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BKEP Blueknight Energy Partners

Filed: 5 May 21, 4:58pm
 

 

Table of Contents


 

UNITED STATES

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, 2021

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: (918) 237-4000

 

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    ☒    No   ☐

 

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   ☒   No   ☐

 

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  ☐  No ☒

 

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 April 28, 2021, there were 34,436,785 Series A Preferred Units and 41,468,125 common units outstanding.  
 

 

 

 

 

 

 

 
 

PART I. FINANCIAL INFORMATION

 

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, 2020

  

March 31, 2021

 
  

(unaudited)

 

ASSETS

        

Current assets:

        

Cash and cash equivalents

 $805  $13 
Accounts receivable, net  3,297   6,897 
Receivables from related parties, net  507   664 
Other current assets  2,355   3,693 
Current assets of discontinued operations  96,945   511 
Total current assets  103,909   11,778 

Property, plant and equipment, net of accumulated depreciation of $197,561 and $199,895 at December 31, 2020, and March 31, 2021, respectively

  104,709   104,256 
Goodwill  6,728   6,728 
Debt issuance costs, net  1,340   998 
Operating lease assets  8,548   8,020 
Intangible assets, net  7,531   6,935 
Other noncurrent assets  252   282 

Total assets

 $233,017  $138,997 

LIABILITIES AND PARTNERS’ CAPITAL(DEFICIT)

        

Current liabilities:

        
Accounts payable $1,635  $2,313 
Accounts payable to related parties  31   14 
Accrued interest payable  274   279 
Accrued property taxes payable  1,757   1,505 
Unearned revenue  1,789   1,852 
Unearned revenue with related parties  4,603   4,594 
Accrued payroll  4,977   2,377 
Current operating lease liability  1,684   1,532 
Other current liabilities  1,349   2,327 
Current liabilities of discontinued operations  17,248   2,599 
Total current liabilities  35,347   19,392 
Long-term unearned revenue with related parties  4,153   3,985 
Other long-term liabilities  168   162 
Noncurrent operating lease liability  6,980   6,735 
Long-term debt  252,592   106,592 

Commitments and contingencies (Note 11)

        

Partners’ capital(deficit):

        

Common unitholders (41,214,856 and 41,468,125 units issued and outstanding at December 31, 2020, and March 31, 2021, respectively)

  312,591   384,755 

Preferred unitholders (35,125,202 and 34,436,785 units issued and outstanding at December 31, 2020, and March 31, 2021, respectively)

  253,923   248,946 

General partner interest (1.6% interest with 1,225,409 general partner units outstanding at both dates)

  (632,737)  (631,570)

Total partners’ capital(deficit)

  (66,223)  2,131 

Total liabilities and partners’ capital(deficit)

 $233,017  $138,997 

 

 

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,

 
  

2020

  

2021

 
  

(unaudited)

 

Service revenue:

        

Third-party revenue

 $6,853  $6,919 
Related-party revenue  4,055   4,849 

Lease revenue:

        
Third-party revenue  9,831   8,303 

Related-party revenue

  4,921   7,004 
Total revenue  25,660   27,075 

Costs and expenses:

        
Operating expense  15,660   15,880 
General and administrative expense  3,366   3,982 
Total costs and expenses  19,026   19,862 

Loss on disposal of assets

  (74)  - 
Operating income  6,560   7,213 

Other income(expenses):

        
Other income  650   233 
Interest expense  (1,686)  (1,333)
Income before income taxes  5,524   6,113 
Provision for income taxes  5   10 
Income from continuing operations  5,519   6,103 
Income(loss) from discontinued operations, net  (5,519)  75,550 

Net income

 $-  $81,653 
         

Allocation of net income(loss) for calculation of earnings per unit:

        

General partner interest in net income

 $-  $1,292 

Preferred interest in net income

 $6,279  $6,341 

Net income(loss) available to limited partners

 $(6,279) $74,020 
         
Basic and diluted net income(loss) from discontinued operations per common unit $(0.13) $1.75 
Basic and diluted net loss from continuing operations per common unit $(0.02) $(0.01)
Basic and diluted net income(loss) per common unit $(0.15) $1.74 
         
Weighted average common units outstanding - basic and diluted  41,015   41,430 

 

 

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, 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)
                 

Balance, December 31, 2020

 $312,591  $253,923  $(632,737) $(66,223)

Net income

  73,896   6,465   1,292   81,653 

Equity-based incentive compensation

  (80)  -   3   (77)
Repurchase of preferred units  -   (5,163)  -   (5,163)

Distributions

  (1,700)  (6,279)  (128)  (8,107)
Proceeds from sale of 32,696 common units pursuant to the Employee Unit Purchase Plan  48   -   -   48 

Balance, March 31, 2021

 $384,755  $248,946  $(631,570) $2,131 

 

 

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,

 
  

2020

  

2021

 
  

(unaudited)

 

Cash flows from operating activities:

        

Net income

 $-  $81,653 

Adjustments to reconcile net income to net cash provided by operating activities:

        
Depreciation and amortization  6,094   3,065 
Amortization and write-off of debt issuance costs  251   391 
Tangible asset impairment charge  5,122   156 
(Gain)loss on sale of assets  185   (75,069)
Equity-based incentive compensation  108   (77)

