SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2019
OR
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to _________
Commission File Number 001-33503
BLUEKNIGHT ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 20-8536826 (IRS Employer Identification No.) | ||
6060 American Plaza, Suite 600 Tulsa, Oklahoma 74135 (Address of principal executive offices, zip code) Registrant’s telephone number, including area code: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Units | BKEP | The Nasdaq Global Market |
Series A Preferred Units | BKEPP | The Nasdaq Global Market |
As of May 6, 2019,1, 2020, there were 35,125,202 Series A Preferred Units and 40,714,85741,034,763 common units outstanding.
Table of Contents Page FINANCIAL INFORMATION Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of December 31, 2018,2019, and March 31, 20192020 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 20182019 and 20192020 Condensed Consolidated Statements of Changes in Partners’ Capital (Deficit) for the Three Months Ended March 31, 20182019 and 20192020 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 20182019 and 20192020 Notes to the Unaudited Condensed Consolidated Financial Statements Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Controls and Procedures OTHER INFORMATION Legal Proceedings Risk Factors Exhibits
Item 1. Unaudited Condensed Consolidated Financial Statements
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except unit data) |
As of | As of | |||||||
December 31, 2019 | March 31, 2020 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 558 | $ | 671 | ||||
Accounts receivable, net | 23,716 | 19,515 | ||||||
Receivables from related parties, net | 1,110 | 942 | ||||||
Other current assets | 8,692 | 8,723 | ||||||
Total current assets | 34,076 | 29,851 | ||||||
Property, plant and equipment, net of accumulated depreciation of $274,404 and $279,144 at December 31, 2019, and March 31, 2020, respectively | 232,777 | 226,398 | ||||||
Goodwill | 6,728 | 6,728 | ||||||
Debt issuance costs, net | 2,344 | 2,093 | ||||||
Operating lease assets | 10,758 | 10,349 | ||||||
Intangible assets, net | 14,088 | 13,402 | ||||||
Other noncurrent assets | 1,169 | 1,251 | ||||||
Total assets | $ | 301,940 | $ | 290,072 | ||||
LIABILITIES AND PARTNERS’ CAPITAL(DEFICIT) | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,125 | $ | 3,992 | ||||
Accounts payable to related parties | 2,460 | 2,907 | ||||||
Accrued crude oil purchases | 6,706 | 3,240 | ||||||
Accrued crude oil purchases to related parties | 11,807 | 7,344 | ||||||
Contingent liability with related party (Note 8) | 12,221 | - | ||||||
Accrued interest payable | 293 | 301 | ||||||
Accrued property taxes payable | 3,247 | 2,866 | ||||||
Unearned revenue | 1,942 | 3,248 | ||||||
Unearned revenue with related parties | 2,934 | 3,006 | ||||||
Accrued payroll | 4,823 | 2,495 | ||||||
Current operating lease liability | 2,391 | 2,324 | ||||||
Other current liabilities | 2,627 | 3,698 | ||||||
Total current liabilities | 54,576 | 35,421 | ||||||
Long-term unearned revenue with related parties | 2,149 | 1,792 | ||||||
Other long-term liabilities | 2,417 | 2,362 | ||||||
Noncurrent operating lease liability | 8,529 | 8,147 | ||||||
Long-term debt | 255,592 | 271,592 | ||||||
Commitments and contingencies (Note 12) | ||||||||
Partners’ capital(deficit): | ||||||||
Common unitholders (40,830,051 and 41,034,763 units issued and outstanding at December 31, 2019, and March 31, 2020, respectively) | 356,777 | 348,984 | ||||||
Preferred Units (35,125,202 units issued and outstanding at both dates) | 253,923 | 253,923 | ||||||
General partner interest (1.6% interest with 1,225,409 general partner units outstanding at both dates) | (632,023 | ) | (632,149 | ) | ||||
Total partners’ deficit | (21,323 | ) | (29,242 | ) | ||||
Total liabilities and partners’ deficit | $ | 301,940 | $ | 290,072 |
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except unit data) | |||||||
As of | As of | ||||||
December 31, 2018 | March 31, 2019 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,455 | $ | 1,209 | |||
Accounts receivable, net | 35,683 | 28,561 | |||||
Receivables from related parties, net | 1,043 | 936 | |||||
Other current assets | 9,345 | 7,127 | |||||
Total current assets | 47,526 | 37,833 | |||||
Property, plant and equipment, net of accumulated depreciation of $263,554 and $268,576 at December 31, 2018, and March 31, 2019, respectively | 248,261 | 243,063 | |||||
Goodwill | 6,728 | 6,728 | |||||
Debt issuance costs, net | 3,349 | 3,098 | |||||
Operating lease assets | — | 11,594 | |||||
Intangible assets, net | 16,834 | 16,147 | |||||
Other noncurrent assets | 606 | 1,193 | |||||
Total assets | $ | 323,304 | $ | 319,656 | |||
LIABILITIES AND PARTNERS’ CAPITAL | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,707 | $ | 3,925 | |||
Accounts payable to related parties | 2,263 | 2,111 | |||||
Accrued crude oil purchases | 13,949 | 7,576 | |||||
Accrued crude oil purchases to related parties | 10,219 | 11,885 | |||||
Accrued interest payable | 465 | 294 | |||||
Accrued property taxes payable | 3,089 | 2,237 | |||||
Unearned revenue | 3,206 | 3,536 | |||||
Unearned revenue with related parties | 4,835 | 15,168 | |||||
Accrued payroll | 3,667 | 2,129 | |||||
Current operating lease liability | — | 2,768 | |||||
Other current liabilities | 3,465 | 3,042 | |||||
Total current liabilities | 48,865 | 54,671 | |||||
Long-term unearned revenue with related parties | 1,714 | 1,612 | |||||
Other long-term liabilities | 4,010 | 3,715 | |||||
Noncurrent operating lease liability | — | 8,935 | |||||
Contingent liability with related party (Note 10) | 10,019 | 10,870 | |||||
Long-term debt | 265,592 | 252,592 | |||||
Commitments and contingencies (Note 16) | |||||||
Partners’ capital: | |||||||
Common unitholders (40,424,372 and 40,714,857 units issued and outstanding at December 31, 2018, and March 31, 2019, respectively) | 370,972 | 365,220 | |||||
Preferred Units (35,125,202 units issued and outstanding at both dates) | 253,923 | 253,923 | |||||
General partner interest (1.6% interest with 1,225,409 general partner units outstanding at both dates) | (631,791 | ) | (631,882 | ) | |||
Total partners’ capital | (6,896 | ) | (12,739 | ) | |||
Total liabilities and partners’ capital | $ | 323,304 | $ | 319,656 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit data) | ||||||||
Three Months ended March 31, | ||||||||
2018 | 2019 | |||||||
(unaudited) | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 17,318 | $ | 15,886 | ||||
Related-party revenue | 6,321 | 4,219 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 9,804 | 9,763 | ||||||
Related-party revenue | 7,703 | 4,940 | ||||||
Product sales revenue: | ||||||||
Third-party revenue | 3,514 | 58,924 | ||||||
Total revenue | 44,660 | 93,732 | ||||||
Costs and expenses: | ||||||||
Operating expense | 31,135 | 27,243 | ||||||
Cost of product sales | 2,637 | 24,587 | ||||||
Cost of product sales from related party | — | 30,774 | ||||||
General and administrative expense | 4,221 | 3,693 | ||||||
Asset impairment expense | 616 | 1,119 | ||||||
Total costs and expenses | 38,609 | 87,416 | ||||||
Gain (loss) on sale of assets | (236 | ) | 1,724 | |||||
Operating income | 5,815 | 8,040 | ||||||
Other income (expenses): | ||||||||
Gain on sale of unconsolidated affiliate | 2,225 | — | ||||||
Interest expense | (3,569 | ) | (4,271 | ) | ||||
Income before income taxes | 4,471 | 3,769 | ||||||
Provision for income taxes | 29 | 12 | ||||||
Net income | $ | 4,442 | $ | 3,757 | ||||
Allocation of net income for calculation of earnings per unit: | ||||||||
General partner interest in net income | $ | 231 | $ | 105 | ||||
Preferred interest in net income | $ | 6,278 | $ | 6,279 | ||||
Net loss available to limited partners | $ | (2,067 | ) | $ | (2,627 | ) | ||
Basic and diluted net loss per common unit | $ | (0.05 | ) | $ | (0.06 | ) | ||
Weighted average common units outstanding - basic and diluted | 40,289 | 40,678 |
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit data) |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
(unaudited) | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 15,886 | $ | 13,229 | ||||
Related-party revenue | 4,219 | 4,077 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 9,763 | 9,831 | ||||||
Related-party revenue | 4,940 | 4,921 | ||||||
Product sales revenue: | ||||||||
Third-party revenue | 58,924 | 47,052 | ||||||
Total revenue | 93,732 | 79,110 | ||||||
Costs and expenses: | ||||||||
Operating expense | 27,243 | 24,939 | ||||||
Cost of product sales | 24,587 | 14,221 | ||||||
Cost of product sales from related party | 30,774 | 28,254 | ||||||
General and administrative expense | 3,693 | 3,540 | ||||||
Asset impairment expense | 1,119 | 5,122 | ||||||
Total costs and expenses | 87,416 | 76,076 | ||||||
Gain (loss) on sale of assets | 1,724 | (185 | ) | |||||
Operating income | 8,040 | 2,849 | ||||||
Other income (expenses): | ||||||||
Other income | - | 558 | ||||||
Interest expense | (4,271 | ) | (3,399 | ) | ||||
Income before income taxes | 3,769 | 8 | ||||||
Provision for income taxes | 12 | 8 | ||||||
Net income | $ | 3,757 | $ | - | ||||
Allocation of net income(loss) for calculation of earnings per unit: | ||||||||
General partner interest in net income(loss) | $ | 105 | $ | - | ||||
Preferred interest in net income | $ | 6,279 | $ | 6,279 | ||||
Net loss available to limited partners | $ | (2,627 | ) | $ | (6,279 | ) | ||
Basic and diluted net loss per common unit | $ | (0.06 | ) | $ | (0.15 | ) | ||
Weighted average common units outstanding - basic and diluted | 40,678 | 41,015 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT) (in thousands) | |||||||||||||||
Common Unitholders | Series A Preferred Unitholders | General Partner Interest | Total Partners’ Capital (Deficit) | ||||||||||||
(unaudited) | |||||||||||||||
Balance, December 31, 2017 | $ | 454,358 | $ | 253,923 | $ | (703,597 | ) | $ | 4,684 | ||||||
Net income (loss) | (2,065 | ) | 6,279 | 228 | 4,442 | ||||||||||
Equity-based incentive compensation | 33 | — | 8 | 41 | |||||||||||
Distributions | (5,947 | ) | (6,279 | ) | (361 | ) | (12,587 | ) | |||||||
Capital contributions | — | — | 183 | 183 | |||||||||||
Proceeds from sale of 21,246 common units pursuant to the Employee Unit Purchase Plan | 92 | — | — | 92 | |||||||||||
Balance, March 31, 2018 | $ | 446,471 | $ | 253,923 | $ | (703,539 | ) | $ | (3,145 | ) |
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT) (in thousands) |
Common Unitholders | Series A Preferred Unitholders | General Partner Interest | Total Partners’ Capital (Deficit) | |||||||||||||
(unaudited) | ||||||||||||||||
Balance, December 31, 2018 | $ | 370,972 | $ | 253,923 | $ | (631,791 | ) | $ | (6,896 | ) | ||||||
Net income (loss) | (2,581 | ) | 6,279 | 59 | 3,757 | |||||||||||
Equity-based incentive compensation | 64 | - | 5 | 69 | ||||||||||||
Distributions | (3,308 | ) | (6,279 | ) | (155 | ) | (9,742 | ) | ||||||||
Proceeds from sale of 63,340 common units pursuant to the Employee Unit Purchase Plan | 73 | - | - | 73 | ||||||||||||
Balance, March 31, 2019 | $ | 365,220 | $ | 253,923 | $ | (631,882 | ) | $ | (12,739 | ) | ||||||
Balance, December 31, 2019 | $ | 356,777 | $ | 253,923 | $ | (632,023 | ) | $ | (21,323 | ) | ||||||
Net income (loss) | (6,279 | ) | 6,279 | - | - | |||||||||||
Equity-based incentive compensation | 105 | - | 3 | 108 | ||||||||||||
Distributions | (1,675 | ) | (6,279 | ) | (128 | ) | (8,082 | ) | ||||||||
Proceeds from sale of 53,372 common units pursuant to the Employee Unit Purchase Plan | 55 | - | - | 55 | ||||||||||||
Balance, March 31, 2020 | $ | 348,983 | $ | 253,923 | $ | (632,148 | ) | $ | (29,242 | ) |
Common Unitholders | Series A Preferred Unitholders | General Partner Interest | Total Partners’ Capital (Deficit) | ||||||||||||
(unaudited) | |||||||||||||||
Balance, December 31, 2018 | $ | 370,972 | $ | 253,923 | $ | (631,791 | ) | $ | (6,896 | ) | |||||
Net income (loss) | (2,581 | ) | 6,279 | 59 | 3,757 | ||||||||||
Equity-based incentive compensation | 64 | — | 5 | 69 | |||||||||||
Distributions | (3,308 | ) | (6,279 | ) | (155 | ) | (9,742 | ) | |||||||
Proceeds from sale of 63,340 common units pursuant to the Employee Unit Purchase Plan | 73 | — | — | 73 | |||||||||||
Balance, March 31, 2019 | $ | 365,220 | $ | 253,923 | $ | (631,882 | ) | $ | (12,739 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | |||||||
Three Months ended March 31, | |||||||
2018 | 2019 | ||||||
(unaudited) | |||||||
Cash flows from operating activities: | |||||||
Net income | $ | 4,442 | $ | 3,757 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for uncollectible receivables from third parties | 8 | — | |||||
Depreciation and amortization | 7,367 | 6,734 | |||||
Amortization of debt issuance costs | 256 | 251 | |||||
