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Edited Transcript of BKEP earnings conference call or presentation 9-May-19 3:00pm GMT

Q1 2019 Blueknight Energy Partners LP Earnings Call

TULSA May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Blueknight Energy Partners LP earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* D. Andrew Woodward

Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C.

* Mark A. Hurley

Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C.

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Conference Call Participants

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* Christopher Bertrand Cook

Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager

* Glenn Gardipee

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Blueknight Energy Partners Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Andrew Woodward, Blueknight's Chief Financial Officer. Please go ahead.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [2]

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Thank you, and good morning. It's my pleasure to welcome you to today's conference call where we will discuss Blueknight's financial and operating results for the first quarter of 2019. Mark Hurley, our Chief Executive Officer, will update you on our operational performance as well as external factors influencing our business, after which I will provide a brief update on financial results for Blueknight. We will then take your questions after our prepared remarks.

As a reminder, the earnings release which can be found on our website includes financial disclosures and reconciliations for non-GAAP financial measures that should help you analyze our results. Our comments and answers to questions during the call will include forward-looking statements that refer to management's expectations or future predictions. These statements are made as of the date of this call, and we are under no obligation to update these forward-looking statements in the future. They are subject to risk and uncertainties that could cause actual results to differ from our expectations.

With that, I will now turn it over to Mark Hurley, our CEO. Mark?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [3]

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Thanks, Andy. Good morning, and thanks to everyone who dialed in today. Before I begin my comments on the business, I would like to welcome 2 new members of our senior management team.

The first is Michael McLanahan, our Chief Accounting Officer. Prior to this promotion, Michael spent 7 years as our Controller at Blueknight. Prior to joining Blueknight, Michael spent 7 years at Ernst & Young in public accounting.

Secondly, I would like to welcome Andy Woodward to Blueknight. Andy joined Blueknight on April 29 as our Chief Financial Officer. Andy started his career with RBC as an investment banker. He then went over to Andeavor Logistics, where he most recently held the role of VP of Finance and Principal Financial Officer where he made strong contribution to the growth of that company. We're very lucky to have both Michael and Andy join our leadership team, and I wish them all the best.

Moving back to business. I will be updating you on our strategy, operational performance and external factors influencing our business, and then Andy will provide an update on the financial results for the quarter.

Overall, 2019 is off to a very solid start, and we remain excited about the year ahead and potential opportunities beyond. We continue to execute our plan of strengthening our financial profile and improving on our asset base. Over the course of the quarter, our business performed well. We've raised additional cash from the sale of noncore assets, and we retained more cash flow from operations.

Due to these factors, along with our most recent action on distribution, our coverage improved to 1.23x from 0.89x for the first quarter of the prior year and our leverage ratio ended the quarter at 4.6x versus 5.1x at the end of last year. As we had previously indicated, our year-end 2019 financial targets are a distribution coverage greater than 1.0x and a leverage ratio between 4.0x and 4.5x.

As many of you know, we did reduce our quarterly common unit distribution to $0.04 per unit from $0.08 per unit. We believe this is the appropriate distribution level to strengthen our balance sheet over time, which is our top priority. Our long-term goal, of course, is to continue to improve and grow our business, build coverage and make progress toward our long-term leverage target of 3.5x. Ultimately, we want to be a growing company looking to increase our distribution at a sustainable rate.

Moving on to our operations. I'll start with our largest segment, asphalt. Overall, it was a good quarter for the business, driven by fully contracted terminals under take-or-pay arrangements that generate steady cash flow despite the seasonality of asphalt demand. Industry experts are predicting a strong year in the asphalt business across the U.S. With our diversified footprint, we should benefit from that.

We did experience weather-related challenges during the quarter in Kansas due to heavy rainfall and the flooding of the Missouri River. We have a terminal outside of Kansas City in Wolcott, Kansas that experienced some flood damage in March. Our teams did an excellent job of executing its flood plan to minimize the impact, and costs are expected to be approximately $500,000. We expect the revenue impact in the second quarter to be minimal as the facility is currently back in service.

Despite the weather-related issue, this business performed as expected and in line with last year when factoring in the March 2018 acquisition and the July 2018 asset divestitures.

