Company Quick10K Filing
Blueknight Energy Partners
Price1.00 EPS36,610,000
Shares-0 P/E0
MCap-0 P/FCF-0
Net Debt256 EBIT-24
TEV256 TEV/EBIT-11
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-03-26
10-Q 2019-09-30 Filed 2019-11-07
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-12
10-Q 2018-09-30 Filed 2018-11-01
10-Q 2018-06-30 Filed 2018-08-02
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-08
10-Q 2017-09-30 Filed 2017-11-01
10-Q 2017-06-30 Filed 2017-08-02
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-03-09
10-Q 2016-09-30 Filed 2016-11-02
10-Q 2016-06-30 Filed 2016-08-03
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-03-09
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-11
10-Q 2014-09-30 Filed 2014-11-06
10-Q 2014-06-30 Filed 2014-08-06
10-Q 2014-03-31 Filed 2014-05-07
10-K 2013-12-31 Filed 2014-03-12
10-Q 2013-09-30 Filed 2013-11-06
10-Q 2013-06-30 Filed 2013-08-07
10-Q 2013-03-31 Filed 2013-05-08
10-K 2012-12-31 Filed 2013-03-14
10-Q 2012-09-30 Filed 2012-11-06
10-Q 2012-06-30 Filed 2012-08-07
10-Q 2012-03-31 Filed 2012-05-09
10-K 2011-12-31 Filed 2012-03-13
10-Q 2011-09-30 Filed 2011-11-09
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-10
10-K 2010-12-31 Filed 2011-03-16
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-10
10-K 2009-12-31 Filed 2010-03-30
8-K 2020-06-22
8-K 2020-05-12
8-K 2020-04-16
8-K 2020-03-31
8-K 2020-03-25
8-K 2020-01-22
8-K 2020-01-08
8-K 2020-01-02
8-K 2019-11-06
8-K 2019-10-17
8-K 2019-09-05
8-K 2019-08-07
8-K 2019-07-19
8-K 2019-07-18
8-K 2019-07-18
8-K 2019-05-14
8-K 2019-05-08
8-K 2019-04-22
8-K 2019-04-10
8-K 2019-03-21
8-K 2019-03-11
8-K 2019-02-26
8-K 2019-01-25
8-K 2018-12-06
8-K 2018-10-31
8-K 2018-10-23
8-K 2018-09-04
8-K 2018-08-14
8-K 2018-08-01
8-K 2018-07-19
8-K 2018-07-12
8-K 2018-06-28
8-K 2018-05-22
8-K 2018-05-10
8-K 2018-05-09
8-K 2018-04-23
8-K 2018-04-23
8-K 2018-03-07
8-K 2018-02-13
8-K 2018-01-23

BKEP 10Q Quarterly Report

Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 6. Exhibits.
EX-31.1 ex_172987.htm
EX-31.2 ex_172988.htm
EX-32.1 ex_172989.htm

Blueknight Energy Partners Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
39531222914663-202012201420172020
Assets, Equity
135975921-17-552012201420172020
Rev, G Profit, Net Income
1156617-32-81-1302012201420172020
Ops, Inv, Fin

10-Q 1 bkep20200331_10q.htm FORM 10-Q bkep20190630_10q.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 March 31, 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 May 1, 2020, there were 35,125,202 Series A Preferred Units and 41,034,763 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 March 31, 2020 1
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2020 2
  Condensed Consolidated Statements of Changes in Partners’ Capital (Deficit) for the Three Months Ended March 31, 2019 and 2020 3
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2020 4
  Notes to the Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
     
PART II OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 6. Exhibits 25

 

 

 

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

   

March 31, 2020

 
   

(unaudited)

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 558     $ 671  
Accounts receivable, net     23,716       19,515  
Receivables from related parties, net     1,110       942  
Other current assets     8,692       8,723  
Total current assets     34,076       29,851  

Property, plant and equipment, net of accumulated depreciation of $274,404 and $279,144 at December 31, 2019, and March 31, 2020, respectively

    232,777       226,398  
Goodwill     6,728       6,728  
Debt issuance costs, net     2,344       2,093  
Operating lease assets     10,758       10,349  
Intangible assets, net     14,088       13,402  
Other noncurrent assets     1,169       1,251  

Total assets

  $ 301,940     $ 290,072  

LIABILITIES AND PARTNERS’ CAPITAL(DEFICIT)

               

Current liabilities:

               
Accounts payable   $ 3,125     $ 3,992  
Accounts payable to related parties     2,460       2,907  
Accrued crude oil purchases     6,706       3,240  
Accrued crude oil purchases to related parties     11,807       7,344  
Contingent liability with related party (Note 8)     12,221       -  
Accrued interest payable     293       301  
Accrued property taxes payable     3,247       2,866  
Unearned revenue     1,942       3,248  
Unearned revenue with related parties     2,934       3,006  
Accrued payroll     4,823       2,495  
Current operating lease liability     2,391       2,324  
Other current liabilities     2,627       3,698  
Total current liabilities     54,576       35,421  
Long-term unearned revenue with related parties     2,149       1,792  
Other long-term liabilities     2,417       2,362  
Noncurrent operating lease liability     8,529       8,147  
Long-term debt     255,592       271,592  

Commitments and contingencies (Note 12)

               

Partners’ capital(deficit):

               

Common unitholders (40,830,051 and 41,034,763 units issued and outstanding at December 31, 2019, and March 31, 2020, respectively)

    356,777       348,984  

Preferred Units (35,125,202 units issued and outstanding at both dates)

    253,923       253,923  

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

    (632,023 )     (632,149 )

Total partners’ deficit

    (21,323 )     (29,242 )

Total liabilities and partners’ deficit

  $ 301,940     $ 290,072  

 

 

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

 

 

 

BLUEKNIGHT ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 
   

(unaudited)

 

Service revenue:

               

Third-party revenue

  $ 15,886     $ 13,229  
Related-party revenue     4,219       4,077  

Lease revenue:

               
Third-party revenue     9,763       9,831  

Related-party revenue

    4,940       4,921  

Product sales revenue:

               
Third-party revenue     58,924       47,052  
Total revenue     93,732       79,110  

Costs and expenses:

               
Operating expense     27,243       24,939  
Cost of product sales     24,587       14,221  
Cost of product sales from related party     30,774       28,254  
General and administrative expense     3,693       3,540  
Asset impairment expense     1,119       5,122  
Total costs and expenses     87,416       76,076  

Gain (loss) on sale of assets

    1,724       (185 )
Operating income     8,040       2,849  

Other income (expenses):

               
Other income     -       558  
Interest expense     (4,271 )     (3,399 )
Income before income taxes     3,769       8  
Provision for income taxes     12       8  

Net income

  $ 3,757     $ -  
                 

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

               

General partner interest in net income(loss)

  $ 105     $ -  

Preferred interest in net income

  $ 6,279     $ 6,279  

Net loss available to limited partners

  $ (2,627 )   $ (6,279 )
                 

Basic and diluted net loss per common unit

  $ (0.06 )   $ (0.15 )
                 

Weighted average common units outstanding - basic and diluted

    40,678       41,015  

 

 

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

 

 

 

BLUEKNIGHT ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT)

(in thousands)

 

    Common Unitholders     Series A Preferred Unitholders     General Partner Interest     Total Partners’ Capital (Deficit)  
   

(unaudited)

 

Balance, December 31, 2018

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

Net income (loss)

    (2,581 )     6,279       59       3,757  

Equity-based incentive compensation

    64       -       5       69  

Distributions

    (3,308 )     (6,279 )     (155 )     (9,742 )

Proceeds from sale of 63,340 common units pursuant to the Employee Unit Purchase Plan

    73       -       -       73  

Balance, March 31, 2019

  $ 365,220     $ 253,923     $ (631,882 )   $ (12,739 )
                                 

Balance, December 31, 2019

  $ 356,777     $ 253,923     $ (632,023 )   $ (21,323 )

Net income (loss)

    (6,279 )     6,279       -       -  

Equity-based incentive compensation

    105       -       3       108  

Distributions

    (1,675 )     (6,279 )     (128 )     (8,082 )
Proceeds from sale of 53,372 common units pursuant to the Employee Unit Purchase Plan     55       -       -       55  

Balance, March 31, 2020

  $ 348,983     $ 253,923     $ (632,148 )   $ (29,242 )

 

 

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

 

 

 

BLUEKNIGHT ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 
   

(unaudited)

 

Cash flows from operating activities:

               

Net income

  $ 3,757     $ -  

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

               
Depreciation and amortization     6,734       6,094  
Amortization of debt issuance costs     251       251  
Unrealized loss related to interest rate swaps     44       -  
Fixed asset impairment charge     1,119       5,122  
(Gain)loss on sale of assets     (1,724 )     185  
Equity-based incentive compensation     69       108  

Changes in assets and liabilities:

               
Decrease in accounts receivable     4,480       4,201  
Decrease in receivables from related parties     107       168  
Decrease in other current assets     2,613       1,345  
Decrease in other non-current assets     803       566  

Increase (decrease) in accounts payable

    (297 )     104  
Decrease in payables to related parties     (315 )     (17 )
Decrease in accrued crude oil purchases     (6,373 )     (3,466 )
Increase (decrease) in accrued crude oil purchases to related parties     1,666       (4,463 )
Increase (decrease) in accrued interest payable     (171 )     8  
Decrease in accrued property taxes     (852 )     (381 )
Increase in unearned revenue     165       1,205  
Increase (decrease) in unearned revenue from related parties     10,231       (285 )
Decrease in accrued payroll     (1,538 )     (2,329 )
Decrease in other accrued liabilities     (1,252 )     (542 )
Net cash provided by operating activities     19,517       7,874  

Cash flows from investing activities:

               
Acquisition of DEVCO from Ergon (Note 8)     -       (12,221 )
Capital expenditures     (2,801 )     (2,900 )
Proceeds from sale of assets     6,304       25  
Net cash provided by (used in) investing activities     3,503       (15,096 )

Cash flows from financing activities:

               
Payments on other financing activities     (597 )     (638 )
Borrowings under credit agreement     75,000       78,000  
Payments under credit agreement     (88,000 )     (62,000 )

Proceeds from equity issuance

    73       55  
Distributions     (9,742 )     (8,082 )
Net cash provided by (used in) financing activities     (23,266 )     7,335  
Net increase (decrease) in cash and cash equivalents     (246 )     113  
Cash and cash equivalents at beginning of period     1,455       558  

Cash and cash equivalents at end of period

  $ 1,209     $ 671  
                 

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

               

Non-cash changes in property, plant and equipment

  $ 711     $ 1,241  

Increase in accrued liabilities related to insurance premium financing agreement

  $ 751     $ 1,517  

 

 

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

 

 

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 March 31, 2020, the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2020, the condensed consolidated statements of changes in partners’ capital (deficit) for the three months ended March 31, 2019 and 2020, and the condensed consolidated statements of cash flows for the three months ended March 31, 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.

