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EX-31.1 - EXHIBIT 31.1 - Blueknight Energy Partners, L.P.ex_201311.htm
 

 

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 September 30, 2020

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 October 30, 2020, there were 35,125,202 Series A Preferred Units and 41,198,088 common units outstanding.  
 

 

 

 

 

Table of Contents

 

    Page
PART I FINANCIAL INFORMATION 1
Item 1. Unaudited Condensed Consolidated Financial Statements 1
  Condensed Consolidated Balance Sheets as of December 31, 2019, and September 30, 2020 1
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2020 2
  Condensed Consolidated Statements of Changes in Partners’ Capital (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2020 3
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2020 4
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
  1.   Organization and Nature of Business 5
  2.   Basis of Consolidation and Presentation 5
  3.   Revenue 5
  4.   Property, Plant, and Equipment 8
  5.   Debt 9
  6.   Net Income Per Limited Partner Unit 11
  7.   Partners’ Capital and Distributions 11
  8.   Related Party Transactions 12
  9.   Long-term Incentive Plan 13
  10. Derivative Financial Instruments 14
  11. Fair Value Measurements 14
  12. Operating Segments 15
  13. Commitments and Contingencies 17
  14. Recently Issued Accounting Standards 17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
     
PART II OTHER INFORMATION 30
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 6. Exhibits 30

 

 

 

 

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, 2019

   

September 30, 2020

 
   

(unaudited)

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 558     $ 972  
Accounts receivable, net     23,716       15,039  
Receivables from related parties, net     1,110       1,006  
Other current assets     8,692       7,783  
Total current assets     34,076       24,800  

Property, plant and equipment, net of accumulated depreciation of $274,404 and $287,964 at December 31, 2019, and September 30, 2020, respectively

    232,777       222,881  
Goodwill     6,728       6,728  
Debt issuance costs, net     2,344       1,591  
Operating lease assets     10,758       9,009  
Intangible assets, net     14,088       12,029  
Other noncurrent assets     1,169       1,047  

Total assets

  $ 301,940     $ 278,085  

LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT)

               

Current liabilities:

               
Accounts payable   $ 3,125     $ 2,281  
Accounts payable to related parties     2,460       837  
Accrued crude oil purchases     6,706       3,668  
Accrued crude oil purchases to related parties     11,807       7,425  
Contingent liability with related party (Note 8)     12,221       -  
Accrued interest payable     293       318  
Accrued property taxes payable     3,247       3,451  
Unearned revenue     1,942       3,874  
Unearned revenue with related parties     2,934       2,910  
Accrued payroll     4,823       4,794  
Current operating lease liability     2,391       1,827  
Other current liabilities     2,627       2,802  
Total current liabilities     54,576       34,187  
Long-term unearned revenue with related parties     2,149       4,224  
Other long-term liabilities     2,417       927  
Noncurrent operating lease liability     8,529       7,221  
Long-term debt     255,592       260,592  

Commitments and contingencies (Note 13)

               

Partners’ capital(deficit):

               

Common unitholders (40,830,051 and 41,198,088 units issued and outstanding at December 31, 2019, and September 30, 2020, respectively)

    356,777       349,160  

Preferred unitholders (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 )     (29,066 )

Total liabilities and partners’ deficit

  $ 301,940     $ 278,085  
 

 

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 September 30,

   

Nine Months ended September 30,

 
   

2019

   

2020

   

2019

   

2020

 
   

(unaudited)

Service revenue:

                               

Third-party revenue

  $ 15,716     $ 12,886     $ 47,318     $ 39,935  

Related-party revenue

    3,934       4,849       12,189       12,945  

Lease revenue:

                               

Third-party revenue

    11,444       9,142       31,004       27,051  

Related-party revenue

    5,427       7,490       15,179       19,239  

Product sales revenue:

                               

Third-party revenue

    55,213       51,390       173,773       119,068  

Total revenue

    91,734       85,757       279,463       218,238  

Costs and expenses:

                               

Operating expense

    25,215       23,715       78,432       73,066  

Cost of product sales

    18,972       19,833       64,069       41,133  

Cost of product sales from related party

    32,691       22,627       99,886       63,671  

General and administrative expense

    3,840       3,401       10,495       11,008  

Asset impairment expense

    83       -       2,316       6,417  

Total costs and expenses

    80,801       69,576       255,198       195,295  

Gain (loss) on disposal of assets

    (40 )     509       1,765       426  

Operating income

    10,893       16,690       26,030       23,369  

Other income (expenses):

                               

Other income

    69       176       475       969  

Interest expense

    (3,989 )     (2,472 )     (12,394 )     (8,586 )

Income before income taxes

    6,973       14,394       14,111       15,752  

Provision for income taxes

    14       1       39       8  

Net income

  $ 6,959     $ 14,393     $ 14,072     $ 15,744  
                                 

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

                               

General partner interest in net income

  $ 110     $ 228     $ 268     $ 249  

Preferred interest in net income

  $ 6,278     $ 6,278     $ 18,836     $ 18,836  

Net income (loss) available to limited partners

  $ 571     $ 7,887     $ (5,032 )   $ (3,341 )
                                 
Basic net income (loss) per common unit   $ 0.01     $ 0.19     $ (0.12 )   $ (0.08 )

Diluted net income (loss) per common unit

  $ 0.01     $ 0.18     $ (0.12 )   $ (0.08 )
                                 
Weighted average common units outstanding - basic     40,811       41,166       40,735       41,072  

Weighted average common units outstanding - diluted

    40,811       77,646       40,735       41,072  

 

 

 

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, June 30, 2019

  $ 360,861     $ 253,923     $ (631,952 )   $ (17,168 )

Net income

    574       6,278       107       6,959  

Equity-based incentive compensation

    284       -       5       289  

Distributions

    (1,678 )     (6,278 )     (128 )     (8,084 )
Proceeds from sale of 98,631 common units pursuant to the Employee Unit Purchase Plan     103       -       -       103  
Balance, September 30, 2019   $ 360,144     $ 253,923     $ (631,968 )   $ (17,901 )
                                 

Balance, December 31, 2018

  $ 370,972     $ 253,923     $ (631,791 )   $ (6,896 )

Net income (loss)

    (4,983 )     18,836       219       14,072  

Equity-based incentive compensation

    637       -       15       652  

Distributions

    (6,658 )     (18,836 )     (411 )     (25,905 )

Proceeds from sale of 161,971 common units pursuant to the Employee Unit Purchase Plan

    176       -       -       176  
Balance, September 30, 2019   $ 360,144     $ 253,923     $ (631,968 )   $ (17,901 )
                                 

Balance, June 30, 2020

  $ 342,651     $ 253,923     $ (632,252 )   $ (35,678 )
Net income     7,887       6,278       228       14,393  
Equity-based incentive compensation     210       -       3       213  
Distributions     (1,703 )     (6,278 )     (128 )     (8,109 )
Proceeds from sale of 104,954 common units pursuant to the Employee Unit Purchase Plan     115       -       -       115  
Balance, September 30, 2020   $ 349,160     $ 253,923     $ (632,149 )   $ (29,066 )
                                 

Balance, December 31, 2019

  $ 356,777     $ 253,923     $ (632,023 )   $ (21,323 )
Net income (loss)     (3,341 )     18,836       249       15,744  
Equity-based incentive compensation     630       -       10       640  
Distributions     (5,076 )     (18,836 )     (385 )     (24,297 )
Proceeds from sale of 158,326 common units pursuant to the Employee Unit Purchase Plan     170       -       -       170  
Balance, September 30, 2020   $ 349,160     $ 253,923     $ (632,149 )   $ (29,066 )

 

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)

 

   

Nine Months ended September 30,

 
   

2019

   

2020

 
   

