UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021March 31, 2022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________from____________ to____________
Commission File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY |
(Exact name of registrant as specified in its charter) |
Delaware |
| 73-1268729 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | |
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801 Travis Street, Suite 2100, Houston, Texas |
| 77002 | |
(Address of principal executive offices) |
| (Zip Code) | |
713-568-4725
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | ||
| OTCQX |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated | ☐ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yes ☐ No ☒
Number of shares of common stock, par value $0.01 per share outstanding as of November 15, 2021: 12,693,514May 16, 2022: 14,799,041
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Blue Dolphin Energy Company |
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Glossary of Terms |
Glossary of Terms
Throughout this Quarterly Report on Form 10-Q, we have used the following terms:
Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Carroll & Company Financial Holdings, L.P., Ingleside and Lazarus Capital, LLC)Capital) and/or LEH and its affiliates (including Lazarus Midstream Partners, L.P.LMT and LTRI). Together, Jonathan Carroll and LEH owned approximately 82% of the Common Stock as of the filing date of this report.
AMT. Alternative Minimum Tax.
Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019, between Pilot and NPS and subsequently amended on May 9, 2019, May 10, 2019, and September 3, 2019, the last amendment being Amendment No. 1; original line of credit amount was $13.0 million; effective October 4, 2021, NPS repaid all its obligations under the Amendedowed to Pilot Line of Credit.on October 4, 2021.
Amended and Restated Operating Agreement. Affiliate agreement dated April 1, 2020, between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets.assets; three-year term effective April 1, 2020 expiring April 1, 2023 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC.
ARO. Asset retirement obligations.
ASU. Accounting Standards Update.
AGO. Atmospheric gas oil, which is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.
bbl. Barrel; a unit of volume equal to 42 U.S. gallons.
BDEC Term Loan Due 2051. Loan Agreement dated May 4, 2021, between Blue Dolphin and the SBA in the original principal amount of $0.5 million.
BDPC. Blue Dolphin Petroleum Company, a wholly-ownedwholly owned subsidiary of Blue Dolphin.
BDPL. Blue Dolphin Pipe Line Company, a wholly-ownedwholly owned subsidiary of Blue Dolphin.
BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016, between BDPL and LEH in the original principal amount of $4.0 million; interest accrues at 16% annually; guaranteed by certain BDPL property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; matured August 2018; currently in default for failure to pay past due obligations at maturity.
BDSC. Blue Dolphin Services Co., a wholly-ownedwholly owned subsidiary of Blue Dolphin.
BDSC-LEH Office Sub-Lease Agreement. Office sublease agreement in Houston, Texas between BDSC and LEH; sixty-eight -month term effective January 1, 2018 expiring August 31, 2023; includes 6-month rent abatement period; rent approximately $0.003 million per month
Blue Dolphin. Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.
bpd. Barrel per day; a measure of the bbls of daily output produced in a refinery or transported through a pipeline.
BDEC Term Loan Due 2051 (as modified). An EIDL dated May 4, 2021 between Blue Dolphin and the SBA in the original principal amount of $0.5 million; the note was modified in February 2022 to increase the principal amount to $2.0 million; additional principal used for working capital; interest accrues at 3.75%; maturity date May 2051; monthly principal and interest payment $0.01 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due December 2023; loan not forgivable; security includes all tangible and intangible personal property, including, but not limited to inventory, equipment, instruments, chattel paper, documents, letter of credit rights, accounts, deposit accounts, commercial tort claims, general intangibles, and as-extracted collateral; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
Board. Board of Directors of Blue Dolphin.
BOEM. U.S. Bureau of Ocean Energy Management.
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Glossary of Terms |
BSEE. U.S. Bureau of Safety and Environmental Enforcement.
Capacity utilization rate. A percentage measure that indicates the amount of available capacity that is being used in a refinery or transported through a pipeline. To calculate capacity utilizationWith respect to the crude distillation tower, the rate divideis calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower’s total capacitytower (currently 15,000 bpd).
CAA. Clean Air Act.
CARES Act. Coronavirus Aid, Relief and Economic Security Act, which was passed by Congress in March 2020, to provide economic assistance related to the onset of the COVID-19 pandemic.
CDC. Centers for Disease Control and Prevention.
CERLA. Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
CIP. Construction in progress.
COVID-19. An infectious disease first identified in 2019 in Wuhan, the capital of China’s Hubei province; the disease has since spread globally, resulting in the ongoing 2019–2021 coronavirus pandemic.
CWA. Clean Water Act.
Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue Dolphin has 20,000,000 shares of Common Stock authorized and 12,693,514 shares of Common Stock issued and outstanding.outstanding as of March 31, 2022.
Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.
Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.
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Cost of goods sold. CrudeReflects the cost of crude oil and condensate, costs, fuel use, and chemicals.
Crude distillation tower. A tall column-like vessel in which crude oil and condensate areis heated and theirits vaporized components are distilled utilizingby means of distillation trays. This process refines crude oil and other inputs into intermediate and finished petroleum products. (CommonlyCommonly referred to as a crude distillation unit or an atmospheric distillation unit.)
Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). DistillationCrude oil must break crude oilbe broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products.
Crude Sale Agreement. Crude Sale Agreement between Pilot and LE dated May 7, 2019, as amended on November 11, 2019, which agreement was assigned by Pilot to Tartan pursuant to an Assignment of Contract dated March 20, 2020.
Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.
Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM, reduced crude, and AGO).
Distillation. The first step in the refining process;process whereby crude oil and condensate are heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their respectivevarious boiling points and then rise to prescribed levels within the tower per their densities, from lightest to heaviest. They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities.
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DOT. U.S. Department of Transportation.
Glossary of Terms |
Downtime. Scheduled andand/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for variousa variety of reasons, including badsevere weather, power failures, and preventive maintenance.
EIA. U.S. Energy Information Administration.
EIDL. Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19.
EPA. U.S. Environmental Protection Agency.
Eagle Ford Shale. A hydrocarbon-producing geological formation that extendsextending across South Texas from the Mexican border into East Texas.
Equipment Loan Due 2025. Installment sales contract dated October 13, 2020 between LE and Texas First in the original principal amount of $0.7 million; loan represents conversion of prior equipment rental agreement with option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment (backhoe); contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a backhoe. LE previously rented the backhoe under a rent-to-own agreement that matured.credit facility of this type.
Exchange Act. Securities Exchange Act of 1934, as amended.
FASB. Financial Accounting Standards Board.
FDIC. Federal Deposit Insurance Corporation.
Feedstocks. Crude oil and other hydrocarbons, such as condensate andand/or intermediate products;products, that are used as primarybasic input materials in thea refining process. Feedstocks are processedtransformed into one or more finished products.
Finished petroleum products. Materials or products at theirwhich have received the final increments of value through processing; productsprocessing operations, and which are being held in inventory for delivery, sale, or use.
Freeport facility. Assets in Freeport, Texas; comprised ofEncompasses processing units for: (i) crude oil and natural gas separation and dehydration, units, (ii) natural gas processing, treating, and redelivery, units,and (iii) a vapor recovery unit, (iv)recovery; also includes two onshore pipelines and (v) 162 acres of land.
GAAP. Accounting principles generally acceptedland in the United States of America.Freeport, Texas.
GEL. GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC; an arbitrator awarded GEL damages, attorney fees, and related expenses in August 2017; the parties fully resolved the dispute in August 2019.LLC.
GNCU. Greater Nevada Credit Union. | |
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Greenhouse gases. Molecules in the Earth’s atmosphere such as carbon dioxide, methane, and chlorofluorocarbons which warm the atmosphere. |
Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount.
HOBM. Heavy oil-based mud blendstock; see also “distillates.”
HUBZone. Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.
IBLA. U.S. Interior Board of Land Appeals.
INC. Incident of Noncompliance issued by BOEM andand/or BSEE.
Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan Carroll.
Intermediate petroleum products. A petroleum product that might require further processing before being offered for saleit is saleable to a customer. Additionalthe ultimate consumer. This further processing maymight be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company to further process.that will process it further.
IRC Section 382. Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following an ownership change.
IRS. U.S. Internal Revenue Service.
Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.
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Glossary of Terms |
Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel between LE and LEH; one-year term effective April 1, 2022 expiring earliest to occur of March 31, 2023, plus 30-day carryover, or delivery of maximum jet fuel quantity; LEH bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification.
June LEH Note. June 2017 promissory note between Blue Dolphin and LEH; for Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
Kissick Debt. APreviously referred to as the ‘Notre Dame Debt; loan agreement initiallyoriginally entered into between LE and Notre Dame Investors, Inc. in the original principal amount of $8.0 million.million; debt held by John Kissick currently holds the debt. Inas of March 31, 2022; pursuant to a 2017 the parties amendedsixth amendment, the Kissick Debt was amended to increase the principal amount by $3.7 million; LE used $3.6 million of the additional principal was used to reduce LE’s obligation to GEL; under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments and security interest, as well as liens on the arbitration award payable to GEL. The Kissick DebtNixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034; interest accrues at 16%; no covenants; matured in January 20182019; security includes subordinated deed of trust that encumbers the crude distillation tower and isgeneral assets of LE; currently in default. The Kissick Debt was previously disclosed as the Notre Dame Debt.default for failure to pay past due obligations at maturity.
Lazarus Capital. Lazarus Capital, LLC, an affiliate of Jonathan Carroll.
LE. Lazarus Energy, LLC, a wholly-ownedwholly owned subsidiary of Blue Dolphin.
LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; tied to payoff of LE Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LE Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.
LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE, Veritex, and Veritexguarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; loan 100% USDA-guaranteed; security includes first priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory), assignment of all Nixon facility contracts, permits, and licenses, absolute assignment of Nixon facility rents and leases, including tank rental income, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default.default for failing to make principal and interest payments, failing to replenish a $1.0 million payment reserve account, and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
LE Term Loan Due 2050. Loan AgreementAn EIDL dated August 29, 2020 between LENPS and the SBA in the original principal amount of $0.15 million.million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due March 2023; loan not forgivable; security includes business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
LEH. Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin.
LEH Operating Fee. A management fee paid to LEH under the Amended and Restated Operating Agreement; calculated as 5% of all consolidated operating expenses,costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC; previously reflected within refinery operating expenses in our consolidated statements of operations.
Leasehold interest. The interest of a lessee under an oil and gas lease.
Light crude. LiquidA liquid petroleum that has a low density and flows freely at room temperature. HasIt has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.
LMT. Lazarus Marine Terminal I, LLC, an affiliate of LEH.
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Glossary of Terms |
LRM. Lazarus Refining & Marketing, LLC, a wholly-ownedwholly owned subsidiary of Blue Dolphin.
LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; tied to payoff of LRM Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.
LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015, between LRM, Veritex, and Veritexguarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; loan 100% USDA-guaranteed; security includes second priority lien on rights of LE in crude distillation tower and other collateral of LE, first priority lien on real property interests of LRM, first priority lien on all LRM fixtures, furniture, machinery, and equipment, first priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default.default for failing to make principal and interest payments and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
LTRI. Lazarus Texas Refinery I, an affiliate of LEH.
March Carroll Note. March 2017 promissory note between Blue Dolphin and Lazarus Capital; reflects amounts owed to Jonathan Carroll under LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
March Ingleside Note. March 2017 promissory note between Blue Dolphin and Ingleside; represents periodic working capital to Blue Dolphin through conversion of accounts payable; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
NAAQS. National Ambient Air Quality Standards.
Naphtha. A refined or partly refined light distillate fraction of crude oil. When blendedBlended further or mixed with other materials it can make high-grade motor gasoline or jet fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions.
Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily of methane, but commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium.
NOL. Net operating losses. Nixon facility. Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas. Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas. NPS. Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin. NPS Term Loan Due 2031. Loan Agreement dated September 20, 2021, between NPS, GNCU, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at 5.75%; maturity date October 2031; monthly principal and interest payment $0.1 million; interest-only payments first thirty-six (36) months; first principal payment due November 2024; purpose of loan working capital; loan 90% USDA-guaranteed; security includes deed of trust lien on approximately 56 acres of land and improvements owned by LE, leasehold deed of trust lien on certain property leased by NPS from LE, and assignment of leases and rents and certain personal property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
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Glossary of Terms |
Nixon facility. Assets in Nixon, Texas; comprised of (i) a crude distillation tower, (ii) petroleum storage tanks, (iii) loading and unloading facilities, and (iv) 56 acres of land.
Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units at the Nixon facility.
NPS. Nixon Product Storage, LLC, a wholly-owned subsidiary of Blue Dolphin.
NPS Term Loan Due 2050. Loan AgreementAn EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million.million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due March 2023; loan not forgivable; security includes business assets (e.g., related machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
NOLNSR/PSD. Net operating losses.New Source Review/Prevention of Significant Deterioration.
OPA 90. Oil Pollution Act of 1990.
Operating days. TheRepresents the number of days thatin a period in which the crude distillation tower was in use during a period. To calculate operatingoperated. Operating days subtractis calculated by subtracting downtime in a period from calendar days in the same period.
OPECOPEC+. Organization of Petroleum Exporting Countries.Countries, Russia, and certain other oil-exporting countries.
OSHA. U.S. Occupational Safety and Health Administration.
OSRO. Oil Spill Response Organization.
Other conversion costs. Represents the combination of direct labor costs and manufacturing overhead costs. These are the costs that are necessary to convert our raw materials into refined products.
Other operating expenses. Represents costs associated with our natural gas processing, treating, and redelivery facility, andas well as our pipeline assets and leasehold interests in oil and gas properties.
PCAOB. Public Company Accounting Oversight Board.
Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. Petroleum reflectsThe name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.
PHMSA. Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation.
Pilot. Pilot Travel Centers LLC, a Delaware limited liability company.
Preferred Stock. Blue Dolphin preferred stock, par value $0.10 per share. Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding.
Product slate. TypeRepresents type and quality of products produced.
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.
Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, that are produced by a refinery produces.refinery.
Refinery. InWithin the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.
Refining gross profit (deficit) per bbl. Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.
ROU. Right-of-use.
SBA. U.S. Small Business Administration.
SEC. U.S. Securities and Exchange Commission.
Securities Act. The Securities Act of 1933, as amended.
Segment margin (deficit). For our refinery operations and tolling and terminaling business segments, represents net revenues (excluding intercompany fees and sales) attributable to the respective business segment less associated intercompany fees and sales less associated operation costs and expenses.
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Glossary of Terms |
Sour crude. Crude oil containing sulfur content of more than 0.5%.
Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product.
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Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. The processAlso, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum also produces sulfur as a by-product.petroleum. Some of the most commonly used hydrocarbon deposits are categorized byper their sulfur content. Lowercontent, with lower sulfur fuels usually sellselling at a higher, or premium, price;price and higher sulfur fuels sellselling at a discount.lower, or discounted, price.
Sweet crude. Crude oil containing sulfur content of less than 0.5%.
Tartan. Tartan Oil LLC, an affiliate of Pilot.
Texas First. Texas First Rentals, LLC.
TCEQ. Texas Commission on Environmental Quality.
Throughput. VolumeThe volume processed through a crude distillation towerunit or a refinery or transported through a pipeline.
TMT. Texas margins tax; a form of business tax imposed on an entity’s gross profit rather than on its net income.
Topping unit. A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.
Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO.
Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit is taken offline for a week or longermore for a more comprehensive revamp and renewal.
USACOE. U.S. Army Corps of Engineers.
USDA. U.S. Department of Agriculture.Agriculture; the USDA, acting through its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes; each USDA guarantee is a full faith and credit obligation of the U.S. with the USDA guaranteeing up to 100% of the principal amount; lenders of USDA-guaranteed loans are required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record; both the guaranteed and unguaranteed portions of the loan are to be secured by the same collateral with equal lien priority; the USDA-guaranteed portion of the loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.
U.S. GAAP. Accounting principles generally accepted in the United States of America.
Veritex. Veritex Community Bank, successor in interest to Sovereign Bank by merger.
WHO. World Health Organization.
WSJ prime rate. A measure of the U.S. prime rate as defined by the Wall Street Journal.
XBRL. eXtensible Business Reporting Language.
Yield. The percentage of refined products that is produced from crude oil and other feedstocks.
Blue Dolphin Energy Company |
|
| Table of Contents |
Important Information Regarding Forward Looking Statements |
Important Information Regarding Forward-Looking Statements
This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals and expectations concerning our market position, future operations and profitability, are forward-looking statements. Forward-looking statements may be identified by the use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. WeAlthough we believe our assumptions concerning future events are reasonable. However,reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those projected. These include,projected, including but are not limited to:
Risks Related to the COVID-19 Pandemic
| |
| |
| |
|
Business and Industry
· | Our going concern status. |
· | Inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin |
· | Substantial debt in current liabilities, all of which is currently in default. |
· | Ability to regain compliance with the terms of our outstanding indebtedness. |
· | Increased costs of capital or a reduction in the availability of credit. |
· | Restrictive covenants in our debt instruments |
· | Affiliate |
· | Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products. |
· | Geographical concentration of our assets and customers in West Texas. |
· | Competition from companies with more significant financial and other resources. |
· | Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities. |
· | Strict laws and regulations regarding personnel and process safety. |
· | Market changes in insurance that impact premium costs and available coverages. |
· | NOL carryforwards to offset future taxable income for U.S. federal income tax purposes that are subject to limitation. |
· | Industry technological developments that outpace our ability to keep up. |
· | Actual or |
· | |
· | Uncertainty regarding the impact of |
· | Public health threats, pandemics, and epidemics, such as the ongoing outbreak of COVID-19, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity. |
· | |
|
|
|
Downstream and Midstream Operations
· | Commodity price and refined product demand volatility, which adversely affect our refining margins. |
· | Crude oil, other feedstocks, and fuel and utility services price volatility. |
· | Availability and cost of crude oil and other feedstocks to operate the Nixon facility. |
Blue Dolphin Energy Company | March 31, 2022 │Page 10 |
| Table of Contents |
Important Information Regarding Forward Looking Statements |
· | Equipment failure and maintenance, which lead to operational downtime. |
· | Failure to effectively execute new business strategies, such as renewable fuels. |
· | Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund. |
· | Critical personnel loss, labor actions, and workplace safety issues. |
· | Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer. |
· | Increases in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting our crude oil and condensate, feedstocks, and refined products. |
· | Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. |
· | Geographical concentration of our refining operations and customers within the Eagle Ford Shale. |
· | Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers. |
· | Assessment of penalties by regulatory agencies, such as the TCEQ, for alleged violations. |
· | Regulatory changes and other measures for the reduction of greenhouse gas |
· | Our ability to effect and integrate potential acquisitions. |
Pipeline and Facilities and Oil and Gas Assets
· | Assessment of civil penalties by BOEM for our failure to satisfy orders to provide additional financial assurance (supplemental pipeline bonds) within the time prescribed. |
· | Assessment of civil penalties by BSEE for our failure to decommission pipeline and platform assets within the time prescribed. |
· | Our estimates of future AROs related to our pipeline and facilities assets may increase. |
Common Stock
· | Fluctuations in our stock price that may result in a substantial investment loss. |
· | Declines in our stock price due to share |
· | Dilution of the equity of current stockholders and the potential decline of our stock price due to the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue. |
· | The potential sale of shares in accordance with Rule 144, which may adversely affect the market. |
· | The lack of dividend payments. |
· | Failure to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act. |
See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021 as filed with the SEC and elsewhere in this filing.report. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements due toas a result of new information, future events, or otherwise. References
Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of Blue Dolphin’sits consolidated subsidiaries, or all of them taken as a whole (unless the context otherwise requires).whole.