 

 

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

  $ 23,929     $ 42,106  
2021     30,211       55,019  
2022     23,198       44,262  
2023     17,605       35,289  
2024     11,250       28,675  
Thereafter     9,930       28,110  

Total revenue related to future performance obligations

  $ 116,123     $ 233,461  

___________________

(1)

Excluded from the table is revenue that is either constrained or related to performance obligations that are wholly unsatisfied as of March 31, 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 March 31, 2019

 
Revenue from contracts with customers                                        

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 4,983     $ 3,069     $ -     $ -     $ 8,052  

Variable throughput revenue

    3       504       -       -       507  

Variable reimbursement revenue

    1,996       -       -       -       1,996  

Crude oil transportation revenue

    -       -       2,498       2,833       5,331  

Crude oil product sales revenue

    -       -       58,924       -       58,924  

Related-party revenue:

                                       

Fixed storage, throughput and other revenue

    2,848       -       83       -       2,931  

Variable reimbursement revenue

    1,270       -       18       -       1,288  

Total revenue from contracts with customers

  $ 11,100     $ 3,573     $ 61,523     $ 2,833     $ 79,029  
Lease revenue                                        
Third-party revenue:                                        
Fixed lease revenue   $ 9,229     $ -     $ -     $ -     $ 9,229  
Variable reimbursement revenue     534       -       -       -       534  
Related-party revenue:                                        
Fixed lease revenue     4,779       -       -       -       4,779  
Variable reimbursement revenue     161       -       -       -       161  
Total lease revenue   $ 14,703     $ -     $ -     $ -     $ 14,703  
Total revenue   $ 25,803     $ 3,573     $ 61,523     $ 2,833     $ 93,732  

 

   

Three Months Ended March 31, 2020

 
Revenue from contracts with customers                                        

Third-party revenue:

                                       

Fixed storage, throughput and other revenue

  $ 5,246     $ 2,859     $ -     $ -     $ 8,105  
Variable throughput revenue     1       471       -       -       472  
Variable reimbursement revenue     1,607       -       -       -       1,607  
Crude oil transportation revenue     -       -       502       2,543       3,045  
Crude oil product sales revenue     -       -       47,052       -       47,052  

Related-party revenue:

                                       
Fixed storage, throughput and other revenue     3,106       -       -       -       3,106  
Variable reimbursement revenue     971       -       -       -       971  

Total revenue from contracts with customers

  $ 10,931     $ 3,330     $ 47,554     $ 2,543     $ 64,358  
Lease revenue                                        
Third-party revenue:                                        
Fixed lease revenue   $ 9,227     $ -     $ -     $ -     $ 9,227  
Variable reimbursement revenue     604       -       -       -       604  
Related-party revenue:                                        
Fixed lease revenue     4,800       -       -       -       4,800  
Variable reimbursement revenue     121       -       -       -       121  
Total lease revenue   $ 14,752     $ -     $ -     $ -     $ 14,752  
Total revenue   $ 25,683     $ 3,330     $ 47,554     $ 2,543     $ 79,110  

 

 

Contract Balances

 

Billed accounts receivable from contracts with customers were $23.2 million and $16.8 million at December 31, 2019, and March 31, 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 $3.4 million at December 31, 2019, and March 31, 2020, respectively. For the three months ended March 31, 2020, the Partnership recognized $1.8 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

 

During the three months ended March 31, 2020, the Partnership recognized asset impairment expense of $5.1 million.  This impairment primarily relates to a write-down of the value of the Partnership’s crude oil linefill from $8.1 million as of December 31, 2019, to $4.0 million as of March 31, 2020, based on the market price of crude oil as of March 31, 2020.  Early in the quarter, $0.8 million of incremental crude oil linefill was 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 three months ended March 31, 2019, the Partnership recognized asset impairment expense of $1.1 million. A change in estimate of the push-down impairment related to Cimarron Express Pipeline, LLC (“Cimarron Express”) resulted in additional impairment expense of $0.8 million, which was recorded at the corporate level (see Note 8 for more information). In addition, a flood at an asphalt terminal in Wolcott, Kansas, led to an impairment of $0.3 million during that period.

 

During the three months ended March 31, 2020, the Partnership had an immaterial loss on the disposal of assets for repair.  During the three months ended March 31, 2019, the Partnership sold various surplus assets, including the sale of three truck stations for $1.6 million, which resulted in a gain of $1.5 million, and the sale of pipeline linefill for $1.6 million, which resulted in a gain of $0.2 million. In addition, proceeds received during the three months ended March 31, 2019, included $2.6 million related to a sale of pipeline linefill in December 2018, for which the proceeds were received in January 2019.

 

 

5.

DEBT

 

On May 11, 2017, the Partnership entered into an amended and restated credit agreement. On June 28, 2018, the credit agreement was amended to, among other things, reduce the revolving loan facility from $450.0 million to $400.0 million and amend the maximum permitted consolidated total leverage ratio as discussed below.

 

As of May 1, 2020, approximately $270.6 million of revolver borrowings and $2.0 million of letters of credit were outstanding under the credit agreement, leaving the Partnership with approximately $127.4 million available capacity for additional revolver borrowings and letters of credit under the credit agreement, although the Partnership’s ability to borrow such funds 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).

 

The credit agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter.

 

Prior to the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio will be 4.75 to 1.00; provided that the maximum permitted consolidated total leverage ratio may be increased to 5.25 to 1.00 for certain quarters, based on the occurrence of a specified acquisition (as defined in the credit agreement, but generally being an acquisition for which the aggregate consideration is $15.0 million or more).

 

From and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio is 5.00 to 1.00; provided that from and after the fiscal quarter ending immediately preceding the fiscal quarter in which a specified acquisition occurs to and including the last day of the second full fiscal quarter following the fiscal quarter in which such acquisition occurred, the maximum permitted consolidated total leverage ratio will be 5.50 to 1.00.

 

The maximum permitted consolidated senior secured leverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated total secured debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) is 3.50 to 1.00, but this covenant is only tested from and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million.

 

The minimum permitted consolidated interest coverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges (“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 of the Partnership (the “Partnership’s partnership agreement”).

 

 

At March 31, 2020, the Partnership’s consolidated total leverage ratio was 4.27 to 1.00 and the consolidated interest coverage ratio was 4.52 to 1.00.  The Partnership was in compliance with all covenants of its credit agreement as of March 31, 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 $271.6 million in outstanding debt, as of March 31, 2020, to become immediately due and payable. If this were to occur, the Partnership would not expect to have sufficient liquidity to repay these outstanding amounts then due, which could cause the lenders under the credit facility to pursue other remedies. Such remedies could include exercising their collateral rights to the Partnership’s assets.