Unrealized (gain) loss related to interest rate swaps | (354 | ) | 44 | ||||
Intangible asset impairment charge | 189 | — | |||||
Fixed asset impairment charge | 427 | 1,119 | |||||
Loss (gain) on sale of assets | 236 | (1,724 | ) | ||||
Gain on sale of unconsolidated affiliate | (2,225 | ) | — | ||||
Equity-based incentive compensation | 41 | 69 | |||||
Changes in assets and liabilities: | |||||||
Decrease (increase) in accounts receivable | (2,811 | ) | 4,480 | ||||
Decrease in receivables from related parties | 960 | 107 | |||||
Decrease (increase) in other current assets | 399 | 2,613 | |||||
Decrease in other non-current assets | 41 | 803 | |||||
Decrease in accounts payable | (154 | ) | (297 | ) | |||
Increase (decrease) in payables to related parties | 625 | (315 | ) | ||||
Decrease in accrued crude oil purchases | — | (6,373 | ) | ||||
Increase in accrued crude oil purchases to related parties | — | 1,666 | |||||
Increase (decrease) in accrued interest payable | 24 | (171 | ) | ||||
Decrease in accrued property taxes | (80 | ) | (852 | ) | |||
Increase in unearned revenue | 637 | 165 | |||||
Increase in unearned revenue from related parties | 3,655 | 10,231 | |||||
Decrease in accrued payroll | (3,323 | ) | (1,538 | ) | |||
Decrease in other accrued liabilities | (419 | ) | (1,252 | ) | |||
Net cash provided by operating activities | 9,941 | 19,517 | |||||
Cash flows from investing activities: | |||||||
Acquisitions | (21,959 | ) | — | ||||
Capital expenditures | (4,563 | ) | (2,801 | ) | |||
Proceeds from sale of assets | 26 | 6,304 | |||||
Proceeds from sale of unconsolidated affiliate | 2,225 | — | |||||
Net cash provided by (used in) investing activities | (24,271 | ) | 3,503 | ||||
Cash flows from financing activities: | |||||||
Payments on other financing activities | (746 | ) | (597 | ) | |||
Borrowings under credit agreement | 54,000 | 75,000 | |||||
Payments under credit agreement | (27,000 | ) | (88,000 | ) | |||
Proceeds from equity issuance | 92 | 73 | |||||
Capital contributions | 183 | — | |||||
Distributions | (12,587 | ) | (9,742 | ) | |||
Net cash provided by (used in) financing activities | 13,942 | (23,266 | ) | ||||
Net decrease in cash and cash equivalents | (388 | ) | (246 | ) | |||
Cash and cash equivalents at beginning of period | 2,469 | 1,455 | |||||
Cash and cash equivalents at end of period | $ | 2,081 | $ | 1,209 | |||
Supplemental disclosure of non-cash financing and investing cash flow information: | |||||||
Non-cash changes in property, plant and equipment | $ | 1,251 | $ | 711 | |||
Increase in accrued liabilities related to insurance premium financing agreement | $ | 720 | $ | 751 |
BLUEKNIGHT ENERGY PARTNERS, L.P. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,757 | $ | - | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 6,734 | 6,094 | ||||||
Amortization of debt issuance costs | 251 | 251 | ||||||
Unrealized loss related to interest rate swaps | 44 | - | ||||||
Fixed asset impairment charge | 1,119 | 5,122 | ||||||
(Gain)loss on sale of assets | (1,724 | ) | 185 | |||||
Equity-based incentive compensation | 69 | 108 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in accounts receivable | 4,480 | 4,201 | ||||||
Decrease in receivables from related parties | 107 | 168 | ||||||
Decrease in other current assets | 2,613 | 1,345 | ||||||
Decrease in other non-current assets | 803 | 566 | ||||||
Increase (decrease) in accounts payable | (297 | ) | 104 | |||||
Decrease in payables to related parties | (315 | ) | (17 | ) | ||||
Decrease in accrued crude oil purchases | (6,373 | ) | (3,466 | ) | ||||
Increase (decrease) in accrued crude oil purchases to related parties | 1,666 | (4,463 | ) | |||||
Increase (decrease) in accrued interest payable | (171 | ) | 8 | |||||
Decrease in accrued property taxes | (852 | ) | (381 | ) | ||||
Increase in unearned revenue | 165 | �� | 1,205 | |||||
Increase (decrease) in unearned revenue from related parties | 10,231 | (285 | ) | |||||
Decrease in accrued payroll | (1,538 | ) | (2,329 | ) | ||||
Decrease in other accrued liabilities | (1,252 | ) | (542 | ) | ||||
Net cash provided by operating activities | 19,517 | 7,874 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of DEVCO from Ergon (Note 8) | - | (12,221 | ) | |||||
Capital expenditures | (2,801 | ) | (2,900 | ) | ||||
Proceeds from sale of assets | 6,304 | 25 | ||||||
Net cash provided by (used in) investing activities | 3,503 | (15,096 | ) | |||||
Cash flows from financing activities: | ||||||||
Payments on other financing activities | (597 | ) | (638 | ) | ||||
Borrowings under credit agreement | 75,000 | 78,000 | ||||||
Payments under credit agreement | (88,000 | ) | (62,000 | ) | ||||
Proceeds from equity issuance | 73 | 55 | ||||||
Distributions | (9,742 | ) | (8,082 | ) | ||||
Net cash provided by (used in) financing activities | (23,266 | ) | 7,335 | |||||
Net increase (decrease) in cash and cash equivalents | (246 | ) | 113 | |||||
Cash and cash equivalents at beginning of period | 1,455 | 558 | ||||||
Cash and cash equivalents at end of period | $ | 1,209 | $ | 671 | ||||
Supplemental disclosure of non-cash financing and investing cash flow information: | ||||||||
Non-cash changes in property, plant and equipment | $ | 711 | $ | 1,241 | ||||
Increase in accrued liabilities related to insurance premium financing agreement | $ | 751 | $ | 1,517 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | ORGANIZATION AND NATURE OF BUSINESS |
Blueknight Energy Partners, L.P. and subsidiaries (collectively, the “Partnership”) is a publicly traded master limited partnership with operations in
2. | BASIS OF CONSOLIDATION AND PRESENTATION |
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated balance sheet as of March 31, 2019,2020, the condensed consolidated statements of operations for the three months ended March 31,
3. | REVENUE |
The Partnership recognizes revenue from contracts with customers as well as lease revenue. The following table includes revenue associated with contractual commitments in the consolidated balance sheetplace related to future performance obligations as of December 31, 2018, and the consolidated statement of cash flows for the three months ended March 31, 2018, to conform to the 2019 financial statement presentation. These reclassifications relate to items included in “Other current assets” and “Other noncurrent assets.” Reclassifications on the consolidated statement of cash flows were limited to the “Cash flows from operating activities” section. The reclassifications have no impact on net income.
Revenue from Contracts with Customers(1) | Revenue from Leases | |||||||
Remainder of 2020 | $ | 23,929 | $ | 42,106 | ||||
2021 | 30,211 | 55,019 | ||||||
2022 | 23,198 | 44,262 | ||||||
2023 | 17,605 | 35,289 | ||||||
2024 | 11,250 | 28,675 | ||||||
Thereafter | 9,930 | 28,110 | ||||||
Total revenue related to future performance obligations | $ | 116,123 | $ | 233,461 |
Revenue Related to Future Performance Obligations Due by Period(1) | ||||
Twelve months ending March 31, 2020 | $ | 30,705 | ||
Twelve months ending March 31, 2021 | 29,704 | |||
Twelve months ending March 31, 2022 | 25,487 | |||
Twelve months ending March 31, 2023 | 18,903 | |||
Twelve months ending March 31, 2024 | 11,711 | |||
Thereafter | 7,841 | |||
Total revenue related to future performance obligations | $ | 124,351 |
___________________
(1) | |
Excluded from the table is revenue that is either constrained or related to performance obligations that are wholly unsatisfied as of March 31, |
Revenue Related to Minimum Future Annual Lease Rentals Due by Period | ||||
Twelve months ending March 31, 2020 | $ | 55,176 | ||
Twelve months ending March 31, 2021 | 52,360 | |||
Twelve months ending March 31, 2022 | 46,637 | |||
Twelve months ending March 31, 2023 | 36,655 | |||
Twelve months ending March 31, 2024 | 24,798 | |||
Thereafter | 19,220 | |||
Total revenue related to minimum future annual lease rentals | $ | 234,846 |
Disaggregation of Revenue
Disaggregation of revenue from contracts with customers for each operating segment by revenue type is presented as follows (in thousands):
Asphalt Terminalling Services | Crude Oil Terminalling Services | Crude Oil Pipeline Services | Crude Oil Trucking Services | Total | ||||||||||||||||
Three Months Ended March 31, 2019 | ||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | $ | 4,983 | $ | 3,069 | $ | - | $ | - | $ | 8,052 | ||||||||||
Variable throughput revenue | 3 | 504 | - | - | 507 | |||||||||||||||
Variable reimbursement revenue | 1,996 | - | - | - | 1,996 | |||||||||||||||
Crude oil transportation revenue | - | - | 2,498 | 2,833 | 5,331 | |||||||||||||||
Crude oil product sales revenue | - | - | 58,924 | - | 58,924 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | 2,848 | - | 83 | - | 2,931 | |||||||||||||||
Variable reimbursement revenue | 1,270 | - | 18 | - | 1,288 | |||||||||||||||
Total revenue from contracts with customers | $ | 11,100 | $ | 3,573 | $ | 61,523 | $ | 2,833 | $ | 79,029 | ||||||||||
Lease revenue | ||||||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed lease revenue | $ | 9,229 | $ | - | $ | - | $ | - | $ | 9,229 | ||||||||||
Variable reimbursement revenue | 534 | - | - | - | 534 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed lease revenue | 4,779 | - | - | - | 4,779 | |||||||||||||||
Variable reimbursement revenue | 161 | - | - | - | 161 | |||||||||||||||
Total lease revenue | $ | 14,703 | $ | - | $ | - | $ | - | $ | 14,703 | ||||||||||
Total revenue | $ | 25,803 | $ | 3,573 | $ | 61,523 | $ | 2,833 | $ | 93,732 |
Three Months Ended March 31, 2020 | ||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | $ | 5,246 | $ | 2,859 | $ | - | $ | - | $ | 8,105 | ||||||||||
Variable throughput revenue | 1 | 471 | - | - | 472 | |||||||||||||||
Variable reimbursement revenue | 1,607 | - | - | - | 1,607 | |||||||||||||||
Crude oil transportation revenue | - | - | 502 | 2,543 | 3,045 | |||||||||||||||
Crude oil product sales revenue | - | - | 47,052 | - | 47,052 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | 3,106 | - | - | - | 3,106 | |||||||||||||||
Variable reimbursement revenue | 971 | - | - | - | 971 | |||||||||||||||
Total revenue from contracts with customers | $ | 10,931 | $ | 3,330 | $ | 47,554 | $ | 2,543 | $ | 64,358 | ||||||||||
Lease revenue | ||||||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed lease revenue | $ | 9,227 | $ | - | $ | - | $ | - | $ | 9,227 | ||||||||||
Variable reimbursement revenue | 604 | - | - | - | 604 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed lease revenue | 4,800 | - | - | - | 4,800 | |||||||||||||||
Variable reimbursement revenue | 121 | - | - | - | 121 | |||||||||||||||
Total lease revenue | $ | 14,752 | $ | - | $ | - | $ | - | $ | 14,752 | ||||||||||
Total revenue | $ | 25,683 | $ | 3,330 | $ | 47,554 | $ | 2,543 | $ | 79,110 |
Three Months ended March 31, 2018 | ||||||||||||||||||||
Asphalt Terminalling Services | Crude Oil Terminalling Services | Crude Oil Pipeline Services | Crude Oil Trucking Services | Total | ||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | $ | 3,549 | $ | 4,081 | $ | — | $ | — | $ | 7,630 | ||||||||||
Variable throughput revenue | 117 | 504 | — | — | 621 | |||||||||||||||
Variable reimbursement revenue | 1,466 | — | — | — | 1,466 | |||||||||||||||
Crude oil transportation revenue | — | — | 2,061 | 5,540 | 7,601 | |||||||||||||||
Crude oil product sales revenue | — | — | 3,508 | 6 | 3,514 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | 4,631 | — | — | — | 4,631 | |||||||||||||||
Variable reimbursement revenue | 1,690 | — | — | — | 1,690 | |||||||||||||||
Total revenue from contracts with customers | $ | 11,453 | $ | 4,585 | $ | 5,569 | $ | 5,546 | $ | 27,153 |
Three Months ended March 31, 2019 | ||||||||||||||||||||
Asphalt Terminalling Services | Crude Oil Terminalling Services | Crude Oil Pipeline Services | Crude Oil Trucking Services | Total | ||||||||||||||||
Third-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | $ | 4,983 | $ | 3,069 | $ | — | $ | — | $ | 8,052 | ||||||||||
Variable throughput revenue | 3 | 504 | — | — | 507 | |||||||||||||||
Variable reimbursement revenue | 1,996 | — | — | — | 1,996 | |||||||||||||||
Crude oil transportation revenue | — | — | 2,498 | 2,833 | 5,331 | |||||||||||||||
Crude oil product sales revenue | — | — | 58,924 | — | 58,924 | |||||||||||||||
Related-party revenue: | ||||||||||||||||||||
Fixed storage, throughput and other revenue | 2,848 | — | 83 | — | 2,931 | |||||||||||||||
Variable reimbursement revenue | 1,270 | — | 18 | — | 1,288 | |||||||||||||||
Total revenue from contracts with customers | $ | 11,100 | $ | 3,573 | $ | 61,523 | $ | 2,833 | $ | 79,029 |
Contract Balances
Billed accounts receivable from contracts with customers were $34.6$23.2 million and $25.8$16.8 million at December 31, 2018,2019, and March 31, 2019,2020, respectively.
