BLUEKNIGHT ENERGY PARTNERS, L.P. As used in this quarterly report, unless we indicate otherwise: (1) "Blueknight," "our," "we," "us" and similar terms refer toBlueknight Energy Partners, L.P. , together with its subsidiaries, (2) our "General Partner" refers toBlueknight Energy Partners G.P., L.L.C. , and (3) "Ergon" refers toErgon, Inc. , its affiliates and subsidiaries (other than ourGeneral Partner and us). The following discussion analyzes the historical financial condition and results of operations of the Partnership and should be read in conjunction with our financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSecurities and Exchange Commission (the "SEC") onMarch 9, 2022 (the "2021 Form 10-K"). Forward-Looking Statements This report contains "forward-looking statements" within the meaning of the federal securities laws. Statements included in this quarterly report that are not historical facts (including any statements regarding plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including "may," "will," "should," "believe," "expect," "intend," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state other "forward-looking" information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of the filing of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in "Part I, Item 1A. Risk Factors" in the 2021 Form 10-K. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report. Overview
We are a publicly traded master limited partnership with operations in 26 states. We have the largest independent asphalt facility footprint in the nation, and through that we provide integrated terminalling services for companies engaged in the production, distribution, and marketing of liquid asphalt for infrastructure or other end markets. We manage our operations through a single operating segment, asphalt terminalling services.
We previously provided integrated terminalling, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil in three different operating segments: (i) crude oil terminalling services, (ii) crude oil pipeline services, and (iii) crude oil trucking services. OnDecember 21, 2020 , we announced that we had entered into multiple definitive agreements to sell these segments. The transactions closed in February and March of 2021, and these segments are presented as discontinued operations for all periods. Our 54 asphalt facilities are well-positioned to provide asphalt terminalling services in the market areas they serve throughout the continentalUnited States . With our approximately 9.0 million barrels of total liquid asphalt storage capacity, we provide our customers the ability to effectively manage their liquid asphalt inventories while allowing significant flexibility in their processing and marketing activities. Our asphalt terminalling business delivers a stable cash flow profile through long-term take-or-pay contracts that generally have original terms of 5 to 10 years with options to extend the term. The stability comes from the contract structure that is comprised primarily of fixed fees and cost reimbursements, which make up approximately 95% of our revenues on an annual basis. The remaining revenue is variable, primarily consisting of volume-based throughput fees. We have contractual agreements in place for all of our asphalt terminalling facilities. We lease certain facilities for operation by our customers and at the remaining facilities we store, process, blend, and manufacture products, among other things, to meet our customers' specifications. The agreements have, based on a weighted average by remaining fixed revenue, approximately 4.9 years remaining under their terms as ofJuly 29, 2022 . Approximately 13% of our tank capacity will expire at the end of 2022 if not renewed with the current customer or a new customer, and the remaining capacity expires at varying times thereafter, through 2035. Our varying contract expiration dates provide for staggered renewals, which provides additional stability to the cash flow. 15
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Table of Contents Merger Agreement OnOctober 8, 2021 , Ergon filed an amendment to its Schedule 13D with theSEC disclosing that Ergon made a non-binding proposal to the Board, pursuant to which Ergon would acquire all the outstanding common units and Preferred Units of the Partnership not already owned by Ergon and its affiliates. OnApril 21, 2022 , the Partnership, the General Partner,Ergon Asphalt & Emulsions, Inc. ("Parent") andMerle, LLC ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will merge with and into the Partnership, with the Partnership surviving as a wholly owned subsidiary of Parent (the "Merger"). Under the terms of the Merger Agreement, at the effective time of the Merger, (i) each issued and outstanding common unit representing a limited partner interest in the Partnership (each, a "Common Unit") other than Common Units owned by Parent, the Partnership and