BLUE DOLPHIN ENERGY CO
10-Ks and 10-Qs
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
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[ √ ]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2018
or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from
to
Commission
File No.
0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
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73-1268729
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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801 Travis Street, Suite 2100, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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713-568-4725
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $0.01 per share
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
[ ]
No
[
√
]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ]
No
[
√
]
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
[
√
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No
[
]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files). Yes
[
√
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No
[
]
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[
√
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Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Act.
Large
accelerated filer
[
]
Accelerated filer
[ ]
Non-accelerated
filer
[ ]
Smaller reporting company
[
√
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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 Act). Yes
[
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No
[
√
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The
aggregate market value of shares of common stock held by
non-affiliates of the registrant was $4,000,124 as of June 29, 2018
(the last business day of the registrant’s most recently
completed second fiscal quarter) based on the number of shares of
common stock held by non-affiliates and the last reported sale
price of the registrant's common stock on June 29,
2018.
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Number
of shares of common stock, par value $0.01 per share, outstanding
at April 1, 2019: 10,975,514
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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TABLE OF
CONTENTS
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4
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6
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BUSINESS
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6
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RISK
FACTORS
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16
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UNRESOLVED
STAFF COMMENTS
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28
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PROPERTIES
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29
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LEGAL
PROCEEDINGS
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30
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MINE
SAFETY DISCLOSURES
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30
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31
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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31
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SELECTED
FINANCIAL DATA
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31
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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32
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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45
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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45
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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79
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CONTROLS
AND PROCEDURES
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79
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OTHER
INFORMATION
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80
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81
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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81
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EXECUTIVE
COMPENSATION
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86
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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88
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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89
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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89
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90
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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90
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FORM
10-K SUMMARY
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90
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98
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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INTRODUCTION
This
Annual Report for the fiscal year ended December 31, 2018 (this
“Annual Report”) is a document that U.S. public
companies file with the Securities and Exchange Commission
(“SEC”) every year. Part I of this Annual Report
provides a general overview of our business, including relevant
risk factors. Part II of this Annual Report contains financial
information and management’s discussion and analysis of our
financial condition and results of operations. Part III provides
information with respect to executive and director compensation. We
hope investors will find it useful to have all this information in
a single document.
In this
Annual Report, “Blue Dolphin,” “we,”
“our,” and “us” are used interchangeably to
refer to Blue Dolphin Energy Company individually or to Blue
Dolphin Energy Company and its subsidiaries collectively, as
appropriate to the context. Information in this Annual Report is
current as of the filing date, unless otherwise
specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this
Annual Report, and from time to time throughout the year, we share
our expectations for our future performance. These forward-looking
statements include statements about our business strategy; our
expected financial performance, including the anticipated effect of
strategic actions; economic, political and market conditions; and
other factors that could affect our future results of operations or
financial condition, including, without limitation, statements
under the sections entitled “Part I, Item 1. Business,”
“Part I, Item 1A. Risk Factors,” “Part I, Item 3.
Legal Proceedings,” and “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations”. Any statements we make that are
not matters of current reportage or historical fact should be
considered forward-looking. Such statements often include words
such as “believe,” “expect,”
“anticipate,” “intend,” “plan,”
“estimate,” “will,” and similar
expressions. By their nature, these types of statements are
uncertain and are not guarantees of our future performance. Our
forward-looking statements represent our estimates and expectations
at the time of disclosure. However, circumstances change
constantly, often unpredictably, and investors should not place
undue reliance on these statements. Many events beyond our control
will determine whether our expectations will be realized. We
disclaim any current intention or obligation to revise or update
any forward-looking statements, or the factors that may affect
their realization, whether considering new information, future
events or otherwise, and investors should not rely on us to do so.
In accordance with the “safe harbor” provisions of the
Private Securities Litigation Reform Act of 1995, “Part I,
Item 1A. Risk Factors” in this Annual Report explains some of
the important factors that may cause actual results to be
materially different from those that we anticipate.
Remainder
of Page Intentionally Left Blank
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Below
are abbreviations and definitions of certain commonly used oil and
gas industry terms, as well as key financial performance measures
used by management, that are used in this Annual
Report.
Regarding
financial terms, m
anagement uses U.S.
generally accepted accounting principles (“GAAP”) and
certain non-GAAP performance measures to assess our results of
operations. Certain performance measures used by management to
assess our operating results and the effectiveness of our business
segment are considered non-GAAP performance measures. These
performance measures may differ from similar calculations used by
other companies within the petroleum industry, thereby limiting
their usefulness as a comparative measure. We refer to certain
refinery throughput and production data in the explanation of our
period over period changes in results of operations. For our
consolidated results, we refer to our consolidated statements of
operations in the explanation of our period over period changes in
results of operations.
Energy Terms
Atmospheric gas oil (“AGO”)
. 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.
Barrel (“bbl”)
. A unit of volume equal to 42
U.S. gallons.
Barrels per Day (“bpd”)
. A measure of the bbls
of daily output produced in a refinery or transported through a
pipeline.
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.
Crude distillation tower
. A tall column-like vessel in which
crude oil and condensate is heated and its vaporized components are
distilled by means of distillation trays. This process turns crude
oil and other inputs into intermediate and finished petroleum
products. (Commonly 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). Crude oil must be broken down into its various components by
distillation before these chemicals and compounds can be used as
fuels or converted to more valuable products.
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 heavy oil-based mud blendstock
(“HOBM”), reduced crude, and AGO).
Distillation
. The first step in the refining process whereby
crude oil and condensate is heated at atmospheric pressure in the
base of a distillation tower. As the temperature increases, the
various compounds vaporize in succession at their various 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.
Feedstocks
. Crude oil and other hydrocarbons, such as
condensate and/or intermediate products, that are used as basic
input materials in a refining process. Feedstocks are transformed
into one or more finished products.
Finished petroleum products
. Materials or products which
have received the final increments of value through processing
operations, and which are being held in inventory for delivery,
sale, or use.
Intermediate petroleum products
. A petroleum product that
might require further processing before it is saleable to the
ultimate consumer. This further processing might 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 that will process it further.
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 about 8 and 16 carbon atoms
per molecule; wide-cut or naphtha-type jet fuel (including Jet B)
has between about 5 and 15 carbon atoms per molecule.
Leasehold interest
. The interest of a lessee under an oil
and gas lease.
Light crude
. A liquid petroleum that has a low density and
flows freely at room temperature. It 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.
Naphtha
. A refined or partly refined light distillate
fraction of crude oil. Blended 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.
Petroleum
. A naturally occurring flammable liquid consisting
of a complex mixture of hydrocarbons of various molecular weights
and other liquid organic compounds. The name petroleum covers both
the naturally occurring unprocessed crude oils and petroleum
products that are made up of refined crude oil.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Product Slate
. Represents 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 petroleum products
. Refined petroleum products are
derived from crude oil and condensate that have been processed
through various refining methods. The resulting products include
gasoline, home heating oil, jet fuel, diesel, lubricants and the
raw materials for fertilizer, chemicals, and
pharmaceuticals.
Refinery
. Within the oil and gas industry, a refinery is an
industrial processing plant where crude oil and condensate is
separated and transformed into petroleum products.
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.
Sweet crude
. Crude oil containing sulfur content of less
than 0.5%.
Financial and Performance Measures
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. With respect to the
crude distillation tower, the rate is calculated by dividing total
refinery throughput or total refinery production on a bpd basis by
the total capacity of the crude distillation tower (currently
15,000 bpd).
Cost of Goods Sold
. Reflects the cost of crude oil and
condensate, fuel use, and chemicals.
Downtime
. Scheduled and/or unscheduled periods in which the
crude distillation tower is not operating. Downtime may occur for a
variety of reasons, including bad weather, power failures, and
preventive maintenance.
Gross Margin
. Calculated as
gross profit divided by total revenue; reflected as a percentage
(%).
Gross Profit
.
Calculated
as total revenue less cost of goods sold; reflected as a dollar ($)
amount.
Operating Days
. Represents the number of days in a period in
which the crude distillation tower operated. Operating days is
calculated by subtracting downtime in a period from calendar days
in the same period.
Other Defined Terms
Final Arbitration Award
.
Damages and attorney fees and related
expenses awarded to GEL Tex Marketing, LLC (“GEL”), an
affiliate of Genesis Energy, L.P. (“Genesis”) by an
arbitrator on August 11, 2017 (the “Final Arbitration
Award”), in arbitration proceedings between LE and GEL (the
“GEL Arbitration”) related to a contractual dispute
involving a Crude Oil Supply and Throughput Services Agreement (the
“Crude Supply Agreement”) and a Joint Marketing
Agreement (the “Joint Marketing Agreement”), each
between LE and GEL and dated August 12, 2011.
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Sulfur
. Present at various levels of concentration in many
hydrocarbon deposits, such as petroleum, coal, or natural gas.
Also, produced as a by-product of removing sulfur-containing
contaminants from natural gas and petroleum. Some of the most
commonly used hydrocarbon deposits are categorized per their sulfur
content, with lower sulfur fuels usually selling at a higher,
premium price and higher sulfur fuels selling at a lower, or
discounted, price.
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.
Throughput
. The volume processed through a unit or a
refinery or transported through a pipeline.
Turnaround
. Scheduled large-scale maintenance activity
wherein an entire process unit is taken offline for a week or more
for comprehensive revamp and renewal.
Yield
. The percentage of refined petroleum products that is
produced from crude oil and other feedstocks.
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
petroleum products.
Other Operating Expenses
. Represents costs associated with
our pipeline assets and leasehold interests in oil and gas
properties.
Refining Gross Profit per Bbl
.
Calculated as refinery operations revenue
less total cost of goods sold divided by the volume, in bbls, of
refined petroleum products sold during the period; reflected as a
dollar ($) amount per bbl.
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.
Total Refinery Throughput
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Refers to the volume processed as
input through the crude distillation tower. Refinery throughput
includes crude oil and condensate and other
feedstocks.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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P
ART I
I
TEM
1.
BUSINESS
Company Overview
Blue
Dolphin Energy Company is a publicly-traded Delaware corporation
formed in 1986, that is primarily engaged in the refining and
marketing of petroleum products. We also provide tolling and
storage terminaling services. Our assets, which are in Nixon,
Texas, primarily include a 15,000-bpd crude distillation tower and
approximately 1.1 million bbls of petroleum storage tank capacity
(collectively the “Nixon Facility”). Pipeline
transportation and oil and gas operations are no longer active.
Blue Dolphin maintains a website at
http://www.blue-dolphin-energy.com
. Information on or
accessible through Blue Dolphin’s website is not incorporated
by reference in or otherwise made a part of this Annual
Report.
Structure and Management
Corporate Structure
Blue
Dolphin has two (2) business segments – Refinery Operations
and Tolling and Terminaling, both of which are conducted at the
Nixon Facility through the below active subsidiaries:
Refinery Operations
●
Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”).
Tolling and Terminaling
●
Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”).
●
Nixon Product
Storage, LLC, a Delaware limited liability company
(“NPS”).
In June
2018, Blue Dolphin acquired 100% of the issued and outstanding
membership interests of NPS from Lazarus Midstream Partners, L.P.,
an affiliate of Lazarus Energy Holdings, LLC (“LEH”),
pursuant to an Assignment Agreement. The transaction represents
transfer of a vacant shell entity for the nominal fee of $10.00.
The assignment was accounted for as a combination of entities under
common control. (See “Part II, Item 8. Financial Statements
and Supplementary Data – Note (5) NPS Assignment” of
this Annual Report for further information related to the NPS
assignment.)
Blue Dolphin also owns pipeline assets and has leasehold interests
in oil and gas wells. These assets and wells, which are not
operational, are included in Corporate and Other. Corporate and
Other includes the below active subsidiaries:
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”).
●
Blue Dolphin
Petroleum Company, a Delaware corporation
(“BDPC”).
●
Blue Dolphin
Services Co., a Texas corporation
(“BDSC”).
See
"Part I, Item 2. Properties” for additional information
regarding our operating subsidiaries, facilities, and
assets.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Management
Blue
Dolphin is controlled by LEH. LEH operates and manages all Blue
Dolphin properties pursuant to an Amended and Restated Operating
Agreement (the “Amended and Restated Operating
Agreement”). Jonathan Carroll is Chairman of the Board of
Directors (the “Board”), Chief Executive Officer, and
President of Blue Dolphin, as well as a majority owner of LEH.
Together LEH and Jonathan Carroll owned 79.8% of our common stock,
par value $0.01 per share (the “Common Stock) at December 31,
2018. (See “Part II, Item 8. Financial Statements and
Supplementary Data – Note (9) Related-Party Transactions,
Note (11) Long-Term Debt, Net and Note (19) Commitments and
Contingencies – Financing Agreements” for additional
disclosures related to LEH, the Amended and Restated Operating
Agreement, and Jonathan Carroll.)
Going Concern
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (1) Organization – Going Concern”
regarding factors that m
anagement has
determined raise substantial doubt about our ability to continue as
a going concern.
Operating Risks
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (1) Organization – Operating Risks”
regarding factors that m
anagement has
determined represent operating risks.
Business Strategy
Management has determined that there is substantial doubt about our
ability to continue as a going concern due to
consecutive net losses, inadequate working
capital, the Final Arbitration Award, and defaults under secured
loan agreements. In 2018, our focus was on improving our financial
stability and increasing utilization of existing assets while
controlling costs, operating safely, and using environmentally
appropriate operating practices. Management believes that it is
continuing to take the appropriate steps. Actions to date
include:
●
Settlement Agreement
with GEL
. LE, NPS, and Blue
Dolphin, together with LEH, Carroll & Company Financial
Holdings, L.P. (“C&C”), and Jonathan Carroll
(collectively referred to herein as the “Lazarus
Parties”), entered into that certain Settlement Agreement
with GEL Tex Marketing, LLC (“GEL”), dated as of July
20, 2018 (as may be further amended, restated, supplemented or
otherwise modified from time to time, the “Settlement
Agreement”), whereby GEL and the Lazarus Paties agreed to
mutually release all claims against each other and to file a
stipulation of dismissal with prejudice in connection with the GEL
Arbitration (the “Settlement”), subject to the terms
and conditions set forth in the Settlement Agreement. The
Settlement is conditioned upon payment by the Lazarus Parties to
GEL of $10.0 million in cash (the “Settlement
Payment”). Until either the Settlement Payment is made or the
Settlement Agreement is terminated, the Lazarus Parties must pay
GEL $0.5 million in cash at the end of each calendar month (the
“Interim Payments”). At December 31, 2018 and 2017,
accrued arbitration award payable on our consolidated balance sheet
was $21.1 million and $27.1 million, respectively. As of the date
of this Annual Report, LE has paid $11.7 million to GEL towards
reducing the outstanding balance of the Final Arbitration
Award.
●
Operational
Improvements
. We made a number
of operational improvements, including: (i) selling certain of our
refined petroleum products immediately following production, which
minimizes inventory, improves cash flow, and reduces commodity
risk/exposure, (ii) decreasing costs, reducing inventory levels,
improving our sales cycle, and receiving pre-payments from certain
customers, all of which reduced our working capital requirements,
and (ii) implementing short-term, evergreen contracts with
customers to limit commodity exposure.
Successful execution of our business strategy depends on several
key factors, including Settlement with GEL, having adequate working
capital, obtaining credit to meet operational and regulatory
requirements, maintaining safe and reliable operations at the Nixon
Facility, meeting contractual obligations, and having favorable
margins on refined petroleum products.
Our results of
operations and liquidity are highly dependent upon the margins that
we receive for our refined petroleum products. The dollar per bbl
price difference between crude oil and condensate (input) and
refined petroleum products (output) is the most significant driver
of refining margins, and they have historically been subject to
wide fluctuations.
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BLUE
DOLPHIN ENERGY COMPANY
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10-K 12/31/18
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There can be no assurance that our strategy will be successful,
that LEH and its affiliates will continue to fund our working
capital needs, that we will be able to obtain additional financing
on commercially reasonable terms or at all, or that margins for
refined petroleum products will be favorable. Veritex Community
Bank (“Veritex”), as first lien holder in secured loan
agreements, has been working with LE and LRM and continues to be
aware and party to all discussions and arrangements with GEL
surrounding the Settlement. However, if Veritex does not
approve the Settlement or exercises its rights and remedies under
secured loan agreements or the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin would likely be required to seek protection under
bankruptcy laws.
See “Part II, Item 8. Financial Statements and Supplementary
Data – Note (1) Organization – Going Concern” for
additional disclosures related to the Final Arbitration Award, the
Settlement Agreement with GEL (as amended), defaults under secured
loan agreements, as well as certain factors: (i) that raise
substantial doubt about our ability to continue as a going
concern
and (ii) that m
anagement has determined represent operating
risks.
Nixon Facility
The
Nixon Facility is comprised of assets owned by LE and LRM. LE owns
the land, crude oil distillation unit, certain refined petroleum
product storage tanks and related piping, and loading and unloading
facilities and utilities. LRM owns the naphtha stabilizer and
depropanizer units, as well as certain petroleum product storage
tanks and related piping. NPS subleases certain petroleum storage
tanks from LE.
In
2015, LE and LRM secured $35.0 million in the aggregate in
USDA-guaranteed 19-year financing to expand the Nixon
Facility’s petroleum storage tank farm.
Increased petroleum storage capacity: (i) assists
with de-bottlenecking the facility, (ii) supports increased
refinery throughput up to approximately 30,000 bpd, and (iii)
provides an opportunity to generate additional tolling and
terminaling revenue.
As of
the date of this Annual Report, the refinery had approximately 1.1
million bbls of crude oil, condensate, and refined petroleum
product storage capacity across 35 tanks.
When the expansion project is complete, petroleum
storage capacity at the Nixon Facility will exceed 1.2 million
bbls, an increase of more than 0.9 million bbls since the project
began in 2015.
The Nixon Facility’s business assets
are pledged as collateral under certain of our long-term debt. See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (11) Long-Term Debt, Net” for additional
disclosures related to borrowings for capital
spending.
Refinery Operations
Refining Industry Overview
Crude
oil refining is the process of separating the hydrocarbons present
in crude oil into usable or refined petroleum products such as
naphtha, diesel, jet fuel and other products. Crude oil refining is
primarily a margin-based business where both crude oil and refined
petroleum products are commodities with prices that can fluctuate
independently for short periods due to supply, demand,
transportation and other factors. To increase profitability, or
improve margins, it is important for a crude oil refinery to
maximize the yields of higher value petroleum products and to
minimize the costs of feedstocks and operating expenses. There are
also several operational efficiencies that can be deployed to
improve margins. These include selecting the appropriate crude oil
or condensate to fulfill anticipated product demand, increasing the
amount and value of refined petroleum products processed from the
crude oil or condensate, reducing downtime for maintenance, repair
and investment, developing valuable by-products or production
inputs out of materials that are typically discarded, and adjusting
utilization rates.
A
refinery's product slate depends on the refinery's configuration
and the type of crude oil and/or condensate being refined and can
be adjusted based on market demand. Although an increase or
decrease in the price for crude oil generally results in a similar
increase or decrease in prices for refined petroleum products,
typically there is a time lag between the comparable increase or
decrease in prices for refined petroleum products. The effect of
changes in crude oil prices on a refinery’s results of
operations depends, in part, on how quickly and how fully refined
petroleum products prices adjust to reflect these
changes.
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Refinery Process Summary
The
Nixon refinery is considered a “topping unit” because
it is primarily comprised of a crude oil distillation tower or
unit, the first stage of the crude oil refining process. The
distillation process (crude distillation tower) separates crude oil
and condensate into finished and intermediate petroleum
products.
The
below diagram represents a high-level overview of the current crude
oil and condensate refining process at the Nixon
refinery.
Example represents a
simplified plant configuration. The specific configuration will
vary based on various market and operational
factors.
The
Nixon refinery is supported by a tank farm that provides feedstock
and surge storage capacity, ensuring smooth, uninterrupted refinery
operations. A regional electric cooperative supplies electrical
power to the Nixon refinery. Fuel gas that is produced at the Nixon
refinery is primarily used as fuel within the refinery. In
addition, small amounts of propane are occasionally acquired for
use in starting-up the Nixon refinery.
Safety and Reliability
We are
committed to safe and efficient operations at the Nixon Facility.
Turnarounds are used to repair, restore, refurbish or replace
refinery equipment such as vessels, tanks, reactors, piping,
rotating equipment, instrumentation, electrical equipment, heat
exchangers and fired heaters. Typically, a refinery undergoes a
major facility turnaround every three to five years. Since the
Nixon refinery is still in the recommissioning phase, turnarounds
and unscheduled downtime are needed more frequently for
unanticipated maintenance or repairs.
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Crude Oil and Condensate Supply
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future. Our ability to purchase adequate amounts of
crude oil and condensate could be adversely affected if the
Settlement Agreement is terminated and GEL seeks to confirm and
enforce the Final Arbitration Award, as well as other factors,
including as net losses, working capital deficits, and financial
covenant defaults in secured loan agreements.
Management
believes that it is taking the appropriate steps to improve our
operations and financial stability. If our business strategy is
unsuccessful, it could affect our ability to acquire adequate
supplies of crude oil and condensate under the existing contract or
otherwise. Further, because our existing crude supply contract is a
month-to-month arrangement, there can be no assurance that crude
oil and condensate supplies will continue to be available under
this contract in the future.
Products and Markets
Products
.
The
Nixon refinery’s product slate can be moderately adjusted
based on market demand. We currently produce a single finished
product – jet fuel. We produce several intermediate products,
including naphtha, HOBM, and AGO.
Markets
.
The
Nixon refinery is in the Gulf Coast region of the U.S., which is
represented by the Energy Information Administration as Petroleum
Administration for Defense District 3 (“PADD 3”).
Our products are primarily sold in the U.S. within PADD 3. However,
with the opening of the Mexican refined products market to private
companies, we occasionally sell refined products to customers that
export to Mexico. LEH, which is HUBZone certified, purchases our
jet fuel and resells the jet fuel to a government agency. Our
intermediate products are primarily sold in nearby markets to
wholesalers and refiners as a feedstock for further blending and
processing. (See “Part I, Item 1. Business – Structure
and Management” and “Part II, Item 8. Financial
Statements and Supplementary Data – Note (9) Related-Party
Transactions, Note (11) Long-Term Debt, Net, and Note (19)
Commitments and Contingencies – Financing Agreements”
for additional disclosures related to LEH.)
Customer
s.
Customers for our refined
petroleum 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,
including month-to-month, six months, and up to one-year terms, in
place with most of our customers. Certain of our contracts require
our customers to prepay and us to sell fixed quantities and/or
minimum quantities of finished and intermediate petroleum products.
Many of these arrangements are subject to periodic renegotiation,
which could result in higher or lower relative prices for our
refined petroleum products. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (15) Concentration
of Risk” of this Annual Report for disclosures related to
significant customers.
Competitio
n.
Many of our competitors are
substantially larger than us and are engaged on a national or
international basis in many segments of the petroleum products
business, including exploration and production, refining,
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 petroleum products slate because of changing
commodity prices, market demand, and refinery operating
costs.
Tolling and Terminaling Operations
Operations Overview
We conduct tolling and terminaling operations at the Nixon
Facility. The Nixon Facility has a tank farm providing
approximately 1.1
million bbls of petroleum storage tank
capacity, 0.7 million bbls of which is used for tolling and
terminaling storage. Shipments are received and redelivered from
within the Nixon Facility via pipeline or from third parties via
truck.
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Products and Customers
The Nixon Facility’s petroleum storage tanks and
infrastructure are primarily suited for crude oil and condensate
and refined petroleum products, such as naphtha, jet fuel, diesel
and fuel oil. Storage c
ustomers are typically refiners
primarily in the lower portion of the Texas Triangle (the Houston -
San Antonio - Dallas/Fort Worth area). Contract terms range from
month-to-month to three years.
Acquisition, Disposition and Restructuring Activities
We
regularly engage in discussions with third parties regarding the
possible purchase of assets and operations that are strategic and
complementary to our existing operations. However, we do not
anticipate any material acquisition activity in the foreseeable
future.
Insurance and Risk Management
Our
operations are subject to significant hazards and risks inherent in
crude oil and condensate refining operations, as well as in the
transportation and storage of crude oil and condensate and finished
and intermediate petroleum products. We have property damage and
business interruption coverage at the Nixon Facility. Business
interruption coverage is for 24 months from the date of the loss,
subject to a deductible with a 45-day waiting period. Our property
damage insurance has deductibles ranging from $5,000 to $500,000.