(unaudited)

 

Cash flows from operating activities:

               

Net income

  $ 14,072     $ 15,744  

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

               
Depreciation and amortization     19,211       17,698  
Amortization of debt issuance costs     754       753  
Tangible asset impairment charge     2,316       6,417  
Gain on disposal of assets     (1,765 )     (426 )
Equity-based incentive compensation     652       640  

Changes in assets and liabilities:

               
Decrease in accounts receivable     7,128       8,677  
Decrease (increase) in receivables from related parties     (830 )     104  
Decrease in other current assets     3,615       3,032  
Decrease in other non-current assets     2,255       1,767  

Decrease in accounts payable

    (250 )     (379 )
Increase (decrease) in payables to related parties     535       (1,256 )
Decrease in accrued crude oil purchases     (7,484 )     (4,244 )
Increase (decrease) in accrued crude oil purchases to related parties     1,219       (4,382 )
Increase (decrease) in accrued interest payable     (176 )     25  
Increase in accrued property taxes     612       204  
Increase in unearned revenue     1,557       318  
Increase (decrease) in unearned revenue from related parties     (2,380 )     1,382  
Increase (decrease) in accrued payroll     169       (29 )
Decrease in other accrued liabilities     (2,926 )     (2,145 )
Net cash provided by operating activities     38,284       43,900  

Cash flows from investing activities:

               
Acquisition of DEVCO from Ergon (Note 8)     -       (12,221 )
Capital expenditures     (9,428 )     (12,381 )
Proceeds from sale of assets     7,089       2,409  
Net cash used in investing activities     (2,339 )     (22,193 )

Cash flows from financing activities:

               
Payments on other financing activities     (1,894 )     (2,166 )
Borrowings under credit agreement     218,000       181,000  
Payments under credit agreement     (225,000 )     (176,000 )

Proceeds from equity issuance

    176       170  
Distributions     (25,905 )     (24,297 )
Net cash used in financing activities     (34,623 )     (21,293 )
Net increase in cash and cash equivalents     1,322       414  
Cash and cash equivalents at beginning of period     1,455       558  

Cash and cash equivalents at end of period

  $ 2,777     $ 972  
                 

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

               

Non-cash changes in property, plant and equipment

  $ 1,528     $ 1,185  

Increase in accrued liabilities related to insurance premium financing agreement

  $ 2,356     $ 2,324  

 

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, gathering, transportation and marketing services for companies engaged in the production, distribution and marketing of crude oil and asphalt products. The Partnership manages its 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. 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 initially to own, operate and develop a diversified portfolio of complementary midstream energy assets.

 

 

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 September 30, 2020, the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2020, the condensed consolidated statements of changes in partners’ capital (deficit) for the three and nine months ended September 30, 2019 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2020, 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 2019 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, 2019, filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2020 (the “2019 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 2019 Form 10-K. The following reclassifications have been made in the consolidated financial statements: (i) an immaterial operating cash flow item was combined with another operating cash flow item in the condensed consolidated statement of cash flows for the nine months ended September 30, 2019, and (ii) immaterial corporate items previously allocated to revenues and operating expenses have been reclassified to other income in the condensed consolidated statements of operations for all periods presented. These reclassifications had no impact on net income.

 

 

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 2020

  $ 9,620     $ 14,358  

2021

    38,156       57,083  

2022

    30,076       45,512  

2023

    26,462       38,446  

2024

    26,506       38,494  

Thereafter

    61,140       76,644  

Total revenue related to future performance obligations

  $ 191,960     $ 270,537  

___________________

(1)

Excluded from the table is revenue that is either constrained or related to performance obligations that are wholly unsatisfied as of September 30, 2020.

 

 

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 September 30, 2019

 

Revenue from contracts with customers

                                       

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 5,008     $ 3,264     $ -     $ -     $ 8,272  

Variable throughput and other revenue

    648       961       -       -       1,609  

Variable reimbursement revenue

    1,729       -       -       -       1,729  

Crude oil transportation revenue

    -       -       1,284       2,822       4,106  

Crude oil product sales revenue

    -       -       55,213       -       55,213  

Related-party revenue:

                                       

Fixed storage, throughput and other revenue

    2,750       -       63       -       2,813  

Variable throughput and other revenue

    21       -       -       -       21  

Variable reimbursement revenue

    1,099       -       1       -       1,100  

Total revenue from contracts with customers

  $ 11,255     $ 4,225     $ 56,561     $ 2,822     $ 74,863  

Lease revenue

                                       

Third-party revenue:

                                       

Fixed lease revenue

  $ 9,415     $ -     $ -     $ -     $ 9,415  

Variable throughput and other revenue

    1,451       -       -       -       1,451  

Variable reimbursement revenue

    578       -       -       -       578  

Related-party revenue:

                                       

Fixed lease revenue

    4,733       -       -       -       4,733  

Variable throughput and other revenue

    615       -       -       -       615  

Variable reimbursement revenue

    79       -       -       -       79  

Total lease revenue

  $ 16,871     $ -     $ -     $ -     $ 16,871  

Total revenue

  $ 28,126     $ 4,225     $ 56,561     $ 2,822     $ 91,734  

 

 

   

Three Months ended September 30, 2020

 

Revenue from contracts with customers

                                       

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 5,097     $ 3,327     $ -     $ -     $ 8,424  

Variable throughput and other revenue

    752       863       -       -       1,615  

Variable reimbursement revenue

    1,665       -       -       -       1,665  

Crude oil transportation revenue

    -       -       412       770       1,182  

Crude oil product sales revenue

    -       -       51,390       -       51,390  

Related-party revenue:

                                       

Fixed storage, throughput and other revenue

    4,079       -       -       -       4,079  

Variable throughput and other revenue

    267       -       -       -       267  

Variable reimbursement revenue

    503       -       -       -       503  

Total revenue from contracts with customers

  $ 12,363     $ 4,190     $ 51,802     $ 770     $ 69,125  

Lease revenue

                                       

Third-party revenue:

                                       

Fixed lease revenue

  $ 7,930     $ -     $ -     $ -     $ 7,930  

Variable throughput revenue

    713       -       -       -       713  

Variable reimbursement revenue

    499       -       -       -       499  

Related-party revenue:

                                       

Fixed lease revenue

    6,552       -       -       -       6,552  

Variable throughput revenue

    784       -       -       -       784  

Variable reimbursement revenue

    154       -       -       -       154  

Total lease revenue

  $ 16,632     $ -     $ -     $ -     $ 16,632  

Total revenue

  $ 28,995     $ 4,190     $ 51,802     $ 770     $ 85,757  

 

 

 

   

Asphalt Terminalling Services

   

Crude Oil Terminalling Services

   

Crude Oil Pipeline Services

   

Crude Oil Trucking Services

   

Total

 
   

Nine Months ended September 30, 2019

 

Revenue from contracts with customers

                                       

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 14,852     $ 9,380     $ -     $ -     $ 24,232  

Variable throughput and other revenue

    877       2,435       -       -       3,312  

Variable reimbursement revenue

    5,489       -       -       -       5,489  

Crude oil transportation revenue

    -       -       5,748       8,537       14,285  

Crude oil product sales revenue

    -       -       173,773       -       173,773  

Related-party revenue:

                                       

Fixed storage, throughput and other revenue

    8,296       -       229       -       8,525  

Variable throughput and other revenue

    136       -       -       -       136  

Variable reimbursement revenue

    3,491       -       37       -       3,528  

Total revenue from contracts with customers

  $ 33,141     $ 11,815     $ 179,787     $ 8,537     $ 233,280  

Lease revenue

                                       

Third-party revenue:

                                       