Changes in assets and liabilities:

        
Decrease in accounts receivable  4,201   10,022 
Decrease(increase) in receivables from related parties  168   (157)
Decrease in other current assets  1,345   1,630 
Decrease in other non-current assets  566   379 

Increase in accounts payable

  104   412 
Decrease in payables to related parties  (17)  (17)
Decrease in accrued crude oil purchases  (3,466)  (3,868)
Decrease in accrued crude oil purchases to related parties  (4,463)  (8,842)
Increase in accrued interest payable  8   5 
Decrease in accrued property taxes  (381)  (743)
Increase(decrease) in unearned revenue  1,205   (373)
Decrease in unearned revenue from related parties  (285)  (227)
Decrease in accrued payroll  (2,329)  (3,822)
Increase(decrease) in other accrued liabilities  (542)  860 
Net cash provided by operating activities  7,874   5,378 

Cash flows from investing activities:

        
Acquisition of DEVCO from Ergon (Note 8)  (12,221)  - 
Capital expenditures  (2,900)  (2,044)
Net proceeds from sale of assets  25   155,316 
Net cash provided by(used in) investing activities  (15,096)  153,272 

Cash flows from financing activities:

        
Payments on other financing activities  (638)  (171)
Debt issuance costs  -   (49)
Borrowings under credit agreement  78,000   48,000 
Payments under credit agreement  (62,000)  (194,000)

Proceeds from equity issuance

  55   48 
Repurchase of preferred units  -   (5,163)
Distributions  (8,082)  (8,107)
Net cash provided by(used in) financing activities  7,335   (159,442)
Net increase(decrease) in cash and cash equivalents  113   (792)
Cash and cash equivalents at beginning of period  558   805 

Cash and cash equivalents at end of period

 $671  $13 
         

Supplemental disclosure of non-cash financing and investing cash flow information:

        

Non-cash changes in property, plant and equipment

 $1,241  $(74)

Increase in accrued liabilities related to insurance premium financing agreement

 $1,517  $1,208 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 

 

 

BLUEKNIGHT ENERGY PARTNERS, L.P.

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 26 states. The Partnership provides integrated terminalling services for companies engaged in the production, distribution, and marketing of liquid asphalt. The Partnership manages its operations through one operating segment, asphalt terminalling services. The Partnership’s common units and preferred units, which represent limited partnership interests in the Partnership, are listed on the Nasdaq Global Market under the symbols “BKEP” and “BKEPP,” respectively. The Partnership was formed in February 2007 as a Delaware master limited partnership.

 

The Partnership previously provided integrated terminalling, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil in three different operating segments: (i) crude oil terminalling services, (ii) crude oil pipeline services, and (iii) crude oil trucking services. On December 21, 2020, the Partnership announced it had entered into multiple definitive agreements to sell these segments. These transactions closed in February and March of 2021. These segments are presented as discontinued operations for all periods presented. Unless otherwise noted, information in these notes to the consolidated financial statements relates to continuing operations. As the Partnership is only operating through one operating segment, a segment footnote is no longer required.

 

 

2.

BASIS OF 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, 2021, the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2021, the condensed consolidated statements of changes in partners’ capital (deficit) for the three months ended March 31, 2020 and 2021, and the condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2021, are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary to state fairly the financial position and results of operations for the respective interim periods. All adjustments are of a recurring nature unless otherwise disclosed herein. The 2020 year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2021 (the “2020 Form 10-K”).  Interim financial results are not necessarily indicative of the results to be expected for an annual period. The Partnership’s significant accounting policies are consistent with those disclosed in Note 3 of the Notes to Consolidated Financial Statements in its 2020 Form 10-K.

 

 

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 place related to future performance obligations as of the end of the reporting period, which are expected to be recognized in revenue in the specified periods (in thousands):

 

  

Revenue from Contracts with Customers(1)

  

Revenue from Leases

 
Remainder of 2021 $29,431  $43,923 
2022  31,808   49,739 
2023  28,131   42,546 
2024  28,174   42,593 
2025  26,857   37,595 
Thereafter  37,078   43,000 

Total revenue related to future performance obligations

 $181,479  $259,396 

___________________

(1)

Excluded from the table is revenue that is either constrained or related to performance obligations that are wholly unsatisfied as of March 31, 2021.

 

 

Disaggregation of Revenue

 

Disaggregation of revenue from contracts with customers and lease revenue by revenue type is presented as follows (in thousands):

 

  

Three Months Ended March 31, 2020

 
  

Revenue from contracts with customers

  

Lease revenue

 
  

Third-party revenue

  

Related-party revenue

  

Third-party revenue

  

Related-party revenue

 

Fixed storage and throughput revenue

 $5,245  $3,084  $-  $- 

Fixed lease revenue

  -   -   9,227   4,800 

Variable cost recovery revenue

  1,607   971   604   121 

Variable throughput and other revenue

  1   -   -   - 

Total

 $6,853  $4,055  $9,831  $4,921 

 

  

Three Months Ended March 31, 2021

 
  

Revenue from contracts with customers

  

Lease revenue

 
   Third-party revenue   Related-party revenue   Third-party revenue   Related-party revenue 

Fixed storage and throughput revenue

 $5,064  $4,721  $-  $- 

Fixed lease revenue

  -   -   7,801   6,785 

Variable cost recovery revenue

  1,735   128   502   219 

Variable throughput and other revenue

  120   -   -   - 

Total

 $6,919  $4,849  $8,303  $7,004 

 

Contract Balances

 

Billed accounts receivable from contracts with customers were $2.1 million and $3.7 million at December 31, 2020, and March 31, 2021, respectively.