Blue Dolphin Energy Company |
|
|
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands except share amounts) |
| |||||
|
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 2,177 |
|
| $ | 549 |
|
Restricted cash |
|
| 48 |
|
|
| 48 |
|
Accounts receivable, net |
|
| 63 |
|
|
| 214 |
|
Prepaid expenses and other current assets |
|
| 1,431 |
|
|
| 3,564 |
|
Deposits |
|
| 110 |
|
|
| 124 |
|
Inventory |
|
| 1,088 |
|
|
| 1,062 |
|
Total current assets |
|
| 4,917 |
|
|
| 5,561 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
| 60,573 |
|
|
| 62,497 |
|
Operating lease right-of-use assets, net |
|
| 375 |
|
|
| 498 |
|
Restricted cash, noncurrent |
|
| 0 |
|
|
| 514 |
|
Surety bonds |
|
| 230 |
|
|
| 230 |
|
Total long-term assets |
|
| 61,178 |
|
|
| 63,739 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 66,095 |
|
| $ | 69,300 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt less unamortized debt issue costs, current portion (in default) |
| $ | 33,788 |
|
| $ | 33,692 |
|
Line of credit payable (in default) |
|
| 4,754 |
|
|
| 8,042 |
|
Long-term debt, related party, current portion (in default) |
|
| 19,818 |
|
|
| 16,010 |
|
Interest payable (in default) |
|
| 8,384 |
|
|
| 6,408 |
|
Interest payable, related party (in default) |
|
| 3,294 |
|
|
| 2,814 |
|
Accounts payable |
|
| 2,583 |
|
|
| 3,274 |
|
Accounts payable, related party |
|
| 155 |
|
|
| 155 |
|
Current portion of lease liabilities |
|
| 209 |
|
|
| 194 |
|
|
|
| 2,370 |
|
|
| 2,370 |
|
Accrued expenses and other current liabilities |
|
| 9,361 |
|
|
| 4,882 |
|
Total current liabilities |
|
| 84,716 |
|
|
| 77,841 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Long-term lease liabilities, net of current |
|
| 211 |
|
|
| 370 |
|
Deferred revenues |
|
| 1,313 |
|
|
| 1,520 |
|
Long-term debt, net of current portion |
|
| 843 |
|
|
| 355 |
|
Total long-term liabilities |
|
| 2,367 |
|
|
| 2,245 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
| 87,083 |
|
|
| 80,086 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514 |
|
|
|
|
|
|
|
|
shares issued at September 30, 2021 and December 31, 2020) |
|
| 127 |
|
|
| 127 |
|
Additional paid-in capital |
|
| 38,457 |
|
|
| 38,457 |
|
Accumulated deficit |
|
| (59,572 | ) |
|
| (49,370 | ) |
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) |
|
| (20,988 | ) |
|
| (10,786 | ) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
| $ | 66,095 |
|
| $ | 69,300 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
Consolidated Statements of Operations (Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands, except share and per-share amounts) |
| |||||||||||||
REVENUE FROM OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Refinery operations |
| $ | 79,466 |
|
| $ | 41,929 |
|
| $ | 206,467 |
|
| $ | 120,185 |
|
Tolling and terminaling |
|
| 924 |
|
|
| 1,001 |
|
|
| 2,777 |
|
|
| 3,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from operations |
|
| 80,390 |
|
|
| 42,930 |
|
|
| 209,244 |
|
|
| 123,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil, fuel use, and chemicals |
|
| 78,312 |
|
|
| 41,789 |
|
|
| 204,594 |
|
|
| 118,292 |
|
Other conversion costs |
|
| 1,802 |
|
|
| 2,611 |
|
|
| 5,609 |
|
|
| 7,872 |
|
Total cost of goods sold |
|
| 80,114 |
|
|
| 44,400 |
|
|
| 210,203 |
|
|
| 126,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
| 276 |
|
|
| (1,470 | ) |
|
| (959 | ) |
|
| (2,765 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEH operating fee |
|
| 126 |
|
|
| 169 |
|
|
| 381 |
|
|
| 506 |
|
Other operating expenses |
|
| 83 |
|
|
| 58 |
|
|
| 187 |
|
|
| 164 |
|
General and administrative expenses |
|
| 649 |
|
|
| 684 |
|
|
| 1,919 |
|
|
| 1,859 |
|
Depletion, depreciation and amortization |
|
| 693 |
|
|
| 690 |
|
|
| 2,079 |
|
|
| 1,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of operations |
|
| 1,551 |
|
|
| 1,601 |
|
|
| 4,566 |
|
|
| 4,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (1,275 | ) |
|
| (3,071 | ) |
|
| (5,525 | ) |
|
| (7,286 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easement, interest and other income |
|
| 0 |
|
|
| 70 |
|
|
| 2 |
|
|
| 170 |
|
Interest and other expense |
|
| (1,654 | ) |
|
| (1,652 | ) |
|
| (4,722 | ) |
|
| (5,104 | ) |
Gain on extinguishment of debt |
|
| 0 |
|
|
| 0 |
|
|
| 43 |
|
|
| 0 |
|
Total other expense |
|
| (1,654 | ) |
|
| (1,582 | ) |
|
| (4,677 | ) |
|
| (4,934 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (2,929 | ) |
|
| (4,653 | ) |
|
| (10,202 | ) |
|
| (12,220 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (15 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
| $ | (2,929 | ) |
| $ | (4,653 | ) |
| $ | (10,202 | ) |
| $ | (12,235 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.23 | ) |
| $ | (0.37 | ) |
| $ | (0.80 | ) |
| $ | (0.98 | ) |
Diluted |
| $ | (0.23 | ) |
| $ | (0.37 | ) |
| $ | (0.80 | ) |
| $ | (0.98 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,534,493 |
|
Diluted |
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,534,493 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
| Table of Contents |
Financial Statements |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands except share amounts) |
| |||||
|
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 106 |
|
| $ | 9 |
|
Restricted cash |
|
| 0 |
|
|
| 48 |
|
Accounts receivable, net |
|
| 143 |
|
|
| 126 |
|
Prepaid expenses and other current assets |
|
| 1,732 |
|
|
| 2,433 |
|
Deposits |
|
| 110 |
|
|
| 110 |
|
Inventory |
|
| 5,810 |
|
|
| 3,098 |
|
Total current assets |
|
| 7,901 |
|
|
| 5,824 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
| 59,274 |
|
|
| 59,923 |
|
Operating lease right-of-use assets, net |
|
| 288 |
|
|
| 332 |
|
Surety bonds |
|
| 230 |
|
|
| 230 |
|
Total long-term assets |
|
| 59,792 |
|
|
| 60,485 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 67,693 |
|
| $ | 66,309 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt less unamortized debt issue costs, current portion (in default) |
| $ | 43,004 |
|
| $ | 42,953 |
|
Long-term debt, related party, current portion (in default) |
|
| 18,087 |
|
|
| 20,042 |
|
Interest payable (in default) |
|
| 8,493 |
|
|
| 8,689 |
|
Interest payable, related party (in default) |
|
| 3,614 |
|
|
| 3,454 |
|
Accounts payable |
|
| 2,356 |
|
|
| 2,548 |
|
Accounts payable, related party |
|
| 155 |
|
|
| 155 |
|
Current portion of lease liabilities |
|
| 220 |
|
|
| 215 |
|
Income taxes payable |
|
| 41 |
|
|
| 0 |
|
Accrued expenses and other current liabilities |
|
| 4,855 |
|
|
| 6,225 |
|
Total current liabilities |
|
| 80,825 |
|
|
| 84,281 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Asset retirement obligations |
|
| 3,494 |
|
|
| 3,461 |
|
Long-term lease liabilities, net of current |
|
| 99 |
|
|
| 156 |
|
Unearned contract renewal income |
|
| 1,090 |
|
|
| 1,200 |
|
Long-term debt, net of current portion |
|
| 2,334 |
|
|
| 838 |
|
Total long-term liabilities |
|
| 7,017 |
|
|
| 5,655 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
| 87,842 |
|
|
| 89,936 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514 shares issued at both March 31, 2022 and December 31, 2021)(1) |
|
| 127 |
|
|
| 127 |
|
Additional paid-in capital |
|
| 38,457 |
|
|
| 38,457 |
|
Accumulated deficit |
|
| (58,733 | ) |
|
| (62,211 | ) |
TOTAL STOCKHOLDERS' DEFICIT |
|
| (20,149 | ) |
|
| (23,627 | ) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
| $ | 67,693 |
|
| $ | 66,309 |
|
(1) | Blue Dolphin has 20,000,000 shares of common stock, par value $0.01 per share, and 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. There are 12,693,514 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2022 │Page 12 |
| Table of Contents |
Financial Statements |
Consolidated Statements of Cash FlowsOperations (Unaudited) (Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | (10,202 | ) |
| $ | (12,235 | ) |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
used in operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization |
|
| 2,079 |
|
|
| 1,992 |
|
Deferred income tax |
|
| 0 |
|
|
| 15 |
|
Amortization of debt issue costs |
|
| 96 |
|
|
| 316 |
|
Guaranty fees paid in kind |
|
| 456 |
|
|
| 457 |
|
Related-party interest expense paid in kind |
|
| 826 |
|
|
| 361 |
|
Deferred revenues and expenses |
|
| (207 | ) |
|
| (295 | ) |
Loss (gain) on issuance of shares |
|
| 0 |
|
|
| (80 | ) |
Gain on extinguishment of debt |
|
| (43 | ) |
|
| 0 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
| ||
Accounts receivable |
|
| 151 |
|
|
| 243 |
|
Accounts receivable, related party |
|
| 0 |
|
|
| 1,364 |
|
Prepaid expenses and other current assets |
|
| 2,133 |
|
|
| 659 |
|
Deposits and other assets |
|
| 14 |
|
|
| 34 |
|
Inventory |
|
| (26 | ) |
|
| 783 |
|
Accounts payable, accrued expenses and other liabilities |
|
| 5,141 |
|
|
| 4,184 |
|
Accounts payable, related party |
|
| 0 |
|
|
| 6 |
|
Net cash used in operating activities |
|
| (418 | ) |
|
| (2,196 | ) |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| 0 |
|
|
| (1,085 | ) |
Net cash used in investing activities |
|
| 0 |
|
|
| (1,085 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
|
| 500 |
|
|
| 300 |
|
Payments on debt |
|
| (13 | ) |
|
| (2,351 | ) |
Net activity on related-party debt |
|
| 209 |
|
|
| 5,502 |
|
Net cash provided by financing activities |
|
| 696 |
|
|
| 3,451 |
|
Net change in cash, cash equivalents, and restricted cash |
|
| 1,114 |
|
|
| 170 |
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
|
| 1,111 |
|
|
| 668 |
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
| $ | 2,225 |
|
| $ | 838 |
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Financing of line of credit via related-party debt |
| $ | 2,317 |
|
| $ | 1,789 |
|
Line of credit financed by offsetting tank leases less interest |
| $ | 971 |
|
| $ | 273 |
|
Issuance of shares for services and/or to extinguish debt |
| $ | 0 |
|
| $ | 120 |
|
Conversion of related-party notes to common stock |
| $ | 0 |
|
| $ | 148 |
|
Interest paid |
| $ | 727 |
|
| $ | 1,980 |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands, except share and per-share amounts) |
| |||||
REVENUE FROM OPERATIONS |
|
|
|
|
|
| ||
Refinery operations |
| $ | 109,757 |
|
| $ | 58,483 |
|
Tolling and terminaling |
|
| 926 |
|
|
| 930 |
|
|
|
|
|
|
|
|
|
|
Total revenue from operations |
|
| 110,683 |
|
|
| 59,413 |
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
Crude oil, fuel use, and chemicals |
|
| 102,393 |
|
|
| 57,783 |
|
Other conversion costs |
|
| 1,684 |
|
|
| 1,840 |
|
Total cost of goods sold |
|
| 104,077 |
|
|
| 59,623 |
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
| 6,606 |
|
|
| (210 | ) |
|
|
|
|
|
|
|
|
|
COST OF OPERATIONS |
|
|
|
|
|
|
|
|
LEH operating fee, related party |
|
| 126 |
|
|
| 124 |
|
Other operating expenses |
|
| 11 |
|
|
| 54 |
|
General and administrative expenses |
|
| 624 |
|
|
| 658 |
|
Depreciation and amortization |
|
| 701 |
|
|
| 693 |
|
Accretion of asset retirement obligations |
|
| 33 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Total cost of operations |
|
| 1,495 |
|
|
| 1,529 |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
| 5,111 |
|
|
| (1,739 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easement, interest and other income |
|
| 0 |
|
|
| 2 |
|
Interest and other expense |
|
| (1,592 | ) |
|
| (1,480 | ) |
Gain on extinguishment of debt |
|
| 0 |
|
|
| 43 |
|
Total other expense |
|
| (1,592 | ) |
|
| (1,435 | ) |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
| 3,519 |
|
|
| (3,174 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| (41) |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
| $ | 3,478 |
|
| $ | (3,174 | ) |
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.27 |
|
| $ | (0.25 | ) |
Diluted |
| $ | 0.27 |
|
| $ | (0.25 | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 12,693,514 |
|
|
| 12,693,514 |
|
Diluted |
|
| 12,693,514 |
|
|
| 12,693,514 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2022 │Page 13 |
| Table of Contents |
Financial Statements |
Consolidated Statements of Cash Flows (Unaudited)
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net income (loss) |
| $ | 3,478 |
|
| $ | (3,174 | ) |
Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
used in operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization |
|
| 701 |
|
|
| 693 |
|
Accretion of asset retirement obligations |
|
| 33 |
|
|
| 0 |
|
Amortization of debt issue costs |
|
| 51 |
|
|
| 32 |
|
Guaranty fees paid in kind |
|
| 152 |
|
|
| 152 |
|
Related-party interest expense paid in kind |
|
| 277 |
|
|
| 225 |
|
Deferred revenue and expenses |
|
| (110 | ) |
|
| 3 |
|
Gain on extinguishment of debt |
|
| 0 |
|
|
| (43 | ) |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (17 | ) |
|
| 44 |
|
Prepaid expenses and other current assets |
|
| 701 |
|
|
| 2,504 |
|
Deposits and other assets |
|
| 0 |
|
|
| 14 |
|
Inventory |
|
| (2,712 | ) |
|
| (37 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| (1,617 | ) |
|
| (913 | ) |
Accounts payable, related party |
|
| 0 |
|
|
| 0 |
|
Net cash provided by operating activities |
|
| 937 |
|
|
| (500 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
| 1,500 |
|
|
| 0 |
|
Payments on debt |
|
| (4 | ) |
|
| (6 | ) |
Net activity on related-party debt |
|
| (2,384 | ) |
|
| (36 | ) |
Net cash used in financing activities |
|
| (888 | ) |
|
| (42 | ) |
Net change in cash, cash equivalents, and restricted cash |
|
| 49 |
|
|
| (542 | ) |
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
|
| 57 |
|
|
| 1,111 |
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
| $ | 106 |
|
| $ | 569 |
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Non-cash operating activities |
|
|
|
|
|
|
|
|
Financing of line of credit via related-party debt |
| $ | 0 |
|
| $ | 873 |
|
Amended Pilot Line of Credit offset by tank lease payments |
| $ | 0 |
|
| $ | 576 |
|
Interest paid |
| $ | 1,051 |
|
| $ | 287 |
|
Income taxes paid (refunded) |
| $ | 0 |
|
| $ | 0 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
Notes to Consolidated Financial Statements
(1) Organization
Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are primarily organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours”“ours,” refer to Blue Dolphin, one or more of Blue Dolphin’sits consolidated subsidiaries or all of them taken as a whole.
Affiliates
Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin propertiesassets and funds working capital requirements during periods of working capital deficits. In addition, an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Going Concern
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, and historical net losses and working capital and equity deficits, as discussed more fully below. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options mightcould include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2022 and December 31, 2021. See “Notes (3) and (10)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.
Third-Party Defaults
· | Veritex Loans |
|
|
· |
|
|
|
|
|
| |
|
|
· | Kissick Debt – Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, LE has made no payments under the subordinated Kissick Debt. To date, Mr. Kissick has taken no action due to the non-payment. As of the filing date of this report, there were defaults under the Kissick Debt related to payment of past due obligations at maturity. |
Blue Dolphin Energy Company | March 31, 2022 │Page 15 |
| Table of Contents |
Notes to Consolidated Financial Statements |
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on the trading prices of our Common Stock and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders regarding defaults and continues to actively discuss potential restructuring and refinance opportunities. See “Note (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Related-Party Defaults
As of the filing date of this report, Blue Dolphin was in default concerning past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits.
· | Notes and Loan Agreement – As of the filing date of this report, Blue Dolphin was in default concerning past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin assets, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. |
Substantial Current Debt
As of September 30, 2021, and December 31, 2020,Excluding accrued interest, we had current debt of $58.4$61.1 million and $57.7$63.0 million, respectively, consistingas of March 31, 2022 and December 31, 2021. Current debt consists of bank debt, investor debt, and related party debt, and the line of credit payable to Pilot, although the Pilot debt was subsequently repaid.debt. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2021,March 31, 2022 and December 31, 2020.2021.
Margin Volatility. OurCrude oil refining is primarily a margin-based business. To improve margins, generally improve in an environmentwe must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and refined productother feedstocks generally results in a similar increase or decrease in commodity prices and wherefor finished petroleum products, typically there is a time lag between the spread betweentwo. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and refined product prices widens. In early 2020, global and national measures takenhow fully the market adjusts to address the COVID-19 pandemic, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets. With the introduction and approval of COVID-19 vaccines and increased inoculation rates, global economic activity has shown signs of recovery in 2021. Current EIA forecasts show economic growth and mobility increases in the short term. Also, refineryreflect these changes. Unfavorable refining margins are forecasted to improve during the winter months due to projected colder winter temperatures compared to 2020 and low distillates inventory levels. However, forecasts are subject to various factors that are subject to change, including the ongoing impact of COVID-19 and related variants. As a result, we are currently unable to estimate our future financial position and results of operations. Accordingly, we believe these factors couldmay have a material adverse effect on our earnings, cash flows, and liquidity.
In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and the U.S. economy began to experience pronounced adverse effects as a result of the global outbreak. Significant progress has been made to combat COVID-19 and its multiple variants; however, it remains a global challenge and continues to have an impact on our financial results. The extent of the COVID-19 outbreak on our operational and financial performance will significantly depend on further developments, including the duration and spread of the outbreak and continued impact on our personnel and customers. While domestic demand and refining margins improved heading into 2022 and during the first quarter, we expect global market volatility to continue at least until the outbreak of COVID-19, including any new variants, stabilizes, if not longer.
In February 2022, Russia invaded neighboring Ukraine. The conflict caused turmoil in global commodity markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Sanctions imposed on Russia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results forin the remainderfirst quarter of 20212022 compared to the prior year period. Despite favorable refining margins during the first quarter, the future impact of the Russian-Ukrainian conflict on our financial position and into 2022.results of operations remains uncertain.
The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
HistoricalHistoric Net Losses and Working Capital Deficits
Net LossesIncome (Losses). Net loss We had net income of $3.5 million for the three months ended September 30, 2021, was $2.9 million, or a loss of $0.23 per share,March 31, 2022 compared to a net loss of $4.7$3.2 million or a loss of $0.37 per share, duringfor the three months ended September 30, 2020. Net lossMarch 31, 2021. The significant improvement for the ninethree months ended September 30, 2021, was $10.2 million, or a loss of $0.80 per share, compared to a net loss of $12.2 million, or a loss of $0.98 per share,March 31, 2022 resulted from improved refining margins associated with supply contraction and strong demand. While refining margins improved significantly in 2022, the general outlook for the nine months ended September 30, 2020. The improvement between both comparative periods resulted fromremainder of the year remains unclear, and we can provide no assurances that refining margins and demand recovery, commodity price improvements, and encouraging trends in pandemic containment efforts.will remain at current levels.
Blue Dolphin Energy Company | March 31, 2022 │Page 16 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Working Capital Deficits. We had $79.8$72.9 million and $72.3$78.5 million in working capital deficits at September 30, 2021,March 31, 2022 and December 31, 2020,2021, respectively. Excluding the current portion of long-term debt, we had $26.2$11.8 million and $22.6$15.5 million in working capital deficits at September 30, 2021,March 31, 2022 and December 31, 2020,2021, respectively.
Cash and cash equivalents totaled $2.2$0.1 million and $0.5$0.01 million at September 30, 2021,March 31, 2022 and December 31, 2020,2021, respectively. Restricted cash (current portion) totaled $0 and $0.05 million at both September 30, 2021,March 31, 2022 and December 31, 2020. Restricted cash, noncurrent totaled $0 and $0.5 million at September 30, 2021, and December 31, 2020, respectively.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, and historical net losses and working capital and equity deficits. If PilotTartan terminates the crude supply agreementCrude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the three-month periods ended September 30, 2021, and 2020, our refinery experienced 6 days and 8 days of downtime, respectively, due to crude deficiencies associated with COVID-19 related cash constraints. During the nine-month periods ended September 30, 2021, and 2020, our refinery experienced 11 days and 16 days of downtime, respectively.
|
|
|
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. We are currently unable to estimate the impactThe Russian conflict with Ukraine and the COVID-19 pandemic will have oncontinue to evolve, and the extent to which these events may impact our futurebusiness, financial position andcondition, liquidity, results of operations. Earlier stateoperations, and federal mandates that regulated business closures due to COVID-19 deemed our business essential,prospects will depend highly on future developments, which are very uncertain and we remained open. If future restrictive directives become necessary, we expect to continue operating. However, additional governmental mandates will likely result in business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.cannot be predicted with confidence.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, managingoptimizing inventory to avoid buildup,levels based on demand, monitoring discretionary spending, and delaying capital expenditures. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.
We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we will be able tocan obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if Veritex exercises itsthird parties exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
(2) Principles of Consolidation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements, includingwhich include Blue Dolphin and its subsidiaries, werehave been prepared underin accordance with GAAP for interim consolidated financial information accordingpursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures usuallynormally included in our audited financial statements werehave been condensed or omitted accordingpursuant to the SEC’s rules and regulations. Significant intercompany transactions werehave been eliminated in the consolidation. In management’s opinion, consolidated financial statements include all adjustments considered necessary adjustments for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.
We derived theThe consolidated balance sheet as of December 31, 2020,2021 was derived from the audited financial statements at that date. We recommend that investorsThe accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in this report together with the consolidated financial statements and notesthereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021 as filed with the SEC. Our financial and operatingOperating results for the three and nine months ended September 30, 2021, shouldMarch 31, 2022 are not necessarily indicative of the results that may be exclusively relied upon to indicate our performanceexpected for the fiscal year ending December 31, 2021,2022, or for any other period.
Significant Accounting Policies
The summary of Blue Dolphin’s significant accounting policies assists investorsof Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. WeThese accounting policies conform to GAAP and have been consistently applied these accounting policies in the preparation of our consolidated financial statements. Our accounting policies conform to GAAP.
Use of Estimates. PreparingThe preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual results could differ from those estimates. The ongoing COVID-19 pandemic and correspondingrelated governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2021,March 31, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, AROs, inventory, and related reserves, and the carrying value of long-lived assets.
Cash and Cash Equivalents. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. We maintain cash balances in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and, to date, have experienced no losses associated with these accounts.
Restricted Cash. Restricted cash, current portion primarily represents a payment reserve account held by Veritex as security for payments under a secured loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction-related expenses for completion of new petroleum storage tanks.
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
Cash and Cash Equivalents. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts.
Restricted Cash. Restricted cash, current portion reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034.
Accounts Receivable and Allowance for Doubtful Accounts.
Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. We value inventoryInventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. We record a write-down of inventory and an associated adjustment to the cost of goods sold ifIf the net realizable value of our refined products inventory declines to an amount that is less than our average cost.cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.