In addition, we have a full suite of insurance policies covering
workers’ compensation, general liability, directors’
and officers’ liability, environmental liability, and other
business risks. These are supported by safety and other risk
management programs. See also, “Part I, Item 1A. Risk Factors
– Risks Related to Our Business” in this Annual
Report.
Governmental Regulation
Our
operations are subject to extensive and complex federal, state, and
local environmental, health, and safety statutes, regulations, and
ordinances. These laws govern, among other things, the generation,
storage, handling, use and transportation of petroleum, solid
wastes, hazardous wastes, and hazardous substances; the emission
and discharge of materials into or through the environment; waste
management; characteristics and composition of diesel and other
fuels; the monitoring, reporting and control of greenhouse gas
emissions; the financial assurance necessary to satisfy
decommissioning obligations; and the management of pipeline safety.
These laws impose costly obligations on our operations, including
requiring the acquisition of permits and authorizations to conduct
regulated activities, restricting the way regulated activities are
conducted, limiting the quantities and types of materials that may
be released into the environment, and requiring the monitoring of
releases of materials into the environment.
Failure
to comply with environmental, health or safety laws and our
existing permits or other authorizations issued under such laws
could result in fines, civil or criminal penalties or other
sanctions, injunctive relief compelling the installation of
additional controls, a revocation of administering our permits,
and/or the shutdown of our facilities.
We
cannot predict the extent to which additional environmental,
health, and safety laws will be enacted in the future, or how
existing or future laws will be interpreted with respect to our
operations. Many environmental, health, and safety laws and
regulations are becoming increasingly stringent. The cost of
compliance with and governmental enforcement of environmental,
health, and safety laws may increase in the future. We may be
required to make significant capital expenditures or incur
increased operating costs to achieve or sustain compliance with
applicable environmental, health, and safety laws. This
Governmental Regulation section should be read in conjunction with
“Part I, Item 1A. Risk Factors” of this Annual Report,
which discusses our expectations regarding future events based on
currently available information.
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Air Emissions
Toxic Air Pollutants
. The federal Clean Air Act (the
“CAA”)
regulates
air pollutants from stationary and mobile sources. Among other
things, the law authorizes the Environmental Protection Agency (the
“EPA”) to establish National Ambient Air Quality
Standards to protect public health and public welfare and to
regulate emissions of hazardous air pollutants. The CAA, as well as
corresponding state laws and regulations regarding emissions of
pollutants into the air, affect our crude oil and condensate
processing operations and impact certain emissions sources located
offshore. Under the CAA, facilities that emit volatile organic
compounds (“VOCs”) or nitrogen oxides face increasingly
stringent regulations.
Petroleum
refineries are subject to the EPA’s National Standards for
Hazardous Air Pollutants. These standards require petroleum
refineries to meet emission standards reflecting the application of
the maximum achievable control technology. The affected sources at
petroleum refineries are defined to include all process vents,
storage vessels, marine tank vessel loading operations, gasoline
rack operations, equipment leaks, and wastewater treatment systems
located at the refinery. To meet emission standards, we are
required to obtain permits, as well as test, monitor, report, and
implement control requirements.
Under
the EPA’s Mobile Source Air Toxics regulations most
refineries producing transportation fuels for highway use in the
United States are required to produce at or below 15 ppm sulfur for
“on-road” and “off-road” diesel and 30 ppm
sulfur for gasoline. The EPA’s Tier 3 Standards similarly
reduced motor vehicle emission requirements. The Nixon refinery
does not produce gasoline, and the facility ceased production of
nonroad, locomotive, and marine, a transportation-related diesel
fuel product in 2014 – when the new regulations took
effect. Since 2014, the Nixon refinery has produced
HOBM, a non-transportation lubricant blend
product. “Topping units,” like the Nixon
refinery, typically lack a desulfurization process unit to lower
sulfur content levels within the range required by the EPA’s
sulfur control standards, and integration of such a desulfurization
unit generally requires additional permitting and significant
capital upgrades. We can produce and sell diesel with sulfur
content levels above the EPA’s sulfur control standards: (i)
in the U.S. as a feedstock to other refineries and blenders and
(ii) to other countries as a finished petroleum
product.
Greenhouse Gas Emissions
. Emission of Greenhouse Gases
(“GHGs”) is regulated by the EPA under the CAA. By
allowing the regulation of GHGs under the CAA, the EPA’s
findings also indirectly impacted many other carbon-intensive
industries, which would potentially become subject to federal New
Source Review Prevention of Significant Deterioration and Title V
permitting requirements under the CAA (the “CAA Permitting
Requirements”). Although we are not currently subject to
reporting requirements under GHGs-related regulations, the future
adoption of any regulations that require reporting of GHGs or
otherwise limit emissions of GHGs from the Nixon refinery could
require us to incur significant costs and expenses or changes in
operations, which could adversely affect our operations and
financial condition.
Renewable Fuels
Pursuant
to the Energy Policy Act of 2005 and the Energy Independence and
Security Act of 2007, the EPA issued Renewable Fuels Standards
(“RFS”) that require the blending of biofuels into
transportation fuel. Since the compliance mechanism for RFS -
Renewable Identification Numbers – would have created a
burden on the Nixon refinery related to its nonroad, locomotive,
and marine production through 2014, LE applied for an extension of
the temporary exemption afforded small refineries through December
31, 2010 under the CAA Section 211(o)(9)(B). The EPA granted the
Nixon refinery a small refinery exemption from RFS requirements for
2013 and 2014. Since 2014, the Nixon refinery has solely produced
HOBM, a non-transportation lubricant blend product that does not
fall under RFS.
Hazardous Substances and Wastes
The
Comprehensive Environmental Response, Compensation, and Liability
Act (“CERCLA”) imposes strict, joint and several
liability on a broad group of potentially responsible parties for
response actions necessary to address a release of hazardous
substances into the environment. The law authorizes two kinds
of response actions: (i) short-term removals, where actions may be
taken to address releases or threatened releases requiring prompt
response, and (ii) long-term remedial response actions, that
permanently and significantly reduce the dangers associated with
releases or threats of releases of hazardous substances that are
serious, but not immediately life threatening. As of the filing of
this Annual Report, neither we nor any of our predecessors have
been designated as a potentially responsible party under CERCLA or
a similar state statute.
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The
Resource Conservation and Recovery Act (“RCRA”) and
comparable state and local laws impose requirements related to the
handling, storage, treatment and disposal of solid and hazardous
wastes. Our refining operations generate petroleum product wastes,
solid wastes, and ordinary industrial wastes, such as from paints
and solvents, that are regulated under RCRA and state law. Certain
other wastes generated by the Nixon refinery are currently exempt
from regulation as hazardous wastes but are subject to
non-hazardous waste regulations. In the future, these wastes could
be designated as hazardous wastes under RCRA or other applicable
statutes and therefore may become subject to more rigorous and
costly requirements.
The
Nixon refinery has been used for refining activities for many
years. Although prior owners and operators may have used operating
and waste disposal practices that were standard in the industry at
the time, petroleum hydrocarbons and various wastes may have been
released on or under the Nixon Facility site. Regulatory audits to
date have revealed no hazardous substance and waste
issues.
Water Discharges
The
Clean Water Act (the “CWA”) and analogous state laws
impose restrictions and stringent controls on the discharge of
pollutants, including oil, into federal and state waters. These
laws affect our crude oil and condensate processing operations, our
petroleum storage and terminaling operations, and our pipeline,
facilities, and exploration and production assets. The CWA
prohibits the discharge of pollutants into U.S. waters except as
authorized by the terms of a permit issued by the EPA or a state
agency with delegated authority. Stormwater at the Nixon Facility
is tested and discharged pursuant to applicable stormwater permits.
Process wastewater from the Nixon refinery is tested and discharged
to a nearby municipal treatment facility pursuant to applicable
process wastewater permits. Wastewater from our offshore
facilities, including our oil and natural gas pipelines and anchor
platform, is tested and discharged pursuant to applicable produced
water permits.
Spill Prevention and Control
Spill
prevention, control, and countermeasure requirements mandate the
use of structures, such as berms and other secondary containment,
to prevent hydrocarbons or other pollutants from reaching a
jurisdictional body of water in the event of a spill or leak.
Federal and state regulatory agencies can impose administrative,
civil, and criminal penalties for non-compliance with discharge
permits or other requirements of the CWA or analogous state laws
and regulations. The EPA regulates inland oil spills. See
“Offshore Safety and Environmental Oversight” within
this governmental regulation section for information on
o
il spills
that occur in coastal waters.
Offshore Safety and Environmental Oversight
In
addition to the CAA, our pipeline, exploration and production
assets are also subject to the requirements of the Outer
Continental Shelf Lands Act (the “OCSLA”). The OCSLA is
administered by the Bureau of Ocean Energy Management
(“BOEM”) and the Bureau of Safety and Environmental
Enforcement (“BSEE”) and the Office of Natural
Resources Revenue. BSEE has partnered with the U.S. Coast Guard for
oil spill response.
Spill Liability
. The Oil Pollution Act of 1990
(“OPA”), which amends oil spill provisions of the Clean
Water Act (“CWA”), imposes duties and liabilities on
“responsible parties” related to the prevention of oil
spills and damages resulting from such spills in or threatening
United States waters or adjoining shorelines. With limited
exceptions, responsible parties are liable for all removal costs
and damages arising from oil spills. Damages may include: injury or
economic losses resulting from destruction of real or personal
property, damages or loss of use of natural resources used for
subsistence, lost tax revenue, royalties, rents, or net profit
shares suffered by federal, state, or local governments due to
injury to real or personal property, lost profits or impaired
earning power because of injury to real or personal property or
natural resources, and the net costs of providing increased or
additional public services during or after removal
activities.
BOEM
increased the offshore limit of liability for damages under the OPA
from $133.7 million to $137.7 million, plus all clean-up costs, to
reflect the increase in the Consumer Price Index since 2013. The
onshore facilities limit of liability for damages under the OPA is
$633.9 million. A party cannot take advantage of the liability
limits if the spill is caused by gross negligence or willful
misconduct or resulted from a violation of federal safety,
construction or operating regulations. If a party fails to report a
spill or cooperate in the clean-up, liability limits do not apply.
The OPA requires responsible parties to provide proof of financial
responsibility for potential spills. The amount required for
certain types of offshore
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facilities
located seaward of the seaward boundary of a state, including
properties used for oil transportation, is $35.0 million. BDPL
maintains the statutory $35.0 million coverage.
Spill Response
. Pursuant to the OPA, the National Oil and
Hazardous Substances Pollution Contingency Plan, more commonly
called the National Contingency Plan, provides a blueprint for
responding to both oil spills and hazardous substance releases. The
National Contingency Plan requires, among other things, that
responsible parties have an oil spill response plan in place. We
have an oil spill response plan in place.
Idle Iron
. BSEE requires operators to decommission wells and
platforms that have not been used in the past five (5) years for
exploration and development operations or as infrastructure to
support such operations.
BDPL’s
Blue Dolphin Pipeline has been inactive since September 2012. Due
to the length of inactivity, BSEE required BDPL to: (i) flush and
fill the Blue Dolphin Pipeline, (ii) abandon-in-place a portion of
the Blue Dolphin Pipeline’s 20” segment and certain
smaller diameter connecting lateral lines that reside offshore in
federal waters and (iii) remove from federal waters the GA-288C
anchor platform. In April 2016, BDPL submitted decommissioning
permit applications to BSEE for three (3) pipeline segments –
Segments #13101, #9428, and #15635 – and the GA-288C anchor
platform. In June 2016, BDPL also submitted a decommissioning
permit application to the U.S. Army Corps of Engineers for
abandonment of Segment #9428. The permit applications were granted
by BSEE at varying dates between August 2016 and April 2017. Work
must typically be completed within 120 days from the date of permit
approval. Abandonment timing primarily depends on resource
availability and weather conditions in the Gulf of Mexico.
Management anticipates performing abandonment work during 2019.
Weather conditions in the Gulf of Mexico during the winter months
is typically not conducive to abandonment operations. As of the
date of this Annual Report, decommissioning work has not yet been
completed.
In a
letter dated December 19, 2018, BSEE issued to BDPL an Incident of
Noncompliance (“INC”) for its failure to flush and fill
Segment #13101 pursuant to the pipeline decommissioning approval
letter issued in March 2017. BSEE asserts that the INC authorizes
BSEE to impose financial penalties on BDPL if it does not comply
with the INC within ten (10) days. As of the date of this Annual
Report, flushing of the pipeline segment has not yet
commenced.
BDPL
has advised BOEM that flushing and abandonment work has not yet
been completed. There can be no assurance that BSEE will not impose
penalties under the INC. As a result, we are unable to predict
BOEM’s response or the ultimate impact, if any, on our
business, financial condition or results of operations.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of December 31, 2018. As of December 31, 2018 and
2017, BDPL maintained $2.6 million and $2.3 million, respectively,
in asset retirement obligations related to abandonment of these
assets. If BDPL is assessed significant penalties under the INC, we
will experience a significant and material adverse effect on our
operations, liquidity, and financial condition.
Decommissioning Requirements
. To cover the various
obligations of lessees and rights-of-way holders operating in
federal waters of the Gulf of Mexico, BOEM evaluates an
operator’s financial ability to carry out present and future
obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
In a
letter dated March 30, 2018, BOEM ordered BDPL to provide
additional supplemental bonds or acceptable financial assurance of
approximately $4.8 million (the “Separate Orders”)
within sixty (60) calendar days of receipt of the letter. The
Separate Orders relate to five (5) existing pipeline rights-of-way.
BOEM issued an INC for each Separate Order dated June 8, 2018 and
received by BDPL on June 11, 2018. BOEM asserts that the INCs
authorize BOEM to impose financial penalties on BDPL if it does not
comply with the Separate Orders within twenty (20) days. BOEM
asserts that potential penalties accrue for each day BDPL failed to
comply after June 28, 2018. BDPL appealed the INCs on
August 8, 2018. The Interior Board of Land Appeals (the
“IBLA”) has granted four extension requests that extend
BDPL’s deadline for filing a Statement of Reasons with the
IBLA until April 22, 2019. BDPL’s pending appeal of the INCs
does not relieve BDPL of its obligations to provide additional
financial assurance in accordance with the Separate Orders, or of
BOEM’s authority to impose financial penalties.
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BDPL
has initiated settlement discussions with BOEM to resolve the
Separate Orders and the INCs. There can be no assurance that BOEM
will: (i) accept a proposal for a reduced amount of supplemental
financial assurance, (ii) not require additional supplemental
pipeline bonds related to BDPL’s existing pipeline
rights-of-way, and/or (iii) not impose penalties under the INCs. As
a result, we are unable to predict the outcome of the Separate
Orders, the settlement discussions with BOEM or their ultimate
impact, if any, on our business, financial condition or results of
operations. Accordingly, we have not recorded a liability on our
consolidated balance sheet as of December 31, 2018. As of December
31, 2018 and 2017, BDPL maintained approximately $0.9 million in
credit and cash-backed pipeline rights-of-way bonds issued to the
BOEM. If BDPL is required by BOEM to provide significant additional
supplemental bonds or acceptable financial assurance or is assessed
significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition.
Offshore Safety
. Under the Workplace Safety Rule, BSEE
requires operators to employ a comprehensive safety and
environmental management system
(“SEMS”). SEMS are designed to reduce human
and organizational errors as root causes of work-related accidents
and offshore spills, develop protocols as to who at the facility
has the ultimate operational safety and decision-making authority,
and establish procedures to provide all personnel with “stop
work” authority. BSEE regulations require that an
operator’s SEMS program must be periodically audited by an
independent third-party auditor. BDPL has a SEMS program in
place.
Health, Safety and Maintenance
We are
subject to federal and state laws and regulations related to the
health and safety of workers pursuant to the Occupational Safety
and Health Act of 1970. These laws and regulations are administered
by the Occupational Safety and Health Administration (the
“OSHA”) and by states that have established an
OSHA-approved state safety plan
.
Our
refinery operations are also subject to OSHA process safety
management regulations and the National Emphasis Program for
Petroleum Refineries (the “RNEP”). RNEP requires
refineries to be inspected for compliance with process safety
management regulations. Inspections may last from two to six
months, including one to three months on site. Inspectors primarily
focus on process safety management implementation and
recordkeeping. The Nixon Facility was inspected by OSHA in 2013 and
again in 2016. Following each inspection, LE was assessed a nominal
civil penalty related to failure to comply with documentation and
notice posting requirements.
We
operate a comprehensive safety, health and security program, with
participation by personnel at all levels of the organization.
Despite our efforts to achieve excellence in our safety and health
performance, there can be no assurances that there will not be
accidents resulting in injuries or even fatalities. We routinely
monitor our programs and consider improvements in our management
systems.
Intellectual Property
We rely
on intellectual property laws to protect our brand, as well as
those of our subsidiaries. “Blue Dolphin Energy
Company” is a registered trademark in the U.S. in name and
logo form. “Petroport, Inc.” is a registered trademark
in the U.S. in name form. In addition,
“www.blue-dolphin-energy.com” is a registered domain
name.
Personnel
We rely
on the services of LEH pursuant to the Amended and Restated
Operating Agreement to manage our property and the property of our
subsidiaries in the ordinary course of business. LEH provides us
with the following personnel services under the Amended and
Restated Operating Agreement:
●
Personnel serving
in the capacities of corporate executive officers, including Chief
Executive Officer, as well as general manager, operations,
maintenance, environmental, and health and safety personnel;
and
●
Personnel providing
administrative and professional services, including accounting,
human resources, insurance, and regulatory compliance.
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All
personnel work for and are paid by LEH. Blue Dolphin is billed by
LEH at cost plus a 5% markup. As of December 31, 2018, Blue Dolphin
had 55 full-time workers. See “Part II, Item 8. Financial
Statements and Supplementary Data - Note (9), Related-Party
Transactions” of this Annual Report for additional
disclosures related to LEH.
Available Information
We are
subject to the informational requirements of the Exchange Act. We
file financial and other information with the SEC as required,
including but not limited to, proxy statements on Schedule 14A,
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K. The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549, on official
business days during the hours of 10:00 a.m. to 3:00 p.m. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet website at
http:///www.sec.gov
that contains reports, proxy information and information
statements, and other information regarding issuers, including us,
that file electronically with the SEC.
We also
make our SEC filings available through our website (
http://www.blue-dolphin-energy.com
)
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
I
TEM 1A. RISK FACTORS
An investment in our Common Stock involves risks. In addition to
the other information in this Annual Report and our other filings
with the SEC, you should carefully consider the following risk
factors in evaluating us and our business. The risks described
below are not the only risks we face. Additional risks and
uncertainties not specified herein, not currently known to us, or
currently deemed to be immaterial may also materially adversely
affect our business, financial condition, operating results and/or
cash flows.
Any one
of these factors or a combination of these factors could materially
affect our future results of operations and could influence whether
any forward-looking statements ultimately prove to be accurate. Our
forward-looking statements are not guarantees of future
performance, and actual results and future performance may differ
materially from those suggested in any forward-looking statements.
We do not intend to update these statements unless we are required
to do so.
A.
Risks Related to Our Business and Industry
A1.
Failure to meet the terms and conditions set forth in the
Settlement Agreement with GEL, including but not limited to
securing the Settlement Financing, could have a material adverse
effect on our business, financial condition, and results of
operations and could materially adversely affect the value of an
investment in our common stock.
As
previously disclosed, LE was involved in arbitration proceedings
with GEL, an affiliate of Genesis, related to a contractual dispute
involving the Crude Supply Agreement and the Joint Marketing
Agreement. On August 11, 2017, the arbitrator delivered the Final
Arbitration Award. The Final Arbitration Award denied all
LE’s claims against GEL and granted substantially all the
relief requested by GEL in its counterclaims. Among other matters,
the Final Arbitration Award awarded damages and GEL’s
attorneys’ fees and related expenses to GEL in the aggregate
amount of $31.3 million.
After the initial $3.7 million
payment to GEL in September 2017, LE has made payments to GEL of
$0.5 million per month. As of the date of this Annual Report, LE
has paid $11.7 million to GEL towards reducing the outstanding
balance of the Final Arbitration Award.
A
hearing on confirmation of the Final Arbitration Award was
scheduled to occur on September 18, 2017 in state district court in
Harris County, Texas. Prior to the scheduled hearing, LE and GEL
jointly notified the court that the hearing would be continued for
a period of no more than 90 days after September 18, 2017 (the
“Continuance Period”), to facilitate settlement
discussions between the parties. On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a
Letter Agreement with GEL, effective September 18, 2017 (the
“GEL Letter Agreement”), confirming the parties’
agreement to the continuation of the confirmation hearing during
the Continuance Period, subject to the terms of the GEL Letter
Agreement. The GEL Letter Agreement was subsequently amended nine
times to extend the Continuance Period through July
2018.
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The
Lazarus Parties entered into the Settlement Agreement, whereby GEL
and the Lazarus Parties agreed to the Settlement, subject to the
terms and conditions set forth in the Settlement Agreement. The
Settlement is conditioned upon the Settlement Payment and the
Interim Payments or the Settlement Agreement is terminated. The
Interim Payments will not be applied to reduce the amount of the
Settlement Payment, but such payments will reduce the Final
Arbitration Award. At the time of the Settlement, the difference
between the Settlement Payment and the amount we have accrued on
our consolidated balance sheet for arbitration award payable will
be recognized as a gain on our consolidated statement of
operations. At December 31, 2018 and 2017, accrued arbitration
award payable on our consolidated balance sheet was $21.1 million
and $27.1 million, respectively.
Unless
extended in writing by GEL, the Settlement Agreement will terminate
on July 31, 2019 if the Settlement Payment is not made on or before
such date, and the Settlement Agreement may be terminated by GEL
following the occurrence of an event of default under the
Settlement Agreement, as described above. Pursuant to the
Settlement Agreement, the parties agreed to terminate the GEL
Letter Agreement, and GEL agreed not to take any action to execute
or collect on the Final Arbitration Award and to take all action
necessary to continue the District Court Action until the earlier
of: (i) the date on which the Settlement Payment is paid or (ii)
the termination of the Settlement Agreement. On February 1, 2019,
GEL filed a proposed order granting a joint motion to continue the
District Court Action.
Veritex,
as successor in interest to Sovereign Bank by merger, delivered to
obligors notices of default under secured loan agreements with
Veritex, stating that the Final Arbitration Award constitutes an
event of default under the secured loan agreements. The occurrence
of an event of default permits Veritex to declare the amounts owed
under these loan agreements immediately due and payable, exercise
its rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available.
Veritex
has not accelerated or called due the secured loan agreements
considering the Settlement Agreement, which Veritex must ultimately
approve. Instead, Veritex has expressly reserved all of its rights,
privileges and remedies related to events of default under the
secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan agreements. The debt
associated with these loans was classified within the current
portion of long-term debt on our consolidated balance sheets at
December 31, 2018 and 2017 due to existing events of default
related to the Final Arbitration Award as well as the uncertainty
of LE and LRM’s ability to meet financial covenants in the
secured loan agreements in the future.
Veritex has been working with LE and LRM and
continues to be aware and party to all discussions and arrangements
with GEL surrounding the Settlement. We
can provide no
assurance that the conditions necessary for consummation of the
Settlement will be met. If certain conditions are not met or the
Settlement Agreement is terminated, GEL may seek to enforce the
Final Arbitration Award against the Lazarus Parties. Further, we
can provide no assurance as to whether
Veritex, as first lienholder, will approve the Settlement. If
Veritex does not approve the Settlement, Veritex may exercise its
rights and remedies under the secured loan agreements. In either
case
: (i) our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations will be materially affected,
(ii) Blue Dolphin and its affiliates would likely be required to
seek protection under bankruptcy laws, and (iii) the trading prices
of our common stock and the value of an investment in our common
stock could significantly decrease, which could lead to holders of
our common stock losing their investment in our common stock in its
entirety.
See
“Part I, Item 3. Legal Proceedings,” “Part II,
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and the notes to our
consolidated financial statements in “Part II, Item 8.
Financial Statements and Supplementary Data” for additional
information regarding the Final Arbitration Award, the Settlement
Agreement with GEL, and our long-term debt.
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A2.
Inadequate liquidity to sustain operations due to the unfavorable
outcome in the arbitration of the contract-related dispute with
GEL, net losses, working capital deficits, and other factors,
including defaults under secured loan agreements, any of which
could have a material adverse effect on us.