 

The Partnership records unearned revenues when cash payments are received in advance of performance. Unearned revenue related to contracts with customers was $3.2 million at both December 31, 2020, and March 31, 2021. For the three months ended March 31, 2021, the Partnership recognized $2.2 million of revenues that were previously included in the unearned revenue balance.

 

Practical Expedients and Exemptions

 

The Partnership does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

 

 

 

 

4.

DISCONTINUED OPERATIONS

 

On December 21, 2020, the Partnership announced executed agreements to sell its crude oil trucking services, crude oil pipeline services, and crude oil terminalling services segments. These segments are reported as discontinued operations in the results of operations and financial position for all periods presented. The crude oil trucking services agreement closed in two phases, one on December 15, 2020, and one on February 2, 2021. The crude oil pipeline services agreement closed on February 1, 2021.  Loss recognized on the disposal and classification of held for sale of these assets was recorded in the year ended December 31, 2020. The transaction related to the crude oil terminalling services segment closed on March 1, 2021. The Partnership has allocated interest to discontinued operations on debt that was required to be repaid as a result of the sales of the crude oil pipeline and terminalling services segment for the three months ended March 31, 2020 and 2021.

 

As part of the crude oil pipeline sale, $1.5 million of the gross sale proceeds are currently being held in escrow, subject to post-closing settlement terms and conditions. The Partnership expects to receive the majority of this in increments over the next two years.

 

Exit and disposal costs related to these sales, in the form of employee severance payments, are expected to total approximately $1.6 million. The Partnership is providing limited transition services to both of the buyers of the crude oil pipeline and terminalling services segments. These services are expected to last approximately six months beyond the final closing date. The contracts were designed to recover the costs of providing services, so a minimal income statement impact is expected for these services.

 

During the three months ended March 31, 2020, an impairment of $4.9 million was recognized to write-down the value of the Partnership's crude oil linefill based on the market price of crude oil as of March 31, 2020.

 

Assets and Liabilities of Discontinued Operations (in thousands)

 

As of December 31, 2020

 
  

Crude Oil Trucking Services

  

Crude Oil Pipeline Services

  

Crude Oil Terminalling Services

  

Total

 

ASSETS

                

Accounts receivable, net

 $81  $13,711  $167  $13,959 

Plant, property, and equipment

  442   23,541   52,854   76,837 

Other assets

  331   547   5,271   6,149 

Total assets of discontinued operations

 $854  $37,799  $58,292  $96,945 
                 

LIABILITIES

                

Current liabilities

 $1,017  $14,921  $1,310  $17,248 

Total liabilities of discontinued operations

 $1,017  $14,921  $1,310  $17,248 

 

 

Assets and Liabilities of Discontinued Operations (in thousands)

 

As of March 31, 2021

 
  

Crude Oil Trucking Services

  

Crude Oil Pipeline Services

  

Crude Oil Terminalling Services

  

Total

 

ASSETS

                

Accounts receivable, net

 $-  $287  $48  $335 

Other assets

  40   -   136   176 

Total assets of discontinued operations

 $40  $287  $184  $511 
                 

LIABILITIES

                

Current liabilities

 $32  $936  $1,631  $2,599 

Total liabilities of discontinued operations

 $32  $936  $1,631  $2,599 

 

 

Statement of Operations for Discontinued Operations (in thousands)  Three Months Ended March 31, 2020 
  

Crude Oil Trucking Services

  

Crude Oil Pipeline Services

  

Crude Oil Terminalling Services

  

Total

 

Revenue:

                

Third-party service revenue

 $2,543  $502  $3,330  $6,375 

Intercompany service revenue

  1,425   -   -   1,425 

Third-party product sales revenue

  -   47,052   -   47,052 

Costs and expenses:

                

Operating expense

  4,025   3,302   2,023   9,350 

Intercompany operating expense

  -   1,425   -   1,425 

Cost of product sales

  -   14,221   -   14,221 

Cost of product sales from related party

  -   28,254   -   28,254 

General and administrative expense

  69   105   -   174 

Tangible asset impairment expense

  35   2,820   2,266   5,121 

(Gain)loss on disposal of assets

  (10)  121   -   111 

Interest expense

  3   325   1,384   1,712 

Loss before income taxes

  (154)  (3,019)  (2,343)  (5,516)

Provision for income taxes

  3   -   -   3 

Net loss from discontinued operations

 $(157) $(3,019) $(2,343) $(5,519)

 

Statement of Operations for Discontinued Operations (in thousands)

 

Three Months Ended March 31, 2021

 
  

Crude Oil Trucking Services

  

Crude Oil Pipeline Services

  

Crude Oil Terminalling Services

  

Total

 

Revenue:

                

Third-party service revenue

 $9  $413  $3,643  $4,065 

Intercompany service revenue

  409   -   -   409 

Third-party product sales revenue

  -   15,591   -   15,591 

Costs and expenses:

                

Operating expense

  1,333   1,438   910   3,681 

Intercompany operating expense

  -   409   -   409 

Cost of product sales

  -   4,994   -   4,994 

Cost of product sales from related party

  -   9,461   -   9,461 

General and administrative expense

  59   118   -   177 
Tangible asset impairment expense  92   41   23   156 

Gain on disposal of assets

  (3)  (1,694)  (73,372)  (75,069)

Interest expense

  -   72   634   706 

Income (loss) before income taxes

  (1,063)  1,165   75,448   75,550 

Provision for income taxes

  -   -   -   - 

Net income (loss) from discontinued operations

 $(1,063) $1,165  $75,448  $75,550 

 

Select cash flow information (in thousands)

                
  

Crude Oil Trucking Services

  

Crude Oil Pipeline Services

  

Crude Oil Terminalling Services

  

Total

 
  

Three Months Ended March 31, 2020

 

Depreciation and amortization

 $200  $1,170  $1,139  $2,509 

Capital expenditures

 $180  $882  $89  $1,152 
                 
  

Three Months Ended March 31, 2021

 

Amortization

 $3  $14  $15  $32 

Capital expenditures

 $-  $10  $109  $119 

 

 

 

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 $400.0 million and amend the maximum permitted consolidated total leverage ratio as discussed below.  On January 8, 2021, the credit facility was amended a second time to, among other things, reduce the revolving loan facility from $400.0 million to $350.0 million upon the sale of the crude oil terminalling segment, which became effective on March 1, 2021 (the “ January 2021 Amendment”).

 

As of April 28, 2021, approximately $106.6 million of revolver borrowings and $0.7 million of letters of credit were outstanding under the credit agreement, leaving the Partnership with approximately $242.7 million available capacity for additional revolver borrowings and letters of credit under the credit agreement, although the Partnership’s ability to borrow such funds is 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 $600.0 million for all revolving loan commitments under the credit agreement.

 

The credit agreement will mature on May 11, 2022, and all amounts outstanding under the credit agreement will become due and payable on such date. The credit agreement requires mandatory prepayments of amounts outstanding thereunder with the net proceeds of certain asset sales, property or casualty insurance claims and condemnation proceedings, unless the Partnership reinvests such proceeds in accordance with the credit agreement, but these mandatory prepayments will not require any reduction of the lenders’ commitments under the credit agreement.

 

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) (“Eurodollar Rate”) 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 4.75 to 1.00; provided that the maximum permitted consolidated total leverage ratio may be increased to 5.25 to 1.00 for certain quarters, based on the occurrence of a specified acquisition (as defined in the credit agreement, but generally being an acquisition for which the aggregate consideration is $15.0 million or more).

 

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 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 Fourth Amended and Restated Agreement of Limited Partnership of the Partnership (the “Partnership’s partnership agreement”).

 

At March 31, 2021, the Partnership’s consolidated total leverage ratio was 2.12 to 1.00 and the consolidated interest coverage ratio was 11.68 to 1.00.  The Partnership was in compliance with all covenants of its credit agreement as of March 31, 2021. Based on current operating plans and forecasts, the Partnership expects to remain in compliance with all covenants of the credit agreement for at least the next year.

 

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. 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 7 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. 

 

Upon the March 1, 2021 effective date of the January 2021 Amendment, the Partnership expensed $0.1 million of debt issuance costs due to the reduction in available borrowing capacity. Debt issuance costs are being amortized over the term of the credit agreement. Interest expense related to debt issuance cost amortization for both the three months ended three months ended March 31, 2020 and 2021, was $0.3 million and $0.2 million, respectively.

  

During the three months ended March 31, 2020 and 2021, the weighted average interest rate under the Partnership’s credit agreement was 4.90% and 3.83%, respectively, resulting in interest expense of approximately $1.7 million and $1.2 million, respectively, excluding the $0.1 million of debt issuance costs that were expensed as described above. 

 

 

6.

NET INCOME PER LIMITED PARTNER UNIT

 

For purposes of calculating earnings per unit, preferred units, general partner units, and common units are first allocated net income to the extent they receive a distribution. Next, 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. For the three months ended March 31, 2021, the preferred units were also allocated income for the excess consideration paid over carrying value for the repurchase of 688,417 preferred units. The remainder is allocated to common units. 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,

 
  

2020

  

2021

 

Net income

 $-  $81,653 

General partner interest in net income

  -   1,292 

Preferred interest in net income

  6,279   6,341 

Net income(loss) available to limited partners

 $(6,279) $74,020 
         

Basic weighted average number of units:

        

Common units

  41,015   41,430 

Restricted and phantom units

  983   1,166 

Total units

  41,998   42,596 
         
Basic and diluted net income(loss) from discontinued operations per common unit $(0.13) $1.75 
Basic and diluted net loss from continuing operations per common unit $(0.02) $(0.01)
Basic and diluted net income(loss) per common unit $(0.15) $1.74 

 

 

 

 

7.

PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

On March 12, 2021, the Partnership repurchased 688,417 outstanding preferred units at $7.50 per unit or total cash consideration of $5.2 million. The consideration paid was based on the fair market value of the units at the time of purchase. The carrying value of the units was $7.23 per unit, or total carrying value of $5.0 million. The preferred units were allocated additional net income for the $0.2 million of consideration paid in excess of carrying value. The units were retired on March 24, 2021.

 

On April 21, 2021, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended March 31, 2021. The Partnership will pay this distribution on May 14, 2021, to unitholders of record as of May 7, 2021. The total distribution will be approximately $6.3 million, with approximately $6.2 million and $0.1 million paid to the Partnership’s preferred unitholders and general partner, respectively.

 

In addition, the Board approved a cash distribution of $0.04 per outstanding common unit for the three months ended March 31, 2021. The Partnership will pay this distribution on May 14, 2021, to unitholders of record on May 7, 2021. The total distribution will be approximately $1.7 million, with approximately $1.7 million and less than $0.1 million to be paid to the Partnership’s common unitholders and general partner, respectively, and approximately $0.1 million to be paid to holders of phantom and restricted units pursuant to awards granted under the Partnership’s Long-Term Incentive Plan.

 

 

8.

RELATED-PARTY TRANSACTIONS

 

The Partnership leases asphalt facilities and provides asphalt terminalling services to Ergon. For the three months ended March 31, 2020 and 2021, the Partnership recognized related-party revenues of $9.0 million and $11.9 million, respectively, for services provided to Ergon. As of December 31, 2020, and March 31, 2021, the Partnership had receivables from Ergon of $0.5 million and $0.7 million, respectively. As of December 31, 2020, and March 31, 2021, the Partnership had unearned revenues from Ergon of $8.8 million and $8.6 million, respectively.

 

As of December 31, 2019, the Partnership had a contingent liability to Ergon of $12.2 million related to the Cimarron Express project, a previously disclosed joint venture between Kingfisher Midstream and Ergon's development company (“DEVCO”) that was cancelled in December 2018. The contingent liability reflected Ergon's investment in the joint venture and accrued interest, for which the Partnership, in accordance with the membership interest purchase agreement with Ergon, was meant to bear the risk of loss related to DEVCO’s portion of the project. The Partnership paid this liability in full on January 3, 2020, and it is reflected as an acquisition of the DEVCO on the 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. The Partnership’s unitholders have approved 8.1 million common units to be reserved for issuance under the incentive plan, 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 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 2018

  23,436  $1.20  $28 

December 2019

  7,500  $1.07  $8 

December 2020

  7,500  $2.06  $15 

(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 2019

  524,997  $1.14  $598 

June 2019

  46,168  $1.08  $50 

March 2020

  600,396  $0.90  $540 
October 2020  16,339  $1.53  $25 

March 2021

  530,435  $2.71  $1,437 

(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, 2021, was $1.7 million, which will be expensed over the remaining vesting period.

 

The Partnership’s equity-based incentive compensation expense for the three months ended March 31, 2020 and 2021, was $0.2 million and $0.1 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, 2020

  1,350,366  $1.81 

Granted

  530,435   2.71 

Vested

  329,996   4.20 

Forfeited

  -   - 

Nonvested at March 31, 2021

  1,550,805  $1.61 

 

 

 

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.

 

As of December 31, 2020, and March 31, 2021, the Partnership had no recurring financial assets or liabilities subject to fair value measurement.

 

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, 2021, 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, 2021, approximates its fair value. The fair value of the Partnership’s long-term debt was calculated using observable inputs (Eurodollar Rate for the risk-free component) and unobservable company-specific credit spread information. As such, the Partnership considers this debt to be Level 3.

 

 

11.

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 would be required to settle the obligations based on current costs are not material.  The Partnership will record asset retirement obligations for these assets in the period in which sufficient information becomes available for it to reasonably determine the settlement dates.

 

 

12.

RECENTLY ISSUED ACCOUNTING STANDARDS

 

Except as discussed in the 2020 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, 2021, that are of significance or potential significance to the Partnership.

 

 

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

As used in this quarterly report, unless we indicate otherwise: (1) “Blueknight,” “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., and (3) “Ergon” refers to Ergon, Inc., its affiliates and subsidiaries (other than our General Partner and us).  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, 2020, which was filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2021 (the “2020 Form 10-K”). 

 

Forward-Looking Statements

 

This report contains “forward-looking statements” within the meaning of the federal securities laws.  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,” “anticipate,” “estimate,” “continue,” or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state other “forward-looking” information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements.

 

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 2020 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 26 states. We have the largest independent asphalt facility footprint in the nation, and through that we provide integrated terminalling services for companies engaged in the production, distribution, and marketing of liquid asphalt for infrastructure or other end markets.  We manage our operations through a single operating segment, asphalt terminalling services.

 

We previously provided integrated terminalling, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil in three different operating segments: (i) crude oil terminalling services, (ii) crude oil pipeline services, and (iii) crude oil trucking services. On December 21, 2020, we announced we had entered into multiple definitive agreements to sell these segments. The transactions closed in February and March of 2021, and these segments are presented as discontinued operations for all periods.