The Partnership records unearned revenues when cash payments are received in advance of performance. Unearned revenue related to contracts with customers was $5.9$3.0 million and $10.1$3.4 million at December 31, 2018,2019, and March 31, 2019,2020, respectively. The change inFor the unearned revenue balance for the three months ended March 31, 2019, is driven by $7.3 million in cash payments received in advance of satisfying performance obligations, partially offset by $3.12020, the Partnership recognized $1.8 million of revenues recognized that were previously included in the unearned revenue balance at the beginning of the period.
Practical Expedients and Exemptions
The Partnership does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which revenue is recognized at the amount to which the Partnership has the right to invoice for services performed. The Partnership is using the right-to-invoice practical expedient on all contracts with customers in its crude oil terminalling services, crude oil pipeline services and crude oil trucking services segments.
Three Months ended March 31, | |||
2018 | |||
Beginning balance | $ | 286 | |
Cash payments | 49 | ||
Ending balance | $ | 237 |
Estimated Useful Lives (Years) | December 31, 2018 | March 31, 2019 | |||||||
(dollars in thousands) | |||||||||
Land | N/A | $ | 24,705 | $ | 24,705 | ||||
Land improvements | 10-20 | 5,758 | 5,798 | ||||||
Pipelines and facilities | 5-30 | 116,155 | 117,188 | ||||||
Storage and terminal facilities | 10-35 | 321,096 | 322,476 | ||||||
Transportation equipment | 3-10 | 2,798 | 1,782 | ||||||
Office property and equipment and other | 3-20 | 26,980 | 27,186 | ||||||
Pipeline linefill and tank bottoms | N/A | 10,297 | 8,882 | ||||||
Construction-in-progress | N/A | 4,026 | 3,622 | ||||||
Property, plant and equipment, gross | 511,815 | 511,639 | |||||||
Accumulated depreciation | (263,554 | ) | (268,576 | ) | |||||
Property, plant and equipment, net | $ | 248,261 | $ | 243,063 |
4. | PROPERTY, PLANT AND EQUIPMENT |
During the three months ended March 31, 2018 and2020, the Partnership recognized asset impairment expense of $5.1 million. This impairment primarily relates to a write-down of the value of the Partnership’s crude oil linefill from $8.1 million as of December 31, 2019, to $4.0 million as of March 31, 2020, based on the market price of crude oil as of March 31, 2020. Early in the quarter, $0.8 million of incremental crude oil linefill was $7.0 million and $6.0 million, respectively.
During the three months ended March 31, 2020, the Partnership had an immaterial loss on the disposal of assets for repair. During the three months ended March 31, 2019, the Partnership sold various surplus assets, including the sale of three truck stations for $1.6 million, which resulted in a gain of $1.5 million, and the sale of pipeline linefill for $1.6 million, which resulted in a gain of $0.2 million. In addition, proceeds received during the three months ended March 31, 2019, included $2.6 million related to a sale of pipeline linefill in December 2018, for which the proceeds were received in January 2019.
5. | DEBT |
On May 11, 2017, the Partnership entered into an amended and restated credit agreement. On June 28, 2018, the credit agreement was amended to, among other things, reduce the revolving loan facility from $450.0 million to
As of May 6, 2019,1, 2020, approximately $251.6$270.6 million of revolver borrowings and $1.0$2.0 million of letters of credit were outstanding under the credit agreement, leaving the Partnership with approximately $147.4$127.4 million available capacity for additional revolver borrowings and letters of credit under the credit agreement, although the Partnership’s ability to borrow such funds may beis limited by the financial covenants in the credit agreement. The proceeds of loans made under the credit agreement may be used for working capital and other general corporate purposes of the Partnership.
The credit agreement is guaranteed by all of the Partnership’s existing subsidiaries. Obligations under the credit agreement are secured by first priority liens on substantially all of the Partnership’s assets and those of the guarantors.
The credit agreement includes procedures for additional financial institutions to become revolving lenders, or for any existing lender to increase its revolving commitment thereunder, subject to an aggregate maximum of
Borrowings under the credit agreement bear interest, at the Partnership’s option, at either the reserve-adjusted eurodollar rate (as defined in the credit agreement) plus an applicable margin that ranges from
2.0% to 3.25% or the alternate base rate (the highest of the agent bank’s prime rate, the federal funds effective rate plus 0.5%, and the 30-day eurodollar rate plus 1.0%) plus an applicable margin that ranges from 1.0% to 2.25%. The Partnership pays a per annum fee on all letters of credit issued under the credit agreement, which fee equals the applicable margin for loans accruing interest based on the eurodollar rate, and the Partnership pays a commitment fee ranging from 0.375% to 0.5% on the unused commitments under the credit agreement. The applicable margins for the Partnership’s interest rate, the letter of credit fee and the commitment fee vary quarterly based on the Partnership’s consolidated total leverage ratio (as defined in the credit agreement, being generally computed as the ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges).The credit agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter.
Prior to the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio will be 5.25 to 1.00 for the fiscal quarters ending March 31, 2019, and June 30, 2019; 5.00 to 1.00 for the fiscal quarters ending September 30, 2019, and December 31, 2019; and 4.75 to 1.00 for the fiscal
From and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio is 5.00 to 1.00; provided that from and after the fiscal quarter ending immediately preceding the fiscal quarter in which a specified acquisition occurs to and including the last day of the second full fiscal quarter following the fiscal quarter in which such acquisition occurred, the maximum permitted consolidated total leverage ratio will be 5.50 to 1.00.
The maximum permitted consolidated senior secured leverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated total secured debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) is 3.50 to 1.00, but this covenant is only tested from and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million.
The minimum permitted consolidated interest coverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges (“credit agreement EBITDA”) to consolidated interest expense) is
2.50 to 1.00.In addition, the credit agreement contains various covenants that, among other restrictions, limit the Partnership’s ability to:
create, issue, incur or assume indebtedness;
create, incur or assume liens;
engage in mergers or acquisitions;
sell, transfer, assign or convey assets;
repurchase the Partnership’s equity, make distributions to unitholders and make certain other restricted payments;
make investments;
modify the terms of certain indebtedness, or prepay certain indebtedness;
engage in transactions with affiliates;
enter into certain hedging contracts;
enter into certain burdensome agreements;
change the nature of the Partnership’s business; and
make certain amendments to the Partnership’sFourth Amended and Restated Agreement of Limited Partnership of the Partnership (the “Partnership’s partnership agreement.agreement”).
Management evaluates whether conditions and/or events raise substantial doubt about the Partnership’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued (the “assessment period”). In performing this assessment, management considered the risk associated with its ongoing ability to meet the financial covenants.
Based on the Partnership’s forecasted credit agreement EBITDA during the assessment period, management believes that it will meetremain in compliance with these financial covenants (as described below). However, there are certain inherent risks associated with ourthe continued ability to comply with ourthe consolidated total leverage ratio covenant. These risks relate, among other things, to potential future (a) decreases in storage volumes and rates as well as throughput and transportation rates realized; (b) weather phenomenon that may potentially hinder the Partnership’s asphalt business activity; and (c) other items affecting forecasted levels of expenditures and uses of cash resources. Violation of the consolidated total leverage ratio covenant would be an event of default under the credit agreement, which would cause our $252.6the $271.6 million in outstanding debt, as of March 31, 2019,2020, to become immediately due and payable. If this were to occur, the Partnership would not expect to have sufficient liquidity to repay these outstanding amounts then due, which could cause the lenders under the credit facility to pursue other remedies. Such remedies could include exercising their collateral rights to the Partnership’s assets.
Based on management’s current forecasts, management believes the Partnership will be able to comply with the consolidated total leverage ratio during the assessment period. However, the Partnership cannot make any assurances that it will be able to achieve management’s forecasts. If the Partnership is unable to achieve management’s forecasts, further actions may be necessary to remain in compliance with the Partnership’s consolidated total leverage ratio covenant including, but not limited to, cost reductions, common and preferred unitholder distribution curtailments, and/or asset sales. The Partnership can make no assurances that it would be successful in undertaking these actions or that the Partnership will remain in compliance with the consolidated total leverage ratio during the assessment period.
The credit agreement permits the Partnership to make quarterly distributions of available cash (as defined in the Partnership’s partnership agreement) to unitholders so long as no default or event of default exists under the credit agreement on a pro forma basis after giving effect to such distribution, provided, however, commencing with the fiscal quarter ending September 30, 2018, in no event shall aggregate quarterly distributions in any individual fiscal quarter exceed $10.7 million through, and including, the fiscal quarter ending December 31, 2019.distribution. The Partnership is currently allowed to make distributions to its unitholders in accordance with this covenant; however, the Partnership will only make distributions to the extent it has sufficient cash from operations after establishment of cash reserves as determined by the Board of Directors (the “Board”) of Blueknight Energy Partners G.P., L.L.C. (the “general partner”) in accordance with the Partnership’s cash distribution policy, including the establishment of any reserves for the proper conduct of the Partnership’s business. See Note 97 for additional information regarding distributions.
In addition to other customary events of default, the credit agreement includes an event of default if:
(i) | the general partner ceases to own 100% of the Partnership’s general partner interest or ceases to control the Partnership; |
(ii) | Ergon ceases to own and control 50% or more of the membership interests of the general partner; or |
(iii) | during any period of 12 consecutive months, a majority of the members of the Board of the general partner ceases to be composed of individuals: |
(A) | who were members of the Board on the first day of such period; |
(B) | whose election or nomination to the Board was approved by individuals referred to in clause (A) above constituting at the time of such election or nomination at least a majority of the Board; or |
(C) | whose election or nomination to the Board was approved by individuals referred to in clauses (A) and (B) above constituting at the time of such election or nomination at least a majority of the Board, provided that any changes to the composition of individuals serving as members of the Board approved by Ergon will not cause an event of default. |
If an event of default relating to bankruptcy or other insolvency events occurs with respect to the general partner or the Partnership, all indebtedness under the credit agreement will immediately become due and payable. If any other event of default exists under the credit agreement, the lenders may accelerate the maturity of the obligations outstanding under the credit agreement and exercise other rights and remedies. In addition, if any event of default exists under the credit agreement, the lenders may commence foreclosure or other actions against the collateral.
If any default occurs under the credit agreement, or if the Partnership is unable to make any of the representations and warranties in the credit agreement, the Partnership will be unable to borrow funds or to have letters of credit issued under the credit agreement.
Debt issuance costs are being amortized over the term of the credit agreement. Interest expense related to debt issuance cost amortization for each ofboth the three months ended March 31, 20182020 and 2019, was $0.3$0.3 million.
During the three months ended March 31, 20182019 and 2019,2020, the weighted average interest rate under the Partnership’s credit agreement was 4.96%6.43% and 6.43%4.90%, respectively, resulting in interest expense of approximately $3.9$4.3 million and $4.3$3.4 million, respectively.
Derivatives Not Designated as Hedging Instruments | Balance Sheet Location | Fair Value of Derivatives | ||||
December 31, 2018 | ||||||
Interest rate swap assets - current | Other current assets | $ | 44 |
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Net Income on Derivatives | Amount of Gain (Loss) Recognized in Net Income on Derivatives | ||||||||
Three Months ended March 31, | ||||||||||
2018 | 2019 | |||||||||
Interest rate swaps | Interest expense, net of capitalized interest | $ | 354 | $ | (44 | ) |
6. | NET INCOME PER LIMITED PARTNER UNIT |
For purposes of calculating earnings per unit, the excess of distributions over earnings or excess of earnings over distributions for each period are allocated to the Partnership’s general partner based on the general partner’s ownership interest at the time. The following sets forth the computation of basic and diluted net income per common unit (in thousands, except per unit data):
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Net income | $ | 3,757 | $ | - | ||||
General partner interest in net income(loss) | 105 | - | ||||||
Preferred interest in net income | 6,279 | 6,279 | ||||||
Net loss available to limited partners | $ | (2,627 | ) | $ | (6,279 | ) | ||
Basic and diluted weighted average number of units: | ||||||||
Common units | 40,678 | 41,015 | ||||||
Restricted and phantom units | 769 | 983 | ||||||
Total units | 41,447 | 41,998 | ||||||
Basic and diluted net loss per common unit | $ | (0.06 | ) | $ | (0.15 | ) |
Three Months ended March 31, | |||||||
2018 | 2019 | ||||||
Net income | $ | 4,442 | $ | 3,757 | |||
General partner interest in net income | 231 | 105 | |||||
Preferred interest in net income | 6,278 | 6,279 | |||||
Net loss available to limited partners | $ | (2,067 | ) | $ | (2,627 | ) | |
Basic and diluted weighted average number of units: | |||||||
Common units | 40,289 | 40,678 | |||||
Restricted and phantom units | 833 | 769 | |||||
Total units | 41,122 | 41,447 | |||||
Basic and diluted net loss per common unit | $ | (0.05 | ) | $ | (0.06 | ) |
7. | PARTNERS’ CAPITAL AND DISTRIBUTIONS |
On April 22, 2019, the Partnership announced that16, 2020, the Board approved a cash distribution of
In addition, the Board approved a cash distribution of
$0.04 per outstanding common unit for the three months ended March 31,8. | RELATED-PARTY TRANSACTIONS |
The Partnership leases asphalt facilities and provides asphalt terminalling services to Ergon. For the three months ended March 31, 20182019 and 2019,2020, the Partnership recognized related-party revenues of $14.0$9.1 million and $9.1$9.0 million, respectively, for services provided to Ergon. As of December 31, 2018,2019, and March 31, 2019,2020, the Partnership had receivables from Ergon of $1.0$1.1 million and $0.9$0.9 million, respectively, net of allowance for doubtful accounts.respectively. As of December 31, 2018,2019, and March 31, 2019,2020, the Partnership had unearned revenues from Ergon of $6.5$5.1 million and $16.8$4.8 million, respectively.
