BLUEKNIGHT ENERGY PARTNERS, L.P. Overview
We are a publicly traded master limited partnership with operations in 26 states. We have the largest independent asphalt facility footprint in the nation, and through that we provide integrated terminalling services for companies engaged in the production and marketing of liquid asphalt. We manage our operations through a single operating segment, asphalt terminalling services. We previously provided integrated terminalling, gathering, and transportation services for companies engaged in the production, distribution, and marketing of crude oil in three different operating segments: (i) crude oil terminalling services, (ii) crude oil pipeline services, and (iii) crude oil trucking services. OnDecember 21, 2020 , we announced we had entered into multiple definitive agreements to sell these segments. The transactions closed in February andMarch 2021 , and these segments are presented as discontinued operations. Our 54 asphalt facilities are well-positioned to provide asphalt terminalling services in the market areas they serve throughout the continentalUnited States . With our approximately 9.0 million barrels of total liquid asphalt storage capacity, we are able to provide our customers the ability to effectively manage their liquid asphalt inventories while allowing significant flexibility in their processing and marketing activities. Our asphalt terminalling business delivers a stable cash flow profile underpinned by long-term take-or-pay contracts that generally have original terms of 5 to 10 years with options to extend the term. The stability comes from the contract structure that is comprised primarily of fixed fees and cost reimbursements, which make up approximately 95% of our revenues. The remaining revenue is variable, primarily consisting of volume-based throughput fees. We have agreements for all our 54 asphalt terminalling facilities throughout the 26 states. We lease certain facilities for operation by our customers and at the remaining facilities we store, process, blend, and manufacture products, among other things, to meet our customers' specifications. The agreements have, based on a weighted average by remaining fixed revenue, approximately 5.3 years remaining under their terms as ofMarch 1, 2022 . Approximately 13% of our tank capacity will expire at the end of 2022 if not renewed with the current customer or a new customer, and the remaining capacity expires at varying times thereafter, through 2035. Our varying contract expiration dates provide for staggered renewals, which provides additional stability to the cash flow.
Potential Impact of Certain Factors on Future Revenues
Due to the high percentage of fixed and reimbursement revenue from our long-term contracts, our focus and our primary risk is renewing contracts at favorable terms. Our ability to renew agreements on favorable terms, or at all, could be impacted if our customers experience negative market conditions. These factors include infrastructure spending, the strength of state and local economies, and the level of allocations of tax funding to transportation spending from state or federal funds. Public transportation infrastructure projects historically have been a relatively stable portion of state and federal budgets and represent a significant share ofthe United States construction market. Federal funds are allocated on a state-by-state basis, and each state is required to match a portion of the federal funds that it receives. Currently, from a macroeconomic view, there are positive indicators for the infrastructure and construction sector, such as the federal infrastructure spending bill that was passed inNovember 2021 , low interest rates, and a recovering economy. However, due to COVID-19, as discussed below, some uncertainty exists. Due to the global pandemic related to COVID-19, the economy experienced a significant downturn during part of 2020. Despite this economic volatility, our cash flows remained stable and are expected to remain stable moving forward. While our customers may be impacted by the economic volatility, they are primarily high-quality counterparties, with over 50% of our revenues earned from those that are investment-grade quality, which minimizes our counterparty credit risk. We do not expect any supply chain disruptions from COVID-19 to affect our customers. While we are unaware of any potential negative impact of COVID-19 on our business at this time, we are continuing to monitor the situation and have prepared our employees to take precautions and planning for unexpected events, which may include disruptions to our workforce, customers, vendors, facilities and communities in which we operate. Infrastructure spending is currently a focus at the federal, state, and local levels. The federal infrastructure spending bill (theInfrastructure Investment and Jobs Act) that was passed inNovember 2021 , subject to final appropriations, provides long-term funding and support for road construction and repair. Increased funding potentially impacts us through favorable customer contract renewals, including facility expansion opportunities, as well as increased customer volumes through our terminals. Separate from these funds, COVID relief funds remain available and could have a positive impact on the allocation of state and local spending. Further, there has been an increase in state and local initiatives to support infrastructure funding, and a high percentage of those initiatives have been approved by voters. Another factor impacting us and our customers, from a short-term perspective, is weather patterns. Our customers' volumes could be significantly impacted by prolonged rain or snow seasons or any severe weather that occurs. Damage to our terminal facilities from severe weather, such as flooding or hurricanes, could impact our operating results through additional costs and/or loss of revenue. 24