We
currently rely on revenue from operations, LEH and its affiliates
(including Jonathan Carroll), and borrowings under bank facilities
to meet our liquidity needs. Our short-term working capital needs
are primarily related to acquisition of crude oil and condensate to
operate the Nixon refinery, repayment of debt obligations, and
capital expenditures for maintenance, upgrades, and refurbishment
of equipment at the Nixon Facility. Our long-term working capital
needs are primarily related to repayment of long-term debt
obligations. In addition, we continue to utilize capital to reduce
operational, safety and environmental risks. We may incur
substantial compliance costs relating to any new environmental,
health and safety regulations. Our liquidity will affect our
ability to satisfy any of these needs.
We
reported a net loss of $0.5 million, or a loss of $0.05 per share
for the twelve months ended December 31, 2018 compared to a net
loss of $22.3 million, or a loss of $2.09 per share, for the twelve
months ended December 31, 2017. The twelve months ended December
31, 2017 included the net effect to our consolidated statement of
operations of the Final Arbitration Award, which was an expense of
$24.3 million, or $2.29 per share, in arbitration award and
associated fees. Excluding the Final Arbitration Award,
we would have reported net income for the twelve months ended
December 31, 2017 of $2.0 million, or income of $0.19 per share,
reflecting a decline of $2.5 million, or $0.24 per share, for 2018
compared to 2017 due to lower margins.
We had
a working capital deficit of $71.9 million at December 31, 2018
compared to a working capital deficit of $69.5 million at December
31, 2017. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31, 2018 and
2017.
We had
cash and cash equivalents and restricted cash (current portion) of
$0.01 million and $0.05 million, respectively, at December 31,
2018. Comparatively, we had cash and cash equivalents and
restricted cash (current portion) of $0.5 million and $0.05
million, respectively, at December 31, 2017.
[See
“Part I, Item 1. Business – Going Concern,”
“ – Operating Risks,” and “ –
Business Strategy” for additional disclosures related to
certain factors (including net losses, working capital deficits,
and defaults under secured loan agreements) that could have a
material adverse effect on our liquidity and the steps management
is continuing to take to improve operations at the Nixon
Facility.]
A3.
Defaults under our secured loan agreements could have a material
adverse effect on our business, financial condition, and results of
operations and materially adversely affect the value of an
investment in our common stock.
As
described elsewhere in this Annual Report, Veritex notified
obligors that the Final Arbitration Award constitutes an event of
default under secured loan agreements with Veritex. In addition to
existing events of default related to the Final Arbitration Award,
at December 31, 2018, LE and LRM were in violation of the debt
service coverage ratio, the current ratio, and debt to net worth
ratio financial covenants related to the secured loan agreements.
LE also failed to replenish a payment reserve account as required.
The occurrence of events of default under the secured loan
agreements permits Veritex to declare the amounts owed under the
secured loan agreements immediately due and payable, exercise its
rights with respect to collateral securing obligors’
obligations under the loan agreements, and/or exercise any other
rights and remedies available.
Veritex
has not accelerated or called due the secured loan agreements
considering the Settlement Agreement, which Veritex must ultimately
approve. Instead, Veritex has expressly reserved
all its
rights, privileges and remedies related to events of default under
the secured loan agreements and informed LE and LRM that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan agreements. The debt
associated with these loans was classified within the current
portion of long-term debt on our consolidated balance sheets at
December 31, 2018 and 2017 due to existing events of default
related to the Final Arbitration Award as well as the uncertainty
of LE and LRM’s ability to meet financial covenants in the
secured loan agreements in the future.
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We can
provide no assurance that: (i) our assets or cash flow would be
sufficient to fully repay borrowings under outstanding long-term
debt, either upon maturity or if accelerated, (ii) LE and LRM would
be able to refinance or restructure the payments on the long-term
debt, and/or (iii) Veritex, as first lien holder, will approve the
Settlement or provide future waivers.
Veritex has been working with LE and LRM and
continues to be aware and party to all discussions and arrangements
with GEL surrounding the Settlement.
If Veritex does
not approve the Settlement, Veritex may exercise its rights and
remedies under the secured loan agreements. Defaults under secured
loan agreements and any exercise by Veritex of its 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, particularly if Blue Dolphin is required to seek
protection under bankruptcy laws.
For
additional information regarding defaults under our secured loan
agreements and their potential effects on our business, financial
condition, and results of operations, see “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Part II, Item 8.
Financial Statements and Supplementary Data – Note (11)
Long-Term Debt, Net”.
A4.
Our substantial debt in the current portion of long-term debt,
which is currently in default, could adversely affect our financial
health and make us more vulnerable to adverse economic
conditions.
As of
December 31, 2018 and 2017, we had $34.9 million and $35.5 million,
respectively, of bank debt in the current portion of long-term
debt. Blue Dolphin, as parent company, has guaranteed the
indebtedness of certain subsidiaries. In addition, LEH and certain
LEH affiliates have guaranteed the indebtedness of Blue Dolphin and
certain of its subsidiaries. This level of debt in current
liabilities and the cross guarantee agreements could have important
consequences, such as: (i) limiting our ability to obtain
additional financing to fund our working capital, capital
expenditures, debt service requirements or potential growth, or for
other purposes; (ii) increasing the cost of future borrowings;
(iii) limiting our ability to use operating cash flow in other
areas of our business because we must dedicate a substantial
portion of these funds to make payments on our debt; (iv) placing
us at a competitive disadvantage compared to competitors with less
debt; and (v) increasing our vulnerability to adverse economic and
industry conditions.
As of
the date of this Annual Report, LE and LRM are current with
payments under their respective secured loan agreements with
Veritex. Our ability to service debt will depend upon, among other
things, our future financial and operating performance, which will
be affected by prevailing economic conditions and financial,
business, regulatory and other factors, many of which are beyond
our control. If our working capital is not sufficient to service
our debt, and any future indebtedness that we incur, our business,
financial condition, and results of operations will be materially
adversely affected, and Blue Dolphin would likely be required to
seek protection under bankruptcy laws.
A5.
Our business, financial condition and operating results may be
adversely affected by increased costs of capital or a reduction in
the availability of credit.
Adverse
changes to the availability, terms and cost of capital, interest
rates or our credit ratings (which would have a corresponding
impact on the credit ratings of our subsidiaries that are party to
any cross-guarantee agreements) could cause our cost of doing
business to increase by limiting our access to capital, including
our ability to refinance maturing or accelerated existing
indebtedness on similar terms.
A6.
LEH holds a significant interest in us, and related-party
transactions with LEH and its affiliates may cause conflicts of
interest that may adversely affect us.
Jonathan Carroll,
our Chief Executive Officer, President, Assistant Treasurer and
Secretary, is also a majority owner of LEH. Together, LEH and
Jonathan Carroll owned 79.8% of our Common Stock at December 31,
2018, and, pursuant to the Amended and Restated Operating
Agreement, manages and operates all Blue Dolphin properties. LEH
and Jonathan Carroll have significant influence over matters such
as the election of the Board, control over our business, policies
and affairs and other matters submitted to our stockholders. LEH
and Jonathan Carroll are entitled to vote the Common Stock owned by
LEH in accordance with its interests, which may be contrary to the
interests of other stockholders. LEH has interests that may differ
from the interests of other stockholders and, as a result, there is
a risk that important business decisions will not be made in the
best interest of some of our stockholders.
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LEH and
its affiliates are not limited in their ability to compete with us
and are not obligated to offer us business opportunities. We
believe that the transactions and agreements that we have entered
with LEH and its affiliates are on terms that are at least as
favorable as could reasonably have been obtained at such time from
third parties. However, these relationships could create, or appear
to create, potential conflicts of interest when our Board is faced
with decisions that could have different implications for us and
LEH or its affiliates. The appearance of conflicts, even if such
conflicts do not materialize, might adversely affect the
public’s perception of us, as well as our relationship with
other companies and our ability to enter new relationships in the
future, which may have a material adverse effect on our ability to
do business.
A7.
The dangers inherent in oil and gas operations could expose us to
potentially significant losses, costs or liabilities and reduce our
liquidity.
Oil and
gas operations are inherently subject to significant hazards and
risks. These hazards and risks include, but are not limited to,
fires, explosions, ruptures, blowouts, spills, third-party
interference and equipment failure, any of which could result in
interruption or termination of operations, pollution, personal
injury and death, or damage to our assets and the property of
others. These risks could harm our reputation and business, result
in claims against us, and have a material adverse effect on our
results of operations and financial condition.
A8.
The geographic concentration of our assets creates a significant
exposure to the risks of the regional economy and other regional
adverse conditions.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined petroleum products in a single,
relatively limited geographic area. In addition, our onshore
facilities assets are in Freeport, Texas, and all our pipelines,
offshore facilities and oil and gas properties are located within
the Gulf of Mexico. As a result, our operations are more
susceptible to regional economic conditions than our more
geographically diversified competitors. Any changes in market
conditions, unforeseen circumstances, or other events affecting the
area in which our assets are located could have a material adverse
effect on our business, financial condition, and results of
operations. These factors include, among other things, changes in
the economy, weather conditions, demographics, and
population.
A9.
Competition from companies having greater financial and other
resources could materially and adversely affect our business and
results of operations.
The
refining industry is highly competitive. Our refining
operations compete with domestic refiners and marketers in PADD 3
(Gulf Coast), domestic refiners in other PADD regions, and foreign
refiners that import products into the U.S. Certain of our
competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. Several of
our principal competitors are integrated national or international
oil companies that are larger and have substantially greater
resources than we do and have access to proprietary sources of
controlled crude oil production. Unlike these competitors, we
obtain all our feedstocks from a single supplier. Because of their
integrated operations and larger capitalization, larger, more
complex refineries may be more flexible in responding to volatile
industry or market conditions, such as crude oil and other
feedstocks supply shortages or commodity price
fluctuations. If we are unable to compete effectively,
we may lose existing customers or fail to acquire new
customers.
A10.
Environmental laws and regulations could require us to make
substantial capital expenditures to remain in compliance or to
remediate current or future contamination that could give rise to
material liabilities.
Our
operations are subject to a variety of federal, state and local
environmental laws and regulations relating to the protection of
the environment and natural resources, including those governing
the emission or discharge of pollutants into the environment,
product specifications and the generation, treatment, storage,
transportation, disposal and remediation of solid and hazardous
wastes. Violations of these laws and regulations or permit
conditions can result in substantial penalties, injunctive orders
compelling installation of additional controls, civil and criminal
sanctions, permit revocations and/or facility
shutdowns.
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In
addition, new environmental laws and regulations, new
interpretations of existing laws and regulations, increased
governmental enforcement of laws and regulations, or other
developments could require us to make additional unforeseen
expenditures. Many of these laws and regulations are becoming
increasingly stringent, and the cost of compliance with these
requirements can be expected to increase over time. The
requirements to be met, as well as the technology and length of
time available to meet those requirements, continue to develop and
change. Expenditures or costs for environmental compliance could
have a material adverse effect on our results of operations,
financial condition, and profitability.
The
Nixon Facility operates under several federal and state permits,
licenses, and approvals with terms and conditions that contain a
significant number of prescriptive limits and performance
standards. These permits, licenses, approvals, limits, and
standards require a significant amount of monitoring, record
keeping and reporting to demonstrate compliance with the underlying
permit, license, approval, limit or standard. Non-compliance or
incomplete documentation of our compliance status may result in the
imposition of fines, penalties and injunctive relief. Additionally,
there may be times when we are unable to meet the standards and
terms and conditions of our permits, licenses and approvals due to
operational upsets or malfunctions, which may lead to the
imposition of fines and penalties or operating restrictions that
may have a material adverse effect on our ability to operate our
facilities, and accordingly our financial performance.
A11.
We are subject to strict laws and regulations regarding personnel
and process safety, and failure to comply with these laws and
regulations could have a material adverse effect on our results of
operations, financial condition and profitability.
We are
subject to the requirements of OSHA and comparable state statutes
that regulate the protection of the health and safety of workers,
and the proper design, operation and maintenance of our equipment.
In addition, OSHA and certain environmental regulations require
that we maintain information about hazardous materials used or
produced in our operations and that we provide this information to
personnel and state and local governmental authorities. Failure to
comply with these requirements, including general industry
standards, record keeping requirements and monitoring and control
of occupational exposure to regulated substances, may result in
significant fines or compliance costs, which could have a material
adverse effect on our results of operations, financial condition
and cash flows.
A12.
Our insurance policies may be inadequate or expensive.
Our
insurance coverage does not cover all potential losses, costs or
liabilities. We could suffer losses for uninsurable or uninsured
risks or in amounts more than our existing insurance coverage. Our
ability to obtain and maintain adequate insurance may be affected
by conditions in the insurance market over which we have no
control. In addition, if we experience insurable events, we may
experience an increase in annual premiums, a limit on coverage, or
loss of coverage. Inadequate insurance or loss of coverage could
have a material adverse effect on our business, financial
condition, and results of operations.
A13.
Our ability to use net operating loss (“NOL”)
carryforwards to offset future taxable income for U.S. federal
income tax purposes is subject to limitation.
Under
Section 382 of the Internal Revenue Code of 1986, as amended
(“IRC Section 382”), a corporation that undergoes an
“ownership change” is subject to limitations on its
ability to utilize its 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 certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than 50
percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three
years).
Blue
Dolphin experienced ownership changes in 2005 because of a series
of private placements, and in 2012 because of a reverse
acquisition. The 2012 ownership change limits our ability to
utilize NOLs following the 2005 ownership change that were not
previously subject to limitation. Limitations imposed on our
ability to use NOLs to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would
be paid if such limitations were not in effect, and could cause
such NOLs to expire unused, in each case reducing or eliminating
the benefit of such NOLs. Similar rules and limitations may apply
for state income tax purposes. NOLs generated after the 2012
ownership change are not subject to limitation.
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At
December 31, 2018 and 2017, management determined that cumulative
losses incurred over the prior three-year period provided
significant objective evidence that limited the ability to consider
other subjective evidence, such as projections for future growth.
Based on this evaluation, we recorded a full valuation allowance
against the deferred tax assets as of December 31, 2018 and
2017.
A14.
Terrorist attacks, cyber-attacks, threats of war, or actual war may
negatively affect our operations, financial condition, results of
operations, and cash flows.
Energy-related
assets in the U.S. may be at a greater risk for future terrorist
attacks than other potential targets. A direct attack on our assets
or assets used by us could have a material adverse effect on our
operations, financial condition, results of operations, and cash
flows. In addition, any terrorist attack in the U.S. could have an
adverse impact on energy prices, including prices for crude oil and
refined petroleum products, and refining margins. Disruption or
significant increases in energy prices could result in
government-imposed price controls. While we currently maintain some
insurance that provides coverage against terrorist attacks, such
insurance has become increasingly expensive and difficult to
obtain. As a result, insurance providers may not continue to offer
this coverage to us on terms that we consider affordable, or at
all.
Our
operations are dependent on our technology infrastructure, which
includes a data network, telecommunications system, internet
access, and various computer hardware equipment and software
applications. Our technology infrastructure is subject to damage or
interruption from several potential sources, including natural
disasters, software viruses or other malware, power failures,
cyber-attacks, and/or other events. To the extent that our
technology infrastructure is under our control, we have implemented
measures such as virus protection software and emergency recovery
processes to address identified risks. However, there can be no
assurance that a security breach or cyber-attack will not
compromise confidential, business critical information, cause a
disruption in our operations, or harm our reputation, any of which
could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
B.
Risks Related to Our Operations
B1.
Management has determined that there is, and the report of our
independent registered public accounting firm expresses,
substantial doubt about our ability to continue as a going
concern.
Management
has determined that conditions exist that raise substantial doubt
about our ability to continue as a going concern due to the Final
Arbitration Award, defaults in secured loan agreements, recurring
losses from operations, and the substantial decline in working
capital. A “going concern” opinion could impair our
ability to finance our operations through the sale of equity,
incurring debt, or other financing alternatives. Our ability to
continue as a going concern will depend upon consummation of the
Settlement with GEL, sustained positive operating margins, and
financing at commercially reasonable terms for working capital to
operate the Nixon Facility, purchase crude oil and condensate, and
funding for capital expenditures. If we are unable to achieve
these goals, our business would be jeopardized, and we may not be
able to continue.
B2.
Refining margins are volatile, and a reduction in refining margins
will adversely affect the amount of cash we will have available for
working capital.
Historically,
refining margins have been volatile, and they are likely to
continue to be volatile in the future. Our financial results are
primarily affected by the relationship, or margin, between our
refined petroleum product sales prices and our crude oil and
condensate costs. Our crude oil and condensate acquisition costs
and the prices at which we can ultimately sell our refined
petroleum products depend upon numerous factors beyond our control.
The prices at which we sell refined petroleum products are strongly
influenced by the commodity price of crude oil. If crude oil prices
increase, our “refinery operations” business segment
margins will fall unless we can pass along these price increases to
our wholesale customers. Increases in the selling prices for
refined petroleum products typically trail the rising cost of crude
oil and may be difficult to implement when crude oil costs increase
dramatically over a short period.
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B3.
The price volatility of crude oil, other feedstocks, refined
petroleum products, and fuel and utility services may have a
material adverse effect on our earnings, cash flows and
liquidity.
Our
refining earnings, cash flows and liquidity from operations depend
primarily on the margin above operating expenses (including the
cost of refinery feedstocks, such as crude oil and condensate that
are processed and blended into refined petroleum products) at which
we can sell refined petroleum products. Crude oil refining is
primarily a margin-based business. To improve margins, it is
important for a crude oil refinery to maximize the yields of high
value finished petroleum produces and to minimize the costs of
feedstocks and operating expenses. When the margin between refined
petroleum product prices and crude oil and other feedstock costs
decreases, our margins are negatively affected. Crude oil refining
margins have historically been volatile, and are likely to continue
to be volatile, because of a variety of factors, including
fluctuations in the prices of crude oil, other feedstocks, refined
petroleum products, and fuel and utility services. Although an
increase or decrease in the price for crude oil generally results
in a similar increase or decrease in prices for refined petroleum
products, typically there is a time lag between the comparable
increase or decrease in prices for refined petroleum products. The
effect of changes in crude oil and condensate prices on our
refining margins therefore depends, in part, on how quickly and how
fully refined petroleum product prices adjust to reflect these
changes.
Prices
of crude oil, other feedstocks and refined petroleum products
depend on numerous factors beyond our control, including the supply
of and demand for crude oil, other feedstocks, and refined
petroleum products. Such supply and demand are affected by, among
other things:
|
●
|
changes
in foreign, domestic, and local economic conditions;
|
|
●
|
foreign
and domestic demand for fuel products;
|
|
●
|
worldwide political
conditions, particularly in significant oil producing
regions;
|
|
●
|
foreign
and domestic production levels of crude oil, other feedstocks, and
refined petroleum products and the volume of crude oil, feedstocks,
and refined petroleum products imported into the U.S.;
|
|
●
|
availability of and
access to transportation infrastructure;
|
|
●
|
capacity
utilization rates of refineries in the U.S.;
|
|
●
|
Organization of
Petroleum Exporting Countries’ influence on oil
prices;
|
|
●
|
development and
marketing of alternative and competing fuels;
|
|
●
|
commodities
speculation;
|
|
●
|
natural
disasters (such as hurricanes and tornadoes), accidents,
interruptions in transportation, inclement weather or other events
that can cause unscheduled shutdowns or otherwise adversely affect
our refineries;
|
|
●
|
federal
and state governmental regulations and taxes; and
|
|
●
|
local
factors, including market conditions, weather conditions and the
level of operations of other refineries and pipelines in our
markets.
|
23
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
B4.
Our future success depends on our ability to acquire sufficient
levels of crude oil on favorable terms to operate the Nixon
refinery.
Operation of the
Nixon refinery depends on our ability to purchase adequate crude
supplies on favorable terms. Following the cessation of crude
supplies under the Crude Supply Agreement with GEL, we put in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future. Our ability to purchase adequate amounts of
crude oil and condensate could be adversely affected if the
Settlement Agreement is terminated and GEL seeks to confirm and
enforce the Final Arbitration Award, as well as other factors,
including as net losses, working capital deficits, and financial
covenant defaults in secured loan agreements.
We are
pursuing alternative sources to finance crude oil and condensate
acquisition costs, including commodity sale and repurchase
programs, inventory financing, debt financing, equity financing, or
other means. We may not be successful in consummating suitable
financing transactions in the time required or at all, securing
financing on terms favorable to us, or obtaining crude oil and
condensate at the levels needed to earn a profit and/or safely
operate the Nixon Facility, any of which could adversely affect our
business, results of operations and financial
condition.
B5.
Downtime at the Nixon refinery could result in lost margin
opportunity, increased maintenance expense, increased inventory,
and a reduction in cash available for payment of our
obligations.
The
safe and reliable operation of the Nixon refinery is key to our
financial performance and results of operations, and we are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Although operating at anticipated levels, the Nixon refinery is
still in a recommissioning phase and may require unscheduled
downtime for unanticipated reasons, including maintenance and
repairs, voluntary regulatory compliance measures, or cessation or
suspension by regulatory authorities. Occasionally, the Nixon
refinery experiences a temporary shutdown due to power outages
because of high winds and thunderstorms. In the case of such a
shutdown, the refinery must initiate a standard start-up process,
and such process can last several days although we are typically
able to resume normal operations the next day. Any scheduled or
unscheduled downtime may result in lost margin opportunity,
increased maintenance expense and a build-up of refined petroleum
products inventory, which could reduce our ability to meet our
payment obligations.
For the
twelve months ended December 31,2018, the refinery experienced
thirty (30) days of downtime primarily related to repair and
maintenance of the naphtha stabilizer unit and short maintenance
turnarounds scheduled during January and March of 2018. For the
twelve months ended December 31, 2017, the refinery experienced
seventeen (17) days of downtime primarily due to a contract-related
dispute with GEL and Hurricane Harvey. See “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” for additional disclosures related
to the performance of the Nixon refinery.
B6.
We may have capital needs for which our internally generated cash
flows and other sources of liquidity may not be adequate. Further,
LEH and its affiliates (including Jonathan Carroll) may, but are
not required to, fund our working capital requirements in the event
our internally generated cash flows and other sources of liquidity
are inadequate.
If we
are unable to generate sufficient cash flows or otherwise secure
sufficient liquidity to support our short-term and long-term
capital requirements, we may not be able to meet our payment
obligations or pursue our business strategies, any of which could
have a material adverse effect on our results of operations or
liquidity. We currently rely on revenue from operations, including
sales of refined petroleum products and rental of petroleum storage
tanks, LEH and its affiliates (including Jonathan Carroll), and
borrowings under bank facilities to meet our liquidity needs. At
December 31, 2018 and 2017, accounts payable, related party was
$1.5 million and $1.0 million, respectively.
24
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BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
In the
event our working capital requirements are inadequate, or we are
otherwise unable to secure sufficient liquidity to support our
short term and/or long-term capital requirements, we may not be
able to meet our payment obligations, comply with certain deadlines
related to environmental regulations and standards, or pursue our
business strategies, any of which may have a material adverse
effect on our results of operations or liquidity. Our short-term
working capital needs are primarily related to acquisition of crude
oil and condensate to operate the Nixon refinery, repayment of debt
obligations, and capital expenditures for maintenance, upgrades,
and refurbishment of equipment at the Nixon Facility. Our long-term
working capital needs are primarily related to repayment of
long-term debt obligations. Our liquidity will affect our ability
to satisfy all these needs.
B7.
Our business may suffer if any of the executive officers or other
key personnel discontinue employment with us. Furthermore, a
shortage of skilled labor or disruptions in our labor force may
make it difficult for us to maintain productivity.
Our
future success depends on the services of the executive officers
and other key personnel and on our continuing ability to recruit,
train and retain highly qualified personnel in all areas of our
operations. Furthermore, our operations require skilled and
experienced personnel with proficiency in multiple tasks.
Competition for skilled personnel with industry-specific experience
is intense, and the loss of these executives or personnel could
harm our business. If any of these executives or other key
personnel resign or become unable to continue in their present
roles and are not adequately replaced, our business could be
materially adversely affected.
B8.
Loss of market share by a key customer, one of which is LEH, or
consolidation among our customer base could harm our operating
results.
For the
twelve months ended December 31, 2018, we had 4 customers that
accounted for approximately 91% of our refined petroleum product
sales. LEH was 1 of these 4 significant customers and accounted for
approximately 29% of our refined petroleum product
sales. At December 31, 2018, these 4 customers
represented approximately $0.1 million in accounts
receivable. LEH represented approximately $0 million in
accounts receivable. LEH purchases our jet fuel and resells the jet
fuel to a government agency. LEH bids for jet fuel contracts are
evaluated under preferential pricing terms due to its HUBZone
certification. (See “Part I, Item 1. Business –
Structure and Management” and “Part II, Item 8.