Fixed lease revenue

  $ 27,867     $ -     $ -     $ -     $ 27,867  

Variable throughput and other revenue

    1,451       -       -       -       1,451  

Variable reimbursement revenue

    1,685       -       -       -       1,685  

Related-party revenue:

                                       

Fixed lease revenue

    14,249       -       -       -       14,249  

Variable throughput and other revenue

    615       -       -       -       615  

Variable reimbursement revenue

    316       -       -       -       316  

Total lease revenue

  $ 46,183     $ -     $ -     $ -     $ 46,183  

Total revenue

  $ 79,324     $ 11,815     $ 179,787     $ 8,537     $ 279,463  

 

 

   

Nine Months ended September 30, 2020

 

Revenue from contracts with customers

                                       

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 15,318     $ 9,858     $ -     $ -     $ 25,176  

Variable throughput and other revenue

    1,129       2,755       -       -       3,884  

Variable reimbursement revenue

    4,754       -       -       -       4,754  

Crude oil transportation revenue

    -       -       1,287       4,834       6,121  

Crude oil product sales revenue

    -       -       119,068       -       119,068  

Related-party revenue:

                                       

Fixed storage, throughput and other revenue

    9,861       -       -       -       9,861  

Variable throughput and other revenue

    647       -       -       -       647  

Variable reimbursement revenue

    2,437       -       -       -       2,437  

Total revenue from contracts with customers

  $ 34,146     $ 12,613     $ 120,355     $ 4,834     $ 171,948  

Lease revenue

                                       

Third-party revenue:

                                       

Fixed lease revenue

  $ 24,729     $ -     $ -     $ -     $ 24,729  

Variable throughput and other revenue

    746       -       -       -       746  

Variable reimbursement revenue

    1,576       -       -       -       1,576  

Related-party revenue:

                                       

Fixed lease revenue

    17,914       -       -       -       17,914  

Variable throughput and other revenue

    784       -       -       -       784  

Variable reimbursement revenue

    541       -       -       -       541  

Total lease revenue

  $ 46,290     $ -     $ -     $ -     $ 46,290  

Total revenue

  $ 80,436     $ 12,613     $ 120,355     $ 4,834     $ 218,238  

 

 

Contract Balances

 

Billed accounts receivable from contracts with customers were $23.2 million and $13.7 million at December 31, 2019, and September 30, 2020, respectively.

 

The Partnership records unearned revenues when cash payments are received in advance of performance. Unearned revenue related to contracts with customers was $3.0 million and $3.6 million at December 31, 2019, and September 30, 2020, respectively. For the nine months ended September 30, 2020, 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 (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.

 

 

 

4.

PROPERTY, PLANT, AND EQUIPMENT

 

The Partnership recognized asset impairment expense of $6.4 million for the nine months ended September 30, 2020. In the second quarter of 2020, the Partnership recorded an impairment of $1.3 million related to the crude oil trucking segment based on the expected future cash flows and market interest of the segment compared to the carrying value of its assets, and consisted of $1.1 million related to plant, property and equipment and $0.2 million related to operating right-of-use assets. In addition, an impairment was recorded in the first quarter of 2020 to write-down 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 2020, $0.8 million of incremental crude oil linefill was acquired to meet the requirements of the pipeline system, resulting in a total impairment on the crude oil linefill of $4.9 million.
 
During the nine months ended September 30, 2019, the Partnership recognized asset impairment expense of $2.3 million. A change in estimate of the push-down impairment related to Cimarron Express Pipeline, LLC (“Cimarron Express”) resulted in additional impairment expense of $2.0 million, which was recorded at the corporate level (see Note 8 for more information). In addition, flooding at several asphalt terminals in the Midwest led to an impairment of $0.3 million during that period.
 

During the three and nine months ended September 30, 2020, the Partnership had a small gain on the disposal of assets that were no longer being used for operations. During the nine months ended September 30, 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 $0.3 million. 

 

 In addition, proceeds received during the nine months ended September 30, 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 $400.0 million and amend the maximum permitted consolidated total leverage ratio as discussed below.

 

As of October 30, 2020, approximately $255.6 million of revolver borrowings and $1.7 million of letters of credit were outstanding under the credit agreement, leaving the Partnership with approximately $142.7 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) 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 (“credit agreement EBITDA”)).

 

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 credit agreement EBITDA) 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 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 Fourth Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”).

 

At September 30, 2020, the Partnership’s consolidated total leverage ratio was 4.06 to 1.00 and the consolidated interest coverage ratio was 5.79 to 1.00. The Partnership was in compliance with all covenants of its credit agreement as of September 30, 2020.
 

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 remain in compliance with these financial covenants (as described below). However, there are certain inherent risks associated with the continued ability to comply with the 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 the $260.6 million in outstanding debt as of September 30, 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 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. 

 

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 September 30, 2019 and 2020, was $0.3 million. Interest expense related to debt issuance cost amortization for both the nine months ended September 30, 2019 and 2020, was $0.8 million.

  

During the three months ended September 30, 2019 and 2020, the weighted average interest rate under the Partnership’s credit agreement was 5.90% and 3.56%, respectively, resulting in interest expense of approximately $4.0 million and $2.5 million, respectively. During the nine months ended September 30, 2019 and 2020, the weighted average interest rate under the Partnership’s credit agreement was 6.20% and 4.11%, respectively, resulting in interest expense of approximately $12.3 million and $8.5 million, respectively.

 

 

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 for each period are allocated to the Partnership’s general partner based on its respective ownership interests at the time. The remainder is allocated to the 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 September 30,

   

Nine Months ended September 30,

 
   

2019

   

2020

   

2019

   

2020

 

Net income

  $ 6,959     $ 14,393     $ 14,072     $ 15,744  

General partner interest in net income

    110       228       268       249  

Preferred interest in net income

    6,278       6,278       18,836       18,836  

Net income (loss) available to limited partners

  $ 571     $ 7,887     $ (5,032 )   $ (3,341 )
                                 
Basic weighted average number of units:                                

Common units

    40,811       41,166       40,735       41,072  

Restricted and phantom units

    1,130       1,354       1,004       1,259  

Total units

    41,941       42,520       41,739       42,331  
                                 

Diluted weighted average number of units:

                               
Common units     40,811       77,646       40,735       41,072  
                                 
Basic net income (loss) per common unit   $ 0.01     $ 0.19     $ (0.12 )   $ (0.08 )

Diluted net income (loss) per common unit

  $ 0.01     $ 0.18     $ (0.12 )   $ (0.08 )

 

 

7.

PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

On October 15, 2020, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended September 30, 2020. The Partnership will pay this distribution on November 13, 2020, to unitholders of record as of November 3, 2020. The total distribution will be approximately $6.4 million, with approximately $6.3 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 September 30, 2020. The Partnership will pay this distribution on November 13, 2020, to unitholders of record as of November 3, 2020. The total distribution will be approximately $1.7 million, with approximately $1.6 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. On April 3, 2020, Ergon purchased another customer of the Partnership, increasing the number of asphalt facilities under contract with Ergon from 23 to 28. On August 4, 2020, the Partnership and Ergon entered into the 2020 Master Storage, Throughput and Handling Agreement, which was effective August 1, 2020. Pursuant to the 2020 Master Storage, Throughput and Handling Agreement, which replaced three previously filed agreements and all related amendments, the Partnership provides Ergon with storage and terminalling services at 22 facilities. The remaining six facilities under contract with Ergon continue under their existing agreements. For the three months ended September 30, 2019 and 2020, the Partnership recognized related-party revenues of $9.3 million and $12.4 million, respectively, for services provided to Ergon. For the nine months ended September 30, 2019 and 2020, the Partnership recognized related-party revenues of $27.2 million and $32.3 million, respectively, for services provided to Ergon. As of December 31, 2019, and September 30, 2020, the Partnership had receivables from Ergon of $1.1 million and $1.0 million, respectively. As of December 31, 2019, and September 30, 2020, the Partnership had unearned revenues from Ergon of $5.1 million and $6.7 million, respectively.