Property and Equipment.
Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.
Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016. Our pipelines and facilities assets are inactive. Although we planned to decommission the offshore pipelines and platform assets during 2020, decommissioningDecommissioning of these assets was delayed due to cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
Oil and Gas Properties. We account for our Our oil and gas properties are accounted for using the full-cost method of accounting. Under this method,accounting, whereby all costs associated with the acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization expensesof such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired. We fully impairedexpired, and our oil and gas properties at December 31,have been fully impaired since 2011.
CIP. CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. We capitalize theseThese expenditures are capitalized as incurred. We depreciate CIP whenDepreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
For operating leases, we record lease rental paymentscost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Blue Dolphin Energy Company | March 31, 2022 │Page 18 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. When the product is not lifted immediately (billUnder bill and hold arrangements),arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.
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Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer. The fixed cost under the customer’s tank storage agreement does not include ancillary service fees. We consider ancillary services as a separate performance obligation under the tank storage agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a straight-line basis over the term of the supply contract.
Income Taxes. We determine deferred income taxes based on: (i) temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities and (ii) operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which we expect the differences to reverse. Our provision for income taxes consists of our current tax liability and the change in deferred income tax assets and liabilities.
Management uses significant judgment in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to assess the realizability of deferred tax assets. We weigh whether there is a more than 50% probability of realizing a portion or all the deferred tax assets. Realization depends on the generation of future taxable income before the expiration of any NOL carryforwards. We record a valuation allowance against deferred income tax assets if there is a more than 50% probability of not realizing some portion of the asset. We recognize an uncertain tax positions benefit in our financial statements if deferred tax assets meet a minimum recognition threshold. First, we determine whether there is a more than 50% probability that our income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If we meet the criteria, we record a benefit in the financial statements equal to the largest amount greater than 50% likely to be realized upon settlement with taxing authorities.
A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended March 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of March 31, 2022 and December 31, 2021. In addition, we have NOL carryforwards that remain available for future use. See “Note (14)(13)” to our consolidated financial statements for more information related to income taxes.
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we re-assess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.
Blue Dolphin Energy Company | March 31, 2022 │Page 19 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Commodity price market volatility associated with the COVID-19 pandemic and the Russian conflict with Ukraine could affect the value of certain of our long-lived assets. Management evaluated our refinery and facilities assets for impairment as of September 30,December 31, 2021. We did not record any impairment of our refinery and facilitieslong-lived assets for the periods presented. However, impairment may be required in the future if losses continue to be material, or as new opportunities arise, such as reconfiguration of the Nixon refinery into a renewable fuels facility.
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities;Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and seabeds.sea beds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (12)(11)” to our consolidated financial statements for additional information related to AROs.
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Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (15)(14)” to our consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritative SEC content. During the three and nine months ended September 30, 2021,March 31, 2022, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective.
OtherNo new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
(3) Related-Party Transactions
Affiliate Operational Agreements Summary
Blue Dolphin and certain of its subsidiaries are parties to several operational agreements with Affiliates. Management believes that these related-party agreements are arm’s-length transactions.Affiliates, including the Amended and Restated Operating Agreement, BDSC-LEH Office Sub-Lease Agreement, and the Jet Fuel Sales Agreement.
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Working Capital
We have historically dependedrelied on Affiliates for funding when revenue from operations and availability under bank facilities arewere insufficient to meet our liquidity and working capital needs. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party.
Related-Party Long-Term Debt
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(1) The original principal amount of the BDPL-LEH Loan Agreement was $4.0 million.
(2)As a condition for our secured loan agreements, Veritex required Jonathan Carroll to guarantee repayment of borrowed funds and accrued interest personally. Mr. Carroll receives guaranty fees under the guaranty fee agreements. Fees are payable 50% in cash and 50% in Common Stock. We accrue payment of the Common Stock portion quarterly. For the foreseeable future, management does not intend to pay Mr. Carroll the cash portion due to Blue Dolphin’s working capital deficits. The cash portion will continue to accrue and increase the outstanding principal balance owed to Mr. Carroll under the March Carroll Note.
Guarantees, Security, and Defaults
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Covenants
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the March Carroll Note, March Ingleside Note, or June LEH Note.
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both September 30, 2021,March 31, 2022 and December 31, 2020.2021.
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
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| September 30, |
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| December 31, |
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| 2020 |
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LEH |
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June LEH Note (in default) |
| $ | 12,644 |
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| $ | 9,446 |
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BDPL-LEH Loan Agreement (in default) |
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| 7,294 |
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| 6,814 |
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LEH Total |
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| 19,938 |
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| 16,260 |
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Ingleside |
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March Ingleside Note (in default) |
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| 1,059 |
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| 1,013 |
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Jonathan Carroll |
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March Carroll Note (in default) |
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| 2,115 |
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| 1,551 |
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| 23,112 |
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| 18,824 |
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Less: Long-term debt, related party, current portion (in default) |
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| (19,818 | ) |
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| (16,010 | ) |
Less: Accrued interest payable, related party (in default) |
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| (3,294 | ) |
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| (2,814 | ) |
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| $ | 0 |
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| $ | 0 |
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Consolidated Statements of Operations.
Total revenue from operations.
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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| 2021 |
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| 2020 |
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| 2020 |
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Refinery operations |
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LEH |
| $ | 24,214 |
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| 30.1 | % |
| $ | 11,942 |
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| 27.8 | % |
| $ | 61,271 |
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| $ | 34,244 |
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| 27.8 | % |
Third-Parties |
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| 55,252 |
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| 68.7 | % |
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| 29,987 |
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| 69.9 | % |
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| 145,196 |
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| 69.4 | % |
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| 85,941 |
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| 69.6 | % |
Tolling and terminaling |
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Third-Parties |
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| 924 |
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| 1,001 |
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| 2.3 | % |
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| 2,777 |
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| 3,214 |
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| $ | 80,390 |
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| $ | 42,930 |
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| $ | 209,244 |
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| $ | 123,399 |
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Interest expense.
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| Three Months Ended September 30, |
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| 2020 |
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| 2020 |
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Jonathan Carroll |
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Guaranty Fee Agreements |
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First Term Loan Due 2034 |
| $ | 108 |
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| $ | 108 |
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| $ | 323 |
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| $ | 324 |
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Second Term Loan Due 2034 |
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| 45 |
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| 45 |
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| 134 |
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| 134 |
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March Carroll Note (in default) |
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| 33 |
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| 23 |
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| 94 |
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| 66 |
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LEH |
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BDPL-LEH Loan Agreement (in default) |
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| 160 |
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| 160 |
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| 480 |
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| 480 |
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June LEH Note (in default) |
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| 293 |
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| 102 |
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| 690 |
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| 245 |
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Ingleside |
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March Ingleside Note (in default) |
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| 14 |
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| 15 |
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| 42 |
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| 50 |
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| $ | 653 |
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| $ | 453 |
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| $ | 1,763 |
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| $ | 1,299 |
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Blue Dolphin Energy Company |
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| Table of Contents |
Notes to Consolidated Financial Statements |
Other.Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
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| March 31, |
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| 2021 |
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LEH |
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June LEH Note (in default) |
| $ | 10,507 |
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| $ | 12,672 |
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BDPL-LEH Loan Agreement |
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| 7,614 |
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| 7,454 |
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LEH Total |
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| 18,121 |
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| 20,126 |
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Ingleside |
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March Ingleside Note (in default) |
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| 1,075 |
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| 1,066 |
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Jonathan Carroll |
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March Carroll Note (in default) |
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| 2,505 |
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| 2,304 |
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| 21,701 |
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| 23,496 |
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Less: Long-term debt, related party, current portion, in default |
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Less: Accrued interest payable, related party (in default) |
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Currently, management does not intend to pay Mr. Carroll the cash portion owed under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement due to Blue Dolphin’s working capital deficits. The cash portion will continue to accrue and increase the outstanding principal balance owed to Mr. Carroll under the March Carroll Note. See “Notes (1) and (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Consolidated Statements of Operations.
Total revenue from operations.
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| Three Months Ended March 31, |
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Refinery operations |
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LEH |
| $ | 34,518 |
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| 31.2 | % |
| $ | 16,080 |
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| 27.1 | % |
Third-Parties |
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| 75,239 |
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| 68.0 | % |
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| 42,403 |
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| 71.3 | % |
Tolling and terminaling |
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Third-Parties |
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| 926 |
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| 0.8 | % |
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| 930 |
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| 1.6 | % |
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| $ | 110,683 |
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| $ | 59,413 |
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Interest expense.
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| Three Months Ended March 31, |
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| 2021 |
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Jonathan Carroll |
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Guaranty Fee Agreements |
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LE Term Loan Due 2034 |
| $ | 107 |
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| $ | 108 |
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LRM Term Loan Due 2034 |
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| 45 |
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| 45 |
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March Carroll Note (in default) |
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| 49 |
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| 29 |
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LEH |
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BDPL-LEH Loan Agreement (in default) |
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| 160 |
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| 160 |
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June LEH Note (in default) |
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| 206 |
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| 182 |
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Ingleside |
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March Ingleside Note (in default) |
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| 21 |
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| 14 |
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| $ | 588 |
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| $ | 538 |
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Other. BDSC received sublease income from LEH totaling $0.01 million for both the three months ended September 30, 2021, and 2020. Sublease income totaled $0.03 million for both the nine-monththree-month periods ended September 30, 2021,March 31, 2022 and 2020.
2021. The LEH operating fee totaled approximately $0.1 million and $0.2 millionwas flat for theboth three-month periods ended September 30,March 31, 2022 and 2021, and 2020, respectively. The LEH operating fee totaledtotaling approximately $0.4 million and $0.5 million for the nine months ended September 30, 2021, and 2020, respectively. Decreases in both periods was the result of lower operating costs.$0.1 million.
Blue Dolphin Energy Company | March 31, 2022 │Page 21 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(4) Revenue and Segment Information
We have two reportable business segments: (i) refinery operations, focused on refining and marketing petroleum products at the Nixon facility, and (ii) tolling and terminaling, focused on tolling and storing petroleum products for third parties at the Nixon facility. Corporate and other includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company |
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Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2021 |
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| 2020 |
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| 2021 |
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| 2020 |
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Net revenue (excluding intercompany fees and sales) |
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Refinery operations |
| $ | 79,466 |
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| $ | 41,929 |
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| $ | 206,467 |
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| $ | 120,185 |
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Tolling and terminaling |
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| 924 |
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| 1,001 |
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| 2,777 |
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| 3,214 |
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Total net revenue |
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| 80,390 |
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| 42,930 |
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| 209,244 |
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| 123,399 |
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Intercompany fees and sales |
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Refinery operations |
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| (650 | ) |
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| (595 | ) |
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| (1,797 | ) |
|
| (1,618 | ) |
Tolling and terminaling |
|
| 650 |
|
|
| 595 |
|
|
| 1,797 |
|
|
| 1,618 |
|
Total intercompany fees |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation costs and expenses(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (79,593 | ) |
|
| (43,691 | ) |
|
| (208,936 | ) |
|
| (124,942 | ) |
Tolling and terminaling |
|
| (521 | ) |
|
| (709 | ) |
|
| (1,267 | ) |
|
| (1,222 | ) |
Corporate and other |
|
| (83 | ) |
|
| (58 | ) |
|
| (187 | ) |
|
| (164 | ) |
Total operation costs and expenses |
|
| (80,197 | ) |
|
| (44,458 | ) |
|
| (210,390 | ) |
|
| (126,328 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment contribution margin (deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (777 | ) |
|
| (2,357 | ) |
|
| (4,266 | ) |
|
| (6,375 | ) |
Tolling and terminaling |
|
| 1,053 |
|
|
| 887 |
|
|
| 3,307 |
|
|
| 3,610 |
|
Corporate and other |
|
| (83 | ) |
|
| (58 | ) |
|
| (187 | ) |
|
| (164 | ) |
Total segment contribution margin (deficit) |
|
| 193 |
|
|
| (1,528 | ) |
|
| (1,146 | ) |
|
| (2,929 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (282 | ) |
|
| (414 | ) |
|
| (848 | ) |
|
| (1,045 | ) |
Tolling and terminaling |
|
| (70 | ) |
|
| (132 | ) |
|
| (206 | ) |
|
| (268 | ) |
Corporate and other |
|
| (423 | ) |
|
| (307 | ) |
|
| (1,246 | ) |
|
| (1,052 | ) |
Total general and administrative expenses |
|
| (775 | ) |
|
| (853 | ) |
|
| (2,300 | ) |
|
| (2,365 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (302 | ) |
|
| (301 | ) |
|
| (906 | ) |
|
| (883 | ) |
Tolling and terminaling |
|
| (340 | ) |
|
| (338 | ) |
|
| (1,020 | ) |
|
| (956 | ) |
Corporate and other |
|
| (51 | ) |
|
| (51 | ) |
|
| (153 | ) |
|
| (153 | ) |
Total depreciation and amortization |
|
| (693 | ) |
|
| (690 | ) |
|
| (2,079 | ) |
|
| (1,992 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other non-operating expenses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (747 | ) |
|
| (679 | ) |
|
| (2,053 | ) |
|
| (2,171 | ) |
Tolling and terminaling |
|
| (384 | ) |
|
| (599 | ) |
|
| (1,284 | ) |
|
| (1,985 | ) |
Corporate and other |
|
| (523 | ) |
|
| (304 | ) |
|
| (1,340 | ) |
|
| (778 | ) |
Total interest and other non-operating expenses, net |
|
| (1,654 | ) |
|
| (1,582 | ) |
|
| (4,677 | ) |
|
| (4,934 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| (2,108 | ) |
|
| (3,751 | ) |
|
| (8,073 | ) |
|
| (10,474 | ) |
Tolling and terminaling |
|
| 259 |
|
|
| (182 | ) |
|
| 797 |
|
|
| 401 |
|
Corporate and other |
|
| (1,080 | ) |
|
| (720 | ) |
|
| (2,926 | ) |
|
| (2,147 | ) |
Total loss before income taxes |
|
| (2,929 | ) |
|
| (4,653 | ) |
|
| (10,202 | ) |
|
| (12,220 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (15 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (2,929 | ) |
| $ | (4,653 | ) |
| $ | (10,202 | ) |
| $ | (12,235 | ) |
(1) Operation costs and expenses include cost of goods sold. Also, operation costs and expenses within: (i) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (ii) corporate and other includes expenses related to BDSC, BDPC, and BDPL.
(2)General and administrative expenses within refinery operations include the LEH operating fee.
|
|
| Table of Contents |
Notes to Consolidated Financial Statements |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Refinery operations |
| $ | 0 |
|
| $ | 3 |
|
| $ | 0 |
|
| $ | 295 |
|
Tolling and terminaling |
|
| 0 |
|
|
| 174 |
|
|
| 0 |
|
|
| 790 |
|
Corporate and other |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Total capital expenditures |
| $ | 0 |
|
| $ | 177 |
|
| $ | 0 |
|
| $ | 1,085 |
|
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
|
| September 30, |
|
| December 31, |
|
| Three Months Ended |
| |||||||
|
| 2021 |
|
| 2020 |
|
| March 31, |
| |||||||
|
| (in thousands) |
|
| 2022 |
|
| 2021 |
| |||||||
Identifiable assets |
|
|
|
|
| |||||||||||
|
| (in thousands) |
| |||||||||||||
Net revenue (excluding intercompany fees and sales) |
|
|
|
|
| |||||||||||
Refinery operations |
| $ | 109,757 |
| $ | 58,483 |
| |||||||||
Tolling and terminaling |
|
| 926 |
|
|
| 930 |
| ||||||||
Total net revenue |
|
| 110,683 |
|
|
| 59,413 |
| ||||||||
|
|
|
|
|
| |||||||||||
Intercompany fees and sales |
|
|
|
|
| |||||||||||
Refinery operations |
| (653 | ) |
| (566 | ) | ||||||||||
Tolling and terminaling |
|
| 653 |
|
|
| 566 |
| ||||||||
Total intercompany fees |
|
| 0 |
|
|
| 0 |
| ||||||||
|
|
|
|
|
| |||||||||||
Operation costs and expenses(1) |
|
|
|
|
| |||||||||||
Refinery operations |
| $ | 44,939 |
| $ | 48,521 |
|
| (103,458 | ) |
| (59,289 | ) | |||
Tolling and terminaling |
| 19,878 |
| 18,722 |
|
| (619 | ) |
| (334 | ) | |||||
Corporate and other |
|
| 1,278 |
|
|
| 2,057 |
|
|
| (11 | ) |
|
| (54 | ) |
Total identifiable assets |
| $ | 66,095 |
|
| $ | 69,300 |
| ||||||||
Total operation costs and expenses |
|
| (104,088 | ) |
|
| (59,677 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Segment contribution margin (deficit) |
|
|
|
|
| |||||||||||
Refinery operations |
| 5,646 |
| (1,372 | ) | |||||||||||
Tolling and terminaling |
| 960 |
| 1,162 |
| |||||||||||
Corporate and other |
|
| (11 | ) |
|
| (54 | ) | ||||||||
Total segment contribution margin (deficit) |
|
| 6,595 |
|
|
| (264 | ) | ||||||||
|
|
|
|
|
| |||||||||||
General and administrative expenses(2) |
|
|
|
|
| |||||||||||
Refinery operations |
| (282 | ) |
| (301 | ) | ||||||||||
Tolling and terminaling |
| (70 | ) |
| (68 | ) | ||||||||||
Corporate and other |
|
| (431 | ) |
|
| (413 | ) | ||||||||
Total general and administrative expenses |
|
| (783 | ) |
|
| (782 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Depreciation and amortization |
|
|
|
|
| |||||||||||
Refinery operations |
| (307 | ) |
| (302 | ) | ||||||||||
Tolling and terminaling |
| (342 | ) |
| (340 | ) | ||||||||||
Corporate and other |
|
| (52 | ) |
|
| (51 | ) | ||||||||
Total depreciation and amortization |
|
| (701 | ) |
|
| (693 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Interest and other non-operating expenses, net(3) |
|
|
|
|
| |||||||||||
Refinery operations |
| (717 | ) |
| (598 | ) | ||||||||||
Tolling and terminaling |
| (418 | ) |
| (452 | ) | ||||||||||
Corporate and other |
|
| (457 | ) |
|
| (385 | ) | ||||||||
Total interest and other non-operating expenses, net |
|
| (1,592 | ) |
|
| (1,435 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Income (loss) before income taxes |
|
|
|
|
| |||||||||||
Refinery operations |
| 4,340 |
| (2,573 | ) | |||||||||||
Tolling and terminaling |
| 130 |
| 302 |
| |||||||||||
Corporate and other |
|
| (951 | ) |
|
| (903 | ) | ||||||||
Total income (loss) before income taxes |
|
| 3,519 |
|
|
| (3,174 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Income tax expense |
| (41) |
| 0 |
| |||||||||||
|
|
|
|
|
|
|
|
| ||||||||
Net income (loss) |
| $ | 3,478 |
|
| $ | (3,174 | ) | ||||||||
(1) | Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL. |
(2) | General and administrative expenses within refinery operations include the LEH operating fee and accretion of asset retirement obligations. |
(3) | Corporate and other within interest and other non-operating expenses, net primarily reflects interest expense for the LE Amended and Restated Guaranty Fee Agreement, LRM Amended and Restated Guaranty Fee Agreement, June LEH Note, March Carroll Note, and March Ingleside Note. |
Blue Dolphin Energy Company | March 31, 2022 │Page 23 |
| Table of Contents |
Notes to Consolidated Financial Statements |
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Capital expenditures |
|
|
|
|
|
| ||
Refinery operations |
| $ | 0 |
|
| $ | 0 |
|
Tolling and terminaling |
|
| 0 |
|
|
| 0 |
|
Corporate and other |
|
| 0 |
|
|
| 0 |
|
Total capital expenditures |
| $ | 0 |
|
| $ | 0 |
|
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Identifiable assets |
|
|
|
|
|
| ||
Refinery operations |
| $ | 48,741 |
|
| $ | 45,186 |
|
Tolling and terminaling |
|
| 17,434 |
|
|
| 18,527 |
|
Corporate and other |
|
| 1,518 |
|
|
| 1,839 |
|
Total identifiable assets |
| $ | 67,693 |
|
| $ | 65,552 |
|
(5) Concentration of Risk Concentration
Bank Accounts
Financial instruments that potentially subject us to concentrations of risk concentrations consist primarily of cash, trade receivables and accounts payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At September 30, 2021,March 31, 2022 and December 31, 2020, we had2021, our cash balances (including restricted cash) that exceededdid not exceed the FDIC insurance limit per depositor of $1.9 million and $0.6 million, respectively.depositor.
Key Supplier
The operationOperation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot.Tartan. The volume-based crude supply agreementCrude Supply Agreement expires when Pilot sells uswe receive 24.8 million net bbls of crude oil. After that, the crude supply agreementCrude Supply Agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”)renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any Renewal Term. Effective June 30, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate.renewal term. As of September 30, 2021,March 31, 2022, we received approximately 10.1 million bbls, or 40.4%, of the contracted total volume we received under the crude supply agreement was approximately 7.9 million bbls.Crude Supply Agreement.
Pilot alsoRelated to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under twoa terminal services agreements.agreement dated as of June 1, 2019. Under the terminal services agreements, Pilot storesagreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of theThe terminal services agreement expired April 30, 2020, the agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, and historical net losses and working capital and equity deficits. If PilotTartan terminates the crude supply agreementCrude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the three-month periods ended September 30, 2021, and 2020, our refinery experienced 6 days and 8 days of downtime, respectively, due to crude deficiencies associated with COVID-19 related cash constraints. During the nine-month periods ended September 30, 2021, and 2020, our refinery experienced 11 days and 16 days of downtime, respectively.
