Blueknight Energy Partners, L.P. (BKEP) on Q4 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Blueknight Fourth Quarter and Year End Conference Call. The conference is being recorded. I would now like to turn the conference over to Mr. Matt Lewis, Chief Financial Officer. Please go ahead.
Matthew Lewis: Thank you and good morning. We are pleased to welcome you to Blueknight’s conference call, where we will discuss financial and operating results for the fourth quarter and full year ended December 31, 2021. Please note that our earnings release which can be found on our website includes financial disclosures and reconciliations for certain non-GAAP financial measures that should help you analyze our results. Additionally, supplemental information will be available on annual report on Form 10-K which will be filed tomorrow with the SEC. I would like to remind you that comments and answers to questions during the call may 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 management is under no obligation to update these forward-looking statements in the future. They are subject to risks and uncertainties that could cause actual results to differ from management’s expectations. Finally, as previously mentioned, during our third quarter earnings call on October 8, Blueknight’s Board of Directors of the general partner received a non-binding cash offer from Ergon Inc. to acquire all of the outstanding publicly held preferred and common units. The Conflicts Committee, which is composed solely of Blueknight’s three independent directors has retained independent financial and legal advisors to assist in their evaluation and negotiation of the offer. Given that the Conflicts Committee’s review is still ongoing, management is unable to comment about the process I will now turn it over to Andy Woodward, our Chief Executive Officer.
Andy Woodward: Thanks, Matt. And good morning to everyone who dialed in. I'm pleased to review our performance during 2021. The various milestones achieved where our business stands today, along with updating you on the current macro environment and our growth strategy, including the two new projects announced at year end. Matt will then provide more details on our financials, capital allocation strategy and 2022 guidance before we open the lines for Q&A. As Matt mentioned already, but worth reiterating, the Ergon Inc. private offer is still ongoing, and under negotiation, I can certainly understand and even empathize with the various levels of interest and feelings you might have regarding the process, timing and ultimate outcome. That said, I hope you can appreciate our inability to comment on the matter due to ongoing negotiations. The need for management to be particularly thoughtful about our forward-looking statements during these prepared remarks and Q&A. Also, please note that the process between Ergon and the conflicts committee is handled independently from management outside of us answering questions on the business. This independence allows management to remain fully dedicated and focused on the business and executing our strategy. Furthermore, I'd like to add during this period, we have also received the necessary support from our board to deliver on our strategic plans, as evidenced by the approvals received on our recent growth projects and common unit distribution increase. I am thankful for the support and look forward to sharing more of these details later on. Now, turning back towards business and highlights during 2021. I'd like to start by saying how proud I am of the Blueknight team and the year we just had. As I reflected on the year ahead of this call, I'm reminded of how far we've come in a rather short amount of time. Our aim was high, and we hit several critical milestones across many aspects of our business and continued to build upon our track record of executing on our strategic objectives. This includes achieving superb results on our environmental health and safety program where we continue to demonstrate progress year after year, improving on all measurements we track by 50% versus the prior three year averages. This is a strong testament to our team and culture. Our employees and operators have a sense of pride, personal responsibility and ownership over the respective operations and it shows not only in our continual EHS outperformance but also how we strive to better serve our customers and the communities in which we operate. Another key milestone during 2021 was the successful close of our crude oil transaction. This transaction was truly monumental in rewriting the Blueknight story, strategically, it sharpened our focus and enhance our positioning as a pure play downstream terminalling company with the largest independent asphalt network in the nation, which we are now showing evidence of expanding. Our team is now fully dedicated to developing and growing this business, garnering 100% of our full attention versus managing four different disparate business segments prior. Pro forma investment thesis of our business and risk profile have improved dramatically, we no longer have a portion of our business tied directly to changes in commodity prices, or indirectly subjected to producer drilling activities and volume volatility. Our asphalt take-or-pay contracts are the most coveted type in the industry, and what we believe the MLP structure was always intended for. As a result, our revenue is approximately 95% take-or-pay, the majority of which is from investment grade counterparties. And from long-term contracts with a weighted average length over five years. Just as important, our crude oil transaction has led to best-in-class financial metrics, and significantly strengthened the stability of our underlying cash flows. Post transaction, our leveraged dropped to 2x and stands today near 1.8x. Additionally, the timing could not have been more ideal as we look to refinance our credit facility in the spring, we encountered the challenging banking market with strength, which led to extending our facility for another four years at competitive rates and terms. Since Blueknight went public dating back to 2007, this is likely the first time in a very long time that we have a supportive and healthy balance