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Table of Contents Ergon Agreements Twenty-eight of our asphalt facilities are contracted to Ergon under multiple agreements. Service revenues under these agreements are primarily based on contracted monthly fees under the applicable agreement at rates, which we believe are fair and reasonable to us and our unitholders and are comparable with the rates we charge third parties. Agreements for six of the facilities expire in late 2025, and agreements for the remaining 22 facilities expire onDecember 31, 2027 . We may not be able to extend, renegotiate or replace these contracts when they expire, and the terms of any renegotiated contracts may not be as favorable as the contracts they replace. The Board's conflicts committee reviewed and approved these agreements in accordance with our procedures for approval of related-party transactions and the provisions of the partnership agreement. For the years endedDecember 31, 2020 and 2021, we recognized revenues of$44.4 million and$49.6 million , respectively, for services provided to Ergon under these agreements. Ergon Buyout Offer OnOctober 8, 2021 , Ergon filed an amendment to its Schedule 13D with theSEC disclosing that Ergon made a non-binding proposal to the Board, pursuant to which Ergon would acquire all the outstanding common units and Preferred Units of the Partnership not already owned by Ergon and its affiliates in exchange for$3.32 per common unit and$8.46 per Preferred Unit. The transaction, as proposed, is subject to a number of contingencies, including the approval of the conflicts committee of the Board, the approval by the Partnership's unitholders and the satisfaction of any conditions to the consummation of a transaction set forth in any definitive agreement concerning the transaction. There can be no assurance that a definitive agreement will be executed or that any transaction will materialize. Results of Operations Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, management uses additional measures that are known as "non-GAAP financial measures" in its evaluation of past performance and prospects for the future. The primary measure used by management is operating margin excluding depreciation and amortization.
Management believes that the presentation of this additional financial measure provides useful information to investors regarding our performance and results of operations because this measure, when used in conjunction with related GAAP financial measures, (i) provides additional information about our core operating performance and ability to generate and distribute cash flow; (ii) provides investors with the financial analytical framework upon which management bases financial, operational, compensation and planning decisions; and (iii) presents measurements that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. This additional financial measure is reconciled to the most directly comparable measures as reported in accordance with GAAP, and should be viewed in addition to, and not in lieu of, our consolidated financial statements and footnotes.
The table below summarizes our financial results for the years ended
Operating Results Year ended December 31, Favorable/(Unfavorable) (dollars in thousands) 2020 2021 $ % Fixed fee revenue$ 91,879 $ 97,603 $ 5,724 6 % Variable cost recovery revenue 12,664 12,066 (598 ) (5 )% Variable throughput and other revenue 5,702 5,748 46 1 % Total revenue 110,245 115,417 5,172 5 % Operating expenses, excluding depreciation and amortization (49,396 ) (52,312 ) (2,916 ) (6 )% Total operating margin 60,849 63,105 2,256 4 % Depreciation and amortization 13,416 11,891 1,525 11 % General and administrative expense 14,182 13,902 280 2 % Loss on disposal of assets 67 195 (128 ) (191 )% Operating income 33,184 37,117 3,933 12 % Other income (expenses): Other income 1,169 2,615 1,446 124 % Interest expense (5,665 ) (4,944 ) 721 13 % Provision for income taxes 7 (30 ) (37 ) (529 )% Income from continuing operations 28,695 34,758 6,063 21 % Gain (loss) from discontinued operations, net (42,175 ) 75,772 117,947 280 % Net income (loss)$ (13,480 ) $ 110,530 124,010 920 % 25
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Revenues. Total revenues increased to$115.4 million for 2021 as compared to$110.2 million for 2020. Revenues consist primarily of fixed fees for items such as storage and minimum throughput requirements, with consideration of annual consumer price index ("CPI") adjustments built into our agreements. In addition to CPI escalations, the increase in fixed fee revenue is primarily due to certain contracts that changed from a lease arrangement to an operating arrangement. Variable cost recovery revenue is driven by certain reimbursable operating expenses, such as utility costs, and therefore have no net impact on operating margin or net income. Variable throughput revenue is primarily driven by our customers' excess volumes over annual minimum thresholds, which was comparable in 2021 to 2020. Operating expenses, excluding depreciation and amortization. Operating expense, excluding depreciation and amortization increased by 6%, or$2.9 million , for 2021 as compared to 2020. Significant factors contributing to this change include certain contracts that changed from a lease arrangement to an operating arrangement and higher utility costs from rising prices, which are recoverable costs from our customers. Depreciation and amortization. Depreciation and amortization decreased to$11.9 million for 2021 as compared to$13.4 million for 2020. The decrease is primarily the result of certain assets reaching the end of their depreciable lives. General and administrative expense. General and administrative expense decreased to$13.9 million for the year endedDecember 31, 2021 , as compared to$14.2 million for 2020. The decrease from 2020 to 2021 is primarily due to separation costs incurred in the second quarter of 2020 related to the resignation of the former Chief Executive Officer of our general partner and lower compensation costs in 2021 due to reductions in corporate overhead, partially offset by severance paid in the first quarter of 2021 related to the crude oil business divestitures and$0.7 million in non-recurring legal and professional fees related to the Ergon buyout offer.