Financial Statements and Supplementary Data – Note (9)
Related-Party Transactions, Note (11) Long-Term Debt, Net, and Note
(19) Commitments and Contingencies – Financing
Agreements” for additional disclosures related to
LEH.)
For the
twelve months ended December 31, 2017, we had 3 customers that
accounted for approximately 70% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and accounted for
approximately 33% of our refined petroleum product
sales. At December 31, 2017, these 3 customers
represented approximately $1.3 million in accounts
receivable. LEH represented approximately $0.7 in
accounts receivable.
Our
customers have a variety of suppliers to choose from and therefore
can make substantial demands on us, including demands on product
pricing and on contractual terms, which often results in the
allocation of risk to us as the supplier. Our ability to maintain
strong relationships with our principal customers is essential to
our future performance. Our operating results could be harmed if a
key customer is lost, reduces their order quantity, requires us to
reduce our prices, is acquired by a competitor, or suffers
financial hardship.
Additionally, our
profitability could be adversely affected if there is consolidation
among our customer base and our customers command increased
leverage in negotiating prices and other terms of sale. We could
decide not to sell our refined petroleum products to a certain
customer if, because of increased leverage, the customer pressures
us to reduce our pricing such that our gross profits are
diminished, which could result in a decrease in our revenue.
Consolidation may also lead to reduced demand for our products,
replacement of our products by the combined entity with those of
our competitors, and cancellations of orders, each of which could
harm our operating results.
25
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
B9.
The sale of refined petroleum products to the wholesale market is
our primary business, and if we fail to maintain and grow the
market share of our refined petroleum products, our operating
results could suffer.
Our
success in the wholesale market depends in large part on our
ability to maintain and grow our image and reputation as a reliable
operator and to expand into and gain market acceptance of our
refined petroleum products. Adverse perceptions of product quality,
whether justified, or allegations of product quality issues, even
if false or unfounded, could tarnish our reputation and cause our
wholesale customers to choose refined petroleum products offered by
our competitors.
B10.
We are dependent on third parties for the transportation of crude
oil and condensate into and refined petroleum products out of our
Nixon Facility, and if these third parties become unavailable to
us, our ability to process crude oil and condensate and sell
refined petroleum products to wholesale markets could be materially
and adversely affected.
We rely
on trucks for the receipt of crude oil and condensate into and the
sale of refined petroleum products out of our Nixon Facility. Since
we do not own or operate any of these trucks, their continuing
operation is not within our control. If any of the third-party
trucking companies that we use, or the trucking industry in
general, become unavailable to transport crude oil, condensate,
and/or our refined petroleum products because of acts of God,
accidents, government regulation, terrorism or other events, our
revenue and net income would be materially and adversely
affected.
B11.
Our suppliers source a substantial amount, if not all, of our crude
oil and condensate from the Eagle Ford Shale and may experience
interruptions of supply from that region.
Our
suppliers source a substantial amount, if not all, of our crude oil
and condensate from the Eagle Ford Shale. Consequently, we may be
disproportionately exposed to the impact of delays or interruptions
of supply from that region caused by transportation capacity
constraints, curtailment of production, unavailability of
equipment, facilities, personnel or services, significant
governmental regulation, natural disasters, adverse weather
conditions, plant closures for scheduled maintenance or
interruption of transportation of oil or natural gas produced from
the wells in that area.
B12.
Our refining operations and customers are primarily located within
the Eagle Ford Shale and changes in the supply/demand balance in
this region could result in lower refining margins.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined petroleum products in a single,
relatively limited geographic area. Therefore, we are more
susceptible to regional economic conditions than our more
geographically diversified competitors. Should the supply/demand
balance shift in our region due to changes in the local economy, an
increase in refining capacity or other reasons, resulting in supply
in the PADD 3 (Gulf Coast) region to exceed demand, we would have
to deliver refined petroleum products to customers outside of our
current operating region and thus incur considerably higher
transportation costs, resulting in lower refining
margins.
26
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
B13.
Regulation of GHG emissions could increase our operational costs
and reduce demand for our products.
Continued political
focus on climate change, human activities contributing to the
release of large amounts of carbon dioxide and other GHGs into the
atmosphere, and potential mitigation through regulation could have
a material impact on our operations and financial results.
International agreements and federal, state and local regulatory
measures to limit GHG emissions have been in various stages of
discussion and implementation. These and other GHG
emissions-related laws, policies, and regulations may result in
substantial capital, compliance, operating, and maintenance costs.
The level of expenditure required to comply with these laws and
regulations is uncertain and is expected to vary depending on the
laws enacted in each jurisdiction, our activities in the particular
jurisdiction, and market conditions. The effect of regulation on
our financial performance will depend on many factors including,
among others, the sectors covered, the GHG emissions reductions
required by law, the extent to which we would be entitled to
receive emission allowance allocations, our ability to acquire
compliance related equipment, the price and availability of
emission allowances and credits, and our ability to recover
incurred regulatory compliance costs through the pricing of our
products. Material price increases or incentives to conserve or use
alternative energy sources could also reduce demand for products we
currently sell and adversely affect our sales throughput volumes,
revenues and margins.
C.
Risks
Related to Our Pipelines and Oil and Gas Properties
C1.
Orders by BOEM to increase bonds or other sureties to maintain
compliance with BOEM’s regulations, or the assessment of
penalties for failure to do so, could significantly impact our
operations, liquidity, and financial condition.
To
cover the various obligations of lessees on the Outer Continental
Shelf, such as the cost to plug and abandon wells and decommission
and remove platforms and pipelines at the end of production, BOEM
generally requires that lessees demonstrate financial strength and
reliability per regulations or post bonds or other acceptable
assurances that such obligations will be satisfied.
BOEM
ordered BDPL to provide additional supplemental pipeline bonds or
acceptable financial assurance of approximately $4.8 million
related to five (5) existing pipeline rights-of-way. At December
31, 2018 and 2017, BDPL maintained approximately $0.9 million in
credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
Of the five (5) existing pipeline rights-of-ways related to
BOEM’s request, the pipeline associated with one (1)
right-of-way was decommissioned in 1997. Management is seeking a
reduction in the amount of BOEM’s request for additional
financial assurance. There can be no assurance that BOEM will
accept a reduced amount of supplemental financial assurance or not
require additional supplemental pipeline bonds related to our
existing pipeline rights-of-way. If BDPL is required by BOEM to
provide significant additional supplemental bonds or acceptable
financial assurance or if BOEM imposes penalties under INCs for
failure to meet orders to increase bonds or other sureties, we may
experience a significant and material adverse effect on our
operations, liquidity, and financial condition.
C2.
More stringent requirements imposed by BOEM and BSEE related to the
decommissioning, plugging, and abandonment of wells, platforms, and
pipelines could materially increase our estimate of future
AROs.
BSEE
requires operators to decommission wells and platforms that have
not been used in the past five (5) years for exploration or
development operations or as infrastructure to support such
operations. BDPL holds non-operating leasehold interests in several
wells, all of which have been plugged and abandoned by their
operators. BDPL owns several pipelines in the Gulf of Mexico that
are currently inactive. Although management has used its best
efforts to determine future AROs, assumptions and estimates can be
influenced by many factors beyond management’s control. Such
factors include, but are not limited to, changes in regulatory
requirements, changes in costs for abandonment related services and
technologies, which could increase or decrease based on supply and
demand, and/or extreme weather conditions, such as hurricanes,
which may cause structural or other damage to pipeline and related
assets and oil and gas properties. At December 31, 2018 and 2017,
our estimated future asset retirement obligations were
approximately $2.6 million and $2.3 million, respectively. See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (12) Asset Retirement Obligations” of this
Annual Report for additional information regarding asset retirement
obligations.
27
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
I
TEM 1B. UNRESOLVED STAFF
COMMENTS
None.
Remainder
of Page Intentionally Left Blank
28
|
BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
LEH
manages and operates all Blue Dolphin properties pursuant to the
Amended and Restated Operating Agreement. Management believes that
our properties are generally adequate for our operations and are
maintained in a good state of repair in the ordinary course of
business. Following is a summary of our principal facilities and
assets:
|
Property
|
|
Operating
Subsidiary
|
|
|
Location
|
|
|
|
|
|
|
|
|
Refinery Operations
Tolling and Terminaling
|
|
|
|
|
|
|
●
Nixon Facility (56
acres)
|
|
LE,
LRM, NPS
|
|
|
Nixon,
Texas
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
●
Freeport Facility
(162 acres)
|
|
BDPL
|
|
|
Freeport,
Texas
|
|
|
|
|
|
|
|
|
●
Pipelines
and oil and gas working interests in wells
|
|
BDPL,
BDPC
|
|
|
Gulf of
Mexico
|
|
|
|
|
|
|
|
|
●
Corporate
headquarters
|
|
BDSC
|
|
|
Houston,
Texas
|
Nixon Facility
. See “Part I, Item 1. Business –
Company Overview” and “– Nixon Facility”
for a description of the Nixon Facility. The Nixon Facility’s
business assets are pledged as collateral under certain of our
long-term debt as discussed in “Part II, Item 8. Financial
Statements and Supplementary Data – Note (11) Long-Term Debt,
Net”.
Freeport Facility
. The Freeport Facility includes pipeline
easements and rights-of-way, crude oil and natural gas separation
and dehydration facilities, a vapor recovery unit and two onshore
pipelines. The two onshore pipelines consist of approximately 4
miles of the 20-inch Blue Dolphin Pipeline and a 16-inch natural
gas pipeline that connects the Freeport Facility to the Dow
Chemical Plant Complex in Freeport, Texas. In February 2017, BDPL
sold approximately 15 acres of property located in Brazoria County,
Texas to FLIQ Common Facilities, LLC, an affiliate of
FLNG.
Pipelines and Oil and Gas Assets
. We fully impaired our
pipeline assets at December 31, 2016 and our oil and gas properties
at December 31, 2011. Our pipeline and oil and gas properties had
no revenue during the years ended December 31, 2018 and 2017.
Although the pipelines are no longer active, management believes
the pipelines have future operational potential and continues to
explore business development opportunities.
The
following provides a summary of our oil and gas and pipeline
assets, all of which are in the Gulf of Mexico:
●
Oil and Gas
Properties – Include a 2.5% working interest and a 2.008% net
revenue interest in High Island Block 115, a 0.5% overriding
royalty interest in Galveston Area Block 321, and a 2.88% working
interest and 2.246% net revenue interest in High Island Block
37.
●
Blue Dolphin
Pipeline – The Blue Dolphin Pipeline consists of 16-inch
onshore and 20-inch offshore pipeline segments, including a trunk
line and lateral lines, that run from an offshore anchor platform
in Galveston Area Block 288 to our Freeport Facility and then on to
the DOW Chemical plant complex in Freeport, Texas;
●
GA 350 Pipeline
– The GA 350 Pipeline is an 8-inch offshore pipeline
extending from Galveston Area Block 350 to a subsea interconnect
and tie-in that was previously connected to a transmission pipeline
in Galveston Area Block 391; and
●
Omega Pipeline
– The Omega Pipeline is a 12-inch offshore pipeline that
originates in the High Island Area, East Addition Block A-173 and
extends to West Cameron Block 342, where it was previously
connected to the High Island Offshore System.
29
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
|
|
Natural
Gas
|
|
|
|
|
Capacity
|
|
Pipeline
|
Ownership
|
Miles
|
(MMcf/d)
|
|
|
|
|
|
|
Blue Dolphin Pipeline
(1)
|
100
%
|
38
|
180
|
|
GA 350 Pipeline
(1)
|
100
%
|
13
|
65
|
|
Omega Pipeline
(2)
|
100
%
|
18
|
110
|
(1)
Currently
inactive.
(2)
Currently abandoned
in place.
Corporate Headquarters
. We lease 7,675 square feet of office
space in Houston, Texas. Our office lease is discussed more fully
in “Part II, Item 8. Financial Statements and Supplementary
Data – Note (16) Leases” of this Annual
Report.
I
TEM 3. LEGAL PROCEEDINGS
Final Arbitration Award and Settlement Agreement
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (1) Organization – Going Concern – Final
Arbitration Award and Settlement Agreement” of this Annual
Report for disclosures related to the Final Arbitration Award to
GEL and the Settlement Agreement between the Lazarus Parties and
GEL.
Other Legal Matters
We are
involved in lawsuits, claims, and proceedings incidental to the
conduct of our business, including mechanic’s liens,
contract-related disputes, administrative proceedings, and
financial assurance (bonding) requirements with regulatory bodies.
Management is in discussion with all concerned parties and does not
believe that such matters will have a material adverse effect on
our financial position, earnings, or cash flows. However, there can
be no assurance that such discussions will result in a manageable
outcome or that we will be able to meet financial assurance
(bonding) requirements. If Veritex does not approve the Settlement
or exercises its rights and remedies under the secured loan
agreements or if the Settlement Agreement with GEL is terminated
and GEL seeks to confirm and enforce the Final Arbitration Award,
our business, financial condition, and results of operations will
be materially adversely affected, and Blue Dolphin and its
affiliates would likely be required to seek protection under
bankruptcy laws.
I
TEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
Remainder
of Page Intentionally Left Blank
30
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BLUE
DOLPHIN ENERGY COMPANY
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|
FORM
10-K 12/31/18
|
P
ART II
Market Information
Our
Common Stock currently trades on the OTCQX U.S. tier of the OTC
Markets under the ticker symbol “BDCO." The following table
sets forth, for the periods indicated, the high and low bid prices
for our Common Stock as reported by the OTC Markets. The quotations
reflect inter-dealer prices, without adjustment for retail
mark-ups, markdowns or commissions and may not represent actual
transactions.
|
Quarter
Ended
|
High
Bid
|
Low Bid
|
|
|
|
|
|
2018
|
|
|
|
December
31
|
$
1.13
|
$
0.40
|
|
September
30
|
$
1.11
|
$
0.22
|
|
June
30
|
$
0.59
|
$
0.11
|
|
March
31
|
$
1.63
|
$
0.53
|
|
|
|
|
|
2017
|
|
|
|
December
31
|
$
0.90
|
$
0.06
|
|
September
30
|
$
1.77
|
$
0.02
|
|
June
30
|
$
2.75
|
$
1.25
|
|
March
31
|
$
4.00
|
$
3.00
|
Stockholders
At
April 1, 2019, we had 270 record holders of our Common Stock. We
have approximately 3,000 beneficial holders of our Common
Stock.
Dividends
Under
certain of our secured loan agreements, we are restricted from
declaring or paying any dividend on our Common Stock without the
prior written consent of the lender. We have not declared any
dividends on our Common Stock during the last two fiscal
years.
I
TEM 6. SELECTED FINANCIAL DATA
Not
applicable.
31
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BLUE
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FORM
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|
I
TEM
7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following
discussion together with the financial statements and the notes
thereto included elsewhere in this Annual Report. This discussion
contains forward-looking statements that are based on
management’s current expectations, estimates, and projections
about our business and operations. The cautionary statements made
in this Annual Report should be read as applying to all related
forward-looking statements wherever they appear in this Annual
Report. Our actual results may differ materially from those
currently anticipated and expressed in such forward-looking
statements due to many factors, including those we discuss under
“Part I, Item 1A. Risk Factors” and elsewhere
in this Annual Report. You should read such risk
factors
and
forward-looking statements in this Annual
Report.
Company Overview
See
“Part I, Item 1. Business” and “Part
II, Item 8. Financial Statements and Supplementary Data –
Note (1) Operating Risks” for detailed information related to
our business and operations and factors that m
anagement has determined raise substantial doubt
about our ability to continue as a going
concern.
Major Influences on Results of Operations
Refinery Operations
As a
margin-based business, our refinery operations are primarily
affected by gross profit per bbl, product slate, and refinery
downtime.
Price Differentials per Bbl
Gross
profit per bbl, which reflects the dollar per bbl price difference
between crude oil and condensate (input) and refined petroleum
products (output), is the most significant driver of refining
margins, and they have historically been subject to wide
fluctuations. Our per bbl cost to acquire crude oil and condensate
and the dollar per bbl price for which our refined petroleum
products are ultimately sold depend on the economics of supply and
demand. Supply and demand are affected by numerous factors, most,
if not all, of which are beyond our control,
including:
●
Domestic and
foreign market conditions, political affairs, and economic
developments;
●
Import supply
levels and export opportunities;
●
Existing domestic
inventory levels;
●
Operating and
production levels of competing refineries;
●
Expansion and/or
upgrades of competitors’ facilities;
●
Governmental
regulations (e.g., mandated renewable fuels standards, proposed
climate change laws and regulations, and increased mileage
standards for vehicles);
●
Weather
conditions;
●
Availability of and
access to transportation infrastructure;
●
Availability of
competing fuels (e.g., renewables); and
●
Seasonal
fluctuations.
Product Slate
Management periodically determines whether to change the
refinery’s product mix, as well as maintain, increase, or
decrease inventory levels based on various factors. These factors
include the crude oil pricing market in the U.S. Gulf Coast region,
the refined petroleum products market in the same region, the
relationship between these two markets, fulfilling contract
demands, and other factors that may impact our operations,
financial condition, and cash flows.
32
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Refinery Downtime
The safe and reliable operation of the refinery is key to our
financial performance and results of operations, and we are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Although operating at anticipated levels, the refinery is still in
a recommissioning phase and may require unscheduled downtime for
unanticipated reasons, including maintenance and repairs, voluntary
regulatory compliance measures, or cessation or suspension by
regulatory authorities.
Occasionally, the Nixon refinery experiences a temporary shutdown
due to power outages from high winds and thunderstorms. In such
cases, we must initiate a standard refinery start-up process, which
can last several days. We are typically able to resume normal
operations the next day. Any scheduled or unscheduled downtime will
result in lost margin opportunity, potential increased maintenance
expense and a reduction of refined petroleum products inventory,
which could reduce our ability to meet our payment
obligations.
Tolling and Terminaling Operations
The Nixon Facility’s petroleum storage tanks and
infrastructure are primarily suited for crude oil and condensate
and refined petroleum products, such as naphtha, jet fuel, diesel
and fuel oil. Our storage terminaling operations are primarily
affected by:
●
price
(in terms of storage fees) and available capacity;
●
industry
factors including changes in the prices of petroleum products that
affect demand for storage services; and
●
utilization
rates of our competitors (local demand).
Key Relationships
Relationship with LEH
Blue
Dolphin and certain of its subsidiaries are currently parties to a
variety of agreements with LEH and its affiliates and a
counter-party. Related-party agreements with LEH include: (i) an
Amended and Restated Operating Agreement with Blue Dolphin and LE,
(ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan Agreement
with BDPL, (iv) an Amended and Restated Promissory Note with Blue
Dolphin, and (v) a Debt Assumption Agreement with LE, and (vi) an
office sub-lease agreement with BDSC. In addition, we currently
rely on advances from LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. There can be no
assurances that LEH and its affiliates will continue to fund our
working capital requirements. (See “Part II, Item 8.
Financial Statements and Supplementary Data – Note (9)
Related-Party Transactions” for additional disclosures
related to agreements that we have in place with LEH and its
affiliates.)
Relationship with Crude Supplier
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future. Our ability to purchase adequate amounts of
crude oil and condensate could be adversely affected if the
Settlement Agreement is terminated and GEL seeks to confirm and
enforce the Final Arbitration Award,
as well as other factors, including as
net
losses, working capital deficits, and financial covenant defaults
in secured loan agreements.
Management
believes that it is taking the appropriate steps to improve our
operations and financial stability. If our business strategy is
unsuccessful, it could affect our ability to acquire adequate
supplies of crude oil and condensate under the existing contract or
otherwise. Further, because our existing crude supply contract is a
month-to-month arrangement, there can be no assurance that crude
oil and condensate supplies will continue to be available under
this contract in the future.
33
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Results of Operations
Certain
prior year amounts have been reclassified in order to conform to
the current year presentation. Additionally, certain changes to the
presentation of prior period statements of operations have been
made to conform to the current period presentation, primarily
relating to: (i) a retitling from ‘cost of sales’ to
‘cost of goods sold,’ which includes all costs directly
attributable to the generation of the related revenue, as defined
by GAAP and (ii) a breakout of the ‘LEH operating fee’
under the Amended and Restated Operating Agreement, which was
previously reported within ‘refinery operating
expenses’. These changes had no effect on the reported
results of operations.
Consolidated Results
Twelve Months Ended December 31, 2018 (the “Current
Year”) Compared to December 31, 2017 (the “Prior
Year”)
.
Total Revenue from Operations
. For the Current Year, we had
total revenue from operations of $340.8 million compared to total
revenue from operations of $258.4 million for the Prior Year, an
increase of approximately 32%. Approximately 99% of our revenue is
derived from refinery operations while 1% is derived from tolling
and terminaling. Refinery operations revenue increased
approximately $81.5 million in the Current Year compared to the
Prior Year. Of that increase, 90% was due to higher commodity
pricing while 10% was due to slightly increased sales throughput
volume. For the same period, tolling and terminaling revenue
increased approximately $0.8 million, or 28%, as a result of
increased storage fees under new and renewed customer
agreements.
Total Cost of Goods Sold
. Total cost of goods sold was
$331.9 million for the Current Year compared to $248.4 million for
the Prior Year. The 34% increase in total cost of goods sold in the
Current Year compared to the Prior Year related to higher commodity
prices for crude oil and chemicals and, to a lesser extent,
increased direct operating expenses due to a Nixon refinery
turnaround.
Gross Profit / Gross Margin
. For the Current Year, gross
profit totaled $8.8 million, or approximately 3%, compared to gross
profit of $10.0 million, or approximately 4%, for the Prior Year.
The decrease in gross profit between the periods primarily related
to higher commodity prices for crude oil and chemicals and
increased direct operating expenses, which was partially offset by
increased tank rental revenue in the Current Year compared to the
Prior Year.
LEH Operating Fee
. The LEH operating fee under the Amended
and Restated Operating Agreement totaled $0.6 million in the
Current Year compared to $0.8 million in the Prior Year. The $0.2
million decrease in operating fee between the periods was the
result of the fee restructure under the Amended and Restated
Operating Agreement in April 2017. (See “Part II, Item 8.
Financial Statements and Supplementary Data – Note (9)
Related-Party Transactions” for additional disclosures
related to the Amended and Restated Operating
Agreement.)
Arbitration Award and Associated Fees.
The Final
Arbitration Award awarded damages and GEL’s attorneys’
fees and related expenses to GEL in the aggregate amount of $31.3
million. However, the net effect to our consolidated statement of
operations was an expense of $24.3 million in arbitration award and
associated fees related to the Final Arbitration Award during the
Prior Year. Arbitration award and associated fees totaled $0 for
the Current Year.
General and Administrative Expenses
. We incurred general and
administrative expenses of $3.3 million in the Current Year
compared to $4.0 million in the Prior Year. For the Current Year
compared to the Prior Year, the 19% decrease in general and
administrative expenses primarily related to lower legal
fees.
Depletion, Depreciation and Amortization
. We recorded
depletion, depreciation and amortization expenses of $1.9 million
in the Current Year compared to $1.8 million in the Prior Year, an
increase of nearly 7%. The increase related to placement in service
of a new boiler and new petroleum storage tanks.
Other Expense.
Total other
expense was $3.3 million in the Current Year compared to $0.5
million in the Prior Year. The
Prior Year included a
one-time gain on the sale of property.
Income Tax Benefit
. We recognized an income tax benefit of
$0.3 million in the Current Year compared to $0 in the Prior Year.
Income tax benefit in the Current Year primarily related to a
refundable Alternative Minimum Tax that was paid in prior periods.
(See “Part II, Item 8. Financial Statements and Supplementary
Data – Note (17) Income Taxes” for additional
disclosures related to income taxes.)
34
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Net Loss
. For the Current Year, we reported a net loss of
$0.5 million, or loss of $0.05 per share, compared to a net loss of
$22.3 million, or loss of $2.09 per share, for the Prior Year. The
Prior Year included the net effect to our consolidated statement of
operations of the Final Arbitration Award, which was an expense of
$24.3 million, or $2.29 per share, in arbitration award and
associated fees. Excluding the Final Arbitration Award,
we would have reported net income in the Prior Year of $2.0
million, or income of $0.19 per share, reflecting a decline of $2.5
million, or $0.24 per share, for the Current Year compared to the
Prior Year due to lower margins.
Non-GAAP Financial Measures
To supplement our consolidated results, management uses refining
gross profit per bbl, a non-GAAP financial measure, to help
investors evaluate our core operating results and allow for greater
transparency in reviewing our overall financial, operational and
economic performance. Refining gross profit per bbl is reconciled
to GAAP-based results below. Refining gross profit per bbl should
not be considered an alternative for GAAP results. Refining gross
profit per bbl is provided to enhance an overall understanding of
our core financial performance for the applicable periods and is an
indicator that management believes is relevant and useful. Refining
gross profit per bbl may differ from similar calculations used by
other companies within the petroleum industry, thereby limiting its
usefulness as a comparative measure. (See “Part II, Item 8.