sheet with the financial flexibility to pursue our strategy and growth, discipline and sustainable manner. Finally, crude oil transaction delivered significant value back to our investors without materially sacrificing cash flow. We ended 2021 With LTM coverage of 1.38x on all distributions and increased our common distribution, 6.25% for the first time since 2015. It also gives me great pleasure to report that we've now achieved and exceeded both our long-term targets on leverage and distribution coverage. Shifting now to operations. During 2021, the base business had another strong year. This time last year, as you may recall, we had approximately 20% of our tank capacity expiring a year end, we successfully re-contracted that available capacity at either current or more favorable terms. For 2022, 15% of our tank capacity will expire by year end. And there are no expirations expected in 2023 that should lead to further stability over the next few years. As per volumes, total asphalt delivered from our facilities during 2021 was slightly higher up 2% versus the prior year, which as a reminder was also as a strong year during the height of the pandemic. Year-over-year volumes did vary by region driven by certain demand factors, competition and supply changes. However, this also highlights the benefits of our diversified portfolio that when taken together often results in stable growing volumes year-over-year. Looking forward as it relates to future volumes and roadwork activity, we are encouraged by the passage of the infrastructure investment and Jobs Act, a landmark and historic bill for our industry. It has the potential to stimulate growth over multiple years. The bill contains a five year reauthorization of the FAST Act, which was the prior federal funding program for roads plus an additional $110 billion in new funding for roads, bridges and other projects. When appropriated in full annually, this represents an approximately 50% increase in federal funding versus recent years past. As it relates to the appropriation of the funds, we anticipate that occurring sometime in the first half of this year, which implies real benefits will likely be seen in 2023 and thereafter. As for 2022, we are encouraged by existing budgets in funds available at the federal and state level, we see healthy state surpluses, solid lending and spending and expected growth across our regions in support of infrastructure and roadwork. For instance, in November of 2021, voters approved 89% of the state and local transportation ballot measures. These initiatives are estimated to generate an additional $7 billion of funding. Again, it's a combination of factors, we see strong footing for roadwork in 2022 and see most of the benefit from the new infrastructure law taking effect in 2023 and beyond. Now, but even that said, we do remain cautious with these expectations, and continue to revisit our assumptions in the context of an ever changing macro environment impacted by the Russian and Ukraine war and rising commodity prices, along with other inflationary measures. We do not know the full extent of how these factors could impact spending on infrastructure and roadwork, if at all. Turning back to 2021 and our achievements, we also delivered on our synergy targets throughout the year, and continue to find efficiencies in our business. We estimate that run rate synergies at the end of the year reach $2 million, helping to offset increases elsewhere in the business. Collectively, these activities and many others during 2021 led to adjusted EBITDA up 9% year-over-year, and distributed cash flow up 15% year-over-year. Matt will be spending more time on our financial performance and I am credibly pleased with this outcome. Finally, 2021 also marked the start of executing our new refined strategy in earnest, initiating a new growth process in a meaningful way, and reorienting our culture and organization at all levels around having a growth mindset. In our pursuit of growth, we now characterize our efforts into three different tiers. Tier one is within asphalt, which remains our core focus, leveraging on our competitive positioning, our core competencies, and customer relationships. We see growth in tier one similar as before from either new organic developments or acquisitions. Tier two is serving similar customers but in a complementary products and services outside of asphalt, either at existing sites, or even new Greenfield locations. And then lastly, tier three is more opportunistic and regionally specific. It's capturing opportunities that better utilize our excess land for industrial use. These opportunities will likely be driven more by regional demand around our sites, and could come in the form of long-term leases from various parcels of our access land. I am pleased to report that this strategy process and renewed focus on growth led to announcing two new projects at the end of the year. The first opportunity was an acquisition of an existing asphalt terminal and high growth state of Colorado, which included a 200 acre industrial park. Second opportunity was an organic expansion of an existing site, adding rail and tankage improving certain capabilities. Combined, these two projects require approximately $15 million of capital with the potential for an additional $5 million to $10 million of growth capital over time. Matt will share more details on expected incremental cash flow, timing and how they align with our risk adjusted target of returns. That said, I'm excited to report that we closed it Colorado acquisition in January. We received all permitting and regulatory approvals for the organic expansion in February. These two projects are perfect examples of our approach and symbolic of our investment strategy and growth aspirations. Not only are these sites a good example of tier one opportunities as just described, but they also have the potential to lead the tier two and three opportunities over time, providing additional potential upside. In summary, I'm incredibly proud of this team. These pivotal milestones, our progress and our ability to deliver on what we said we would do. With that, I'll turn it over to Matt to walk through key financial details and our 2022 outlook. Matt?