Effective April 1, 2018, the Partnership entered into an agreement with Ergon under which the Partnership purchases crude oil in connection with its crude oil marketing operations. For the three months ended March 31, 2019 and 2020, the Partnership made purchases of crude oil under this agreement totaling $29.7 million.$29.7 million and $27.8 million, respectively. As of March 31, 2019,2020, the Partnership had payables to Ergon related to this agreement of $11.9$7.3 million related to the March crude oil settlement cycle, and this balance was paid in full on April 19, 2019.
In May 2018, the Partnership, along with Kingfisher Midstream and Ergon, have an agreement (the “Agreement”) that gives each party rights concerningannounced the purchase or saleexecution of Ergon’s interest indefinitive agreements to form Cimarron Express, subject to certain terms and conditions.Express. Cimarron Express was planned to be a new 16-inch diameter, 65-mile crude oil pipeline running from northeastern Kingfisher County, Oklahoma to the Partnership’s Cushing, Oklahoma crude oil terminal, with an originallyoriginal anticipated in-service date in the second half of 2019. Ergon formed a Delaware limited liability company, Ergon - Oklahoma Pipeline, LLC (“DEVCO”), which holdsheld Ergon’s 50% membership interest in Cimarron Express. UnderThe Partnership and Ergon had an agreement (the “Agreement”) that gave each party certain rights to obligate the Agreement,counterparty to either sell or purchase the Partnership has the right, at any time, to purchase 100% of the authorized and outstanding membermembership interests in DEVCO from Ergon for the Purchase Price (as defined in the Agreement), which shall bea purchase price computed by taking Ergon’s total investment in the Cimarron Express plus interest, by giving written noticesubject to Ergon (the “Call”). Ergon hascertain terms and conditions as described in the right to require the Partnership to purchase 100% of the authorized and outstanding member interests of DEVCO for the Purchase Price (the “Put”) at any time beginning the earlier of (i) 18 months from the formation, May 9, 2018, of the joint venture company to build the pipeline, (ii) six months after completion of the pipeline, or (iii) the event of dissolution of Cimarron Express. Upon exercise of the Call or the Put, the Partnership and Ergon will execute the Member Interest Purchase Agreement, which is attached to the Agreement as Exhibit B. Upon receipt of the Purchase Price, Ergon shall be obligated to convey 100% of the authorized and outstanding member interests in DEVCO to the Partnership or its designee. As of March 31, 2019, neither Ergon nor the Partnership has exercised their options under the Agreement.
In December 2018, the Partnership and Ergon were informed that Kingfisher Midstream made the decision to suspend future investments in Cimarron Express as Kingfisher Midstream determined that the anticipated volumes from the currently dedicated acreage, and the resultant project economics, did not support additional investment from Kingfisher Midstream. As of December 31, 2018, Cimarron Express had spent approximately $30.6 million on the pipeline project, primarily related to the purchase of steel pipe and equipment, rights of way and engineering and design services. Cimarron Express recorded a $20.9 million impairment charge in the fourth quarter of 2018 to reduce the carrying amount of its assets to their estimated fair value. In addition to its capital contributions to Cimarron Express, Ergon’s interest in DEVCO includes internal Ergon labor and capitalized interest that bring its investment in DEVCO to approximately $17.8 million through March 31, 2019. Ergon recorded a $10.0 million other-than-temporary impairment on its investment in Cimarron Express as of December 31, 2018 to reduce its investment to its estimated fair value. As a result, theThe Partnership considered the SEC staff’s opinions outlined in SAB 107 Topic 5.T Accounting for Expenses or Liabilities Paid by Principal Stockholders. TheStockholders, and, as the Agreement was designed to have the Partnership, ultimately and from the onset, bear any risk of loss on the construction of the pipeline project and eventually own a 50% interest in the pipeline. As a result,pipeline, the Partnership recorded impairments on a push downpush-down basis a $10.0 million impairment of Ergon’s investment in Cimarron Express in its consolidated results of operations during the year ended December 31, 2018, and a contingent liability payable to Ergon as of December 31, 2018. In April 2019, assets from the project were sold to a third-party for approximately $1.4 million over the fair market value that was estimated at December 31, 2018. As a result, the Partnership will record in April 2019, on a push down basis, a gain on the sale based on Ergon’s 50% interest in Cimarron Express. During the assets.three months ended March 31, 2019, the Partnership recorded impairment expense of $0.8 million related to the Agreement, which included a change in estimate and accrued interest. The Partnership’s contingent liability as of December 31, 2019, consisted of Ergon’s $10.2 million investment plus accrued interest of $2.0 million. In November 2019, Ergon and Kingfisher Midstream wound up the business, distributed assets, and dissolved Cimarron Express. On January 2, 2020, Ergon exercised its right under the Agreement to require the Partnership to purchase the outstanding member interest in DEVCO, and the Partnership paid the amount in full on January 3, 2020. This cash payment is reflected as an acquisition of DEVCO in the investing cash flows section on the Partnership’s condensed consolidated statement of cash flows for the three months ended March 31, 2020.
9. | LONG-TERM INCENTIVE PLAN |
In July 2007, the general partner adopted the Long-Term Incentive Plan (the “LTIP”), which is administered by the compensation committee of the Board. Effective April 29, 2014, the Partnership’s unitholders approved an amendment to the LTIP to increase the number of common units reserved for issuance under the incentive plan to 4,100,000 common units, subject to adjustments for certain events. Although other types of awards are contemplated under the LTIP, currently outstanding awards include “phantom” units, which convey the right to receive common units upon vesting, and “restricted” units, which are grants of common units restricted until the time of vesting. The phantom unit awards also include distribution equivalent rights (“DERs”).
Subject to applicable earning criteria, a DER entitles the grantee to a cash payment equal to the cash distribution paid on an outstanding common unit prior to the vesting date of the underlying award. Recipients of restricted and phantom units are entitled to receive cash distributions paid on common units during the vesting period which are reflected initially as a reduction of partners’ capital. Distributions paid on units which ultimately do not vest are reclassified as compensation expense. Awards granted to date are equity awards and, accordingly, the fair value of the awards as of the grant date is expensed over the vesting period.
Restricted common units are granted to the independent directors.directors on each anniversary of joining the Board. The units vest in one-third increments over three years. The following table includes information on outstanding grants made to the directors under the LTIP:
Grant Date | Number of Units | Weighted Average Grant Date Fair Value(1) | Grant Date Total Fair Value (in thousands) | |||||||||
December 2017 | 15,306 | $ | 4.85 | $ | 74 | |||||||
December 2018 | 23,436 | $ | 1.20 | $ | 28 | |||||||
December 2019 | 7,500 | $ | 1.07 | $ | 8 |
Grant Date | Number of Units | Weighted Average Grant Date Fair Value(1) | Grant Date Total Fair Value | |||||||
(in thousands) | ||||||||||
December 2016 | 10,950 | $ | 6.85 | $ | 75 | |||||
December 2017 | 15,306 | $ | 4.85 | $ | 74 | |||||
December 2018 | 23,436 | $ | 1.20 | $ | 28 |
Grant Date | Number of Units | Weighted Average Grant Date Fair Value(1) | Grant Date Total Fair Value | |||||||
(in thousands) | ||||||||||
December 2016 | 10,220 | $ | 6.85 | $ | 70 | |||||
December 2017 | 14,286 | $ | 4.85 | $ | 69 | |||||
December 2018 | 21,875 | $ | 1.20 | $ | 26 |
(1) | Fair value is the closing market price on the grant date of the awards. |
The Partnership also grants phantom units to employees. These grants are equity awards under
ASC 718 – Stock Compensation and, accordingly, the fair value of the awards as of the grant date is expensed over the three-year vesting period. The following table includes information on the outstanding grants:Grant Date | Number of Units | Weighted Average Grant Date Fair Value(1) | Grant Date Total Fair Value (in thousands) | |||||||||
March 2018 | 396,536 | $ | 4.77 | $ | 1,891 | |||||||
March 2019 | 524,997 | $ | 1.14 | $ | 598 | |||||||
June 2019 | 46,168 | $ | 1.08 | $ | 50 | |||||||
March 2020 | 600,396 | $ | 0.90 | $ | 540 |
Grant Date | Number of Units | Weighted Average Grant Date Fair Value(1) | Grant Date Total Fair Value | |||||||
(in thousands) | ||||||||||
March 2017 | 323,339 | $ | 7.15 | $ | 2,312 | |||||
March 2018 | 457,984 | $ | 4.77 | $ | 2,185 | |||||
March 2019 | 524,997 | $ | 1.14 | $ | 598 |
(1) | Fair value is the closing market price on the grant date of the awards. |
The unrecognized estimated compensation cost of outstanding phantom and restricted units at
March 31,The Partnership’s equity-based incentive compensation expense for the three months ended March 31, 20182019 and 2019,2020, was $0.5$0.3 million and $0.3$0.2 million, respectively.
Activity pertaining to phantom and restricted common unit awards granted under the LTIP is as follows:
Number of Units | Weighted Average Grant Date Fair Value | |||||||
Nonvested at December 31, 2019 | 1,068,343 | $ | 3.42 | |||||
Granted | 600,396 | 0.90 | ||||||
Vested | 227,701 | 7.15 | ||||||
Forfeited | - | - | ||||||
Nonvested at March 31, 2020 | 1,441,038 | $ | 2.80 |
Number of Units | Weighted Average Grant Date Fair Value | |||||
Nonvested at December 31, 2018 | 998,219 | $ | 5.88 | |||
Granted | 524,997 | 1.14 | ||||
Vested | 366,282 | 4.80 | ||||
Forfeited | — | — | ||||
Nonvested at March 31, 2019 | 1,156,934 | $ | 3.60 |
10. | FAIR VALUE MEASUREMENTS |
The Partnership uses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost) to value assets and liabilities required to be measured at fair value, as appropriate. The Partnership uses an exit price when determining the fair value. The exit price represents amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The Partnership utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1 | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2 | Inputs other than quoted prices that are observable for these assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
Level 3 | Unobservable inputs in which there is little market data, which requires the reporting entity to develop its own assumptions. |
This hierarchy requires the use of observable market data, when available, to minimize the use of unobservable inputs when determining fair value. In periods in which they occur,
As of December 31, 2019, and March 31, 2020, the Partnership recognizes transfers into and out of Level 3 as of the end of the reporting period. There werehad no transfers during the three months ended March 31, 2019. Transfers out of Level 3 represent existing assets and liabilities that were classified previously as Level 3 for which the observable inputs became a more significant portion of the fair value estimates. Determining the appropriate classification of the Partnership’s fair value measurements within the fair value hierarchy requires management’s judgment regarding the degree to which market data is observable or corroborated by observable market data.
Fair Value Measurements as of December 31, 2018 | |||||||||||||||
Description | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
Assets: | |||||||||||||||
Interest rate swap assets | $ | 44 | $ | — | $ | 44 | $ | — | |||||||
Total swap assets | $ | 44 | $ | — | $ | 44 | $ | — |
Fair Value of Other Financial Instruments
The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance for financial instruments. The Partnership has determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
At March 31, 2019,2020, the carrying values on the unaudited condensed consolidated balance sheets for cash and cash equivalents (classified as Level 1), accounts receivable, and accounts payable approximate their fair value because of their short-term nature.
Based on the borrowing rates currently available to the Partnership for credit agreement debt with similar terms and maturities and consideration of the Partnership’s non-performance risk, long-term debt associated with the Partnership’s credit agreement at March 31, 2019,2020, approximates its fair value. The fair value of the Partnership’s long-term debt was calculated using observable inputs (LIBOR for the risk-free component) and unobservable company-specific credit spread information. As such, the Partnership considers this debt to be Level 3.