Financial Statements and Supplementary Data” for comparative
GAAP results.)
Refining Gross Profit per Bbl –
For the Current Year,
refining gross profit per bbl was $1.14 compared to $1.63 per bbl
for the Prior Year, reflecting a decrease of $0.49 per bbl. The
decrease between the periods primarily related to less favorable
margins for refined petroleum products in the Current Year compared
to the Prior Year. (See “Glossary of Selected Energy and
Financial Terms” in this Annual Report for the definition of
gross margin per bbl.)
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands except per bbl amounts)
|
|
|
|
|
|
|
Refined
petroleum product sales
|
$
337,038
|
$
255,547
|
|
Less:
Total cost of goods sold
|
(331,936
)
|
(248,433
)
|
|
|
5,102
|
7,114
|
|
|
|
|
|
Sales
(Bbls)
|
4,493
|
4,359
|
|
|
|
|
|
Gross
Margin per Bbl
|
$
1.14
|
$
1.63
|
Remainder
of Page Intentionally Left Blank
35
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Refinery Operations Throughput and Production Data
Operational metrics
for the refinery for the periods indicated were as
follow:
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Calendar
Days
|
365
|
365
|
|
Refinery
downtime
|
(30
)
|
(17
)
|
|
Operating
Days
|
335
|
348
|
|
|
|
|
|
Total
refinery throughput (bbls)
|
4,605,705
|
4,488,658
|
|
Operating
days:
|
|
|
|
bpd
|
13,748
|
12,898
|
|
Capacity
utilization rate
|
91.7
%
|
86.0
%
|
|
Calendar
days:
|
|
|
|
bpd
|
12,618
|
12,298
|
|
Capacity
utilization rate
|
84.1
%
|
82.0
%
|
|
|
|
|
|
Total
refinery production (bbls)
|
4,479,701
|
4,352,745
|
|
Operating
days:
|
|
|
|
bpd
|
13,372
|
12,508
|
|
Capacity
utilization rate
|
89.1
%
|
83.4
%
|
|
Calendar
days:
|
|
|
|
bpd
|
12,273
|
11,925
|
|
Capacity
utilization rate
|
81.8
%
|
79.5
%
|
|
Note:
|
The
small difference between total refinery throughput (volume
processed as input) and total refinery production (volume processed
as output) represents a combination of multiple factors including
refinery fuel use, elimination of some impurities originally
present in the crude oil, loss, and other factors.
|
In the
Current Year, the refinery experienced thirty (30) days of downtime
primarily related to repair and maintenance of the naphtha
stabilizer unit and short maintenance turnarounds scheduled in
January and March of 2018. In the Prior Year, the refinery
experienced seventeen (17) days of downtime primarily due to a
contract-related dispute with GEL and Hurricane
Harvey.
For the
Current Year compared to the Prior Year, total refinery throughput
bbls and total refinery production bbls increased nominally despite
the refinery being down more days in the Current Year compared to
the Prior Year. Typically, during the summer months refinery
throughput volumes at the Nixon refinery are negatively impacted by
the extreme Texas heat. For the Current Year, the Nixon refinery
was positively impacted renting and utilizing a cooling unit. The
cooling unit allowed the refinery to run more bbls per day,
resulting in increased refinery throughput and production volumes
in the periods despite refinery downtime. The cooling unit was not
used during the Prior Year.
Refined Petroleum Product Sales Summary
.
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (15) Concentration of Risk” for a discussion of
refined petroleum product sales.
36
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Liquidity and Capital Resources
Overview
.
We
currently rely on revenue from operations, LEH and its affiliates
(including Jonathan Carroll), and borrowings under bank facilities
to meet our liquidity needs. Primary uses of cash include: (i)
payment to LEH for our direct operating expenses under the Amended
and Restated Operating Agreement, (ii) payments on long-term debt
and the Final Arbitration Award, (iii) purchase of crude oil and
condensate, and (iv) construction in progress.
As
discussed elsewhere within this “Liquidity and Capital
Resources” section, management has determined that there is
substantial doubt about our ability to continue as a going concern
due to consecutive net losses, inadequate working capital, the
Final Arbitration Award, and defaults under secured loan
agreements. See “Part II, Item 8. Financial Statements and
Supplementary Data – Note (1) Organization – Going
Concern” for additional disclosures related to the Final
Arbitration Award, the Settlement Agreement with GEL, defaults
under secured loan agreements, and the going concern.
Management believes that it is taking the appropriate steps to
improve our operations and financial stability. If our business
strategy is unsuccessful, it could affect our ability to acquire
adequate supplies of crude oil and condensate under our existing
contract or otherwise. Further because our existing crude supply
contract is an evergreen arrangement, there can be no assurance
that crude oil and condensate supplies will continue to be
available under our crude supply contract in the
future.
Our results of operations and liquidity are highly dependent upon
the margins that we receive for our refined petroleum products.
T
he dollar per bbl price difference between crude oil and
condensate (input) and refined petroleum products (output), is the
most significant driver of refining margins, and they have
historically been subject to wide fluctuations.
There can be no assurance that margins for refined
petroleum products will be favorable, LEH and its affiliates will
continue to fund our working capital needs in periods of working
capital deficits, or we will be able to obtain additional financing
on commercially reasonable terms or at all. Further, if Veritex
Community Bank (“Veritex”) does not approve the
Settlement or the Settlement Agreement with GEL is terminated and
GEL seeks to confirm and enforce the Final Arbitration Award, our
business, financial condition, and results of operations will be
materially adversely affected, and Blue Dolphin would likely be
required to seek protection under bankruptcy laws. (See “Part
I, Item 1. Business – Business Strategy” for a
discussion related to our business strategy.)
Crude Oil and Condensate Supply
.
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future. Our ability to purchase adequate amounts of
crude oil and condensate could be adversely affected if the
Settlement Agreement is terminated and GEL seeks to confirm and
enforce the Final Arbitration Award, as well as other factors,
including net losses, working capital deficits, and financial
covenant defaults in secured loan agreements.
37
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Cash Flow
.
Our
cash flow from operations for the periods indicated was as
follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
Beginning
cash, cash equivalents, and restricted cash
|
$
2,146
|
$
6,083
|
|
|
|
|
|
Cash
flow from operations
|
|
|
|
Reconciled
net loss to net cash provided by operating activities
|
1,618
|
(19,659
)
|
|
Change
in assets and operating liabilities
|
(613
)
|
14,715
|
|
|
|
|
|
Total
cash flow from operations
|
1,005
|
(4,944
)
|
|
|
|
|
|
Cash
inflows (outflows)
|
|
|
|
Proceeds
from issuance of debt
|
-
|
3,678
|
|
Payments
on debt
|
(890
)
|
(1,364
)
|
|
Net
activity on related-party debt
|
1,433
|
1,125
|
|
Capital
expenditures
|
(2,029
)
|
(2,432
)
|
|
|
|
|
|
Total
cash inflows (outflows)
|
(1,486
)
|
1,007
|
|
|
|
|
|
Total
change in cash flows
|
(481
)
|
(3,937
)
|
|
|
|
|
|
Ending
cash, cash equivalents, and restricted cash
|
$
1,665
|
$
2,146
|
For the
Current Year, we experienced cash flow from operations of $1.0
million compared to negative cash flow from operations of $4.9
million for the Prior Year. The $6.0 million improvement in cash
flow from operations between the periods was primarily the result
of decreased inventory and increased accounts payable and accrued
expenses.
Working Capital
.
We had
a working capital deficit of $71.9 million at December 31, 2018
compared to a working capital deficit of $69.5 million at December
31, 2017. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31, 2018 and
2017.
As
discussed elsewhere within this “Liquidity and Capital
Resources” section, the Final Arbitration Award has affected
our ability to obtain working capital through financing.
If the Settlement Agreement with GEL
is terminated and GEL seeks to confirm and enforce the Final
Arbitration Award: (i) our business operations, including crude oil
and condensate procurement and our customer relationships;
financial condition; and results of operations will be materially
affected, and (ii) Blue Dolphin and its affiliates would likely be
required to seek protection under bankruptcy
laws.
We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. There can be no
assurance that LEH and its affiliates (including Jonathan Carroll)
will continue to fund our working capital
requirements.
38
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Capital Spending
.
Since
2015, the Nixon Facility has been undergoing a capital improvement
expansion project. Capital improvements have primarily related to
construction of new petroleum storage tanks to significantly
increase petroleum storage capacity. However, smaller efficiency
improvements have been made as well. Increased petroleum storage
capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000
bpd, and (iii) provides an opportunity to generate additional
tolling and terminaling revenue. When the expansion project is
complete, petroleum storage capacity at the Nixon Facility will
exceed 1.2 million bbls, an increase of more than 0.9 million
bbls.
For the
next 12 to 18 months, we expect to
continue to incur capital expenditures related to
facility and land improvements and completion of an unfinished
petroleum storage tank.
Capital spending at the Nixon
Facility is being funded by working capital derived from revenue
from operations and LEH and its affiliates (including Jonathan
Carroll), as well as from long-term debt from Veritex that was
secured in 2015 for expansion of the Nixon Facility. Unused amounts
under the Veritex loans are reflected in restricted cash (current
and non-current portions) on our consolidated balance sheets and
will be available for use once events of default associated with
the Final Arbitration Award are remedied.
See “Part I, Item 1. Financial Statements
– Note (11) Long-Term Debt, Net” for additional
disclosures related to borrowings for capital
spending.
We
account for our capital expenditures in accordance with GAAP. We
also distinguish between capital expenditures that are for
maintenance and those that are for expansion. We classify a capital
expenditure as maintenance if it maintains capacity or throughput.
A classification of expansion is used if the capital expenditure is
expected to increase capacity or throughput. The distinction
between maintenance and expansion is made consistent with our
accounting policies and is generally a straightforward process.
However, in certain circumstances the distinction can be a matter
of management judgment and discretion.
Budgeting
and approval of maintenance capital expenditures is done throughout
the year on a project-by-project basis. We budget for and make
maintenance capital expenditures that are necessary to maintain
safe and efficient operations, meet customer needs and comply with
operating policies and applicable law. We may budget for and make
additional maintenance capital expenditures that we expect to
produce economic benefits such as increasing efficiency and/or
lowering future expenses. Budgeting and approval of expansion
capital expenditures are generally made periodically on a
project-by-project basis in response to specific investment
opportunities identified by our business segments.
Contractual Obligations
.
Related-Party
. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (9) Related-Party
Transactions” for a summary of the agreements we have in
place with related parties.
Long-Term Debt
. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (11) Long-Term Debt,
Net” for a summary of our long-term debt.
GEL
. See “Part II, Item
8. Financial Statements and Supplementary Data – Note (1)
Organization – Going Concern – Final Arbitration Award
and Settlement Agreement” for disclosures related to the
Final Arbitration Award to GEL and Settlement Agreement with
GEL.
Supplemental Pipeline Bonds
. See “Part II, Item 8.
Financial Statements and Supplementary Data – Note (19)
Commitments and Contingencies – Supplemental Pipeline
Bonds” for a discussion of supplemental pipeline bonding
requirements.
39
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Indebtedness
.
The principal balances outstanding on our long-term debt, net
(including related-party) for the periods indicated were as
follow:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
First
Term Loan Due 2034 (in default)
|
$
22,550
|
$
23,199
|
|
Second
Term Loan Due 2034 (in default)
|
9,300
|
9,502
|
|
Notre
Dame Debt (in default)
|
4,978
|
4,978
|
|
BDPL
Loan Agreement (in default)
|
4,000
|
4,000
|
|
March
Ingleside Note (in default)
|
1,283
|
1,169
|
|
March
Carroll Note (in default)
|
1,147
|
439
|
|
June
LEH Note (in default)
|
71
|
-
|
|
Capital
Leases
|
41
|
-
|
|
|
$
43,370
|
$
43,287
|
|
Less:
Current portion of long-term debt, net
|
(41,364
)
|
(39,544
)
|
|
Less:
Unamortized debt issue costs
|
(2,006
)
|
(2,135
)
|
|
|
$
-
|
$
1,608
|
Principal
payments on long-term debt totaled $0.9 million in the Current Year
compared to $1.4 million in the Prior Year. As of the date of this
Annual Report, LE and LRM were current on monthly payments under
the First Term Loan Due 2034 and Second Term Loan Due 2034. There
have been no payments under the Notre Dame Debt to date and no
payments to Jonathan Carroll under the March Carroll Note since May
2017.
As
described elsewhere in this Annual Report, Veritex notified
obligors that the Final Arbitration Award constitutes an event of
default under the First Term Loan Due 2034 and Second Term Loan Due
2034. In addition to existing events of default related to the
Final Arbitration Award, at December 31, 2018, LE and LRM were in
violation of the debt service coverage ratio, the current ratio,
and debt to net worth ratio financial covenants related to the
secured loan agreements. LE also failed to replenish a payment
reserve account as required. The occurrence of events of default
under the secured loan agreements permits Veritex to declare the
amounts owed under the secured loan agreements immediately due and
payable, exercise its rights with respect to collateral securing
obligors’ obligations under the loan agreements, and/or
exercise any other rights and remedies available.
Veritex has not accelerated or called due the secured loan
agreements considering the Settlement Agreement, which Veritex must
ultimately approve. Instead, Veritex has expressly reserved
all its rights, privileges and remedies related to events of
default under the secured loan agreements and informed obligors
that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements.
Veritex has been working
with LE and LRM and continues to be aware and party to all
discussions and arrangements with GEL surrounding the
Settlement.
Veritex must ultimately approve the Settlement.
However, if Veritex does not approve
the Settlement or exercises its rights and remedies under the
secured loan agreements or the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin would likely be required to seek protection under
bankruptcy laws.
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (1) Organization – Going Concern” and
“ – Operating Risks”, as well as “Note (11)
Long-Term Debt, Net” for additional disclosures related to
long-term debt financial covenant violations and events of
default.
See
“Contractual Obligations – Related-Party” within
the Liquidity and Capital Resources section for additional
disclosures with respect to related-party
indebtedness.
40
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Long-Lived Assets
.
Refinery and Facilities
.
Management expects to continue making improvements to the crude
distillation tower based on operation needs and technological
advances. Additions to refinery and facilities assets are
capitalized. Expenditures for repairs and maintenance are expensed
as incurred and included as operating expenses under the Amended
and Restated Operating Agreement.
We record refinery and facilities at cost less any adjustments for
depreciation or impairment. Adjustment of the asset and the related
accumulated depreciation accounts are made 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, depreciation of
refinery and facilities assets is computed using the straight-line
method using an estimated useful life of 25 years beginning when
the refinery and facilities assets are placed in service. As a
result of the Final Arbitration Award, which represents a
significant adverse change that could affect the value of a
long-lived asset, management performed potential impairment testing
of our refinery and facilities assets in the fourth quarter of
2018.
Upon completion of that testing, we determined that no
impairment was necessary at December 31, 2018. We did not record
any impairment of our refinery and facilities assets for the
periods presented.
Pipelines and Facilities Assets
.
Our pipelines and facilities are recorded
at cost less any adjustments for depreciation or impairment.
Depreciation is computed using the straight-line method over
estimated useful lives ranging from 10 to 22 years. In accordance
with
FASB ASC
guidance on
accounting for the impairment or disposal of long-lived assets,
management performed periodic impairment testing of our pipeline
and facilities assets in the fourth quarter of 2016. Upon
completion of that testing, our pipeline assets were fully
impaired. All pipeline transportation services to third parties
have ceased, existing third-party wells along our pipeline corridor
were permanently abandoned, and no new third-party wells are being
drilled near our pipelines.
Oil and Gas Properties
. Our oil and gas properties are
accounted for using the full-cost method of accounting, whereby all
costs associated with acquisition, exploration, and development of
oil and gas properties, including directly related internal costs,
are capitalized on a cost center basis. Amortization of
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, and our oil and gas properties
were fully impaired in 2011.
Construction in Progress
.
Construction in progress expenditures, which relate to construction
and refurbishment activities at the Nixon Facility, are capitalized
as incurred. Depreciation begins once the asset is placed in
service.
Revenue Recognition
.
We
adopted the provisions of FASB ASU 2014-09,
Revenue from Contracts with Customers (ASC
606)
, on January 1, 2018, as described below in
“Recently Adopted Accounting Guidance.” Accordingly,
our revenue recognition accounting policy has been revised to
reflect the adoption of this standard.
Refinery Operations Revenue
.
Revenue from the sale of refined petroleum
products is recognized when
the product is sold to a
customer in fulfillment of performance obligations. Each load of
refined petroleum product is separately identifiable and represents
a distinct performance obligation to which the transaction price is
allocated. Performance obligations are met when control is
transferred to the customer. Control is transferred to the customer
when the product has been lifted, or in cases where the product is
not lifted immediately (bill and hold arrangements), when the
product is added to the customer’s bulk inventory as stored
at the Nixon Facility.
We
consider a variety of facts and circumstances in assessing the
point of control transfer, including but not limited to: whether
the purchaser can direct the use of the refined petroleum product,
the transfer of significant risks and rewards, our rights to
payment, and transfer of legal title. In each case, the term
between sale and when payment is due is not significant.
Transportation, shipping and handling
costs incurred are included in cost of goods sold. Excise and other
taxes that are collected from customers and remitted to
governmental authorities are not included in
revenue.
41
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Tolling and Terminaling Revenue
. Revenues for tolling and
terminaling include fees pursuant to: (i) 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 use of the naphtha
stabilizer unit and (ii) tank storage agreements, whereby a
customer agrees to pay a certain fee per tank based on tank size
over a period of time for the storage of products. We typically
satisfy performance obligations for tolling and terminaling
operations with the passage of time. We determine the transaction
price at agreement inception based on the guaranteed minimum amount
of revenue over the term of the agreement. We allocate the
transaction price to the single performance obligation that exists
under the agreement, and we recognize revenue in the amount for
which we have a right to invoice. Generally, payment terms do
not exceed thirty (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, and the
price we charge for such services is not included in the fixed cost
under the customer’s tank storage agreement. Ancillary
services do not provide a material right to the customer, and such
services are considered a separate performance obligation by us
under the tank storage agreement. The performance obligation is
satisfied when the requested service has been performed in the
applicable period.
Inventory
.
Our
inventory primarily consists of refined petroleum products, crude
oil and condensate, and chemicals. Inventory is valued at lower of
cost or net realizable value with cost being determined by the
average cost method, and net realizable value being determined
based on estimated selling prices less any associated delivery
costs. If the net realizable value of our refined petroleum
products inventory declines to an amount less than our average
cost, we record a write-down of inventory and an associated
adjustment to cost of goods sold.
Asset Retirement Obligations
.
FASB
ASC guidance related to AROs requires that a liability for the
discounted fair value of an ARO be recorded in the period in which
incurred, and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The liability is
accreted towards its future value each period, and the capitalized
cost is depreciated over the useful life of the related asset. If
the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized.
Management
has concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facility assets arises and
a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We
recorded an ARO liability related to future asset retirement costs
associated with dismantling, relocating or disposing of our
offshore platform, pipeline systems and related onshore facilities,
as well as plugging and abandoning wells and restoring land and sea
beds. We developed these cost estimates for each of our assets
based upon regulatory requirements, structural makeup, water depth,
reservoir characteristics, reservoir depth, equipment demand,
current retirement procedures, and construction and engineering
consultations. Because these costs typically extend many years into
the future, estimating future costs are difficult and require
management to make judgments that are subject to future revisions
based upon numerous factors, including changing technology,
political, and regulatory environments. We review our assumptions
and estimates of future abandonment costs on an annual
basis.
Income Taxes
.
We
account for income taxes under FASB ASC guidance related to income
taxes, which requires recognition of income taxes based on amounts
payable with respect to the current reporting period and the
effects of deferred taxes for the expected future tax consequences
of events that have been included in our financial statements or
tax returns. Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial
accounting and tax basis of assets and liabilities, as well as for
operating losses and tax credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected
to reverse.
42
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
As of
each reporting date, management considers new evidence, both
positive and negative, to determine the realizability of deferred
tax assets. Management considers whether it is more likely than not
that some portion or all the deferred tax assets will be realized,
which is dependent upon the generation of future taxable income
prior to the expiration of any NOL carryforwards. At December 31,
2018 and 2017, management determined that cumulative losses
incurred over the prior three-year period provided significant
objective evidence that limited 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 December 31, 2018 and 2017.
FASB
ASC guidance related to income taxes also prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to
be taken in a tax return, as well as guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosures, and transition.
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (17) Income Taxes” for further information
related to income taxes.
Recently Adopted Accounting Guidance
FASB
issues an ASU to communicate changes to the FASB ASC, including
changes to non-authoritative SEC content. Recently adopted ASUs
include:
ASU 2018-09, Codification Improvements
. In July 2018, FASB
issued ASU 2018-09. This guidance affects a wide variety of topics
in the codification and represents changes to clarify, correct
errors in, or make minor improvements to the codification. The
amendments make the codification easier to understand and easier to
apply by eliminating inconsistencies and providing clarifications.
The amendments apply to all reporting entities within the scope of
the affected accounting guidance. Some of the amendments in ASU
2018-09 do not require transition guidance and will be effective
upon issuance. However, many of the amendments do have transition
guidance with effective dates for annual periods beginning after
December 15, 2018, for public business entities. Adoption of this
guidance did not have a significant impact on our consolidated
financial statements.
ASU 2014-09, Revenue from Contracts with Customers (ASC
606)
. We adopted this accounting pronouncement effective
January 1, 2018, using a modified retrospective approach, which
required us to apply the new revenue standard to: (i) all new
revenue contracts entered into after January 1, 2018 and (ii) all
existing revenue contracts as of January 1, 2018. In accordance
with this approach, our consolidated revenues for the periods prior
to January 1, 2018 will not be revised. In November 2018, FASB
issued ASU 2018-18,
Collaborative
Arrangements (Topic 808)
. ASU 2018-18 clarifies the
interaction between ASC 808 and ASC 606. Our implementation
activities related to ASC 606 are complete, and we did not have any
material differences in the amount or timing of revenues as a
result of the adoption of ASC 606. Our largest revenue streams
consist of orders received from our customers for crude-oil derived
specialty products based on market prices. These revenues are
recognized at a point in time upon transfer of control of the
product in accordance with contractual terms. With respect to ASC
808, we are not party to a collaborative agreement with a third
party.
New Pronouncements Issued, Not Yet Effective
The
following are recently issued, but not yet effective, ASU’s
that may influence our consolidated financial position, results of
operations, or cash flows:
ASUs 2018-20, 2018-11, 2018-10, and 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. In December 2018, FASB
issued ASU 2018-20 to provide additional guidance related to sales
taxes and other similar taxes collected from lessees, certain
lessor costs, and recognition of variable payments for contracts
with lease and non-lease components. In July 2018, FASB issued ASUs
2018-11 and 2018-10. ASU 2018-11 provides entities with relief from
the costs of implementing certain aspects of ASU 2016-02 (codified
as ASC 842). Specifically, under the amendments in ASU 2018-11: (i)
Entities may elect not to recast the comparative periods presented
when transitioning to ASC 842 (Issue 1), and (ii) Lessors may elect
not to separate lease and non-lease components when certain
conditions are met (Issue 2). ASU 2018-10 made 16 separate
amendments to ASC 842.
43
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
For a
public business entity, the amendments in ASUs 2018-11 and 2018-10
affect the amendments in ASU 2016-02, which are not yet effective,
but for which early adoption upon issuance is permitted. For
entities that early adopted Topic 842, the amendments are effective
upon issuance of ASUs 2018-20, 2018-11 and 2018-10, and the
transition requirements are the same as those in Topic 842. For
entities that have not adopted Topic 842, the effective date and
transition requirements will be the same as the effective date and
transition requirements in Topic 842. Adoption of this guidance
affects leases with a term of greater than 12-months and will
result in an increase of approximately $1.0 million in our total
assets and liabilities on our consolidated balance sheets. We do
not expect adoption of this guidance to have a significant impact
on our consolidated statements of operations.
ASU 2018-17, Consolidation (Topic 810)
. In October 2018,
FASB issued ASU 2018-17. This ASU provides targeted improvements to
related-party guidance for variable interest entities. In
particular, indirect interests held through related parties in
common control arrangements should be considered on a proportional
basis for determining whether fees paid to decision makers and
service providers are variable interests. For entities other than
private companies, the amendments in ASU 2018-17 are effective for
fiscal years beginning after December 15, 2019, and interim periods
within those fiscal years. We do not expect adoption of this
guidance to have a significant impact on our consolidated financial
statements.
