations
under the indentures by a successor upon any merger,
consolidation or asset transfer permitted under the indenture;
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to provide for uncertificated debt securities in addition to or
in place of certificated debt securities or to provide for
bearer debt securities;
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to provide any security for, any guarantees of or any additional
obligors on any series of debt securities or, with respect to
the senior indentures, the related guarantees;
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to comply with any requirement to effect or maintain the
qualification of that indenture under the Trust Indenture
Act of 1939;
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to add covenants that would benefit the holders of any debt
securities or to surrender any rights the issuer has under the
indentures;
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to add events of default with respect to any debt
securities; and
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28
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to make any change that does not adversely affect any
outstanding debt securities of any series issued under that
indenture in any material respect.
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The holders of a majority in principal amount of the outstanding
debt securities of any series (or, in some cases, of all debt
securities issued under the applicable indenture that are
affected, voting as one class) may waive any existing or past
default or event of default with respect to those debt
securities. Those holders may not, however, waive any default or
event of default in any payment on any debt security or
compliance with a provision that cannot be amended or
supplemented without the consent of each holder affected.
Defeasance. When we use the term defeasance,
we mean discharge from some or all of our obligations under the
indentures. If any combination of funds or government securities
are deposited with the trustee under an indenture sufficient to
make payments on the debt securities of a series issued under
that indenture on the dates those payments are due and payable,
then, at our option, either of the following will occur:
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we will be discharged from our or their obligations with respect
to the debt securities of that series and, if applicable, the
related guarantees (legal defeasance); or
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we will no longer have any obligation to comply with the
restrictive covenants, the merger covenant and other specified
covenants under the applicable indenture, and the related events
of default will no longer apply (covenant
defeasance).
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If a series of debt securities is defeased, the holders of the
debt securities of the series affected will not be entitled to
the benefits of the applicable indenture, except for obligations
to register the transfer or exchange of debt securities, replace
stolen, lost or mutilated debt securities or maintain paying
agencies and hold moneys for payment in trust. In the case of
covenant defeasance, our obligation to pay principal, premium
and interest on the debt securities and, if applicable,
guarantees of the payments will also survive.
Unless we inform you otherwise in the prospectus supplement, we
will be required to deliver to the trustee an opinion of counsel
that the deposit and related defeasance would not cause the
holders of the debt securities to recognize income, gain or loss
for U.S. federal income tax purposes. If we elect legal
defeasance, that opinion of counsel must be based upon a ruling
from the U.S. Internal Revenue Service or a change in law
to that effect.
No Personal Liability of General
Partner. Martin Midstream GP LLC, the general
partner of Martin Midstream Partners, and its directors,
managers, officers, employees and members, in such capacity,
will not be liable for the obligations of Martin Midstream
Partners or Martin Operating Partnership under the debt
securities, the indentures or the guarantees or for any claim
based on, in respect of, or by reason of, such obligations or
their creation. By accepting a debt security, each holder of
that debt security will have agreed to this provision and waived
and released any such liability on the part of Martin Midstream
GP LLC and its directors, managers, officers, employees and
members. This waiver and release are part of the consideration
for our issuance of the debt securities. It is the view of the
SEC that a waiver of liabilities under the federal securities
laws is against public policy and unenforceable.
Governing Law. New York law will govern the
indentures and the debt securities.
Trustee. We may appoint a separate trustee for
any series of debt securities. We use the term
trustee to refer to the trustee appointed with
respect to any such series of debt securities. We may maintain
banking and other commercial relationships with the trustee and
its affiliates in the ordinary course of business, and the
trustee may own debt securities.
Form, Exchange, Registration and Transfer. The
debt securities will be issued in registered form, without
interest coupons. There will be no service charge for any
registration of transfer or exchange of the debt securities.
However, payment of any transfer tax or similar governmental
charge payable for that registration may be required.
Debt securities of any series will be exchangeable for other
debt securities of the same series, the same total principal
amount and the same terms but in different authorized
denominations in accordance with the applicable indenture.
Holders may present debt securities for registration of transfer
at the office of the security registrar or any transfer agent we
designate. The security registrar or transfer agent will effect
the transfer or exchange if its requirements and the
requirements of the applicable indenture are met.
29
The trustee will be appointed as security registrar for the debt
securities. If a prospectus supplement refers to any transfer
agent we initially designate, we may at any time rescind that
designation or approve a change in the location through which
any transfer agent acts. We are required to maintain an office
or agency for transfers and exchanges in each place of payment.
We may at any time designate additional transfer agents for any
series of debt securities.
In the case of any redemption, we will not be required to
register the transfer or exchange of:
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any debt security during a period beginning 15 business days
prior to the mailing of the relevant notice of redemption and
ending on the close of business on the day of mailing of such
notice; or
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any debt security that has been called for redemption in whole
or in part, except the unredeemed portion of any debt security
being redeemed in part.
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Payment and Paying Agents. Unless we inform
you otherwise in a prospectus supplement, payments on the debt
securities will be made in U.S. dollars at the office of
the trustee or any paying agent. At our option, however,
payments may be made by wire transfer for global debt securities
or by check mailed to the address of the person entitled to the
payment as it appears in the security register. Unless we inform
you otherwise in a prospectus supplement, interest payments may
be made to the person in whose name the debt security is
registered at the close of business on the record date for the
interest payment.
Unless we inform you otherwise in a prospectus supplement, the
trustee under the applicable indenture will be designated as the
paying agent for payments on debt securities issued under that
indenture. We may at any time designate additional paying agents
or rescind the designation of any paying agent or approve a
change in the office through which any paying agent acts.
If the principal of or any premium or interest on debt
securities of a series is payable on a day that is not a
business day, the payment will be made on the following business
day. For these purposes, unless we inform you otherwise in a
prospectus supplement, a business day is any day
that is not a Saturday, a Sunday or a day on which banking
institutions in New York, New York or a place of payment on the
debt securities of that series is authorized or obligated by
law, regulation or executive order to remain closed.
Subject to the requirements of any applicable abandoned property
laws, the trustee and paying agent will pay to us upon written
request any money held by them for payments on the debt
securities that remains unclaimed for two years after the date
upon which that payment has become due. After payment to us,
holders entitled to the money must look to us for payment. In
that case, all liability of the trustee or paying agent with
respect to that money will cease.
Book-Entry Debt Securities. The debt
securities of a series may be issued in the form of one or more
global debt securities that would be deposited with a depositary
or its nominee identified in the prospectus supplement. Global
debt securities may be issued in either temporary or permanent
form. We will describe in the prospectus supplement the terms of
any depositary arrangement and the rights and limitations of
owners of beneficial interests in any global debt security.
Provisions
Applicable Solely to the Martin Midstream Partners and Martin
Operating Partnership Subordinated Indentures
Subordination. Debt securities of a series may
be subordinated to the issuers Senior
Indebtedness, which is defined generally to include any
obligation created or assumed by the issuer (or, if the series
is guaranteed, the Guarantor) for the repayment of borrowed
money, any purchase money obligation created or assumed by the
issuer, and any guarantee therefor, whether outstanding or
hereafter issued, unless, by the terms of the instrument
creating or evidencing such obligation, it is provided that such
obligation is subordinate or not superior in right of payment to
the debt securities (or, if the series is guaranteed, the
guarantee of the Guarantor), or to other obligations which are
pari passu with or subordinated to the debt securities (or, if
the series is guaranteed, the guarantee of the Guarantor).
Subordinated debt securities will be subordinated in right of
payment, to the extent and in the manner set forth in the
subordinated indentures and the prospectus supplement relating
to such series, to the prior payment of all of the issuers
indebtedness and that of the Guarantor that is designated as
Senior Indebtedness with respect to the series.
30
The holders of Senior Indebtedness of the issuer or, if
applicable, the Guarantor, will receive payment in full of the
Senior Indebtedness before holders of subordinated debt
securities will receive any payment of principal, premium or
interest with respect to the subordinated debt securities upon
any payment or distribution of our assets or, if applicable to
any series of outstanding debt securities, the Guarantors
assets, to creditors:
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upon a liquidation or dissolution of the issuer or, if
applicable to any series of outstanding debt securities, the
Guarantor; or
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in a bankruptcy, receivership or similar proceeding relating to
the issuer or, if applicable to any series of outstanding debt
securities, to the Guarantor.
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Until the Senior Indebtedness is paid in full, any distribution
to which holders of subordinated debt securities would otherwise
be entitled will be made to the holders of Senior Indebtedness,
except that the holders of subordinated debt securities may
receive units representing limited partner interests and any
debt securities that are subordinated to Senior Indebtedness to
at least the same extent as the subordinated debt securities.
If the issuer does not pay any principal, premium or interest
with respect to Senior Indebtedness within any applicable grace
period (including at maturity), or any other default on Senior
Indebtedness occurs and the maturity of the Senior Indebtedness
is accelerated in accordance with its terms, the issuer may not:
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make any payments of principal, premium, if any, or interest
with respect to subordinated debt securities;
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make any deposit for the purpose of defeasance of the
subordinated debt securities; or
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repurchase, redeem or otherwise retire any subordinated debt
securities, except that in the case of subordinated debt
securities that provide for a mandatory sinking fund, the issuer
may deliver subordinated debt securities to the trustee in
satisfaction of our sinking fund obligation,
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unless, in either case,
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the default has been cured or waived and any declaration of
acceleration has been rescinded;
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the Senior Indebtedness has been paid in full in cash; or
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the issuer and the trustee receive written notice approving the
payment from the representatives of each issue of
Designated Senior Indebtedness.
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Generally, Designated Senior Indebtedness will
include:
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any specified issue of Senior Indebtedness of at least
$100.0 million; and
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any other Senior Indebtedness that we may designate in respect
of any series of subordinated debt securities.
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During the continuance of any default, other than a default
described in the immediately preceding paragraph, that may cause
the maturity of any Designated Senior Indebtedness to be
accelerated immediately without further notice, other than any
notice required to effect such acceleration, or the expiration
of any applicable grace periods, the issuer may not pay the
subordinated debt securities for a period called the
Payment Blockage Period. A Payment Blockage Period
will commence on the receipt by the issuer and the trustee of
written notice of the default, called a Blockage
Notice, from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage
Period and will end 179 days thereafter.
The Payment Blockage Period may be terminated before its
expiration:
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by written notice from the person or persons who gave the
Blockage Notice;
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by repayment in full in cash of the Designated Senior
Indebtedness with respect to which the Blockage Notice was
given; or
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if the default giving rise to the Payment Blockage Period is no
longer continuing.
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Unless the holders of the Designated Senior Indebtedness have
accelerated the maturity of the Designated Senior Indebtedness,
we may resume payments on the subordinated debt securities after
the expiration of the Payment Blockage Period.
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Generally, not more than one Blockage Notice may be given in any
period of 360 consecutive days. The total number of days during
which any one or more Payment Blockage Periods are in effect,
however, may not exceed an aggregate of 179 days during any
period of 360 consecutive days.
After all Senior Indebtedness is paid in full and until the
subordinated debt securities are paid in full, holders of the
subordinated debt securities shall be subrogated to the rights
of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness.
As a result of the subordination provisions described above, in
the event of insolvency, the holders of Senior Indebtedness, as
well as certain of our general creditors, may recover more,
ratably, than the holders of the subordinated debt securities.
DESCRIPTION
OF THE COMMON UNITS
Our common units represent limited partner interests that
entitle the holders to participate in our partnership
distributions and to exercise the rights and privileges
available to limited partners under our partnership agreement.