 

Our 53 asphalt facilities are well-positioned to provide asphalt terminalling services in the market areas they serve throughout the continental United States. With our approximately 8.7 million barrels of total liquid asphalt storage capacity, we provide our customers the ability to effectively manage their liquid asphalt inventories in their processing and marketing activities. Our asphalt terminalling business delivers a stable cash flow profile through long-term take-or-pay contracts that generally have original terms of 5 to 7 years with options to extend the term. The stability comes from the contract structure that is comprised primarily of take-or-pay fixed fees, which make up approximately 95% of our revenues on an annual basis after excluding cost reimbursements primarily for utilities. The remaining revenue is variable, primarily consisting of volume-based throughput fees.

 

We have contractual agreements in place for all of our asphalt terminalling facilities. We lease certain facilities for operation by our customers and at the remaining facilities our employees operate the facility to meet our customers’ specifications. The agreements have, based on a weighted average by remaining fixed revenue, approximately 5.6 years remaining under their terms as of April 28, 2021. Approximately 18% of our tank capacity will expire at the end of 2021 if not renewed with the current customer or a new customer, and the remaining capacity expires at varying times thereafter, through 2027. Our varying contract expiration dates provide for staggered renewals, which provides additional stability to the cash flow. 

 

 

Potential Impact of Certain Factors on Future Revenues

 

Due to the high percentage of fixed and reimbursement revenue from our long-term contracts, our focus and our primary risk is renewing contracts at favorable terms. Our ability to renew agreements on favorable terms, or at all, could be impacted if our customers experience negative market conditions. These factors include infrastructure spending, the strength of state and local economies, and the level of allocations of tax funding to transportation spending from state or federal funds. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share of the United States construction market. Federal funds are allocated on a state-by-state basis, and each state is required to match a portion of the federal funds that it receives. Currently, from a macroeconomic view, there are positive indicators for the infrastructure and construction sector, such as continued discussion and support for infrastructure spending from all sides of the federal government, low interest rates, and a recovering economy since mid-2020. However, due to the novel coronavirus disease (“ COVID-19”), as discussed below, some uncertainty exists.

 

Due to the global pandemic related to COVID-19, the economy experienced a significant downturn during part of 2020. Despite this economic volatility, our cash flows remained stable and are expected to remain stable moving forward. While our customers may be impacted by the economic 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. We do not expect any supply chain disruptions from COVID-19 to affect our customers. 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 prepared 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, and reducing the number of people in our sites at any one time.

 

Infrastructure spending is currently a focus at the federal, state, and local levels, and the initiatives are receiving high approval ratings. At the same time, state revenue is down due to COVID-19, so we remain cautious about future spending on infrastructure and road construction absent an infrastructure bill passed by the federal government to support funding efforts. The current federal administration has targeted infrastructure as a top priority. Based on recent history, infrastructure investment has been renewed at increased levels, and, based on recent federal proposals, we expect the funding to continue to increase. Increased funding potentially impacts us through favorable customer contract renewals as well as increased customer volumes through our terminals.

 

Another factor impacting us and our customers, from a short-term perspective, is weather patterns. Our customers’ volumes could be significantly impacted by prolonged rain or snow seasons or any severe weather that occurs. Damage to our terminal facilities from severe weather, such as flooding or hurricanes, could impact our operating results through additional costs and/or loss of revenue.

 

 

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, 2020 and 2021, reconciled to the most directly comparable GAAP measure:

 

  

Three Months Ended

  

Favorable/(Unfavorable)

 

Operating results

 

March 31,

  

Three Months

 

(dollars in thousands)

 

2020

  

2021

  $   %
Fixed fee revenue $22,356  $24,371  $2,015   9%

Variable cost recovery revenue

  3,303   2,584   (719)  (22)%
Variable throughput and other revenue  1   120   119   11900%
Total revenue  25,660   27,075   1,415   6%

Operating expenses, excluding depreciation and amortization

  (12,075)  (12,847)  (772)  (6)%

Total operating margin, excluding depreciation and amortization

  13,585   14,228   643   5%
                 
Depreciation and amortization  3,585   3,033   552   15%
General and administrative expense  3,366   3,982   (616)  (18)%

Loss on disposal of assets

  74   -   74   100%
Operating income  6,560   7,213   653   10%
                 

Other income (expenses):

                
Other income  650   233   (417)  (64)%
Interest expense  (1,686)  (1,333)  353   21%
Provision for income taxes  (5)  (10)  (5)  (100)%

Income from continuing operations

  5,519   6,103   584   11%

Income(loss) from discontinued operations, net

  (5,519)  75,550   81,069   1469%

Net income

 $-  $81,653  $81,653   N/A 

 

Revenues. Total revenues increased to $27.1 million for the three months ended March 31, 2021, as compared $25.7 million for the same period in 2020. Revenues consist primarily of fixed fees for items such as storage and minimum throughput requirements, with consideration of annual CPI index increases built into our agreements. The increase in fixed fee revenue is primarily due to certain contracts that changed from a lease arrangement to an operating arrangement. Variable cost recovery revenue is driven by certain reimbursable operating expenses, such as utility costs, and therefore have no net impact on operating margin or net income.

 

       Operating expenses, excluding depreciation and amortization. Operating expense, excluding depreciation and amortization, increased to $12.8 million for the three months ended March 31, 2021, as compared to $12.1 million for the same period in 2020.  Significant factors contributing to this change include certain contracts that changed from a lease arrangement to an operating arrangement and increases in insurance premiums due to overall market conditions from second quarter 2020 renewals.