ASU 2018-05, Income Taxes (Topic 740)
. In March
2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs
in ASC 740, Income Taxes, to reflect SAB 118, which provides
guidance for companies that are not able to complete their
accounting for the income tax effects of the Tax Cuts and Jobs Act
in the period of enactment. This guidance also includes
amendments to the XBRL Taxonomy. For public business
entities, the amendments in ASU 2018-05 are effective for fiscal
years ending after December 15, 2020. Early adoption is
permitted. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
Other
new pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
Remainder
of Page Intentionally Left Blank
44
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
I
TEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not
applicable.
I
TEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
|
Report of
Independent Registered Public Accounting Firm
|
46
|
|
Consolidated
Balance Sheets
|
47
|
|
Consolidated
Statements of Operations
|
48
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit
|
49
|
|
Consolidated
Statements of Cash Flows
|
50
|
|
Notes to
Consolidated Financial Statements
|
51
|
Remainder
of Page Intentionally Left Blank
45
To the
Board of Directors and
Stockholders
of Blue Dolphin Energy Company
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of Blue
Dolphin Energy Company and Subsidiaries (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated
statements of operations, stockholders’ deficit and cash
flows for the years then ended, and the related notes (collectively
referred to as the consolidated financial statements). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and
its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note (1) to the consolidated financial statements, the
Company received an adverse outcome of arbitration proceedings for
which a settlement has been reached, however the Company has yet to
secure financing for payment of the settlement amount, is in
default under secured loan agreements, has suffered recurring
losses from operations and has a net working capital deficiency.
These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note (1). The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have
served as the Company’s auditor since 2002.
|
/s/ UHY
LLP
_____________________
|
|
UHY
LLP
|
|
Sterling
Heights, Michigan
April
1, 2019
|
46
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands except share
amounts)
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
14
|
$
495
|
|
Restricted
cash
|
49
|
49
|
|
Accounts
receivable, net
|
379
|
1,357
|
|
Accounts
receivable, related party
|
-
|
653
|
|
Prepaid
expenses and other current assets
|
1,786
|
1,207
|
|
Deposits
|
194
|
129
|
|
Inventory
|
1,510
|
3,089
|
|
Refundable
federal income tax
|
108
|
-
|
|
Total
current assets
|
4,040
|
6,979
|
|
|
|
|
|
LONG-TERM
ASSETS
|
|
|
|
Total
property and equipment, net
|
64,697
|
64,597
|
|
Restricted
cash, noncurrent
|
1,602
|
1,602
|
|
Surety
bonds
|
230
|
230
|
|
Deferred
tax assets, net
|
108
|
-
|
|
Total
long-term assets
|
66,637
|
66,429
|
|
|
|
|
|
TOTAL
ASSETS
|
$
70,677
|
$
73,408
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Long-term
debt less unamortized debt issue costs, current portion, in
default
|
$
34,863
|
35,544
|
|
Long-term
debt, related party, current portion, in default
|
7,041
|
4,000
|
|
Interest
payable, in default
|
2,939
|
2,135
|
|
Interest
payable, related party, in default
|
1,534
|
892
|
|
Accounts
payable
|
2,719
|
2,344
|
|
Accounts
payable, related party
|
1,529
|
974
|
|
Asset
retirement obligations, current portion
|
2,580
|
2,315
|
|
Accrued
expenses and other current liabilities
|
1,571
|
1,160
|
|
Accrued
arbitration award payable
|
21,128
|
27,128
|
|
Total
current liabilities
|
75,904
|
76,492
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Deferred
revenues and expenses
|
-
|
42
|
|
Long-term
debt, related party, net of current portion
|
-
|
1,608
|
|
Total
long-term liabilities
|
-
|
1,650
|
|
|
|
|
|
TOTAL
LIABILITIES
|
75,904
|
78,142
|
|
|
|
|
|
Commitments
and contingencies (Note 19)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
Common
stock ($0.01 par value, 20,000,000 shares authorized; 10,975,514
and 10,925,513
|
||
|
shares
issued at December 31, 2018 and 2017, respectively)
|
110
|
109
|
|
Additional
paid-in capital
|
36,936
|
36,907
|
|
Accumulated
deficit
|
(42,273
)
|
(41,750
)
|
|
TOTAL
STOCKHOLDERS' DEFICIT
|
(5,227
)
|
(4,734
)
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$
70,677
|
$
73,408
|
See
accompanying notes to consolidated financial
statements.
47
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands, except share and
per-share amounts)
|
|
|
REVENUE
FROM OPERATIONS
|
|
|
|
Refinery
operations
|
$
337,038
|
$
255,547
|
|
Tolling
and terminaling
|
3,723
|
2,902
|
|
Total
revenue from operations
|
340,761
|
258,449
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
Crude
oil, fuel use, and chemicals
|
322,297
|
239,740
|
|
Other
conversion costs
|
9,639
|
8,693
|
|
Total
cost of goods sold
|
331,936
|
248,433
|
|
|
|
|
|
Gross
Profit
|
8,825
|
10,016
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
LEH
operating fee
|
614
|
817
|
|
Other
operating expenses
|
180
|
228
|
|
Arbitration
award and associated fees
|
-
|
24,339
|
|
General
and administrative expenses
|
3,272
|
4,022
|
|
Depletion,
depreciation and amortization
|
1,933
|
1,810
|
|
Impairment
of assets
|
-
|
303
|
|
Bad
debt expense
|
-
|
81
|
|
Accretion
of asset retirement obligations
|
266
|
287
|
|
Total
cost of operations
|
6,265
|
31,887
|
|
|
|
|
|
Income
(loss) from operations
|
2,560
|
(21,871
)
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
Easement,
interest and other income
|
20
|
479
|
|
Interest
and other expense
|
(3,363
)
|
(2,770
)
|
|
Gain
on disposal of property
|
-
|
1,834
|
|
Total
other income (expense)
|
(3,343
)
|
(457
)
|
|
|
|
|
|
Loss
before income taxes
|
(783
)
|
(22,328
)
|
|
|
|
|
|
Income
tax benefit
|
260
|
-
|
|
|
|
|
|
Net
loss
|
$
(523
)
|
$
(22,328
)
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
Basic
|
$
(0.05
)
|
$
(2.09
)
|
|
Diluted
|
$
(0.05
)
|
$
(2.09
)
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
||
|
Basic
|
10,935,787
|
10,689,615
|
|
Diluted
|
10,935,787
|
10,689,615
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
||
48
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
(
in
thousands except share amounts)
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
Common
Stock
|
Paid-In
|
Accumulated
|
Treasury
Stock
|
Stockholders’
|
||
|
|
Shares
Issued
|
Par
Value
|
Capital
|
Deficit
|
Shares
|
Cost
|
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
10,624,714
|
$
106
|
$
36,819
|
$
(19,422
)
|
(150,000
)
|
$
(800
)
|
$
16,703
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
300,799
|
3
|
88
|
|
150,000
|
800
|
891
|
|
Net
loss
|
-
|
-
|
-
|
(22,328
)
|
-
|
-
|
(22,328
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
10,925,513
|
$
109
|
$
36,907
|
$
(41,750
)
|
-
|
$
-
|
$
(4,734
)
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
50,001
|
1
|
29
|
|
-
|
-
|
30
|
|
Net
loss
|
-
|
-
|
-
|
(523
)
|
-
|
-
|
(523
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
10,975,514
|
$
110
|
$
36,936
|
$
(42,273
)
|
-
|
$
-
|
$
(5,227
)
|
See
accompanying notes to consolidated financial
statements.
49
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Net
loss
|
$
(523
)
|
$
(22,328
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
Depletion,
depreciation and amortization
|
1,933
|
1,810
|
|
Deferred
income tax
|
(216
)
|
-
|
|
Amortization
of debt issue costs
|
128
|
128
|
|
Accretion
of asset retirement obligations
|
266
|
287
|
|
Common
stock issued for services
|
30
|
60
|
|
Changes
in operating assets and liabilities
|
|
|
|
Accounts
receivable
|
978
|
584
|
|
Accounts
receivable, related party
|
653
|
509
|
|
Prepaid
expenses and other current assets
|
(579
)
|
(161
)
|
|
Deposits
and other assets
|
(65
)
|
(15
)
|
|
Inventory
|
1,579
|
(1,014
)
|
|
Accrued
arbitration award
|
(6,000
)
|
27,128
|
|
Accounts
payable, accrued expenses and other liabilities
|
2,266
|
(12,921
)
|
|
Accounts
payable, related party
|
555
|
605
|
|
Net
cash provided by (used in) operating activities
|
1,005
|
(4,944
)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Capital
expenditures
|
(2,029
)
|
(2,432
)
|
|
Net
cash used in investing activities
|
(2,029
)
|
(2,432
)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Proceeds
from issuance of debt
|
-
|
3,678
|
|
Payments
on debt
|
(890
)
|
(1,364
)
|
|
Net
activity on related-party debt
|
1,433
|
1,125
|
|
Net
cash provided by financing activities
|
543
|
3,439
|
|
Net
change in cash, cash equivalents, and restricted cash
|
(481
)
|
(3,937
)
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
2,146
|
6,083
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
1,665
|
$
2,146
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Financing
of capital expenditures via accounts payable and capital
leases
|
$
4
|
$
1,651
|
|
Financing
of guaranty fees via long-term debt, related party
|
$
644
|
$
327
|
|
Conversion
of related-party notes to common stock
|
$
-
|
$
831
|
|
Interest
paid
|
$
2,823
|
$
2,688
|
|
Income
taxes paid
|
$
-
|
$
-
|
See
accompanying notes to consolidated financial
statements.
50
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
|
||
Nature of Operations
. Blue Dolphin Energy Company is a
publicly-traded Delaware corporation primarily engaged in the
refining and marketing of petroleum products. We also provide
tolling and storage terminaling services. Our assets, which are in
Nixon, Texas, primarily include a 15,000-bpd crude distillation
tower and more than 1.0 million bbls of petroleum storage tanks
(collectively the “Nixon Facility”). Pipeline
transportation and oil and gas operations are no longer
active.
Structure and Management
.
Blue Dolphin is controlled by
Lazarus Energy Holdings, LLC (“LEH”). LEH operates and
manages all Blue Dolphin properties pursuant to an Amended and
Restated Operating Agreement (the “Amended and Restated
Operating Agreement”). Jonathan Carroll is Chairman of the
Board of Directors (the “Board”), Chief Executive
Officer, and President of Blue Dolphin, as well as a majority owner
of LEH. Together, LEH and Jonathan Carroll owned 79.8% of our
common stock, par value $0.01 per share (the “Common
Stock”) at December 31, 2018. (See “Note (9)
Related-Party Transactions,” “Note (11) Long-Term Debt,
Net” and “Note (19) Commitments and Contingencies
– Financing Agreements” for additional disclosures
related to LEH, the Amended and Restated Operating Agreement, and
Jonathan Carroll.)
We have
the following active subsidiaries:
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”);
●
Blue Dolphin
Petroleum Company, a Delaware corporation;
●
Blue Dolphin
Services Co., a Texas corporation
(“BDSC”);
●
Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”);
●
Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”); and
●
Nixon Product
Storage, LLC, a Delaware limited liability company
(“NPS”).
In June
2018, Blue Dolphin acquired 100% of the issued and outstanding
membership interests of NPS from Lazarus Midstream Partners, L.P.,
an affiliate of LEH, pursuant to an Assignment Agreement. The
assignment was accounted for as a combination of entities under
common control. See “Note (5) NPS Assignment” of this
Annual Report for further information related to the NPS
assignment.
See
“Part I, Item 1. Business” and “Part I, Item 2.
Properties” in this Annual Report for additional information
regarding our operating subsidiaries, principal facilities, and
assets.
Remainder
of Page Intentionally Left Blank
51
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Going Concern
. Management has
determined that certain factors raise substantial doubt about our
ability to continue as a going concern. These factors include the
following:
●
Consecutive Net Losses and
Working Capital Deficits
–
For the twelve months ended December 31, 2018, we reported net loss
of $0.5 million, or a loss of $0.05 per share. For the twelve
months ended December 31, 2017, we reported a net loss of $22.3
million, or a loss of $2.09 per share. The twelve months ended
December 31, 2017 included the net effect to our consolidated
statement of operations of the Final Arbitration Award, which was
an expense of $24.3 million, or $2.29 per share, in arbitration
award and associated fees. Excluding the Final
Arbitration Award, we would have reported net income for the twelve
months ended December 31, 2017 of $2.0 million, or income of $0.19
per share, reflecting a decline of $2.5 million, or $0.24 per
share, for 2018 compared to 2017 due to lower
margins.
At
December 31, 2018, we had a working capital deficit of $71.9
million. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31, 2018. At
December 31, 2017, we had a working capital deficit of $69.5
million. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31,
2017.
●
Final Arbitration Award and
Settlement Agreement
– As
previously disclosed,
LE was
involved in arbitration proceedings (the “GEL
Arbitration”) with GEL Tex Marketing, LLC
(“GEL”), an affiliate of Genesis Energy, LP
(“Genesis”), related to a contractual dispute involving
a Crude Oil Supply and Throughput Services Agreement (the
“Crude Supply Agreement”) and a Joint Marketing
Agreement (the “Joint Marketing Agreement”), each
between LE and GEL and dated August 12, 2011. On August 11, 2017,
the arbitrator delivered its final award in the GEL Arbitration
(the “Final Arbitration Award”). The Final Arbitration
Award denied all of LE’s claims against GEL and granted
substantially all the relief requested by GEL in its counterclaims.
Among other matters,
the Final
Arbitration Award awarded damages and GEL’s attorneys’
fees and related expenses to GEL in the aggregate amount of $31.3
million.
After the initial $3.7
million payment to GEL in September 2017, LE has made payments to
GEL of $0.5 million per month. As of the date of this Annual
Report, LE has paid $11.7 million to GEL towards reducing the
outstanding balance of the Final Arbitration
Award.
A hearing on confirmation of the Final Arbitration
Award was scheduled to occur on September 18, 2017 in state
district court in Harris County, Texas. Prior to the scheduled
hearing, LE and GEL jointly notified the court that the hearing
would be continued for a period of no more than 90 days after
September 18, 2017 (the “Continuance Period”), to
facilitate settlement discussions between the parties.
On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a
Letter Agreement with GEL, effective September 18, 2017 (the
“GEL Letter Agreement”), confirming the parties’
agreement to the continuation of the confirmation hearing during
the Continuance Period, subject to the terms of the GEL Letter
Agreement. The GEL Letter Agreement was subsequently amended nine
times to extend the Continuance Period through July
2018.
LE,
NPS, and Blue Dolphin, together with LEH, Carroll & Company
Financial Holdings, L.P. (“C&C”), and Jonathan
Carroll (collectively referred to herein as the “Lazarus
Parties”), entered into that certain Settlement Agreement
with GEL, dated as of July 20, 2018 (as may be further amended,
restated, supplemented or otherwise modified from time to time, the
“Settlement Agreement”), whereby GEL and the Lazarus
Parties agreed to mutually release all claims against each other
and to file a stipulation of dismissal with prejudice in connection
with the GEL Arbitration (the “Settlement”), subject to
the terms and conditions set forth in the Settlement Agreement. The
Settlement is conditioned upon payment by the Lazarus Parties to
GEL of $10.0 million in cash (the “Settlement
Payment”). Until either the Settlement Payment is made or the
Settlement Agreement is terminated, the Lazarus Parties must pay
GEL $0.5 million in cash at the end of each calendar month (the
“Interim Payments”). The Interim Payments will not be
applied to reduce the amount of the Settlement Payment, but such
payments will reduce the Final Arbitration Award. At the time of
the Settlement, the difference between the Settlement Payment and
the amount we have accrued on our consolidated balance sheet for
arbitration award payable will be recognized as a gain on our
consolidated statement of operations. At December 31, 2018 and
2017, accrued arbitration award payable on our consolidated balance
sheet was $21.1 million and $27.1 million,
respectively.
52
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
The
Settlement Agreement restricts the Lazarus Parties from taking
certain actions without the prior written consent of GEL,
including: (i) the incurrence of any debt not specifically excepted
in the Settlement Agreement, (ii) the establishment of any liens
not specifically excepted in the Settlement Agreement, (iii) the
disposition of any assets other than certain ordinary course sales
to unaffiliated third parties, payments to unaffiliated third-party
trade creditors and scheduled debt payments, (iv) the entrance into
any transactions with affiliates not specifically excepted in the
Settlement Agreement, (v) the failure to pay debts generally as
they become due, and (vi) the entrance into a bankruptcy,
reorganization or similar proceeding. A violation of any of the
restrictions in the Settlement Agreement, as well as the failure of
the Lazarus Parties to make Interim Payments as they become due,
will constitute an event of default under the Settlement Agreement
which, subject to certain cure periods, would allow GEL to
terminate the Settlement Agreement and enforce its rights under the
Final Arbitration Award.
The Lazarus Parties are exploring the possibility
of obtaining a commercial loan
or other financing
in an aggregate principal amount equal
to the Settlement Payment (the “Settlement Financing”),
subject to obtaining the consent of Veritex Community Bank
(“Veritex”), as lender under certain loan agreements
with the Lazarus Parties and their affiliates. Under the Settlement
Agreement, the Lazarus Parties are required to work in good faith
and take reasonable actions necessary to obtain the Settlement
Financing in accordance with the terms of the Settlement Agreement.
Prior to the consummation of the Settlement Financing, the Lazarus
Parties are required to: (i) cause NPS to consummate the Settlement
Financing and restrict its ability to commence a bankruptcy case,
(ii) assign to NPS certain tank leases that will constitute
collateral for the Settlement Financing, and (iii) cause NPS to
assume joint and several liability for all or a portion of the
Final Arbitration Award. The failure to achieve certain milestones
in connection with obtaining the Settlement Financing will
constitute an event of default under the Settlement Agreement,
which would allow GEL to terminate the Settlement Agreement and
enforce its rights under the Final Arbitration
Award.
Simultaneously
with the execution of the Settlement Agreement, Jonathan Carroll
and C&C entered into a Security Agreement pursuant to which
Jonathan Carroll and C&C agreed to secure up to $10.0 million
of LE’s obligations under the Final Arbitration Award with a
security interest in their equity in LEH.
Unless extended in writing by GEL, the Settlement
Agreement will terminate on July 31, 2019 if the Settlement Payment
is not made on or before such date, and the Settlement Agreement
may be terminated by GEL following the occurrence of an event of
default under the Settlement Agreement, as described above.
Pursuant to the Settlement Agreement, the parties agreed to
terminate the GEL Letter Agreement, and GEL agreed not to take any
action to execute or collect on the Final Arbitration Award and to
take all action necessary to continue the District Court Action
until the earlier of: (i) the date on which the Settlement Payment
is paid or (ii) the termination of the Settlement Agreement.
On February 1, 2019, GEL filed a proposed order granting a joint
motion to continue the District Court Action.
●
Defaults Under Veritex Secured
Loan Agreements
– LE and
LRM each have loans with a USDA guarantee of 100% through Veritex,
as successor in interest to Sovereign Bank by merger, in the
aggregate amount of $35.0 million.
–
Events
of Default
. Veritex delivered
to obligors notices of default under secured loan agreements with
Veritex, stating that the Final Arbitration Award constitutes an
event of default under the secured loan agreements. The occurrence
of an event of default permits Veritex to declare the amounts owed
under these loan agreements immediately due and payable, exercise
its rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available.
Veritex
has not accelerated or called due the secured loan agreements
considering the Settlement Agreement, which Veritex must ultimately
approve. Instead, Veritex has expressly reserved all of its rights,
privileges and remedies related to events of default under the
secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan agreements. The debt
associated with these loans was classified within the current
portion of long-term debt on our consolidated balance sheets at
December 31, 2018 and 2017 due to existing events of default
related to the Final Arbitration Award as well as the uncertainty
of LE and LRM’s ability to meet financial covenants in the
secured loan agreements in the future.
53
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Veritex has been working with LE and LRM and
continues to be aware and party to all discussions and arrangements
with GEL surrounding the Settlement. We
can provide no
assurance that the conditions necessary for consummation of the
Settlement will be met. If certain conditions are not met or the
Settlement Agreement is terminated, GEL may seek to enforce the
Final Arbitration Award against the Lazarus Parties. Further, we
can provide no assurance as to whether
Veritex, as first lienholder, will approve the Settlement. If
Veritex does not approve the Settlement, Veritex may exercise its
rights and remedies under the secured loan agreements. In either
case
: (i) our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations will be materially affected,
(ii) Blue Dolphin and its affiliates would likely be required to
seek protection under bankruptcy laws, and (iii) the trading prices
of our common stock and the value of an investment in our common
stock could significantly decrease, which could lead to holders of
our common stock losing their investment in our common stock in its
entirety.
–
Financial
Covenant Defaults
. In addition
to existing events of default related to the Final Arbitration
Award, at December 31, 2018 LE and LRM were in violation of certain
financial covenants in secured loan agreements with Veritex.
Covenant defaults under the secured loan agreements would permit
Veritex to declare the amounts owed under these loan agreements
immediately due and payable, exercise its 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 loans was classified
within the current portion of long-term debt on our consolidated
balance sheets at December 31, 2018 and 2017 due to existing events
of default related to the Final Arbitration Award as well as the
uncertainty of LE and LRM’s ability to meet the financial
covenants in the future.
Veritex
has been working with LE and LRM and continues to be aware and
party to all discussions and arrangements with GEL
surrounding the executed settlement agreement and all
amendments and extensions with GEL. There can be no assurance that
Veritex will provide a waiver of events of default related to the
Final Arbitration Award, consent to the Settlement Agreement with
GEL, or provide future waivers of any financial covenant defaults,
which would have an adverse impact on our financial position and
results of operations.
Operating Risks
.
Successful
execution of our business strategy depends on several key factors,
including
the Settlement with GEL,
having adequate working capital, obtaining credit
to meet operational needs and regulatory requirements, maintaining
safe and reliable operations at the Nixon Facility, meeting
contractual obligations, and having favorable margins on refined
petroleum products. Management believes that it is continuing to
take the appropriate steps to improve our operations and financial
stability.
However, there can
be no assurance that our business strategy will be successful, that
LEH and its affiliates will continue to fund our working capital
needs, or that we will be able to obtain additional financing or
meet financial assurance (bonding) requirements on commercially
reasonable terms or at all. If Veritex does not approve the
Settlement or exercises its rights and remedies under the secured
loan agreements or if the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin and its affiliates would likely be required to seek
protection under bankruptcy laws. (See “Part I, Item 1.
Business – Business Strategy” in this Annual Report for
additional disclosures related to our business plan and initiatives
management has taken to date.)
For
additional disclosures related to the Final Arbitration Award, the
Settlement Agreement, defaults under secured loan agreements, our
business strategy, and risk factors that could materially affect
our future business, financial condition and results of operations,
refer to the following sections in this Annual Report:
●
Part I, Item 1.
Business – Business Strategy
●
Part I, Item 1A.
Risk Factors
●
Part I, Item 3.
Legal Proceedings
●
Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations:
–
Final Arbitration
Award and Settlement Agreement
–
Results of
Operations
–
Liquidity and
Capital Resources
54
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
●
Part II, Item 8.
Financial Statements and Supplementary Data:
–
Note (9)
Related-Party Transactions
–
Note (11) Long-Term
Debt, Net
–
Note (19)
Commitments and Contingencies – Legal Matters
|
(2)
|
Basis of Presentation
|
Our
consolidated financial statements include Blue Dolphin and its
subsidiaries. Significant intercompany transactions have been
eliminated in consolidation. The accompanying consolidated
financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
consolidated financial information pursuant to the rules and
regulations of the SEC under Regulation S-X and the instructions to
Form 10-K. In management’s opinion, all adjustments
considered necessary for a fair presentation have been included,
disclosures are adequate, and the presented information is not
misleading.
|
(3)
|
Significant Accounting Policies
|
The
summary of significant accounting policies of 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. These accounting policies conform
to GAAP and have been consistently applied in the preparation of
our consolidated financial statements.
Use of Estimates
.
We have made several estimates and
assumptions related to the reporting of our consolidated assets and
liabilities and to the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with GAAP. We believe our current estimates are
reasonable and appropriate; however, actual results could differ
from those estimated.
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
primarily represents a payment reserve account held by Veritex as
security for payments under a loan agreement. Restricted cash,
noncurrent represents funds held in the Veritex disbursement
account for payment of construction related expenses to build new
petroleum storage tanks.