As of | |||||
Classification | March 31, 2019 | ||||
(thousands) | |||||
Assets | |||||
Operating lease assets | Operating lease assets | $ | 11,594 | ||
Finance lease assets | Other noncurrent assets | 631 | |||
Total leased assets | $ | 12,225 | |||
Liabilities | |||||
Current | |||||
Operating lease liabilities | Current operating lease liability | $ | 2,768 | ||
Finance lease liabilities | Other current liabilities | 263 | |||
Noncurrent | |||||
Operating lease liabilities | Noncurrent operating lease liability | 8,935 | |||
Finance lease liabilities | Other long-term liabilities | 368 | |||
Total lease liabilities | $ | 12,334 |
Operating Leases | Financing Leases | ||||||
Twelve months ending March 31, 2020 | $ | 2,993 | $ | 285 | |||
Twelve months ending March 31, 2021 | 2,447 | 215 | |||||
Twelve months ending March 31, 2022 | 1,843 | 129 | |||||
Twelve months ending March 31, 2023 | 1,413 | 42 | |||||
Twelve months ending March 31, 2024 | 1,199 | — | |||||
Thereafter | 5,208 | — | |||||
Total | 15,103 | 671 | |||||
Less: Interest | 3,400 | 40 | |||||
Present value of lease liabilities | $ | 11,703 | $ | 631 |
Operating Leases | |||
Year ending December 31, 2019 | $ | 2,862 | |
Year ending December 31, 2020 | 1,904 | ||
Year ending December 31, 2021 | 1,242 | ||
Year ending December 31, 2022 | 640 | ||
Year ending December 31, 2023 | 548 | ||
Thereafter | 1,259 | ||
Total future minimum lease payments | $ | 8,455 |
Three Months ended March 31, | |||||
Classification | 2019 | ||||
Total Lease Cost by Type: | |||||
Operating lease cost(1) | Operating Expenses | $ | 1,142 | ||
Finance lease cost | |||||
Amortization of leased assets | Operating Expenses | 70 | |||
Interest on lease liabilities | Interest Expense | 7 | |||
Net lease cost | $ | 1,219 | |||
Supplemental cash flow disclosures: | |||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||
Operating cash flows from operating leases | $ | (750 | ) | ||
Operating cash flows from finance leases | $ | (12 | ) | ||
Financing cash flows from finance leases | $ | (66 | ) | ||
Leased assets obtained in exchange for new operating lease liabilities | $ | 569 | |||
Leased assets obtained in exchange for new finance lease liabilities | $ | 112 |
11. | |||
OPERATING SEGMENTS |
The Partnership’s operations consist of
four reportable segments: (i) asphalt terminalling services, (ii) crude oil terminalling services, (iii) crude oil pipeline services and (iv) crude oil trucking services.ASPHALT TERMINALLING SERVICES
—The Partnership provides asphalt product and residual fuel terminalling services, including storage, blending, processing and throughput services.CRUDE OIL TERMINALLING SERVICES
—The Partnership provides crude oil terminalling services at its terminalling facility located in Oklahoma.CRUDE OIL PIPELINE SERVICES
—The Partnership owns and operates its Mid-Continent pipelineCRUDE OIL TRUCKING SERVICES
— The Partnership uses its owned and leased tanker trucks to gather crude oil for its customers at remote wellhead locations generally not covered by pipeline and gathering systems and to transport the crude oil to aggregation points and storage facilities located along pipeline gathering and transportation systems.The Partnership’s management evaluates segment performance based upon operating margin, excluding amortization and depreciation, which includes revenues from related parties and external customers and operating expense, excluding depreciation and amortization. Operating margin, excluding depreciation and amortization (in the aggregate and by segment) is presented in the following table. The Partnership computes the components of operating margin, excluding depreciation and amortization by using amounts that are determined in accordance with GAAP. The Partnership accounts for intersegment product sales as ifTransactions between segments are generally recorded based on prices negotiated between the sales weresegments and are similar to prices charged to third parties, that is, at current market prices.parties. A reconciliation of operating margin, excluding depreciation and amortization to income before income taxes, which is its nearest comparable GAAP financial measure, is included in the following table. The Partnership believes that investors benefit from having access to the same financial measures being utilized by management. Operating margin, excluding depreciation and amortization is an important measure of the economic performance of the Partnership’s core operations. This measure forms the basis of the Partnership’s internal financial reporting and is used by its management in deciding how to allocate capital resources among segments. Income before income taxes, alternatively, includes expense items, such as depreciation and amortization, general and administrative expenses and interest expense, which management does not consider when evaluating the core profitability of the Partnership’s operations.
The following table reflects certain financial data for each segment for the periods indicated (in thousands):
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Asphalt Terminalling Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 6,982 | $ | 6,854 | ||||
Related-party revenue | 4,118 | 4,077 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 9,763 | 9,831 | ||||||
Related-party revenue | 4,940 | 4,921 | ||||||
Total revenue for reportable segment | 25,803 | 25,683 | ||||||
Operating expense, excluding depreciation and amortization | 12,285 | 12,026 | ||||||
Operating margin, excluding depreciation and amortization | $ | 13,518 | $ | 13,657 | ||||
Total assets (end of period) | $ | 147,844 | $ | 143,621 | ||||
Crude Oil Terminalling Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 3,573 | $ | 3,330 | ||||
Intersegment revenue | 298 | - | ||||||
Total revenue for reportable segment | 3,871 | 3,330 | ||||||
Operating expense, excluding depreciation and amortization | 1,282 | 878 | ||||||
Operating margin, excluding depreciation and amortization | $ | 2,589 | $ | 2,452 | ||||
Total assets (end of period) | $ | 67,934 | $ | 61,984 |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Crude Oil Pipeline Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 2,498 | $ | 502 | ||||
Related-party revenue | 101 | - | ||||||
Product sales revenue: | ||||||||
Third-party revenue | 58,924 | 47,052 | ||||||
Total revenue for reportable segment | 61,523 | 47,554 | ||||||
Operating expense, excluding depreciation and amortization | 2,722 | 2,123 | ||||||
Intersegment operating expense | 1,627 | 1,425 | ||||||
Third-party cost of product sales | 24,587 | 14,221 | ||||||
Related-party cost of product sales | 30,774 | 28,254 | ||||||
Operating margin, excluding depreciation and amortization | $ | 1,813 | $ | 1,531 | ||||
Total assets (end of period) | $ | 98,722 | $ | 79,180 | ||||
Crude Oil Trucking Services | ||||||||
Service revenue | ||||||||
Third-party revenue | $ | 2,833 | $ | 2,543 | ||||
Intersegment revenue | 1,329 | 1,425 | ||||||
Total revenue for reportable segment | 4,162 | 3,968 | ||||||
Operating expense, excluding depreciation and amortization | 4,220 | 3,818 | ||||||
Operating margin, excluding depreciation and amortization | $ | (58 | ) | $ | 150 | |||
Total assets (end of period) | $ | 5,156 | $ | 5,287 | ||||
Total operating margin, excluding depreciation and amortization(1) | $ | 17,862 | $ | 17,790 | ||||
Total Segment Revenues | $ | 95,359 | $ | 80,535 | ||||
Elimination of Intersegment Revenues | (1,627 | ) | (1,425 | ) | ||||
Consolidated Revenues | $ | 93,732 | $ | 79,110 |
(1) | The following table reconciles segment operating margin (excluding depreciation and amortization) to income before income taxes (in thousands): |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Operating margin, excluding depreciation and amortization | $ | 17,862 | $ | 17,790 | ||||
Depreciation and amortization | (6,734 | ) | (6,094 | ) | ||||
General and administrative expense | (3,693 | ) | (3,540 | ) | ||||
Asset impairment expense | (1,119 | ) | (5,122 | ) | ||||
Gain (loss) on sale of assets | 1,724 | (185 | ) | |||||
Other income | - | 558 | ||||||
Interest expense | (4,271 | ) | (3,399 | ) | ||||
Income before income taxes | �� | $ | 3,769 | $ | 8 |
Three Months ended March 31, | ||||||||
2018 | 2019 | |||||||
Asphalt Terminalling Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 5,132 | $ | 6,982 | ||||
Related-party revenue | 6,321 | 4,118 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 9,458 | 9,763 | ||||||
Related-party revenue | 7,702 | 4,940 | ||||||
Total revenue for reportable segment | 28,613 | 25,803 | ||||||
Operating expense, excluding depreciation and amortization | 13,333 | 12,285 | ||||||
Operating margin, excluding depreciation and amortization | $ | 15,280 | $ | 13,518 | ||||
Total assets (end of period) | $ | 170,473 | $ | 147,844 | ||||
Crude Oil Terminalling Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 4,585 | $ | 3,573 | ||||
Intersegment revenue | — | 298 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 15 | — | ||||||
Total revenue for reportable segment | 4,600 | 3,871 | ||||||
Operating expense, excluding depreciation and amortization | 1,275 | 1,282 | ||||||
Operating margin, excluding depreciation and amortization | $ | 3,325 | $ | 2,589 | ||||
Total assets (end of period) | $ | 68,160 | $ | 67,934 | ||||
Three Months ended March 31, | ||||||||
2018 | 2019 | |||||||
Crude Oil Pipeline Services | ||||||||
Service revenue: | ||||||||
Third-party revenue | $ | 2,061 | $ | 2,498 | ||||
Related-party revenue | — | 101 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 235 | — | ||||||
Product sales revenue: | ||||||||
Third-party revenue | 3,508 | 58,924 | ||||||
Total revenue for reportable segment | 5,804 | 61,523 | ||||||
Operating expense, excluding depreciation and amortization | 2,785 | 2,722 | ||||||
Intersegment operating expense | 442 | 1,627 | ||||||
Third-party cost of product sales | 2,637 | 24,587 | ||||||
Related-party cost of product sales | — | 30,774 | ||||||
Operating margin, excluding depreciation and amortization | $ | (60 | ) | $ | 1,813 | |||
Total assets (end of period) | $ | 116,845 | $ | 98,722 | ||||
Crude Oil Trucking Services | ||||||||
Service revenue | ||||||||
Third-party revenue | $ | 5,540 | $ | 2,833 | ||||
Intersegment revenue | 442 | 1,329 | ||||||
Lease revenue: | ||||||||
Third-party revenue | 97 | — | ||||||
Product sales revenue: | ||||||||
Third-party revenue | 6 | — | ||||||
Total revenue for reportable segment | 6,085 | 4,162 | ||||||
Operating expense, excluding depreciation and amortization | 6,375 | 4,220 | ||||||
Operating margin, excluding depreciation and amortization | $ | (290 | ) | $ | (58 | ) | ||
Total assets (end of period) | $ | 6,113 | $ | 5,156 | ||||
Total operating margin, excluding depreciation and amortization(1) | $ | 18,255 | $ | 17,862 | ||||
Total Segment Revenues | $ | 45,102 | $ | 95,359 | ||||
Elimination of Intersegment Revenues | (442 | ) | (1,627 | ) | ||||
Consolidated Revenues | $ | 44,660 | $ | 93,732 |
Three Months ended March 31, | |||||||
2018 | 2019 | ||||||
Operating margin, excluding depreciation and amortization | $ | 18,255 | $ | 17,862 | |||
Depreciation and amortization | (7,367 | ) | (6,734 | ) | |||
General and administrative expense | (4,221 | ) | (3,693 | ) | |||
Asset impairment expense | (616 | ) | (1,119 | ) | |||
Gain (loss) on sale of assets | (236 | ) | 1,724 | ||||
Interest expense | (3,569 | ) | (4,271 | ) | |||
Gain on sale of unconsolidated affiliate | 2,225 | — | |||||
Income before income taxes | $ | 4,471 | $ | 3,769 |
12. | COMMITMENTS AND CONTINGENCIES |
The Partnership is from time to time subject to various legal actions and claims incidental to its business. Management believes that these legal proceedings will not have a material adverse effect on the financial position, results of operations or cash flows of the Partnership. Once management determines that information pertaining to a legal proceeding indicates that it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated, an accrual is established equal to its estimate of the likely exposure.
The Partnership has contractual obligations to perform dismantlement and removal activities in the event that some of its asphalt product and residual fuel oil terminalling and storage assets are abandoned. These obligations include varying levels of activity including completely removing the assets and returning the land to its original state. The Partnership has determined that the settlement dates related to the retirement obligations are indeterminate. The assets with indeterminate settlement dates have been in existence for many years and with regular maintenance will continue to be in service for many years to come. Also, it is not possible to predict when demands for the Partnership’s terminalling and storage services will cease, and the Partnership does not believe that such demand will cease for the foreseeable future. Accordingly, the Partnership believes the date when these assets will be abandoned is indeterminate. With no reasonably determinable abandonment date, the Partnership cannot reasonably estimate the fair value of the associated asset retirement obligations. Management believes that if the Partnership’s asset retirement obligations were settled in the foreseeable future the present value of potential cash flows that
Deferred Tax Asset | |||
Difference in bases of property, plant and equipment | $ | 260 | |
Net operating loss carryforwards | 7 | ||
Deferred tax asset | 267 | ||
Less: valuation allowance | 267 | ||
Net deferred tax asset | $ | — |
13. | RECENTLY ISSUED ACCOUNTING STANDARDS |
Except as discussed below and in the 20182019 Form 10-K, there have been no new accounting pronouncements that have become effective or have been issued during the three months ended March 31, 2019,2020, that are of significance or potential significance to the Partnership.
As used in this quarterly report, unless we indicate otherwise: (1) “Blueknight Energy Partners,” “our,” “we,” “us” and similar terms refer to Blueknight Energy Partners, L.P., together with its subsidiaries, (2) our “General Partner” refers to Blueknight Energy Partners G.P., L.L.C., (3) “Ergon” refers to Ergon, Inc., its affiliates and subsidiaries (other than our General Partner and us) and (4) “Vitol” refers to Vitol Holding B.V., its affiliates and subsidiaries. The following discussion analyzes the historical financial condition and results of operations of the Partnership and should be read in conjunction with our financial statements and notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, which was filed with the Securities and Exchange Commission (the “SEC”) on March 12, 201926, 2020 (the “2018“2019 Form 10-K”).