their subsidiaries will be converted into the right to receive$4.65 in cash without any interest thereon (the "Common Unit Merger Consideration"), and (ii) each issued and outstanding Series A Preferred Unit of the Partnership (each, a "Preferred Unit"), other than Preferred Units owned by Parent, the Partnership and their subsidiaries will be converted into the right to receive$8.75 in cash without any interest thereon (the "Preferred Unit Merger Consideration" and, together with the Common Unit Merger Consideration, the "Merger Consideration"). In connection with the Merger, (i) the General Partner's non-economic general partner interest in the Partnership, (ii) the incentive distribution rights held by the General Partner and (iii) the Common Units and the Preferred Units owned by Parent and its subsidiaries, in each case, will not be cancelled, will not be converted into the right to receive the Merger Consideration and will remain outstanding following the Merger. Immediately prior to the effective time of the Merger, all restricted units and phantom units outstanding immediately prior to the effective time will fully vest, and each holder of such units will receive an amount equal to the Merger Consideration with respect to each such unit that becomes vested pursuant to the terms of the Merger Agreement. The Partnership has entered into a Support Agreement, dated as ofApril 21, 2022 (the "Support Agreement"), with Parent, pursuant to which Parent has agreed to vote the Covered Units (as defined in the Support Agreement) it beneficially owns in favor of the Merger Agreement and the transactions contemplated thereby, including the Merger.
The Merger is subject to customary closing conditions, including approval of
the unitholders. The Partnership has established a special meeting date
of
Potential Impact of Certain Factors on Future Earnings
Due to the high percentage of fixed and reimbursement revenue from our long-term contracts, our focus and our primary risk is renewing contracts at current or more favorable terms. Our ability to renew agreements at more favorable terms, or at all, could be impacted if our customers experience negative market conditions. These factors include infrastructure spending, the strength of state and local economies, and the level of allocations of tax funding to transportation spending from state or federal funds. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share ofthe United States construction market. Federal funds are allocated on a state-by-state basis, and each state is required to match a portion of the federal funds that it receives. Currently, from a macroeconomic view, a positive indicator for the infrastructure and construction sector includes government spending programs for infrastructure at the federal, state, and local levels. The federal infrastructure spending bill (theInfrastructure Investment and Jobs Act) that was passed inNovember 2021 , is expected to provide long-term funding and support for road construction and repair. Increased funding potentially impacts us through favorable customer contract renewals, including facility expansion opportunities, as well as increased customer volumes through our terminals. Separate from these funds, COVID-19 relief funds remain available and could have a positive impact on the allocation of state and local spending. Further, there has been an increase in state and local initiatives to support infrastructure funding, and a high percentage of those initiatives have been approved by voters. While it is still early in the asphalt season, customer throughput volumes are trending in line with prior years. However, it is too early in the season to determine the financial impact for this year. Currently, from a macroeconomic view, negative indicators for the infrastructure and construction sector include increased costs due to higher fuel and energy costs, inflation and supply chain disruptions. Although asphalt prices have risen to help customers offset the higher costs, if margins deteriorate for our customers, it could impact their volumes through our terminals. We continue to monitor potential impacts to our business due to inflation and supply chain disruptions. To date, we have had limited impact to our business from these items primarily due to the structure of our contracts. For example, our utility and fuel costs are passed through to our customers. However, we have experienced higher maintenance and repair costs due to timing delays from supply chain disruptions or availability of certain maintenance contractors. Another factor impacting us and our customers, from a short-term perspective, is weather patterns. Our customers' volumes could be significantly impacted by prolonged rain or snow seasons or any severe weather that occurs. Damage to our terminal facilities from severe weather, such as flooding or hurricanes, could impact our operating results through additional costs and/or loss of revenue. 16