 

Based on management’s current forecasts, management believes the Partnership will be able to comply with the consolidated total leverage ratio during the assessment period. However, the Partnership cannot make any assurances that it will be able to achieve management’s forecasts. If the Partnership is unable to achieve management’s forecasts, further actions may be necessary to remain in compliance with the Partnership’s consolidated total leverage ratio covenant including, but not limited to, cost reductions, common and preferred unitholder distribution curtailments, and/or asset sales. The Partnership can make no assurances that it would be successful in undertaking these actions or that the Partnership will remain in compliance with the consolidated total leverage ratio during the assessment period.

 

The credit agreement permits the Partnership to make quarterly distributions of available cash (as defined in the Partnership’s partnership agreement) to unitholders so long as no default or event of default exists under the credit agreement on a pro forma basis after giving effect to such distribution. 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 March 31, 2020 and 2019, was $0.3 million.

  

During the three months ended March 31, 2019 and 2020, the weighted average interest rate under the Partnership’s credit agreement was 6.43% and 4.90%, respectively, resulting in interest expense of approximately $4.3 million and $3.4 million, respectively. 

 

 

 

6.

NET INCOME PER LIMITED PARTNER UNIT

 

For purposes of calculating earnings per unit, the excess of distributions over earnings or excess of earnings over distributions for each period are allocated to the Partnership’s general partner based on the general partner’s ownership interest at the time. The following sets forth the computation of basic and diluted net income per common unit (in thousands, except per unit data): 

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 

Net income

  $ 3,757     $ -  

General partner interest in net income(loss)

    105       -  

Preferred interest in net income

    6,279       6,279  

Net loss available to limited partners

  $ (2,627 )   $ (6,279 )
                 

Basic and diluted weighted average number of units:

               
Common units     40,678       41,015  
Restricted and phantom units     769       983  
Total units     41,447       41,998  
                 

Basic and diluted net loss per common unit

  $ (0.06 )   $ (0.15 )

 

 

7.

PARTNERS’ CAPITAL AND DISTRIBUTIONS

 

On April 16, 2020, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended March 31, 2020.  The Partnership will pay this distribution on May 14, 2020, to unitholders of record as of May 4, 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 March 31, 2020. The Partnership will pay this distribution on May 14, 2020, to unitholders of record on May 4, 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. For the three months ended March 31, 2019 and 2020, the Partnership recognized related-party revenues of $9.1 million and $9.0 million, respectively, for services provided to Ergon. As of December 31, 2019, and March 31, 2020, the Partnership had receivables from Ergon of $1.1 million and $0.9 million, respectively. As of December 31, 2019, and March 31, 2020, the Partnership had unearned revenues from Ergon of $5.1 million and $4.8 million, respectively.

 

Effective April 1, 2018, the Partnership entered into an agreement with Ergon under which the Partnership purchases crude oil in connection with its crude oil marketing operations. For the three months ended March 31, 2019 and 2020, the Partnership made purchases of crude oil under this agreement totaling $29.7 million and $27.8 million, respectively. As of March 31, 2020, the Partnership had payables to Ergon related to this agreement of $7.3 million related to the March crude oil settlement cycle, and this balance was paid in full on April 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 “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 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 three months ended March 31, 2019, the Partnership recorded impairment expense of $0.8 million related to the Agreement, which included a change in estimate and accrued interest.  The Partnership’s contingent liability as of December 31, 2019, consisted of Ergon’s $10.2 million investment plus accrued interest of $2.0 million.  In November 2019, Ergon and Kingfisher Midstream wound up the business, distributed assets, and dissolved Cimarron Express. On January 2, 2020, Ergon exercised its right under the Agreement to require the Partnership to purchase the outstanding member interest in DEVCO, and the Partnership paid the amount in full on January 3, 2020.  This cash payment is reflected as an acquisition of DEVCO in the investing cash flows section on the Partnership’s condensed consolidated statement of cash flows for the three months ended March 31, 2020.

 

 

 

9.

LONG-TERM INCENTIVE PLAN

 

In July 2007, the general partner adopted the Long-Term Incentive Plan (the “LTIP”), which is administered by the compensation committee of the Board. Effective April 29, 2014, the Partnership’s unitholders approved an amendment to the LTIP to increase the number of common units reserved for issuance under the incentive plan to 4,100,000 common units, subject to adjustments for certain events.  Although other types of awards are contemplated under the LTIP, currently outstanding awards include “phantom” units, which convey the right to receive common units upon vesting, and “restricted” units, which are grants of common units restricted until the time of vesting. The phantom unit awards also include distribution equivalent rights (“DERs”).

 

Subject to applicable earning criteria, a DER entitles the grantee to a cash payment equal to the cash distribution paid on an outstanding common unit prior to the vesting date of the underlying award. Recipients of restricted and phantom units are entitled to receive cash distributions paid on common units during the vesting period which are reflected initially as a reduction of partners’ capital. Distributions paid on units which ultimately do not vest are reclassified as compensation expense.  Awards granted to date are equity awards and, accordingly, the fair value of the awards as of the grant date is expensed over the vesting period.  

 

Restricted common units are granted to the independent directors on each anniversary of joining the Board. The units vest in one-third increments over three years. The following table includes information on outstanding grants made to the directors under the LTIP:

 

Grant Date

  Number of Units     Weighted Average Grant Date Fair Value(1)     Grant Date Total Fair Value (in thousands)  

December 2017

    15,306     $ 4.85     $ 74  

December 2018

    23,436     $ 1.20     $ 28  

December 2019

    7,500     $ 1.07     $ 8  

(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 March 31, 2020, was $1.2 million, which will be expensed over the remaining vesting period.

 

The Partnership’s equity-based incentive compensation expense for the three months ended March 31, 2019 and 2020, was $0.3 million and $0.2 million, respectively. 