For a description of the relative rights and preferences of
holders of common units and our general partner in and to
partnership distributions, see Cash Distribution
Policy. For a general discussion of the expected federal
income tax consequences of owning and disposing of common units,
see Material Tax Considerations. References in this
Description of the Common Units to we,
us and our mean Martin Midstream
Partners L.P.
Number of
Units
We currently have 12,837,480 common units outstanding, 9,354,009
of which are held by the public, and 3,483,471 are held by
Martin Resource Management and its affiliates, including certain
officers and directors of our general partner. In addition, we
currently have 1,701,346 subordinated units outstanding, all of
which are held by Martin Resource Management and its affiliates.
For a description of our subordinated units, please read
Subordinated Units. The common units,
together with our subordinated units, represent an aggregate
98.0% limited partner interest. Our general partner owns an
aggregate 2.0% general partner interest in us.
Listing
Our outstanding common units are traded on the Nasdaq National
Market under the symbol MMLP. Any additional common
units that we issue also will be traded on the Nasdaq National
Market.
Transfer
Agent and Registrar
Duties. Mellon Investor Services LLC serves as
transfer agent and registrar for our common units. We will pay
all fees charged by the transfer agent for transfers of common
units, except the following must be paid by unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
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special charges for services requested by a holder of a common
unit; and
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other similar fees or charges.
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We will indemnify the transfer agent, its agents and each of
their stockholders, directors, officers and employees against
all claims and losses that may arise out of acts performed or
omitted in that capacity, except for any liability due to any
gross negligence or intentional misconduct of the indemnified
person or entity.
Resignation or Removal. The transfer agent may
resign, by notice to us, or be removed by us. The resignation or
removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its
acceptance of the appointment. If no successor has been
appointed and accepted the appointment within 30 days after
notice of the resignation or removal, our general partner may
act as the transfer agent and registrar until a successor is
appointed.
32
Transfer
of Common Units
Each purchaser of common units offered by this prospectus must
execute a transfer application. Any subsequent transfers of a
common unit will not be recorded by the transfer agent or
recognized by us unless the transferee executes and delivers a
transfer application. By executing and delivering a transfer
application, the transferee of common units:
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becomes the record holder of the common units and is an assignee
until admitted into our partnership as a substituted limited
partner;
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automatically requests admission as a substituted limited
partner in our partnership;
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agrees to be bound by the terms and conditions of, and executes,
our partnership agreement;
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represents that the transferee has the capacity, power and
authority to enter into our partnership agreement;
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grants powers of attorney to officers of our general partner and
any liquidator of us as specified in our partnership
agreement; and
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makes the consents and waivers contained in our partnership
agreement.
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An assignee will become a substituted limited partner of our
partnership for the transferred common units upon the consent of
our general partner and the recording of the name of the
assignee on our books and records. Our general partner may
withhold its consent in its sole discretion.
A transferees broker, agent or nominee may complete,
execute and deliver a transfer application. We are entitled to
treat the record holder of a common unit as the absolute owner.
In that case, the beneficial holders rights are limited
solely to those that it has against the record holder as a
result of any agreement between the beneficial owner and the
record holder.
Common units are securities and are transferable according to
the laws governing transfer of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to request admission as a substituted
limited partner in our partnership for the transferred common
units. A purchaser or transferee of common units who does not
execute and deliver a transfer application obtains only:
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the right to assign the common unit to a purchaser or other
transferee; and
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the right to transfer the right to seek admission as a
substituted limited partner in our partnership for the
transferred common units.
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Thus, a purchaser or transferee of common units who does not
execute and deliver a transfer application:
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will not receive cash distributions, unless the common units are
held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer
application; and
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may not receive some federal income tax information or reports
furnished to record holders of common units.
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Our partnership agreement requires that a transferor of common
units must provide the transferee with all information that may
be necessary to transfer the common units. The transferor is not
required to insure the execution of the transfer application by
the transferee and has no liability or responsibility if the
transferee neglects or chooses not to execute and forward the
transfer application to the transfer agent. Please read
The Partnership Agreement Status as Limited
Partner or Assignee.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record holder of the unit as
the absolute owner for all purposes, except as otherwise
required by law or applicable stock exchange regulations.
Voting
Each holder of common units is entitled to the voting rights
specified under The Partnership Agreement
Voting Rights below.
33
Subordinated
Units
Our subordinated units are a separate class of limited partner
interests in Martin Midstream Partners, and the rights of
holders to participate in distributions to partners differ from,
and are subordinate to, the rights of the holders of common
units. For any given quarter, any available cash will first be
distributed to our general partner and to the holders of our
common units, until the holders of our common units have
received the minimum quarterly distribution plus any arrearages,
and then will be distributed to the holders of subordinated
units. Please read Cash Distribution Policy.
The subordinated units may also convert into common units under
certain circumstances. Please read Cash Distribution
Policy Subordination Period.
Limited
Voting Rights
Holders of subordinated units sometimes vote as a single class
together with the common units and sometimes vote as a class
separate from the holders of common units and, as in the case of
holders of common units, will have very limited voting rights.
During the subordination period, common units and subordinated
units each vote separately as a class on the following matters:
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a sale or exchange of all or substantially all of our assets;
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the election of a successor general partner in connection with
the removal of the general partner;
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dissolution or reconstitution of our partnership;
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a merger of our partnership;
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issuance of limited partner interests in some
circumstances; and
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some amendments to our partnership agreement including any
amendment that would cause us to be treated as an association
taxable as a corporation.
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The subordinated units are not entitled to a separate class vote
on approval of the withdrawal of our general partner or the
transfer by our general partner of its general partner interest
or incentive distribution rights under some circumstances.
Removal of our general partner requires:
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a
662/3%
vote of all outstanding units voting as a single class, and
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the election of a successor general partner by the holders of a
majority of the outstanding common units and subordinated units,
voting as separate classes.
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Under our partnership agreement, our general partner generally
will be permitted to effect amendments to our partnership
agreement that do not materially adversely affect unitholders
without the approval of any unitholders.
Distributions
upon Liquidation
If we liquidate during the subordination period, in some
circumstances, holders of outstanding common units will be
entitled to receive more per unit in liquidating distributions
than holders of outstanding subordinated units. The per unit
difference will be dependent upon the amount of gain or loss
that we recognize in liquidating our assets. Following
conversion of the subordinated units into common units, all
units will be treated the same upon liquidation.
CASH
DISTRIBUTION POLICY
Distributions
of Available Cash
General. Within 45 days after the end of
each quarter, Martin Midstream Partners will distribute all of
our available cash to unitholders of record on the applicable
record date. During the subordination period, which we define
below and in the glossary located in Appendix A, the common
units will have the right to receive distributions of available
cash from operating surplus in an amount equal to the minimum
quarterly distribution of
34
$0.50 per quarter, plus any arrearages in the payment of the
minimum quarterly distribution on the common units from prior
quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units.
Available Cash. We define available cash in
the glossary located in Appendix A, and it generally means,
for each fiscal quarter, all cash on hand at the end of the
quarter:
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less the amount of cash our general partner determines in its
reasonable discretion is necessary or appropriate to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our debt instruments, or
other agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
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plus all cash on hand on the date of determination of available
cash for the quarter resulting from working capital borrowings
made after the end of the quarter. Working capital borrowings
are generally borrowings that are made under our revolving
credit facility and in all cases are used solely for working
capital purposes or to pay distributions to partners.
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Intent to Distribute the Minimum Quarterly
Distribution. We intend to distribute to the
holders of common units and subordinated units on a quarterly
basis at least the minimum quarterly distribution of $0.50 per
unit, or $2.00 per year, to the extent we have sufficient cash
from our operations after the establishment of cash reserves and
payment of expenses, including payments to our general partner.
There is no guarantee, however, that we will pay the minimum
quarterly distribution on the common units in any quarter, and
we will be prohibited from making any distributions to
unitholders if it would cause an event of default, or an event
of default is existing, under our revolving credit facility.
Restrictions on Our Ability to Distribute Available Cash
Contained in Our Credit Agreement. Our ability to
distribute available cash is contractually restricted by the
terms of our credit agreement. Our credit agreement contains
covenants requiring us to maintain certain financial ratios. We
are prohibited from making any distributions to unitholders if
the distribution would cause an event of default, or an event of
default is existing, under our credit agreement.
Operating
Surplus and Capital Surplus
General. All cash distributed to unitholders
will be characterized as either operating surplus or
capital surplus. We distribute available cash from
operating surplus differently than available cash from capital
surplus.
Operating Surplus. We define operating surplus
in the glossary located in Appendix A. For any period it
generally means:
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our cash balance at the closing of our initial public offering;
plus
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$8.5 million (as described below); plus
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all of our cash receipts since our initial public offering,
excluding cash from borrowings that are not working capital
borrowings, sales of equity and debt securities and sales or
other dispositions of assets outside the ordinary course of
business; plus
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working capital borrowings made after the end of a quarter but
before the date of determination of operating surplus for the
quarter; less
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all of our operating expenditures since our initial public
offering, including the repayment of working capital borrowings,
but not the repayment of other borrowings, and including
maintenance capital expenditures; less
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the amount of cash reserves our general partner deems necessary
or advisable to provide funds for future operating expenditures.
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35
Capital Surplus. We also define capital
surplus in the glossary located in Appendix A. It will
generally be generated only by:
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borrowings other than working capital borrowings;
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sales of debt and equity securities; and
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sales or other disposition of assets for cash, other than
inventory, accounts receivable and other current assets sold in
the ordinary course of business or as part of normal retirements
or replacements of assets.
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Characterization of Cash Distributions. We
will treat all available cash distributed as coming from
operating surplus until the sum of all available cash
distributed since we began operations equals the operating
surplus as of the most recent date of determination of available
cash. We will treat any amount distributed in excess of
operating surplus, regardless of its source, as capital surplus.
As reflected above, operating surplus includes $8.5 million
in addition to our cash balance at the closing of our initial
public offering, cash receipts from our operations and cash from
working capital borrowings. This amount does not reflect actual
cash on hand at the closing of our initial public offering that
was available for distribution to our unitholders. Rather, it is
a provision that will enable us, if we choose, to distribute as
operating surplus up to $8.5 million of cash we receive in
the future from non-operating sources, such as asset sales,
issuances of securities and long-term borrowings, that would
otherwise be distributed as capital surplus. While we do not
currently anticipate that we will make any distributions from
capital surplus in the near term, we may determine that the sale
or disposition of an asset or business owned or acquired by us
may be beneficial to our unitholders. If we distribute to you
the equity we own in a subsidiary or the proceeds from the sale
of one of our businesses, such a distribution would be
characterized as a distribution from capital surplus.
Subordination
Period
General. During the subordination period,
which we define below and in the glossary located in
Appendix A, the common units will have the right to receive
distributions of available cash from operating surplus in an
amount equal to the minimum quarterly distribution of $0.50 per
quarter, plus any arrearages in the payment of the minimum
quarterly distribution on the common units from prior quarters,
before any distributions of available cash from operating
surplus may be made on the subordinated units. The purpose of
the subordinated units is to increase the likelihood that during
the subordination period there will be available cash to be
distributed on the common units.
Subordination Period. We define the
subordination period in the glossary located in Appendix A.
