The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. |
ORGANIZATION AND NATURE OF BUSINESS |
Blueknight Energy Partners, L.P. and subsidiaries (collectively, the “Partnership”) is a publicly traded master limited partnership with operations in 26 states. The Partnership provides integrated terminalling services for companies engaged in the production, distribution, and marketing of liquid asphalt. The Partnership manages its operations through one operating segment, asphalt terminalling services. The Partnership’s common units and preferred units, which represent limited partnership interests in the Partnership, are listed on the Nasdaq Global Market under the symbols “BKEP” and “BKEPP,” respectively. The Partnership was formed in February 2007 as a Delaware master limited partnership.
The Partnership previously provided integrated terminalling, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil in three different operating segments: (i) crude oil terminalling services, (ii) crude oil pipeline services, and (iii) crude oil trucking services. On December 21, 2020, the Partnership announced it had entered into multiple definitive agreements to sell these segments. These transactions closed in February and March of 2021. These segments are presented as discontinued operations for all periods presented. Unless otherwise noted, information in these notes to the consolidated financial statements relates to continuing operations. As the Partnership is only operating through one operating segment, a segment footnote is no longer required.
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, 2022, the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2022, the condensed consolidated statements of changes in partners’ capital (deficit) for the three months ended March 31, 2021 and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2022, 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 2021 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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2022 (the “2021 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 2021 Form 10-K.
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 |
|
Total |
Remainder of 2022 |
|
$ |
30,529 |
|
|
$ |
45,549 |
|
|
$ |
76,078 |
|
2023 |
|
|
36,739 |
|
|
|
53,125 |
|
|
|
89,864 |
|
2024 |
|
|
36,009 |
|
|
|
52,337 |
|
|
|
88,346 |
|
2025 |
|
|
33,801 |
|
|
|
46,268 |
|
|
|
80,069 |
|
2026 |
|
|
24,753 |
|
|
|
30,670 |
|
|
|
55,423 |
|
Thereafter |
|
|
23,639 |
|
|
|
33,902 |
|
|
|
57,541 |
|
Total revenue related to future performance obligations |
|
$ |
185,470 |
|
|
$ |
261,851 |
|
|
$ |
447,321 |
|
___________________
(1) |
Excluded from the table is revenue that is either constrained or related to performance obligations that are wholly unsatisfied as of March 31, 2022. |
Disaggregation of Revenue
Disaggregation of revenue from contracts with customers and lease revenue by revenue type is presented as follows (in thousands):
|
|
Three Months Ended March 31, 2021 |
|
|
Revenue from contracts with customers |
|
Lease revenue |
|
|
|
|
|
|
Third-party revenue |
|
Related-party revenue |
|
Third-party revenue |
|
Related-party revenue |
|
Total |
Fixed storage and throughput revenue |
|
$ |
5,064 |
|
|
$ |
4,721 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,785 |
|
Fixed lease revenue |
|
|
- |
|
|
|
- |
|
|
|
7,801 |
|
|
|
6,785 |
|
|
|
14,586 |
|
Variable cost recovery revenue |
|
|
1,735 |
|
|
|
128 |
|
|
|
502 |
|
|
|
219 |
|
|
|
2,584 |
|
Variable throughput and other revenue |
|
|
120 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
120 |
|
Total |
|
$ |
6,919 |
|
|
$ |
4,849 |
|
|
$ |
8,303 |
|
|
$ |
7,004 |
|
|
$ |
27,075 |
|
|
|
Three Months Ended March 31, 2022 |
|
|
Revenue from contracts with customers |
|
Lease revenue |
|
|
|
|
|
|
Third-party revenue |
|
Related-party revenue |
|
Third-party revenue |
|
Related-party revenue |
|
Total |
Fixed storage and throughput revenue |
|
$ |
5,186 |
|
|
$ |
4,861 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,047 |
|
Fixed lease revenue |
|
|
- |
|
|
|
- |
|
|
|
8,122 |
|
|
|
6,988 |
|
|
|
15,110 |
|
Variable cost recovery revenue |
|
|
2,313 |
|
|
|
260 |
|
|
|
363 |
|
|
|
258 |
|
|
|
3,194 |
|
Variable throughput and other revenue |
|
|
107 |
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
109 |
|
Total |
|
$ |
7,606 |
|
|
$ |
5,121 |
|
|
$ |
8,487 |
|
|
$ |
7,246 |
|
|
$ |
28,460 |
|
Contract Balances
Accounts receivable from contracts with customers were $2.2 million and $2.1 million at December 31, 2021, and March 31, 2022, respectively. Contract assets were $2.0 million at March 31, 2022, and were immaterial at December 31, 2021.