 

Activity pertaining to phantom and restricted common unit awards granted under the LTIP is as follows:

 

    Number of Units     Weighted Average Grant Date Fair Value  

Nonvested at December 31, 2019

    1,068,343     $ 3.42  

Granted

    600,396       0.90  

Vested

    227,701       7.15  

Forfeited

    -       -  

Nonvested at March 31, 2020

    1,441,038     $ 2.80  

 

 

 

10.

FAIR VALUE MEASUREMENTS

 

The Partnership uses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost) to value assets and liabilities required to be measured at fair value, as appropriate. The Partnership uses an exit price when determining the fair value. The exit price represents amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

 

The Partnership utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

Level 1

Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

 

Level 2

Inputs other than quoted prices that are observable for these assets or liabilities, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

 

Level 3

Unobservable inputs in which there is little market data, which requires the reporting entity to develop its own assumptions.

 

This hierarchy requires the use of observable market data, when available, to minimize the use of unobservable inputs when determining fair value.  

 

As of December 31, 2019, and March 31, 2020, the Partnership had no recurring financial assets or liabilities subject to fair value measurement.

 

Fair Value of Other Financial Instruments

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with accounting guidance for financial instruments. The Partnership has determined the estimated fair values by using available market information and valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

  

At March 31, 2020, the carrying values on the unaudited condensed consolidated balance sheets for cash and cash equivalents (classified as Level 1), accounts receivable, and accounts payable approximate their fair value because of their short-term nature.

 

Based on the borrowing rates currently available to the Partnership for credit agreement debt with similar terms and maturities and consideration of the Partnership’s non-performance risk, long-term debt associated with the Partnership’s credit agreement at March 31, 2020, approximates its fair value. The fair value of the Partnership’s long-term debt was calculated using observable inputs (LIBOR for the risk-free component) and unobservable company-specific credit spread information.  As such, the Partnership considers this debt to be Level 3.

 

 

 

11.

OPERATING SEGMENTS

 

The Partnership’s operations consist of four reportable segments: (i) asphalt terminalling services, (ii) crude oil terminalling services, (iii) crude oil pipeline services and (iv) crude oil trucking services.  

 

ASPHALT TERMINALLING SERVICES —The Partnership provides asphalt product and residual fuel terminalling services, including storage, blending, processing and throughput services. 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 and leased tanker trucks to gather crude oil for its customers at remote wellhead locations generally not covered by pipeline and gathering systems and to transport the crude oil to aggregation points and storage facilities located along pipeline gathering and transportation systems.  

 

The Partnership’s management evaluates segment performance based upon operating margin, excluding amortization and depreciation, which includes revenues from related parties and external customers and operating expense, excluding depreciation and amortization.  Operating margin, excluding depreciation and amortization (in the aggregate and by segment) is presented in the following table. The Partnership computes the components of operating margin, excluding depreciation and amortization by using amounts that are determined in accordance with GAAP.  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):

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 

Asphalt Terminalling Services

               

Service revenue:

               

Third-party revenue

  $ 6,982     $ 6,854  
Related-party revenue     4,118       4,077  

Lease revenue:

               

Third-party revenue

    9,763       9,831  
Related-party revenue     4,940       4,921  
Total revenue for reportable segment     25,803       25,683  
Operating expense, excluding depreciation and amortization     12,285       12,026  

Operating margin, excluding depreciation and amortization

  $ 13,518     $ 13,657  

Total assets (end of period)

  $ 147,844     $ 143,621  
                 

Crude Oil Terminalling Services

               

Service revenue:

               

Third-party revenue

  $ 3,573     $ 3,330  
Intersegment revenue     298       -  
Total revenue for reportable segment     3,871       3,330  
Operating expense, excluding depreciation and amortization     1,282       878  

Operating margin, excluding depreciation and amortization

  $ 2,589     $ 2,452  

Total assets (end of period)

  $ 67,934     $ 61,984  

 

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 

Crude Oil Pipeline Services

               

Service revenue:

               

Third-party revenue

  $ 2,498     $ 502  

Related-party revenue

    101       -  

Product sales revenue:

               

Third-party revenue

    58,924       47,052  
Total revenue for reportable segment     61,523       47,554  
Operating expense, excluding depreciation and amortization     2,722       2,123  
Intersegment operating expense     1,627       1,425  
Third-party cost of product sales     24,587       14,221  
Related-party cost of product sales     30,774       28,254  

Operating margin, excluding depreciation and amortization

  $ 1,813     $ 1,531  

Total assets (end of period)

  $ 98,722     $ 79,180  
                 

Crude Oil Trucking Services

               

Service revenue

               

Third-party revenue

  $ 2,833     $ 2,543  

Intersegment revenue

    1,329       1,425  
Total revenue for reportable segment     4,162       3,968  
Operating expense, excluding depreciation and amortization     4,220       3,818  

Operating margin, excluding depreciation and amortization

  $ (58 )   $ 150  

Total assets (end of period)

  $ 5,156     $ 5,287  
                 

Total operating margin, excluding depreciation and amortization(1)

  $ 17,862     $ 17,790  
                 

Total Segment Revenues

  $ 95,359     $ 80,535  

Elimination of Intersegment Revenues

    (1,627 )     (1,425 )

Consolidated Revenues

  $ 93,732     $ 79,110  

(1)

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

 

   

Three Months Ended March 31,

 
   

2019

   

2020

 

Operating margin, excluding depreciation and amortization

  $ 17,862     $ 17,790  
Depreciation and amortization     (6,734 )     (6,094 )
General and administrative expense     (3,693 )     (3,540 )
Asset impairment expense     (1,119 )     (5,122 )

Gain (loss) on sale of assets

    1,724       (185 )
Other income     -       558  
Interest expense     (4,271 )     (3,399 )

Income before income taxes

  $ 3,769     $ 8  

 

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

The Partnership is from time to time subject to various legal actions and claims incidental to its business. Management believes that these legal proceedings will not have a material adverse effect on the financial position, results of operations or cash flows of the Partnership. Once management determines that information pertaining to a legal proceeding indicates that it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated, an accrual is established equal to its estimate of the likely exposure.