 

On August 4, 2020, the Partnership and Ergon also entered into the Operating and Maintenance Agreement, effective August 1, 2020, pursuant to which Ergon will provide certain operations and maintenance services to the 22 facilities also under the 2020 Master Storage, Throughput and Handling Agreement. For both the three and nine months ended September 30, 2020, the Partnership recognized expense of $3.1 million related to the Operating and Maintenance Agreement.

 

The Partnership has an agreement with Ergon under which the Partnership purchases crude oil in connection with its crude oil marketing operations. For the three months ended September 30, 2019 and 2020, the Partnership made purchases of crude oil under this agreement totaling $32.8 million and $25.5 million, respectively. For the nine months ended September 30, 2019 and 2020, the Partnership made purchases of crude oil under this agreement totaling $98.6 million and $69.9 million, respectively. As of September 30, 2020, the Partnership had payables to Ergon related to this agreement of $7.4 million for the September crude oil settlement cycle, and this balance was paid in full on October 20, 2020.

 

In May 2018, the Partnership, along with Kingfisher Midstream and Ergon, announced the execution of definitive agreements to form Cimarron 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 original anticipated in-service date in the second half of 2019. Ergon formed a Delaware limited liability company, Ergon - Oklahoma Pipeline, LLC (“DEVCO”), which held Ergon’s 50% membership interest in Cimarron Express. The Partnership and Ergon had an agreement (the “DEVCO Agreement”) that gave each party certain rights to obligate the counterparty to either sell or purchase the outstanding membership interests in DEVCO for a purchase price computed by taking Ergon’s total investment in Cimarron Express plus interest, subject to certain terms and conditions as described in 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 dedicated acreage and the resultant project economics did not support additional investment from Kingfisher Midstream. The Partnership considered the SEC staff’s opinions outlined in SAB 107 Topic 5.T Accounting for Expenses or Liabilities Paid by Principal Stockholders, and, as the DEVCO 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, the Partnership recorded impairments on a push-down basis based on Ergon’s 50% interest in Cimarron Express. During the nine months ended September 30, 2019, the Partnership recorded impairment expense of $2.0 million related to the DEVCO 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 DEVCO 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 nine months ended September 30, 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, DERs entitle 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 annually. 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  

(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  

(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 September 30, 2020, was $0.7 million, which will be expensed over the remaining vesting period.

 

The Partnership’s equity-based incentive compensation expense for the three months ended September 30, 2019 and 2020, was $0.3 million and $0.2 million, respectively. The Partnership's equity-based incentive compensation expense for the nine months ended September 30, 2019 and 2020, was $0.8 million and $0.7 million, respectively. 

 

Activity pertaining to phantom and restricted common unit awards granted under the LTIP was 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

    305,149       5.59  

Forfeited

    14,156       2.19  

Nonvested at September 30, 2020

    1,349,434     $ 2.68  

 

 

 

10.

DERIVATIVE FINANCIAL INSTRUMENT

 

Commodity Derivative - During the second quarter of 2020, the Partnership’s internal crude oil marketing department entered into crude oil forward purchase contracts for 0.3 million barrels of crude oil through sell/buy arrangements with a counterparty to facilitate spot storage deals in the Partnership’s Cushing terminal with such counterparty during a time of favorable contango spreads. The Partnership was not exposed to additional commodity price risk beyond its normal marketing activity. The final purchase settlement on the contracts occurred in August 2020 at then-market prices. There were no open derivative positions at September 30, 2020 or December 31, 2019.

 

Changes in the fair value of the commodity derivative are reflected in the unaudited condensed consolidated statements of operation as follows (in thousands):

 

Derivatives Not Designated as

 

Location of Gain(Loss) Recognized in Net

 

Amount of Gain Recognized

 

Hedging Instruments

 

Income on Derivatives

 

in Net Income on Derivatives

 
       

Three Months ended September 30,

 
       

2020

 

Commodity derivative

 

Cost of product sales

  $ 3,589  

 

Due to the corresponding loss that was recognized in the second quarter of 2020, there is no income statement impact for the change in fair market value of the derivative for the nine months ended September 30, 2020. The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

 

 

11.

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, the Partnership recognizes transfers into and out of Level 3 as of the end of the reporting period. There were no transfers during the nine months ended September 30, 2020. 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.

 

As of September 30, 2020, and December 31, 2019, 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 September 30, 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 September 30, 2020, approximates its fair value. The fair value of the Partnership’s long-term debt was calculated using observable inputs (eurodollar for the risk-free component) and unobservable company-specific credit spread information.  As such, the Partnership considers this debt to be Level 3.

 

 

14

 

 

 

12.

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. The Partnership has 53 terminalling facilities located in 26 states.

 

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 pipeline system that gathers crude oil purchased by its customers and transports it to refiners, to common carrier pipelines for ultimate delivery to refiners or to terminalling facilities owned by the Partnership and others. Crude oil product sales revenues consist of sales proceeds recognized for the sale of crude oil to third-party customers. 

 

CRUDE OIL TRUCKING SERVICES — The Partnership uses its owned 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 depreciation and amortization, 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. Transactions between segments are generally recorded based on prices negotiated between the segments and are similar to prices charged to third 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). Immaterial corporate items previously allocated to reportable segment revenues and operating expense, excluding depreciation and amortization in prior periods have been reclassified to other income to be consistent with current period presentation.

 

   

Three Months ended September 30,

   

Nine Months ended September 30,

 
   

2019

   

2020

   

2019

   

2020

 

Asphalt Terminalling Services

                               

Service revenue:

                               

Third-party revenue

  $ 7,385     $ 7,514     $ 21,218     $ 21,201  

Related-party revenue

    3,870       4,849       11,923       12,945  

Lease revenue:

                               

Third-party revenue

    11,444       9,142       31,004       27,050  

Related-party revenue

    5,427       7,490       15,179       19,240  

Total revenue for reportable segment

    28,126       28,995       79,324       80,436  

Operating expense, excluding depreciation and amortization

    11,058       12,518       35,050       36,139  

Operating margin, excluding depreciation and amortization

  $ 17,068     $ 16,477     $ 44,274     $ 44,297  
Total assets (end of period)   $ 141,153     $ 134,818     $ 141,153     $ 134,818  
                                 

Crude Oil Terminalling Services

                               

Service revenue:

                               

Third-party revenue

  $ 4,225     $ 4,190     $ 11,815     $ 12,613  

Intersegment revenue

    278       -       853       -  

Total revenue for reportable segment

    4,503       4,190       12,668       12,613  

Operating expense, excluding depreciation and amortization

    1,217       1,223       3,522       3,157  

Operating margin, excluding depreciation and amortization

  $ 3,286     $ 2,967     $ 9,146     $ 9,456  
Total assets (end of period)   $ 64,579     $ 57,056     $ 64,579     $ 57,056  

 

 

   

Three Months ended September 30,

   

Nine Months ended September 30,

 
   

2019

   

2020

   

2019

   

2020

 

Crude Oil Pipeline Services

                               

Service revenue:

                               

Third-party revenue

  $ 1,284     $ 412     $ 5,748     $ 1,287  

Related-party revenue

    64       -       266       -  

Product sales revenue:

                               

Third-party revenue

    55,213       51,390       173,773       119,068  

Total revenue for reportable segment

    56,561       51,802       179,787       120,355  

Operating expense, excluding depreciation and amortization

    2,642       2,247       8,123       6,714  

Intersegment operating expense

    1,642       1,434       4,971       4,364  

Third-party cost of product sales

    18,972       19,833       64,069       41,133  

Related-party cost of product sales

    32,691       22,627       99,886       63,671  

Operating margin, excluding depreciation and amortization

  $ 614     $ 5,661     $ 2,738     $ 4,473  
Total assets (end of period)   $ 94,247     $ 77,380     $ 94,247     $ 77,380  
                                 