Accounts Receivable and Allowance for Doubtful Accounts
.
Accounts receivable are presented net of any necessary allowance(s)
for doubtful accounts. Receivables are recorded at the invoiced
amount and generally do not bear interest. An allowance for
doubtful accounts is established, when necessary, based
on past experience and other factors which, in management's
judgment, deserve consideration in estimating bad debts.
Management assesses collectability primarily based on
the current aging status of the customer's account, our
historical collection experience with the customer, and the
customer's financial condition. Based on a review of
these factors, management establishes or adjusts the allowance for
specific customers and the accounts receivable portfolio as a
whole. We had an allowance for doubtful accounts of $0.1
million and $0 at December 31, 2018 and 2017,
respectively.
Inventory
.
Our
inventory primarily consists of refined petroleum products, crude
oil and condensate, and chemicals. Inventory is valued at lower of
cost or net realizable value with cost being determined by the
average cost method, and net realizable value being determined
based on estimated selling prices less any associated delivery
costs. If the net realizable value of our refined petroleum
products inventory declines to an amount less than our average
cost, we record a write-down of inventory and an associated
adjustment to cost of goods sold. (See “Note (7)
Inventory” for additional disclosures related to our
inventory.)
55
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Property and Equipment
.
Refinery and Facilities
. Management expects to continue
making improvements to the crude distillation tower based on
operational needs and technological advances. Additions to refinery
and facilities assets are capitalized. Expenditures for repairs and
maintenance are expensed as incurred.
We record refinery and facilities at cost less any adjustments for
depreciation or impairment.
Adjustment of the asset and the
related accumulated depreciation accounts are made 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, depreciation of
refinery and facilities assets is computed using the straight-line
method using an estimated useful life of 25 years beginning when
the refinery and facilities assets are placed in service. As a
result of the Final Arbitration Award, which represents a
significant adverse change that could affect the value of a
long-lived asset, management performed potential impairment testing
of our refinery and facilities assets in the fourth quarter of
2018. Upon completion of that testing, we determined that no
impairment was necessary at December 31, 2018. We did not record
any impairment of our refinery and facilities assets for the
periods presented.
Pipelines and Facilities
. Our pipelines and facilities are
recorded at cost less any adjustments for depreciation or
impairment. Depreciation is computed using the straight-line method
over estimated useful lives ranging from 10 to 22 years. In
accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) guidance on accounting for the impairment or
disposal of long-lived assets, management performed periodic
impairment testing of our pipeline and facilities assets in the
fourth quarter of 2016. Upon completion of that testing, our
pipeline assets were fully impaired. All pipeline transportation
services to third parties have ceased, existing third-party wells
along our pipeline corridor have been permanently abandoned, and no
new third-party wells are being drilled near our
pipelines.
Oil and Gas Properties
. Our oil and gas properties are
accounted for using the full-cost method of accounting, whereby all
costs associated with acquisition, exploration and development of
oil and gas properties, including directly related internal costs,
are capitalized on a cost center basis. Amortization of
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, and our oil and gas properties
were fully impaired in 2011.
Construction in Progress
. Construction in progress
expenditures, including capitalized interest, relate to
construction and refurbishment activities at the Nixon Facility.
These expenditures are capitalized as incurred. Depreciation begins
once the asset is placed in service.
(See
“Note (8) Property, Plant and Equipment, Net” for
additional disclosures related to our refinery and facilities
assets, oil and gas properties, pipelines and facilities assets,
and construction in progress.)
Intangibles – Other
. Trade name, an intangible asset,
represents the “Blue Dolphin Energy Company” brand
name. We account for intangible assets under FASB ASC guidance
related to intangibles, goodwill, and other. Under the guidance, we
determined trade name to have an indefinite useful life, and we
test intangible assets with indefinite lives annually for
impairment. Management performed its regular annual impairment
testing of trade name in the fourth quarter of 2017. Upon
completion of that testing, our trade name asset was fully impaired
at December 31, 2017.
Debt Issue Costs
. We have debt issue costs related to
certain refinery and facilities assets debt. Debt issue costs are
capitalized and amortized over the term of the related debt using
the straight-line method, which approximates the effective interest
method. Debt issue costs are presented net with the related debt
liability. (See “Note (11) Long-Term Debt, Net” for
additional disclosures related to debt issue
costs.)
56
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Revenue Recognition
.
We
adopted the provisions of FASB ASU (defined below) 2014-09,
Revenue from Contracts with
Customers (ASC 606)
, on January 1, 2018, as described
below in “New Pronouncements Adopted.” Accordingly, our
revenue recognition accounting policy has been revised to reflect
the adoption of this standard.
Refinery Operations Revenue
. Revenue from the sale of
refined petroleum products is recognized when product is sold to
the customer in fulfillment of performance obligations. Each load
of refined petroleum product is separately identifiable and
represents a distinct performance obligation to which the
transaction price is allocated. Performance obligations are met
when control is transferred to the customer. Control is transferred
to the customer when the product has been lifted or, in cases where
the product is not lifted immediately (bill and hold arrangements),
when the product is added to the customer’s bulk inventory as
stored at the Nixon Facility.
We
consider a variety of facts and circumstances in assessing the
point of control transfer, including but not limited to: whether
the purchaser can direct the use of the refined petroleum product,
the transfer of significant risks and rewards, our rights to
payment, and transfer of legal title. In each case, the term
between sale and when payment is due is not significant.
Transportation, shipping, and handling costs incurred are included
in cost of goods sold. Excise and other taxes that are collected
from customers and remitted to governmental authorities are not
included in revenue.
Tolling and Terminaling Revenue
. Tolling and terminaling
represents fees pursuant to: (i) 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 use of the naphtha stabilizer
unit and (ii) tank storage agreements, whereby a customer agrees to
pay a certain fee per tank based on tank size over a period of time
for the storage of products.
We
typically satisfy performance obligations for tolling and
terminaling operations with the passage of time. We determine the
transaction price at agreement inception based on the guaranteed
minimum amount of revenue over the term of the agreement. We
allocate the transaction price to the single performance obligation
that exists under the agreement, and 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, and the
price we charge for such services is not included in the fixed cost
under the customer’s tank storage agreement. Ancillary
services are considered a separate performance obligation by us
under the tank storage agreement. The performance obligation is
satisfied when the requested service has been performed in the
applicable period.
Income Taxes
.
We
account for income taxes under FASB ASC guidance related to income
taxes, which requires recognition of income taxes based on amounts
payable with respect to the current reporting period and the
effects of deferred taxes for the expected future tax consequences
of events that have been included in our financial statements or
tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of
each reporting date, management considers new evidence, both
positive and negative, to determine the realizability of deferred
tax assets. Management considers whether it is more likely than not
that a portion or all of the deferred tax assets will be realized,
which is dependent upon the generation of future taxable income
prior to the expiration of any net operating loss
(“NOL”) carryforwards. When management determines that
it is more likely than not that a tax benefit will not be realized,
a valuation allowance is recorded to reduce deferred tax assets. A
significant piece of objective negative evidence evaluated was
cumulative losses incurred over the three-year period ended
December 31, 2018. 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 December 31, 2018 and 2017. We
expect to recover deferred tax assets related to the Alternative
Minimum Tax (“AMT”) credit carryforwards. In addition,
we have NOL carryforwards that remain available for future
use.
57
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
The
benefit of an uncertain tax position is recognized in the financial
statements if it meets a minimum recognition threshold. A
determination is first made as to whether it is more likely than
not that the income tax position will be sustained, based upon
technical merits, upon examination by the taxing authorities. If
the income tax position is expected to meet the
more-likely-than-not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate settlement. At December
31, 2018 and 2017, there were no uncertain tax positions for which
a reserve or liability was necessary. (See “Note (17) Income
Taxes” for further information related to income
taxes.)
Impairment or Disposal of Long-Lived Assets
. In accordance
with FASB ASC guidance on accounting for the impairment or disposal
of long-lived assets, we periodically evaluate our long-lived
assets for impairment. Additionally, we evaluate 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 to result 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. Significant management
judgment is required in the forecasting of future operating results
that are used in the preparation of projected cash flows and,
should different conditions prevail or judgments be made, material
impairment charges could be necessary. As a result of the Final
Arbitration Award, which represents a significant adverse change
that could affect the value of a long-lived asset, management
performed potential impairment testing of our refinery and
facilities assets in the fourth quarter of 2018. Upon completion of
that testing, we determined that no impairment was necessary at
December 31, 2018. We did not record any impairment of our refinery
and facilities assets for the periods presented.
Asset Retirement Obligations
. FASB ASC guidance related to
asset retirement obligations (“AROs”) requires that a
liability for the discounted fair value of an ARO be recorded in
the period in which incurred, and the corresponding cost
capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted towards its future
value each period, and the capitalized cost is depreciated over the
useful life of the related asset. If the liability is settled for
an amount other than the recorded amount, a gain or loss is
recognized.
Management
has concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facilities assets arises
and a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We
recorded an ARO liability related to future asset retirement costs
associated with dismantling, relocating, or disposing of our
offshore platform, pipeline systems, and related onshore
facilities, as well as for plugging and abandoning wells and
restoring land and sea beds. We developed these cost estimates for
each of our assets based upon regulatory requirements, structural
makeup, water depth, reservoir characteristics, reservoir depth,
equipment demand, current retirement procedures, and construction
and engineering consultations. Because these costs typically extend
many years into the future, estimating future costs are difficult
and require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis. (See “Note (12) Asset Retirement Obligations”
for additional information related to our AROs.)
Computation of Earnings Per Share
. We apply the provisions
of FASB ASC guidance for computing earnings per share
(“EPS”). The guidance requires the presentation of
basic EPS, which 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. The
guidance requires dual presentation of basic EPS and diluted EPS on
the face of our consolidated statements of operations and requires
a reconciliation of the denominator of basic EPS and diluted EPS.
Diluted EPS is computed by dividing net income available to common
stockholders by the diluted weighted average number of common
shares outstanding, which 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
earnings of the entity.
58
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
The
number of shares related to options, warrants, restricted stock,
and similar instruments included in diluted EPS is based on the
“Treasury Stock Method” prescribed in FASB ASC guidance
for computation of EPS. This method assumes theoretical repurchase
of shares using proceeds of the respective stock option or warrant
exercised, and, for restricted stock, the amount of compensation
cost attributed to future services that has not yet been recognized
and the amount of any current and deferred tax benefit that would
be credited to additional paid-in-capital upon the vesting of the
restricted stock, at a price equal to the issuer’s average
stock price during the related earnings period. Accordingly, the
number of shares includable in the calculation of EPS in respect of
the stock options, warrants, restricted stock, and similar
instruments is dependent on this average stock price and will
increase as the average stock price increases. (See “Note
(18) Earnings Per Share” for additional information related
to EPS.)
New Pronouncements Adopted
. The FASB issues an Accounting
Standards Update (“ASU”) to communicate changes to the
FASB ASC, including changes to non-authoritative SEC content.
Recently adopted ASUs include:
ASU 2018-09, Codification Improvements
. In July 2018, FASB
issued ASU 2018-09. This guidance affects a wide variety of topics
in the codification and represents changes to clarify, correct
errors in, or make minor improvements to the codification. The
amendments make the codification easier to understand and easier to
apply by eliminating inconsistencies and providing clarifications.
The amendments apply to all reporting entities within the scope of
the affected accounting guidance. Some of the amendments in ASU
2018-09 do not require transition guidance and will be effective
upon issuance. However, many of the amendments do have transition
guidance with effective dates for annual periods beginning after
December 15, 2018, for public business entities. Adoption of this
guidance did not have a significant impact on our consolidated
financial statements.
ASU 2014-09, Revenue from Contracts with Customers (ASC
606)
. We adopted this accounting pronouncement effective
January 1, 2018, using a modified retrospective approach, which
required us to apply the new revenue standard to: (i) all new
revenue contracts entered into after January 1, 2018 and (ii) all
existing revenue contracts as of January 1, 2018. In accordance
with this approach, our consolidated revenues for the periods prior
to January 1, 2018 will not be revised. In November 2018, FASB
issued ASU 2018-18,
Collaborative
Arrangements (Topic 808)
.
ASU 2018-18 clarifies the
interaction between ASC 808 and ASC 606. Our implementation
activities related to ASC 606 are complete, and we did not have any
material differences in the amount or timing of revenues as a
result of the adoption of ASC 606. Our largest revenue streams
consist of orders received from our customers for crude-oil derived
specialty products based on market prices. These revenues are
recognized at a point in time upon transfer of control of the
product in accordance with contractual terms. With respect to ASC
808, we are not party to a collaborative agreement with a third
party.
New Pronouncements Issued, Not Yet Effective
. The following
are recently issued, but not yet effective, ASU’s that may
influence our consolidated financial position, results of
operations, or cash flows:
ASUs 2018-20, 2018-11, 2018-10, and 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. In December 2018, FASB
issued ASU 2018-20 to provide additional guidance related to sales
taxes and other similar taxes collected from lessees, certain
lessor costs, and recognition of
variable
payments for contracts with lease and non-lease components. In July
2018, FASB issued ASUs 2018-11 and 2018-10. ASU 2018-11 provides
entities with relief from the costs of implementing certain aspects
of ASU 2016-02 (codified as ASC 842). Specifically, under the
amendments in ASU 2018-11: (i) entities may elect not to recast the
comparative periods presented when transitioning to ASC 842 (Issue
1), and (ii) lessors may elect not to separate lease and non-lease
components when certain conditions are met (Issue 2). ASU 2018-10
made 16 separate amendments to ASC 842.
For a
public business entity, the amendments in ASUs 2018-11 and 2018-10
affect the amendments in ASU 2016-02, which are not yet effective,
but for which early adoption upon issuance is permitted. For
entities that early adopted Topic 842, the amendments are effective
upon issuance of ASUs 2018-20, 2018-11 and 2018-10, and the
transition requirements are the same as those in Topic 842. For
entities that have not adopted Topic 842, the effective date and
transition requirements will be the same as the effective date and
transition requirements in Topic 842. Adoption of this guidance
affects leases with a term of greater than 12-months and will
result in an increase of approximately $1.0 million in our total
assets and liabilities on our consolidated balance sheets.
We do
not expect adoption of this guidance to have a significant impact
on our consolidated statements of operations.
59
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
ASU 2018-17, Consolidation (Topic 810)
. In October 2018,
FASB issued ASU 2018-17. This ASU provides targeted improvements to
related-party guidance for variable interest entities. In
particular, indirect interests held through related parties in
common control
arrangements
should be considered on a proportional basis for determining
whether fees paid to decision makers and service providers are
variable interests. For entities other than private companies, the
amendments in ASU 2018-17 are effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. We do not expect adoption of this guidance to have a
significant impact on our consolidated financial
statements.
ASU 2018-05, Income Taxes (Topic 740)
. In March
2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs
in ASC 740, Income Taxes, to reflect SAB 118, which provides
guidance for companies that are not able to complete their
accounting for the income tax effects of the Tax Cuts and Jobs Act
in the period of enactment. This guidance also includes
amendments to the XBRL Taxonomy. For public business
entities, the amendments in ASU 2018-05 are effective for fiscal
years ending after December 15, 2020. Early adoption is
permitted. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
Other new pronouncements issued but not yet effective are not
expected to have a material impact on our financial position,
results of operations, or liquidity.
|
(4)
|
Revenue
and Segment Information
|
We have
two reportable business segments: (i) Refinery Operations and (ii)
Tolling and Terminaling. Refinery operations relate to the refining
and marketing of petroleum products at our 15,000-bpd crude
distillation tower. Tolling and terminaling operations relate to
tolling and storage terminaling services under related-party and
third-party lease agreements. Both operations are conducted at the
Nixon Facility.
Revenue from Contracts with Customers
.
●
Disaggregation of Revenue
- Revenue is
presented in the table below under “Segment
Information” disaggregated by business segment because this
is the level of disaggregation that management has determined to be
beneficial to users of our financial statements.
●
Receivables from Contracts with
Customers
- Our receivables from contracts with customers
are reflected as receivables, net as presented on our consolidated
balance sheets.
●
Remaining Performance Obligations
- The
majority of our contracts with customers are spot contracts and
therefore have no remaining performance obligations.
Remainder
of Page Intentionally Left Blank
60
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Segment Information
.
|
|
Twelve
Months December 31,
|
||||||
|
|
2018
|
2017
|
|||||
|
|
(in
thousands)
|
||||||
|
|
Segments
|
|
|
Segment
|
|
||
|
|
Refinery
|
Tolling
and
|
Corporate
|
|
Refinery
|
Corporate
|
|
|
|
Operations
|
Terminaling
|
&
Other
|
Total
|
Operations
|
&
Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
Net
revenues (excluding intercompany fees and sales)
|
$
337,038
|
$
3,723
|
$
-
|
$
340,761
|
$
258,449
|
$
-
|
$
258,449
|
|
Intercompany
fees and sales
|
(3,270
)
|
3,270
|
-
|
-
|
-
|
-
|
-
|
|
Operation costs and expenses
(1)
|
(331,220
)
|
(1,332
)
|
(444
)
|
(332,996
)
|
(273,671
)
|
(817
)
|
(274,488
)
|
|
Segment
contribution margin
|
$
2,548
|
$
5,661
|
$
(444
)
|
$
7,765
|
$
(15,222
)
|
$
(817
)
|
$
(16,039
)
|
|
General
and administrative expenses
|
(1,232
)
|
(245
)
|
(1,795
)
|
(3,272
)
|
(2,850
)
|
(1,172
)
|
(4,022
)
|
|
Depreciation
and amortization
|
(1,842
)
|
(91
)
|
-
|
(1,933
)
|
(1,799
)
|
(10
)
|
(1,810
)
|
|
Interest and other non-operating expenses,
net
(2)
|
|
|
|
(3,343
)
|
|
|
(457
)
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
|
(783
)
|
|
|
(22,328
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
|
260
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
$
(523
)
|
|
|
$
(22,328
)
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
$
1,124
|
$
905
|
$
-
|
$
2,029
|
$
4,082
|
$
-
|
$
4,082
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
$
41,116
|
$
28,446
|
$
1,115
|
$
70,677
|
$
71,708
|
$
1,700
|
$
73,408
|
Business
segment information for the periods indicated (and as of the dates
indicated) was as follows:
|
(1)
|
Operation
costs within Refinery Operations includes the arbitration award and
associated fees. Operation cost within Tolling and Terminaling
includes terminal operating expenses, an allocation of other costs
(e.g. insurance and maintenance), and associated refinery fuel use
costs. Operation cost within Corporate and Other includes expenses
associated with our pipeline assets and oil and gas leasehold
interests (such as accretion).
|
|
(2)
|
Reflects
FLNG Land II, Inc. easement revenue in 2017. See “Note (19)
Commitments and Contingencies – FLNG Easements” for
further discussion related to FLNG.
|
|
(5)
|
NPS Assignment
|
In June
2018, Blue Dolphin obtained 100% of the issued and outstanding
membership interest of NPS, a Delaware limited liability company,
from Lazarus Midstream Partners, L.P. (“Lazarus
Midstream”), an affiliate of LEH, pursuant to an Assignment
Agreement. The transaction represents transfer of a vacant shell
entity owned by Lazarus Midstream to Blue Dolphin for the nominal
fee of $10.00. The assignment of interest facilitates the Lazarus
Parties
exploring the possibility of
obtaining the Settlement Financing under the Settlement
Agreement.
The
assignment was accounted for as a combination of entities under
common control. Accordingly, the recognized assets and liabilities
of NPS were transferred at their carrying amounts at the date of
transfer and the results of operations are included for the twelve
months ended December 31, 2018. NPS did not have significant
assets, liabilities or results of operations for the twelve months
ended December 31, 2017. NPS holds a leasehold interest in
petroleum storage tanks at the Nixon Facility. NPS’ revenues
and expenses are included in our Tolling and Terminaling business
segment.
61
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(6)
|
Prepaid Expenses and Other Current Assets
|
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
Prepaid
crude oil and condensate
|
$
1,166
|
$
913
|
|
Prepaid
insurance
|
437
|
294
|
|
Other
prepaids
|
183
|
-
|
|
|
|
|
|
|
$
1,786
|
$
1,207
|
|
(7)
|
Inventory
|
Inventory
as of the dates indicated consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Crude
oil and condensate
|
$
861
|
$
961
|
|
AGO
|
276
|
213
|
|
Naphtha
|
143
|
170
|
|
Chemicals
|
106
|
162
|
|
HOBM
|
102
|
1,558
|
|
Propane
|
17
|
17
|
|
LPG
mix
|
5
|
8
|
|
|
|
|
|
|
$
1,510
|
$
3,089
|
|
(8)
|
Property, Plant and Equipment, Net
|
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Refinery
and facilities
|
$
63,058
|
$
51,432
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
747
|
653
|
|
|
64,371
|
52,651
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortization
|
(10,429
)
|
(8,495
)
|
|
|
53,942
|
44,156
|
|
|
|
|
|
Construction
in progress
|
10,755
|
20,441
|
|
|
|
|
|
|
$
64,697
|
$
64,597
|
62
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest, which is
recorded as part of the asset to which it relates, is depreciated
over the asset’s useful life. Interest cost capitalized,
which is currently included in construction in progress, was $1.3
million and $3.9 million at December 31, 2018 and 2017,
respectively. Capital expenditures at the Nixon Facility are being
funded by working capital derived from revenue from operations and
LEH and its affiliates (including Jonathan Carroll), as well as
from long-term debt from Veritex that was secured in 2015 for
expansion of the Nixon Facility. Unused amounts under the Veritex
loans are reflected in restricted cash (current and non-current
portions) on our consolidated balance sheets and will be available
for use once events of default associated with the Final
Arbitration Award are remedied.
See
“Note (11) Long-Term Debt, Net” for additional
disclosures related to borrowings for capital
spending.
|
(9)
|
Related-Party Transactions
|
Blue
Dolphin and certain of its subsidiaries are party to several
agreements with LEH and its affiliates. Management believes that
these related-party transactions were consummated on terms
equivalent to those that prevail in arm's-length
transactions.
Related Parties
.
LEH
. LEH is our controlling shareholder. Jonathan Carroll,
Chairman of the Board, Chief Executive Officer, and President of
Blue Dolphin, is the majority owner of LEH. Together, LEH and
Jonathan Carroll owned 79.8% of our Common Stock at December 31,
2018. Related-party agreements with LEH include: (i) an Amended and
Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet
Fuel Sales Agreement with LE, (iii) a Loan Agreement with BDPL,
(iv) an Amended and Restated Promissory Note with Blue Dolphin, (v)
a Debt Assumption Agreement with LE, and (vi) an office
sublease-agreement with BDSC. Additionally, in June 2018, Blue
Dolphin obtained 100% of the issued and outstanding membership
interest of NPS from Lazarus Midstream for the nominal fee of
$10.00 pursuant to an Assignment Agreement. (See “Note (5)
NPS Assignment” for further discussion related to the NPS
transaction.)
Ingleside Crude, LLC (“Ingleside”)
. Ingleside is
a related party of LEH and Jonathan Carroll. Blue Dolphin is party
to an Amended and Restated Promissory Note with
Ingleside.
Lazarus Marine Terminal I, LLC (“LMT”)
. LMT is a
related party of LEH and Jonathan Carroll. LE is party to a Dock
Tolling Agreement with LMT.
Jonathan Carroll
. Jonathan Carroll is Chairman of the Board,
Chief Executive Officer, and President of Blue Dolphin.
Related-party agreements with Jonathan Carroll include: (i) Amended
and Restated Guaranty Fee Agreements with LE and LRM and (ii) an
Amended and Restated Promissory Note with Blue Dolphin. The
guaranty fee agreements and the promissory note relate to LE and
LRM USDA-guaranteed loans.
Currently,
we depend on LEH and its affiliates (including Jonathan Carroll and
Ingleside) for financing when revenue from operations and
borrowings under bank facilities are insufficient to meet our
liquidity needs. Such borrowings are reflected in our consolidated
balance sheets in accounts payable, related party, and/or long-term
debt, related party.
Operations Related Agreements
.
Amended and Restated Operating Agreement
. LEH operates and
manages all Blue Dolphin properties pursuant to the Amended and
Restated Operating Agreement. The Amended and Restated Operating
Agreement, which was restructured in 2017 following cessation of
crude supply and marketing activities under the Crude Supply
Agreement and Joint Marketing Agreement with GEL, expires: (i)
April 1, 2020, (ii) upon written notice by either party to the
Amended and Restated Operating Agreement of a material breach by
the other party, or (iii) upon 90 days’ notice by the Board
if the Board determines that the Amended and Restated Operating
Agreement is not in our best interest. LEH receives an operating
fee of 5% of our direct operating expenses. Prior to the fourth
quarter of 2018, the 5% fee was calculated on expenses paid by LEH
on behalf of LE. During the fourth quarter of 2018 the fee was
changed to be calculated based on year to date operating expenses
incurred, regardless of whether they were paid for by LEH or LE.