Other income. Other income for the years ended
Income (loss) from discontinued operations. Income from discontinued operations represents the results of our former crude oil trucking, pipeline, and terminalling services segments that were sold in February and March of 2021. The year endedDecember 31, 2020 , included$39.1 million of losses on disposal and classification as held for sale the crude oil trucking and pipeline services segments based on the net book value of the assets compared to expected net proceeds under the sale agreements. The year endedDecember 31, 2021 , included a$73.5 million gain on the sale of the crude oil terminalling services segment. Interest expense. Interest expense was$4.9 million for 2021 compared to$5.7 million for 2020. Interest expense represents interest on borrowings under our credit agreement, as well as amortization of debt issuance costs. The following table presents the significant components of interest expense (dollars in thousands): Year ended December 31, Favorable/(Unfavorable) 2020 2021 $ % Credit agreement interest$ 4,611 $ 3,350 $ 1,261 27 % Amortization of debt issuance costs 1,004 856 148 15 % Write-off of debt issuance costs - 730 (730 ) N/A Other 50 8 42 84 % Total interest expense$ 5,665 $ 4,944 $ 721 13 % The decrease in credit agreement interest was primarily driven by lower floating eurodollar rates, lower average borrowings outstanding during the period, and favorable changes to the applicable margin based on an improved leverage ratio. 26
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Table of Contents Income Taxes As part of the process of preparing the consolidated financial statements, we are required to estimate the federal and state income taxes in each of the jurisdictions in which our subsidiary that is taxed as a corporation operates. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include an expense or reduction of expense within the tax provisions in the consolidated statements of operations. Under ASC 740 - Accounting for Income Taxes, an enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all of the deferred tax asset. Among the more significant types of evidence that we consider are: • taxable income projections in future years;
• future revenue and operating cost projections that will produce more than
enough taxable income to realize the deferred tax asset based on existing
service rates and cost structures; and
• our earnings history exclusive of the loss that created the future deductible
amount coupled with evidence indicating that the loss is an aberration rather
than a continuing condition.
Based on the consideration of the above factors for our subsidiary that is taxed
as a corporation for purposes of determining the likelihood of realizing the
benefits of the deferred tax assets, we have provided a full valuation allowance
against our deferred tax asset as of December 31, 2021 .
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Liquidity and Capital Resources
Cash Flows and Capital Expenditures
The following table summarizes our sources and uses of cash, including
discontinued operations, for the years ended
Year ended December 31,
2020 2021
(in thousands)
Net cash provided by operating activities $ 61,167 $ 49,329
Net cash provided by (used in) investing activities (22,657 ) 147,879 Net cash used in financing activities
(38,263 ) (196,841 )
Operating Activities. Net cash provided by operating activities
was
Investing Activities. Net cash provided by investing activities was$147.9 million for the year endedDecember 31, 2021 , compared to net cash used in investing activities of$22.7 million for the year endedDecember 31, 2020 . The year endedDecember 31, 2021 , included net proceeds, primarily from the sale of the crude oil businesses, of$155.2 million , which excludes$1.4 million of funds held in escrow for right of way renewals. Capital expenditures for the year endedDecember 31, 2021 , inclusive of both continuing and discontinued operations, included net maintenance capital expenditures of$6.4 million and net expansion capital expenditures of$1.9 million . In addition, we received$1.1 million of insurance proceeds during the year endedDecember 31, 2021 , from claims related to property damage. Capital expenditures for the year endedDecember 31, 2020 , inclusive of both continuing and discontinued operations, included net maintenance capital expenditures of$7.8 million and net expansion capital expenditures of$6.2 million . The year endedDecember 31, 2020 , also included a$12.2 million payment to Ergon related to our purchase of Ergon's DEVCO entity associated with Cimarron Express. Financing Activities. Net cash used in financing activities of$196.8 million for the year endedDecember 31, 2021 , included net payments under our credit agreement of$157.5 million , distributions to unitholders of$32.1 million , and the repurchase of Preferred Units of$5.4 million . Net cash used in financing activities was$38.3 million for the year endedDecember 31, 2020 , and primarily comprised of net payments under our credit agreement of$3.0 million and distributions to unitholders of$32.4 million .