 

Depreciation and amortization expense. Depreciation and amortization expense decreased to $3.0 million for the three months ended March 31, 2021, compared to $3.6 million for the same period in 2020. This decrease is primarily the result of certain assets reaching the end of their depreciable lives.

 

General and administrative expense.  General and administrative expense increased to $4.0 million for the three months ended March 31, 2021, compared to $3.4 million for the same period in 2020, primarily due to severance costs and professional fees associated with the crude oil business sales.

 

Other income. Other income for the three months ended March 31, 2021 and 2020, primarily relates to insurance recoveries related to flood damages incurred in 2019 and 2020 at certain asphalt facilities.

 

 

Interest expense. Interest expense represents interest on borrowings under our credit agreement as well as amortization of debt issuance costs. The following table presents the significant components of interest expense (dollars in thousands):

 

  

Three Months Ended

  

Favorable/(Unfavorable)

 
  

March 31,

  

Three Months

 
  

2020

  

2021

  $ %

Credit agreement interest

 $1,435  $942  $493   34%
Amortization of debt issuance costs  251   244   7   3%
Write-off of debt issuance costs  -   147   (147)  N/A 

Total interest expense

 $1,686  $1,333  $353   21%

 

The decrease in credit agreement interest is due to lower floating eurodollar interest rates, lower average borrowings outstanding during the period, and favorable changes to the applicable margin based on an improved leverage ratio.

 

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 21, 2021, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended March 31, 2021. We will pay this distribution on May 14, 2021, to unitholders of record as of May 7, 2021. The total distribution will be approximately $6.3 million, with approximately $6.2 million and $0.1 million paid to our preferred unitholders and general partner, respectively.

 

In addition, the Board approved a cash distribution of $0.04 per outstanding common unit for the three months ended March 31, 2021. We will pay this distribution on May 14, 2021, to unitholders of record as of May 7, 2021. The total distribution will be approximately $1.7 million, with approximately $1.7 million and less than $0.1 million paid to our common unitholders and general partner, respectively, and approximately $0.1 million paid to holders of phantom and restricted units pursuant to awards granted under our Long-Term Incentive Plan.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined by Item 303 of Regulation S-K.

 

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table summarizes our sources and uses of cash, inclusive of both continuing and discontinued operations, for the three months ended March 31, 2020 and 2021

 

  Three Months Ended March 31, 
  

2020

  

2021

 
  

(in millions)

 

Net cash provided by operating activities

 $7.9  $5.4 

Net cash provided by (used in) investing activities

 $(15.1) $153.3 

Net cash provided by (used in) financing activities

 $7.3  $(159.4)

 

Operating Activities.  Net cash provided by operating activities decreased to $5.4 million for the three months ended March 31, 2021, as compared to $7.9 million for the three months ended March 31, 2020, due to changes in working capital.

 

Investing Activities.  Net cash provided by investing activities was $153.3 million for the three months ended March 31, 2021, compared to net cash used in investing activities of $15.1 million for the three months ended March 31, 2020. The three months ended March 31, 2021, included net proceeds from the sale of the crude oil businesses of $155.3 million, which excludes $1.5 million of funds held in escrow for right of way renewals. The three months ended March 31, 2020, included a $12.2 million payment to Ergon related to our purchase of Ergon’s DEVCO entity related to Cimarron Express. Capital expenditures for the three months ended March 31, 2021, inclusive of both continuing and discontinued operations, included maintenance capital expenditures of $1.5 million and expansion capital expenditures $0.5 million. Capital expenditures for the three months ended March 31, 2020, inclusive of both continuing and discontinued operations, included maintenance capital expenditures of $1.8 million and expansion capital expenditures of $1.1 million. 

 

Financing Activities.  Net cash used in financing activities was $159.4 million for the three months ended March 31, 2021, compared to net cash provided by financing activities of $7.3 million for the three months ended March 31, 2020. Cash used in financing activities for the three months ended March 31, 2021, consisted primarily of net payments on long-term debt of $146.0 million, $8.1 million in distributions to our unitholders, and the repurchase of preferred units of $5.2 million. Net cash provided by financing activities for the three months ended March 31, 2020, consisted primarily of net borrowings on long-term debt of $16.0 million partially offset by $8.1 million in distributions to our unitholders.

 

Liquidity and Capital Resources

 

Cash flows from operations and availability under our revolving credit facility are our primary sources of liquidity. At March 31, 2021, we had a working capital deficit of $7.6 million. This is primarily a function of our approach to cash management. At March 31, 2021, we had approximately $106.6 million of revolver borrowings and approximately $0.7 million of letters of credit outstanding under the credit agreement, leaving us with approximately $242.7 million of availability under our credit agreement subject to covenant restrictions, which limited our availability to $132.9 million. As of April 28, 2021, we have approximately $106.6 million of revolver borrowings and approximately $0.7 million of letters of credit outstanding under the credit agreement, leaving us with aggregate unused commitments under our revolving credit facility of approximately $242.7 million and cash on hand of approximately $1.2 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, 2021, and for each fiscal quarter thereafter, is 4.75. Our consolidated total leverage ratio was 2.12 to 1.00 as of March 31, 2021.  Based on current operating plans and forecasts, we expect to remain in compliance with all covenants of the credit agreement for at least the next year.