Matthew Lewis: Thanks Andy. This morning, I plan to walk through highlights from the fourth quarter and full year before touching on capital allocation, and a few details around our 2022 outlook. Starting with fourth quarter, adjusted EBITDA from continuing operations was $13.9 million, up 2% compared to the prior year, and it excludes approximately $0.7 million of one time professional and legal fees related to the conflict committee's ongoing review of the Ergon buyout offer. Total fixed fee take-or-pay revenue was $24.4 million up compared to the prior year by approximately $0.4 million due to favorable contract renewals and annual contract escalators. This increase was essentially offset by lower variable throughput revenue of a similar amount, which as we've discussed on previous calls and fluctuate between third and fourth quarter each year depending on when certain customers achieve minimum annual thresholds. Last year, we had a seasonally strong fourth quarter, stable weather conditions extended the construction season in certain operating regions. However, on a full year basis 2021 variable throughput revenue was in line with the prior year and represented approximately 6% of total revenue excluding variable cost recovery amounts. Fourth quarter distributable cash flow from continuing operations was $11.8 million, up 4% compared to the prior year, our coverage ratio was 1.46x on all distributions and 3.0x on common unit distributions. Now stepping back to look at full year 2021, Blueknight’s adjusted EBITDA from continuing operations was $54.2 million, up 9% compared to the prior year. In addition to higher fixed fee revenue, the partnership also benefited from lower operating expenses net of recoverable costs, improvements in our run rate, general and administrative expense, and approximately $2.2 million in non-recurring other income related to insurance claim reimbursements received during 2021. At the beginning of the year, we communicated synergy targets ranging between $1.5 million and $2.5 million on an annual run rate basis following the crude oil divestiture. At year end, we're pleased to report that we've achieved approximately $2 million in annual run rate synergies through reductions in corporate overhead and administrative services. Full year 2021 distributable cash flow from continuing operations was $44.4 million, up 15% or $5.6 million compared to the prior year. Our full year covered ratio was 1.38x on all distributions and 2.74x on common unit distributions. To put our 2021 distributable cash flow into context relative to historical periods. If you were to average Blueknight’s reported annual distributable cash flow over the last three years 2018 to 2020, for both continuing and discontinued operations, so including the crude oil business, at average was $41.2 million. This year, we achieved distributable cash flow of $44.4 million from continuing operations or just asphalt pro forma for the crude oil sale. Said differently, we were able to divest three businesses and reduce our total leverage ratio from approximately 4x to less than 2x in a distributable cash flow from our pro forma business actually increased versus the historical three year average during when periods when we owned the crude oil business. Now, as we move on to balance sheet and cash flow highlights, I'm going to use it as an opportunity to incorporate some thoughts on capital allocation. First, it starts with that and strengthening our balance sheet. And thanks to the divestiture of the crude oil business and support from our senior lender group, Blueknight successfully extended our credit facility to May 2025. And our current leverage and liquidity position are in the best place it's ever been in the partnership history and well situated to support future growth. We ended the year with $98 million of total borrowings outstanding and approximately $201 million available under our credit facility subject to covenant restrictions. As of March 1, our total borrowings outstanding were $110 million which also included $8 million related to our quarterly distributions paid in February. Our fourth quarter of 2021 total leverage ratio was 1.84x compared to 3.83x in the prior year. Lower debt and leverage favorably impacted our effective interest rate on borrowings outstanding, which was reflected in material improvements in cash interest expense year-over-year. I'll make a brief statement on interest rates given the recent trends and commentary out in the market. A credit facility calculates cash interest expense based on LIBOR plus a pricing grid is leveraged dependent, which does partially expose us to movements in the underlying LIBOR rate. Management is evaluating potential impacts and sensitivities from a higher floating interest rate environment. We are currently exploring longer term risk management strategies with our board and senior lenders. Those are our thoughts on debt. We are undoubtedly well below our internal long-term leverage target of 3.5x and intend to utilize liquidity from our credit facility to pursue growth projects, which is the next item in our capital allocation strategy. As we've mentioned on previous calls, we're keenly focused on maximizing risk adjusted returns over the long term. We are targeting investment multiples ranging from 6x to 8x calculated as a ratio of capital over EBITDA and as Andy noted, the two growth projects announced in December fit our investment criteria and represent excellent examples of how we intend to utilize available liquidity to maximize returns. As far as timing of capital spend goes, we close the asphalt terminal and industrial park acquisition during January and have taken over operations this month. Capital spent for the organic project will be spread out over the first three quarters of 2022. And credit to our engineering team for de-risking approximately 80% of the total project costs by procuring critical long lead items, which allow us to protect our construction timeline and returns. We expect the project to be fully in service during the fourth quarter of 2020. The $5 million to $10 million of potential future expansion capital is separate and not currently included in our assumptions, but would only further improve our project cash flows and returns. Finally, we will continue to evaluate returning capital to our unitholders when appropriate. For instance, this past year, we opportunistically repurchase 719,000 preferred units, and in January announced a 6.25% increase to the fourth quarter common unit distribution rate. This return of capital will be based on a number of factors that influence our decision making process, including but not limited to potential headwinds and tailwinds affecting the business, the sustainability of any increase in our underlying cash flows and maintaining our long-term coverage ratio target of 1.3x or greater. Capital allocation is not an either or it's and which allows us to maintain flexibility. Growth absolutely remains our top priority, which we believe will allow us to maximize risk adjusted returns over the long term versus other alternatives. I'll finish with a few notes related to our 2022 outlook. We expect adjusted EBITDA for the base business to be approximately 2% higher than 2021, excluding the $2.2 million in onetime other income related to insurance recoveries received during 2021. Incremental to the base business, the two recently approved and announced growth projects will provide incremental EBITDA for a portion of the year once they are in service. Now on an annual run rate basis, these projects are expected to add combined EBITDA of approximately $2 million per year starting in the fourth quarter of 2020. We expect maintenance capital to be in a similar range to last year between $5.5 million to $6.5 million. In summary, we accomplished a lot this past year. And I echo Andy's comments that the credit appropriately goes to the efforts of our whole team. Operator, we are ready for Q&A.