Due to NPS’ default under the Amended Pilot Line of Credit, Pilot applied payments owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit from June 2020 to September 2021. For both three-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $0.6 million. For the nine-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $1.7 million and $0.8 million, respectively.
The amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.2 million and $0.4 million, respectively, for the three months ended September 30, 2021, and 2020. For the nine months ended September 30, 2021, and 2020, interest was $0.7 million and $1.1 million, respectively. See “Note (1) Organization – Going Concern,” “Note (11) Line of Credit Payable,” and “Note (17) Subsequent Events” to our consolidated financial statements for additional disclosures related to the Amended Pilot Line of Credit.
|
|
|
Significant Customers
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2021 |
|
| 3 |
|
|
| 69 | % |
| $ | 0 |
|
September 30, 2020 |
|
| 4 |
|
|
| 80 | % |
| $ | 0 |
|
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at March 31, |
| |||
|
|
|
|
|
|
|
|
|
| |||
March 31, 2022 |
|
| 3 |
|
|
| 64.9 | % |
| $ | 0 |
|
March 31, 2021 |
|
| 4 |
|
|
| 90.4 | % |
| $ | 0 |
|
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. The Affiliate accounted for 30%31.2% and 28%27.1% of total revenue from operations for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both September 30,March 31, 2022 and 2021, and 2020, respectively.
Nine Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2021 |
|
| 3 |
|
|
| 72 | % |
| $ | 0 |
|
September 30, 2020 |
|
| 4 |
|
|
| 82 | % |
| $ | 0 |
|
The Affiliate accounted for 29% and 28% of total revenue from operations for the nine months ended September 30, 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both September 30, 2021, and 2020, respectively.
Outstanding amounts under certain related party agreements can significantly vary from period to period based on the timing of sales and payments. Concerning the Amended and Restated Operating Agreement, we add any amount that remains outstanding at the end of the quarter to the June LEH Note. We classify the June LEH Note within long-term debt, related party, current portion (in default) on the consolidated balance sheets. At September 30, 2021, and December 31, 2020, the total amount we owed to LEH under long-term debt, related-party agreements including accrued interest totaled $19.9 million and $16.3 million, respectively. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to transactions with Affiliates.
Customer Concentration. All of our customers are refined petroleum product wholesalers. This customer concentration may impact our overall exposure to credit risk, either positively or negatively, as our customers are likely similarly affected by economic changes. Exposure risk includes, but is not limited to, uncertainties related to the COVID-19 pandemic and the volatility in the global oil markets. Historically, we have had no significant problems collecting our accounts receivable, including from many of our pre-pay customers.
Refined Product Sales. Our market is the Gulf Coast region of the U.S., which the EIA represents as Petroleum Administration for Defense District 3 (PADD 3). We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||||||||||||||
|
| (in thousands, except percent amounts) |
|
| (in thousands, except percent amounts) |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
LPG mix |
| $ | 9 |
|
|
| 0 | % |
| $ | 0 |
|
|
| 0 | % |
| $ | 21 |
|
|
| 0 | % |
| $ | 0 |
|
|
| 0 | % |
Naphtha |
|
| 20,440 |
|
|
| 22.3 | % |
|
| 7,847 |
|
|
| 18.7 | % |
|
| 49,928 |
|
|
| 23.2 | % |
|
| 22,523 |
|
|
| 18.7 | % |
Jet fuel |
|
| 24,212 |
|
|
| 30.6 | % |
|
| 11,942 |
|
|
| 28.5 | % |
|
| 61,271 |
|
|
| 29.2 | % |
|
| 34,244 |
|
|
| 28.5 | % |
HOBM |
|
| 17,607 |
|
|
| 23.4 | % |
|
| 12,196 |
|
|
| 29.1 | % |
|
| 49,282 |
|
|
| 24.9 | % |
|
| 31,077 |
|
|
| 25.9 | % |
AGO |
|
| 17,198 |
|
|
| 23.7 | % |
|
| 9,944 |
|
|
| 23.7 | % |
|
| 45,965 |
|
|
| 22.7 | % |
|
| 32,341 |
|
|
| 26.9 | % |
|
| $ | 79,466 |
|
|
| 100.0 | % |
| $ | 41,929 |
|
|
| 100.0 | % |
| $ | 206,467 |
|
|
| 100.0 | % |
| $ | 120,185 |
|
|
| 100.0 | % |
An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to Affiliate transactions.
Blue Dolphin Energy Company |
|
|
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Prepaid insurance |
| $ | 935 |
|
| $ | 1,182 |
|
Prepaid crude oil and condensate |
|
| 360 |
|
|
| 2,249 |
|
Prepaid easement renewal fees |
|
| 82 |
|
|
| 99 |
|
Other prepaids |
|
| 54 |
|
|
| 34 |
|
|
| $ | 1,431 |
|
| $ | 3,564 |
|
(7) Inventory
Inventory as of the dates indicated consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Crude oil and condensate |
| $ | 536 |
|
| $ | 463 |
|
AGO |
|
| 259 |
|
|
| 133 |
|
Naphtha |
|
| 142 |
|
|
| 120 |
|
Chemicals |
|
| 108 |
|
|
| 271 |
|
Propane |
|
| 27 |
|
|
| 15 |
|
LPG mix |
|
| 16 |
|
|
| 6 |
|
HOBM |
|
| 0 |
|
|
| 54 |
|
|
| $ | 1,088 |
|
| $ | 1,062 |
|
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated, consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Refinery and facilities |
| $ | 72,184 |
|
| $ | 72,184 |
|
Land |
|
| 566 |
|
|
| 566 |
|
Other property and equipment |
|
| 903 |
|
|
| 903 |
|
|
|
| 73,653 |
|
|
| 73,653 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depletion, depreciation, and amortiation |
|
| (17,145 | ) |
|
| (15,220 | ) |
|
|
| 56,508 |
|
|
| 58,433 |
|
|
|
|
|
|
|
|
|
|
CIP |
|
| 4,065 |
|
|
| 4,064 |
|
|
| $ | 60,573 |
|
| $ | 62,497 |
|
We capitalize the interest cost incurred on funds used to construct property, plant, and equipment. We record capitalized interest as part of the asset it relates to, and we depreciate the capitalized interest over the asset’s useful life. The capitalized interest cost included in CIP was $0 at September 30, 2021, and December 31, 2020.
We funded capital expenditures for expansion at the Nixon facility through long-term debt from Veritex, revenue from operations, and working capital from Affiliates. At September 30, 2021, and December 31, 2020, we reflected Veritex-derived amounts not used for capital expenditures in restricted cash (current and non-current portions) on our consolidated balance sheets.
|
|
| Table of Contents |
Notes to Consolidated Financial Statements |
Concentration of Customers. Our customer base is concentrated on refined petroleum product wholesalers. This customer concentration may impact our overall exposure to credit risk, either positively or negatively, as our customers are likely similarly affected by economic changes. This includes the uncertainties related to the COVID-19 pandemic and the associated volatility in the global commodities markets. Historically, we have had no significant problems collecting our accounts receivable.
Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to Mexico and other countries. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
|
| (in thousands, except percent amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
LPG mix |
| $ | 0 |
|
|
| 0.0 | % |
| $ | 6 |
|
|
| 0.0 | % |
Naphtha |
|
| 27,754 |
|
|
| 25.2 | % |
|
| 14,224 |
|
|
| 24.3 | % |
Jet fuel |
|
| 34,518 |
|
|
| 30.3 | % |
|
| 16,080 |
|
|
| 27.5 | % |
HOBM |
|
| 23,075 |
|
|
| 22.0 | % |
|
| 15,663 |
|
|
| 26.8 | % |
AGO |
|
| 24,410 |
|
|
| 22.5 | % |
|
| 12,510 |
|
|
| 21.4 | % |
|
| $ | 109,757 |
|
|
| 100.0 | % |
| $ | 58,483 |
|
|
| 100.0 | % |
An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (15)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements, as well as “Part I, Item 1A. Risk Factors” in our (9) Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC for additional disclosures related to Affiliate risk.
Accrued(6) Prepaid Expenses and Other Current LiabilitiesAssets
AccruedPrepaid expenses and other current liabilitiesassets as of the dates indicated consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Unearned revenue from contracts with customers |
| $ | 7,713 |
|
| $ | 3,421 |
|
Unearned contract renewal income |
|
| 400 |
|
|
| 500 |
|
Insurance |
|
| 385 |
|
|
| 541 |
|
Other payable |
|
| 282 |
|
|
| 252 |
|
Taxes payable |
|
| 210 |
|
|
| 58 |
|
Board of director fees payable |
|
| 198 |
|
|
| 100 |
|
Customer deposits |
|
| 173 |
|
|
| 10 |
|
|
| $ | 9,361 |
|
| $ | 4,882 |
|
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Prepaid crude oil and condensate |
| $ | 932 |
|
| $ | 1,368 |
|
Prepaid insurance |
|
| 680 |
|
|
| 953 |
|
Prepaid easement renewal fees |
|
| 71 |
|
|
| 76 |
|
Other prepaids |
|
| 49 |
|
|
| 36 |
|
|
| $ | 1,732 |
|
| $ | 2,433 |
|
(10)(7) Third-Party Long-Term DebtInventory
AsInventory as of the filing datedates indicated consisted of this report, we are in default under our Veritex loans and the Kissick Debt. See ‘Defaults’ within this Note (10) for more information related to these defaults.following:
Loan Agreements Summary
Loan Description |
Parties | Original Principal Amount (in millions) |
Maturity Date |
Monthly Principal and Interest Payment |
Interest Rate |
Loan Purpose |
Veritex Loans(1) |
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) | LE Veritex | $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements |
LRM Term Loan Due 2034 (in default) | LRM Veritex | $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements |
Kissick Debt (in default)(2)(3) | LE Kissick | $11.7 | Jan 2018 | No payments to date; payment rights subordinated | 16.00% | Working capital; reduced arbitration award payable to GEL |
SBA EIDLs |
|
|
|
|
|
|
BDEC Term Loan Due 2051(4) | Blue Dolphin SBA | $0.5 | Jun 2051 | $0.003 million | 3.75% | Working capital |
LE Term Loan Due 2050(5) | LE SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital |
NPS Term Loan Due 2050(5) | NPS SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital |
Equipment Loan Due 2025(6) | LE Texas First | $0.07 | Oct 2025 | $0.0013 million | 4.50% | Equipment Lease Conversion |
(1)Veritex placed proceeds in a disbursement account for the payment of construction-related expenses. We reflected the amounts held in the disbursement account as restricted cash (current portion) and restricted cash, noncurrent on our consolidated balance sheets. At September 30, 2021, restricted cash (current portion) was $0.05 million, and restricted cash, noncurrent, was $0. At December 31, 2020, restricted cash (current portion) was $0.05 million, and restricted cash, noncurrent, was $0.5 million.
(2)LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount of $8.0 million. John Kissick currently holds this debt. Under a 2017 amendment, the parties amended the Kissick Debt to increase the principal amount by $3.7 million; LE used the additional principal to reduce the arbitration award payable to GEL by $3.6 million.
(3)Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.
(4)For disaster loans made in 2021, the SBA initially deferred payments for the first twelve (12) months. The SBA later extended the payment deferral period from twelve (12) months to eighteen (18) months; under the extension, the first payment is due in December 2022; interest accrues during the deferral period. The BDEC Term Loan Due 2051 is not forgivable.
(5)For disaster loans made in 2020, the SBA initially deferred payments for the first twelve (12) months. The SBA later extended the payment deferral period from twelve (12) months to twenty-four (24) months; under the extension, the first payment is due in September 2022; interest accrues during the deferral period. The LE Term Loan Due 2050 and NPS Term Loan Due 2050 are not forgivable.
(6)In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The equipment rental agreement matured in May 2020. In October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase. We use the backhoe at the Nixon facility.
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
HOBM |
| $ | 3,265 |
|
| $ | 1,749 |
|
Naphtha |
|
| 1,107 |
|
|
| 189 |
|
Crude oil and condensate |
|
| 954 |
|
|
| 660 |
|
AGO |
|
| 305 |
|
|
| 338 |
|
Chemicals |
|
| 116 |
|
|
| 121 |
|
Propane |
|
| 43 |
|
|
| 27 |
|
LPG mix |
|
| 20 |
|
|
| 14 |
|
|
| $ | 5,810 |
|
| $ | 3,098 |
|
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Refinery and facilities |
| $ | 72,583 |
|
| $ | 72,583 |
|
Land |
|
| 566 |
|
|
| 566 |
|
Other property and equipment |
|
| 903 |
|
|
| 903 |
|
|
|
| 74,052 |
|
|
| 74,052 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortiation |
|
| (18,444 | ) |
|
| (17,795 | ) |
|
|
| 55,608 |
|
|
| 56,257 |
|
|
|
|
|
|
|
|
|
|
CIP |
|
| 3,666 |
|
|
| 3,666 |
|
|
| $ | 59,274 |
|
| $ | 59,923 |
|
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Unearned revenue from contracts with customers |
| $ | 3,066 |
|
| $ | 4,388 |
|
Accrued fines and penalties |
|
| 407 |
|
|
| 407 |
|
Unearned contract renewal income |
|
| 400 |
|
|
| 400 |
|
Board of director fees payable |
|
| 263 |
|
|
| 230 |
|
Other payable |
|
| 207 |
|
|
| 218 |
|
Taxes payable |
|
| 203 |
|
|
| 136 |
|
Customer deposits |
|
| 173 |
|
|
| 173 |
|
Insurance |
|
| 136 |
|
|
| 273 |
|
|
| $ | 4,855 |
|
| $ | 6,225 |
|
(10) Third-Party Long-Term Debt
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt, (outstandingincluding outstanding principal and accrued interest, and late fees), as of the dates indicated was as follows:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Veritex Loans |
|
|
|
|
|
|
|
|
|
| ||||||
LE Term Loan Due 2034 (in default) |
| $ | 23,827 |
| $ | 22,840 |
|
| $ | 23,580 |
| $ | 23,789 |
| ||
LRM Term Loan Due 2034 (in default) |
| 9,881 |
| 9,473 |
|
| 9,777 |
| 9,861 |
| ||||||
Kissick Debt (in default) |
| 10,011 |
| 9,413 |
|
| 10,409 |
| 10,210 |
| ||||||
GNCU Loan |
|
|
|
|
| |||||||||||
NPS Term Loan Due 2031 (in default) |
| 9,976 |
| 10,094 |
| |||||||||||
SBA EIDLs |
|
|
|
|
|
|
|
|
|
| ||||||
BDEC Term Loan Due 2051 |
| 507 |
| 0 |
|
| 2,025 |
| 512 |
| ||||||
LE Term Loan Due 2050 |
| 155 |
| 152 |
|
| 158 |
| 156 |
| ||||||
NPS Term Loan Due 2050 |
| 155 |
| 152 |
|
| 158 |
| 156 |
| ||||||
Equipment Loan Due 2025 |
|
| 59 |
|
|
| 71 |
|
|
| 49 |
|
|
| 53 |
|
|
| 44,595 |
| 42,101 |
|
| 56,132 |
| 54,831 |
| ||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Current portion of long-term debt, net |
| (33,788 | ) |
| (33,692 | ) |
| (43,004 | ) |
| (42,953 | ) | ||||
Less: Unamortized debt issue costs |
| (1,653 | ) |
| (1,749 | ) |
| (2,301 | ) |
| (2,351 | ) | ||||
Less: Accrued interest payable (in default) |
|
| (8,311 | ) |
|
| (6,305 | ) |
|
| (8,493 | ) |
|
| (8,689 | ) |
|
| $ | 843 |
|
| $ | 355 |
|
| $ | 2,334 |
|
| $ | 838 |
|
Blue Dolphin Energy Company | March 31, 2022 │Page 26 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
|
| June 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Veritex Loans |
|
|
|
|
|
|
|
|
|
| ||||||
LE Term Loan Due 2034 (in default) |
| $ | 1,674 |
| $ | 1,674 |
|
| $ | 1,674 |
| $ | 1,674 |
| ||
LRM Term Loan Due 2034 (in default) |
| 768 |
| 768 |
|
| 768 |
| 768 |
| ||||||
GNCU Loan |
|
|
|
|
| |||||||||||
NPS Term Loan Due 2031 (in default) |
| 730 |
| 730 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Less: Accumulated amortization |
|
| (789 | ) |
|
| (693 | ) |
|
| (871 | ) |
|
| (821 | ) |
|
| $ | 1,653 |
|
| $ | 1,749 |
|
| $ | 2,301 |
|
| $ | 2,351 |
|
Amortization expense was $0.05 million and $0.03 million for both three-month periodsthe three months ended September 30,March 31, 2022 and 2021, and 2020. Amortization expense was $0.09 million for both nine-month periods ended September 30, 2021, and 2020.respectively.
Accrued interest and late fees related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Kissick Debt (in default) |
| $ | 5,033 |
|
| $ | 4,435 |
|
Veritex Loans |
|
|
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) |
|
| 2,282 |
|
|
| 1,295 |
|
LRM Term Loan Due 2034 (in default) |
|
| 979 |
|
|
| 571 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 7 |
|
|
| 0 |
|
LE Term Loan Due 2050 |
|
| 5 |
|
|
| 2 |
|
NPS Term Loan Due 2050 |
|
| 5 |
|
|
| 2 |
|
|
|
| 8,311 |
|
|
| 6,305 |
|
Less: Accrued interest payable (in default) |
|
| (8,311 | ) |
|
| (6,305 | ) |
Long-term Interest Payable, Net of Current Portion |
| $ | - |
|
| $ | - |
|
|
|
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Kissick Debt (in default) |
| $ | 5,431 |
|
| $ | 5,232 |
|
Veritex Loans |
|
|
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) |
|
| 2,129 |
|
|
| 2,338 |
|
LRM Term Loan Due 2034 (in default) |
|
| 875 |
|
|
| 959 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 17 |
|
|
| 136 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 25 |
|
|
| 12 |
|
LE Term Loan Due 2050 |
|
| 8 |
|
|
| 6 |
|
NPS Term Loan Due 2050 |
|
| 8 |
|
|
| 6 |
|
|
|
| 8,493 |
|
|
| 8,689 |
|
Less: Accrued interest payable (in default) |
|
| (8,493 | ) |
|
| (8,689 | ) |
Long-term Interest Payable, Net of Current Portion |
| $ | 0 |
|
| $ | 0 |
|
|
Payment Deferments
Veritex Loans. In 2020, LEAs reflected in the table above and LRM were each granted a two-month payment deferment on their respective Veritex loans. The moratorium was from April 2020 to June 2020. LE and LRM were not required to make payments during the deferment period. However, interest continued to accrue at the stated rates of the loans. In July 2020, Veritex re-amortized the loans to recast principal and interest payments. Veritex also reinstated previous defaults. See ‘Defaults’ withinelsewhere in this “Note (10) for additional disclosures related to defaults.
SBA EIDLs. The SBA EIDLs include a payment deferral period. Interest accrues during the deferral period. The deferral period for the BDEC Term Loan Due 2051 is the first eighteen (18) months; principal and interest payments beginreport, we are in December 2022. The deferral period for the LE Term Loan Due 2051 and the NPS Term Loan Due 2050 is the first twenty-four (24) months; principal and interest payments begin in September 2022.
Guarantees and Security
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
(1)Veritex required Jonathan Carroll personally guarantee repayment of borrowed funds and accrued interest fordefault under the LE Term Loan Due 2034, and LRM Term Loan Due 2034.
(2)Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.
(3)In November 2020, Pilot notified NPS and guarantors that LE and NPS’ entry into the LE Term Loan Due 2050 and2034, NPS Term Loan Due 20502031, and the Kissick Debt. Defaults under these secured loan agreements permit the lender to declare the amounts owed under these loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. The debt associated with these loan agreements was classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2022 and December 31, 2021.
Any exercise by third parties of their rights and remedies under our secured loan agreements will have a breachmaterial adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the Amended Pilot Linetrading price of Credit; Pilot demanded full repaymentour Common Stock and the value of the Pilot Obligations, including through the usean investment in our Common Stock could significantly decrease, which could lead to holders of SBA EIDLour Common Stock losing their investment in our Common Stock in its entirety.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan proceeds. Pilot also notified the SBA that the liens securing theagreements, either upon maturity or if accelerated, (ii) LE, Term Loan Due 2050LRM, and NPS Term Loan Due 2050 were juniorwill be able to liens securingrefinance or restructure the Pilot Obligations. Whiledebt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the SBA acknowledged this pointtrading prices of our Common Stock, and indicated a willingness to subordinate these loans to Pilot, Pilot has taken no further actions ason the value of the filing datean investment in our Common Stock, and holders of this report.
The USDA, acting throughour Common Stock could lose their investment in our Common Stock in its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders. Each USDA guarantee is a full faith and credit obligation of the U.S., with the USDA guaranteeing up to 100% of the principal amount. USDA regulations require that Veritex, as the lender, retain both the guaranteed and unguaranteed portions of the loan, service the entire underlying loan, and remain mortgage or secured party of record. The same collateral must secure both the guaranteed and unguaranteed parts of the loan with equal lien priority. Borrowers cannot pay or otherwise subordinate the USDA-guaranteed portion of a loan to the unguaranteed portion.entirety. See “Notes (3)(1) and (16)(3)” to our consolidated financial statements for additional disclosures related to Affiliateinformation regarding defaults under our secured loan agreements and transactions, including long-term debt guarantees.