Forward-Looking Statements
This report contains forward-looking statements. Statements included in this quarterly report that are not historical facts (including any statements regarding plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “will,” “should,” “believe,” “expect,” “intend,”
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of the filing of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in “Part I, Item 1A. Risk Factors” in the 20182019 Form 10-K.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.
Overview
We are a publicly traded master limited partnership with operations in 2726 states. We provide integrated terminalling, gathering and transportation services for companies engaged in the production, distribution and marketing of liquid asphalt and crude oil. We manage our operations through four operating segments: (i) asphalt terminalling services, (ii) crude oil terminalling services, (iii) crude oil pipeline services and (iv) crude oil trucking services.
Potential Impact of Crude Oil Market Price Changes and Other Matters on Future Revenues
The crude oil market price and the corresponding forward market pricing curve may fluctuate significantly from period to period. In addition,period, and other volatility in the overall energy industry, and specifically in publicly tradedthe midstream energy partnershipsindustry, may impact our partnership in the near term. Factors include the overall market price for crude oil and whether or not the forward price curve is in contango (in which future prices are higher than current prices and a premium is placed on storing product and selling at a later time) or backwardated (in which the current crude oil price per barrel is higher than the future price per barrel and a premium is placed on delivering product to market and selling as soon as possible), changes in crude oil production volume and the demand for storage and transportation capacity in the areas in which we serve, geopolitical concerns and overall changes in our cost of capital. As of May 6, 2019,1, 2020, the forward crude oil price has fallen considerably and the curve is currently in a shallowdeep contango. Potential impacts of these factors are discussed below.
Due to the global pandemic related to the coronavirus disease, COVID-19, and the Organization of Petroleum Exporting Countries’ and Russia’s disagreements over production output, the energy market had historic drops in oil prices in March and April of 2020. Despite this volatility in prices, our business is uniquely positioned and expected to benefit in certain areas, and cash flow for the full year is expected to remain stable in 2020. Our asphalt and crude oil terminalling services segments represented 91% of our operating margin for the three months ended March 31, 2020, and as of May 1, 2020, these segments are fully contracted with take-or-pay revenue that have a weighted average remaining term of 4.5 years. While our customers across all our segments could be impacted by the recent market volatility, they are primarily high-quality counterparties, with over 50% of our revenues earned from those that are investment grade quality, which minimizes our counterparty credit risk. As of May 1, 2020, we do not expect any supply chain disruptions from COVID-19 to affect our customers. Management is also actively monitoring the states and regions in which we operate, and, as of now, our operations are excluded from mandatory closings due to the essential designation of our assets. In addition, a large portion of our operating margin, approximately 77%, from the asphalt terminalling services business unit is related to infrastructure spending at the federal, state, and local levels, and the U.S. government has continued to indicate its support for infrastructure spending. While we are unaware of any potential negative impact of COVID-19 on our business at this time, we are continuing to monitor the situation and have been preparing our employees to take precautions and planning for unexpected events, which may include disruptions to our workforce, customers, vendors, facilities and communities in which we operate. In an effort to protect the health and safety of our employees and the customers and vendors we interact with, we took proactive action to adopt social distancing policies at our locations, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel.
Asphalt Terminalling Services - AlthoughHistorically, there is nohave only been limited times in which asphalt prices and volumes have had a direct correlation betweenwith the price of crude oil. However, due to the current steep decline in crude oil prices, asphalt prices have significantly fallen while demand has held steady for road construction activity due to there being fewer vehicles on roads to interfere with construction work and the price oflower asphalt the asphalt industry tendsprices. This current environment is expected to benefit from a lower crude oil price environment, a strong economy and an increase in infrastructure spending. As a result, we do not expect the changes in the price of crude oil to significantly impacthave more positive than negative implications for our asphalt terminalling services operating segment. WeGenerally, asphalt volumes correlate more closely with the strength of state and local economies, the level of allocations of tax funding to transportation spending and an increase in infrastructure spending needs.
As previously mentioned, the U.S. government continues to indicate supporting infrastructure spending in this time of economic uncertainty. Further, customers have received positive feedback from customerscommunicated that they are generally expecting improved throughput volumes through our terminals in 2019; however, sinceinfrastructure projects may be accelerated and increased during this time of decreased transportation volume on the roads and highways and decreased asphalt commodity prices. While it is early in the asphalt season, we cannot be certain of the level of thosecustomer throughput volumes orhave generally been higher than the impact that weather may have on customers’ construction or paving projects throughoutprior year. However, it is too early in the year.
Crude Oil Terminalling Services - A contango crude oil curve tends to favor the crude oil storage business as crude oil marketers are incentivized to store crude oil during the current month and sell into the future month. SinceFrom March 2016 through February 2020, the crude oil curve hashad generally been in a shallow contango or backwardation. In these shallow contango or backwardated markets there is no clear incentive for marketers to store crude oil. ADespite the shallow contango curve, we saw increased activity and interests from customers that are regularly turning over their volumes by blending various crude grades and delivering it out of the terminal or a backwardated market may impact
Crude Oil Pipeline Services - A backwardated crudeCrude oil curve tends to favorpipeline transportation, while potentially influenced by the shape of the crude oil pipeline transportation business as crude oil marketers are incentivized to transport crude oil to market for sale as soon as possible. However, our crude oil pipeline services business has beencurve, is typically impacted recentlymore by an out-of-service pipeline. Between April 2016 and July 2018, we had been operating one Oklahoma pipeline system, instead of two systems, providing us with a capacity of approximately 20,000 to 25,000 barrels per day (Bpd). In July 2018, we were able to restore service to a second system which has increased the transportation capacity of our pipeline systems by approximately 20,000 Bpd.overall drilling activity. The ability to fully utilize the capacity of these systemsour pipeline system may be impacted by the market price of crude oil and producers’ decisions to increase or decrease production in the areas we serve.
In our internal crude oil marketing operations, with the objective of increasing the overall utilization of our Oklahoma crude oil pipeline systems. Typically, the volume of crude oil we purchase in a given month will be sold in the same month. However, we have market price exposure for inventory that is carried over month-to-month as well as pipeline linefill we maintain. Since our pipeline tariffs require shippers to carry their share of linefill, our crude oil marketing operations, as a shipper, also carries linefill. We may also be exposed to price risk with respect to the differing qualities of crude oil we transport and our ability to effectively blend them to market specifications.
Crude Oil Trucking Services - Crude oil trucking, while potentially influenced by the shape of the crude oil market curve, is typically impacted more by overall drilling activity and the ability to have the appropriate level of assets located properly to efficiently move the barrels to delivery points for customers.
Our revenues consist of (i) terminalling revenues, (ii) gathering and transportation revenues, (iii) product sales revenues and (iv) fuel surcharge revenues. For the three months ended March 31, 2019,2020, the Partnership recognized revenues of $9.1 million and $0.1 million for services provided to Ergon, and Cimarron Express, respectively, with the remainder of our services being provided to third parties.
Terminalling revenues consist of (i) storage service and operating lease fees resulting from short-term and long-term contracts for committed space that may or may not be utilized by the customer in a given month;month and (ii) terminal throughput service charges to pump crude oil to connecting carriers or to deliver asphalt product out of our terminals. We earn terminalling revenues in two of our segments: (i) asphalt terminalling services and (ii) crude oil terminalling services. Storage service revenues are recognized as the services are provided on a monthly basis. Terminal throughput service charges are recognized as the crude oil or asphalt product is delivered out of our terminal. Storage service revenues are recognized as the services are provided on a monthly basis. We earn terminalling revenues in two of our segments: (i) asphalt terminalling services and (ii) crude oil terminalling services.
We have leases and terminalling agreements with customers for all of our 53 asphalt facilities, including 2328 facilities under contract with Ergon. These agreements have, based on a weighted average by remaining fixed revenue, approximately five4.6 years remaining under their terms. Agreements for four of the facilities expire byOne agreement expires at the end of 2019,2020, and the remaining agreements expire at varying times thereafter, including agreements for 23 facilities that expire in 2023.through 2026. We may not be able to extend, renegotiate or replace these contracts when they expire and the terms of any renegotiated contracts may not be as favorable as the contracts they replace. We operate the asphalt facilities pursuant to the terminalling agreements, while our contract counterparties operate the asphalt facilities that are subject to lease agreements.
As of May 6, 2019,1, 2020, we had approximately 5.8 million barrels of crude oil storage under service contracts, including 3.13.2 million barrels of crude oil storage contracts that expire in 2019.2020. The remaining terms on the service contracts that extend beyond 2020range from 511 to 3220 months. Storage contracts with Vitol represent 2.93.2 million barrels of crude oil storage capacity under contract, and an additional 0.5 million barrelscontract. We are under an intercompany contract.
Gathering and transportation services revenues consist of service fees recognized for the gathering of crude oil for our customers and the transportation of crude oil to refiners, to common carrier pipelines for ultimate delivery to refiners or to terminalling facilities owned by us and others. We earn gathering and transportation revenues in two of our segments: (i) crude oil pipeline services and (ii) crude oil trucking services. Revenue for the gathering and transportation of crude oil is recognized when the service is performed and is based upon regulated and non-regulated tariff rates and the related transport volumes.
The following is a summary of our average gathering and transportation volumes for the periods indicated (in thousands of barrels per day):
Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||
2018 | 2019 | Three Months | |||||||||
Average pipeline throughput volume | 23 | 37 | 14 | 61 | % | ||||||
Average trucking transportation volume | 23 | 27 | 4 | 17 | % |
Three Months Ended March 31, | Favorable/(Unfavorable) | |||||||||||||||
2019 | 2020 | Three Months | ||||||||||||||
Average pipeline throughput volume | 37 | 16 | (21 | ) | (57 | )% | ||||||||||
Average trucking transportation volume | 27 | 23 | (4 | ) | (15 | )% |
Volumes have decreased in both pipeline and trucking transportation due to decreased drilling activities in the Eagle pipeline system and restored service in July 2018, increasing the transportation capacity of our pipeline systems by approximately 20,000 Bpd. See
Product sales revenues are comprised of (i) revenues recognized for the sale of crude oil to our customers that we purchase at production leases and (ii) revenue recognized in buy/sell transactions with our customers. We earn product sales revenue in our crude oil pipeline services operating segment. Product sales revenue is recognized for products upon delivery and when the customer assumes the risks and rewards of ownership. We earn product sales revenue in our crude oil pipeline services operating segment.
Fuel surcharge revenues are comprised of revenues recognized for the reimbursement of fuel and power consumed to operate our asphalt terminals. We recognize fuel surcharge revenues in the period in which the related fuel and power expenses are incurred.
Our Expenses
Operating expenses decreased by 13%8% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreases in compensation expense and maintenance repairs expense as compared toa result of a focus on managing costs, as well as a decrease in depreciation expense. General and administrative expenses also decreased for the three months ended March 31, 2018. In addition to decreases related2020, as compared to the sale of the three asphalt plants in July 2018, depreciation expense decreased due to certain assets reaching the end of their depreciable lives and vehicle expenses decreased due to a reduction in the size of our fleet. General and administrative expenses decreased 13% for the three months ended March 31, 2019 as compared. The is primarily due to a decrease in professional fees and an overall commitment to reducing costs across the company. Our interest expense decreased by 20% for the three months ended March 31, 2018. The decrease is primarily due2020, as compared to decreased compensation expense. Our interest expense increased by $0.7 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.. See
Distributions
The amount of distributions we pay and the decision to make any distribution is determined by the Board of Directors of our General Partner (the “Board”), which has broad discretion to establish cash reserves for the proper conduct of our business and for future distributions to our unitholders. In addition, our cash distribution policy is subject to restrictions on distributions under our credit agreement.
On April 22, 2019, we announced that16, 2020, the Board approved a cash distribution of $0.17875$0.17875 per outstanding Preferred Unitpreferred unit for the three months ended March 31, 2019.2020. We will pay this distribution on May 14, 2019,2020, to unitholders of record as of May 3, 2019.4, 2020. The total distribution will be approximately $6.4$6.4 million, with approximately $6.3$6.3 million and $0.1$0.1 million paid to our preferred unitholders and General Partner, respectively.
In addition, the Board approved a cash distribution of $0.04$0.04 per outstanding common unit for the three months ended March 31, 2019.2020. We will pay this distribution on May 14, 2019,2020, to unitholders of record on as of May 3, 2019.4, 2020. The total distribution will be approximately $1.7$1.7 million, with approximately $1.6$1.6 million and $0.1less than $0.1 million paid to our common unitholders and General Partner, respectively, and less than $0.1approximately $0.1 million paid to holders of phantom and restricted units pursuant to awards granted under our Long-Term Incentive Plan.
Results of Operations
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, management uses additional measures that are known as “non-GAAP financial measures” in its evaluation of past performance and prospects for the future. The primary measure used by management is operating margin, excluding depreciation and amortization.
Management believes that the presentation of such additional financial measures provides useful information to investors regarding our performance and results of operations because these measures, when used in conjunction with related GAAP financial measures, (i) provide additional information about our core operating performance and ability to generate and distribute cash flow; (ii) provide investors with the financial analytical framework upon which management bases financial, operational, compensation and planning decisions and (iii) present measurements that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. These additional financial measures are reconciled to the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our unaudited condensed consolidated financial statements and footnotes.