Operator: Our first question is from Chris Cook with Zazove.
Chris Cook: Hi, thanks for taking my call. I think you said and I missed it. How much have you spent on evaluating the proposal from Ergon?
Matthew Lewis: Chris, this is Matt, we've spent about $700,000 in the fourth quarter, and that was related to the conflict committee’s costs on the review.
Chris Cook: So we would expect that kind of run right until the end of the negotiations.
Andy Woodward: No, Chris, this is Andy, as Matt just shared there. And just to remind you all that's those are costs that the conflict committee is spending, it's not Ergon’s costs, and it’s cost for their time along with their financial and legal advisors to be able to both evaluate and negotiate the offer on behalf of the unitholders. Depending on the outcome, there could be more costs, if the outcome, if it were to get approved and go through obviously, there would be filings with the SEC, there would be fairness opinion. So we would certainly expect more costs to be incurred if that was the case. But outside of that we don't expect interiorly any further types of costs, versus what you've seen here in our release.
Chris Cook: Go it, so it's just a one time. One time cost with respect to firing up and it's coming out of unitholders. Make no mistake, correct.
Andy Woodward: Yes, this is Blueknight paying those costs on behalf of the conflict committee. And supporting their work. That's right.
Chris Cook: Okay, I guess evaluating a take under and spending money doesn't make much sense. But I know you guys can't comment.
Andy Woodward: No, we can’t, but we certainly understand the question. But like you said, we can't comment.
Operator: Next question is from Matt Stewart with NAS Capital.
Unidentified Analyst: Hey, thanks for taking my question. Yes, I just had a few questions about the growth prospects. What, is there any more kind of qualitative stuff you can tell us first about I guess it could potentially tie into what you called your tier three growth prospects? I don't know. But the Colorado acquisition, I wasn't sure if the asphalt terminal was on the 200 acres, or if it was like a separate parcel that was nearby. And obviously, it sounds like that could be what you call tier three, potentially. But is that land have significant potential commercial use? Or is that something you'll be evaluating in the near term potentially selling? Or just what was the thought process behind buying that large parcel land?
Andy Woodward: Yes, Matt, this is Andy, I can take that question. And so you're right, the Colorado site. 200 acres is inclusive of the asphalt terminal there. And there's roughly 335,000 barrels of storage of which 155,000 is operational storage today. But that still leaves plenty of space for other industrial use throughout that property. It's in western Colorado, near the Grand Junction area. So not in Denver. But we still see we've received a number of inbounds already on potential industrial use for that property. But we're continue to evaluate our strategy around tier three to ensure that we're best utilizing that excess land for the highest return possible. And so we're going through that work as you just mentioned.
Unidentified Analyst: Okay, yes, that makes sense. In terms of kind of the bigger picture you guys have quite a bit of financial capacity, particularly if you were to acquire an asset in your target range. What does the environment look like out there to potentially add some substantial acquisitions and move you closer to your target leverage ratio? Just how things look out there and how the prospects look, I would classify this first acquisition. That sounds very good. I'd say for you guys. It's kind of on the moderate size. So how do things look for, you're looking out for some larger acquisitions that could move you to the leverage ratio you want?
Andy Woodward: Yes, no, it's a great question, Matt, and maybe a couple points, I could -- I can mention to help you understand that question from our standpoint. And I think first, as it relates to the two projects, we just announced, I mean, I'd love to be able to do 10 more of those. I think they're, even though they are, to your point, modest or on the smaller size side, they're great projects that I think even just on the initial returns that we see are clearly within our investment targeted returns. And then as we just went through, there's also additional upside thereafter by either adding additional capital with current customers even today to exploring tier three opportunities on the land, in particular in Colorado. So granted, I get the question, but I would love to be able to do 10 more of those over the next handful of years. But when it comes to our backlog, I mean, what we're aiming for, is to have a robust and healthy backlog, where in any given year, we're executing on a certain amount of capital per year. And so the backlog today would I say we're there yet? I don't think so. But we're continuing to make good progress on that backlog. And I would also say it's a combination of these types of projects that we just announced here, recently, but also bigger projects in a bigger range of capital.