Now I'll turn to our Cushing crude oil storage business. Currently, we're fully contracted in 2019. With our current customer mix, we are seeing significant uptick in throughput revenue. Storage contracts are typically made up of 2 components: storage revenue and services revenue. Our services revenue, which includes blending and throughput, have been very strong this year, and we expect this to continue. This type of business is also less sensitive to the shape of the crude oil forward curve, so this is a positive development.

We do have storage up for renewal starting at the end of 2019. Recontracting this place is a high priority for us, and we remain optimistic about successfully recontracting the storage despite a more challenging contango market. We're seeing more and more need for blending and segregation of crude oil grades, driven by factors beyond just the crude oil forward curve. We're also having encouraging discussions with potential customers about longer-dated storage capacity to serve their more strategic long-term needs. We'll continue to be transparent with our investors as we progress opportunities and share more details at the appropriate time.

Lastly, our crude transportation segments had their best quarter for some time. Within our pipeline and trucking businesses, volumes increased 61% and 17% year-over-year, respectively. We haven't experienced that level of throughput on our pipelines over a quarter since we started up the second crude line in mid-2018. We're continuing to see higher volumes in the second quarter supported by $50 to $60 crude oil prices. This increased level of activity during the quarter helped contribute, among other factors, to approximately $2 million more in operating margin, excluding depreciation and amortization, versus the same period last year.

Now I'll take some time to update you all on the latest in the Cimarron Express pipeline project. As we communicated last quarter, we recorded a pushdown impairment of $10 million that we revised since with an additional $800,000 impairment related to the project during the quarter. In April 2019, assets from the project were sold to a third party for approximately $1.4 million over the fair value estimated at the end of last year. As a result, we expect to recognize a gain in the second quarter related to the sale.

Looking forward, our 2 highest priorities for 2019 continue be strengthening our balance sheet and improving our distribution coverage. With 2019 off to good start, we remain confident [our] plan to accomplish these goals. We're also excited about the strategic dialogue we're having with potential customers and partners that could lead to interesting growth opportunities beyond 2019.

With that, I will now turn the call over to Andy Woodward, our Chief Financial Officer. Andy?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [4]

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Thanks, Mark. Yesterday, we reported financial results for the 3 months ended March 31, 2019. Adjusted EBITDA was $16.2 million for the first quarter as compared to $16.5 million for the same period in 2018. If you remove the impact from the March 2018 asphalt acquisition and the July 2018 asphalt divestiture, for comparability purposes, adjusted EBITDA would have been higher year-over-year by approximately $1.5 million. The increase was largely due to higher volumes and margins within our crude oil transportation segments.

Distributable cash flow was $10 million for the first quarter as compared to $11.3 million for the same period in 2018. Similar to comparing adjusted EBITDA year-over-year, our distributable cash flow would have been higher after adjusting for the 2 asphalt transactions completed last year. Adjusted EBITDA and distributable cash flow, including a reconciliation of such measures to net income, are explained in the Non-GAAP Financial Measures section of the earnings release issued yesterday.

Benefiting from the solid operations and the most recent change to our distribution, coverage for the first quarter of 2019 was approximately 1.23x. Additionally, over the course of the quarter, we were able to pay down approximately $13 million in debt through a portion of excess cash from operations; proceeds raised from the sale of noncore assets; and a prepayment of services from our sponsor, Ergon, Inc., highlighting its continued support of our business and financial profile. As a result, our leverage ratio fell below 5x to 4.6x.

As Mark mentioned earlier, we remain keenly focused on driving higher distribution coverage and lower leverage through improved operations and efficiency of our existing assets, sales of noncore assets and retaining more cash flow. Our recent quarterly common unit distribution announcement of $0.04 per unit supports this effort and we are on track to exceed our target of coverage greater than 1x for the full year 2019 and on track to achieve a leverage ratio of 4 to 4.5x by the end of the year. Additional information regarding the partnership's results of operations will be provided in the partnership's quarterly report on Form 10-Q for the 3 months ended March 31, 2019, to be filed today with the SEC.

I'll now go into a few highlights for each segment. Within asphalt and terminalling, total operating margin excluding depreciation and amortization decreased for the 3 months ended March 31, 2019 as compared to the 3 months ended March 31, 2018. As mentioned earlier, removing the impact from the 2 asphalt transactions last year for comparability purposes results in operating margin in line with prior year.