The Partnership records unearned revenues when cash payments are received in advance of performance. Unearned revenue related to contracts with customers was $3.4 million and $2.5 million at December 31, 2021, and March 31, 2022, respectively. For the three months ended March 31, 2022, the Partnership recognized $1.6 million of revenues that were previously included in the unearned revenue balance.
Practical Expedients and Exemptions
The Partnership does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
4. |
DISCONTINUED OPERATIONS |
On December 21, 2020, the Partnership announced that it entered into agreements to sell its crude oil trucking services, crude oil pipeline services, and crude oil terminalling services segments. These segments are reported as discontinued operations in the results of operations and financial position for all periods presented. The crude oil trucking services agreement closed in two phases, one on December 15, 2020, and one on February 2, 2021. The crude oil pipeline services agreement closed on February 1, 2021. Loss recognized on the classification of held for sale and disposal of these assets was recorded in the year ended December 31, 2020. The transaction related to the crude oil terminalling services segment closed on March 1, 2021. The Partnership has allocated interest to discontinued operations on debt that was required to be repaid as a result of the sales of the crude oil pipeline and terminalling services segments for the three months ended March 31, 2021.
As part of the crude oil pipeline sale, $1.2 million of the gross sale proceeds are currently being held in escrow, subject to post-closing settlement terms and conditions. The Partnership expects to receive the majority of this in increments over the two years following the date of sale.
Exit and disposal costs related to these sales, in the form of employee severance payments, totaled $1.9 million. The Partnership provided limited transition services to both of the buyers of the crude oil pipeline and terminalling services segments, with the final transition services being completed during the third quarter of 2021. The contracts were designed to recover the costs of providing services, so there is minimal income statement impact for these services.
Assets and Liabilities of Discontinued Operations (in thousands) |
|
As of December 31, 2021 |
|
|
|
Crude Oil Trucking Services |
|
|
Crude Oil Pipeline Services |
|
|
Crude Oil Terminalling Services |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Total assets of discontinued operations |
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
12 |
|
|
$ |
218 |
|
|
$ |
10 |
|
|
$ |
240 |
|
Total liabilities of discontinued operations |
|
$ |
12 |
|
|
$ |
218 |
|
|
$ |
10 |
|
|
$ |
240 |
|
Statement of Operations for Discontinued Operations (in thousands) |
|
|
Three Months Ended March 31, 2021 |
|
|
|
Crude Oil Trucking Services |
|
|
Crude Oil Pipeline Services |
|
|
Crude Oil Terminalling Services |
|
|
Total |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party service revenue |
|
$ |
9 |
|
|
$ |
413 |
|
|
$ |
3,643 |
|
|
$ |
4,065 |
|
Intercompany service revenue |
|
|
409 |
|
|
|
- |
|
|
|
- |
|
|
|
409 |
|
Third-party product sales revenue |
|
|
- |
|
|
|
15,591 |
|
|
|
- |
|
|
|
15,591 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense |
|
|
1,333 |
|
|
|
1,438 |
|
|
|
910 |
|
|
|
3,681 |
|
Intercompany operating expense |
|
|
- |
|
|
|
409 |
|
|
|
- |
|
|
|
409 |
|
Cost of product sales |
|
|
- |
|
|
|
4,994 |
|
|
|
- |
|
|
|
4,994 |
|
Cost of product sales from related party |
|
|
- |
|
|
|
9,461 |
|
|
|
- |
|
|
|
9,461 |
|
General and administrative expense |
|
|
59 |
|
|
|
118 |
|
|
|
- |
|
|
|
177 |
|
Tangible asset impairment expense |
|
|
92 |
|
|
|
41 |
|
|
|
23 |
|
|
|
156 |
|
Gain on disposal of assets |
|
|
(3 |
) |
|
|
(1,694 |
) |
|
|
(73,372 |
) |
|
|
(75,069 |
) |