The subordination period will extend until the first day of any
quarter beginning after September 30, 2009 in which each of
the following tests are met:
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distributions of available cash from operating surplus on each
of the outstanding common units and subordinated units equaled
or exceeded the minimum quarterly distribution for each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date;
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the adjusted operating surplus (as defined below)
generated during each of the three consecutive, non-overlapping
four-quarter periods immediately preceding that date equaled or
exceeded the sum of the minimum quarterly distributions on all
of the outstanding common units and subordinated units during
those periods on a fully diluted basis and the related
distribution on the 2% general partner interest during those
periods; and
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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Early Conversion of Subordinated Units. Our
Partnership Agreement provides that before the end of the
subordination period, a portion of the subordinated units may
convert into common units on a one-for-one basis immediately
after the distribution of available cash to the partners in
respect of any quarter ending on or after:
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September 30, 2005 with respect to 20% of the subordinated
units;
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September 30, 2006 with respect to 20% of the subordinated
units;
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September 30, 2007 with respect to 20% of the subordinated
units; and
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September 30, 2008 with respect to 20% of the subordinated
units.
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The early conversions will occur if at the end of the applicable
quarter each of the following occurs:
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distributions of available cash from operating surplus on the
common units and the subordinated units equal or exceed the
minimum quarterly distribution for each of the three
consecutive, non-overlapping four-quarter periods immediately
preceding that date;
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the adjusted operating surplus generated during each of the
three consecutive, non-overlapping four-quarter periods
immediately preceding that date equaled or exceeded the sum of
the minimum quarterly distributions on all of the outstanding
common units and subordinated units during those periods on a
fully diluted basis and the related distribution on the 2%
general partner interest during those periods; and
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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However, the early conversion of the second, third or fourth 20%
of the subordinated units may not occur until at least one year
following the early conversion of the first, second or third 20%
of the subordinated units, as the case may be.
As a result of achieving the defined financial test, 850,672
subordinated units were converted into common units on
November 14, 2005, November 14, 2006 and
November 14, 2007, respectively. When the subordination
period ends, any remaining subordinated units will convert into
common units on a one-for-one basis and the common units will no
longer be entitled to arrearages.
Adjusted Operating Surplus. We define adjusted
operating surplus in the glossary located in Appendix A and
for any period it generally means:
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operating surplus generated with respect to that period; less
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any net increase in working capital borrowings with respect to
that period; less
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any net reduction in cash reserves for operating expenditures
with respect to that period not relating to an operating
expenditure made with respect to that period; plus
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any net decrease in working capital borrowings with respect to
that period; plus
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any net increase in cash reserves for operating expenditures
with respect to that period required by any debt instrument for
the repayment of principal, interest or premium.
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Adjusted operating surplus is intended to reflect the cash
generated from operations during a particular period and
therefore excludes net increases in working capital borrowings
and net drawdowns of reserves of cash generated in prior periods.
Effect of Expiration of the Subordination
Period. Upon expiration of the subordination
period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other
common units in distributions of available cash. In addition, if
the unitholders remove our general partner other than for cause
and units held by our general partner and its affiliates are not
voted in favor of such removal:
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the subordination period will end and each subordinated unit
will immediately convert into one common unit;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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the general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at the time.
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37
Distributions
of Available Cash from Operating Surplus during the
Subordination Period
We will make distributions of available cash from operating
surplus for any quarter during the subordination period in the
following manner:
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First, 98% to the common unitholders, pro rata, and 2% to
our general partner until we distribute for each outstanding
unit an amount equal to the minimum quarterly distribution for
that quarter;
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Second, 98% to the common unitholders, pro rata, and 2%
to our general partner, until we distribute for each outstanding
common unit an amount equal to any arrearages in payment of the
minimum quarterly distribution on the common units for any prior
quarters during the subordination period;
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Third, 98% to the subordinated unitholders, pro rata, and
2% to our general partner, until we distribute for each
subordinated unit an amount equal to the minimum quarterly
distribution for that quarter; and
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Thereafter, in the manner described in
Incentive Distribution Rights below.
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Distributions
of Available Cash from Operating Surplus after the Subordination
Period
We will make distributions of available cash from operating
surplus for any quarter after the subordination period in the
following manner:
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First, 98% to all unitholders, pro rata, and 2% to our
general partner, until we distribute for each outstanding unit
an amount equal to the minimum quarterly distribution for that
quarter; and
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Thereafter, in the manner described in
Incentive Distribution Rights below.
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Incentive
Distribution Rights
Incentive distribution rights represent the right to receive an
increasing percentage of quarterly distributions of available
cash from operating surplus after the minimum quarterly
distribution and the target distribution levels have been
achieved. Our general partner currently holds the incentive
distribution rights but may transfer these rights separately
from its general partner interest, subject to restrictions in
our partnership agreement.
If for any quarter:
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we have distributed available cash from operating surplus on
each common unit and subordinated unit in an amount equal to the
minimum quarterly distribution; and
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we have distributed available cash from operating surplus on
each outstanding common unit in an amount necessary to eliminate
any cumulative arrearages in payment of the minimum quarterly
distribution;
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then we will distribute any additional available cash from
operating surplus for that quarter among the unitholders and our
general partner in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to our
general partner, until each unitholder receives a total of $0.55
per unit for that quarter (the first target
distribution);
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Second, 85% to all unitholders, pro rata, and 15% to our
general partner, until each unitholder receives a total of
$0.625 per unit for that quarter (the second target
distribution);
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Third, 75% to all unitholders, pro rata, and 25% to our
general partner, until each unitholder receives a total of $0.75
per unit for that quarter (the third target
distribution);
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Thereafter, 50% to all unitholders, pro rata, and 50% to
our general partner.
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In each case, the amount of the target distribution set forth
above is exclusive of any distributions to common unitholders to
eliminate any cumulative arrearages in payment of the minimum
quarterly distribution.
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Percentage
Allocations of Available Cash from Operating Surplus
The following table illustrates the percentage allocations of
the additional available cash from operating surplus between the
unitholders and our general partner up to various target
distribution levels. The amounts set forth under Marginal
Percentage Interest in Distributions are the percentage
interests of our general partner and the unitholders in any
available cash from operating surplus we distribute up to and
including the corresponding amount in the column Total
Quarterly Distribution Target Amount, until available cash
from operating surplus we distribute reaches the next target
distribution level, if any. The percentage interests shown for
the unitholders and our general partner for the minimum
quarterly distribution are also applicable to quarterly
distribution amounts that are less than the minimum quarterly
distribution. The percentage interests shown for our general
partner include its 2% general partner interest and assumes the
general partner has not transferred the incentive distribution
rights.
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Total Quarterly
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Marginal Percentage Interest in
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Distribution Target
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Distributions
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Amount
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Unitholder
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General Partner
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Minimum Quarterly Distribution
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$0.50
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98%
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2
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%
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First Target Distribution
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up to $0.55
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98%
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2
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%
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Second Target Distribution
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above $0.55 up to $0.625
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85%
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15
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%
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Third Target Distribution
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above $0.625 up to $0.75
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75%
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25
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%
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Thereafter
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above $0.75
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50%
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50
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%
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Distributions
from Capital Surplus
How Distributions from Capital Surplus Will Be
Made. We will make distributions of available
cash from capital surplus, if any, in the following manner:
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First, 98% to all unitholders, pro rata, and 2% to our
general partner, until we distribute for each common unit that
was issued in this offering an amount of available cash from
capital surplus equal to the initial public offering price;
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Second, 98% to the common unitholders, pro rata, and 2%
to our general partner, until we distribute for each common unit
an amount of available cash from capital surplus equal to any
unpaid arrearages in payment of the minimum quarterly
distribution on the common units; and
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Thereafter, we will make all distributions of available
cash from capital surplus as if they were from operating surplus.
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Effect of a Distribution from Capital
Surplus. Our partnership agreement treats a
distribution of capital surplus as the repayment of the initial
unit price from the initial public offering, which is a return
of capital. The initial public offering price less any
distributions of capital surplus per unit is referred to as the
unrecovered initial unit price. Each time a
distribution of capital surplus is made, the minimum quarterly
distribution and the target distribution levels will be reduced
in the same proportion as the corresponding reduction in the
unrecovered initial unit price. Because distributions of capital
surplus will reduce the minimum quarterly distribution, after
any of these distributions are made, it may be easier for our
general partner to receive incentive distributions and for the
subordinated units to convert into common units. Any
distribution of capital surplus before the unrecovered initial
unit price is reduced to zero, however, cannot be applied to the
payment of the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a unit in an amount equal
to the initial unit price, we will reduce the minimum quarterly
distribution and the target distribution levels to zero. We will
then make all future distributions from operating surplus, with
50% being paid to the holders of units, 48% to the holders of
the incentive distribution rights and 2% to our general partner.
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Adjustment
to the Minimum Quarterly Distribution and Target Distribution
Levels
In addition to adjusting the minimum quarterly distribution and
target distribution levels to reflect a distribution of capital
surplus, if we combine our units into fewer units or subdivide
our units into a greater number of units, we will
proportionately adjust:
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the minimum quarterly distribution;
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target distribution levels;
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unrecovered initial unit price;
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the number of common units issuable during the subordination
period without a unitholder vote; and
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the number of common units into which a subordinated unit is
convertible.
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For example, if a two-for-one split of the common units should
occur, the minimum quarterly distribution, the target
distribution levels and the unrecovered initial unit price would
each be reduced to 50% of its initial level. We will not make
any adjustment by reason of the issuance of additional units for
cash or property.
In addition, if legislation is enacted or if existing law is
modified or interpreted in a manner that causes us to become
taxable as a corporation or otherwise subject to taxation as an
entity for federal, state or local income tax purposes, we will
reduce the minimum quarterly distribution and the target
distribution levels by multiplying the same by one minus the sum
of the highest marginal federal corporate income tax rate that
could apply and any increase in the effective overall state and
local income tax rates. For example, if we became subject to a
maximum marginal federal and effective state and local income
tax rate of 38%, then the minimum quarterly distribution and the
target distributions levels would each be reduced to 62% of
their previous levels.
Distributions
of Cash upon Liquidation
If we dissolve in accordance with our partnership agreement, we
will sell or otherwise dispose of our assets in a process called
liquidation. We will first apply the proceeds of liquidation to
the payment of our creditors. We will distribute any remaining
proceeds to the unitholders and our general partner, in
accordance with their capital account balances, as adjusted to
reflect any gain or loss upon the sale or other disposition of
our assets in liquidation.
The allocations of gain and loss upon liquidation are intended,
to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding
subordinated units upon our liquidation, to the extent required
to permit common unitholders to receive their unrecovered
initial unit price plus the minimum quarterly distribution for
the quarter during which liquidation occurs plus any unpaid
arrearages in payment of the minimum quarterly distribution on
the common units. However, there may not be sufficient gain upon
our liquidation to enable the holders of common units to fully
recover all of these amounts, even though there may be cash
available for distribution to the holders of subordinated units.
Any further net gain recognized upon liquidation will be
allocated in a manner that takes into account the incentive
distribution rights of our general partner.