Moving to crude oil terminalling and storage. Total operating margin excluding depreciation and amortization decreased for the 3 months ended March 31, 2019 compared to the same period in 2018, due primarily to lower market rates for storage contracts. On the positive side, average crude oil stored per month increased over 70% versus the same period last year as there's more crude oil blending and segregation opportunities.

Now on to our crude oil pipeline segment. Performance over the quarter was strong with throughput on our system significantly higher than the prior year. Pipeline throughput averaged 37,000 barrels per day, an increase of 61% compared to the same period in 2018. Most of the throughput increase was attributed to the restoring of second Oklahoma pipeline to full service in July 2018, bringing total pipeline capacity to 50,000 barrels per day and allowing for higher throughput. This resulted in solid operating margins excluding depreciation and amortization of $1.8 million for the first quarter 2019, approximately $1.9 million higher than the same period in 2018.

Lastly, within our crude oil trucking segment, average volumes increased 17% for the 3 months ended March 31, 2019 as compared to the 3 months ended March 31, 2018. Operating margin excluding depreciation and amortization was roughly breakeven, driven by higher volumes captured from our producers to serve our 2 Oklahoma pipelines and the sale of producer field services business in April 2018.

Moving finally to our balance sheet and capital investments. As mentioned in my earlier remarks, our leverage ratio was 4.6x at the end of the quarter, a significant improvement versus 5.1x at the end of last year. [Expansion] capital remained very low, and net maintenance capital totaled approximately $2 million for the quarter. Finally, as Mark stated earlier, our #1 priority right now is balance sheet improvement while finding opportunities to grow the business with minimal expansion investment. We think this quarter demonstrates significant progress as we continue to execute that plan.

Will that, that concludes our prepared remarks. I will now turn the call over to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Chris Cook with Zazove.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [2]

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Quick question. What was the ending balance on the first lien facility at the end of the quarter?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [3]

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Yes, Chris. This is Andy. The ending balance was $253 million, and it currently sits at that today.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [4]

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Okay. And then has cash gone out for the Cimarron Express pipeline cancellation?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [5]

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No, no. The put is still out there with Ergon, our sponsor.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [6]

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And what was -- could you update us on that?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [7]

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Yes. Ergon have not exercised the put yet. It's not intended that, that will happen immediately. They have assured us that they would work with us on paying back the cost of that project over a period of time so that it does not affect the covenants or [put Cimarron in any] kind of stressful situation. So we do anticipate it will be executed at some point in the future. The timing has not been settled, and we feel it's a very -- it will be a very manageable repayment.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [8]

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And what was the size of that repayment?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [9]

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We're estimating that it would be $8 million to $11 million. That's what we had filed on our 8-K some time ago, and that's still a good estimate.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [10]

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And that does not grow over time, you're saying? That, that's potentially free capital?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [11]

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It'll -- there'll be interest added to it on a quarterly basis, and so we'll grow that liability over time until the put is exercised.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [12]

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And at what rate?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [13]

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Effectively a 9% rate.

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Operator [14]

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The next question comes from Glenn Gardipee with Northern Systems Capital Partners.

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Glenn Gardipee, [15]

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I have a question regarding your statement where you said year-end targets of distribution coverage greater than 1.0 remain unchanged. Could you please clarify that in light of the reduction in the dividend to common unitholders?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [16]

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Well, it includes the reduction in that dividend. And so where we want to be at the end of the year, we're comfortable that we'll be there. As Andy said, it is in excess of 1. And longer term, we want to be comfortably over 1, up and around 1.1, 1.2, 1.3, et cetera. And so we think we're on track to do that for 2019.

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Glenn Gardipee, [17]

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Well, what I'm getting at is you made that statement in the -- at year-end, and in the first quarter here, you reduced the dividend. Are you achieving that by reducing the dividend? Is that the...

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [18]

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Well, part of it -- [I'm sorry].

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Glenn Gardipee, [19]

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I'd just like clarification on exactly what you mean by 1.0 in light of both the preferred dividend and the common unit dividend.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [20]

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Well, part of it obviously includes reducing the distribution because that's used to pay down -- some of those funds are used to pay down debt, but the other portion of that comes from increasing cash flow. And so those 2 combined with a pretty strong year in the business should get us above 1.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [21]

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Yes. And just to also add to that. We ended the quarter at 1.23x. And so we're -- in my statements, we're exceeding that target of 1x currently.