Crude Oil Trucking Services                                
Service revenue                                

Third-party revenue

  $ 2,822     $ 770     $ 8,537     $ 4,834  
Intersegment revenue     1,364       1,434       4,118       4,364  
Total revenue for reportable segment     4,186       2,204       12,655       9,198  

Operating expense, excluding depreciation and amortization

  $ 4,058       2,289     $ 12,526       9,358  

Operating margin, excluding depreciation and amortization

  $ 128     $ (85 )   $ 129     $ (160 )

Total assets (end of period)

  $ 5,498     $ 4,113     $ 5,498     $ 4,113  
                                 
Consolidated Amounts                                

Total operating margin, excluding depreciation and amortization(1)

  $ 21,096     $ 25,020     $ 56,287     $ 58,066  
                                 

Total reportable segment revenues

  $ 93,376     $ 87,191     $ 284,434     $ 222,602  

Elimination of intersegment revenues

    (1,642 )     (1,434 )     (4,971 )     (4,364 )

Consolidated Revenues

  $ 91,734     $ 85,757     $ 279,463     $ 218,238  
                                 
Total reportable segment assets   $ 305,477     $ 273,367     $ 305,477     $ 273,367  

Corporate assets

    8,498       4,718       8,498       4,718  
Consolidated assets   $ 313,975     $ 278,085     $ 313,975     $ 278,085  

(1)

The following table reconciles segment operating margin (excluding depreciation and amortization) to income from continuing operations before income taxes (in thousands):

 

   

Three Months ended September 30,

   

Nine Months ended September 30,

 
   

2019

   

2020

   

2019

   

2020

 

Operating margin, excluding depreciation and amortization

  $ 21,096     $ 25,020     $ 56,287     $ 58,066  

Depreciation and amortization

    (6,240 )     (5,438 )     (19,211 )     (17,698 )

General and administrative expense

    (3,840 )     (3,401 )     (10,495 )     (11,008 )

Asset impairment expense

    (83 )     -       (2,316 )     (6,417 )

Gain (loss) on disposal of assets

    (40 )     509       1,765       426  

Other income

    69       176       475       969  

Interest expense

    (3,989 )     (2,472 )     (12,394 )     (8,586 )

Income before income taxes

  $ 6,973     $ 14,394     $ 14,111     $ 15,752  

 

 

 

 

13.

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.

 

 

14.

RECENTLY ISSUED ACCOUNTING STANDARDS

 

Except as discussed in the 2019 Form 10-K, there have been no new accounting pronouncements that have become effective or have been issued during the nine months ended September 30, 2020, 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 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., 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, 2019, which was filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2020 (the “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,” “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 2019 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 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 and other volatility in the overall energy industry, specifically in the midstream energy industry, 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 October 30, 2020, the forward crude oil price curve is in 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; however, prices have subsequently risen to near pre-COVID-19 levels. 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 93% of our operating margin for the nine months ended September 30, 2020, and as of October 30, 2020, these segments are fully contracted with take-or-pay revenue that have a weighted average remaining term of 5.8 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 October 30, 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, approximately 76% of our operating margin for the year comes from the asphalt terminalling services business unit which 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. 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. 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 - While, historically, there have only been limited times in which asphalt prices and volumes have had a direct correlation with the price of crude oil, due to the steep decline in crude oil prices earlier this year, asphalt prices also fell significantly before recovering. However, demand has held steady for road construction activity due to there being fewer vehicles on roads to interfere with construction work and the lower asphalt prices. This current environment is expected to have more positive than negative implications for our asphalt terminalling services operating segment. Generally, 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 communicated that infrastructure projects may be accelerated and increased during this time of decreased transportation volume on the roads and highways. While customer throughput volumes were generally higher the first half of the year compared to prior year, the third quarter has seen lower volumes compared to prior year, but for the nine months they are consistent. Current conversations with our customers indicate volumes are expected to trend lower through the end of the year as compared to prior year, which could result in lower throughput revenues; however, this is not expected to have a material impact on our results of operations.

 

At the end of June 2020, a 40,000 barrel tank (less than 10% of facility capacity) caught fire at our Gloucester City, New Jersey, asphalt facility. The roof and top portion of the tank was damaged, but the asphalt product remained in the tank. The facility remains operational, and we are making operational adjustments to continue to fulfill our obligation to meet our customer’s needs. Initial costs are estimated at $0.3 million for cleanup. Capital expenditures to repair the tank are expected to be between $1.0 million and $1.25 million, with the majority completed in the fourth quarter of 2020. We are pursuing insurance recoveries for this event, but there can be no assurance of the amount or timing of any proceeds we may receive.

 

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. From March 2016 through February 2020, the crude oil curve had generally been in a shallow contango or backwardation. In shallow contango or backwardated markets there is no clear incentive for marketers to store crude oil. Despite 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 customers utilizing the storage for more operational purposes for their downstream operations. In late 2019, during recontracting efforts for 2020, the demand for storage declined and a small percentage of tanks were not contracted. However, as the forward price curve moved into a deeper contango in March and April 2020, there was a significant increase in demand for crude oil storage in Cushing and globally, which positively impacted contracted volumes and rates in the second and third quarters of 2020. As we have started recontracting efforts for 2021, they have been positively impacted by the current contango market; however, any shifts in the market in the fourth quarter could impact rates on uncontracted tanks.

 

 

Crude Oil Pipeline Services - Crude oil pipeline transportation, while potentially influenced by the shape of the crude oil market curve, is typically impacted more by overall drilling activity. The ability to fully utilize the capacity of our 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. With the historic drop in crude oil prices earlier this year, the outlook for increased drilling activity remains challenging and the risk is higher for potential well shut-ins in this environment. While volumes have decreased year-over-year, we expect a key customer to bring on several new wells in the fourth quarter of 2020.

 

In our internal crude oil marketing operations, 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. Due to the historic drop in oil prices in March and April 2020 and continued uncertainty in the market, customers could have wells shut-in or request rate decreases, which could impact our revenues and operating margin. The expected new wells from a key customer noted above will also impact the crude oil trucking volumes.

 

Our Revenues 

 

Our revenues consist of (i) terminalling revenues, (ii) gathering and transportation revenues, (iii) product sales revenues, and (iv) fuel surcharge revenues. For the nine months ended September 30, 2020, the Partnership recognized revenues of $32.3 million for services provided to Ergon, 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 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.

 

We have leases and terminalling agreements with customers for all of our 53 asphalt facilities, including 28 under contract with Ergon. As of October 30, 2020, these agreements have, based on a weighted average by remaining fixed revenue, approximately 6.0 years remaining under their terms. Six agreements with third parties, representing seven facilities, expire in late 2021, and the remaining agreements expire at varying times thereafter, through 2027. 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. The new storage, throughput and handling agreement and the new operating and maintenance agreement entered into on August 4, 2020, with Ergon at 22 facilities are expected to improve our earnings.

 

As of October 30, 2020, we had approximately 5.7 million barrels of crude oil storage under service contracts, including 1.1 million barrels of crude oil storage contracts that expire at the end of 2020. The remaining terms on the service contracts that extend beyond 2020 range from 5 to 14 months. Storage contracts with a subsidiary of Vitol Group (together with its subsidiaries, “Vitol”) represent 2.9 million barrels of crude oil storage capacity under contract. We are in negotiations to either extend contracts or enter into new customer contracts for the agreements expiring in 2020; however, there is no certainty that we will have success in contracting available capacity or that extended or new contracts will be at the same or similar rates as expiring contracts. If we are unable to renew even some of the expiring storage contracts, we may experience lower utilization of our assets which could have a material adverse effect on our business, cash flows, ability to make distributions to our unitholders, the price of our common units, results of operations, and ability to conduct our business.