Covenants
The Veritex loanstheir potential effects on our business, financial condition, and SBA EIDLs contain representations and warranties, affirmative and negative covenants, and eventsresults of default that we consider usual and customary for credit facilities of this type. There are no covenants associated with the Kissick Debt and the Equipment Loan Due 2025.operations.
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
Defaults
|
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| ||
|
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|
|
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|
|
Veritex Loans. As reflected in the table above and elsewhere in this filing, the LE Term Loan Due 2034 and LRM Term Loan Due 2034 are in default. Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights concerning collateral securing obligors’ obligations under these loan agreements, and exercise any other rights and remedies available. We classified the debt associated with the LE Term Loan Due 2034 and LRM Term Loan Due 2034 within the current portion of long-term debt on our consolidated balance sheets at September 30, 2021, and December 31, 2020. For both three-month periods ended September 30, 2021, and 2020, principal and interest payments to Veritex totaled $0. For the nine-month periods ended September 30, 2021, and 2020, principal and interest payments to Veritex totaled $0 and $0.3 million, respectively.
As the first lienholder, any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease. These adverse market actions could lead to holders of our common stock losing their investment in its entirety.
Kissick Debt. Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, LE has made no payments under the subordinated Kissick Debt. Mr. Kissick has taken no action due to the non-payment.
We cannot assure investors that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex and Mr. Kissick, either upon maturity or if accelerated, (ii) we will be able to refinance or restructure the payments of the debt, or (iii) lenders will provide future default waivers. See “Notes (1) and (11)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
(11) Line of Credit Payable
On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, NPS was in default as of September 30, 2021, and December 31, 2020. This debt was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2021, and December 31, 2020. See “Note (17)” for additional disclosures related to the Line of Credit Payable.
Line of Credit Agreement Summary
Line of Credit Description | Original Principal Amount (in millions) |
Maturity Date |
Monthly Principal and Interest Payment |
Interest Rate |
Loan Purpose |
|
|
|
|
|
|
Amended Pilot Line of Credit (in default) | $13.0 | May 2020 | ---- | 14.00% | Settlement payment to GEL, NPS purchase of crude oil from Pilot, and working capital |
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Amounts owed under the Amended Pilot Line of Credit, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Amended Pilot Line of Credit (in default) |
| $ | 4,827 |
|
| $ | 8,145 |
|
|
|
|
|
|
|
|
|
|
Less: Interest payable, short-term |
|
| (73 | ) |
|
| (103 | ) |
|
| $ | 4,754 |
|
| $ | 8,042 |
|
|
|
|
Guarantees and Security
|
|
|
|
|
|
In an Agreement Regarding Attornment of Tank Leases dated April 30, 2019, between Veritex, LE, NPS, and Pilot, Veritex, in its capacity as a secured lender of LE and LRM, agreed to permit the continued performance of LE’s obligations under a particular tank lease agreement if Veritex were to foreclose on LE property that NPS was leasing from LE so long as LE met certain conditions. The effectiveness of the Agreement Regarding Attornment of Tank Leases was subject to certain conditions, including the agreement and concurrence of the USDA that the Agreement Regarding Attornment of Tank Leases does not impair or void the LE Term Loan Due 2034 and LRM Term Loan Due 2034 or any associated guarantees. Veritex used commercially reasonable efforts to obtain such USDA concurrence. However, to date, such USDA concurrence has not been provided.
Covenants
The Amended Pilot Line of Credit contains customary affirmative and negative covenants and events of default.
Defaults
|
|
|
|
|
|
NPS was in default under the Amended Pilot Line of Credit at September 30, 2021, and December 31, 2020. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit.
In May 2020, when NPS failed to pay off the Amended Pilot Line of Credit at maturity, Pilot sent NPS (as borrower), and LRM, LEH, LE, and Blue Dolphin (each a guarantor and collectively guarantors), a notice demanding immediate payment. Under the Amended Pilot Line of Credit, on May 4, 2020, the Pilot Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Pilot Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity.
Due to NPS’ default under the Amended Pilot Line of Credit, Pilot applied payments owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit from June 2020 to September 2021. For both three-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $0.6 million. For the nine-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $1.7 million and $0.8 million, respectively.
The amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.2 million and $0.4 million, respectively, for the three months ended September 30, 2021, and 2020. For the nine months ended September 30, 2021, and 2020, interest was $0.7 million and $1.1 million, respectively. See “Note (1) Organization – Going Concern,” “Note (11) Line of Credit Payable,” and “Note (17) Subsequent Events” to our consolidated financial statements for additional disclosures related to the Amended Pilot Line of Credit.
In November 2020, Pilot notified NPS and guarantors that LE and NPS’ entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit; Pilot demanded full repayment of the Pilot Obligations, including through the use of SBA EIDL loan proceeds. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to liens securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate these loans to Pilot, Pilot has taken no further actions as of the filing date of this report.
Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.
(12) AROs
Refinery and Facilities
We believe we haveManagement has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believeManagement believes that theserefinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an assetassets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement obligation forof these assets, whenwe will estimate the cost of performing the retirement activities and record a definitive obligation arises and retirement dates are evident.liability for the fair value of that cost using present value techniques.
|
|
|
Pipelines and Facilities and Oil and Gas Properties
We have AROs associated with decommissioning our pipelines and facilities assets, andas well as plugging and abandoning our oil and gas properties. When we placed these assets in service, weWe recorded a discounted liability for the fair value of thean ARO with a corresponding increase to the carrying value of the related long-lived asset. Subsequently,asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipmentequipment. Although these assets were previously fully accreted, during the twelve months ended December 31, 2021 we determined that the estimated future cost and recognizedtiming of decommissioning these assets changed. As a result, we recorded an increase in liability at December 31, 2021, and we will recognize accretion expense relating to the discounted liability over the remaining life of the asset. The ARO liability was fully accreted at September 30, 2021, and December 31, 2020. See “Note (16)” to our consolidated financial statements for disclosures related to decommissioning our offshore pipelines and platform assets and related risks.over their remaining life.
ARO liability as of the dates indicated was as follows:
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2021 |
| 2020 |
|
| 2022 |
|
| 2021 |
| |||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
AROs, at the beginning of the period |
| $ | 2,370 |
| $ | 2,565 |
|
| $ | 3,461 |
| $ | 2,370 |
| ||
Liabilities settled |
|
| 0 |
|
|
| (195 | ) | ||||||||
Changes in estimates of existing obligations |
| 0 |
| 1,091 |
| |||||||||||
Accretion expense |
|
| 33 |
|
|
| 0 |
| ||||||||
|
| 2,370 |
| 2,370 |
|
| 3,494 |
| 3,461 |
| ||||||
Less: AROs, current portion |
|
| (2,370 | ) |
|
| (2,370 | ) |
|
| 0 |
|
|
| 0 |
|
Long-term AROs, at the end of the period |
| $ | - |
|
| $ | - |
|
| $ | 3,494 |
|
| $ | 3,461 |
|
Liabilities settled reflect preparation costs in the period associated withSee “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets.assets and related risks.
(13)(12) Lease Obligations
Lease Obligations
Operating Lease
Office Lease. BDSC has an office lease related to our headquarters office in Houston, Texas. The 68-month operating lease expires in August 2023. Under the lease, BDSC has an option to extend the lease term for an additional five (5) year period. To exercise the option, BDSC must provide lessor notice at least twelve (12) months before the end of the current term.
In March 2021, BDSC defaulted on the office lease due to non-payment.non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement to cure BDSC’s office lease default. Under the terms of a fourth amendment to the May arrangement, BDSCoffice lease, Building Lessor agreed to pay Building Lessordefer BDSC’s past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning in June 2021, and continuing through lease expiration The Past Due Obligations are subject to an annual percentage rate of 4.50%. As revised, BDSC’s monthly base rent plusincluding the prorated portion of the Past Due Obligations iswas $0.02 million.
Building Lessor notified BDSC madein an October 11, 2021 letter of a new default under the June 2021 revisedoffice lease payment. However, asdue to non-payment of rent. As of the filing date of this report, BDSC was in default related to required monthly lease paymentsbase rent including Past Due Obligations, as well as for July through November 2021. In an October 11, 2021, letter, Building Lessor notified BDSC of its new default under the office lease due to non-payment.proportionate base costs. Default under the office lease permits Building Lessor to declare the amounts owed under the office lease immediately due and payable, exercise its rights concerning collateral securing obligors’ obligations under the office lease, including property placed in or upon the leased premises, and exercise any other rights and remedies available. Although BDSC intendsand Lessor are in discussions with regard to requirements to cure the leasedefault. Although management desires to cure the default, wethere can providebe no assurance that ourmanagement’s efforts will be successful.
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.01$0.008 million for both the three months ended September 30, 2021, and 2020. Sublease income totaled $0.03 million for both nine-monththree-month periods ended September 30, 2021,March 31, 2022, and 2020.2021. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
|
|
| September 30, |
| December 31, |
|
|
|
| March 31, |
| December 31, |
| ||||||||||
|
| Balance Sheet Location |
| 2021 |
|
| 2020 |
|
| Balance Sheet Location |
|
| 2022 |
|
| 2021 |
| ||||||
|
|
| (in thousands) |
|
|
|
| (in thousands) |
| ||||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Operating lease ROU assets |
| Operating lease ROU assets |
| $ | 787 |
| $ | 787 |
|
| Operating lease ROU assets |
| $ | 787 |
| $ | 787 |
| |||||
Less: Accumulated amortization on operating lease assets |
| Operating lease ROU assets |
| (412 | ) |
| (289 | ) |
| Operating lease ROU assets |
| (499 | ) |
| (455 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total lease assets |
|
|
|
| 375 |
|
|
| 498 |
|
|
|
|
|
| 288 |
|
|
| 332 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Operating lease |
| Current portion of lease liabilities |
|
| 209 |
|
|
| 194 |
|
| Current portion of lease liabilities |
|
|
| 220 |
|
|
| 215 |
| ||
|
|
|
| 209 |
| 194 |
|
|
|
|
|
|
|
| |||||||||
Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Operating lease |
| Long-term lease liabilities, net of current |
|
| 211 |
|
|
| 370 |
|
| Long-term lease liabilities, net of current |
|
|
| 99 |
|
|
| 156 |
| ||
Total lease liabilities |
|
| $ | 420 |
|
| $ | 564 |
|
|
|
|
| $ | 319 |
|
| $ | 371 |
| |||
Weighted average remaining lease term in years |
| |||
Operating lease |
|
|
| |
Weighted average discount rate |
|
|
|
|
Operating lease |
|
| 8.25 | % |
Finance leases |
|
| 8.25 | % |
The following table presents information related to leasinglease costs incurred for operating and finance leases:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating lease costs |
| $ | 51 |
|
| $ | 51 |
|
| $ | 154 |
|
| $ | 154 |
|
Finance lease costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of leased assets |
|
| 0 |
|
|
| 3 |
|
|
| 0 |
|
|
| 13 |
|
Interest on lease liabilities |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 3 |
|
Total lease cost |
| $ | 51 |
|
| $ | 54 |
|
| $ | 154 |
|
| $ | 170 |
|
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Operating lease costs |
| $ | 51 |
|
| $ | 51 |
|
Total lease cost |
| $ | 51 |
|
| $ | 51 |
|
The table below presents supplemental cash flow information related to leases as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Cash paid for amounts included in the measurement |
|
|
|
|
|
|
|
|
|
|
|
| ||||
of lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating cash flows for operating lease |
| $ | 49 |
|
| $ | 44 |
|
| $ | 148 |
|
| $ | 130 |
|
Operating cash flows for finance leases |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | 4 |
|
Financing cash flows for finance leases |
| $ | 0 |
|
| $ | 5 |
|
| $ | 0 |
|
| $ | 17 |
|
|
|
|
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
| (in thousands) |
| |||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
Operating cash flows for operating lease |
| $ | 52 |
|
| $ | 47 |
|
As of September 30, 2021,March 31, 2022, maturities of lease liabilities for the periods indicated were as follows:
September 30, |
| Operating Lease |
| |
|
| (in thousands) |
| |
|
|
|
| |
2021 |
| $ | 209 |
|
2022 |
|
| 211 |
|
2023 |
|
| 0 |
|
|
|
|
|
|
|
| $ | 420 |
|
March 31, |
| Operating Lease |
|
| Total |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
2023 |
| $ | 220 |
|
| $ | 220 |
|
2024 |
|
| 99 |
|
|
| 99 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 319 |
|
| $ | 319 |
|
Future minimum annual lease commitments that are non-cancelable:
|
| Operating |
| |
March 31, |
| Lease |
| |
|
| (in thousands) |
| |
2023 |
| $ | 238 |
|
2024 |
|
| 101 |
|
|
| $ | 339 |
|
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
Future minimum annual lease commitments that are non-cancelable:
|
| Operating |
| |
September 30, |
| Lease |
| |
|
| (in thousands) |
| |
2021 |
| $ | 236 |
|
2022 |
|
| 220 |
|
2023 |
|
| 0 |
|
|
| $ | 456 |
|
(14) (13) Income Taxes
Tax Provision
The provision for income tax expensebenefit (expense) for the periods indicated was as follows:
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||||||||
|
| September 30, |
| September 30, |
|
| March 31, |
| ||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||||
|
| (in thousands) |
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Federal |
| $ | 0 |
| $ | 0 |
| $ | 0 |
| $ | (15 | ) |
| $ | 0 |
| $ | 0 |
| ||||
State |
| 0 |
| 0 |
| 0 |
| 0 |
|
| (41) |
| 0 |
| ||||||||||
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Federal |
| 615 |
| 975 |
| 1,782 |
| 2,566 |
|
| (1,086) |
| 667 |
| ||||||||||
State |
| 0 |
|
|
| 0 |
|
|
|
| 0 |
| 0 |
| ||||||||||
Change in valuation allowance |
| (615 | ) |
| (975 | ) |
| (1,782 | ) |
| (2,566 | ) |
| 1,086 |
| (667 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total provision for income taxes |
| $ | 0 |
|
| $ | 0 |
|
| $ | 0 |
|
| $ | (15 | ) |
| $ | (41) |
|
| $ | 0 |
|
GAAP treats TMT is treated like an income tax for financial reporting purposes.
Deferred income taxes as of the dates indicated consisted of the following:
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Deferred tax assets: |
|
|
|
|
|
| ||
NOL and capital loss carryforwards |
| $ | 16,646 |
|
| $ | 15,258 |
|
Business interest expense |
|
| 4,335 |
|
|
| 3,343 |
|
Start-up costs (crude oil and condensate processing facility) |
|
| 445 |
|
|
| 509 |
|
ARO liability/deferred revenue |
|
| 498 |
|
|
| 498 |
|
Other |
|
| 3 |
|
|
| 3 |
|
Total deferred tax assets |
|
| 21,927 |
|
|
| 19,611 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis differences in property and equipment |
|
| (7,765 | ) |
|
| (7,230 | ) |
Total deferred tax liabilities |
|
| (7,765 | ) |
|
| (7,230 | ) |
|
|
| 14,162 |
|
|
| 12,381 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
| (14,162 | ) |
|
| (12,381 | ) |
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 0 |
|
| $ | 0 |
|
|
|
|
|
| March 31, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Deferred tax assets: |
|
|
|
|
|
| ||
NOL and capital loss carryforwards |
| $ | 15,588 |
|
| $ | 16,818 |
|
Business interest expense |
|
| 4,573 |
|
|
| 4,680 |
|
Start-up costs (crude oil and condensate processing facility) |
|
| 403 |
|
|
| 424 |
|
ARO liability/deferred revenue |
|
| 734 |
|
|
| 727 |
|
Other |
|
| 18 |
|
|
| 12 |
|
Total deferred tax assets |
|
| 21,316 |
|
|
| 22,661 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis differences in property and equipment |
|
| (8,012 | ) |
|
| (7,945 | ) |
Total deferred tax liabilities |
|
| (8,012 | ) |
|
| (7,945 | ) |
|
|
| 13,304 |
|
|
| 14,716 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
| (13,304 | ) |
|
| (14,716 | ) |
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 0 |
|
| $ | 0 |
|
Deferred Income Taxes
Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.
NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition. These ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of roughly $0.6 million per year. We may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change.
NOL Carryforwards. NOL carryforwards that were generated beginning in 2018 may only used to offset 80% of taxable income and are carried forward indefinitely.
Blue Dolphin Energy Company | March 31, 2022 │Page 30 |
| Table of Contents |
Notes to Consolidated Financial Statements |
NOL Carryforwards. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the annual useIRC Section 382 limitation):
|
| Net Operating Loss Carryforward |
|
|
|
| ||||||
|
| Pre-Ownership Change |
|
| Post-Ownership Change |
|
| Total |
| |||
|
| (in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Balance at December 31, 2019 |
|
| 9,614 |
|
|
| 43,058 |
|
|
| 52,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
| 0 |
|
|
| 13,306 |
|
|
| 13,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
| $ | 9,614 |
|
| $ | 56,364 |
|
| $ | 65,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
| 0 |
|
|
| 8,331 |
|
|
| 8,331 |
|
Expiration of net operating losses |
|
| (1,718 | ) |
|
| 0 |
|
|
| (1,718 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2021 |
| $ | 7,896 |
|
| $ | 64,695 |
|
| $ | 72,591 |
|
|
| Net Operating Loss Carryforward |
|
|
|
| ||||||
|
| Pre-Ownership Change |
|
| Post-Ownership Change |
|
| Total |
| |||
|
| (in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Balance at December 31, 2020 |
|
| 9,614 |
|
|
| 56,363 |
|
|
| 65,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses used and expired |
|
| (1,717 | ) |
|
| 9,148 |
|
|
| 7,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
| $ | 7,897 |
|
| $ | 65,511 |
|
| $ | 73,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses used and expired |
|
| (5,855 | ) |
|
| 0 |
|
|
| (5,855 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2022 |
| $ | 2,042 |
|
| $ | 65,511 |
|
| $ | 67,553 |
|
Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At September 30, 2021,March 31, 2022 and December 31, 2020,2021, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of September 30, 2021,March 31, 2022 and December 31, 2020.2021.
We have NOL carryforwards that remain available for future use. At September 30, 2021,March 31, 2022 and December 31, 2020,2021, there were no uncertain tax positions for which a reserve or liability was necessary.
(14)Earnings Per Share A reconciliation between basic and diluted income per share for the periods indicated was as follows:
Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS for the three months ended March 31, 2022 and 2021 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.
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Blue Dolphin Energy Company |
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| Table of Contents |
Notes to Consolidated Financial Statements |
(15) Earnings Per Share
A reconciliation between basic and diluted income per share for the periods indicated was as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands, |
|
| (in thousands, |
| ||||||||||
|
| except share and per share amounts) |
|
| except share and per share amounts) |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (2,929 | ) |
| $ | (4,653 | ) |
| $ | (10,202 | ) |
| $ | (12,235 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
| $ | (0.23 | ) |
| $ | (0.37 | ) |
| $ | (0.80 | ) |
| $ | (0.98 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock outstanding and potential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dilutive shares of common stock |
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,693,514 |
|
|
| 12,534,493 |
|
Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS for the three and nine months ended September 30, 2021, and 2020 was the same as basic EPS; no stock options or other dilutive instruments were outstanding.
(16) Commitments and Contingencies
Amended and Restated Operating Agreement
See “Note (3)” to our consolidated financial statements for additional disclosures related to the operation and management of all Blue Dolphin propertiesassets by an Affiliate under the Amended and Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer active.useful for operations. Until such facilitiesstructures are decommissioned,abandoned or removed, lessees and rights-of-way holders mustare required to inspect and maintain them perthe assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans concerningwith respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning andpermit applications, including a safe boarding plan, for the platform. BSEE imposed a deadline of six (6) months (February 2020) to submit theby February 2020. BDPL submitted permit applications and safe boarding plan. Further,to BSEE mandated BDPL complete approved, permitted work within twelve (12) months (August 2020). BDPL timely submitted the permit applicationsin February 2020 and safe boarding plan to BOEM and BSEE on February 11, 2020; we submitted related permits to the USACOE onin March 25, 2020. Although we planned decommissioning activities for 2020, offshore weather conditions and cash constraints associated with the ongoing COVID-19 pandemic led to delays. We cannot currently estimate when decommissioning will occur.
In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to comply with the INC, and BSEE approved BDPL’s extension request. BDPL completed the structuralrequired platform surveys and resolved the INC in June 2020. Abandonment operations were delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
Financial constraints doLack of permit approvals does not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. If BDPL fails to complete decommissioning of the facilitiesoffshore pipelines and platform assets and/or remedy the INCs within a timeframe deemeddetermined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation. Such BSEE actionsdesignation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we havedid not recordedrecord a liability related to potential penalties on our consolidated balance sheetsheets as of September 30,March 31, 2022 and December 31, 2021. At both September 30, 2021,March 31, 2022 and December 31, 2020,2021, BDPL maintained $2.4$3.5 million in AROs related to decommissioningabandonment of these assets.assets, which amount does not include potential penalties.
Defaults Under Secured Loan Agreements with Third Parties and Related Parties
See “Notes (1), (3), (10), and (11)(10)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.
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|
|
Financing Agreements and Guarantees
Indebtedness. See “Notes (1), (3), (10), and (11)(10)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.
Guarantees. Affiliates provided guarantees on certain debtsdebt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount and accrued interest. Payments reduce the outstanding balances.interest, which amounts are reduced as payments are made. See “Notes (1), (3), (10), and (11)(10)” to our consolidated financial statements for additional disclosures related to Affiliate and related-partythird-party guarantees associated with indebtedness and defaults thereto.
Health, Safety and Environmental Matters
The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failure to obtain and comply with these permits or environmental, health, or safety laws generally could result in fines, penalties or other sanctions, or a revocation of our permits.