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Table of Contents Results of Operations Non-GAAP Financial Measures To supplement our financial information presented in accordance with generally accepted accounting principles, or "GAAP", management uses additional measures that are known as "non-GAAP financial measures" in its evaluation of past performance and prospects for the future. The primary measure used by management is operating margin, excluding depreciation and amortization. Management believes that the presentation of such additional financial measures provides useful information to investors regarding our performance and results of operations because these measures, when used in conjunction with related GAAP financial measures, (i) provide additional information about our core operating performance and ability to generate and distribute cash flow; (ii) provide investors with the financial analytical framework upon which management bases financial, operational, compensation and planning decisions and (iii) present measurements that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. These additional financial measures are reconciled to the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our unaudited condensed consolidated financial statements and footnotes. The table below summarizes our financial results for the three and six months endedJune 30, 2021 and 2022, reconciled to the most directly comparable GAAP measure: Three Months Ended Three Months Variance Six Months Ended Six Months Variance Operating results June 30, Favorable/(Unfavorable) June 30, Favorable/(Unfavorable) (dollars in thousands) 2021 2022 $% 2021 2022 $% Fixed fee revenue$ 24,411 $ 25,399 $ 988 4 %$ 48,780 $ 50,558 $ 1,778 4 % Variable cost recovery revenue 2,984 3,723 739 25 % 5,534 6,915 1,381 25 % Variable throughput and other revenue 364 388 24 7 % 520 497 (23 ) (4 )% Total revenue 27,759 29,510 1,751 6 % 54,834 57,970 3,136 6 % Operating expenses, excluding depreciation and amortization (13,116 ) (14,819 ) (1,703 ) (13 )% (25,963 ) (28,998 ) (3,035 ) (12 )% Total operating margin, excluding depreciation and amortization 14,643 14,691 48 0 % 28,871 28,972 101 0 % Depreciation and amortization 2,967 3,482 (515 ) (17 )% 6,000 6,879 (879 ) (15 )% General and administrative expense 2,972 3,558 (586 ) (20 )% 6,954 6,929 25 0 % Loss on disposal of assets - 223 (223 ) N/A - 247 (247 ) N/A Operating income 8,704 7,428 (1,276 ) (15 )% 15,917 14,917 (1,000 ) (6 )% Other income (expenses): Other income 109 91 (18 ) (17 )% 342 218 (124 ) (36 )% Interest expense (1,695 ) (1,164 ) 531 31 % (3,028 ) (2,128 ) 900 30 % Provision for income taxes (10 ) (10 ) - 0 % (20 ) (20 ) - 0 % Income from continuing operations 7,108 6,345 (763 ) (11 )% 13,211 12,987 (224 ) (2 )% Income from discontinued operations, net 175 - (175 ) (100 )% 75,725 - (75,725 ) (100 )% Net income$ 7,283 $ 6,345 $ (938 ) (13 )%$ 88,936 $ 12,987 $ (75,949 ) (85 )% 17
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Revenues. Total revenues increased to$29.5 million for the three months endedJune 30, 2022 , as compared to$27.8 million for the same period in 2021, and increased to$58.0 million for the six months endedJune 30, 2022 , as compared to$54.8 million for the same period in 2021. Revenues consist primarily of fixed fees for items such as storage and minimum throughput requirements, with consideration of annual consumer price index ("CPI") adjustments built into our agreements. Variable cost recovery revenue is driven by certain reimbursable operating expenses, such as utility costs, and therefore have no net impact on operating margin or net income. Variable throughput revenue is primarily driven by our customers' excess volumes over annual minimum thresholds and such thresholds are typically reached during the latter part of the year. Operating expenses, excluding depreciation and amortization. Operating expense, excluding depreciation and amortization, increased to$14.8 million for the three months endedJune 30, 2022 , as compared to$13.1 million for the same period in 2021, and increased to$29.0 million for the six months endedJune 30, 2022 , as compared to$26.0 million for the same period in 2021. The increase was primarily due to higher utility costs, which are recoverable costs from our customers, and timing of maintenance and repair projects. Depreciation and amortization expense. Depreciation and amortization expense increased to$3.5 million for the three months endedJune 30, 2022 , as compared to$3.0 million for the same period in 2021, and increased to$6.9 million for the six months endedJune 30, 2022 , as compared to$6.0 million for the same period in 2021. This increase is primarily related to the timing of placing maintenance capital projects in-service and the asphalt terminal and industrial park acquisition that closed inJanuary 2022 . General and administrative expense. General