Unidentified Analyst: Okay, that makes sense. So would you say you're mostly focused on building the pipeline of the smaller deals versus looking at kind of a more scaled transaction? I had assume on a bigger transaction, you might have to pay -- you might not get that targeted return you're looking for? Is that kind of what the issue is?
Andy Woodward: I mean, it's certainly an either or. Or excuse me, it's both, we are certainly looking at both, I would say, I'm really pleased with both the quantity that we're looking at and the quality. And I think, at the end of the day, as Matt described in his section, what we're really after here is trying to best deploy that capital to be able to maximize returns back to our investors and back to Blueknight and like you said those bigger deals can be harder for us to achieve that. But we're certainly looking at those size of opportunities along with the types of opportunities we just announced here recently.
Unidentified Analyst: Okay, So You think you do have a decent looking pipeline of additional products, projects that you're looking at, or investments you're looking at?
Andy Woodward: Yes, absolutely. But like anything, two different parties to be able to get over the finish line. And I can promise you, it's not us slowing things down. But we're working really hard. And for us, this is something that's in our control. Well, we can't control is obviously whether the project gets done or not.
Unidentified Analyst: Okay, yes. I just wanted a little more details in terms of how you can put that money to work. You guys are doing a great job. And we all appreciate it. Thanks.
Operator: The next question is from Stephen Chick with Sebis Garden Capital.
Stephen Chick: Hey, thanks. And thanks for the prepared remarks guys on 2021. And what you have laid out ahead for you it was pretty well, I think, orchestrated. So I guess my first question is just on the numbers. The quarter itself actually end up looking different than I had expected given the tough comparison with the throughput volumes of the year ago. You're offering margins actually better than I thought and then the G&A piece was a little bit heavier in the quarter, the $3.3 million. And so Matt, I'm wondering if there's something you can speak to that was within that G&A for the quarter. And then secondly as we looked at 2022, and your EBITDA guidance for growth of 2% is a $3.3 million quarterly run rate of G&A. What we should think about within your guidance for next year?
Matthew Lewis: Yes, Steve, I’ll take that one and I'll probably weave in corporate synergies too because we did talk about achieving a run rate of around $2 million at the end of 2021. And a couple points there, obviously, when we look at G&A make sure we take out the onetime items in the non-cash equity based comp to try to get to clean number, but within the synergies, I would make a note that not all that necessarily shows up in corporate, some of it may show up in an improved asphalt operating margin just in the way that we allocate some of those costs between the segments, but going forward, I think that I would anticipate that there is a tail of that that synergies that it would roll into 2022. But also, I think the last piece is lot of these synergies helped us offset the underlying increase in costs of our business just within corporate. So an example of that this past year would be, we did make some investments to upgrade the IT systems and cybersecurity, for example, that it first glance or first blush, if you tried to compare the synergies in year-over-year, you might see an increase, but we certainly expect benefit to continue into 2022, which, again, will just help us offset potentially some other increases in the business.
Stephen Chick: Okay, but I guess so in terms of next year, and I don't want to get too granular on what you want to disclose for guidance, but is this kind of general this G&A run rate, kind of the right runway, we should think about for next year, per quarter as we mark this out.
Matthew Lewis: I certainly wouldn't take just the fourth quarter, I think I would look again at the full year of 2021. And then fast forward to 2022. And recognizing that we will continue to get some benefit of those synergy costs, per se.
Stephen Chick: Okay. And then what's not in guidance, as you said, is any the incremental benefit from the growth projects that you've announced? And maybe move into that? Of the $15 million of capital for the growth projects can you say how much has been expended to date, and I know the debt level went up understandably, versus year end by give or take $12 million. You had a distribution that you made. And then you also had paid for the acquisition of the Colorado piece, how much that $15 million has been extended within that. And then secondly, the $2 million incremental EBITDA from these projects, it kind of looks like that $2 million is you'll achieve that full year worth in 2023. How much? I mean, is it safe to assume that half of that or a million of it would be kind of a number to assume for 2022?
Matthew Lewis: Yes, Steve, in all, I think you hit it on the head there at the end. I mean we were very intentional about how we reported both the capital and EBITDA for these products on a combined basis. And part of that is because we are negotiating with customers, and we want to continue to do business with them. And so we're not necessarily going to break it out individually to give you all those details, but I think you're thinking about it exactly the right way. And roughly half from an EBITDA could certainly depend on when a project is in service. And then I'll tell you to just on the capital piece, it is reflected partially in our debt balance as of March 1st, and those details will be included in future filings when we call the first quarter 10-Q.