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Glenn Gardipee, [22]

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Yes, yes. I was impressed by that particular number. Also, how does that play into your -- now you mentioned a long-term leverage of 3.5. How does that relate to the dividend going forward on the common units?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [23]

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Yes. So related to that, those are, again, long-term targets that the company is aspiring for both on -- from a leverage standpoint, long-term target of 3.5x; and then from a coverage, greater than -- obviously greater than 1x, but we would certainly like to target above 2 over time. And so once we get to more comfortable levels, as Mark alluded to, and depending on the forecast and the growth of the business at the time, we'll look to start beginning to raise our distribution in a very sustainable way at that time.

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Glenn Gardipee, [24]

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Okay. That's the answer I was looking for.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [25]

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Appreciate the questions.

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Operator [26]

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The next question comes from [Jeff Bailey] with [Beach Capital].

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Unidentified Analyst, [27]

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Would you please explain your thinking on the -- on holding that Cimarron liability off balance sheet with Ergon for now? The interest rate is 9%, and then I think your facility is at 5.4%. What's the thinking behind leaving that liability off balance sheet for now?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [28]

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Yes. It's a good question, Jeff. I think the thought process around that is, remember, by the end of this year, our covenant drops from 5.25x to 4.75x. And so we -- even with that, we don't have a lot of cushion for where we are today at the 4.6x. And so we like the optionality of having that put still with Ergon, and Ergon is very supportive of both our business and operations but also our financial profile. And so that optionality is important to us at this time.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [29]

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It's all about creating a comfort level, and we want to be comfortably within those covenants. And so once we show that we can sustain that, we'll begin repayment on that expense.

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Unidentified Analyst, [30]

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So is it fair to say that (inaudible) your distribution coverage that's printed will be overstated because really you have interest cost of 9%, so maybe $700,000, $800,000 a year that aren't recorded on the P&L. Is that correct? Is that a fair assumption?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [31]

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We are recording those interest payments in the form of an impairment related to that liability, and that impairment is showing up on our P&L statement quarter after quarter.

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Unidentified Analyst, [32]

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So as the interest expense accrues to Ergon, is there going to be $200,000 or $300,000 in interest cost -- or impairment expense that will be printed every quarter on the P&L? Did I understand that correctly?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [33]

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Yes. As long as the put hasn't been exercised, that is correct.

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Unidentified Analyst, [34]

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Understood. As far as pipeline performance, you did quite well. You mentioned in late 2018, you thought it was going to come in at 40,000 barrels a day at March. How is that trending for Q2? And assuming that WTI prices hold, how do you see that moving forward the rest of the year?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [35]

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Yes. We're running between 30,000 and 40,000 barrels a day total on the 2 systems combined, and we feel pretty comfortable with that at these crude prices. All that business is coming to us naturally other than 1 take-or-pay contract that we have. And so it's the most economical solution for the producer to get their crude to market. And so we don't see any reason for that to change.

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Unidentified Analyst, [36]

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Okay. Assuming oil price is constant, I assume, right?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [37]

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Well, I'm not assuming. I'm never assuming oil price is constant, but I think in this -- what we've seen is that in this range of $50 to $65, it is supporting enough drilling activity in the regions where our pipelines are located to support that 30,000 to 40,000 barrel-a-day volume.

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Unidentified Analyst, [38]

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Yes. And then what confidence can you gentlemen give investors that $0.04 on the common distribution is the right number, is the sustainable number, quarter after quarter investors can expect at least that?

What confidence can you give investors of that number? And the reason why I ask is because it looks to me like there was about $3.6 million as a result of, let's just call it a proprietary oil trading gain from your product sales. So how do we know that $0.04 going forward is a number that will withstand the test of time?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [39]

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First of all, let me clarify one thing. We don't do any proprietary oil trading. We have a modest crude marketing program to support volumes on our system. And so it would not be accurate to call that trading. We don't do any price speculations and so forth. We obviously owned -- as a part of that, we own some working capital. But -- and so we've had some impacts from that, but we're not traders. And then, I'll let Andy answer the question on the $0.04 distribution, and then we're going to move on to the next person in line with a question.