Interest expense |
|
|
- |
|
|
|
72 |
|
|
|
634 |
|
|
|
706 |
|
Income (loss) before income taxes |
|
|
(1,063 |
) |
|
|
1,165 |
|
|
|
75,448 |
|
|
|
75,550 |
|
Provision for income taxes |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income (loss) from discontinued operations |
|
$ |
(1,063 |
) |
|
$ |
1,165 |
|
|
$ |
75,448 |
|
|
$ |
75,550 |
|
Select cash flow information (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil Trucking Services |
|
|
Crude Oil Pipeline Services |
|
|
Crude Oil Terminalling Services |
|
|
Total |
|
|
|
Three Months Ended March 31, 2021 |
|
Amortization |
|
$ |
3 |
|
|
$ |
14 |
|
|
$ |
15 |
|
|
$ |
32 |
|
Capital expenditures |
|
$ |
- |
|
|
$ |
10 |
|
|
$ |
109 |
|
|
$ |
119 |
|
5. |
PROPERTY, PLANT AND EQUIPMENT |
|
|
Estimated Useful |
|
|
December 31, |
|
|
March 31, |
|
|
|
Lives (Years) |
|
|
2021 |
|
|
2022 |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Land |
|
|
N/A |
|
|
$ |
21,826 |
|
|
$ |
23,313 |
|
Land improvements |
|
|
10-20 |
|
|
|
5,125 |
|
|
|
5,145 |
|
Storage and terminal facilities |
|
|
10-35 |
|
|
|
257,433 |
|
|
|
262,453 |
|
Office property and equipment and other |
|
|
3-30 |
|
|
|
21,751 |
|
|
|
22,529 |
|
Construction-in-progress |
|
|
N/A |
|
|
|
4,355 |
|
|
|
9,083 |
|
Property, plant and equipment, gross |
|
|
|
|
|
|
310,490 |
|
|
|
322,523 |
|
Accumulated depreciation |
|
|
|
|
|
|
(204,101 |
) |
|
|
(206,495 |
) |
Property, plant and equipment, net |
|
|
|
|
|
$ |
106,389 |
|
|
$ |
116,028 |
|
Capital expenditures for the three months ended March 31, 2022, include an asphalt terminal and industrial park acquisition that closed in January 2022 and costs related to an expansion project at an existing terminal.
On May 26, 2021, the Partnership entered into an amended and restated credit agreement with a revolving loan facility of $300.0 million. As of April 29, 2022, approximately $110.0 million of revolver borrowings and $0.6 million of letters of credit were outstanding under the credit agreement, leaving the Partnership with approximately $189.4 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 $450.0 million for all revolving loan commitments under the credit agreement.
The credit agreement will mature on
May 26, 2025, and all amounts outstanding under the credit agreement will become due and payable on such date. The credit agreement requires mandatory prepayments of amounts outstanding thereunder with the net proceeds of certain asset sales, property or casualty insurance claims and condemnation proceedings, unless the Partnership reinvests such proceeds in accordance with the credit agreement, but these mandatory prepayments will
not require any reduction of the lenders’ commitments under the credit agreement.
Borrowings under the credit agreement bear interest, at the Partnership’s option, at either the reserve-adjusted eurodollar rate (as defined in the credit agreement) (“eurodollar rate”) plus an applicable margin that ranges from 2.0% to 3.25% or the alternate base rate (the highest of the agent bank’s prime rate, the federal funds effective rate plus 0.5%, and the 30-day eurodollar rate plus 1.0%) plus an applicable margin that ranges from 1.0% to 2.25%. The Partnership pays a per annum fee on all letters of credit issued under the credit agreement, which fee equals the applicable margin for loans accruing interest based on the eurodollar rate, and the Partnership pays a commitment fee ranging from 0.375% to 0.5% on the unused commitments under the credit agreement. The applicable margins for the Partnership’s interest rate, the letter of credit fee and the commitment fee vary quarterly based on the Partnership’s consolidated total leverage ratio (as defined in the credit agreement, being generally computed as the ratio of consolidated total debt to consolidated earnings before interest, taxes, depreciation, amortization, and certain other non-cash charges).