Stephen Chick: Okay. And the M&A portion will be in the first quarter that we're in now, right. Like in terms of positive EBITDA. I think you mentioned I don't know, Andy or Matt, if you said that actually you took ownership of it just recently or was that in January, that you took ownership of that Colorado site?
Andy Woodward: So Steve, this is Andy, the acquisition itself closed in January. And so we took ownership over that site call it Feb, beginning of February and then we -- the site itself was originally a leased site from an asphalt standpoint leased to our customer there. We've now taken over operations of that site. So it's no longer a leased site. We're operating it at the beginning of March. Hopefully that helps clear up the confusion.
Stephen Chick: Yes. All right, that helps. Thanks. And you've -- related these projects, you've called out the incremental potential of $5 million to $10 million of capital that could be deployed. I'm kind of assuming that it could be related to the Colorado site. And it's got 335,000 barrels of capacity, 155 is now in operation, would that be the capital that would be required to get that to the 335,000 barrels of capacity? Is that what that capital would be towards?
Andy Woodward: Not exclusively, Steve. But a large portion would be to do better utilize that full capacity that's available at the site today. There's also an ability with additional capital to incorporate rail at the site. And so that's another factor that would add to that additional capital estimate that we provided. But even the other project itself may require additional tankage over time, so there would be a portion of capital as well related to that. And any of this additional capitals is not within our original economics as we've communicated, but would be additional upside here.
Stephen Chick: Right, okay, got that. What dictates the timing and when? Is that kind of a customer? Or is that you guys seeing, okay, the project's kind of going well, we can get started on this next phase of the $5 million to $10 million. So kind of what is your timing of that.
Andy Woodward: Fully dictated by our customer in their want and their need to deal with those types of projects.
Stephen Chick: Got you. Okay. And then another question on, I mean, Matt you mentioned, I think related to your credit agreements, and your work with your lending group, you said something about potentially looking at long term risk management strategies. I just wonder what does that mean. I mean, is that kind of swap like agreements? Or is it actually look into term out debt? What do you mean by that?
Matthew Lewis: It was related to interest rate hedging. When we think about liability, risk management, for interest rates, we're looking at a pretty steep LIBOR curve today. And so again, I think just here internally, with our board and senior lenders, it's just getting alignment around, what's the real objective in terms of protecting cash flow from volatility or shocks to the system again, and just making sure that it could be some sort of a neutral strategy, if you will, which, again, is about 50% of our debt hedged, but the tender amount, all of those things come into play. And we just want to make sure that we're being thoughtful about that, not knowing necessarily how interest rates might unfold over the next handful years.
Stephen Chick: Okay, all right, got you. That's helpful. And then one last question, if I could change gears a little. And it's actually related to the Blueknight board. And I guess, first off this is kind of inherent obstacles for some investors with MLPs, public trade MLPs, in general just given the concentration of control and issues with corporate governance, and so forth. And in the case of Blueknight I'm wondering, and I'm curious if in the past, it's ever been considered, or if it could be entertained in the future to appoint a member of the senior management, to the Blueknight board. And I understand that will be kind of one of appointment of form really over substance, but I just think it'd be a favorable gesture and good for the stock. And when I look at the partnership documents, and please correct me if I'm wrong, but I don't see a structural reason why that couldn't happen. And, Andy, I just be interested to hear your thoughts on that.
Andy Woodward: No, I appreciate that, Steve, and I think you're right. I don't think there's anything preventing management or somebody from management to act on the board. I think it happens quite regularly at other MLPs. But outside of that I really can't comment of whether that's something that would be considered in our situation. Again, that's a -- it's certainly a board matter but similar to other questions or comments in past calls, we'll certainly pass that along.
Stephen Chick: Yes, I appreciate that. I mean, obviously, maybe once the dust settles, we get this Ergon thing resolved, and I think it would be -- I think it would help. So in any event. Thanks, guys.
Operator: The next question is from Jeff Bailey with Beach Capital.
Unidentified Analyst: Good morning, Andy and Matt. Another great quarter, great year. I think what you also what could be said when you were talking about your transformation earlier is that the storage was sold pretty much at the perfect time. And right now, I don't know if I've ever seen storage worth less with the forward curve, it's, it would be really hard to sell oil storage right now. So the timing on that divestiture was just perfect. My first question is for Matt. Matt, as we go through the press release, and we look at the breakdown for distributable cash flow in the other line is $684,000. Is that the $700,000 that we refer to for the conflicts committee expenses?
Matthew Lewis: That's exactly right, Jeff.
Unidentified Analyst: Okay. And then Matt, also the 2% EBITDA growth projection is interesting. We talked on the last conference call about the inflation and it appears that it may be even getting stronger, and the chances of it declining over the year seem to be slimmer. So but we also talked about how the contracts with a lot of your customers will have sort of a lag effect with the escalators. But then offsetting that, of course, you got the growth projects, can you talk a little bit about your assumptions around inflation for 2022?