Manner of Adjustments for Gain. The manner of
the adjustment for gain is set forth in our partnership
agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any gain to the partners
in the following manner:
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First, to our general partner and the holders of units
who have negative balances in their capital accounts to the
extent of and in proportion to those negative balances;
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Second, 98% to the common unitholders, pro rata, and 2%
to our general partner until the capital account for each common
unit is equal to the sum of:
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(1) the unrecovered initial unit price; plus
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs; plus
(3) any unpaid arrearages in payment of the minimum
quarterly distribution;
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Third, 98% to the subordinated unitholders, pro rata, and
2% to our general partner until the capital account for each
subordinated unit is equal to the sum of:
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(1) the unrecovered initial unit price; and
(2) the amount of the minimum quarterly distribution for
the quarter during which our liquidation occurs;
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Fourth, 98% to all unitholders, pro rata, and 2% to our
general partner, until we allocate under this paragraph an
amount per unit equal to:
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(1) the sum of the excess of the first target distribution
per unit over the minimum quarterly distribution per unit for
each quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 98% to the
unitholders, pro rata, and 2% to our general partner, for each
quarter of our existence;
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Fifth, 85% to all unitholders, pro rata, and 15% to our
general partner, pro rata, until we allocate under this
paragraph an amount per unit equal to:
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(1) the sum of the excess of the second target distribution
per unit over the first target distribution per unit for each
quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the minimum
quarterly distribution per unit that we distributed 85% to the
units, pro rata, and 15% to our general partner, pro rata, for
each quarter of our existence;
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Sixth, 75% to all unitholders, pro rata, and 25% to our
general partner, until we allocate under this paragraph an
amount per unit equal to:
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(1) the sum of the excess of the third target distribution
per unit over the second target distribution per unit for each
quarter of our existence; less
(2) the cumulative amount per unit of any distributions of
available cash from operating surplus in excess of the first
target distribution per unit that we distributed 75% to the
unitholders, pro rata, and 25% to our general partner for each
quarter of our existence;
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Thereafter, 50% to all unitholders, pro rata, and 50% to
our general partner.
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If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that clause (3) of the second
bullet point above and all of the third bullet point above will
no longer be applicable.
Manner of Adjustments for Losses. Upon our
liquidation, we will generally allocate any loss to our general
partner and the unitholders in the following manner:
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First, 98% to holders of subordinated units in proportion
to the positive balances in their capital accounts and 2% to our
general partner until the capital accounts of the subordinated
unitholders have been reduced to zero;
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Second, 98% to the holders of common units in proportion
to the positive balances in their capital accounts and 2% to our
general partner until the capital accounts of the common
unitholders have been reduced to zero; and
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Thereafter, 100% to our general partner.
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If the liquidation occurs after the end of the subordination
period, the distinction between common units and subordinated
units will disappear, so that all of the first priority above
will no longer be applicable.
Adjustments to Capital Accounts. We will make
adjustments to capital accounts upon the issuance of additional
units. In doing so, we will allocate any unrealized and, for tax
purposes, unrecognized gain or loss
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resulting from the adjustments to the unitholders and our
general partner in the same manner as we allocate gain or loss
upon liquidation. In the event that we make positive adjustments
to the capital accounts upon the issuance of additional units,
we will allocate any later negative adjustments to the capital
accounts resulting from the issuance of additional units or upon
our liquidation in a manner that results, to the extent
possible, in the general partners capital account balances
equaling the amount that they would have been if no earlier
positive adjustments to the capital accounts had been made.
THE
PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. A copy of the partnership agreement of
Martin Midstream Partners is filed as an exhibit to this
registration statement of which this prospectus is a part.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
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With regard to distributions of available cash, please read
Cash Distribution Policy.
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With regard to the transfer of common units, please read
Description of the Common Units Transfer of
Common Units.
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With regard to allocations of taxable income and taxable loss,
please read Material Tax Considerations.
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Organization
and Duration
We were organized in June 2002 and have a perpetual existence.
Purpose
Our purposes under our partnership agreement are limited to
owning the equity of the general partner of our operating
partnership, serving as the limited partner of our operating
partnership and engaging in any business activities that may be
engaged in by our operating partnership or that are approved by
our general partner. The partnership agreement of our operating
partnership provides that our operating partnership may,
directly or indirectly, engage in:
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its operations as conducted immediately after our initial public
offering;
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any other activity approved by our general partner but only to
the extent that our general partner reasonably determines that,
as of the date of the acquisition or commencement of the
activity, the activity generates qualifying income
as this term is defined in Section 7704 of the Internal
Revenue Code; or
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any activity that enhances the operations of an activity that is
described in either of the two preceding clauses.
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Although our general partner has the ability to cause us and our
operating partnership to engage in activities other than those
described in this prospectus, our general partner has no current
plans to do so. Our general partner is authorized in general to
perform all acts as it may deem, in its sole discretion,
necessary to carry out our purposes and to conduct our business.
Power of
Attorney
Each limited partner, and each person who acquires a unit from a
unitholder and executes and delivers a transfer application,
grants to our general partner and, if appointed, a liquidator, a
power of attorney to, among other things, execute and file
documents required for our qualification, continuance or
dissolution. The power of attorney also grants our general
partner the authority to amend, and to make consents and waivers
under, our partnership agreement.
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Capital
Contributions
Unitholders are not obligated to make additional capital
contributions, except as described under
Limited Liability.
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware
Revised Uniform Limited Partnership Act, or the Delaware Act,
and that he otherwise acts in conformity with the provisions of
our partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace our general partner;
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to approve some amendments to our partnership agreement; or
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to take other action under our partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither our partnership agreement nor the
Delaware Act specifically provides for legal recourse against
our general partner if a limited partner were to lose limited
liability through any fault of our general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds that liability. The Delaware Act provides that
a limited partner who receives a distribution and knew at the
time of the distribution that the distribution was in violation
of the Delaware Act is liable to the limited partnership for the
amount of the distribution for three years. Under the Delaware
Act, unless otherwise agreed, an assignee who becomes a
substituted limited partner of a limited partnership is liable
for the obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for
liabilities unknown to him at the time he became a limited
partner and that could not be ascertained from our partnership
agreement.
Our operating partnership currently conducts business in
10 states. Maintenance of our limited liability as a
limited partner of our operating partnership may require
compliance with legal requirements in the jurisdictions in which
our operating partnership conducts business, including
qualifying our subsidiaries to do business there. Limitations on
the liability of limited partners for the obligations of a
limited partnership have not been clearly established in many
jurisdictions. If, by virtue of our limited partner interest in
our operating partnership or otherwise, it were determined that
we were conducting business in any state without compliance with
the applicable limited partnership or limited liability company
statute, or that the right or exercise of the right to remove or
replace the general partner of our operating partnership, to
approve some amendments to our partnership agreement of our
operating partnership, or to take other action under our
partnership agreement of our operating partnership constituted
participation in the control of its business for
purposes of the statutes of any relevant jurisdiction, then we
could be held personally liable for the obligations of our
operating partnership under the law of that jurisdiction to the
same extent as its general partner under the circumstances.
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Voting
Rights
The following matters require the unitholder vote specified
below. Matters requiring the approval of a
unit majority require:
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during the subordination period, the approval of a majority of
the outstanding common units, excluding those common units held
by our general partner and its affiliates, and a majority of the
outstanding subordinated units, voting as separate
classes; and
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after the subordination period, the approval of a majority of
the outstanding common units.
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Matter
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Vote Requirement
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Issuance of additional common units or units of equal rank with
the common units during the subordination period
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Unit majority, with certain exceptions described under
Issuance of Additional Securities.
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Issuance of units senior to the common units during the
subordination period
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Unit majority.
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Issuance of units junior to the common units during the
subordination period
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No approval rights.
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Issuance of additional units after the subordination period
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No approval rights.
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Amendment of the partnership agreement
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Certain amendments may be made by the general partner without
the approval of the unitholders. Other amendments generally
require the approval of a unit majority. Please read
Amendment of the Partnership Agreement.
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Merger of our partnership or the sale of all or substantially
all of our assets
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Unit majority. Please read Merger, Sale or
Other Disposition of Assets.
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Dissolution of our partnership
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Unit majority. Please read Termination and
Dissolution.
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Reconstitution of our partnership upon dissolution
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Unit majority.
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Withdrawal of the general partner
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The approval of a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, is required for the withdrawal of the general
partner prior to September 30, 2012 in a manner which would
cause a dissolution of our partnership. Please read
Withdrawal or Removal of the General
Partner.
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Removal of the general partner
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Not less than
662/3%
of the outstanding units, including units held by our general
partner and its affiliates. Please read
Withdrawal or Removal of the General
Partner.
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Matter
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Vote Requirement
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Transfer of ownership interests in the general partner
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Our general partner may transfer its general partner interest
without a vote of our unitholders in connection with the general
partners merger or consolidation with or into, or sale of
all or substantially all of its assets to, a third person. Our
general partner may also transfer all of its general partner
interest to an affiliate without a vote of our unitholders. The
approval of a majority of the outstanding common units,
excluding common units held by the general partner and its
affiliates, is required in other circumstances for a transfer of
the general partner interest to a third party prior to September
30, 2012. Please read Transfer of General
Partner Interests and Incentive Distribution Rights.
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Transfer of incentive distribution rights
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Except for transfers to an affiliate or another person as part
of the general partners merger or consolidation with or
into, or sale of all or substantially all of its assets to, such
affiliate or person, the approval of a majority of the
outstanding common units is required in most circumstances for a
transfer of the incentive distribution rights to a third party
prior to September 30, 2012. Please read
Transfer of General Partner Interests and
Incentive Distribution Rights.
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Transfer of ownership interests in the general partner
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No approval required at any time. Please read
Transfer of Ownership Interests in the General
Partner.
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Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities and rights to buy
partnership securities for the consideration and on the terms
and conditions established by our general partner in its sole
discretion without the approval of the unitholders. During the
subordination period, however, except as discussed in the
following paragraph, we may not issue equity securities ranking
senior to the common units or an aggregate of more than
1,500,000 additional common units or units on a parity with the
common units without the approval of the holders of a majority
of the outstanding common units and subordinated units, voting
as separate classes.
During and after the subordination period, we may issue an
unlimited number of common units as follows:
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upon conversion of the subordinated units;
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under employee benefit plans;
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upon conversion of the general partner interest and incentive
distribution rights as a result of a withdrawal of our general
partner;
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in the event of a combination or subdivision of common units;
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in connection with an acquisition or a capital improvement that
increases cash flow from operations per unit on a pro forma
basis; or
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if the proceeds of the issuance are used exclusively to repay up
to $15 million of certain of our indebtedness.
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It is possible that we will fund acquisitions through the
issuance of additional common units or other equity securities.
Holders of any additional common units we issue will be entitled
to share equally with the then-existing holders of common units
in our distributions of available cash. In addition, the
issuance of additional partnership interests may dilute the
value of the interests of the then-existing holders of common
units in our net assets.
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In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, in the sole discretion of our general partner,
have special voting rights to which the common units are not
entitled.
Upon issuance of additional partnership securities, our general
partner will be required to make additional capital
contributions to the extent necessary to maintain its 2% general
partner interest in us. Moreover, our general partner will have
the right, which it may from time to time assign in whole or in
part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on
the same terms that, we issue those securities to persons other
than our general partner and its affiliates, to the extent
necessary to maintain its percentage interest, including its
interest represented by common units and subordinated units,
that existed immediately prior to each issuance. The holders of
common units will not have preemptive rights to acquire
additional common units or other partnership securities.
Amendment
of the Partnership Agreement
General. Amendments to our partnership
agreement may be proposed only by or with the consent of our
general partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, other
than the amendments discussed below, our general partner must
seek written approval of the holders of the number of units
required to approve the amendment or call a meeting of the
limited partners to consider and vote upon the proposed
amendment. Except as described below, an amendment must be
approved by a unit majority.