  

The Partnership has contractual obligations to perform dismantlement and removal activities in the event that some of its asphalt product and residual fuel oil terminalling and storage assets are abandoned. These obligations include varying levels of activity including completely removing the assets and returning the land to its original state. The Partnership has determined that the settlement dates related to the retirement obligations are indeterminate. The assets with indeterminate settlement dates have been in existence for many years and with regular maintenance will continue to be in service for many years to come. Also, it is not possible to predict when demands for the Partnership’s terminalling and storage services will cease, and the Partnership does not believe that such demand will cease for the foreseeable future.  Accordingly, the Partnership believes the date when these assets will be abandoned is indeterminate. With no reasonably determinable abandonment date, the Partnership cannot reasonably estimate the fair value of the associated asset retirement obligations.  Management believes that if the Partnership’s asset retirement obligations were settled in the foreseeable future the present value of potential cash flows that 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.

 

 

13.

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 three months ended March 31, 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., (3) “Ergon” refers to Ergon, Inc., its affiliates and subsidiaries (other than our General Partner and us) and (4) “Vitol” refers to Vitol Holding B.V., its affiliates and subsidiaries.  The following discussion analyzes the historical financial condition and results of operations of the Partnership and should be read in conjunction with our financial statements and notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year ended December 31, 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 May 1, 2020, the forward crude oil price has fallen considerably and the curve is currently in a deep contango. Potential impacts of these factors are discussed below.

 

 

Due to the global pandemic related to the coronavirus disease, COVID-19, and the Organization of Petroleum Exporting Countries’ and Russia’s disagreements over production output, the energy market had historic drops in oil prices in March and April of 2020. Despite this volatility in prices, our business is uniquely positioned and expected to benefit in certain areas, and cash flow for the full year is expected to remain stable in 2020. Our asphalt and crude oil terminalling services segments represented 91% of our operating margin for the three months ended March 31, 2020, and as of May 1, 2020, these segments are fully contracted with take-or-pay revenue that have a weighted average remaining term of 4.5 years. While our customers across all our segments could be impacted by the recent market volatility, they are primarily high-quality counterparties, with over 50% of our revenues earned from those that are investment grade quality, which minimizes our counterparty credit risk.  As of May 1, 2020, we do not expect any supply chain disruptions from COVID-19 to affect our customers. Management is also actively monitoring the states and regions in which we operate, and, as of now, our operations are excluded from mandatory closings due to the essential designation of our assets.  In addition, a large portion of our operating margin, approximately 77%, from the asphalt terminalling services business unit is related to infrastructure spending at the federal, state, and local levels, and the U.S. government has continued to indicate its support for infrastructure spending. While we are unaware of any potential negative impact of COVID-19 on our business at this time, we are continuing to monitor the situation and have been preparing our employees to take precautions and planning for unexpected events, which may include disruptions to our workforce, customers, vendors, facilities and communities in which we operate. In an effort to protect the health and safety of our employees and the customers and vendors we interact with, we took proactive action to adopt social distancing policies at our locations, including working from home, limiting the number of employees attending meetings, reducing the number of people in our sites at any one time, and suspending employee travel.

 

Asphalt Terminalling Services - Historically, there have only been limited times in which asphalt prices and volumes have had a direct correlation with the price of crude oil. However, due to the current steep decline in crude oil prices, asphalt prices have significantly fallen while demand has held steady for road construction activity due to there being fewer vehicles on roads to interfere with construction work and the 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 and decreased asphalt commodity prices. While it is early in the asphalt season, customer throughput volumes have generally been higher than the prior year. However, it is too early in the season to determine the financial impact for the year.

 

Crude Oil Terminalling Services - A contango crude oil curve tends to favor the crude oil storage business as crude oil marketers are incentivized to store crude oil during the current month and sell into the future month. 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, with the forward price curve moving into a deeper contango in March and April 2020, there has been a significant increase in demand for crude oil storage in Cushing and globally, which positively impacted contracted volumes as of April 2020 and has the potential to affect the volumes, rates, and terms of our future recontracting efforts.

 

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, the outlook for increased drilling activity is very challenging and the risk is higher for potential well shut-ins in this environment.

 

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.  Due to the historic drop in crude oil prices in March 2020, we evaluated our pipeline linefill assets for impairment and recorded an impairment expense of $4.9 million for the three months ended March 31, 2020, based on a prior crude oil cost basis of approximately $46 per barrel as compared to prices at quarter end of approximately $20 per barrel.

 

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, customers could have wells shut-in or request rate decreases, which could impact our revenues and operating margin.

 

 

 

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 three months ended March 31, 2020, the Partnership recognized revenues of  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 facilities under contract with Ergon.  These agreements have, based on a weighted average by remaining fixed revenue, approximately 4.6 years remaining under their terms.  One agreement expires at the end of 2020, and the remaining agreements expire at varying times thereafter, through 2026. We may not be able to extend, renegotiate or replace these contracts when they expire and the terms of any renegotiated contracts may not be as favorable as the contracts they replace. We operate the asphalt facilities pursuant to the terminalling agreements, while our contract counterparties operate the asphalt facilities that are subject to lease agreements.

 

As of May 1, 2020, we had approximately 5.8 million barrels of crude oil storage under service contracts, including 3.2 million barrels of crude oil storage contracts that expire in 2020. The remaining terms on the service contracts that extend beyond 2020 range from 11 to 20 months. Storage contracts with Vitol represent 3.2 million barrels of crude oil storage capacity under contract. 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 two of our segments: (i) crude oil pipeline services and (ii) crude oil trucking services. Revenue for the gathering and transportation of crude oil is recognized when the service is performed and is based upon regulated and non-regulated tariff rates and the related transport volumes.