Liquidity and Capital Resources
Cash flows from operations and borrowings under our credit agreement are our primary sources of liquidity. Our ability to borrow funds under our credit agreement may be limited by financial covenants. AtDecember 31, 2021 , we had a working capital deficit of$12.1 million . This is primarily a function of our approach to cash management. AtDecember 31, 2021 , we had approximately$98.0 million of revolver borrowings and approximately$0.6 million of letters of credit outstanding under the credit agreement, leaving us with$201.4 million of availability under our revolving loan facility, subject to covenant restrictions, which limited our availability to$155.4 million . AtMarch 1, 2022 , we had approximately$110.0 million of revolver borrowings and approximately$0.6 million of letters of credit outstanding under the credit agreement, leaving us with$189.4 million of availability under our revolving loan facility. The Partnership's ability to borrow such funds may be limited by the financial covenants in the credit agreement. The Partnership has certain financial covenants associated with its credit agreement which include a maximum permitted consolidated total leverage ratio. The consolidated total leverage ratio is assessed quarterly based on the trailing twelve months of EBITDA, as defined in the credit agreement. The maximum permitted consolidated total leverage ratio as ofDecember 31, 2021 , and for every quarter thereafter, is 4.75 to 1.00. The Partnership's consolidated total leverage ratio was 1.84 to 1.00 as ofDecember 31, 2021 . 28
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Capital Requirements. Our capital requirements consist of the following:
• maintenance capital expenditures, which are capital expenditures made to
maintain the existing integrity and operating capacity of our assets and
related cash flows further extending the useful lives of the assets; and
• expansion capital expenditures, which are capital expenditures made to expand
or to replace partially or fully depreciated assets or to expand the operating
capacity or revenue of existing or new assets, whether through construction,
acquisition or modification.
The following table breaks out capital expenditures from continuing operations
for the years ended
Year ended December 31,
2020 2021
Acquisitions(1) $ 12,221 $ -
Expansion capital expenditures $ 723 $ 1,992
Reimbursable expenditures (289 ) (54 )
Net expansion capital expenditures $ 434
Gross Maintenance capital expenditures
(2,084 ) (19 )
Net maintenance capital expenditures
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(1) Relates to the purchase of Ergon's interest in the Cimarron Express project.
See Note 12 to our consolidated financial statements for additional
information.
We currently expect our 2022 expansion capital expenditures to be approximately
$15.0 million and our maintenance capital expenditures to be between $5.5
million and $6.5 million , each net of reimbursable expenditures. Our expansion
capital expenditures will consist of organic growth projects and acquisitions,
which includes expanding one of our current terminals and an acquisition that
closed in January 2022 for an asphalt terminal and industrial park. Management
is evaluating other expansion opportunities for 2022 and beyond that could
increase this range of capital expenditures. These projects will have potential
future expansion opportunities that are not currently part of our 2022 expansion
capital forecast. Our sources of liquidity for expansion and maintenance capital
expenditures in 2021 were a combination of cash flows from operations and
borrowings under our credit agreement, and we expect to use the same sources in
2022.
Our Ability to Grow Depends on Our Ability to Access External Expansion Capital .
Our partnership agreement requires that we distribute all of our available cash
to our unitholders. Available cash is reduced by cash reserves established by
our General Partner to provide for the proper conduct of our business (including
for future capital expenditures) and to comply with the provisions of our credit
agreement. We may not grow as quickly as businesses that reinvest their
available cash to expand ongoing operations because we distribute all of our
available cash.