Prohibited Amendments. No amendment may be
made that would:
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enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected;
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enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner
or any of its affiliates without the consent of our general
partner, which may be given or withheld in its sole discretion;
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change the duration of our partnership;
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provide that our partnership is not dissolved upon an election
to dissolve our partnership by our general partner that is
approved by a unit majority; or
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give any person the right to dissolve our partnership other than
our general partners right to dissolve our partnership
with the approval of a unit majority.
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The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding units voting together as a single
class.
No Unitholder Approval. Our general partner
may generally make amendments to our partnership agreement
without the approval of any limited partner or assignee to
reflect:
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a change in our name, the location of our principal place of
business, our registered agent or our registered office;
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the admission, substitution, withdrawal, or removal of partners
in accordance with our partnership agreement;
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the reduction in the vote needed to remove the general partner
from not less than
662/3%
of all outstanding units to a lesser percentage of all
outstanding units;
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an increase in the percentage of a class of units that a person
or group may own without losing their voting rights from 20% to
a higher percentage;
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change that, in the sole discretion of our general partner, is
necessary or advisable for us to qualify or to continue our
qualification as a limited partnership or a partnership in which
the limited partners have limited
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liability under the laws of any state or to ensure that neither
we, our operating partnership nor its subsidiaries will be
treated as an association taxable as a corporation or otherwise
taxed as an entity for federal income tax purposes;
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an amendment changing our fiscal or taxable year and any changes
that are necessary as a result of a change in our fiscal or
taxable year;
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an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or its directors, officers,
agents, or trustees from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment
Advisors Act of 1940, or plan asset regulations adopted under
the Employee Retirement Income Security Act of 1974, whether or
not substantially similar to plan asset regulations currently
applied or proposed;
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subject to the limitations on the issuance of additional
partnership securities described above, an amendment that in the
discretion of our general partner is necessary or advisable for
the authorization of additional partnership securities or rights
to acquire partnership securities;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
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any amendment that, in the sole discretion of our general
partner, is necessary or advisable for the formation by us of,
or our investment in, any corporation, partnership or other
entity, as otherwise permitted by our partnership agreement;
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a change in our fiscal year or taxable year and related changes;
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a merger of the partnership or any of its subsidiaries into, or
a conveyance of assets to, a newly-created limited liability
entity the sole purpose of which is to effect a change in the
legal form of the partnership into another limited liability
entity; and
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner or assignee if those amendments, in the sole discretion
of our general partner:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
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are necessary or advisable to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
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are necessary or advisable to facilitate the trading of limited
partner interests or to comply with any rule, regulation,
guideline or requirement of any securities exchange or trading
system on which the limited partner interests are or will be
listed for trading, compliance with any of which our general
partner deems to be in our best interest and the best interest
of the limited partners;
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are necessary or advisable for any action taken by our general
partner relating to splits or combinations of units under the
provisions of our partnership agreement; or
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of our partnership agreement or
are otherwise contemplated by our partnership agreement.
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Opinion of Counsel and Unitholder
Approval. Our general partner will not be
required to obtain an opinion of counsel that an amendment will
not result in a loss of limited liability to the limited
partners or result in our being treated as an entity for federal
income tax purposes if one of the amendments described above
under No Unitholder Approval should
occur. No other amendments to our partnership agreement will
become effective without the approval of holders of at least 90%
of the units unless we obtain an opinion of counsel to the
effect that
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the amendment will not affect the limited liability under
applicable law of any of our limited partners or cause us, our
operating partnership or our subsidiaries to be taxable as a
corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously taxed as such).
Any amendment that would have a material adverse effect on the
rights or preferences of any type or class of outstanding units
in relation to other classes of units will require the approval
of at least a majority of the type or class of units so
affected. Any amendment that reduces the voting percentage
required to take any action must be approved by the affirmative
vote of limited partners constituting not less than the voting
requirement sought to be reduced.
Action
Relating to our Operating Partnership
Without the approval of the holders of units representing a unit
majority, our general partner is prohibited from consenting on
our behalf or on behalf of the general partner of our operating
partnership to any amendment to the partnership agreement of our
operating partnership or taking any action on our behalf
permitted to be taken by a partner of our operating partnership
in each case that would adversely affect our limited partners
(or any particular class of limited partners) in any material
respect.
Merger,
Sale or Other Disposition of Assets
Our partnership agreement generally prohibits our general
partner, without the prior approval of a unit majority, from
causing us to, among other things, sell, exchange or otherwise
dispose of all or substantially all of our assets in a single
transaction or a series of related transactions, including by
way of merger, consolidation or other combination, or approving
on our behalf the sale, exchange or other disposition of all or
substantially all of the assets of our subsidiaries. Our general
partner may, however, mortgage, pledge, hypothecate or grant a
security interest in all or substantially all of our assets
without that approval. Our general partner may also sell all or
substantially all of our assets under a foreclosure or other
realization upon those encumbrances without that approval.
If conditions specified in our partnership agreement are
satisfied, our general partner may merge us or any of our
subsidiaries into, or convey some or all of our assets to, a
newly formed entity if the sole purpose of that merger or
conveyance is to change our legal form into another limited
liability entity. The unitholders are not entitled to
dissenters rights of appraisal under our partnership
agreement or applicable Delaware law in the event of a merger or
consolidation, a sale of substantially all of our assets or any
other transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
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the election of our general partner to dissolve us, if approved
by a unit majority;
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the sale, exchange or other disposition of all or substantially
all of our assets and properties and our subsidiaries;
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the entry of a judicial order dissolving us; or
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the withdrawal or removal of our general partner or any other
event that results in its ceasing to be our general partner
other than by reason of a transfer of its general partner
interest in accordance with our partnership agreement or
withdrawal or removal following approval and admission of a
successor.
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Upon a dissolution under the last clause, the holders of a
majority of the outstanding common units and subordinated units,
voting as separate classes, may also elect, within specific time
limitations, to reconstitute us and continue our business on the
same terms and conditions described in our partnership agreement
by forming a new limited partnership on terms identical to those
in our partnership agreement and having as general partner an
entity approved by the holders of a majority of the outstanding
common units and subordinated units, voting as separate classes,
subject to our receipt of an opinion of counsel to the effect
that:
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the action would not result in the loss of limited liability of
any limited partner; and
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neither our partnership, the reconstituted limited partnership
nor our operating partnership would be treated as an association
taxable as a corporation or otherwise be taxable as an entity
for federal income tax purposes upon the exercise of that right
to continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are reconstituted and continued
as a new limited partnership, the liquidator authorized to wind
up our affairs will, acting with all of the powers of our
general partner that the liquidator deems necessary or desirable
in its judgment, liquidate our assets and apply the proceeds of
the liquidation as provided in Cash Distribution
Policy Distributions of Cash upon Liquidation.
The liquidator may defer liquidation of our assets for a
reasonable period or distribute assets to partners in kind if it
determines that a sale would be impractical or would cause undue
loss to the partners.
Withdrawal
or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
September 30, 2012 without obtaining the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by our general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after
September 30, 2012, our general partner may withdraw as
general partner without first obtaining approval of any
unitholder by giving 90 days written notice, and that
withdrawal will not constitute a violation of our partnership
agreement. Notwithstanding the foregoing, our general partner
may withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than our general partner and its
affiliates. In addition, our partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of the unitholders. Please read Transfer of
General Partner Interests and Incentive Distribution
Rights.
Upon the withdrawal of our general partner under any
circumstances, other than as a result of a transfer by our
general partner of all or a part of its general partner interest
in us, the holders of a majority of the outstanding common units
and subordinated units, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, we will be
dissolved, wound up and liquidated, unless within 180 days
after that withdrawal, the holders of a majority of the
outstanding common units and subordinated units, voting as
separate classes, agree in writing to continue our business and
to appoint a successor general partner.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, including units held by our general
partner and its affiliates, and we receive an opinion of counsel
regarding limited liability and tax matters. Any removal of our
general partner is also subject to the approval of a successor
general partner by the vote of the holders of a majority of the
outstanding common units and subordinated units, voting as
separate classes. The ownership of more than
331/3%
of the outstanding units by our general partner and its
affiliates would give it the practical ability to prevent its
removal. As of September 30, 2007, affiliates of our
general partner owned approximately 35.7% of our outstanding
units.
Our partnership agreement also provides that if our general
partner is removed under circumstances where cause does not
exist and units held by our general partner and its affiliates
are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests
based on the fair market value of those interests at the time.
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In the event of removal of a general partner under circumstances
where cause exists or withdrawal of a general partner where that
withdrawal violates our partnership agreement, a successor
general partner will have the option to purchase the general
partner interest and incentive distribution rights of the
departing general partner for a cash payment equal to the fair
market value of those interests. Under all other circumstances
where our general partner withdraws or is removed by the limited
partners, the departing general partner will have the option to
require the successor general partner to purchase the general
partner interest of the departing general partner and its
incentive distribution rights for the fair market value. In each
case, this fair market value will be determined by agreement
between the departing general partner and the successor general
partner. If no agreement is reached, an independent investment
banking firm or other independent expert selected by the
departing general partner and the successor general partner will
determine the fair market value. If the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest and
its incentive distribution rights will automatically convert
into common units equal to the fair market value of those
interests as determined by an investment banking firm or other
independent expert selected in the manner described in the
preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer
of General Partner Interests and Incentive Distribution
Rights
Except for transfer by our general partner of all, but not less
than all, of its general partner interest in us or its incentive
distribution rights to:
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an affiliate of our general partner (other than an
individual); or
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another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
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Our general partner may not transfer all or any part of its
general partner interest in us or its incentive distribution
rights to another person prior to September 30, 2012
without the approval of the holders of at least a majority of
the outstanding common units, excluding common units held by our
general partner and its affiliates. In the case of a transfer by
our general partner of its general partner interest in us, as a
condition of this transfer, the transferee must, among other
things, assume the rights and duties of our general partner,
agree to be bound by the provisions of our partnership
agreement, furnish an opinion of counsel regarding limited
liability and tax matters, and agree to be bound by the
provisions of our partnership agreement and the partnership
agreement of our operating partnership.
The general partner and its affiliates may at any time transfer
units to one or more persons, without unitholder approval,
except that they may not transfer subordinated units to us.
Transfer
of Ownership Interests in General Partner
At any time, the members of our general partner may sell or
transfer all or part of their membership interests in our
general partner to an affiliate without the approval of the
unitholders.
Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove Martin Midstream GP LLC as our general partner or
otherwise change management. If any person or group other than
our general partner and its affiliates acquires beneficial
ownership of 20% or more of any class of units, that person or
group loses voting rights on all of its units. The general
partner has the discretion to increase, but not subsequently
decrease, the ownership percentage at which voting rights are
forfeited. This loss of voting rights does not apply to any
person or group that acquires the units from our general partner
or its affiliates
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and any transferees of that person or group approved by our
general partner or to any person or group who acquires the units
with the prior approval of the directors of our general partner.
Our partnership agreement also provides that if our general
partner is removed under circumstances where cause does not
exist and units held by our general partner and its affiliates
are not voted in favor of that removal:
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the subordination period will end and all outstanding
subordinated units will immediately convert into common units on
a one-for-one basis;
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any existing arrearages in payment of the minimum quarterly
distribution on the common units will be extinguished; and
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our general partner will have the right to convert its general
partner interest and its incentive distribution rights into
common units or to receive cash in exchange for those interests.