Legal Matters
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Blue Dolphin Energy Company | March 31, 2022 │Page 32 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Unresolved Matters.
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). OffshoreTo cover the various obligations of lessees operators, and rights-of-way holders are required to provideoperating in federal waters of the Gulf of Mexico, BOEM with theevaluates an operator’s financial assurance of their ability to carry out present and future abandonment obligations. Obligationsobligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. When the lessee, operator, or rights-of-way holder completesOnce plugging and abandonment work BOEM releaseshas been completed, the collateral backing the financial assurance.assurance is released by BOEM.
InBDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way. BDPL historically maintained $0.9 million in financial security. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. BecauseAlthough the IBLA is separate and independent from the agencies whose decisions it reviews, BDPL’s appeal to BOEM took considerable time to matriculate through the appeals process. Ultimately,granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that once BDPL completes abandonment operations,BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, will be significantly reduced or eliminated. In addition, BOEM’s INCs will bewhich may serve to partially or fully resolved. Although we planned decommissioning activities for 2020, offshore weather conditions andresolve the INCs. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing COVID-19 pandemic led to delays.impact of COVID-19. We cannot currently estimate when decommissioning willmay occur. Further, we cannot currently estimate when we can provide additional financial assurance (supplemental pipeline bonds).
Financial constraints and BDPL’s pending appeal of the BOEM INCs dodoes not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM requires BDPL to provide significant additional financial securityassurance (supplemental pipeline bonds) or assessesis assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we havedid not recordedrecord a liability on our consolidated balance sheetsheets as of September 30,March 31, 2022 and December 31, 2021. At both September 30, 2021,March 31, 2022 and December 31, 2020,2021, BDPL maintained approximately $0.9 million in credit and cash-backedpipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, issued to BOEM.$0.7 million was credit-backed and $0.2 million was cash-backed.
Other Legal MattersTCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January 29, 2020 to March 2, 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. However, we recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of March 31, 2022 and December 31, 2021.
Pilot Dispute Related to Set-Off Payments. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments Pilot made to Tartan arising under a product sales agreement. NPS contends the disputed amount should have been applied to the balance owed by NPS under the Amended Pilot Line of Credit. Pilot has asserted that the redirected payment was offset by accrued interest owed by NPS under the Amended Pilot Line of Credit. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are involvedcurrently in lawsuits, claims, and proceedings incidental to the conductdefault under certain of our business, includingsecured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and office lease paymentthe potential effects of such defaults mechanic’s liens, contract-related disputes, and administrative proceedings. Management communicates with all concerned parties and does not believe that these matters will have a material adverse effect on our business, financial position, earnings, or cash flows.However, we cannot assure that communications will result in a manageable outcome.condition, and results of operations. If for example, Veritex exercises itsthird parties exercise their rights and remedies due to defaults under our secured loan agreements, with them, our business, financial condition, and results of operations will be materially adversely affected.
(17) Counterparty Contract-Related DisputeSubsequent Event
NPS Term Loan Due 2031
NPS entered into. As of the filing date of this report, we were involved in a Loan Agreementcontract-related dispute with Greater Nevada Credit Union, as lender (“Lender”),Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute will have a term loanmaterial adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that management’s efforts will result in the aggregate principal amount of $10.0 million (the “NPS Loan”) effective October 1, 2021. The NPS Loan has a ten-year term with a fixed interest rate of 5.75%. The loan requires monthly interest-only payments beginning in October 2021 and continuing through the first thirty-six (36) months. After that, principal and interest payments will be due monthly through loan maturity in October 2031. We plan to use proceeds from the NPS Loan for working capital purposes.manageable outcome.
Blue Dolphin Energy Company |
|
| Table of Contents |
Notes to Consolidated Financial Statements |
NPS securedResolved Matters.
None.
(16) Subsequent Events
Sales of Unregistered Securities.
Set forth below is information regarding the NPS Loansale or issuance of shares of Common Stock by a deedus that were not registered under the Securities Act of trust lien on approximately 56 acres of land1933 and improvements owned by LE in Wilson County, Texas, a leasehold deed of trust lien on certain property leased by NPS from LE, an assignment of leases and rents, and certain personal property. The NPS Loan contains various customary terms and conditions, including representations and warranties, affirmative and negative covenants respecting the business of the partiessubsequent to the NPS Loan, financial covenants respecting debt service coverage ratio, ratio of debt to net worth and ratio of current assets to current liabilities, and events of default.
NPS Repayment of Line of Credit Payablethree months ended March 31, 2022:
On October 4, 2021, NPS repaid all obligations owedMay 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to PilotJonathan Carroll, which represents payment of the common stock component under the LE Amended Pilot Lineand Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from April 30, 2020 through March 31, 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64. Currently, management does not intend on paying Mr. Carroll the cash portion of Credit.guaranty fees due to Blue Dolphin’s working capital deficits. The payoff, which totaled approximately $5.0 million, included all outstandingcash portion will continue to accrue and be added to the principal and accrued interest . As a resultbalance of the payoff,March Carroll Note. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the loan agreementLE Amended and associated pledge agreement, subordination agreement,Restated Guaranty Fee Agreement and guaranty agreementLRM Amended and Restated Guaranty Fee Agreement.
On May 12, 2022, we also issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The average cost basis was $0.55, the low was $0.33, and the high was $0.91.
The sale and issuance of the securities were terminated.exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis providesis our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected. Investorsprojected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and the related notes containedincluded thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021, and ourQuarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2021., and June 30, 2021.
Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist ofOur subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower and approximatelywith more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
AssetsOur assets are primarily organized in two segments: ‘refinery operations’refinery operations (owned by LE) and ‘tollingtolling and terminaling services’services (owned by LRM and NPS). ‘CorporateSubsidiaries that are reflected in corporate and other’ includesother include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see “Part I, Item 1. Financial Statements – Note (4)”.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin one or more of Blue Dolphin’s subsidiaries, or all of them takenwas formed in 1986 as a wholeDelaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.
Affiliates
Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin propertiesassets and fundshas historically funded working capital requirements during periods of working capital deficits. In addition,deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements – Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Business Operations UpdateGeneral Trends and Outlook
General Business Environment. In early 2020, globalWe anticipate that our business will continue to be affected by the following key factors. Our expectations are based on assumptions made by us and national measures takeninformation currently available to addressus. To the COVID-19 pandemic, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil pricesextent our underlying assumptions about, or interpretations of, available information prove to decline sharply. In addition, actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets. With the introduction and approval of COVID-19 vaccines and increased inoculation rates, global economic activity has shown signs of recovery in 2021.be incorrect, our actual results may vary materially from our expected results.
Our Business.COVID-19 Pandemic Current EIA forecasts show economic growth. In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and mobility increasesthe U.S. economy began to experience pronounced adverse effects as a result of the global outbreak. Significant progress has been made to combat COVID-19 and its multiple variants; however, it remains a global challenge and continues to have an impact on our financial results. The extent of the COVID-19 outbreak on our operational and financial performance will significantly depend on further developments, including the duration and spread of the outbreak and continued impact on our personnel and customers. While domestic demand and refining margins improved heading into 2022 and during the quarter ended March 31, 2022, we expect global market volatility to continue at least until the outbreak of COVID-19, including any new variants, stabilizes, if not longer. The extent to which the pandemic may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Russian-Ukrainian Conflict. In February 2022, Russia invaded neighboring Ukraine. The conflict caused turmoil in global markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Sanctions imposed on Russia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the short term. Also, refineryfirst quarter of 2022 compared to the prior year. Despite favorable refining margins are forecasted to improve during the winter months due to projected colder winter temperatures compared to 2020 and low distillates inventory levels. However, forecasts are subject to various factors that are subject to change, includingfirst quarter, the ongoingfuture impact of COVID-19the Russian-Ukrainian Conflict on our financial position and related variants. Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, delaying capital spending, and monitoring discretionary spending and nonessential costs. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-siteresults of operations are required. We also incentivize personnel to receive the COVID-19 vaccine.remains uncertain.
Liquidity and Access to Capital Markets. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund ouractively explore additional financing to meet working capital needs whenor refinance and restructure debt. During the three months ended March 31, 2022 and 2021, we experiencesuccessfully secured an additional $1.5 million and $0, respectively, in working capital deficits, we will meet regulatory requirements to provide additional financialthrough CARES Act loans. There can be no assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets,that we will be able to obtainraise additional financingcapital on commercially reasonableacceptable terms, or at all,all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or margins on our refined products willmeet debt payment obligations. In the long term, we may not be favorable. Further, if Veritex exercises its rights and remedies under our secured loan agreements,able to withstand business disruptions, such as those related to COVID-19 or the Russian conflict with Ukraine, or execute our business financial condition, and results of operations will be materially adversely affected.strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operations.
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
Going Concern
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, and historical net losses and working capital deficits, as discussed more fully below.and equity deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options mightcould include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
Defaults Under Secured Loan AgreementsBusiness Opportunities. We are currentlyAlthough we regularly engage in defaultdiscussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations, in the foreseeable future we anticipate that such activities will likely only relate to renewable energy-related projects. Management determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under certain of our secured loan agreements, with third parties and related parties. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.
Third-Party Defaults
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Related-Party Defaults
As of the filing date of this report, Blue Dolphin was in default concerning past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits.
Substantial Current Debt
As of September 30, 2021, and December 31, 2020, we hadsubstantial current debt, of $58.4 million and $57.7 million, respectively, consisting of bank debt, related party debt, and the line of credit payable to Pilot, although the Pilot debt was subsequently repaid. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2021, and December 31, 2020.
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Margin Volatility. Our refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widens. In early 2020, global and national measures taken to address the COVID-19 pandemic, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets. With the introduction and approval of COVID-19 vaccines and increased inoculation rates, global economic activity has shown signs of recovery in 2021. Current EIA forecasts show economic growth and mobility increases in the short term. Also, refinery margins are forecasted to improve during the winter months due to projected colder winter temperatures compared to 2020 and low distillates inventory levels. However, forecasts are subject to various factors that are subject to change, including the ongoing impact of COVID-19 and related variants. As a result, we are currently unable to estimate our future financial position and results of operations. Accordingly, we believe these factors could have a material adverse effect on our financial results for the remainder of 2021 and into 2022.
Historic Net Losses and Working Capital Deficits.
Net Losses
Net loss for the three months ended September 30, 2021, was $2.9 million, or a loss of $0.23 per share, compared to a net loss of $4.7 million, or a loss of $0.37 per share, during the three months ended September 30, 2020. Net loss for the nine months ended September 30, 2021, was $10.2 million, or a loss of $0.80 per share, compared to a net loss of $12.2 million, or a loss of $0.98 per share, for the nine months ended September 30, 2020. The improvement between both comparative periods resulted from demand recovery, commodity price improvements, and encouraging trends in pandemic containment efforts.
Working Capital Deficits
We had $79.8 million and $72.3 million in working capital deficits at September 30, 2021, and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had $26.2 million and $22.6 million in working capital deficits at September 30, 2021, and December 31, 2020, respectively.
Cash and cash equivalents totaled $2.2 million and $0.5 million at September 30, 2021, and December 31, 2020, respectively. Restricted cash (current portion) totaled $0.05 million at both September 30, 2021, and December 31, 2020. Restricted cash, noncurrent totaled $0 and $0.5 million at September 30, 2021, and December 31, 2020, respectively.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, margin volatility, and historical net losses and working capital and equity deficits. If Pilot terminates the crude supply agreement or terminal services agreement,A ‘going concern’ opinion likely limits our ability to acquirefinance our operations through options such as selling equity or incurring additional debt. Our ability to continue as a going concern depends on sustained positive operating margins and working capital, purchase of crude oil and condensate, could be adversely affected.and payments on long-term debt. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, orwe are unable to meet these requirements, we may not receive sufficient amountshave to meet our needs. During the three-month periods ended September 30, 2021, and 2020, our refinery experienced 6 days and 8 days of downtime, respectively, due to crude deficiencies associated with COVID-19 related cash constraints. During the nine-month periods ended September 30, 2021, and 2020, our refinery experienced 11 days and 16 days of downtime, respectively.cease operating or seek bankruptcy protection.
Operating RisksChanges in Regulations.
Successful executionOur operations and the operations of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory,customers have been, and safety needs and having favorable margins on refined products. We are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. Earlier state and federal mandates that regulated business closures due to COVID-19 deemed our business essential, and we remained open. If future restrictive directives become necessary, we expect to continue operating. However, additional governmental mandates will likely result in business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.
We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fundbe, affected by political developments and federal, state, tribal, local, and other laws and regulations that are becoming more numerous, more stringent, and more complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other GHG emissions, and renewable fuels standards. The number and scope of the regulations with which we and our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we will be able to obtain additional financing on commercially reasonable terms or at all, or marginscustomers must comply has a meaningful impact on our refined products will be favorable. Further, if Veritex exercises its rights and remedies undertheir businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.assets.
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Business Strategy and Accomplishments
Our primary business objective isobjectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:
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Optimize Existing Asset Base |
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· Planning and managing turnarounds and downtime. | |
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Improve Operational Efficiencies |
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· Increase throughput capacity and optimize product slate.
· Increase tolling and terminaling | |
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Seize Market Opportunities |
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· Take advantage of market opportunities as they arise. | |
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Optimize Existing Asset Base. ThroughoutThe refinery experienced less downtime during the third quarterthree-month period ended March 31, 2022 compared to the same period a year earlier. During the three-month periods ended March 31, 2022 and 2021, the refinery experienced 6 days and 11 days of 2021, we maintained safe and reliable operations atdowntime, respectively. Given recent favorable refining margins, management delayed the Nixon facility. COVID-related social distancing measures presented unique challenges. However, we successfully balanced protecting personnel from exposurefacility’s annual maintenance turnaround in order to COVID-19 and related variants and ensuring adequate staffing levels to operate the plant. Refinery downtime decreased to 6 days in the third quarter of 2021 compared to 11 days in the third quarter of 2020.maximize refinery runs.
Improve Operational Efficiencies. RefineryManagement continued to focus on optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. Continued austerity measures further contributed to improved refinery throughput, production, and sales continued to improve year to date 2021during the three-months ended March 31, 2022 compared to 2020. Management process reviews led to improved efficienciesthe same period in inventory management, throughput and production levels, and cash management.2021.
Seize Market Opportunities. We continue to explore renewable energy growth opportunities through commercial partnerships and repurposing our assets and facilities. In March 2021, we announced a pivotplans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green energy growth. We continue to explore potential commercial partnerships and project-based government loans as vehicles to expand our corporate strategy into renewable energy, opportunities through an affiliate, Lazarus Energy Alternative Fuels LLC (“LEAF”). LEAFand we will explore potential options to position Blue Dolphin in the global transition to cleaner, lower-carbon alternatives from traditional fossil fuels through collaborationcontinue these efforts throughout 2022. While we believe our renewable energy strategy successfully aligns with our long-term growth strategy and innovation.financial and operational priorities, they are aspirational and may change, and there is no guarantee that we will achieve our objectives.
Successful execution of our business strategy depends on several factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful.
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We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities in the foreseeable future. Management determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under our secured loan agreements, margin deterioration, and historical net losses and working capital deficits. A ‘going concern’ opinion impairs our ability to finance our operations by selling equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern depends on sustained positive operating margins and working capital to sustain operations, purchase of crude oil and condensate, and payments on long-term debt. If we cannot achieve these goals, we may have to cease operating or seek bankruptcy protection.
Management’s Discussion and Analysis |
Downstream Operations
Our refinery operations business segment consists of the following assets and operations:
Property |
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| Operating Subsidiary |
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Nixon facility
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| Crude Oil Refined Products |
| LE |
| Nixon, Texas | ||||||
Crude Oil and Condensate Supply. The operationOperation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot.Tartan. The volume-based crude supply agreementCrude Supply Agreement expires when Pilot sells uswe receive 24.8 million net bbls of crude oil. After that, the crude supply agreementCrude Supply Agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”).terms. Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any Renewal Term. Effective June 30, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate.renewal term. As of September 30, 2021,March 31, 2022, we received approximately 10.1 million bbls, or 40.4%, of the contracted total volume we received under the crude supply agreement was approximately 7.9 million bbls.agreement.
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Pilot alsoRelated to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under twoa terminal services agreements.agreement dated as of June 1, 2019. Under the terminal services agreements, Pilot storesagreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of theThe terminal services agreement expired April 30, 2020, the agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, and historical net losses and working capital and equity deficits. If PilotTartan terminates the crude supply agreementCrude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the three-month periods ended September 30, 2021, and 2020, our refinery experienced 6 days and 8 days of downtime, respectively, due to crude deficiencies associated with COVID-19 related cash constraints. During the nine-month periods ended September 30, 2021, and 2020, our refinery experienced 11 days and 16 days of downtime, respectively.
Due to NPS’ default under the Amended Pilot Line of Credit, Pilot applied payments owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit from June 2020 to September 2021. For both three-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $0.6 million. For the nine-month periods ended September 30, 2021, and 2020, the tank lease payment setoff totaled $1.7 million and $0.8 million, respectively.
The amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.2 million and $0.4 million, respectively, for the three months ended September 30, 2021, and 2020. For the nine months ended September 30, 2021, and 2020, interest was $0.7 million and $1.1 million, respectively. See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern,” “Note (11) Line of Credit Payable,” and “Note (17) Subsequent Events” to our consolidated financial statements for additional disclosures related to the Amended Pilot Line of Credit.
Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA represents as Petroleum Administration for Defense District 3 (PADD 3).PADD 3. We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to Mexico.Mexico and other countries.
The Nixon refinery’s product slate is moderately adjusted based on current market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. We sell ourOur jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur of March 31, 2022,2023 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.
Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require customer prepaymentsour customers to prepay and the sale ofus to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.
Competition. Many of our competitors are substantially larger than us. Their sizeus and greater access to resources allow them to engage in various oil and gas industry segmentsare engaged on a national or international level.level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and Downtime. We operate ourthe refinery in a waymanner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Technological systems enhance regulatory oversight. For example, mostMost of our storage tanks haveare equipped with emissions controlmonitoring devices. We also have response and control plans in place for spill prevention and emergencies.
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Management’s Discussion and Analysis |
The Nixon refinery periodically experiencesundergoes planned and unplanned temporary shutdowns. We usetypically complete a planned turnaroundsturnaround annually to repair, restore, refurbish, or replace refinery equipment. Occasionally, unplanned shutdowns occur. Unplanned shutdownsdowntime can occur for variousa variety of reasons; however, common reasons including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities,for unplanned downtime include repair/replacement of disabled equipment, or crude deficiencies due toassociated with cash constraints. However, the most typical reason is excessive heat orconstraints, high temperatures, and power outages from high winds and thunderstorms in Texas.outages. The Nixon refinery did not incur significant damage due to Winter Storm Uri in the first quarter ofthree months ended March 31, 2021. However, the facility lost external power for 10 days.days due to the storm.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.
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Midstream Operations
Our tolling and terminaling business segment consists of the following assets and operations:
Property |
| Key Products Handled |
| Operating Subsidiary |
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Location |
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Nixon facility
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| Crude Oil Refined Products |
| LRM, NPS |
| Nixon, Texas |
Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month to monthmonth-to-month to three years.
Operations Safety. We conduct ourOur midstream operations are operated in a manner materially consistent with industry safetysafe practices and standards. EPA,These operations are subject to regulations under OSHA and comparable state and local agencies provide regulatory oversight. Weregulations. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have the appropriate emergency response and control plans, spill prevention and control plans in place.other programs to respond to emergencies.
Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are not operational.inactive. We account for these inactive operations in ‘corporate and other.’ WeOur pipeline assets have been fully impaired our pipeline assets insince 2016 and our oil and gas leasehold interests inhave been fully impaired since 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and nine months ended September 30, 2021,March 31, 2022 and 2020.2021. See “Part I, Item 1. Financial Statements – Note (16)(15)” related to abandonmentpipelines and platform decommissioning requirements and associatedrelated risks.
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Freeport facility
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| BDPL |
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Offshore Pipelines (Trunk Line and Lateral Lines) |
| BDPL |
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| Gulf of Mexico |
Oil and Gas Leasehold Interests |
| BDPC |
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| Gulf of Mexico |
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance. Theymaintenance and are also subject to safety requirementsregulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.
Results of Operations
We present below a discussion and analysis of the factors contributing to our consolidated financial results of operations. Investors should read this section in conjunction with our financial statements in “Part I, Item 1. Financial Statements”. When combined with the following information, the financial statements provide investors with a reasonable basis for assessing our historical operations. However, this information should not serve as the only criteria for predicting our future performance.
Major Influences on Results of Operations. Our results of operations and liquidity depend on the margins that we receive for our refined products. The dollar per bbl price difference between crude oil and condensate (input) and refined products (output) significantly drives refining margins. These margins have historically been subject to wide fluctuations. In early 2020, global and national measures taken to address the COVID-19 pandemic, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets. With the introduction and approval of COVID-19 vaccines and increased inoculation rates, global economic activity has shown signs of recovery in 2021. Current EIA forecasts show economic growth and mobility increases in the short term. Also, refinery margins are forecasted to improve during the winter months due to projected colder winter temperatures compared to 2020 and low distillates inventory levels. However, forecasts are subject to various factors that are subject to change, including the ongoing impact of COVID-19 and related variants. As a result, we are currently unable to estimate our future financial position and results of operations. Accordingly, we believe these factors could have a material adverse effect on our financial results for the remainder of 2021 and into 2022.