The credit agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter.
Prior to the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio is 4.75 to 1.00; provided that the maximum permitted consolidated total leverage ratio may be increased to 5.25 to 1.00 for certain quarters, based on the occurrence of a specified acquisition (as defined in the credit agreement, but generally being an acquisition for which the aggregate consideration is $15.0 million or more).
From and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million, the maximum permitted consolidated total leverage ratio is 5.00 to 1.00; provided that from and after the fiscal quarter ending immediately preceding the fiscal quarter in which a specified acquisition occurs to and including the last day of the second full fiscal quarter following the fiscal quarter in which such acquisition occurred, the maximum permitted consolidated total leverage ratio will be 5.50 to 1.00.
The maximum permitted consolidated senior secured leverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated total secured debt to consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges) is 3.50 to 1.00, but this covenant is only tested from and after the date on which the Partnership issues qualified senior notes in an aggregate principal amount (when combined with all other qualified senior notes previously or concurrently issued) that equals or exceeds $200.0 million.
The minimum permitted consolidated interest coverage ratio (as defined in the credit agreement, but generally computed as the ratio of consolidated earnings before interest, taxes, depreciation, amortization and certain other non-cash charges to consolidated interest expense) is 2.50 to 1.00.In addition, the credit agreement contains various covenants that, among other restrictions, limit the Partnership’s ability to:
| • | create, issue, incur or assume indebtedness; |
| • | create, incur or assume liens; |
| • | consummate mergers or acquisitions; |
| • | sell, transfer, assign or convey assets; |
| • | repurchase the Partnership’s equity, make distributions to unitholders, and make certain other restricted payments; |
| • | 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, 2022, the Partnership’s consolidated total leverage ratio was
2.17 to
1.00 and the consolidated interest coverage ratio was
16.66 to
1.00. The Partnership was in compliance with all covenants of its credit agreement as of
March 31, 2022. B
ased on current operating plans and forecasts, the Partnership expects to remain in compliance with all covenants of the credit agreement for at least the next year.
The credit agreement permits the Partnership to make quarterly distributions of available cash (as defined in the Partnership’s partnership agreement) to unitholders so long as, on a pro forma basis after giving effect to such distributions, the Partnership is in compliance with its financial covenants under the credit agreement and no default or event of default exists under the credit agreement. Additionally, the credit agreement permits the Partnership to repurchase up to an aggregate of $40.0 million of its units (including preferred units), up to $10.0 million for each calendar year, so long as, on a pro forma basis after giving effect to such repurchases, the Partnership’s total leverage ratio is less than 4.00 to 1.00, no default or event of default exists under the credit agreement, and availability under the revolving credit facility is at least 20% of the total commitments thereunder.
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.