 

 

 

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 our crude oil pipeline services operating segment and our crude oil trucking services segment. 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

 

Nine Months ended

 

Favorable/(Unfavorable)

 
   

September 30,

 

September 30,

 

Three Months

 

Nine Months

   

2019

 

2020

 

2019

 

2020

 

#

 

%

 

#

 

%

Average pipeline throughput volume

    23       15       31       15       (8 )     (35 )%     (16 )     (52 )%

Average trucking throughput volume

    25       16       26       19       (9 )     (36 )%     (7 )     (27 )%

 

Volumes have decreased in both pipeline and trucking transportation due to decreased drilling activities in the areas we serve. In addition, a significant pipeline customer, Vitol, entered into a joint venture with a pipeline in the same area and in late 2019 began moving a significant portion of their volumes to this competing pipeline. Vitol accounted for 28% and 38% of volumes transported on our pipelines in the three and nine months ended September 30, 2019, respectively. Vitol accounted for less than 10% of volumes transported on our pipelines in both the three and nine months ended September 30, 2020. A key customer is expected to bring on several new wells in the fourth quarter of 2020 that should positively impact both our crude oil pipeline and trucking services volumes.

 

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.

 

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 7% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, primarily due to decreases in compensation expense, utility costs and maintenance repairs expense as a result of a focus on managing costs as well as a decrease in depreciation expense. General and administrative expenses increased by 5% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase is primarily due to the receipt in June 2019 of a $0.5 million settlement related to a payment made in 2018 to a fraudulent bank account due to a compromise of the vendor’s email system as disclosed in our 2018 Form 10-K, which reduced expenses for that period. Our interest expense decreased by 31% for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. See Interest expense within our results of operations discussion for additional detail regarding the factors that contributed to the decrease in interest expense in 2020.

 

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 October 15, 2020, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended September 30, 2020. We will pay this distribution on November 13, 2020, to unitholders of record as of November 3, 2020. The total distribution will be approximately $6.4 million, with approximately $6.3 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 September 30, 2020. We will pay this distribution on November 13, 2020, to unitholders of record as of November 3, 2020. The total distribution will be approximately $1.7 million, with approximately $1.6 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.

 

 

 

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 and nine months ended September 30, 2019 and 2020, reconciled to the most directly comparable GAAP measure:

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 

Operating results

 

September 30,

   

September 30,

   

Three Months

   

Nine Months

 

(dollars in thousands)

 

2019

   

2020

   

2019

   

2020

   

$

   

%

   

$

   

%

 

Operating margin, excluding depreciation and amortization:

                                                               

Asphalt terminalling services

  $ 17,068     $ 16,477     $ 44,274     $ 44,297     $ (591 )     (3 )%   $ 23       0 %

Crude oil terminalling services

    3,286       2,967       9,146       9,456       (319 )     (10 )%     310       3 %

Crude oil pipeline services

    614       5,661       2,738       4,473       5,047       822 %     1,735       63 %

Crude oil trucking services

    128       (85 )     129       (160 )     (213 )     (166 )%     (289 )     (224 )%

Total operating margin, excluding depreciation and amortization

    21,096       25,020       56,287       58,066       3,924       19 %     1,779       3 %
                                                                 

Depreciation and amortization

    (6,240 )     (5,438 )     (19,211 )     (17,698 )     802       13 %     1,513       8 %

General and administrative expense

    (3,840 )     (3,401 )     (10,495 )     (11,008 )     439       11 %     (513 )     (5 )%

Asset impairment expense

    (83 )     -       (2,316 )     (6,417 )     83       100 %     (4,101 )     (177 )%

Gain (loss) on disposal of assets

    (40 )     509       1,765       426       549       1373 %     (1,339 )     (76 )%

Operating income

    10,893       16,690       26,030       23,369       5,797       53 %     (2,661 )     (10 )%
                                                                 

Other income (expenses):

                                                               

Other income

    69       176       475       969       107       155 %     494       104 %

Interest expense

    (3,989 )     (2,472 )     (12,394 )     (8,586 )     1,517       38 %     3,808       31 %

Provision for income taxes

    (14 )     (1 )     (39 )     (8 )     13       93 %     31       79 %

Net income

  $ 6,959     $ 14,393     $ 14,072     $ 15,744     $ 7,434       107 %   $ 1,672       12 %

 

For the three and nine months ended September 30, 2020, overall operating margin, excluding depreciation and amortization, was higher than the same period in 2019. The increase for the three months ended September 30, 2020, compared to the same period in 2019 is primarily driven by a derivative gain in the crude oil pipeline services segment for the three months ended September 30, 2020, of $3.6 million due to the settlement of crude oil forward purchase contracts that were entered into in the second quarter of 2020. This gain is offset for the year by a corresponding unrealized loss that was recognized in the second quarter of 2020, so there is no impact on year-to-date results. The year-over-year increase is primarily driven by improved margins in our crude oil marketing operations within the crude oil pipeline services segment.

 

A more detailed analysis of changes in operating margin by segment follows.

 

 

Analysis of Operating Segments

 

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:

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 

Operating results

 

September 30,

   

September 30,

   

Three Months

   

Nine Months

 

(dollars in thousands)

 

2019

   

2020

   

2019

   

2020

    $    

%

    $    

%

 

Service revenue:

                                                               

Third-party revenue

  $ 7,385     $ 7,514     $ 21,218     $ 21,201     $ 129       2 %   $ (17 )     0 %

Related-party revenue

    3,870       4,849       11,923       12,945       979       25 %     1,022       9 %

Lease revenue:

                                                               

Third-party revenue

    11,444       9,142       31,004       27,050       (2,302 )     (20 )%     (3,954 )     (13 )%

Related-party revenue

    5,427       7,490       15,179       19,240       2,063       38 %     4,061       27 %

Total revenue

    28,126       28,995       79,324       80,436       869       3 %     1,112       1 %

Operating expense, excluding depreciation and amortization

    11,058       12,518       35,050       36,139       (1,460 )     (13 )%     (1,089 )     (3 )%

Operating margin, excluding depreciation and amortization

  $ 17,068     $ 16,477     $ 44,274     $ 44,297     $ (591 )     (3 )%   $ 23       0 %

 

The following is a discussion of items impacting asphalt terminalling services segment operating margin for the periods indicated:

 

 

Third-party service revenue was consistent for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 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. The movement of lease revenue from third-party to related-party was due to Ergon purchasing another customer of ours in April 2020.

  Increases in related-party lease and service revenues, in addition to Ergon’s purchase of another customer, was due to a new agreement with Ergon that became effective August 1, 2020. This storage, throughput and handling agreement replaced multiple previous agreements covering 22 facilities, of which certain facilities were previously under a lease-only arrangement.
  Operating expenses increased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to the new operating and maintenance agreement with Ergon at 22 facilities. We expect the new agreements to improve operating margin, excluding depreciation and amortization at those facilities, at these facilities. Other operating expense increases relate to insurance premiums, which were partly offset by improved fuel and power costs.