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Limited
Call Right
If at any time our general partner and its affiliates own more
than 80% of the then-issued and outstanding partnership
securities of any class, our general partner will have the
right, which it may assign in whole or in part to any of its
affiliates or to us, to acquire all, but not less than all, of
the remaining partnership securities of the class held by
unaffiliated persons as of a record date to be selected by our
general partner, on at least ten but not more than 60 days
notice. Our general partner may exercise this right in its sole
discretion. The purchase price in the event of this purchase
will be the greater of:
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the highest cash price paid by either of our general partner or
any of its affiliates for any partnership securities of the
class purchased within the 90 days preceding the date on
which our general partner first mails notice of its election to
purchase those partnership securities; and
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the current market price as of the date three days before the
date the notice is mailed.
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As a result of our general partners right to purchase
outstanding partnership securities, a holder of partnership
securities may have his partnership securities purchased at an
undesirable time or price. The tax consequences to a unitholder
of the exercise of this call right are the same as a sale by
that unitholder of his common units in the market. Please read
Material Tax Considerations Disposition of
Common Units.
Meetings
and Voting
Except as described below regarding a person or group owning 20%
or more of any class of units then outstanding, unitholders or
assignees who are record holders of units on the record date
will be entitled to notice of, and to vote at, meetings of our
limited partners and to act upon matters for which approvals may
be solicited. Common units that are owned by an assignee who is
a record holder, but who has not yet been admitted as a limited
partner, will be voted by our general partner at the written
direction of the record holder. Absent direction of this kind,
the common units will not be voted, except that, in the case of
common units held by our general partner on behalf of
non-citizen assignees, our general partner will distribute the
votes on those common units in the same ratios as the votes of
limited partners on other units are cast.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by the unitholders may
be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of units necessary to
authorize or take that action at a meeting. Meetings of the
unitholders may be called by our general partner or, subject to
the provision described in the next paragraph, by unitholders
owning at least 20% of the outstanding units of the class for
which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the
outstanding units of the class or classes for which a meeting
has been called, represented in person or by proxy, will
constitute a quorum unless any action by the unitholders
requires approval by holders of a greater percentage of the
units, in which case the quorum will be the greater percentage.
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Each record holder of a unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
read Issuance of Additional Securities.
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20% or more
of any class of units then outstanding, that person or group
will lose voting rights on all of its units and the units may
not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of unitholders,
calculating required votes, determining the presence of a quorum
or for other similar purposes. Common units held in nominee or
street name account will be voted by the broker or other nominee
in accordance with the instruction of the beneficial owner
unless the arrangement between the beneficial owner and his
nominee provides otherwise. Except as our partnership agreement
otherwise provides, subordinated units will vote together with
common units as a single class.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as
Limited Partner or Assignee
Except as described above under Limited
Liability, the common units will be fully paid and
unitholders will not be required to make additional
contributions.
An assignee of a common unit, after executing and delivering a
transfer application, but pending its admission as a substituted
limited partner, is entitled to an interest equivalent to that
of a limited partner for the right to share in allocations and
distributions from us, including liquidating distributions. Our
general partner will vote and exercise other powers attributable
to common units owned by an assignee that has not become a
substitute limited partner at the written direction of the
assignee. Please read Meetings and
Voting. Transferees that do not execute and deliver a
transfer application will not be treated as assignees or as
record holders of common units, and will not receive cash
distributions, federal income tax allocations or reports
furnished to holders of common units. Please read
Description of the Common Units Transfer of
Common Units.
Non-citizen
Assignees; Redemption
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create either (i) a substantial risk of
cancellation or forfeiture of any property in which we have an
interest because of the nationality, citizenship or other
related status of any limited partner or assignee, or
(ii) a substantial risk that we or one or more of our
subsidiaries or other entities in which we have at least a 25%
equity interest will not be permitted to conduct business as a
United States maritime company under the Jones Act and other
United States federal statutes based on the status of any
limited partner or assignee as a
non-United
States citizen, we may redeem the units held by any of these
limited partners or assignees at the units current market
price. In order to avoid any cancellation or forfeiture, our
general partner may require each limited partner or assignee to
furnish information about his nationality, citizenship or
related status. If a limited partner or assignee fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or if our general partner determines after receipt
of the information that the limited partner or assignee is not
an eligible citizen, the limited partner or assignee may be
treated as a non-citizen assignee. In addition to other
limitations on the rights of an assignee that is not a
substituted limited partner, a non-citizen assignee does not
have the right to direct the voting of his units and may not
receive distributions in kind upon our liquidation.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
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our general partner;
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any departing general partner;
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any person who is or was an affiliate of a general partner or
any departing general partner;
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any person who is or was a member, partner, officer, director,
employee, agent or trustee of our general partner, any departing
general partner, or any affiliate of a general partner or any
departing general partner; or
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any person who is or was serving at the request of a general
partner or any departing general partner or any affiliate of a
general partner or any departing general partner, as an officer,
director, manager, employee, member, partner, agent or trustee
of another person.
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Any indemnification under these provisions will only be out of
our assets. Our general partner will not be personally liable
for, or have any obligation to contribute or loan funds or
assets to us to enable us to effectuate, indemnification. We may
purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of
whether we would have the power to indemnify the person against
liabilities under our partnership agreement.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a unit with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
Right to
Inspect our Books and Records
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable demand and at his own expense, have
furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each became a partner;
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copies of the partnership agreement, the certificate of limited
partnership of the partnership, related amendments and powers of
attorney under which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep confidential from
the limited partners trade secrets or other information the
disclosure of which our general partner believes in good faith
is not in our best interests or which we are required by law or
by agreements with third parties to keep confidential.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units or other partnership
securities proposed to be sold by our
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general partner or any of its affiliates or their assignees if
an exemption from the registration requirements is not otherwise
available. These registration rights continue for two years
following any withdrawal or removal of Martin Midstream GP LLC
as our general partner. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts
and commissions.
MATERIAL
TAX CONSIDERATIONS
This section addresses all of the material tax consequences that
may be relevant to prospective unitholders who are individual
citizens or residents of the United States and, except as
otherwise indicated, is the opinion of Baker Botts L.L.P.,
counsel to our general partner and us, insofar as it relates to
legal conclusions with respect to matters of United States
federal income tax law that are addressed in this section. This
section is based upon current provisions of the Internal Revenue
Code, existing regulations, proposed regulations to the extent
noted and current administrative rulings and court decisions,
all of which are subject to change. Changes in these authorities
may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are references to Martin Midstream Partners and
Martin Operating Partnership.
No attempt has been made in this section to comment on all
federal income tax matters affecting us or the unitholders.
Moreover, this section focuses on unitholders who are individual
citizens or residents of the United States and has only
limited application to corporations, estates, trusts,
nonresident aliens or other unitholders subject to specialized
tax treatment, such as tax-exempt institutions, foreign persons,
individual retirement accounts (IRAs), real estate
investment trusts (REITs) or mutual funds.
Accordingly, we urge each prospective unitholder to consult, and
depend on, his own tax advisor in analyzing the federal, state,
local and foreign tax consequences particular to him of the
ownership or disposition of common units.
All statements of law and legal conclusions, but not statements
of facts, contained in this section, except as otherwise
indicated, are the opinions of Baker Botts L.L.P. Such opinions
are based on the accuracy and completeness of facts described in
this prospectus and representations made by us to Baker Botts
L.L.P. Baker Botts L.L.P. has not undertaken any obligation to
update its opinions discussed in this section after the date of
this prospectus.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. An opinion
of counsel represents only that counsels best legal
judgment and does not bind the IRS or the courts. Accordingly,
the opinions expressed in this section may not be sustained by a
court if challenged by the IRS. Any such challenge by the IRS
may materially and adversely impact the market for the common
units and the prices at which common units trade. In addition,
the costs of any dispute with the IRS will be borne directly or
indirectly by the unitholders and our general partner.
Furthermore, the tax treatment of us, or of an investment in us,
may be significantly modified by future legislative or
administrative changes or court decisions. Any modifications may
or may not be retroactively applied.
For the reasons described below, Baker Botts L.L.P. has not
rendered an opinion with respect to the following specific
federal income tax issues:
(1) the treatment of a unitholder whose common units are
loaned to a short seller to cover a short sale of common units
(please read Tax Consequences of Unit
Ownership Treatment of Short Sales);
(2) whether our monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations
(please read Disposition of Common
Units Allocations Between Transferors and
Transferees);
(3) whether our method for depreciating Section 743
adjustments is sustainable (please read Tax
Consequences of Unit Ownership Section 754
Election); and
(4) whether assignees of common units who fail to execute
and deliver transfer applications will be treated as partners
for federal income tax purposes (please read
Limited Partner Status).
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Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable unless
the amount of cash distributed is in excess of the
partners adjusted basis in his partnership interest.
Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the marketing, transportation, storage and
processing of crude oil, natural gas and products thereof
(including sales of propane to retail customers or end users),
and certain other natural resources and products,
including sulfur, sulfur products and fertilizer. Other types of
qualifying income include interest other than from a financial
business, dividends, real property rents, gains from the sale of
real property and gains from the sale or other disposition of
assets held for the production of income that otherwise
constitutes qualifying income. We estimate that, as of the date
of this prospectus, less than 7% of our gross income is not
qualifying income. In reliance upon facts provided by Martin
Resource Management, us and our general partner concerning the
sources and amounts of gross income attributable to our
businesses for the current calendar year through the month-end
prior to the date of this prospectus, together with the
representation that the composition of such gross income
remained materially unchanged through the date of this
prospectus, and based on applicable legal authority, Baker Botts
L.L.P. is of the opinion that at least 90% of our gross income
as of the date of this prospectus constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS
has made no determination of our status as a partnership for
federal income tax purposes, the status of the operating
partnership for federal income tax purposes or whether our
operations generate qualifying income under
Section 7704 of the Internal Revenue Code. Instead, we will
rely on the opinion of Baker Botts L.L.P., based upon the
Internal Revenue Code, Treasury Regulations, published revenue
rulings and court decisions and the representations and
assumptions described below, that as of the date of this
prospectus Martin Midstream Partners L.P. will be classified as
a partnership and our operating partnership will be disregarded
as an entity separate from Martin Midstream Partners L.P. for
federal income tax purposes.
In rendering its opinion, Baker Botts L.L.P. has relied on
certain assumptions, and on factual representations made by us
and our general partner. Such assumptions and representations
are:
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Neither we nor our operating partnership has elected or will
elect to be treated as a corporation; and
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For each taxable year, more than 90% of our gross income has
been and will be income from sources that Baker Botts L.L.P. has
opined, or will opine, is qualifying income within
the meaning of Section 7704(d) of the Internal Revenue Code.
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We intend to monitor our income on a continuing basis and to
manage our operations in subsequent taxable years with the
objective to assure, although we cannot completely assure, that
the ratio of our qualifying income to our total gross income
will remain at 90% or above for each such taxable year.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery, we will be
treated as if we had transferred all of our assets, subject to
liabilities, to a newly formed corporation, on the first day of
the year in which we fail to meet the Qualifying Income
Exception, in return for stock in that corporation, and then
distributed that stock to the unitholders in liquidation of
their interests in us. This contribution and liquidation should
be tax-free to unitholders and us so long as we, at that time,
do not have liabilities in excess of the tax basis of our
assets. Thereafter, we would be treated as a corporation for
federal income tax purposes.