Description of Credit Agreement. On
Our credit agreement is guaranteed by all of our existing subsidiaries. Obligations under our credit agreement are secured by first priority liens on substantially all of our assets and those of the guarantors.
Our credit agreement includes procedures for adding financial institutions as revolving lenders or for increasing the revolving commitment of any currently committed revolving lender, subject to the consent of the new or increasing lenders and an aggregate maximum of$450.0 million for all revolving loan commitments under our credit agreement. The credit agreement will mature onMay 26, 2025 , and all amounts outstanding under our credit agreement shall become due and payable on such date. The credit agreement requires mandatory prepayments of amounts outstanding thereunder with the net proceeds from certain asset sales, property or casualty insurance claims and condemnation proceedings, unless we reinvest 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 our credit agreement bear interest, at our option, at either the reserve-adjusted eurodollar rate (as defined in the credit agreement) plus an applicable margin which 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 which ranges from 1.0% to 2.25%. 29
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We pay 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 we pay a commitment fee ranging from 0.375% to 0.5% on the unused commitments under the credit agreement. The applicable margins for the interest rate, the letters of credit fee and the commitment fee vary quarterly based on our 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 which 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 we issue 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 for the fiscal quarter endingDecember 31, 2021 , and each fiscal quarter thereafter; provided that the maximum permitted consolidated total leverage ratio will be 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 we issue 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 is 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 we issue 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 our ability to:
• create, issue, incur or assume indebtedness; • create, incur or assume liens; • engage in mergers or acquisitions; • sell, transfer, assign or convey assets;
• repurchase the Partnership's equity, make distributions to unitholders and
make certain other restricted payments;
• make investments;
• modify the terms of certain indebtedness, or prepay certain indebtedness;
• engage in transactions with affiliates; • enter into certain hedging contracts; • enter into certain burdensome agreements; • change the nature of the Partnership's business; and
• make certain amendments to the Fourth Amended and Restated Agreement of
Limited Partnership of the Partnership (the "Partnership's partnership
agreement").
At December 31, 2021 , our consolidated total leverage ratio was 1.84 to 1.00 and
our consolidated interest coverage ratio was 15.79 to 1.00. We were in
compliance with all covenants of our credit agreement as of December 31,
2021 . Based 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 us to make quarterly distributions of available
cash (as defined in the partnership agreement) to unitholders so long as, on a
pro forma basis after giving effect to such distributions, we are 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 us 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 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.
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In addition to other customary events of default, the credit agreement includes an event of default if:
(i) our
ceases to control us;
(ii) Ergon ceases to own and control 50.0% or more of the membership interests
of our
(iii) during any period of 12 consecutive months, a majority of the members of
the Board of our
(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 individualsreferred 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 our General Partner or us, all indebtedness under our credit
agreement will immediately become due and payable. If any other event of default
exists under our credit agreement, the lenders may accelerate the maturity of
the obligations outstanding under our credit agreement and exercise other rights
and remedies. In addition, if any event of default exists under our credit
agreement, the lenders may commence foreclosure or other actions against the
collateral.
If any default occurs under our credit agreement, or if we are unable to make
any of the representations and warranties in our credit agreement, we will be
unable to borrow funds or have letters of credit issued under our credit
agreement.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepared these consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America . As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We based our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies that we believe require our most difficult, subjective or complex judgments and are the most critical to our reporting of results of operations and financial position are as follows: Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosure of contingencies. Management makes significant estimates including: (1) estimated cash flows and fair values inherent in impairment tests; (2) the estimated fair value of financial instruments; and (3) liability and contingency accruals. Although management believes these estimates are reasonable, actual results could differ from these estimates. 31
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Impairment of Long-Lived Assets. Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written down to estimated fair value. Assets are tested for impairment when events or circumstances indicate that their carrying values may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount the carrying value exceeds the fair value of the asset is recognized. Fair value is generally determined from estimated discounted future net cash flows.Goodwill .Goodwill represents the excess of the cost of acquisitions over the amounts assigned to assets acquired and liabilities assumed.Goodwill is not amortized but is tested annually for impairment and when events and circumstances warrant an interim evaluation.Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered to be impaired. Entities may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Should the quantitative assessment be required, the valuation would generally be based on the estimated discounted future net cash flows of the reporting unit, utilizing discount rates and other factors in determining the fair value of the reporting unit. Management utilized the qualitative assessment in 2020 and 2021 and no impairment expense was recorded in either period.
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