Matthew Lewis: In terms for 2022, and where it's headed, I agree with you, it's tough to see it potentially being any less near term, I would reiterate what we did talk about on the last earnings call, which was there is a lag effect. So you can't take just one month and compare it to a prior year and ripple that all the way through a lot of our contracts there. There is a historical or an annual average that you're comparing year-over-year, and contracts renew throughout the year. So again, it really does vary. But as we fast forward through 2022 certainly I think you would, you could potentially look at something higher, if we got to call it effective contract rates in 2023. But I think I would also end it with a similar comment that Andy made during that Q&A, which is in a lot of ways to we're working with customers over the long term relationships as well. And so we have to take that into consideration.
Unidentified Analyst: Okay. I guess what I'm getting at is that if we just plug in a figure of 7% to 8% inflation and cost. It's interesting that at 2% EBITDA growth would still be your projection, are you assuming 7% to 8% increase in cost just for general inflation? I mean, not excluding the growth projects and things like that. Are you excluding something higher or lower? And then I mean, I assume you're not including 7% to 8% increases in your contracts because we talked about the lagged effect of the escalators.
Andy Woodward: Yes, Jeff, this is Andy, when it comes to as Matt mentioned clearly there's, on the revenue side, there's a benefit that we have, even though it's a slight lag around CPI increases on an annual basis. When it comes to costs, I think you remember this, but I'll just, I think it's worth stating that we do pass along utility costs, which tend to be one of the more volatile from a perspective of inflation. And clearly, where prices are today you can certainly see that being the case from energy or utility perspective. So those are costs that do our contract that we pass along. The probably biggest costs that we see changing year-to- year ends up being employment, but we've already baked all those assumptions in based on how we plan to provide merit increases for our people in this coming year. So that's already baked into this 2% increase. Outside of that it really comes in back to maintenance and repair costs. But based on our, even though over the last few months, and even longer than that, with this type of environment, we aren't seeing the creep that you would expect. They're certainly not at the 6% to 7% level that you quoted. So I think we're very comfortable with this guidance of 2% EBITDA growth on the base business.
Unidentified Analyst: Got you. Okay. So just plugging in the general assumption of 78%, in the cost that Blueknight does incur and doesn't pass on is erroneous, your inflation, you're projecting it to be something lower than 78%, general inflation level for 2022. Fair enough.
Andy Woodward: That's fair.
Unidentified Analyst: Okay, got it. And, Andy, thank you very much for your elaboration on the distribution philosophy. I think that answered a lot of questions for a lot of investors. I would ask too, it was interesting the way that the increase in distribution coincided with the growth projects. And then a little earlier in the call, you mentioned that you'd like to have 10 of those lined up at some point in time, as you go in front of the GP board to talk about distribution, could you see yourself recommending multiple distribution increases in the same year? Could you see -- could you visualize much larger increases in distribution, assuming say, you had multiple big projects in front of you, or you had other tailwinds in the business? Are you looking to more moderate it, even if there are a lot of tailwinds?
Andy Woodward: No, it's a good question, Jeff. And I think the latter is probably what I would steer you towards. I think Matt hit it on the head during his remarks. And I'll say it again, growth is our top priority here. And we're looking at this vehicle, the MLP vehicle more so as a total return vehicle, not just security yielding instrument. And that's built upon the strategy that I think we have in place and it really all comes back to trying to maximize on a risk adjusted basis returns back to our unitholders. And we think growth is going to be far and away the best path forward. And so I do want to reiterate that point as much as possible, and how then that impacts our decisions as it relates to other ways of returning capital back to our unitholders. And I think we've shown that it's certainly not an either or it is and. When it comes to that we've bought back preferred units, and we've now recently increased the distribution at what we think is a very appropriate increase. And so I think looking forward to future increases, I certainly I will promise you all that we're not the type of company that will get over our skis when it comes to trying to signal distribution increases on a ratable basis. That's just I've seen too many management teams get in too much trouble where that distribution policy ends up, ends up dictating a lot of the other businesses practices that management is doing. So we're not going to be that company at the end of the day. And so we look at a lot of different factors that go into that decision, one of which is where coverages currently, but also how we see the outlook and other factors impacting business.
Unidentified Analyst: Okay, thank you for that. Yes. And it also helps that with the current unit price, you're definitely getting paid to increase the distribution. It's one, definitely one of the lower yielding securities in the space, which is wonderful. Last question, Andy, my understanding of MLP regulation is that you can have up to 10% of non-qualifying MLP income, and you have the strong balance sheet and you have seem to have a pretty wide mandate to pursue growth. So is that something you would consider some non-qualifying MLP income if the opportunity arose?