and administrative expense increased to$3.6 million for the three months endedJune 30, 2022 , as compared to$3.0 million for the same period in 2021, and decreased to$6.9 million for the six months endedJune 30, 2022 , as compared to$7.0 million for the same period in 2021. The increase for the three month period was primarily due to non-recurring legal and professional fees related to the Ergon buyout offer. The decrease for the six month period was primarily due to corporate cost synergies, which included lower compensation costs, realized after the completion of the crude oil business sales, offset by non-recurring legal and professional fees related to the Ergon buyout offer. Interest expense. Interest expense represents interest on borrowings under our credit agreement as well as amortization of debt issuance costs. The following table presents the significant components of interest expense (dollars in thousands): Three Months Ended Three Months Variance Six Months Ended Six Months Variance June 30, Favorable/(Unfavorable) June 30, Favorable/(Unfavorable) 2021 2022 $% 2021 2022 $% Credit agreement interest$ 893 $ 995 $ (102 ) (11 )%$ 1,836 $ 1,775 $ 61 3 % Amortization of debt issuance costs 217 210 7 3 % 462 419 43 9 % Write-off of debt issuance costs 583 - 583 100 % 730 - 730 100 % Other 2 (41 ) 43 2150 % - (66 ) 66 N/A Total interest expense$ 1,695 $ 1,164 $ 531 31 %$ 3,028 $ 2,128 $ 900 30 %
The increase in credit agreement interest for the three month period is due to higher interest rates.
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Table of Contents Distributions The amount of distributions we pay and the decision to make any distribution is determined by the Board of Directors of ourGeneral 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. OnJuly 26, 2022 , the Board approved a cash distribution of$0.17875 per outstanding preferred unit for the three months endedJune 30, 2022 . We will pay this distribution onAugust 12, 2022 , to unitholders of record as ofAugust 5, 2022 . The total distribution will be approximately$6.2 million , with approximately$6.2 million and$0.1 million to be paid to our preferred unitholders and general partner, respectively. In addition, the Board approved a cash distribution of$0.0425 per outstanding common unit for the three months endedJune 30, 2022 . We will pay this distribution onAugust 12, 2022 , to unitholders of record as ofAugust 5, 2022 . The total distribution will be approximately$1.9 million , with approximately$1.8 million to be paid to our common unitholders, less than$0.1 million to be paid to our general partner, and approximately$0.1 million to be paid to holders of phantom and restricted units pursuant to awards granted under our Long-Term Incentive Plan.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Liquidity and Capital Resources
Cash Flows The following table summarizes our sources and uses of cash, inclusive of both continuing and discontinued operations, for the six months endedJune 30, 2021 and 2022: Six Months Ended June 30, 2021 2022 (in thousands) Net cash provided by operating activities$ 14,805 $ 13,106 Net cash provided by (used in) investing activities$ 151,692 $ (12,833 ) Net cash provided by (used in) financing activities$ (166,887 ) $ (671 )
Operating Activities. Net cash provided by operating activities was
Investing Activities. Net cash used in investing activities was$12.8 million for the six months endedJune 30, 2022 , compared to net cash provided by investing activities of$151.7 million for the six months endedJune 30, 2021 . Capital expenditures for the six months endedJune 30, 2022 , included expansion capital expenditures and acquisition costs of$9.8 million related to the growth projects announced inDecember 2021 and maintenance capital expenditures of$3.0 million . The six months endedJune 30, 2021 , included net proceeds from the sale of the crude oil businesses of$155.4 million , which excluded$1.5 million of funds held in escrow for right of way renewals. Capital expenditures for the six months endedJune 30, 2021 , inclusive of both continuing and discontinued operations, included maintenance capital expenditures of$2.7 million and expansion capital expenditures of$1.0 million . Financing Activities. Net cash used in financing activities was$0.7 million for the six months endedJune 30, 2022 , compared to net cash used in financing activities of$166.9 million for the six months endedJune 30, 2021 . Cash used in financing activities for the six months endedJune 30, 2022 , consisted primarily of net borrowings on long-term debt of$16.0 million , partially offset by$16.2 million in distributions to our unitholders. Net cash used in financing activities for the six months endedJune 30, 2021 , consisted primarily of$16.1 million in distributions to our unitholders, net payments on long-term debt of$144.5 million , and the repurchase of preferred units for$5.2 million .