The table below summarizes our financial results for the three months ended March 31,
Operating Results | Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||||
Three Months | ||||||||||||||
(dollars in thousands) | 2018 | 2019 | $ | % | ||||||||||
Operating margin, excluding depreciation and amortization: | ||||||||||||||
Asphalt terminalling services | $ | 15,280 | $ | 13,518 | $ | (1,762 | ) | (12 | )% | |||||
Crude oil terminalling services | 3,325 | 2,589 | (736 | ) | (22 | )% | ||||||||
Crude oil pipeline services | (60 | ) | 1,813 | 1,873 | 3,122 | % | ||||||||
Crude oil trucking services | (290 | ) | (58 | ) | 232 | 80 | % | |||||||
Total operating margin, excluding depreciation and amortization | 18,255 | 17,862 | (393 | ) | (2 | )% | ||||||||
Depreciation and amortization | (7,367 | ) | (6,734 | ) | 633 | 9 | % | |||||||
General and administrative expense | (4,221 | ) | (3,693 | ) | 528 | 13 | % | |||||||
Asset impairment expense | (616 | ) | (1,119 | ) | (503 | ) | (82 | )% | ||||||
Gain (loss) on sale of assets | (236 | ) | 1,724 | 1,960 | 831 | % | ||||||||
Operating income | 5,815 | 8,040 | 2,225 | 38 | % | |||||||||
Other income (expenses): | ||||||||||||||
Gain on sale of unconsolidated affiliate | 2,225 | — | (2,225 | ) | (100 | )% | ||||||||
Interest expense | (3,569 | ) | (4,271 | ) | (702 | ) | (20 | )% | ||||||
Provision for income taxes | (29 | ) | (12 | ) | 17 | 59 | % | |||||||
Net income | $ | 4,442 | $ | 3,757 | $ | (685 | ) | (15 | )% |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
Operating results | March 31, | Three Months | ||||||||||||||
(dollars in thousands) | 2019 | 2020 | $ | % | ||||||||||||
Operating margin, excluding depreciation and amortization: | ||||||||||||||||
Asphalt terminalling services | $ | 13,518 | $ | 13,657 | $ | 139 | 1 | % | ||||||||
Crude oil terminalling services | 2,589 | 2,452 | (137 | ) | (5 | )% | ||||||||||
Crude oil pipeline services | 1,813 | 1,531 | (282 | ) | (16 | )% | ||||||||||
Crude oil trucking services | (58 | ) | 150 | 208 | 359 | % | ||||||||||
Total operating margin, excluding depreciation and amortization | 17,862 | 17,790 | (72 | ) | (0 | )% | ||||||||||
Depreciation and amortization | (6,734 | ) | (6,094 | ) | 640 | 10 | % | |||||||||
General and administrative expense | (3,693 | ) | (3,540 | ) | 153 | 4 | % | |||||||||
Asset impairment expense | (1,119 | ) | (5,122 | ) | (4,003 | ) | (358 | )% | ||||||||
Gain (loss) on sale of assets | 1,724 | (185 | ) | (1,909 | ) | (111 | )% | |||||||||
Operating income | 8,040 | 2,849 | (5,191 | ) | (65 | )% | ||||||||||
Other income (expenses): | ||||||||||||||||
Other income | - | 558 | 558 | N/A | ||||||||||||
Interest expense | (4,271 | ) | (3,399 | ) | 872 | 20 | % | |||||||||
Provision for income taxes | (12 | ) | (8 | ) | 4 | 33 | % | |||||||||
Net income | $ | 3,757 | $ | - | $ | (3,757 | ) | (100 | )% |
For the three months ended March 31, 2019,2020, overall operating margin, excluding depreciation and amortization, decreased slightly as compared towas fairly consistent with the same period in 2018. Our2019. Margins in our asphalt terminalling services segment operating margin, excluding
A more detailed analysis of changes in operating margin by segment follows.
Asphalt terminalling services segment
Our asphalt terminalling services segment operations generally consist of fee-based activities associated with providing terminalling services, including storage, blending, processing and throughput services, for asphalt product and residual fuel oil. Revenue is generated through operating lease contracts and storage, throughput and handling contracts.
The following table sets forth our operating results from our asphalt terminalling services segment for the periods indicated:
Operating results | Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||||
Three Months | ||||||||||||||
(dollars in thousands) | 2018 | 2019 | $ | % | ||||||||||
Service revenue: | ||||||||||||||
Third-party revenue | $ | 5,132 | $ | 6,982 | $ | 1,850 | 36 | % | ||||||
Related-party revenue | 6,321 | 4,118 | (2,203 | ) | (35 | )% | ||||||||
Lease revenue: | ||||||||||||||
Third-party revenue | 9,458 | 9,763 | 305 | 3 | % | |||||||||
Related-party revenue | 7,702 | 4,940 | (2,762 | ) | (36 | )% | ||||||||
Total revenue | 28,613 | 25,803 | (2,810 | ) | (10 | )% | ||||||||
Operating expense, excluding depreciation and amortization | 13,333 | 12,285 | 1,048 | 8 | % | |||||||||
Operating margin, excluding depreciation and amortization | $ | 15,280 | $ | 13,518 | $ | (1,762 | ) | (12 | )% |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
Operating results | March 31, | Three Months | ||||||||||||||
(dollars in thousands) | 2019 | 2020 | $ | % | ||||||||||||
Service revenue: | ||||||||||||||||
Third-party revenue | $ | 6,982 | $ | 6,854 | $ | (128 | ) | (2 | )% | |||||||
Related-party revenue | 4,118 | 4,077 | (41 | ) | (1 | )% | ||||||||||
Lease revenue: | ||||||||||||||||
Third-party revenue | 9,763 | 9,831 | 68 | 1 | % | |||||||||||
Related-party revenue | 4,940 | 4,921 | (19 | ) | (0 | )% | ||||||||||
Total revenue | 25,803 | 25,683 | (120 | ) | (0 | )% | ||||||||||
Operating expense, excluding depreciation and amortization | 12,285 | 12,026 | 259 | 2 | % | |||||||||||
Operating margin, excluding depreciation and amortization | $ | 13,518 | $ | 13,657 | $ | 139 | 1 | % |
The following is a discussion of items impacting asphalt terminalling services segment operating margin for the periods indicated:
• | Total revenue was consistent for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Annual CPI index increases in our long-term contracts were offset by lower reimbursement revenue from improved fuel and power costs compared to prior year. | |
• | Operating expenses were also consistent for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Improved fuel and power costs were offset by increases throughout other expense accounts, primarily related to tank maintenance and repair. |
Crude oil terminalling services segment
Our crude oil terminalling services segment operations generally consist of fee-based activities associated with providing terminalling services, including storage, blending, processing and throughput services for crude oil. Revenue is generated through short- and long-term storage contracts.
The following table sets forth our operating results from our crude oil terminalling services segment for the periods indicated:
Operating results | Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||||
Three Months | ||||||||||||||
(dollars in thousands) | 2018 | 2019 | $ | % | ||||||||||
Service revenue: | ||||||||||||||
Third-party revenue | $ | 4,585 | $ | 3,573 | $ | (1,012 | ) | (22 | )% | |||||
Intersegment revenue | — | 298 | 298 | N/A | ||||||||||
Lease revenue: | ||||||||||||||
Third-party revenue | 15 | — | (15 | ) | (100 | )% | ||||||||
Total revenue | 4,600 | 3,871 | (729 | ) | (16 | )% | ||||||||
Operating expense, excluding depreciation and amortization | 1,275 | 1,282 | (7 | ) | (1 | )% | ||||||||
Operating margin, excluding depreciation and amortization | $ | 3,325 | $ | 2,589 | $ | (736 | ) | (22 | )% | |||||
Average crude oil stored per month at our Cushing terminal (in thousands of barrels) | 1,843 | 3,157 | 1,314 | 71 | % | |||||||||
Average crude oil delivered to our Cushing terminal (in thousands of barrels per day) | 82 | 70 | (12 | ) | (15 | )% |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
Operating results | March 31, | Three Months | ||||||||||||||
(dollars in thousands) | 2019 | 2020 | $ | % | ||||||||||||
Service revenue: | ||||||||||||||||
Third-party revenue | $ | 3,573 | $ | 3,330 | $ | (243 | ) | (7 | )% | |||||||
Intersegment revenue | 298 | - | (298 | ) | (100 | )% | ||||||||||
Total revenue | 3,871 | 3,330 | (541 | ) | (14 | )% | ||||||||||
Operating expense, excluding depreciation and amortization | 1,282 | 878 | 404 | 32 | % | |||||||||||
Operating margin, excluding depreciation and amortization | $ | 2,589 | $ | 2,452 | $ | (137 | ) | (5 | )% | |||||||
Average crude oil storage contracted per month at our Cushing terminal (in thousands of barrels) | 5,435 | 4,912 | (523 | ) | (10 | )% | ||||||||||
Average crude oil delivered through our Cushing terminal (in thousands of barrels per day) | 70 | 67 | (3 | ) | (4 | )% |
The following is a discussion of items impacting crude oil terminalling services segment operating margin for the periods indicated:
• | Total revenues for the three months ended March 31, 2020, decreased as compared to the same period in 2019 due to lower contracted volumes. | |
• | Operating expenses for the three months ended March 31, 2020, decreased compared to the three months ended March 31, 2019, due to a decrease in tank repair expenses. | |
• | As of May 1, 2020, we had approximately 5.8 million barrels of crude oil storage under service contracts, including 3.2 million barrels of crude oil storage contracts that expire in 2020. The remaining terms on the service contracts that extend beyond 2020 range from 11 to 20 months. Storage contracts with Vitol represent 3.2 million barrels of crude oil storage capacity under contract. |
Crude oil pipeline services segment
Our crude oil pipeline services segment operations include both service and product sales revenue. Service revenue generally consists of tariffs and other fees associated with transporting crude oil products on pipelines. Product sales revenue is comprised of (i) revenues recognized for the sale of crude oil to our customers that we purchase at production leases and (ii) revenue recognized in buy/sell transactions with our customers. Product sales revenue is recognized for products upon delivery and when the customer assumes the risks and rewards of ownership.
The following table sets forth our operating results from our crude oil pipeline services segment for the periods indicated:
Operating results | Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||||
Three Months | ||||||||||||||
(dollars in thousands) | 2018 | 2019 | $ | % | ||||||||||
Service revenue: | ||||||||||||||
Third-party revenue | $ | 2,061 | $ | 2,498 | $ | 437 | 21 | % | ||||||
Related-party revenue | — | 101 | 101 | N/A | ||||||||||
Lease revenue: | ||||||||||||||
Third-party revenue | 235 | — | (235 | ) | (100 | )% | ||||||||
Product sales revenue: | ||||||||||||||
Third-party revenue | 3,508 | 58,924 | 55,416 | 1,580 | % | |||||||||
Total revenue | 5,804 | 61,523 | 55,719 | 960 | % | |||||||||
Operating expense, excluding depreciation and amortization | 2,785 | 2,722 | 63 | 2 | % | |||||||||
Intersegment operating expense | 442 | 1,627 | (1,185 | ) | (268 | )% | ||||||||
Third-party cost of product sales | 2,637 | 24,587 | (21,950 | ) | (832 | )% | ||||||||
Related-party cost of product sales | — | 30,774 | (30,774 | ) | N/A | |||||||||
Operating margin, excluding depreciation and amortization | $ | (60 | ) | $ | 1,813 | $ | 1,873 | 3,122 | % | |||||
Pipeline transportation services average throughput volume (in thousands of barrels per day) | 23 | 37 | 14 | 61 | % | |||||||||
Crude oil marketing volumes (in thousands of barrels per day) | ||||||||||||||
Sales | 1 | 12 | 11 | 1,100 | % | |||||||||
Purchases | 1 | 12 | 11 | 1,100 | % |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
Operating results | March 31, | Three Months | ||||||||||||||
(dollars in thousands) | 2019 | 2020 | $ | % | ||||||||||||
Service revenue: | ||||||||||||||||
Third-party revenue | $ | 2,498 | $ | 502 | $ | (1,996 | ) | (80 | )% | |||||||
Related-party revenue | 101 | - | (101 | ) | (100 | )% | ||||||||||
Product sales revenue: | ||||||||||||||||
Third-party revenue | 58,924 | 47,052 | (11,872 | ) | (20 | )% | ||||||||||
Total revenue | 61,523 | 47,554 | (13,969 | ) | (23 | )% | ||||||||||
Operating expense, excluding depreciation and amortization | 2,722 | 2,123 | 599 | 22 | % | |||||||||||
Intersegment operating expense | 1,627 | 1,425 | 202 | 12 | % | |||||||||||
Third-party cost of product sales | 24,587 | 14,221 | 10,366 | 42 | % | |||||||||||
Related-party cost of product sales | 30,774 | 28,254 | 2,520 | 8 | % | |||||||||||
Operating margin, excluding depreciation and amortization | $ | 1,813 | $ | 1,531 | $ | (282 | ) | (16 | )% | |||||||
Pipeline transportation services average throughput volume (in thousands of barrels per day) | 37 | 16 | (21 | ) | (57 | )% | ||||||||||
Crude oil marketing volumes (in thousands of barrels per day) | 12 | 11 | (1 | ) | (8 | )% |
The following is a discussion of items impacting crude oil pipeline services segment operating margin for the periods indicated:
• | Throughput volumes and related revenue have decreased for the three months ended March 31, 2020, as compared to the same period in 2019 due to decreased drilling activities in the areas we serve. | |
• | Product sales revenue for the three months ended March 31, 2019 and 2020, included $0.8 million and $1.5 million, respectively, in sales of crude oil product accumulated over time through customer loss allowance deductions. The remaining change in product sales revenue is related to our crude oil marketing business and reflects the decrease in the market price of crude oil. | |
• | Overall cost of product sales has decreased consistently with crude oil marketing revenue and reflect the decrease in the market price of crude oil. Purchases from related party made up a higher portion of total crude oil purchases during the three months ended March 31, 2020 as compared to the same period in 2019. |
Crude oil trucking services segment
Our crude oil trucking services segment operations generally consist of fee-based activity associated with transporting crude oil products on trucks. Revenues are generated primarily through transportation fees.