The following table sets forth financial information pertaining to the credit agreement (in thousands, except for interest rate):
| | Three Months Ended March 31, | |
| | 2021 | | | 2022 | |
Debt issuance costs capitalized | | $ | 49 | | | $ | 8 | |
Write off of debt issuance costs due to amendments(1) | | | 147 | | | | - | |
Interest expense related to amortization of debt issuance costs | | | 244 | | | | 209 | |
Credit facility interest expense(2) | | | 942 | | | | 779 | |
Weighted average interest rate under credit facility(2) | | | 3.83 | % | | | 3.69 | % |
___________________
(1) | On January 8, 2021, the previous credit facility was amended to, among other things, reduce the revolving loan facility from $400.0 million to $350.0 million upon the sale of the crude oil terminalling segment. |
(2) | Excludes interest expense related to amortization and write off of debt issuance costs for the three months ending March 31, 2021. |
7. |
NET INCOME PER LIMITED PARTNER UNIT |
For purposes of calculating earnings per unit, preferred units, general partner units, and common units are first allocated net income to the extent they receive a distribution. Next, the excess of distributions over earnings or excess of earnings over distributions for each period are allocated to the Partnership’s general partner based on the general partner’s ownership interest at the time. For the three months ended March 31, 2022, the preferred units were also allocated income for the excess consideration paid over carrying value for the repurchase of preferred units. The remainder is allocated to common units. The following sets forth the computation of basic and diluted net income per common unit (in thousands, except per unit data):
|
|
Three Months Ended March 31, |
|
|
|
2021 |
|
|
2022 |
|
Net income |
|
$ |
81,653 |
|
|
$ |
6,642 |
|
General partner interest in net income |
|
|
1,292 |
|
|
|
105 |
|
Preferred interest in net income |
|
|
6,341 |
|
|
|
6,150 |
|
Net income available to limited partners |
|
$ |
74,020 |
|
|
$ |
387 |
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of units: |
|
|
|
|
|
|
|
|
Common units |
|
|
41,430 |
|
|
|
41,817 |
|
Restricted and phantom units |
|
|
1,166 |
|
|
|
1,279 |
|
Total units |
|
|
42,596 |
|
|
|
43,096 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income from discontinued operations per common unit |
|
$ |
1.75 |
|
|
$ |
- |
|
Basic and diluted net income (loss) from continuing operations per common unit |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
Basic and diluted net income per common unit |
|
$ |
1.74 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
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8. | PARTNERS’ CAPITAL AND DISTRIBUTIONS |
During the three months ended March 31, 2021, the Partnership repurchased a total of 688,417 outstanding preferred units at $7.50 per unit or total cash consideration of $5.2 million. The consideration paid was based on the fair market value of the units at the time of purchase. The carrying value of the units was $7.23 per unit. The preferred units were allocated additional net income for the three months ended March 31, 2021, of $0.2 million for the consideration paid in excess of carrying value. All repurchased units were subsequently retired.
On April 26, 2022, the Board approved a cash distribution of $0.17875 per outstanding preferred unit for the three months ended March 31, 2022. The Partnership will pay this distribution on May 13, 2022, to unitholders of record as of May 6, 2022. The total distribution will be approximately $6.2 million, with approximately $6.2 million and $0.1 million to be paid to the Partnership’s 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 ended March 31, 2022. The Partnership will pay this distribution on May 13, 2022, to unitholders of record on May 6, 2022. The total distribution will be approximately $1.9 million, with approximately $1.8 million to be paid to the Partnership’s common unitholders, less than $0.1 million to be paid to the general partner, 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.
9. | RELATED-PARTY TRANSACTIONS |
The Partnership leases asphalt facilities and provides asphalt terminalling services to Ergon. For the three months ended March 31, 2021 and 2022, the Partnership recognized related-party revenues of $11.9 million and $12.4 million, respectively, for services provided to Ergon. As of December 31, 2021, and March 31, 2022, the Partnership had receivables from Ergon of $0.4 million and $0.6 million, respectively. As of December 31, 2021, and March 31, 2022, the Partnership had unearned revenues from Ergon of $9.3 million and $6.0 million, respectively, which primarily relates to cash received in advance for the following month's lease and storage fees, and capital project reimbursements and deductibles that are being recognized straight-line over the term of the existing revenue contracts.
Ergon also provides certain operations and maintenance services to certain of the Partnership's asphalt facilities that have existing revenue contracts between the parties. For the three months ended March 31, 2021 and 2022, the Partnership recognized operating expense of $4.6 million and $4.8 million, respectively, for these services.
10. | LONG-TERM INCENTIVE PLAN |
In July 2007, the general partner adopted the Long-Term Incentive Plan (the “LTIP”), which is administered by the compensation committee of the Board. The Partnership’s unitholders have approved 8.1 million common units to be reserved for issuance under the incentive plan, subject to adjustments for certain events. Although other types of awards are contemplated under the LTIP, currently outstanding awards include “phantom” units, which convey the right to receive common units upon vesting, and “restricted” units, which are grants of common units restricted until the time of vesting. The phantom unit awards also include distribution equivalent rights (“DERs”).