If we were taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to the unitholders, and our net income would be
taxed at corporate rates. In
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addition, any distribution made to a unitholder would be treated
as either taxable dividend income, to the extent of our current
or accumulated earnings and profits, or, in the absence of
earnings and profits, a nontaxable return of capital, to the
extent of the unitholders tax basis in his common units,
or taxable capital gain, after the unitholders tax basis
in his common units is reduced to zero. Accordingly, taxation as
a corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The remainder of this section is based on Baker Botts
L.L.P.s opinion that Martin Midstream Partners will be
classified as a partnership and our operating partnership will
be disregarded as an entity separate from Martin Midstream
Partners for federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Martin Midstream
Partners will be treated as partners of Martin Midstream
Partners for federal income tax purposes. Also:
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assignees who have executed and delivered transfer applications,
and are awaiting admission as limited partners; and
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unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
their common units,
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will be treated as partners of Martin Midstream Partners for
federal income tax purposes. Because there is no direct
authority dealing with the status of assignees of common units
who are entitled to execute and deliver transfer applications
and become entitled to direct the exercise of attendant rights,
but who fail to execute and deliver transfer applications,
counsel is unable to opine that such persons are partners for
federal income tax purposes. If not partners, such persons will
not be eligible for the federal income tax treatment described
in this discussion. Furthermore, a purchaser or other transferee
of common units who does not execute and deliver a transfer
application may not receive some federal income tax information
or reports furnished to record holders of common units unless
the common units are held in a nominee or street name account
and the nominee or broker has executed and delivered a transfer
application for those common units.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales.
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for federal
income tax purposes, and any cash distributions received by a
unitholder who is not a partner for federal income tax purposes
would therefore be fully taxable as ordinary income. These
holders are urged to consult their own tax advisors with respect
to their status as partners in Martin Midstream Partners L.P.
for federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income. We will not
pay any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a
cash distribution from us. Each unitholder will be required to
include in income his allocable share of our income, gains,
losses and deductions for our taxable year ending with or within
his taxable year.
Treatment of Distributions. Our distributions
to a unitholder generally will not be taxable to the unitholder
for federal income tax purposes to the extent of his tax basis
in his common units immediately before the distribution. Our
cash distributions in excess of a unitholders tax basis
generally will be considered to be gain from the sale or
exchange of the common units, taxable in accordance with the
rules described under Disposition of Common
Units. To the extent our distributions cause a
unitholders at risk amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
Limitations on Deductibility of Losses.
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Any reduction in a unitholders share of our liabilities
for which no partner, including our general partner, bears the
economic risk of loss, known as nonrecourse
liabilities, will be treated as a distribution of cash to
that unitholder. A decrease in a unitholders percentage
interest in us because of our issuance of additional common
units will decrease his share of our nonrecourse liabilities,
and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may
result in ordinary income to a unitholder, regardless of his tax
basis in his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, including depreciation recapture
and/or
substantially appreciated inventory items, both as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, he will be
treated as having been distributed his proportionate share of
the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will
generally result in the unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis for the share of Section 751
Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero,
by distributions from us, by the unitholders share of our
losses, by any decreases in his share of our nonrecourse
liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to
be capitalized. A limited partner will have no share of our debt
that is recourse to our general partner, but will have a share,
generally based on his share of profits, of our nonrecourse
liabilities. Please read Disposition of Common
Units Recognition of Gain or Loss.
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his common units and, in the case of
an individual unitholder or a corporate unitholder, if more than
50% of the value of the corporate unitholders stock is
owned directly or indirectly by five or fewer individuals or
some tax-exempt organizations, to the amount for which the
unitholder is considered to be at risk with respect
to our activities, if that is less than his tax basis. A
unitholder must recapture losses deducted in previous years to
the extent that distributions cause his at risk amount to be
less than zero at the end of any taxable year. Losses disallowed
to a unitholder or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that his
tax basis or at risk amount, whichever is the limiting factor,
is subsequently increased. Upon the taxable disposition of a
unit, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at risk limitation
but may not be offset by losses suspended by the basis
limitation. Any excess loss above that gain previously suspended
by the at risk or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his common units, excluding any portion of that
basis attributable to his share of our nonrecourse liabilities,
reduced by any amount of money he borrows to acquire or hold his
common units, if the lender of those borrowed funds owns an
interest in us, is related to the unitholder or can look only to
the common units for repayment. A unitholders at risk
amount will increase or decrease as the tax basis of the
unitholders common units increases or decreases, other
than tax basis increases or decreases attributable to increases
or decreases in his share of our nonrecourse liabilities.
The passive loss limitations generally provide that individuals,
estates, trusts and some closely-held corporations and personal
service corporations can deduct losses from passive activities,
which are generally activities in which the taxpayer does not
materially participate, only to the extent of the
taxpayers income from those passive activities. The
passive loss limitations are applied separately with respect to
each publicly traded partnership. Consequently, any losses we
generate will only be available to offset our passive income
generated in the future and will not be available to offset
income from other passive activities or investments, including
our investments or investments in other publicly traded
partnerships, or salary or active business income. Similarly, a
unitholders share of our net income may be offset by our
passive losses, but it may not be offset by any other current or
carryover losses from other passive activities, including those
attributable to other publicly traded partnerships. Passive
losses that are not deductible because they exceed a
unitholders share of income we generate may be deducted in
full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive
activity loss rules are applied after other applicable
limitations on deductions, including the at risk rules and the
basis limitation.
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Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment. The IRS has
indicated that net passive income from a publicly traded
partnership constitutes investment income for purposes of the
limitations on the deductibility of investment interest. In
addition, the unitholders share of our portfolio income
will be treated as investment income.
Entity-Level Collections. If we are
required or elect under applicable law to pay any federal,
state, local or foreign income tax on behalf of any unitholder
or our general partner or any former unitholder, we are
authorized to pay those taxes from our funds. That payment, if
made, will be treated as a distribution of cash to the
unitholder on whose behalf the payment was made. If the payment
is made on behalf of a person whose identity cannot be
determined, we are authorized to treat the payment as a
distribution to all current unitholders. We are authorized to
amend our partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units
and to adjust later distributions, so that after giving effect
to these distributions, the priority and characterization of
distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual unitholder in which event the
unitholder would be required to file a claim in order to obtain
a credit or refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with
their percentage interests in us. At any time that distributions
are made to the common units in excess of distributions to the
subordinated units, or incentive distributions are made to our
general partner, gross income will be allocated to the
recipients to the extent of these distributions. If we have a
net loss for the entire year, that loss will be allocated first
to our general partner and the unitholders in accordance with
their percentage interests in us to the extent of their positive
capital accounts and, second, to our general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
and fair market value of property contributed or deemed
contributed to us, referred to in this discussion as
Contributed Property. The effect of these
allocations to a unitholder purchasing common units in this
offering essentially will be the same as if the tax basis of our
assets were equal to their fair market value at the time of this
offering. In addition, items of recapture income will be
allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner to eliminate the negative
balance as quickly as possible.
Baker Botts L.L.P. is of the opinion that, with the exception of
the issues described in Section 754
Election and Disposition of Common
Units Allocations Between Transferors and
Transferees, allocations under our partnership agreement
will be given effect for federal income tax purposes in
determining a partners share of an item of income, gain,
loss or deduction.
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Treatment of Short Sales. A unitholder whose
units are loaned to a short seller to cover a short
sale of units may be considered as having disposed of those
units. If so, he would no longer be a partner for those units
during the period of the loan and may recognize gain or loss
from the disposition. As a result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Baker Botts L.L.P. has not rendered an opinion regarding the
treatment of a unitholder where common units are loaned to a
short seller to cover a short sale of common units; therefore,
unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller
should modify any applicable brokerage account agreements to
prohibit their brokers from borrowing their units. The IRS has
announced that it is studying issues relating to the tax
treatment of short sales of partnership interests. Please also
read Disposition of Common Units
Recognition of Gain or Loss.
Alternative Minimum Tax. Each unitholder will
be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 ($87,500 in
the case of married individuals filing separately) of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. In general, the highest effective
United States federal income tax rate for individuals for 2007
is 35% and the maximum United States federal income tax rate for
net capital gains of an individual for 2007 is 15% if the asset
disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We made the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS. The election generally permits us to adjust a common unit
purchasers tax basis in our assets (inside
basis) under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply
to a person who purchases common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other partners. For purposes of this discussion, a
partners inside basis in our assets will be considered to
have two components: (1) his share of our tax basis in our
assets (common basis) and (2) his
Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal
Revenue Code require, if the remedial allocation method is
adopted, a portion of the Section 743(b) adjustment
attributable to recovery property to be depreciated over the
remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury
Regulation Section 1.167(c)-l(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. In addition, the holder of a common unit (other than a
common unit that is sold in this offering) may be entitled by
reason of a Section 743(b) adjustment to amortization
deductions in respect of property to which the traditional
method of eliminating differences in book and tax
basis applies. It would not be possible to maintain uniformity
of units if this requirement were literally followed; therefore
under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these
Treasury Regulations. Please read Tax
Treatment of Operations and Uniformity
of Units.
Although Baker Botts L.L.P. is unable to opine as to the
validity of this approach because there is no clear authority on
this issue, we intend to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent
of any unamortized book-tax disparity, using a rate of
depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis
of the property, or treat that portion as
non-amortizable
to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the
regulations under Section 743 of the Internal Revenue Code
but is arguably inconsistent with Treasury
Regulation Section 1.167(c)-l(a)(6).
Although
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Treasury
Regulation Section 1.167(c)-1(a)(6)
is not expected to directly apply to a material portion of our
assets, if we determine that our position cannot reasonably be
taken, we may take a depreciation or amortization position under
which all purchasers acquiring units in the same month would
receive depreciation or amortization, whether attributable to
common basis or a Section 743(b) adjustment, based upon the
same applicable rate as if they had purchased a direct interest
in our assets. This kind of aggregate approach may result in
lower annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. This position will
not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
the unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on the unitholders. In addition, if purchasers of
common units (other than those that are sold in this offering)
are entitled to different treatment in respect of property as to
which we are using the traditional method of eliminating
differences in book and tax basis, we may also take
a position that results in lower annual deductions to some or
all of our unitholders than might otherwise be available. The
IRS may challenge any method of depreciating the
Section 743(b) adjustment described in this paragraph. If
this challenge were sustained, the uniformity of units might be
affected, and the gain from the sale of units might be increased
without the benefit of additional deductions. Please read
Disposition of Common Units
Recognition of Gain or Loss. Please read
Tax Treatment of Operations and
Uniformity of Units.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have a higher tax basis in
his share of our assets for purposes of computing, among other
items, his depreciation and depletion deductions and his share
of any gain or loss on a sale of our assets. Conversely, a
Section 754 election is disadvantageous if the
transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a
less accelerated method than our tangible assets. We cannot
assure you that the determinations we make will not be
successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment
to be made, and should, in our opinion, the expense of
compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election.
If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the
election not been revoked.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for federal income tax purposes. Each
unitholder will be required to include in income his share of
our income, gain, loss and deduction for our taxable year ending
within or with his taxable year. In addition, a unitholder who
has a taxable year ending on a date other than December 31 and
who disposes of all of his units following the close of our
taxable year but before the close of his taxable year must
include his share of our income, gain, loss and deduction in
income for his taxable year, with the result that he will be
required to include in income for his taxable year his share of
more than one year of our income, gain, loss and deduction.
Please read Disposition of Common
Units Allocations Between Transferors and
Transferees.
Tax Basis, Depreciation and Amortization. The
tax basis of our assets is used for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain
or loss on the disposition of these assets. The federal income
tax burden associated with the difference between the fair
market value of our assets and their tax basis immediately prior
to this offering will be borne by our general partner, its
affiliates and our other unitholders as of that time. Please
read Tax Consequences of Unit
Ownership Allocation of Income, Gain, Loss and
Deduction.