The following table sets forth our operating results from our crude oil trucking services segment for the periods indicated:
Operating results | Three Months ended March 31, | Favorable/(Unfavorable) | ||||||||||||
Three Months | ||||||||||||||
(dollars in thousands) | 2018 | 2019 | $ | % | ||||||||||
Service revenue | ||||||||||||||
Third-party revenue | $ | 5,540 | $ | 2,833 | $ | (2,707 | ) | (49 | )% | |||||
Intersegment revenue | 442 | 1,329 | 887 | 201 | % | |||||||||
Lease revenue: | ||||||||||||||
Third-party revenue | 97 | — | (97 | ) | (100 | )% | ||||||||
Product sales revenue: | ||||||||||||||
Third-party revenue | 6 | — | (6 | ) | (100 | )% | ||||||||
Total revenue | 6,085 | 4,162 | (1,923 | ) | (32 | )% | ||||||||
Operating expense, excluding depreciation and amortization | 6,375 | 4,220 | 2,155 | 34 | % | |||||||||
Operating margin, excluding depreciation and amortization | $ | (290 | ) | $ | (58 | ) | $ | 232 | 80 | % | ||||
Average volume (in thousands of barrels per day) | 23 | 27 | 4 | 17 | % |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
Operating results | March 31, | Three Months | ||||||||||||||
(dollars in thousands) | 2019 | 2020 | $ | % | ||||||||||||
Service revenue | ||||||||||||||||
Third-party revenue | $ | 2,833 | $ | 2,543 | $ | (290 | ) | (10 | )% | |||||||
Intersegment revenue | 1,329 | 1,425 | 96 | 7 | % | |||||||||||
Total revenue | 4,162 | 3,968 | (194 | ) | (5 | )% | ||||||||||
Operating expense, excluding depreciation and amortization | 4,220 | 3,818 | 402 | 10 | % | |||||||||||
Operating margin, excluding depreciation and amortization | $ | (58 | ) | $ | 150 | $ | 208 | 359 | % | |||||||
Average volume (in thousands of barrels per day) | 27 | 23 | (4 | ) | (15 | )% |
The following is a discussion of items impacting crude oil trucking services segment operating margin for the periods indicated:
• | Service revenues decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreased drilling activities in the areas we serve. | |
• | Operating expense, excluding depreciation and amortization, decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreases in compensation and fleet expense related to lower volumes. |
Other Income and Expenses
Depreciation and amortization expense. Depreciation and amortization expense decreased to $6.1 million for the three months ended March 31, 2019, as2020, compared to the three months ended March 31, 2018, by $2.2 million due to the sale of the producer field services business in April 2018. This decrease was partially offset by an increase in intersegment service revenues for services provided to our crude oil pipeline services segment’s crude oil marketing business. These volumes transported on an intersegment basis increased from less than 1,000 barrels per day to 10,000 barrels per day.
General and administrative expense
. General and administrative expense decreasedAsset impairment expense. Asset impairment expense for the three months ended March 31, 2020, of $5.1 million primarily consisted of a write-down of crude oil linefill due to the decrease in the market price of crude oil. Asset impairment expense for the three months ended March 31, 2019, compared to the same period in 2018 primarily due to decreases in compensation expense.
Gain (loss) on sale of assets.
Other income. Other income for the pro rata portion of the remaining net escrow proceeds in January 2018, for which we recognized an additional gain on sale of unconsolidated affiliate during the three months ended March 31, 2018.
Interest expense.
Interest expense represents interest on borrowings under our credit agreement as well as amortization of debt issuanceThree Months ended March 31, | Favorable/(Unfavorable) | |||||||||||||
Three Months | ||||||||||||||
2018 | 2019 | $ | % | |||||||||||
Credit agreement interest | $ | 3,626 | $ | 4,009 | $ | (383 | ) | (11 | )% | |||||
Amortization of debt issuance costs | 256 | 251 | 5 | 2 | % | |||||||||
Interest rate swaps interest expense (income) | 66 | (40 | ) | 106 | 161 | % | ||||||||
Loss (gain) on interest rate swaps mark-to-market | (353 | ) | 44 | (397 | ) | (112 | )% | |||||||
Other | (26 | ) | 7 | (33 | ) | (127 | )% | |||||||
Total interest expense | $ | 3,569 | $ | 4,271 | $ | (702 | ) | (20 | )% |
Three Months Ended | Favorable/(Unfavorable) | |||||||||||||||
March 31, | Three Months | |||||||||||||||
2019 | 2020 | $ | % | |||||||||||||
Credit agreement interest | $ | 4,009 | $ | 3,137 | $ | 872 | 22 | % | ||||||||
Amortization of debt issuance costs | 251 | 251 | - | 0 | % | |||||||||||
Other | 11 | 11 | - | 0 | % | |||||||||||
Total interest expense | $ | 4,271 | $ | 3,399 | $ | 872 | 20 | % |
The decrease in credit agreement interest is due to a decrease in floating interest rates.
Effects of Inflation
In recent years, inflation has been modest and has not had a material impact upon the results of our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Cash Flows and Capital Expenditures
The following table summarizes our sources and uses of cash for the
Three Months ended March 31, | |||||||
2018 | 2019 | ||||||
(in millions) | |||||||
Net cash provided by operating activities | $ | 9.9 | $ | 19.5 | |||
Net cash provided by (used in) investing activities | $ | (24.3 | ) | $ | 3.5 | ||
Net cash provided by (used in) financing activities | $ | 13.9 | $ | (23.3 | ) |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
(in millions) | ||||||||
Net cash provided by operating activities | $ | 19.5 | $ | 7.9 | ||||
Net cash provided by (used in) investing activities | $ | 3.5 | $ | (15.1 | ) | |||
Net cash provided by (used in) financing activities | $ | (23.3 | ) | $ | 7.3 |
Operating Activities. Net cash provided by operating activities decreased to $9.9$7.9 million for the three months ended March 31, 2018,2020, as compared to $19.5 million for the three months ended March 31, 2019, due to increaseddecreased net income as discussed in
Investing Activities
. Net cashFinancing Activities
. Net cashOur Liquidity and Capital Resources
Cash flows from operations and from our credit agreement are our primary sources of liquidity. At March 31, 2019,2020, we had a working capital deficit of $16.8$5.6 million. This is primarily a function of our approach to cash management. At March 31, 2019,2020, we had approximately $146.4$271.6 million of revolver borrowings and approximately $1.0 million of letters of credit outstanding under the credit agreement, leaving us with approximately $127.4 million of availability under our credit agreement subject to covenant restrictions, which limited our availability to $32.9$30.5 million. As of May 6, 2019,1, 2020, we have approximately $270.6 million of revolver borrowings and approximately $2.0 million of letters of credit outstanding under the credit agreement, leaving us with aggregate unused commitments under our revolving credit facility of approximately $147.4$127.4 million and cash on hand of approximately $1.2$0.5 million. The credit agreement is scheduled to mature on May 11, 2022.
Our credit agreement contains certain financial covenants which include a maximum permitted consolidated total leverage ratio, which may limit our availability to borrow funds thereunder. The consolidated total leverage ratio is assessed quarterly based on the trailing twelve months of EBITDA, as defined in the credit agreement. The maximum permitted consolidated total leverage ratio as of March 31, 2019, was 5.25 to 1.00, decreases to 5.00 to 1.00 as of September 30, 2019, and decreases to 4.75 to 1.00 as of March 31, 2020 and thereafter., for each fiscal quarter thereafter, is 4.75. Our consolidated total leverage ratio was 4.644.27 to 1.00 as of March 31, 2019.
Management evaluates whether conditions and/or events raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued (the “assessment period”). In performing this assessment, management considered the risk associated with its ongoing ability to meet the financial covenants.
Based on forecasted EBITDA during the assessment period, management believes that it will meet the financial covenants. However, there are certain inherent risks associated with our continued ability to comply with our consolidated total leverage ratio covenant. These risks relate, among other things, to potential future (a) decreases in storage volumes and rates as well as throughput and transportation rates realized; (b) weather phenomenon that may potentially hinder the asphalt business activity; and (c) other items affecting forecasted levels of expenditures and uses of cash resources. Violation of the consolidated total leverage ratio covenant would be an event of default under the credit agreement, which would cause our $252.6$271.6 million in outstanding debt, as of March 31, 2019,2020, to become immediately due and payable. If this were to occur, we would not expect to have sufficient liquidity to repay these outstanding amounts then due, which could cause the lenders under the credit facility to pursue other remedies. Such remedies could include exercising their collateral rights to our assets. Based on our current forecasts, we believe we will be able to comply with the consolidated total leverage ratio during the assessment period. However, we cannot make any assurances that we will be able to achieve our forecasts. If we are unable to achieve our forecasts, further actions may be necessary to remain in compliance with our consolidated total leverage ratio covenant including, but not limited to, cost reductions, common and preferred unitholder distribution curtailments, and/or asset sales. We can make no assurances that we would be successful in undertaking these actions, or that we will remain in compliance with the consolidated total leverage ratio during the assessment period.
Capital Requirements
. Our capital requirements consist of the following:maintenance capital expenditures, which are capital expenditures made to maintain the existing integrity and operating capacity of our assets and related cash flows, further extending the useful lives of the assets; and
expansion capital expenditures, which are capital expenditures made to expand the operating capacity or revenue of existing or new assets, whether through construction, acquisition or modification.
The following table breaks out capital expenditures for the three months ended March 31, 20182019 and 20192020 (in thousands):
Three Months ended March 31, | ||||||
2018 | 2019 | |||||
Acquisitions | 21,959 | — | ||||
Expansion capital expenditures | 2,800 | 700 | ||||
Reimbursable expenditures | (100 | ) | — | |||
Net expansion capital expenditures | 2,700 | 700 | ||||
Gross Maintenance capital expenditures | 1,800 | 2,100 | ||||
Reimbursable expenditures | (200 | ) | (100 | ) | ||
Net maintenance capital expenditures | 1,600 | 2,000 |
Three Months Ended March 31, | ||||||||
2019 | 2020 | |||||||
Acquisitions | $ | - | $ | 12,221 | ||||
Gross expansion capital expenditures | $ | 698 | $ | 1,105 | ||||
Reimbursable expenditures | - | (93 | ) | |||||
Net expansion capital expenditures | $ | 698 | $ | 1,012 | ||||
Gross maintenance capital expenditures | $ | 2,103 | $ | 1,795 | ||||
Reimbursable expenditures | (50 | ) | (106 | ) | ||||
Net maintenance capital expenditures | $ | 2,053 | $ | 1,689 |
We currently expect our expansion capital expenditures for organic growth projects to be approximately $3.5$2.2 million to $4.5$2.6 million for all of 2019.2020. We currently expect maintenance capital expenditures to be approximately $9.5$7.8 million to $11.0$8.2 million, net of reimbursable expenditures, for all of 2019.
Our Ability to Grow Depends on Our Ability to Access External Expansion Capital
. Our partnership agreement requires that we distribute all of our available cash to our unitholders. Available cash is reduced by cash reserves established by our General Partner to provide for the proper conduct of our business (including for future capital expenditures) and to comply withRecent Accounting Pronouncements
For information regarding recent accounting developments that may affect our future financial statements, see Note 1813 to our unaudited condensed consolidated financial statements.
Pursuant to market risk due to variable interest rates under our credit agreement.
Evaluation of disclosure controls and procedures
. Our General Partner’s management, including the Chief Executive Officer and Chief Financial Officer of our General Partner, evaluated, as of the end of the period covered by this report, the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of our General Partner concluded that our disclosure controls and procedures, as of March 31,Changes in internal control over financial reporting
. There were no changes to our internal control over financial reporting that occurred during the three months ended March 31,The information required by this item is included under the caption “Commitments and Contingencies” in Note 1612 to our unaudited condensed consolidated financial statements and is incorporated herein by reference thereto.
See the risk factors set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2018.
The information required by this Item 6 is set forth in the Index to Exhibits accompanying this quarterly report and is incorporated herein by reference.
INDEX TO EXHIBITS
Exhibit Number | Description | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
4.1 | ||
31.1* | ||
31.2* | ||
32.1# | ||
101# | The following financial information from Blueknight Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, |
____________________
* Filed herewith.
# Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLUEKNIGHT ENERGY PARTNERS, L.P. | |||
By: | Blueknight Energy Partners, G.P., L.L.C. | ||
its General Partner | |||
Date: | By: | /s/ D. Andrew Woodward | |
D. Andrew Woodward | |||
Chief Financial Officer | |||
Date: | By: | /s/ Michael McLanahan | |
Michael McLanahan | |||
Chief Accounting Officer |
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