Subject to applicable earning criteria, a DER entitles the grantee to a cash payment equal to the cash distribution paid on an outstanding common unit prior to the vesting date of the underlying award. Recipients of restricted and phantom units are entitled to receive cash distributions paid on common units during the vesting period which are reflected initially as a reduction of partners’ capital. Distributions paid on units which ultimately do not vest are reclassified as compensation expense. Awards granted to date are equity awards and, accordingly, the fair value of the awards as of the grant date is expensed over the vesting period.
Each year, restricted common units are granted to the independent directors that may or may not have vesting requirements. In December 2021, the directors received a total of 21,228 units with a grant date fair value of $3.26 per unit and a total grant date fair value of $0.1 million, that do not have a vesting requirement. The following table includes information on outstanding grants made to the directors under the LTIP that vest in one-third increments over three years:
Grant Date | | Number of Units | | | Weighted Average Grant Date Fair Value(1) | | | Grant Date Total Fair Value (in thousands) | |
December 2019 | | | 7,500 | | | $ | 1.07 | | | $ | 8 | |
December 2020 | | | 7,500 | | | $ | 2.06 | | | $ | 15 | |
December 2021 | | | 22,743 | | | $ | 3.26 | | | $ | 74 | |
(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 vesting period. All grants made in 2019, 2020 and 2021 vest after three years. The grant made in 2022 vests in one-third increments over three years. 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) | |
June 2019 | | | 46,168 | | | $ | 1.08 | | | $ | 50 | |
March 2020 | | | 600,396 | | | $ | 0.90 | | | $ | 540 | |
October 2020 | | | 16,339 | | | $ | 1.53 | | | $ | 25 | |
March 2021 | | | 530,435 | | | $ | 2.71 | | | $ | 1,437 | |
March 2022 | | | 558,411 | | | $ | 3.25 | | | $ | 1,815 | |
(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, 2022, was $3.0 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, 2021 and 2022, was $0.1 million and $0.2 million, respectively .
Activity pertaining to phantom and restricted common unit awards granted under the LTIP was as follows:
| | Number of Units | | | Weighted Average Grant Date Fair Value | |
Nonvested at December 31, 2021 | | | 1,555,290 | | | $ | 1.66 | |
Granted | | | 558,411 | | | $ | 3.25 | |
Vested | | | 426,297 | | | $ | 1.14 | |
Nonvested at March 31, 2022 | | | 1,687,404 | | | $ | 2.30 | |
11. | FAIR VALUE MEASUREMENTS |
The Partnership uses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost) to value assets and liabilities required to be measured at fair value, as appropriate. The Partnership uses an exit price when determining the fair value. The exit price represents amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The Partnership utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| Level 1 | Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| Level 2 | Inputs other than quoted prices that are observable for these assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
| Level 3 | Unobservable inputs in which there is little market data, which requires the reporting entity to develop its own assumptions. |
This hierarchy requires the use of observable market data, when available, to minimize the use of unobservable inputs when determining fair value.
As of December 31, 2021, and March 31, 2022, 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, 2022, 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, 2022, approximates its fair value. The fair value of the Partnership’s long-term debt was calculated using observable inputs (eurodollar rate for the risk-free component) and unobservable company-specific credit spread information. As such, the Partnership considers this debt to be Level 3.
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. As part of the consideration for the purchase of the asphalt terminal during the three months ended March 31, 2022, the Partnership assumed environmental liabilities of approximately $2.0 million related to consent orders with a state regulatory agency. The assumption of the environmental liabilities had no impact on the statement of operations, and actual costs are not expected to vary significantly from the current accrual.
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 |
There have been no new accounting pronouncements that have become effective or have been issued during the three months ended March 31, 2022, that are of significance or potential significance to the Partnership.
Merger Agreement
On October 8, 2021, Ergon filed an amendment to its Schedule 13D with the SEC 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.
On April 21, 2022, the Partnership, the General Partner, Ergon Asphalt & Emulsions, Inc. (“Parent”) and Merle, 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 of April 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.