 

The following is a summary of our average gathering and transportation volumes for the periods indicated (in thousands of barrels per day):

 

   

Three Months Ended March 31,

   

Favorable/(Unfavorable)

 
   

2019

   

2020

   

Three Months

 

Average pipeline throughput volume

    37       16       (21 )     (57 )%

Average trucking transportation volume

    27       23       (4 )     (15 )%

 

Volumes have decreased in both pipeline and trucking transportation due to decreased drilling activities in the areas we serve.  Vitol accounted for 41% and 8% of volumes transported on our pipelines in the three months ended March 31, 2019 and 2020, respectively.

 

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 by 8% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreases in compensation expense and maintenance repairs expense as a result of a focus on managing costs, as well as a decrease in depreciation expense.  General and administrative expenses also decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The is primarily due to a decrease in professional fees and an overall commitment to reducing costs across the company. Our interest expense decreased by 20% for the three months ended March 31, 2020, as compared to the three months ended March 31, 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 April 16, 2020, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended March 31, 2020. We will pay this distribution on May 14, 2020, to unitholders of record as of May 4, 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 March 31, 2020. We will pay this distribution on May 14, 2020, to unitholders of record as of May 4, 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 months ended March 31, 2019 and 2020, reconciled to the most directly comparable GAAP measure:

 

   

Three Months Ended

   

Favorable/(Unfavorable)

 

Operating results

 

March 31,

   

Three Months

 

(dollars in thousands)

 

2019

   

2020

    $     %  

Operating margin, excluding depreciation and amortization:

                               

Asphalt terminalling services

  $ 13,518     $ 13,657     $ 139       1 %

Crude oil terminalling services

    2,589       2,452       (137 )     (5 )%

Crude oil pipeline services

    1,813       1,531       (282 )     (16 )%

Crude oil trucking services

    (58 )     150       208       359 %

Total operating margin, excluding depreciation and amortization

    17,862       17,790       (72 )     (0 )%
                                 
Depreciation and amortization     (6,734 )     (6,094 )     640       10 %
General and administrative expense     (3,693 )     (3,540 )     153       4 %
Asset impairment expense     (1,119 )     (5,122 )     (4,003 )     (358 )%

Gain (loss) on sale of assets

    1,724       (185 )     (1,909 )     (111 )%
Operating income     8,040       2,849       (5,191 )     (65 )%
                                 

Other income (expenses):

                               
Other income     -       558       558       N/A  
Interest expense     (4,271 )     (3,399 )     872       20 %
Provision for income taxes     (12 )     (8 )     4       33 %

Net income

  $ 3,757     $ -     $ (3,757 )     (100 )%

 

For the three months ended March 31, 2020, overall operating margin, excluding depreciation and amortization, was fairly consistent with the same period in 2019.  Margins in our asphalt terminalling segment were in-line with the prior year, crude oil terminalling services was slightly lower due to less contracted storage over the quarter versus the prior year, and crude oil pipeline services segment reflect a significant decrease in throughput volumes.  Crude oil trucking services operating margin, excluding depreciation and amortization, improved for the three months ended March 31, 2020, due to an overall focus on reducing costs and long hauls at higher rates.

 

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

   

Favorable/(Unfavorable)

 

Operating results

 

March 31,

   

Three Months

 

(dollars in thousands)

 

2019

   

2020

    $     %  

Service revenue:

                               

Third-party revenue

  $ 6,982     $ 6,854     $ (128 )     (2 )%
Related-party revenue     4,118       4,077       (41 )     (1 )%

Lease revenue:

                               
Third-party revenue     9,763       9,831       68       1 %
Related-party revenue     4,940       4,921       (19 )     (0 )%
Total revenue     25,803       25,683       (120 )     (0 )%
Operating expense, excluding depreciation and amortization     12,285       12,026       259       2 %

Operating margin, excluding depreciation and amortization

  $ 13,518     $ 13,657     $ 139       1 %

 

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

 

 

Total revenue was consistent for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Annual CPI index increases in our long-term contracts were offset by lower reimbursement revenue from improved fuel and power costs compared to prior year.

  Operating expenses were also consistent for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Improved fuel and power costs were offset by increases throughout other expense accounts, primarily related to tank maintenance and repair.

 

Crude oil terminalling services segment

 

Our crude oil terminalling services segment operations generally consist of fee-based activities associated with providing terminalling services, including storage, blending, processing and throughput services for crude oil. Revenue is generated through short- and long-term storage contracts.

 

The following table sets forth our operating results from our crude oil terminalling services segment for the periods indicated:

 

   

Three Months Ended

   

Favorable/(Unfavorable)

 

Operating results

 

March 31,

   

Three Months

 

(dollars in thousands)

 

2019

   

2020

    $     %  

Service revenue:

                               

Third-party revenue

  $ 3,573     $ 3,330     $ (243 )     (7 )%
Intersegment revenue     298       -       (298 )     (100 )%

Total revenue

    3,871       3,330       (541 )     (14 )%
Operating expense, excluding depreciation and amortization     1,282       878       404       32 %

Operating margin, excluding depreciation and amortization

  $ 2,589     $ 2,452     $ (137 )     (5 )%
                                 
Average crude oil storage contracted per month at our Cushing terminal (in thousands of barrels)     5,435       4,912       (523 )     (10 )%
Average crude oil delivered through our Cushing terminal (in thousands of barrels per day)     70       67       (3 )     (4 )%

 

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

 

 

Total revenues for the three months ended March 31, 2020, decreased as compared to the same period in 2019 due to lower contracted volumes. 

  Operating expenses for the three months ended March 31, 2020, decreased compared to the three months ended March 31, 2019, due to a decrease in tank repair expenses.
  As of May 1, 2020, we had approximately 5.8 million barrels of crude oil storage under service contracts, including 3.2 million barrels of crude oil storage contracts that expire in 2020. The remaining terms on the service contracts that extend beyond 2020 range from 11 to 20 months. Storage contracts with Vitol represent 3.2 million barrels of crude oil storage capacity under contract.