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [40]

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Yes. So this is Andy. I appreciate the question, [Jeff]. The -- we pressure-tested, based on our outlook, a number of different scenarios related to the distribution, and this is where both management and the Board got comfortable with, again, being able to pressure-test it under very, very conservative outlooks related to the business. And so as Mark mentioned earlier, this is -- we feel very comfortable where we're at over our forecast that this is going to be supportive of not only being able to be above the 1x target but also begin to use that excess cash to either priority 1, to pay down debt; and then priority 2, to start self-funding the business and reinvesting that capital into high-growth organic projects.

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Operator [41]

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The next question comes from Chris Cook with Zazove.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [42]

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Yes, I had a quick follow-up. So just to clarify the impairment. The asset impairment expense of $1.1 million in Q1 2019, that contained -- a portion of that was interest on the put or non-put?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [43]

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Yes, that's correct.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [44]

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So [either] you're adding -- even though that -- and is the rest of it noncash?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [45]

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The rest of it was related to the Wolcott terminals where we had some flooding issues that Mark mentioned in his earlier comments.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [46]

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Okay. But that's added back to get to distributable cash?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [47]

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Right, the asset impairment. That's correct.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [48]

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Okay. Even though it's a cash expense, not a noncash expense, correct?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [49]

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It's not a cash expense. Both of these...

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [50]

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It's not?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [51]

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Yes, it's not. It's not.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [52]

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Oh, I see. So you don't cut a check to Ergon every quarter for the cost of the put?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [53]

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That's correct.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [54]

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That's just additive.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [55]

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Okay. And then -- so it looks like you must have had $12 million or $13 million of positive working capital during the quarter to be able to pay down the first lien. Is that a onetime reduction in working capital? Or is that going to snap back in future quarters?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [56]

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The biggest driver related to cash flow outside of operations was the prepayment that I have mentioned in my remarks that we received from Ergon over the course of the quarter.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [57]

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Okay. So that's a payment, I guess -- a prepayment that -- for how many quarters or what time period was that prepayment made for?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [58]

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It was for 6 months.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [59]

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6 months, okay. Great. (inaudible) What's that?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [60]

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So the other point I will make is that because -- when we started up our pipelines last year, we did have a bump in working capital, and we have been kind of slowly working that off. And so we had some working capital reduction as well as we liquidated some inventory. So as we increase third-party shippers on our pipes, it reduces our working capital requirement. So we write that off.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [61]

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And the 6-month prepayment, is that in addition to the, I guess, 3 months of payments that they owed you for the first quarter services?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [62]

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So from a revenue recognition standpoint, we're only recognizing the revenue associated with those 3 months that's showing up in our EBITDA. But once we -- once you see the Q that will get released later today, you will see unearned revenue as a liability that gets back into our cash flow.

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Christopher Bertrand Cook, Zazove Associates, LLC - Director of High Yield Convertibles and Portfolio Manager [63]

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Okay. And that's a 6-month, so through September 30?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [64]

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That's right.

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Operator [65]

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The next question comes from Glenn Gardipee with Northern Systems Capital Partners.

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Glenn Gardipee, [66]

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I had a follow-up question on the sale of the assets from the Cimarron Express. And that will be recognized, you mentioned, in the second quarter, the additional funds?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [67]

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Say that question again.

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Glenn Gardipee, [68]

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The sale of the equipment from the -- that was planned for the Cimarron Express pipeline, that will be recorded in the second quarter?

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D. Andrew Woodward, Blueknight Energy Partners, L.P. - CFO of Blueknight Energy Partners G.P., L.L.C. [69]

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Yes. We'll record a gain related to that sale in the second quarter.

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Glenn Gardipee, [70]

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Will all the funds from that go to pay down the Ergon put?

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [71]

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Yes. It's kind of credited against the -- ultimately what the cost of that will be, yes.

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Operator [72]

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This concludes the question-and-answer session. I would like to turn the conference back over to Mark Hurley, CEO, for any closing remarks.

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Mark A. Hurley, Blueknight Energy Partners, L.P. - CEO of Blueknight Energy Partners G.P., L.L.C. [73]

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Yes. Well, thank you very much for calling in once again. We had what we thought was a very good quarter. We've got a good start to the year, we think the year is going to be a pretty solid year for Blueknight. Our previous guidance remains unchanged.

And we -- again, we appreciate your interest in Blueknight. And as always, if there are needs for further up -- or for further an follow-up discussion, we're happy to do that.

So once again, thank you very much.

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Operator [74]

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This concludes today's conference call. You may disconnect your lines.

Thank you for participating, and have a pleasant day.