 

 

 

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 from continuing operations for the three months ended March 31, 2020 and 2021 (in thousands):

 

  

Three Months Ended March 31,

 
  

2020

  

2021

 

Acquisitions

 $12,221  $- 
         
Gross expansion capital expenditures $214  $517 
Reimbursable expenditures  (93)  - 
Net expansion capital expenditures $121  $517 
         
Gross maintenance capital expenditures $1,534  $1,408 
Reimbursable expenditures  (97)  (19)
Net maintenance capital expenditures $1,437  $1,389 

 

We currently expect our 2021 expansion capital expenditures for organic growth projects to be approximately $0.5 million and our maintenance capital expenditures to be approximately $6.0 million, each net of reimbursable expenditures.

 

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 with the provisions of our credit agreement.  We may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations because we distribute all of our available cash. 

 

Recent Accounting Pronouncements

 

For information regarding recent accounting developments that may affect our future financial statements, see Note 12 to our unaudited condensed consolidated financial statements.

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Partnership is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

Item 4.    Controls and Procedures.

 

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, 2021, were effective. 

 

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, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

The information required by this item is included under the caption “Commitments and Contingencies” in Note 11 to our unaudited condensed consolidated financial statements and is incorporated herein by reference thereto.

 

Item 1A.    Risk Factors.

 

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, 2020.

 

Item 2. Unregistered Sales of Equity Securities

 

The following table sets forth a summary of our purchases during the three months ended March 31, 2021, of equity securities that are registered by Blueknight pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

 

Period

 

Total Number of Series A Preferred Units Purchased(1)

  

Average Price Paid per Series A Preferred Unit(1)

  

Total Number of Series A Preferred Units Purchased as Part of Publicly Announced Plans or Programs

  

Maximum Dollar Value of Series A Preferred Units that May Yet Be Purchased Under the Plans or Programs

 

03/01/2021-03/31/2021

  688,417  $7.50   -  $- 
02/01/2021-02/28/2021  -  $-   -  $- 
01/01/2021-01/31/2021  -  $-   -  $- 

___________________

(1)

The repurchase was made pursuant to a privately negotiated transaction on March 12, 2021.

 

 

21

 

 

 

Item 6.    Exhibits.

 

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

 

Amended and Restated Certificate of Limited Partnership of the Partnership, dated November 19, 2009, but effective as of December 1, 2009 (filed as Exhibit 3.1 to the Partnership’s Current Report on Form 8-K, filed November 25, 2009 (Commission File No. 001-33503), and incorporated herein by reference).

3.2

 

First Amendment to the Amended and Restated Certificate of Limited Partnership of Blueknight Energy Partners L.P., dated July 18, 2019 (filed as Exhibit 3.2 to the Partnership’s Current Report on Form 8-K, filed on July 22, 2019, and incorporated herein by reference).

3.3

 

Fourth Amended and Restated Agreement of Limited Partnership of the Partnership, dated September 14, 2011 (filed as Exhibit 3.1 to the Partnership’s Current Report on Form 8-K, filed September 14, 2011, and incorporated herein by reference).

3.4

 

Amended and Restated Certificate of Formation of the General Partner, dated November 20, 2009 but effective as of December 1, 2009 (filed as Exhibit 3.2 to the Partnership’s Current Report on Form 8-K, filed November 25, 2009 (Commission File No. 001-33503), and incorporated herein by reference).

3.5

 

First Amendment to the Amended and Restated Certificate of Formation of Blueknight Energy Partners G.P., L.L.C., dated July 18, 2019 (filed as Exhibit 3.1 to the Partnership’s Current Report on Form 8-K, filed on July 22, 2019, and incorporated herein by reference).

3.6

 

Second Amended and Restated Limited Liability Company Agreement of the General Partner, dated December 1, 2009 (filed as Exhibit 3.2 to the Partnership’s Current Report on Form 8-K, filed December 7, 2009 (Commission File No. 001-33503), and incorporated herein by reference).

4.1

 

Registration Rights Agreement, dated October 5, 2016, by and among the Partnership, Ergon Asphalt & Emulsions, Inc., Ergon Terminaling, Inc. and Ergon Asphalt Holdings, LLC (filed as Exhibit 4.1 to the Partnership’s Current Report on Form 8-K, filed October 5, 2016, and incorporated herein by reference).

31.1*

 

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

 

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1#

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this Exhibit is furnished to the SEC and shall not be deemed to be “filed.”

101#

 

The following financial information from Blueknight Energy Partners, L.P.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Document and Entity Information; (ii) Unaudited Condensed Consolidated Balance Sheets as of December 31, 2020 and March 31, 2021; (iii) Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2021; (iv) Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital (Deficit) for the three months ended March 31, 2020 and 2021; (v) Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2021; and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

____________________

*    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:

May 5, 2021

By:

/s/ Matthew R. Lewis

 

 

 

Matthew R. Lewis

 

 

 

Chief Financial Officer

 

 

 

 

Date:

May 5, 2021

By:

/s/ Michael G. McLanahan

 

 

 

Michael G. McLanahan

 

 

 

Chief Accounting Officer

 

 

23