Blue Dolphin Energy Company |
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Management’s Discussion and Analysis |
Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be in read in conjunction with our financial statements in “Part I, Item 1. Financial Statements”. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
While refining margins improved significantly in the first quarter of 2022, the general outlook for the oil and natural gas industry for the remainder of the year remains unclear given the impact of COVID-19 and the Russian conflict with Ukraine, and we can provide no assurances that refining margins and demand will remain at current levels.
How We Evaluate Our Operations. Management uses particularcertain financial and operating measures to analyze business segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl
We use segment contribution margin (deficit) to evaluate the performance of our downstream and midstream operations. We use refining gross profit (deficit) per bbl as a downstream benchmark. Both measures supplement GAAP financial information presented. Management uses segment contribution margin (deficit) and refining gross profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial performance considering potential capital investments. These non-GAAP measures have important limitations as analytical tools. They should not be considered a substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with our GAAP financial results. See the “Glossary of Terms” for information on how to calculate these non-GAAP measures. See also “Results of Operations – Non-GAAP“Non-GAAP Reconciliations” within this section and “Part I, Item 1. Financial Statements” for a reconciliation of these Non-GAAP measures to U.S. GAAP.
Tank Rental Revenue
Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, management uses tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.
Operation Costs and Expenses
We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs and expenses include cost of goods sold. Also, operation costs and expenses within: (i) thefor tolling and terminaling business segment includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (ii) corporate and other includes expenses related to BDSC, BDPC, and BDPL.operations are relatively fixed.
Refinery Throughput and Production Data
OurThe amount of revenue we generate from the refinery operations revenuebusiness segment primarily depends on the volumes of crude oil throughput volumes,that we process into refined products productionand the volume of refined products sold to customers. These volumes and customer sales volumes. Theare affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime affect these volumes.downtime.
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Management’s Discussion and Analysis |
Refinery Downtime
The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime resultswill result in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, alland a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.
RemainderConsolidated Results. Our consolidated results of Page Intentionally Left Blankoperations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Three Months Ended March 31, 2022 (“Q1 2022”) Versus March 31, 2021 (“Q1 2021”)
Overview. Net income for Q1 2022 was $3.5 million, or income of $0.27 per share, compared to a net loss of $3.2 million, or a loss of $0.25 per share, in Q1 2021. The $6.7 million, or $0.52 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand as the impact from COVID-19 lessened. The net loss in Q1 2021 was also due to 11 days of refinery downtime, 10 days of which was associated with Winter Storm Uri.
Total Revenue from Operations. Total revenue from operations increased 86% to $110.7 million for Q1 2022 from $59.4 million for Q1 2021. Increased commodity prices primarily drove refinery operations revenue higher in Q1 2022; increased sales volume contributed approximately 10% to the rise in refinery operations revenue. Tolling and terminaling revenue was flat between the periods at $0.9 million.
Total Cost of Goods Sold. Total cost of goods sold increased approximately 75% to $104.1 million for Q1 2022 from $59.6 million for Q1 2021. The significant increase related to higher crude acquisition costs and slightly higher throughput.
Gross Margin (Deficit). Gross margin was $6.6 million for Q1 2022 compared to gross deficit of $0.2 million for Q1 2021. Refinery margins were positively affected by higher commodity prices and improved refinery uptime in Q1 2022 compared to Q1 2021.
General and Administrative Expenses. General and administrative expenses decreased approximately 5% to $0.6 million in Q1 2022 from approximately $0.7 million in Q1 2021. The decrease primarily related to lower insurance premiums and professional fees.
Depreciation and Amortization. Depreciation and amortization expenses totaled approximately $0.7 million for both Q1 2022 and Q1 2021.
Total Other Income (Expense). Total other expense in Q1 2022 was $1.6 million compared to total other expense of $1.4 million in Q1 2021, representing an increase of approximately $0.2 million. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.
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Downstream Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.
Q1 2022 Versus Q1 2021
Refining Gross Margin (Deficit) per Bbl. Refining gross margin per bbl was $5.51 for Q1 2022 compared to gross deficit per bbl of $1.20 in Q1 2021, representing a significant increase of $6.71 per bbl. The significant increase in Q1 2022 related to higher refining margins, improved product demand as the impact from COVID-19 lessened, and increased refinery uptime. Refining gross deficit per bbl in Q1 2021 was the result of lower margins and market fluctuations associated with the COVID-19 pandemic and refinery downtime associated with Winter Storm Uri.
Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Q1 2022 compared to Q1 2021. The increase was driven by higher refining margins.
Refinery Downtime. Refinery downtime decreased to 6 days in Q1 2022 compared to 11 days in Q1 2021. Refinery downtime in Q1 2022 primarily related to maintenance while refinery downtime in Q1 2021 primarily related to power outages during Winter Storm Uri.
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Refined product sales |
| $ | 109,757 |
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| $ | 58,483 |
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Less: Total cost of goods sold |
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Gross margin (deficit) |
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| 5,680 |
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| (1,140 | ) |
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Sales (Bbls) |
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| 1,031 |
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| 948 |
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|
Gross margin (deficit) per bbl |
| $ | 5.51 |
|
| $ | (1.20 | ) |
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 109,757 |
|
| $ | 58,483 |
|
Intercompany fees and sales |
|
| (653 | ) |
|
| (566 | ) |
Operation costs and expenses |
|
| (103,458 | ) |
|
| (59,289 | ) |
Segment contribution margin (deficit) |
| $ | 5,646 |
|
| $ | (1,372 | ) |
(1) | Net revenue excludes intercompany crude sales. |
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
Consolidated ResultsMidstream Operations. Our consolidated results of operations include certain unallocated corporate activitiestolling and the elimination of intercompany transactions. Therefore, the sum of operating results for our ‘refinery operations’terminaling business segment is owned by LRM and ‘tollingNPS. Assets within this segment include petroleum storage tanks and terminaling’ business segment do not equal consolidated resultsloading and unloading facilities. Tolling and terminaling revenue is derived from tank storage rental fees, tolling and reservation fees for use of operations.the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending.
Q1 2022 Versus Q1 2021
Net Revenue. Tolling and terminaling net revenue was relatively flat in Q1 2022 compared to Q1 2021.
Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Q1 2022 compared to Q1 2021. Naphtha volumes processed nearly doubled between the two periods primarily due to improved naphtha refined product demand as the impact from COVID-19 lessened.
Segment Contribution Margin. Segment contribution margin in Q1 2022 decreased 17% to $1.0 million from $1.2 million in Q1 2021. The $0.2 million decrease related to higher intercompany fees and operation costs tied to naphtha volumes.
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 926 |
|
| $ | 930 |
|
Intercompany fees and sales |
|
| 653 |
|
|
| 566 |
|
Operation costs and expenses |
|
| (619 | ) |
|
| (334 | ) |
Segment contribution margin |
| $ | 960 |
|
| $ | 1,162 |
|
|
|
|
|
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
|
| Three Months Ended March 31, |
| |||||||||||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||
|
| Refinery Operations |
|
| Tolling and Terminaling |
|
| Corporate and Other |
|
| Total |
| ||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Segment contribution margin (deficit) |
| $ | 5,646 |
|
| $ | (1,372 | ) |
| $ | 960 |
|
| $ | 1,162 |
|
| $ | (11 | ) |
| $ | (54 | ) |
| $ | 6,595 |
|
| $ | (264 | ) |
General and administrative expenses(1) |
|
| (282 | ) |
|
| (301 | ) |
|
| (70 | ) |
|
| (68 | ) |
|
| (431 | ) |
|
| (413 | ) |
|
| (783 | ) |
|
| (782 | ) |
Depreciation and amortization |
|
| (307 | ) |
|
| (302 | ) |
|
| (342 | ) |
|
| (340 | ) |
|
| (52 | ) |
|
| (51 | ) |
|
| (701 | ) |
|
| (693 | ) |
Interest and other non-operating income (expenses), net |
|
| (717 | ) |
|
| (598 | ) |
|
| (418 | ) |
|
| (452 | ) |
|
| (457 | ) |
|
| (385 | ) |
|
| (1,592 | ) |
|
| (1,435 | ) |
Income (loss) before income taxes |
|
| 4,340 |
|
|
| (2,573 | ) |
|
| 130 |
|
|
| 302 |
|
|
| (951 | ) |
|
| (903 | ) |
|
| 3,519 |
|
|
| (3,174 | ) |
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (41) |
|
|
| - |
|
Net income (loss) |
| $ | 4,340 |
|
| $ | (2,573 | ) |
| $ | 130 |
|
| $ | 302 |
|
| $ | (951 | ) |
| $ | (903 | ) |
| $ | 3,478 |
|
| $ | (3,174 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
Capital Resources and Liquidity We currently rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Due to defaults under our secured loan agreements, substantial current debt, margin volatility, historic net losses and working capital deficits, we have inadequate liquidity to sustain operations. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and expanding the Nixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. We continue to maintain our focus on safe and reliable operations and conserving cash. The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence. Management believes it has made significant progress on bolstering liquidity through efforts including securing additional financing, monitoring discretionary spending, and non-essential costs; and where possible, modifying vendor and contractor payment terms. During the three months ended March 31, 2022 and 2021, we successfully secured an additional $1.5 million and $0, respectively, in working capital through CARES Act loans. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt.
| ||||||||||||||||||||||||||||||||
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
Downstream Operations. LE ownsThere can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our refinery operations business segment. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. LE derives refinery operations revenue from refined product sales.
|
| Three Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Refined product sales |
| $ | 79,466 |
|
| $ | 41,929 |
|
Less: Total cost of goods sold |
|
| (80,114 | ) |
|
| (44,400 | ) |
Gross deficit |
|
| (648 | ) |
|
| (2,471 | ) |
|
|
|
|
|
|
|
|
|
Sales (Bbls) |
|
| 1,059 |
|
|
| 1,008 |
|
|
|
|
|
|
|
|
|
|
Gross Deficit per Bbl |
| $ | (0.61 | ) |
| $ | (2.45 | ) |
|
| Three Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 79,466 |
|
| $ | 41,929 |
|
Intercompany fees and sales |
|
| (650 | ) |
|
| (595 | ) |
Operation costs and expenses |
|
| (79,593 | ) |
|
| (43,691 | ) |
Segment Contribution Deficit |
| $ | (777 | ) |
| $ | (2,357 | ) |
(1) Net revenue excludes intercompany crude sales.strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operating.
Q3Working Capital
We had $72.9 million and $78.5 million in working capital deficits at March 31, 2022 and December 31, 2021, Versus Q3 2020
| |
| |
|
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Refined product sales |
| $ | 206,467 |
|
| $ | 120,185 |
|
Less: Total cost of goods sold |
|
| (210,203 | ) |
|
| (126,164 | ) |
Gross deficit |
|
| (3,736 | ) |
|
| (5,979 | ) |
|
|
|
|
|
|
|
|
|
Sales (Bbls) |
|
| 2,995 |
|
|
| 2,818 |
|
|
|
|
|
|
|
|
|
|
Gross Deficit per Bbl |
| $ | (1.25 | ) |
| $ | (2.12 | ) |
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 206,467 |
|
| $ | 120,185 |
|
Intercompany fees and sales |
|
| (1,797 | ) |
|
| (1,618 | ) |
Operation costs and expenses |
|
| (208,936 | ) |
|
| (124,942 | ) |
Segment Contribution Deficit |
| $ | (4,266 | ) |
| $ | (6,375 | ) |
(1) Net revenue excludes intercompany crude sales.respectively. Excluding the current portion of long-term debt, we had $11.8 million and $15.5 million in working capital deficits at March 31, 2022 and December 31, 2021, respectively. Cash and cash equivalents totaled $0.1 million and $0.01 million at March 31, 2022 and December 31, 2021, respectively. Restricted cash (current portion) totaled $0 and $0.05 million at March 31, 2022 and December 31, 2021, respectively.
Sources and Use of Cash
9 MonthsComponents of Cash Flows
|
| March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Cash Flows Provided By (Used In): |
|
|
|
|
|
| ||
Operating activities |
| $ | 937 |
|
| $ | (500 | ) |
Financing activities |
|
| (888 | ) |
|
| (42 | ) |
Increase (Decrease) in Cash and Cash Equivalents |
| $ | 49 |
|
| $ | (542 | ) |
Cash Flow Q1 2022 Compared to Q1 2021
We had a cash flow from operations of $0.9 million for Q1 2022 compared to a cash flow deficit of $0.5 million for Q1 2021. The significant increase in cash flow from operations in Q1 2022 was due to profit from operations. The cash flow deficit for Q1 2021 Versus 9 Months 2020primarily related to loss from operations.
Capital Expenditures
| |
| |
|
During both Q1 2022 and Q1 2021, capital expenditures totaled $0. Due to continued uncertainties related to the COVID-19 pandemic and the Russian conflict with Ukraine, we anticipate little, if any, new capital expenditures in 2022.However, to the extent we are able to capitalize on green energy growth opportunities, capital expenditures may be financed through project-based government loans.
We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.
Debt Overview.
The table below summarizes our principal contractual obligations at March 31, 2022, by expected settlement period.
Total Debt and Lease Obligations
|
|
|
|
| Between |
|
| Between |
|
|
|
|
|
|
| |||||
|
| Less than |
|
| 1 and 3 |
|
| 3 and 5 |
|
| 5 Years |
|
|
|
| |||||
|
| 1 Year |
|
| Years |
|
| Years |
|
| and Later |
|
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Long-term debt less unamortized debt issue costs(1)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Third-party |
| $ | 43,004 |
|
| $ | 197 |
|
| $ | 142 |
|
| $ | 1,995 |
|
| $ | 45,338 |
|
Related-party |
|
| 18,087 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 18,087 |
|
Total long-term debt less debt issue costs |
|
| 61,091 |
|
|
| 197 |
|
|
| 142 |
|
|
| 1,995 |
|
|
| 63,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations |
|
| 220 |
|
|
| 99 |
|
|
| - |
|
|
| - |
|
|
| 319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 61,311 |
|
| $ | 296 |
|
| $ | 142 |
|
| $ | 1,995 |
|
| $ | 63,744 |
|
| (1) | See “Item 1. Financial Statements – Notes (3) and (10)” for additional disclosures related to third-party and related-party debt. |
(2) | Long-term debt excludes interest payable; at March 31, 2022, interest payable and interest payable, related party was estimated to be 12.1 million (less than 1 year), $0.1 million (between 1 and 3 years), $0.1 million (between 3 and 5 years), and $0.5 million (5 years and later). |
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
Midstream Operations. LRM and NPS own our tolling and terminaling business segment. Assets within this segment include petroleum storage tanks and loading and unloading facilities. LRM and NPS derive tolling and terminaling revenueNet proceeds from tank storage rental fees, tolling and reservation fees for use of the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending.
|
| Three Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 924 |
|
| $ | 1,001 |
|
Intercompany fees and sales |
|
| 650 |
|
|
| 595 |
|
Operation costs and expenses |
|
| (521 | ) |
|
| (709 | ) |
Segment Contribution Margin |
| $ | 1,053 |
|
| $ | 887 |
|
(1) Net revenue excludes intercompany crude sales.
Q3 2021 Versus Q3 2020
| |
| |
|
|
| Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Net revenue (1) |
| $ | 2,777 |
|
| $ | 3,214 |
|
Intercompany fees and sales |
|
| 1,797 |
|
|
| 1,618 |
|
Operation costs and expenses |
|
| (1,267 | ) |
|
| (1,222 | ) |
Segment Contribution Margin |
| $ | 3,307 |
|
| $ | 3,610 |
|
(1) Net revenue excludes intercompany crude sales.
9 Months 2021 Versus 9 Months 2020
| |
| |
|
|
|
|
Non-GAAP Reconciliations.
|
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
|
| Refinery Operations |
|
| Tolling and Terminaling |
|
| Corporate and Other |
|
| Total |
| ||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Segment contribution margin (deficit) |
| $ | (777 | ) |
| $ | (2,357 | ) |
| $ | 1,053 |
|
| $ | 887 |
|
| $ | (83 | ) |
| $ | (58 | ) |
| $ | 193 |
|
| $ | (1,528 | ) |
General and administrative expenses(1) |
|
| (282 | ) |
|
| (414 | ) |
|
| (70 | ) |
|
| (132 | ) |
|
| (423 | ) |
|
| (307 | ) |
|
| (775 | ) |
|
| (853 | ) |
Depreciation and amortization |
|
| (302 | ) |
|
| (301 | ) |
|
| (340 | ) |
|
| (338 | ) |
|
| (51 | ) |
|
| (51 | ) |
|
| (693 | ) |
|
| (690 | ) |
Interest and other non-operating expenses, net |
|
| (747 | ) |
|
| (679 | ) |
|
| (384 | ) |
|
| (599 | ) |
|
| (523 | ) |
|
| (304 | ) |
|
| (1,654 | ) |
|
| (1,582 | ) |
Income (loss) before income taxes |
|
| (2,108 | ) |
|
| (3,751 | ) |
|
| 259 |
|
|
| (182 | ) |
|
| (1,080 | ) |
|
| (720 | ) |
|
| (2,929 | ) |
|
| (4,653 | ) |
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Income (loss) |
| $ | (2,108 | ) |
| $ | (3,751 | ) |
| $ | 259 |
|
| $ | (182 | ) |
| $ | (1,080 | ) |
| $ | (720 | ) |
| $ | (2,929 | ) |
| $ | (4,653 | ) |
(1) General and administrative expenses within refinery operations include the LEH operating fee.
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
|
| Refinery Operations |
|
| Tolling and Terminaling |
|
| Corporate and Other |
|
| Total |
| ||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Segment contribution margin (deficit) |
| $ | (4,266 | ) |
| $ | (6,375 | ) |
| $ | 3,307 |
|
| $ | 3,610 |
|
| $ | (187 | ) |
| $ | (164 | ) |
| $ | (1,146 | ) |
| $ | (2,929 | ) |
General and administrative expenses(1) |
|
| (848 | ) |
|
| (1,045 | ) |
|
| (206 | ) |
|
| (268 | ) |
|
| (1,246 | ) |
|
| (1,052 | ) |
|
| (2,300 | ) |
|
| (2,365 | ) |
Depreciation and amortization |
|
| (906 | ) |
|
| (883 | ) |
|
| (1,020 | ) |
|
| (956 | ) |
|
| (153 | ) |
|
| (153 | ) |
|
| (2,079 | ) |
|
| (1,992 | ) |
Interest and other non-operating expenses, net |
|
| (2,053 | ) |
|
| (2,171 | ) |
|
| (1,284 | ) |
|
| (1,985 | ) |
|
| (1,340 | ) |
|
| (778 | ) |
|
| (4,677 | ) |
|
| (4,934 | ) |
Income (loss) before income taxes |
|
| (8,073 | ) |
|
| (10,474 | ) |
|
| 797 |
|
|
| 401 |
|
|
| (2,926 | ) |
|
| (2,147 | ) |
|
| (10,202 | ) |
|
| (12,220 | ) |
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (15 | ) |
|
| - |
|
|
| (15 | ) |
Income (loss) |
| $ | (8,073 | ) |
| $ | (10,474 | ) |
| $ | 797 |
|
| $ | 401 |
|
| $ | (2,926 | ) |
| $ | (2,162 | ) |
| $ | (10,202 | ) |
| $ | (12,235 | ) |
(1) General and administrative expenses within refinery operations include the LEH operating fee.
Liquidity and Capital Resources
We had $79.8 million and $72.3 million in working capital deficits at September 30, 2021, and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had working capital deficits of $26.2 million and $22.6 million at September 30, 2021, and December 31, 2020, respectively. During the third quarter of 2021, we continued efforts to conserve cash amid lower refined product sales. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, delaying capital spending, and monitoring discretionary spending and nonessential costs.
Our primary cash requirements relate to: (i) purchasing crude oil and condensate for the operation of the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement and (iii) servicing debt. Due to the adverse financial impact of COVID-19, we are actively exploring financing, including potential financing options made available under the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. However, we cannot assure success in raising additional capital or that such additional funds will be available on acceptable terms, if at all. We may further default on certain of our existing debt obligations if we cannot raise sufficient additional capital in the very near term. Without additional financing, it remains unclear whether we will have or can obtain sufficient liquidity to withstand further disruptions to our business.
How long and to what extent COVID-19 and related market developments will continue to affect our business and operations is unknown. With the introduction and approval of COVID-19 vaccines and increased inoculation rates, global economic activity has shown signs of recovery in 2021. Current EIA forecasts show economic growth and mobility increases in the short term. Also, refinery margins are forecasted to improve during the winter months due to projected colder winter temperatures compared to 2020 and low distillates inventory levels. However, forecasts are subject to various factors that are subject to change, including the ongoing impact of COVID-19 and related variants. As a result, we are currently unable to estimate our future financial position and results of operations. Accordingly, we believe these factors could have a material adverse effect on our financial results for the remainder of 2021 and into 2022.