 

 

Crude oil pipeline services segment

 

Our crude oil pipeline services segment operations include both service and product sales revenue. Service revenue generally consists of tariffs and other fees associated with transporting crude oil products on pipelines. Product sales revenue is comprised of (i) revenues recognized for the sale of crude oil to our customers that we purchase at production leases and (ii) revenue recognized in buy/sell transactions with our customers. Product sales revenue is recognized for products upon delivery and when the customer assumes the risks and rewards of ownership.

 

The following table sets forth our operating results from our crude oil pipeline services segment for the periods indicated:

 

   

Three Months Ended

   

Favorable/(Unfavorable)

 

Operating results

 

March 31,

   

Three Months

 

(dollars in thousands)

 

2019

   

2020

    $     %  

Service revenue:

                               

Third-party revenue

  $ 2,498     $ 502     $ (1,996 )     (80 )%
Related-party revenue     101       -       (101 )     (100 )%

Product sales revenue:

                               

Third-party revenue

    58,924       47,052       (11,872 )     (20 )%
Total revenue     61,523       47,554       (13,969 )     (23 )%
Operating expense, excluding depreciation and amortization     2,722       2,123       599       22 %
Intersegment operating expense     1,627       1,425       202       12 %
Third-party cost of product sales     24,587       14,221       10,366       42 %
Related-party cost of product sales     30,774       28,254       2,520       8 %

Operating margin, excluding depreciation and amortization

  $ 1,813     $ 1,531     $ (282 )     (16 )%
                                 
Pipeline transportation services average throughput volume (in thousands of barrels per day)     37       16       (21 )     (57 )%
Crude oil marketing volumes (in thousands of barrels per day)     12       11       (1 )     (8 )%

 

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

 

 

Throughput volumes and related revenue have decreased for the three months ended March 31, 2020, as compared to the same period in 2019 due to decreased drilling activities in the areas we serve.

  Product sales revenue for the three months ended March 31, 2019 and 2020, included $0.8 million and $1.5 million, respectively, in sales of crude oil product accumulated over time through customer loss allowance deductions.  The remaining change in product sales revenue is related to our crude oil marketing business and reflects the decrease in the market price of crude oil.
  Overall cost of product sales has decreased consistently with crude oil marketing revenue and reflect the decrease in the market price of crude oil.  Purchases from related party made up a higher portion of total crude oil purchases during the three months ended March 31, 2020 as compared to the same period in 2019.

 

Crude oil trucking services segment

 

Our crude oil trucking services segment operations generally consist of fee-based activity associated with transporting crude oil products on trucks. Revenues are generated primarily through transportation fees.

 

The following table sets forth our operating results from our crude oil trucking services segment for the periods indicated:

 

   

Three Months Ended

   

Favorable/(Unfavorable)

 

Operating results

 

March 31,

   

Three Months

 

(dollars in thousands)

 

2019

   

2020

    $     %  

Service revenue

                               

Third-party revenue

  $ 2,833     $ 2,543     $ (290 )     (10 )%

Intersegment revenue

    1,329       1,425       96       7 %

Total revenue

    4,162       3,968       (194 )     (5 )%
Operating expense, excluding depreciation and amortization     4,220       3,818       402       10 %

Operating margin, excluding depreciation and amortization

  $ (58 )   $ 150     $ 208       359 %
                                 
Average volume (in thousands of barrels per day)     27       23       (4 )     (15 )%

 

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

 

 

Service revenues decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreased drilling activities in the areas we serve.

  Operating expense, excluding depreciation and amortization, decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to decreases in compensation and fleet expense related to lower volumes.

 

 

Other Income and Expenses

 

Depreciation and amortization expense. Depreciation and amortization expense decreased to $6.1 million for the three months ended March 31, 2020, compared to $6.7 million for the same period in 2019.  This decrease is primarily the result of certain assets reaching the end of their depreciable lives.

 

General and administrative expense.  General and administrative expense decreased to $3.5 million for the three months ended March 31, 2020, compared to $3.7 million for the same period in 2019, primarily due to a decrease in professional fees and an overall commitment to reducing costs across the company.

 

Asset impairment expense. Asset impairment expense for the three months ended March 31, 2020, of $5.1 million primarily consisted of a write-down of crude oil linefill due to the decrease in the market price of crude oil.  Asset impairment expense for the three months ended March 31, 2019, was $1.1 million, and consisted of a change in estimate of the push-down impairment related to Cimarron Express Pipeline, LLC (“Cimarron Express”) of $0.8 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 sale of assets. During the three months ended March 31, 2020, the immaterial loss was due to the disposal of assets for repair. Gains for 2019 primarily relate to the sale of certain truck stations in locations not served by our crude oil trucking services segment.

 

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

 

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

 

   

Three Months Ended

   

Favorable/(Unfavorable)

 
   

March 31,

   

Three Months

 
   

2019

   

2020

    $     %  

Credit agreement interest

  $ 4,009     $ 3,137     $ 872       22 %
Amortization of debt issuance costs     251       251       -       0 %
Other     11       11       -       0 %

Total interest expense

  $ 4,271     $ 3,399     $ 872       20 %

 

The decrease in credit agreement interest is due to a decrease in floating interest rates.

 

Effects of Inflation

 

In recent years, inflation has been modest and has not had a material impact upon the results of our operations.

 

Off-Balance Sheet Arrangements

 

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

 

 

Liquidity and Capital Resources

 

Cash Flows and Capital Expenditures

 

The following table summarizes our sources and uses of cash for the three months ended March 31, 2019 and 2020

 

    Three Months Ended March 31,  
   

2019

   

2020

 
   

(in millions)

 

Net cash provided by operating activities

  $ 19.5     $ 7.9  

Net cash provided by (used in) investing activities

  $ 3.5     $ (15.1 )