Liquidity and Capital Resources
Cash flows from operations and availability under our revolving credit facility are our primary sources of liquidity. AtJune 30, 2022 , we had a working capital deficit of$10.3 million . This is primarily a function of our approach to cash management. AtJune 30, 2022 , we had approximately$114.0 million of revolver borrowings and approximately$0.3 million of letters of credit outstanding under the credit agreement, leaving us with approximately$185.7 million of availability under our revolving credit facility subject to covenant restrictions, which limited our availability to$137.0 million . As ofJuly 29, 2022 , we have approximately$109.0 million of revolver borrowings and approximately$0.3 million of letters of credit outstanding under the credit agreement, leaving us with aggregate unused commitments under our revolving credit facility of approximately$190.7 million and cash on hand of approximately$0.6 million . The credit agreement is scheduled to mature onMay 26, 2025 . 19
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Our credit agreement contains certain financial covenants which include a maximum permitted consolidated total leverage ratio, which may limit our availability to borrow funds thereunder. The consolidated total leverage ratio is assessed quarterly based on the trailing twelve months of EBITDA, as defined in the credit agreement. The maximum permitted consolidated total leverage ratio as ofJune 30, 2022 , and for each fiscal quarter thereafter, is 4.75 to 1.00. Our consolidated total leverage ratio was 2.16 to 1.00 as ofJune 30, 2022 . B ased on current operating plans and forecasts, we expect to remain in compliance with all covenants of the credit agreement for at least the next year.
Capital Requirements. Our capital requirements consist of the following:
• expansion capital expenditures, which are capital expenditures made to expand
the operating capacity or revenue of existing or new assets, whether through
construction, acquisition or modification; and
• maintenance capital expenditures, which are capital expenditures made to
maintain the existing integrity and operating capacity of our assets and
related cash flows, further extending the useful lives of the assets.
The following table breaks out capital expenditures from continuing operations
for the six months ended
Six Months Ended June 30,
2021 2022
Net expansion capital expenditures
Net maintenance capital expenditures
We currently expect our 2022 expansion capital expenditures for organic growth projects to be approximately$15.0 million and our maintenance capital expenditures to be between$5.5 million to$6.5 million , each net of reimbursable expenditures. Our expansion capital expenditures include an asphalt terminal and industrial park acquired inJanuary 2022 and costs related to an expansion project at one of our current terminals. Management is evaluating other expansion opportunities for 2022 and beyond that could increase this range of capital expenditures. These projects will have potential future expansion opportunities that are not currently part of our 2022 expansion capital forecast. Our sources of liquidity for expansion and maintenance capital expenditures will be a combination of cash flows from operations and borrowings under our revolving credit facility. Our Ability to Grow Depends on Our Ability toAccess External Expansion Capital . Our partnership agreement requires that we distribute all of our available cash to our unitholders. Available cash is reduced by cash reserves established by ourGeneral Partner to provide for the proper conduct of our business (including for future capital expenditures) and to comply with the provisions of our credit agreement. We may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations because we distribute all of our available cash.
Recent Accounting Pronouncements
There have been no new accounting pronouncements that have become effective or
have been issued during the six months ended
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