Our ability to continue as a going concern depends on sustained positive operating margins and working capital to sustain operations, purchase of crude oil and condensate, and payments on long-term debt. If we cannot achieve these goals, we may cease operating or seek bankruptcy protection. These adverse market actions could lead to holders of our common stock losing their investment in its entirety.
|
|
|
Debt Overview.
|
|
| September 30, |
|
| December 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ | 23,827 |
|
| $ | 22,840 |
|
LRM Term Loan Due 2034 (in default) |
|
| 9,881 |
|
|
| 9,473 |
|
Kissick Debt (in default) |
|
| 10,011 |
|
|
| 9,413 |
|
Amended Pilot Line of Credit (in default) |
|
| 4,827 |
|
|
| 8,145 |
|
Related-Party Debt |
|
|
|
|
|
|
|
|
June LEH Note (in default) |
|
| 12,644 |
|
|
| 9,446 |
|
BDPL Loan Agreement (in default) |
|
| 7,294 |
|
|
| 6,814 |
|
March Carroll Note (in default) |
|
| 2,115 |
|
|
| 1,551 |
|
March Ingleside Note (in default) |
|
| 1,059 |
|
|
| 1,013 |
|
BDEC Term Loan Due 2051 |
|
| 507 |
|
|
| - |
|
LE Term Loan Due 2050 |
|
| 155 |
|
|
| 152 |
|
NPS Term Loan Due 2050 |
|
| 155 |
|
|
| 152 |
|
Equipment Loan Due 2025 |
|
| 59 |
|
|
| 71 |
|
Total debt and accrued interest |
|
| 72,534 |
|
|
| 69,070 |
|
|
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt, net |
|
| (58,360 | ) |
|
| (57,744 | ) |
Less: Unamortized debt issue costs |
|
| (1,653 | ) |
|
| (1,749 | ) |
Less: Accrued interest payable (in default) |
|
| (11,678 | ) |
|
| (9,222 | ) |
Long-term debt, net of current portion |
| $ | 843 |
|
| $ | 355 |
|
Due to cash constraints associated with COVID-19, payments on debt in 2021 were minimal totaling $0.004 million in Q3 2021 and $0.013 million in 9 Months 2021. Comparatively, payments on debt in 2020 totaled $0.9 million in Q3 2020 and $2.4 million in 9 Months 2020. We received government assistance from CARES Act loans in both 2021 and 2020. For 9 Months 2021, proceeds from issuance of debt totaled $0.5$1.5 million in Q1 2022 compared to $0.3$0 in Q1 2021. Proceeds in Q1 2022 were from the BDEC Term Loan Due 2051. Principal payments on long-term debt totaled $0.004 million in 9 Months 2020. In 9 MonthsQ1 2022 compared to $0.006 million in Q1 2021.Net activity on debt to related parties (non-cash payments) totaled $2.4 million and $0.04 million in Q1 2022 and Q1 2021, we received a single SBA EIDL loan; in 9 Months 2020 we received two smaller SBA EIDL loans.respectively.
Debt Defaults. The majority of our debt is in default.
Third-Party Defaults under Veritex loans include financial covenant violations, failure to make monthly payments, and failure to replenish a payment reserve account. As the Kissick Debt and related-party debts have matured, defaults are for failure to pay past due obligations. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, NPS was in default as of September 30, 2021, and December 31, 2020. Due to their default status, we classified all of these debts within the current portion of long-term debt on our consolidated balance sheets at September 30, 2021, and December 31, 2020. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), (11), and (17)” for additional disclosures related to Affiliate and third-party debt agreements, including debt guarantees, and defaults in our debt obligations.
Contractual Obligations.
Related-Party Debt
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Related-Party Defaults
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Third-Party Debt
Loan Description |
Parties | Original Principal Amount (in millions) |
Maturity Date |
Monthly Principal and Interest Payment |
Interest Rate |
Loan Purpose |
Veritex Loans(1) |
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) | LE Veritex | $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements |
LRM Term Loan Due 2034 (in default) | LRM Veritex | $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements |
Kissick Debt (in default)(2)(3) | LE Kissick | $11.7 | Jan 2018 | No payments to date; payment rights subordinated | 16.00% | Working capital; reduced balance of GEL arbitration award |
Amended Pilot Line of Credit (in default) | NPS Pilot | $13.0 | May 2020 | --- | 14.00% | GEL settlement payment, NPS purchase of crude oil from Pilot, and working capital |
SBA EIDLs |
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|
|
|
|
|
BDEC Term Loan Due 2051(4) | Blue Dolphin SBA | $0.5 | Jun 2051 | $0.003 million | 3.75% | Working capital |
LE Term Loan Due 2050(5) | LE SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital |
NPS Term Loan Due 2050(5) | NPS SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital |
Equipment Loan Due 2025(6) | LE Texas First | $0.07 | Oct 2025 | $0.0013 million | 4.50% | Equipment Lease Conversion |
(1)Veritex placed proceeds in a disbursement for the payment of construction-related expenses. We reflected the amounts held in the disbursement account as restricted cash (current portion) and restricted cash, noncurrent on our consolidated balance sheets. At September 30, 2021, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0. At December 31, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million.
(2)LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount of $8.0 million. John Kissick currently holds this debt. Under a 2017 amendment, the parties amended the Kissick Debt to increase the principal amount by $3.7 million. LE used the additional principal to reduce the arbitration award payable to GEL by $3.6 million.
(3)Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.
(4)For disaster loans made in 2021, the SBA initially deferred payments for the first twelve (12) months. The SBA later extended the payment deferral period from twelve (12) months to eighteen (18) months;default under the extension, the first payment is due in December 2022; interest accrues during the deferral period. The BDEC Term Loan Due 2051 is not forgivable.
(5)For disaster loans made in 2020, the SBA initially deferred payments for the first twelve (12) months. The SBA later extended the payment deferral period from twelve (12) months to twenty-four (24) months; under the extension, the first payment is due in September 2022; interest accrues during the deferral period. The LE Term Loan Due 2050 and NPS Term Loan Due 2050 are not forgivable.
(6) In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The equipment rental agreement matured in May 2020. In October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase. We use the backhoe at the Nixon facility.
Third-Party Defaults
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We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading prices of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders regarding defaults and potential restructuring and refinance opportunities. Related-Party Defaults |
| Notes and |
Concentration of Customers Risk. We routinely assess the financial strength of our customers. To date, wecustomers and have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2021 |
|
| 3 |
|
|
| 69 | % |
| $ | 0 |
|
September 30, 2020 |
|
| 4 |
|
|
| 80 | % |
| $ | 0 |
|
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at March 31, |
| |||
|
|
|
|
|
|
|
|
|
| |||
March 31, 2022 |
|
| 3 |
|
|
| 64.9 | % |
| $ | 0 |
|
March 31, 2021 |
|
| 4 |
|
|
| 90.4 | % |
| $ | 0 |
|
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. The Affiliate accounted for 30%31.2% and 28%27.1% of total revenue from operations for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both September 30,March 31, 2022 and 2021, and 2020, respectively.
Nine Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2021 |
|
| 3 |
|
|
| 72 | % |
| $ | 0 |
|
September 30, 2020 |
|
| 4 |
|
|
| 82 | % |
| $ | 0 |
|
The Affiliate accounted for 29% and 28% of total revenue from operations for the nine months ended September 30, 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both September 30, 2021, and 2020, respectively.
Outstanding amounts under certain related party agreements can significantly vary from period to period based on the timing of sales and payments. Concerning the Amended and Restated Operating Agreement, we add any amount that remains outstanding at the end of the quarter to the June LEH Note. We classify the June LEH Note within long-term debt, related party, current portion (in default) on the consolidated balance sheets. At September 30, 2021, and December 31, 2020, the total amount we owed to LEH under long-term debt, related-party agreements including accrued interest totaled $19.9 million and $16.3 million, respectively. See “Part I, Item“Item 1. Financial Statements – Notes (3) and (16)(15)” for additional disclosures related to Affiliate agreements and arrangements, andas well as “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC for additional disclosures related to Affiliate risk.
Blue Dolphin Energy Company | March 31, 2022 │Page 43 |
| Table of Contents |
Management’s Discussion and Analysis |
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
OffshoreTo cover the various obligations of lessees operators, and rights-of-way holders are required to provideoperating in federal waters of the Gulf of Mexico, BOEM with theevaluates an operator’s financial assurance of their ability to carry out present and future abandonment obligations. Obligationsobligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. When the lessee, operator, or rights-of-way holder completesOnce plugging and abandonment work BOEM releaseshas been completed, the collateral backing the financial assurance.assurance is released by BOEM.
InBDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way. BDPL historically maintained $0.9 million in financial security. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. BecauseAlthough the IBLA is separate and independent from the agencies whose decisions it reviews, BDPL’s appeal to BOEM took considerable time to matriculate through the appeals process. Ultimately,granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that once BDPL completes abandonment operations,BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, will be significantly reduced or eliminated. In addition, BOEM’s INCs will bewhich may serve to partially or fully resolved. Although we planned decommissioning activities for 2020, offshore weather conditions andresolve the INCs. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing COVID-19 pandemic led to delays.impact of COVID-19. We cannot currently estimate when decommissioning willmay occur. Further, we cannot currently estimate when we can provide additional financial assurance (supplemental pipeline bonds).
Financial constraints and BDPL’s pending appeal of the BOEM INCs dodoes not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM requires BDPL to provide significant additional financial securityassurance (supplemental pipeline bonds) or assessesis assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we havedid not recordedrecord a liability on our consolidated balance sheetsheets as of September 30,March 31, 2022 and December 31, 2021. At both September 30, 2021,March 31, 2022 and December 31, 2020,2021, BDPL maintained approximately $0.9 million in credit and cash-backedpipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, issued to BOEM.$0.7 million was credit-backed and $0.2 million was cash-backed.
|
|
|
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer active.useful for operations. Until such facilitiesstructures are decommissioned,abandoned or removed, lessees and rights-of-way holders mustare required to inspect and maintain them perthe assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans concerningwith respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning andpermit applications, including a safe boarding plan, for the platform. BSEE imposed a deadline of six (6) months (February 2020) to submit theby February 2020. BDPL submitted permit applications and safe boarding plan. Further,to BSEE mandated BDPL complete approved, permitted work within twelve (12) months (August 2020). BDPL timely submitted the permit applicationsin February 2020 and safe boarding plan to BOEM and BSEE on February 11, 2020; we submitted related permits to the USACOE onin March 25, 2020. Although we planned decommissioning activities for 2020, offshore weather conditions and cash constraints associated with the ongoing COVID-19 pandemic led to delays. We cannot currently estimate when decommissioning will occur.
In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to comply with the INC, and BSEE approved BDPL’s extension request. BDPL completed the structuralrequired platform surveys and resolved the INC in June 2020. Abandonment operations were delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
Financial constraints doLack of permit approvals does not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. If BDPL fails to complete decommissioning of the facilitiesoffshore pipelines and platform assets and/or remedy the INCs within a timeframe deemeddetermined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation. Such BSEE actionsdesignation, which could have a material adverse effect on our earnings, cash flows and liquidity.
We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we havedid not recordedrecord a liability related to potential penalties on our consolidated balance sheetsheets as of September 30,March 31, 2022 and December 31, 2021. At both September 30, 2021,March 31, 2022 and December 31, 2020,2021, BDPL maintained $2.4$3.5 million in AROs related to decommissioningabandonment of these assets.
Sources and Use of Cash.assets, which amount does not include potential penalties.
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
| Cash Flows Provided By (Used In): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating activities |
| $ | 4,084 |
|
| $ | 1,658 |
|
| $ | (418 | ) |
| $ | (2,196 | ) |
Investing activities |
|
| - |
|
|
| (177 | ) |
|
| - |
|
|
| (1,085 | ) |
Financing activities |
|
| 1,916 |
|
| (1,243 | ) |
|
| 696 |
|
|
| 3,451 |
| |
Decrease in Cash and Cash Equivalents |
| $ | 2,168 |
|
| $ | 238 |
|
| $ | 1,114 |
|
| $ | 170 |
|
Cash Flow
We had cash flow from operations of approximately $4.1 million for Q3 2021 compared to approximately $1.7 million for Q3 2020. The improvement in cash flow from operations between the three-month comparative periods primarily related to an increase in unearned revenue. We had cash flow from operations of approximately $0.4 million for 9 Months 2021 compared to approximately $2.2 million for 9 Months 2020. The improvement in cash flow deficit between the nine-month periods primarily related to loss from operations.
Capital Expenditures
During Q3 2021, capital expenditures totaled $0 compared to $0.2 million during Q3 2020. During 9 Months 2021, capital expenditures totaled $0 compared to $1.1 million during 9 Months 2020. Capital expenditures during 2020 primarily related to completion of a petroleum storage tank and a maintenance turnaround. We completed the 5-year Nixon capital improvement expansion project during 9 Months 2020. Given the uncertainty surrounding the COVID-19 pandemic, combined with the volatile commodity price environment, we anticipate new capital expenditures to be minimal for the remainder of 2021 through the first half of 2022.
We account for our capital expenditures per GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, the determination is a matter of management judgment and discretion in certain circumstances.
Blue Dolphin Energy Company |
|
| Table of Contents |
Management’s Discussion and Analysis |
We identify and prioritize capital projects based on merits such as operational safety and efficiency, customer need, regulatory compliance, and economic benefits. We budget for maintenance capital expenditures throughout the year on a project-by-project basis.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
We describe ourSignificant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and recent accounting developmentscash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.
Estimates. The nature of our business requires that we make estimates and assumptions in “Part I, Item 1. Financial Statements – Note (2)”. accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so.
The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. Although management cannot predictUnder earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. As U.S. federal, state, and local officials address surging coronavirus cases and roll out COVID-19 vaccines, we expect to continue operating.
In February 2022, Russia invaded neighboring Ukraine. The conflict caused turmoil in global markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact these factors willour operations.
We have oninstituted various initiatives throughout the company as part of our future financial positionbusiness continuity programs, and results of operations, historical facts serve aswe are working to mitigate risk when disruptions occur. The Russian conflict with Ukraine and the basisCOVID-19 pandemic continue to evolve. Therefore, uncertainty surrounding refining margins, demand for forecast assumptions. Management believes these assumptionsour refined products, and the general business environment are reasonable.expected to continue through 2022 and beyond.
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the Russian conflict with Ukraine and COVID-19 as of September 30, 2021,March 31, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
See “Part I, Item 1. Financial Statements – Note (2)” forNew Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritative SEC content. During the three months ended March 31, 2022, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective.
No new pronouncements issued but not yet effective are not expected to have a discussionmaterial impact on our financial position, results of new accounting standards and disclosures.operations, or liquidity.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company |
|
| Table of Contents |
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We evaluatedUnder the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on theour evaluation, our Chief Executive Officer (principal executive officer principal financial officer, and principal accountingfinancial officer) concluded that our disclosure controls and procedures were ineffective due to an identified material weakness and a significant deficiency as described below:
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We previously reported the significant deficiency and material weakness in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, andQuarterly Report on Form 10-Q for the quarterly period ended June 30, 2021.
Our disclosure controls and procedures remained ineffectiveeffective as of the end of the period covered by this report. However, management has taken corrective actionsreport to remedy bothensure that information required to be disclosed by us in reports that we file or submit under the significant deficiencyExchange Act, are recorded, processed, summarized, and material weakness. Corrective actions included implementing formal end of month processes to review manual journal entriesreported within the time periods specified in the SEC’s rules and identify complex accounting transactions. In addition, any identified complex accounting transactions are reviewed and evaluated by senior management. Management expects to fully remediate the significant deficiency and material weakness by year end 2021.forms.
Changes in Internal Control over Financial Reporting
We did not identify any new disclosure controls and procedures issuesThere has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2021. See the above section “Evaluation of Disclosure Controls and Procedures” for a discussion relatedMarch 31, 2022 that has materially affected, or is reasonably likely to current ineffective disclosure controls and procedures.materially affect, our internal control over financial reporting.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company |
|
| Table of Contents |
Legal Proceedings |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved Matters.
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
Offshore. To cover the various obligations of lessees operators, and rights-of-way holders are required to provideoperating in federal waters of the Gulf of Mexico, BOEM with theevaluates an operator’s financial assurance of their ability to carry out present and future abandonment obligations. Obligationsobligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. When the lessee, operator, or rights-of-way holder completesOnce plugging and abandonment work BOEM releaseshas been completed, the collateral backing the financial assurance.assurance is released by BOEM.
InBDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way. BDPL historically maintained $0.9 million in financial security. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. BecauseAlthough the IBLA is separate and independent from the agencies whose decisions it reviews, BDPL’s appeal to BOEM took considerable time to matriculate through the appeals process. Ultimately,granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that once BDPL completes abandonment operations,BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, will be significantly reduced or eliminated. In addition, BOEM’s INCs will bewhich may serve to partially or fully resolved. Although we planned decommissioning activities for 2020, offshore weather conditions andresolve the INCs. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing COVID-19 pandemic led to delays.impact of COVID-19. We cannot currently estimate when decommissioning willmay occur. Further, we cannot currently estimate when we can provide additional financial assurance (supplemental pipeline bonds).
Financial constraints and BDPL’s pending appeal of the BOEM INCs dodoes not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM requires BDPL to provide significant additional financial securityassurance (supplemental pipeline bonds) or assessesis assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we havedid not recordedrecord a liability on our consolidated balance sheetsheets as of September 30,March 31, 2022 and December 31, 2021. At both September 30, 2021,March 31, 2022 and December 31, 2020,2021, BDPL maintained approximately $0.9 million in credit and cash-backedpipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, issued to BOEM.$0.7 million was credit-backed and $0.2 million was cash-backed.
Other Legal MattersTCEQ Proposed Agreed Order
. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January 29, 2020 to March 2, 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. However, we recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of March 31, 2022 and December 31, 2021.
Pilot Dispute Related to Set-Off Payments. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments Pilot made to Tartan arising under a product sales agreement. NPS contends the disputed amount should have been applied to the balance owed by NPS under the Amended Pilot Line of Credit. Pilot has asserted that the redirected payment was offset by accrued interest owed by NPS under the Amended Pilot Line of Credit. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If third parties exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
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Risk Factors and Unregistered Sale of Equity Securities |
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in lawsuits, claims,a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and proceedings incidentalsale of crude oil. Management is working to resolve the conduct of our business, including debt and office lease payment defaults, mechanic’s liens, contract-related disputes, and administrative proceedings.dispute amicably, however, the potential outcome is unknown. Management communicates with all concerned parties and does not believe that these mattersthe contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, we cannot assurethere can be no assurance that communicationsmanagement’s efforts will result in a manageable outcome. If, for example, Veritex exercises its rights and remedies due to defaults under our secured loan agreements with them, our business, financial condition, and results of operations will be materially adversely affected.
Resolved Matters.
None.
ITEM 1A. RISK FACTORS
In addition to the other information outlinedset forth in this Quarterly Report, investorscareful consideration should carefully considerbe given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 as filed with the SEC. The identifiedThese risks and uncertainties could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional unknown factors that are not presently known to us or by factors that we currently consider immaterial to our business. Except for the risk factor identifiedas described below, there have been no material changes in theour assessment of our risk factors from those outlinedset forth in our Annual Report for the fiscal year ended December 31, 2020.2021.
Our estimates of future results could be adversely affected if we cannot effectively execute new business strategies, such as renewable fuels.AROs related to our pipeline and facilities assets may increase.
OurAs of March 31, 2022, we maintained $3.5 million in AROs related to decommissioning our pipeline and facilities assets in the Gulf of Mexico. However, estimating these types of future resultsremoval and restoration costs is especially difficult because: (i) removal obligations will likely occur many years in the future, (ii) decommissioning activities for offshore operations are considerably more expensive than land-based operations due to increased regulatory scrutiny and logistical issues associated with working in waters of operations partially depend on whether we can successfully execute new business strategies. In 2021, we implementedvarious depths, and (iii) liabilities could increase in the future for a new business strategy to explore renewable fuels opportunities. This strategy involves a multitudevariety of uncertainties, many of which are beyondreasons outside our control. Related risks include,control including, but are not limited to, partisan politics that affect governmental policies, regulations, and incentives; substantive upfront capital investments; permitting challenges; product market identification; competition; supply chain issues; environmental impact assessment requirements; construction and implementation delays; technology deployment failure; and environmental and ecological consequences. These risks and uncertainties could adversely affect anticipated results and benefits of our renewable fuels business strategy.to:
· | the limited availability of equipment and the experienced workforce necessary to accomplish this type of work; |
· | increased demand for salvage and other contractors by other companies pursuing similar decommissioning requirements; |
· | changes in asset removal technologies that may result in additional or increased costs; |
· | potential damage or destruction to our pipeline and facilities assets as a result of hurricanes or other events; and |
· | the issuance of new or more stringent decommissioning requirements by regulatory agencies. |
Accordingly, the actual future value of the AROs associated with our pipeline and facilities assets may differ dramatically from our recorded estimate, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities.
Set forth below is information regarding the sale or issuance of shares of Common Stock by us that were not registered under the Securities Act of 1933 and subsequent to the three months ended March 31, 2022:
On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from April 30, 2020 through March 31, 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64. Currently, management does not intend on paying Mr. Carroll the cash portion of guaranty fees due to Blue Dolphin’s working capital deficits. The cash portion will continue to accrue and be added to the principal balance of the March Carroll Note. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement.
On May 12, 2022, we also issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The average cost basis was $0.55, the low was $0.33, and the high was $0.91.
The sale and issuance of the securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See “Part I, Item. 1. Financial Statements – Notes (3) and (10)” for disclosures related to defaults on our debt.
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Exhibits |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See “Part I, Item. 1. Financial Statements – Notes (10) and (11)” for disclosures related to defaults on our debt.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITSEXHIBITS
Exhibits Index
No. |
| Description |
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101.INS* |
| XBRL Instance Document. |
101.SCH* |
| XBRL Taxonomy Schema Document. |
101.CAL* |
| XBRL Calculation Linkbase Document. |
101.LAB* |
| XBRL Label Linkbase Document. |
101.PRE* |
| XBRL Presentation Linkbase Document. |
101.DEF* |
| XBRL Definition Linkbase Document. |
* Filed herewith
Remainder of Page Intentionally Left Blank
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Signature Page |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BLUE DOLPHIN ENERGY COMPANY |
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May 16, 2022 | By: | /s/ JONATHAN P. CARROLL |
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| Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
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Blue Dolphin Energy Company |
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