Andy Woodward: Good question, Jeff. And the quick answer is absolutely, we'll -- we would definitely consider other revenue sources that might not necessarily be qualifying however as an MLP, we have to be very careful of that as well, to make sure that in total our revenue is 90% from qualifying sources. But the good news is and why I said it the way I said it in our prepared remarks, when we look at tier three opportunities, leases count as qualifying income. And so as we look to potentially better utilize excess land at our sites, a lease would qualify and would contribute to our overall qualifying income for the company.
Operator: Next question is from Doug of Digi Capital.
Unidentified Analyst: Hi, Andy and Matt. Thanks for taking the call. And for taking the questions and hosting the call. So it's, I just wanted to ask you a quick question on the distribution policy. The way if I'm just looking at your financials, and I'm sure that some gives puts and takes but with your growth, and some of the savings, and then some of the one-time costs, but also some of the one-time benefits, it seems like you have at least maybe greater $20 million available for distributable cash flow to common units. Is that a fair way of looking at it?
Matthew Lewis: And I assume that you're just kind of looking at the delta between our long term targets, or potentially what we just reported, and just a one-time distribution, Doug, is that how you're thinking about it?
Unidentified Analyst: Yes, no, I'm not saying what you should distribute, I'm just saying is what's available?
Matthew Lewis: That's right. There is
Unidentified Analyst: So when I divide that by roughly 41.5 million shares, and maybe you get a little bit of growth? Sounds like you're working on a lot of exciting things, which is great. That and your very low CapEx intensity, as you mentioned, significantly, under levered, very, very modest leverage. We're talking somewhere that should be available to common shareholders, unitholders, excuse me, a $0.50 a share. So I think my question really relates to it. It's a part common part question. But with the stock at $3.35 or $3.40, right now, even if you didn't grow ever, if you just distributed, and our view is we would like you to grow. But even if you just kept everything where it is, and said, we're going to run this thing at low leverage, and annual escalators, and just kind of keep it where it is and pay $0.50 or something like that that's a 15% yield for a very low leverage, relatively recurring revenue business. So I guess my question is to management with the stock at $3.40. How do you think about when you balance different types of priorities and shareholder value, obviously, the shareholders we look at it, and we say, that's pretty frustrating, because we don't seem to be getting any credit for the company's underlying financial value, at least the common unitholder? So how do you think about that? And in terms of your allocation, capital allocation process.
Andy Woodward: Doug, it's a good question, Doug. And I think from our standpoint, I only wish it would be that easy to be able to distribute all of our cash flow on a one time basis and expect the business to perform as it's been performing. As you know and I know you're not necessarily implying that there is tailwind and headwinds to this business that we have to manage at all times. And so a big part of where we come out from a distribution standpoint is ensuring that when we increase the distribution that we are as absolutely sure the board is on the same page with this, that we're absolutely sure that when we increase it, we won't touch that distribution again. Now, I'll be the first to put a disclaimer out there that nothing's as absolute as that. But that's at least the intentions that we have when we target a certain distribution level. And then when it comes to our long term coverage, I mean, that's really what that's intended to do is to try to get it as comfortable with the different business cycles that we could be in, and what would that cushion need to be, throughout all cycles for us to be able to be as consistent and sustainable from a distribution standpoint, but I hear you on your question and your comment, and certainly can understand your perspective.
Unidentified Analyst: I appreciate that. I would say from our perspective we would just say that the distribution is way too low given the coverage, the company worked through a lot of issues. Obviously, over the past few years, you dramatically reduce debt, you sold asset, you are in a very good position where I think you mentioned prior that there's something on the order of a 50% increase in highway spending, this should be a very exciting time for the company, and we're all for growth. But I think that there's a sense by shareholders that the distribution is just aren't being, there's a hesitancy to raise it. And I would just encourage you as much as possible to take a more what seems to us to be a more appropriate path or aggressive path, get into very, very low leverage at a very high coverage ratio. I wouldn't call I use the word aggressive, very hesitantly more rapid growth paths for the distribution, given what seems to be up to $0.50 of potential distribution. $0.17 cents just seems to us to be too little.
Andy Woodward: We certainly appreciate that feedback, Doug, and certainly don't take it lightly. I fully stand behind the distribution level where it is today, especially knowing the history of Blueknight. And I know that the board themselves feel the same way around distributions and the cuts we've had in the past. So we're going to take a very calculated approach here. And but I certainly understand where your perspective and thoughts around the matter.
Operator: This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Andrew Woodward for any closing remarks.
Andy Woodward: Thanks again, everybody for participating in today's call. Again, I think a lot of you that asked questions, said it yourselves. We did truly have a great year and we're looking forward to the next then. And we just want as management, just reiterate that we really appreciate the support as we continue on our own journey. So thanks again and hope everybody has a great week.
Operator: This concludes the conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