 

 

 

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:

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 

Operating results

 

September 30,

   

September 30,

   

Three Months

   

Nine Months

 

(dollars in thousands)

 

2019

   

2020

   

2019

   

2020

    $    

%

    $    

%

 

Service revenue:

                                                               

Third-party revenue

  $ 4,225     $ 4,190     $ 11,815     $ 12,613     $ (35 )     (1 )%   $ 798       7 %

Intersegment revenue

    278       -       853       -       (278 )     (100 )%     (853 )     (100 )%

Total revenue

    4,503       4,190       12,668       12,613       (313 )     (7 )%     (55 )     (0 )%

Operating expense, excluding depreciation and amortization

    1,217       1,223       3,522       3,157       (6 )     (0 )%     365       10 %

Operating margin, excluding depreciation and amortization

  $ 3,286     $ 2,967     $ 9,146     $ 9,456     $ (319 )     (10 )%   $ 310       3 %
                                                                 

Average crude oil storage contracted per month at our Cushing terminal (in thousands of barrels)

    5,862       5,659       5,731       5,457       (203 )     (3 )%     (274 )     (5 )%

Average crude oil delivered through our Cushing terminal (in thousands of barrels per day)

    99       81       87       86       (18 )     (18 )%     (1 )     (1 )%

 

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 September 30, 2020 decreased slightly from the comparable 2019 period due to lower contracted barrels. Prior year periods included an intersegment contract for 500 thousand barrels. In addition, revenues for the third quarter of 2020 decreased sequentially from the prior quarter by approximately $0.8 million due to short-term contracts that were executed during the second quarter of 2020. Total revenues for the nine months ended September 30, 2020, were consistent with the same periods in 2019 despite lower contracted volumes due to those short-term contracts.

  Operating expenses for the three months ended September 30, 2020, were consistent with the same period in 2019, while operating expenses for the nine months ended September 30, 2020, decreased compared to the nine months ended September 30, 2019. Decreases due to lower tank repair expenses were partially offset by higher compensation cost and increases in insurance premiums.

 

 

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:

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 

Operating results

 

September 30,

   

September 30,

   

Three Months

   

Nine Months

 

(dollars in thousands)

 

2019

   

2020

   

2019

   

2020

    $    

%

    $    

%

 

Service revenue:

                                                               

Third-party revenue

  $ 1,284     $ 412     $ 5,748     $ 1,287     $ (872 )     (68 )%   $ (4,461 )     (78 )%

Related-party revenue

    64       -       266       -       (64 )     (100 )%     (266 )     (100 )%

Product sales revenue:

                                                               

Third-party revenue

    55,213       51,390       173,773       119,068       (3,823 )     (7 )%     (54,705 )     (31 )%

Total revenue

    56,561       51,802       179,787       120,355       (4,759 )     (8 )%     (59,432 )     (33 )%

Operating expense, excluding depreciation and amortization

    2,642       2,247       8,123       6,714       395       15 %     1,409       17 %

Intersegment operating expense

    1,642       1,434       4,971       4,364       208       13 %     607       12 %

Third-party cost of product sales

    18,972       19,833       64,069       41,133       (861 )     (5 )%     22,936       36 %

Related-party cost of product sales

    32,691       22,627       99,886       63,671       10,064       31 %     36,215       36 %

Operating margin, excluding depreciation and amortization

  $ 614     $ 5,661     $ 2,738     $ 4,473     $ 5,047       822 %   $ 1,735       63 %
                                                                 

Transportation services average throughput volume (in thousands of barrels per day)

    23       15       31       15       (8 )     (35 )%     (16 )     (52 )%

Crude oil marketing volumes (in thousands of barrels per day)

    11       11       11       11       0       0 %     0       0 %

 

The following is a discussion of items impacting crude oil pipeline services segment operating margin for the periods indicated:

 

  Included in third-party cost of product sales for the three months ended September 30, 2020, was the non-cash gain on our commodity derivative contracts of $3.6 million that settled during the third quarter, which is contributing to the significant increase in operating margin, excluding depreciation and amortization.  A corresponding unrealized loss was recognized in the second quarter of 2020, and as the contracts were settled in the third quarter, there was no impact on year-to-date results from these mark-to-market adjustments. The Partnership realized a $1.5 million net cash gain from the related product sales during the third quarter of 2020. The increase in year-to-date margins for the comparative periods was due to improved margins on our crude oil marketing business.
 

Throughput volumes and related service revenue have decreased for the three and nine months ended September 30, 2020, as compared to the same periods in 2019 due to decreased drilling activities in the areas we serve. In addition, a significant pipeline customer, Vitol, entered into a joint venture with a pipeline in the same area and moved a significant portion of their volumes to this competing pipeline beginning in late 2019. Vitol accounted for 28% and 38% of volumes transported on our pipelines in both the three and nine months ended September 30, 2019, respectively.  Vitol accounted for less than 10% of volumes transported on our pipelines in both the three and nine months ended September 30, 2020.

  Product sales revenue for the nine months ended September 30, 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 reflects the decrease in the market price of crude oil. 

 

 

 

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:

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 

Operating results

 

September 30,

   

September 30,

   

Three Months

   

Nine Months

 

(dollars in thousands)

 

2019

   

2020

   

2019

   

2020

           

$%

           

$%

 

Service revenue:

                                                               

Third-party revenue

  $ 2,822     $ 770     $ 8,537     $ 4,834     $ (2,052 )     (73 )%   $ (3,703 )     (43 )%

Intersegment revenue

    1,364       1,434       4,118       4,364       70       5 %     246       6 %

Total revenue

    4,186       2,204       12,655       9,198       (1,982 )     (47 )%     (3,457 )     (27 )%

Operating expense, excluding depreciation and amortization

    4,058       2,289       12,526       9,358       1,769       44 %     3,168       25 %

Operating margin, excluding depreciation and amortization

  $ 128     $ (85 )   $ 129     $ (160 )   $ (213 )     (166 )%   $ (289 )     (224 )%
                                                                 

Average volume (in thousands of barrels per day)

    25       16       26       19       (9 )     (36 )%     (7 )     (27 )%

 

The following is a discussion of items impacting crude oil trucking services segment operating margin for the periods indicated:

 

 

Third-party service revenues decreased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, due to decreased drilling activities in the areas we serve. Intersegment revenues increased for the same periods due to our crude oil marketing operations purchasing increased volumes from key producers. 

 

Operating expense, excluding depreciation and amortization, decreased for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, primarily due to decreases in compensation and fleet expense related to lower volumes. Fleet lease expense for the third quarter of 2020 were further impacted both by the impairment that was recognized in the second quarter of 2020, as well as, the purchase of all leased vehicles in August, both of which decreased lease expense for 2020 compared to 2019. The decrease in volumes also led to severance costs of $0.2 million in the second quarter of 2020 to optimize headcount.

 

Other Income and Expenses

 

Depreciation and amortization expense. Depreciation and amortization expense decreased to $5.4 million for the three months ended September 30, 2020, compared to $6.2 million for the three months ended September 30, 2019, due to a number of assets reaching the end of their depreciable lives at the end of the second quarter of 2020.  Depreciation and amortization expense decreased to $17.7 million for the nine months ended September 30, 2020, compared to $19.2 million for the same period in 2019. This decrease is primarily the result of certain assets reaching the end of their depreciable lives at the end of the first quarter of 2019 and the end of the second quarter of 2020.

 

General and administrative expense.  General and administrative expense decreased to $3.4 million for three months ended September 30, 2020, compared to $3.8 million for the same period in 2019, and increased to $11.0 million for the nine months ended September 30, 2020, compared to $10.5 million for the same period in 2019. The decrease for the quarterly comparative periods is due to decreases in compensation expense and professional fees. The year-over-year increase was due to the receipt during the nine months ended September 30, 2019, of a $0.5 million settlement payment as discussed above, which reduced expense for that period. 