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To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service. We are not entitled to any amortization
deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be
depreciated using accelerated methods permitted by the Internal
Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
partner who has taken cost recovery or depreciation deductions
with respect to property we own will likely be required to
recapture some or all, of those deductions as ordinary income
upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership Allocation of
Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs incurred in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as a syndication expenses.
Valuation and Tax Basis of Our Properties. The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
of basis are subject to challenge and will not be binding on the
IRS or the courts. If the estimates of fair market value or
basis are later found to be incorrect, the character and amount
of items of income, gain, loss or deductions previously reported
by unitholders might change, and unitholders might be required
to adjust their tax liability for prior years and incur interest
and penalties with respect to those adjustments.
Disposition
of Common Units
Recognition of Gain or Loss. Gain or loss will
be recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property received by him plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholders share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held more than 12 months
will generally be taxed at a maximum rate of 15%. However, a
portion of this gain or loss, which will likely be substantial,
will be separately computed and taxed as ordinary income or loss
under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation
recapture or other unrealized receivables or to
inventory items we own. The term unrealized
receivables includes potential recapture items, including
depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of
a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize
both ordinary income and a capital loss upon a sale of units.
Capital losses may offset capital gains and no more than $3,000
of ordinary income, in the case of individuals, and may only be
used to offset capital gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
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apportionment method. Treasury Regulations under
Section 1223 of the Internal Revenue Code allow a selling
unitholder who can identify common units transferred with an
ascertainable holding period to elect to use the actual holding
period of the common units transferred. Thus, according to the
ruling, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the regulations, may designate specific
common units sold for purposes of determining the holding period
of units transferred. A unitholder electing to use the actual
holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions is urged to consult his tax advisor as to the
possible consequences of this ruling and application of the
regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest (one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value) if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
Treasury is also authorized to issue regulations that treat a
taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees. In general, our taxable income and
losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among the
unitholders in proportion to the number of units owned by each
of them as of the opening of the applicable exchange on the
first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or loss
realized on a sale or other disposition of our assets other than
in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that
gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
It is uncertain, due to the absence of interpretative authority,
whether this method conforms to the requirements of applicable
Treasury Regulations. Accordingly, Baker Botts L.L.P. is unable
to opine on the validity of this method of allocating income and
deductions between unitholders. If this method is disallowed or
only applies to transfers of less than all of the
unitholders interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to
revise our method of allocation between unitholders to conform
to a method permitted under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A person who
purchases units from a unitholder is required to notify us in
writing of that purchase within 30 days after purchase. We
are required to notify the IRS of that transaction and to
furnish specified information to the transferor and transferee.
However, these reporting requirements do not apply to a sale by
an individual who is a citizen of the United States and who
effects the sale or exchange through a broker.
Constructive Termination. We will be
considered to have been terminated for tax purposes if there is
a sale or exchange of 50% or more of the total interests in our
capital and profits within a
12-month
period. A constructive termination results in the closing of our
taxable year for all unitholders. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may result in
more than 12 months of our taxable income or loss being
includable in his taxable income for the year of termination. We
would be required to make new tax elections after a termination,
including a new election under Section 754 of the
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Internal Revenue Code, and a termination would result in a
deferral of our deductions for depreciation. A termination could
also result in penalties if we were unable to determine that the
termination had occurred. Moreover, a termination might either
accelerate the application of, or subject us to, any tax
legislation enacted before the termination.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other
foreign persons and regulated investment companies raises issues
unique to those investors and, as described below, may have
substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
A regulated investment company or mutual fund is
required to derive 90% or more of its gross income from
interest, dividends and gains from the sale of stocks or
securities or foreign currency or specified related sources. It
is not anticipated that any significant amount of our gross
income will include that type of income.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
tax rate from cash distributions made quarterly to foreign
unitholders. Each foreign unitholder must obtain a taxpayer
identification number from the IRS and submit that number to our
transfer agent on a
Form W-8
or applicable substitute form in order to obtain credit for
these withholding taxes.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
Under a ruling of the IRS, a foreign unitholder who sells or
otherwise disposes of a unit will be subject to federal income
tax on gain realized on the sale or disposition of that unit to
the extent that this gain is effectively connected with a United
States trade or business of the foreign unitholder. Apart from
the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has
owned 5% or less in value of the units during the five-year
period ending on the date of the disposition and if the units
are regularly traded on an established securities market at the
time of the sale or disposition.
Administrative
Matters
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be
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reviewed by Baker Botts L.L.P., we will take various accounting
and reporting positions, some of which have been mentioned
earlier, to determine each unitholders share of income,
gain, loss and deduction. We cannot assure you that those
positions will yield a result that conforms to the requirements
of the Internal Revenue Code, regulations or administrative
interpretations of the IRS. Neither we nor Baker Botts L.L.P.
can assure prospective unitholders that the IRS will not
successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. Our partnership agreement names Martin Midstream GP
LLC as our Tax Matters Partner.
The Tax Matters Partner has made and will make some elections on
our behalf and on behalf of unitholders. In addition, the Tax
Matters Partner can extend the statute of limitations for
assessment of tax deficiencies against unitholders for items in
our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% interest in profits in us to a settlement with
the IRS unless that unitholder elects, by filing a statement
with the IRS, not to give that authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review, by
which all the unitholders are bound, of a final partnership
administrative adjustment and, if the Tax Matters Partner fails
to seek judicial review, judicial review may be sought by any
unitholder having at least a 1% interest in profits or by any
group of unitholders having in the aggregate at least a 5%
interest in profits. However, only one action for judicial
review will go forward, and each unitholder with an interest in
the outcome may participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an
interest in us as a nominee for another person are required to
furnish to us:
(a) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(b) whether the beneficial owner is:
(1) a person that is not a United States person;
(2) a foreign government, an international organization or
any wholly-owned agency or instrumentality of either of the
foregoing; or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up
to a maximum of $100,000 per calendar year, is imposed by the
Internal Revenue
Code for failure to report that information to
us. The nominee is required to supply the beneficial
owner of the units with the information furnished to us.
Registration as a Tax Shelter. The Internal
Revenue Code requires that tax shelters be
registered with the Secretary of the Treasury. It is arguable
that we are not subject to the registration requirement on the
basis that we may not constitute a tax shelter. However, we have
registered as a tax shelter with the Secretary of Treasury in
the
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absence of assurance that we are not be subject to tax shelter
registration and in light of the substantial penalties that
might be imposed if registration is required and not undertaken.
Our tax shelter registration number is 02318000009.
Issuance of this tax shelter registration number does not
indicate that investment in us or the claimed tax benefits have
been reviewed, examined or approved by the IRS.
A unitholder who sells or otherwise transfers a unit in a later
transaction must furnish the registration number to the
transferee. The penalty for failure of the transferor of a unit
to furnish the registration number to the transferee is $100 for
each failure. The unitholders must disclose our tax shelter
registration number on Form 8271 to be attached to the tax
return on which any deduction, loss or other benefit we generate
is claimed or on which any of our income is included. A
unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any
penalties discussed are not deductible for federal income tax
purposes.
Recently issued Treasury Regulations require taxpayers to report
certain information on Internal Revenue Service Form 8886
if they participate in a reportable transaction. You
may be required to file this form with the IRS if we participate
in a reportable transaction. A transaction may be a
reportable transaction based upon any of several factors. You
are urged to consult with your own tax advisor concerning the
application of any of these factors to your investment in our
common units. Congress is considering legislative proposals
that, if enacted, would impose significant penalties for failure
to comply with these disclosure requirements. The Treasury
Regulations also impose obligations on material
advisors that organize, manage or sell interests in
registered tax shelters. As described in this
prospectus, we have registered as a tax shelter, and, thus one
of our material advisors will be required to maintain a list
with specific information, including your name and tax
identification number, and to furnish this information to the
IRS upon request. You are urged to consult with your own tax
advisor concerning any possible disclosure obligation with
respect to your investment and should be aware that we and our
material advisors intend to comply with the list and disclosure
requirements.
Accuracy-Related Penalties. An additional tax
equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Internal Revenue
Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
A substantial understatement of income tax in any taxable year
exists if the amount of the understatement exceeds the greater
of 10% of the tax required to be shown on the return for the
taxable year or $5,000 ($10,000 for most corporations). The
amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on
the return:
(1) for which there is, or was, substantial
authority; or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
More stringent rules apply to tax shelters, a term
that in this context does not appear to include us. If any item
of income, gain, loss or deduction included in the distributive
shares of unitholders might result in that kind of an
understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for
unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any
property, or the adjusted basis of any property, claimed on a
tax return is 150% or more of the amount determined to be the
correct amount of the valuation or adjusted basis. No penalty is
imposed unless the portion of the underpayment attributable to a
substantial valuation misstatement exceeds $5,000 ($10,000 for
most corporations). If the valuation claimed on a return is 200%
or more than the correct valuation, the penalty imposed
increases to 40%.
65
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, you will be subject to
other taxes, including state, local and foreign income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in
which you are a resident. Although an analysis of those various
taxes is not presented here, each prospective unitholder is
urged to consider their potential impact on his investment in
us. We will initially own property or do business in Alabama,
Arizona, Arkansas, California, Georgia, Florida, Illinois,
Louisiana, Mississippi, Texas and Utah. We may also own property
or do business in other states or foreign jurisdictions in the
future. Although you may not be required to file a return and
pay taxes in some jurisdictions because your income from that
jurisdiction falls below the filing and payment requirements,
you will be required to file income tax returns and to pay
income taxes in many of these jurisdictions in which we do
business or own property and may be subject to penalties for
failure to comply with those requirements.
In some jurisdictions, tax losses may not produce a tax benefit
in the year incurred and may not be available to offset income
in subsequent taxable years. Some of the jurisdictions may
require us, or we may elect, to withhold a percentage of income
from amounts to be distributed to a unitholder who is not a
resident of the jurisdiction. Withholding, the amount of which
may be greater or less than a particular unitholders
income tax liability to the jurisdiction, generally does not
relieve a nonresident unitholder from the obligation to file an
income tax return. Amounts withheld may be treated as if
distributed to unitholders for purposes of determining the
amounts distributed by us. Please read Tax
Consequences of Unit Ownership
Entity-Level Collections. Based on current law and
our estimate of our future operations, our general partner
anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns, that may be required of him. Baker Botts L.L.P. has not
rendered an opinion on the state, local or foreign tax
consequences of an investment in us.
Tax
Consequences of Ownership of Debt Securities
A description of the material federal income tax consequences of
the acquisition, ownership and disposition of debt securities
will be set forth on the prospectus supplement relating to the
offering of debt securities.
INVESTMENT
IN US BY EMPLOYEE BENEFIT PLANS
An equity investment in us by an employee benefit plan is
subject to additional considerations because the investments of
such plans are subject to the fiduciary responsibility and
prohibited transaction provisions of the Employee Retirement
Income Security Act of 1974, as amended (ERISA), and
restrictions imposed by Section 4975 of the Internal
Revenue Code. For these purposes, the term employee
benefit plan includes, but is not limited to, qualified
pension, profit-sharing and stock bonus plans established or
maintained by an employer or employee organization and IRAs.
Among other things, consideration should be given to:
(a) whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
(b) whether in making the investment, the employee benefit
plan will satisfy the diversification requirements of
Section 404(a)(l)(C) of ERISA; and