 

Asset impairment expense. Asset impairment expense for the nine months ended September 30, 2020, included $1.3 million related to adjustments to our crude oil trucking services segment assets based on the expected future cash flows of the segment. This impairment consisted of $1.1 million related to plant, property, and equipment and $0.2 million related to operating right-of-use assets. In addition, a $4.9 million write-down of crude oil linefill due to the decrease in the market price of crude oil occurred in the first quarter of 2020. Asset impairment expense for the nine months ended September 30, 2019, was $2.3 million and consisted of a change in estimate of the push-down impairment related to Cimarron Express Pipeline, LLC (“Cimarron Express”) of $2.0 million (see Note 8 of our condensed consolidated financial statements for more information) and $0.3 million related to a flood at an asphalt terminal in Wolcott, Kansas.

 

Gain(loss) on disposal of assets. Gains for the three and nine months ended September 30, 2020, relate to the sale of some idle real property in Michigan and pipeline linefill.  Gains for the nine months ended September 30, 2019, relate to the sale of pipeline linefill.

 

Other income. Other income includes insurance recoveries related to flood damages incurred in 2019 at certain asphalt facilities of $0.7 million for the nine months ended September 30, 2020, and $0.3 million for the nine months ended September 30, 2019.



 

 

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 (in thousands):

 

   

Three Months ended

   

Nine Months ended

   

Favorable/(Unfavorable)

 
   

September 30,

   

September 30,

   

Three Months

   

Nine Months

 
   

2019

   

2020

   

2019

   

2020

    $    

%

    $    

%

 

Credit agreement interest

  $ 3,714     $ 2,200     $ 11,585     $ 7,778     $ 1,514       41 %   $ 3,807       33 %

Amortization of debt issuance costs

    251       251       753       753       -       0 %     -       0 %

Other

    24       21       56       55       3       13 %     1       2 %

Total interest expense

  $ 3,989     $ 2,472     $ 12,394     $ 8,586     $ 1,517       38 %   $ 3,808       31 %

 

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.

 

Liquidity and Capital Resources

 

Cash Flows and Capital Expenditures

 

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2019 and 2020

 

    Nine Months ended September 30,  
   

2019

   

2020

 
   

(in millions)

 

Net cash provided by operating activities

  $ 38.3     $ 43.9  

Net cash used in investing activities

  $ (2.3 )   $ (22.2 )

Net cash used in financing activities

  $ (34.6 )   $ (21.3 )

 

Operating Activities. Net cash provided by operating activities increased to $43.9 million for the nine months ended September 30, 2020, as compared to $38.3 million for the nine months ended September 30, 2019, due to increased net income as discussed in Results of Operations above as well as changes in working capital.

 

Investing Activities. Net cash used in investing activities was $22.2 million for the nine months ended September 30, 2020, compared to $2.3 million for the nine months ended September 30, 2019. The nine months ended September 30, 2020, included a $12.2 million payment to Ergon related to our purchase of Ergon’s DEVCO entity related to Cimarron Express. The nine months ended September 30, 2019, included net proceeds from the disposal of certain assets of $7.1 million. Of such proceeds, $2.6 million related to the December 2018 sale of linefill for which the cash consideration was not received until January 2019.  Capital expenditures for the nine months ended September 30, 2019 and 2020, included maintenance capital expenditures of $7.5 million for both periods, and expansion capital expenditures of $2.0 million and $4.9 million, respectively.

 

Financing Activities. Net cash used in financing activities was $21.3 million for the nine months ended September 30, 2020, compared to $34.6 million for the nine months ended September 30, 2019. Net cash used in financing activities for the nine months ended September 30, 2020, consisted primarily of $24.3 million in distributions to our unitholders, partially offset by net borrowings on long-term debt of $5.0 million. Net cash used in financing activities for the nine months ended September 30, 2019, consisted primarily of $25.9 million in distributions to our unitholders and net payments on long-term debt of $7.0 million.

 

Our Liquidity and Capital Resources

 

Cash flows from operations and from our credit agreement are our primary sources of liquidity. At September 30, 2020, we had a working capital deficit of $9.4 million. This is primarily a function of our approach to cash management. At September 30, 2020, we had approximately $260.6 million of revolver borrowings and approximately $1.7 million of letters of credit outstanding under the credit agreement, leaving us with approximately $137.7 million of availability under our credit agreement subject to covenant restrictions, which limited our availability to $44.8 million. As of October 30, 2020, we have approximately $255.6 million of revolver borrowings and approximately $1.7 million of letters of credit outstanding under the credit agreement, leaving us with aggregate unused commitments under our revolving credit facility of approximately $142.7 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 credit agreement EBITDA, as defined in the credit agreement. The maximum permitted consolidated total leverage ratio as of September 30, 2020, and for each fiscal quarter thereafter, is 4.75. Our consolidated total leverage ratio was 4.06 to 1.00 as of September 30, 2020

 

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 we 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 $260.6 million in outstanding debt, as of September 30, 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:

 

  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.
 

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

 

The following table breaks out capital expenditures for the nine months ended September 30, 2019 and 2020 (in thousands):

 

   

Nine Months ended September 30,

 
   

2019

   

2020

 

Acquisitions

  $ -     $ 12,221  
                 

Gross expansion capital expenditures

  $ 1,969     $ 4,860  

Reimbursable expenditures

    (61 )     (289 )

Net expansion capital expenditures

  $ 1,908     $ 4,571  
                 

Gross maintenance capital expenditures

  $ 7,459     $ 7,521  

Reimbursable expenditures

    (202 )     (2,007 )

Net maintenance capital expenditures

  $ 7,257     $ 5,514  

 

Expansion capital expenditures for the nine months ended September 30, 2020, includes $1.7 million related to the buy-out of heavy-duty crude oil transportation trucks and trailers that were under operating leases due to a more favorable cost of capital under our credit agreements as well as the anticipation of a possible future sale of the crude oil trucking services operating segment. Expansion capital expenditures for nine months ended September 30, 2020, also includes crude oil purchases of $1.5 million to replenish linefill requirements on our Oklahoma pipeline related to our crude oil marketing business. Exclusive of these items, we currently expect our expansion capital expenditures for organic growth projects to be approximately $2.2 million to $2.6 million for all of 2020.  We currently expect maintenance capital expenditures to be approximately $7.8 million to $8.2 million, net of reimbursable expenditures, for all of 2020.

 

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 14 to our unaudited condensed consolidated financial statements.

 

Other Items

 

Commodity Derivative Agreements

 

During the second quarter of 2020, our internal crude oil marketing department entered into crude oil forward purchase contracts through sell/buy arrangements with a counterparty to facilitate spot storage deals in our Cushing terminal with such counterparty during a time of favorable contango spreads. Our crude oil marketing department only holds working inventory and linefill and does not hold excess inventory for speculative purposes. Typically, each month’s purchase and sale volumes, including those under the sell/buy arrangements, are similar and at the current month market price; thus, the Partnership is not exposed to additional commodity price risk beyond its normal marketing activity. The final purchase settlement of these contracts occurred during the third quarter of 2020 at then market prices. The product was then sold to a separate counterparty at then market prices; thus, effectively removing the commodity price risk. These contracts were carried at fair value on our consolidated balance sheets last quarter and were valued based on quoted prices in active markets.

 

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 September 30, 2020, 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 September 30, 2020, 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 13 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, 2019.

 

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*

 

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

31.2*   Certification 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 September 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Document and Entity Information; (ii) Unaudited Condensed Consolidated Balance Sheets as of December 31, 2019 and September 30, 2020; (iii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2020; (iv) Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital (Deficit) for the three and nine months ended September 30, 2019 and 2020; (v) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2020; 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:

November 5, 2020

By:

/s/ Matthew R. Lewis

 

 

 

Matthew R. Lewis

 

 

 

Chief Financial Officer

 

 

 

 

Date:

November 5, 2020

By:

/s/ Michael McLanahan

 

 

 

Michael McLanahan

 

 

 

Chief Accounting Officer

 

 

 

31