The LEH operating fee was previously reflected within refinery
operating expenses in our consolidated statements of
operations.
63
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Jet Fuel Sales Agreement
. LE sells jet fuel to LEH pursuant
to a Jet Fuel Sales Agreement. LEH resells the jet fuel purchased
from LE to a government agency. LEH bids for jet fuel contracts are
evaluated under preferential pricing terms due to its HUBZone
certification. The Jet Fuel Sales Agreement terminates on the
earliest to occur of: (a) a one-year term expiring March 31, 2019
plus a 30-day carryover or (b) delivery of a maximum quantity of
jet fuel as defined therein. Sales to LEH under the Jet Fuel Sales
Agreement are reflected within refinery operations revenue in our
consolidated statements of operations. (LRM previously leased
petroleum storage tanks to LEH for the storage of the jet fuel
under a Terminal Services Agreement. The Terminal Services
Agreement was terminated as described below).
Terminal Services Agreement
. Pursuant to a Terminal Services
Agreement, LEH leased petroleum storage tanks from LRM for the
storage of LEH purchased jet fuel under the Jet Fuel Sales
Agreement (as described above). The Terminal Services Agreement was
terminated in June 2017. Rental fees received from LEH under the
Terminal Services Agreement are reflected within tolling and
terminaling revenue in our consolidated statements of
operations.
Amended and Restated Tank Lease Agreement
. Pursuant to an
Amended and Restated Tank Lease Agreement with Ingleside, LE leased
petroleum storage tanks to meet periodic, additional storage needs.
The Amended and Restated Tank Lease Agreement was terminated in
July 2017. Rental fees owed to Ingleside under the tank lease
agreement are reflected within long-term debt, related party, net
of current portion in our consolidated balance sheets.
Dock Tolling Agreement
. In May 2016, LE entered a Dock
Tolling Agreement with LMT to facilitate loading and unloading of
petroleum products by barge at LMT’s dock facility in
Ingleside, Texas. The Dock Tolling Agreement has a five-year term
and may be terminated at any time by the agreement of both parties.
LE pays LMT a flat reservation fee monthly. The reservation fee
includes tolling volumes up to 84,000 gallons per day. Excess
tolling volumes are subject to an increased per gallon rate.
Amounts expensed as tolling fees under the Dock Tolling Agreement
are reflected in cost of goods sold in our consolidated statements
of operations.
Office Sub-Lease Agreement
. In January 2018, BDSC entered
into an Office Space Agreement with LEH to lease office space at
our headquarters building in Houston, Texas. The Office Space
Agreement has a term of sixty-eight (68) months expiring on August
31, 2023. Under the Office Space Agreement, LEH’s base rent
for 6,264 square feet is approximately $0.02 million per month. The
Office Space Agreement includes rent abatement
periods.
Financial Agreements
.
We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. During 2018 and
2017, LEH and its affiliates (Ingleside and Jonathan Carroll)
provided working capital to Blue Dolphin in the form of a term loan
and non-cash advances (such as conversion of accounts payable to
debt under promissory notes). Our long-term debt, related party is
currently in default.
There
can be no assurance that LEH and its affiliates will continue to
fund our working capital requirements. Outstanding principal and
accrued interest owed under these financial agreements are
reflected in long-term debt, related party, current portion in our
consolidated balance sheets.
BDPL Loan Agreement (
In Default
)
. BDPL has a 2016 loan agreement and
related security agreement with LEH as lender (the “BDPL Loan
Agreement”). The BDPL Loan Agreement is currently in default
due to non-payment. Key terms of the BDPL Loan Agreement are as
follow:
|
Principal
Amount:
|
$4.0
million
|
|
Maturity
Date:
|
August
2018
|
|
Principal
and Interest Payment:
|
$500,000
annually
|
|
Interest
Rate:
|
16.00%
|
The
proceeds of the BDPL Loan Agreement were used for working capital.
There are no financial maintenance covenants associated with the
BDPL Loan Agreement. The BDPL Loan Agreement is secured by certain
property owned by BDPL. Outstanding principal owed to LEH under the
BDPL Loan Agreement is reflected in long-term debt, related party,
current portion in our consolidated balance sheets. Accrued
interest under the BDPL Loan Agreement is reflected in interest
payable, related party, current portion in our consolidated balance
sheets.
64
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Promissory
Notes (
In Default
)
.
Working capital provided to Blue Dolphin in the form of non-cash
advances whereby accounts payable, related party was converted to
debt under promissory notes are reflected below. The promissory
notes matured in January 2019. Interest, which is compounded
annually, is still accruing at a rate of 8.00%. The promissory
notes are currently in default due to non-payment.
●
June LEH Note
– The June LEH Note
reflects amounts owed to LEH at December 31, 2018 under the Amended
and Restated Operating Agreement.
●
March Ingleside Note
– The March
Ingleside Note reflects amounts owed to Ingleside at December 31,
2018 under the Amended and Restated Tank Lease
Agreement.
●
March Carroll Note
–The March
Carroll Note reflects amounts owed to Jonathan Carroll at December
31, 2018 under the guaranty fee agreements. Jonathan Carroll has
received no payments under the promissory note, either in cash or
common stock, since May 2017.
Amended and Restated Guaranty Fee Agreements
. Jonathan
Carroll was required to provide a guarantee for repayment of funds
borrowed and interest accrued under certain LE and LRM
USDA-guaranteed loans. For his personal guarantee, LE and LRM each
entered a Guaranty Fee Agreement with Jonathan Carroll whereby he
earns a fee equal to 2.00% per annum of the outstanding principal
balance owed under the loan agreements. Effective in April 2017,
the Guaranty Fee Agreements were amended and restated (the
“Amended and Restated Guaranty Fee Agreements”) to
reflect payment in cash and shares of Blue Dolphin Common Stock.
Amounts owed to Jonathan Carroll under Amended and Restated
Guaranty Fee Agreements are reflected within long-term debt,
related party, net of current portion in our consolidated balance
sheets.
Guaranty fees are recognized
monthly as incurred and are included in interest and other expense
in our consolidated statements of operations.
(See
“Note (11) Long-Term Debt, Net – Amended and Restated
Guaranty Fee Agreements” for a breakdown of guaranty fee
expenses for each secured loan agreement.) Jonathan Carroll has
received no payments under guaranty fee agreements, either in cash
or common stock, since May 2017.
Debt Assumption Agreement
. On September 18, 2017, LEH paid, on
LE’s behalf, certain obligations totaling $3.6 million to GEL
relating to the GEL Arbitration and the GEL Letter Agreement. In
exchange for such payments, LE agreed to assume $3.7 million of
LEH’s existing indebtedness pursuant to the Debt Assumption
Agreement, entered on November 14, 2017 and made effective
September 18, 2017, by and among LE, LEH and John Kissick. Debt
held by John Kissick, including the debt
associated with the
Debt Assumption Agreement, is reported in this Annual Report as the
Notre Dame Debt (defined below) and is reflected in long-term debt
less unamortized debt issue costs, current portion in our
consolidated balance sheets, as it is currently in default. (See
“Note (11) Long-Term Debt, Net” for further discussion
related to the Notre Dame Debt.)
Financial Statements Impact
.
Consolidated Balance Sheets
. Accounts receivable, related
party from LEH associated with the Jet Fuel Sales Agreement were $0
and $0.7 million at December 31, 2018 and 2017, respectively.
Accounts payable, related party to LMT associated with the Dock
Tolling Agreement were $1.5 million and $1.0 million at December
31, 2018 and 2017, respectively.
Remainder
of Page Intentionally Left Blank
65
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Long-term
debt, related party associated with the BDPL Loan Agreement, the
March Ingleside Note, and the March Carroll Note as of the dates
indicated was as follows:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
LEH
|
$
4,611
|
$
4,000
|
|
Ingleside
|
1,283
|
1,169
|
|
Jonathan
Carroll
|
1,147
|
439
|
|
|
|
|
|
|
7,041
|
5,608
|
|
|
|
|
|
Less:
Long-term debt, related party,
current portion
|
(7,041
)
|
(4,000
)
|
|
|
|
|
|
|
$
-
|
$
1,608
|
Accrued
interest associated with the BDPL Loan Agreement was $1.5 million
and $0.9 million at December 31, 2018 and 2017, respectively.
Interest on the March Ingleside Note and the March Carroll Note is
compounded and reported as part of the outstanding
balance.
Consolidated Statements of Operations
. Revenue from related
parties was as follows:
|
|
Twelve
Months Ended December 31,
|
|||
|
|
2018
|
2017
|
||
|
|
(in thousands, except percent
amounts)
|
|||
|
Refinery
operations
|
|
|
|
|
|
LEH
|
$
98,571
|
28.9
%
|
$
81,094
|
31.3
%
|
|
Other
customers
|
238,467
|
70.0
%
|
174,453
|
67.5
%
|
|
Tolling
and terminaling
|
|
|
|
|
|
LEH
|
-
|
0.0
%
|
675
|
0.3
%
|
|
Other
customers
|
3,723
|
1.1
%
|
2,227
|
0.9
%
|
|
|
|
|
|
|
|
|
$
340,761
|
100.0
%
|
$
258,449
|
100.0
%
|
Fees
associated with the Dock Tolling Agreement with LMT totaled $0.6
million for both the twelve months ended December 31, 2018 and
2017. Lease payments under the office sub-lease agreement with LEH
totaled $0.03 million and $0.2 million for the twelve months ended
December 31, 2018 and 2017, respectively.
The LEH
operating fee for the twelve months ended December 31, 2018 totaled
$0.6 million compared to $0.8 million, a decrease of $0.2 million,
or 25%, compared to the same twelve-month period a year earlier.
The decrease in the LEH operating fee was due to the fee
restructure under the Amended and Restated Operating Agreement in
April 2017.
66
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Interest
expense associated with the BDPL Loan Agreement, the Amended and
Restated Guaranty Fee Agreements, and the related-party promissory
notes (the June LEH Note, the March Ingleside Note, and the March
Carroll Note) for the periods indicated was as
follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
Jonathan
Carroll
|
$
700
|
$
685
|
|
LEH
|
648
|
706
|
|
Ingleside
|
97
|
92
|
|
|
|
|
|
|
$
1,445
|
$
1,483
|
|
(10)
|
Accrued Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Unearned
revenue
|
$
434
|
$
450
|
|
Board
of director fees payable
|
273
|
207
|
|
Other
payable
|
265
|
116
|
|
Easement
payable
|
223
|
-
|
|
Accrued
rent
|
111
|
-
|
|
Customer
deposits
|
109
|
109
|
|
Insurance
|
61
|
68
|
|
Property
taxes
|
48
|
131
|
|
Excise
and income taxes payable
|
47
|
79
|
|
|
|
|
|
|
$
1,571
|
$
1,160
|
|
(11)
|
Long-Term Debt, Net
|
USDA Guaranteed Loans
. Certain of our long-term debt is
guaranteed by the United States Department of Agriculture (the
“USDA”). 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 United States with the
USDA guaranteeing up to 100% of the principal amount of guaranteed
loans. The lender on each USDA guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed
loan, to service the entire underlying guaranteed loan, including
the USDA-guaranteed portion and the unguaranteed portion, and to
remain mortgage and/or secured party of record. The USDA-guaranteed
portion and the unguaranteed portion of the loan are to be secured
by the same collateral with equal lien priority. The
USDA-guaranteed portion of a loan cannot be paid later than, or in
any way be subordinated to, the related unguaranteed portion.
During 2015, LE and LRM obtained loans each with a USDA guarantee
of 100% through Sovereign as lender (now
Veritex, as successor in interest to Sovereign by
merger)
in the aggregate amount of $35.0 million. The LE
$25.0 million USDA-guaranteed loan is referenced herein as the
“First Term Loan Due 2034”. The LRM $10.0 million
USDA-guaranteed loan is referenced herein as the “Second Term
Loan Due 2034”.
67
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Amended and Restated Guaranty Fee Agreements
. As a condition
of the First Term Loan Due 2034 and Second Term Loan Due 2034,
Jonathan Carroll was required to provide a guarantee for
r
epayment
of funds
borrowed and interest accrued under the USDA-guaranteed loans. LEH,
LRM and Blue Dolphin also cross-guaranteed the First Term Loan Due
2034 and Second Term Loan Due 2034. (See “Note (9)
Related-Party Transactions” for additional disclosures
related to LEH, Jonathan Carroll, and the Amended and Restated
Guaranty Fee Agreements.)
Guaranty
fees earned by Jonathan Carroll for the periods indicated were as
follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
First
Term Loan Due 2034
|
$
456
|
$
471
|
|
Second
Term Loan Due 2034
|
188
|
192
|
|
|
|
|
|
|
$
644
|
$
663
|
Defaults in USDA-Guaranteed Loan Agreements
. As described
elsewhere in this Annual Report, Veritex notified LE and LRM that
the Final Arbitration Award constitutes an event of default under
the First Term Loan Due 2034 and the Second Term Loan Due 2034. In
addition to existing events of default related to the Final
Arbitration Award, at December 31, 2018, LE and LRM were in
violation of the debt service coverage ratio, the current ratio,
and debt-to-net worth ratio financial covenants related to the
First Term Loan Due 2034 and Second Term Loan 2034. LE also failed
to replenish a payment reserve account as required under the First
Term Loan Due 2034. The occurrence of events of default under the
First Term Loan Due 2034 and Second Term Loan Due 2034 permits
Veritex to declare the amounts owed under the First Term Loan Due
2034 and Second Term Loan Due 2034 immediately due and payable,
exercise its rights with respect to collateral securing LE and
LRM’s obligations under the loan agreements, and/or exercise
any other rights and remedies available.
Veritex has not accelerated or called due the
First Term Loan Due 2034 and Second Term Loan Due 2034 considering
the Settlement Agreement, which Veritex must ultimately approve.
Instead, Veritex has expressly reserved
all its rights,
privileges and remedies related to events of default under the
First Term Loan Due 2034 and Second Term Loan Due 2034 and informed
LE and LRM that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements. Additionally, Veritex must ultimately approve the
Settlement. Any exercise by Veritex of its rights and remedies
under the First Term Loan Due 2034 and Second Term Loan Due 2034
would have a material adverse effect on our business, financial
condition, and results of operations and would likely require Blue
Dolphin to seek protection under bankruptcy laws. (See “Note
(1) Organization – “Going Concern” and “
– Operating Risks” for additional disclosures related
to the First Term Loan Due 2034 and Second Term Loan Due 2034, the
Final Arbitration Award and financial covenant
violations.)
Long-Term Debt, Net Outstanding Balances
. Long-term debt,
net represents the outstanding principal of long-term debt less
associated debt issue costs. [See “Note (9) Related-Party
Transactions” for additional disclosures with respect to
related-party long-term debt.] As described within this “Note
(11”) Long-Term Debt, Net,” certain of our long-term
debt is currently in default. Long-term debt, net as of the dates
indicated consisted of the following:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
First
Term Loan Due 2034 (in default)
|
$
22,550
|
$
23,199
|
|
Second
Term Loan Due 2034 (in default)
|
9,300
|
9,502
|
|
Notre
Dame Debt (in default)
|
4,978
|
4,978
|
|
Capital
leases
|
41
|
-
|
|
|
$
36,869
|
$
37,679
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(34,863
)
|
(35,544
)
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(2,006
)
|
(2,135
)
|
|
|
|
|
|
|
$
-
|
$
-
|
68
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Unamortized
debt issue costs, which relate to secured loan agreements with
Veritex, as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
First
Term Loan Due 2034 (in default)
|
$
1,674
|
$
1,674
|
|
Second
Term Loan Due 2034 (in default)
|
768
|
768
|
|
|
|
|
|
Less:
Accumulated amortization
|
(436
)
|
(307
)
|
|
|
|
|
|
|
$
2,006
|
$
2,135
|
Amortization
expense was $0.1 million for both the twelve months ended December
31, 2018 and 2017.
Accrued
interest associated with long-term debt, net is reflected as
interest payable, in default and interest payable, related party,
in default in our consolidated balance sheets. Accrued interest as
of the dates indicated consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Notre
Dame Debt (in default)
|
$
2,843
|
$
2,046
|
|
BDPL
Loan Agreement (related party, in default)
|
1,534
|
892
|
|
Second
Term Loan Due 2034 (in default)
|
53
|
49
|
|
First
Term Loan Due 2034 (in default)
|
43
|
40
|
|
|
|
|
|
|
4,473
|
3,027
|
|
|
|
|
|
Less:
Interest payable, current portion
|
(4,473
)
|
(3,027
)
|
|
|
|
|
|
Long-term
interest payable, net of current portion
|
$
-
|
$
-
|
At
December 31, 2018, our expected future debt payments are presented
as current due to defaults under the loan agreements:
|
Years Ending December
31,
|
|
|
|
| (in thousands) | |||
|
|
Principal
|
Debt
Issue Costs
|
Total
|
|
|
|
|
|
|
2019
|
$
43,910
|
$
(2,006
)
|
$
41,904
|
|
2020
|
-
|
-
|
-
|
|
2021
|
-
|
-
|
-
|
|
2022
|
-
|
-
|
-
|
|
2023
|
-
|
-
|
-
|
|
Subsequent
to 2023
|
-
|
-
|
-
|
|
|
$
43,910
|
$
(2,006
)
|
$
41,904
|
69
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
First Term Loan Due 2034 (In Default)
. Key terms of the
First Term Loan Due 2034 are as follow:
|
Principal
Amount:
|
$25.0
million
|
|
Maturity
Date:
|
June
2034
|
|
Principal
and Interest Payment:
|
$0.2
million monthly
|
|
Interest
Rate:
|
Wall
Street Journal Prime Rate plus 2.75%
|
A
portion of the proceeds of the First Term Loan Due 2034 were used
to refinance approximately $8.5 million of debt owed under a
previous debt facility with American First National Bank. Remaining
proceeds are being used primarily to construct new petroleum
storage tanks at the Nixon Facility. The First Term Loan Due 2034,
which is 100% USDA-guaranteed, is secured by: (i) a first lien on
the Nixon Facility’s business assets (excluding accounts
receivable and inventory), (ii) assignment of all Nixon Facility
contracts, permits, and licenses, (iii) absolute assignment of
Nixon Facility rents and leases, including tank rental income, (iv)
a payment reserve account held by Veritex, and (v) a pledge of $5.0
million of a life insurance policy on Jonathan Carroll. The First
Term Loan Due 2034 contains representations and warranties,
affirmative, restrictive, and financial covenants, as well as
events of default which are customary for bank facilities of this
type.
Pursuant
to a construction rider in the First Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
Second Term Loan Due 2034 (In Default)
. Key terms of the
Second Term Loan Due 2034 are as follow:
|
Principal
Amount:
|
$10.0
million
|
|
Maturity
Date:
|
December
2034
|
|
Principal
and Interest Payment:
|
$0.1
million monthly
|
|
Interest
Rate:
|
Wall
Street Journal Prime Rate plus 2.75%
|
A
portion of the proceeds of the Second Term Loan Due 2034 were used
to refinance a previous bridge loan from Veritex in the amount of
$3.0 million, the funds of which were used to purchase idle
refinery equipment for refurbishment and use at the Nixon Facility.
Remaining proceeds are being used primarily to construct additional
new petroleum storage tanks at the Nixon Facility. The Second Term
Loan Due 2034, which is 100% USDA-guaranteed, is secured by: (i) a
second priority lien on the rights of LE in the crude distillation
tower and the other collateral of LE pursuant to a security
agreement; (ii) a first priority lien on the real property
interests of LRM; (iii) a first priority lien on all of LRM’s
fixtures, furniture, machinery and equipment; (iv) a first priority
lien on all of LRM’s contractual rights, general intangibles
and instruments, except with respect to LRM’s rights in its
leases of certain specified tanks, with respect to which Veritex
has a second priority lien in such leases subordinate to a prior
lien granted by LRM to Veritex to secure obligations of LRM under a
term loan that matured in 2017; and (v) all other collateral as
described in the security documents. The Second Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Pursuant
to a construction rider in the Second Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
Notre Dame Debt (In Default)
. LE entered a loan with Notre
Dame Investors, Inc. as evidenced by a promissory note that is
currently held by John Kissick (the “Notre Dame Debt”).
Key terms of the Notre Dame Debt are as follow:
|
Original
Principal Amount:
|
$8.0
million
|
|
Additional
Principal:
|
$3.7
million
|
|
Maturity
Date:
|
January
2018
|
|
Principal
and Interest Payment:
|
None;
payment rights subordinated to senior lender
|
|
Default
Interest Rate:
|
16.00%
|
70
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Pursuant
to a Sixth Amendment to the Notre Dame Debt, entered on November
14, 2017 and made effective September 18, 2017, the Notre Dame Debt
was amended to increase the principal amount by $3.7 million (the
“Additional Principal”). The Additional Principal was
used to make payments to GEL to reduce the balance of the Final
Arbitration Award in the amount of $3.6 million in accordance with
the GEL Letter Agreement. Pursuant to a Subordination Agreement
dated June 2015, the holder of the Notre Dame Debt agreed to
subordinate its 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 First Term Loan Due 2034. To date, no
payments have been made to Notre Dame Investors, Inc. under the
Notre Dame Debt.
The
Notre Dame Debt is secured by a Deed of Trust, Security Agreement
and Financing Statements (the “Subordinated Deed of
Trust”), which encumbers the crude distillation tower and
general assets of LE. There are no financial maintenance
covenants associated with the Notre Dame Debt.
Capital Leases
. Capital leases relate to equipment used at
the Nixon Facility as follow:
●
Boiler Equipment Lease
. In
2014, LRM entered a 36-month build-to-suit capital lease for the
purchase two new boilers for the Nixon Facility. One of the boilers
was placed in service during the second quarter of 2017. The other
boiler remains in construction in progress. The lease was paid off
in the first quarter of 2018.
●
Crane Lease
. In January 2018,
LE entered a 24-month capital lease for the purchase of a 20-ton
crane for use at the Nixon Facility. The lease requires a
negligible monthly payment and matures in January
2020.
A
summary of equipment held under long-term capital leases as of the
dates indicated follows:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Boiler
equipment
|
$
-
|
$
539
|
|
Crane
|
94
|
-
|
|
Less:
accumulated depreciation
|
(14
)
|
(21
)
|
|
|
|
|
|
|
$
80
|
$
518
|
|
Years
Ending December 31,
|
|
|
(in thousands)
|
Total
|
|
|
|
|
2019
|
$
41
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
-
|
|
2023
|
-
|
|
Subsequent
to 2023
|
-
|
|
|
$
41
|
|
(12)
|
Asset Retirement Obligations
|
Refinery and Facilities
. Management has concluded that there
is no legal or contractual obligation to dismantle or remove the
refinery and facilities assets. Management believes that the
refinery and facilities assets have indeterminate lives under FASB
ASC guidance for estimating AROs because dates or ranges of dates
upon which we would retire these assets cannot reasonably be
estimated at this time. When a legal or contractual obligation to
dismantle or remove the refinery and facilities assets arises and a
date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
71
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Pipelines and Facilities and Oil and Gas Properties
. We have
AROs associated with the dismantlement and abandonment in place of
our pipelines and facilities assets, as well as the plugging and
abandonment of our oil and gas properties. We recorded a discounted
liability for the fair value of an ARO with a corresponding
increase to the carrying value of the related long-lived asset at
the time the asset was installed or placed in service. We
depreciate the amount added to property and equipment and recognize
accretion expense relating to the discounted liability over the
remaining life of the asset. Plugging and abandonment costs are
recorded during the period incurred or as information becomes
available to substantiate actual and/or probable
costs.
Changes
to our ARO liability for the periods indicated were as
follows:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Asset
retirement obligations, at the beginning of the period
|
$
2,315
|
$
2,028
|
|
Accretion
expense
|
265
|
287
|
|
|
2,580
|
2,315
|
|
Less:
asset retirement obligations, current portion
|
(2,580
)
|
(2,315
)
|
|
|
|
|
|
Long-term
asset retirement obligations, at the end of the period
|
$
-
|
$
-
|
BDPL’s
Blue Dolphin Pipeline has been inactive since September 2012. Due
to the length of inactivity, BDPL is required by the Bureau of
Safety and Environmental Enforcement (“BSEE”) to: (i)
flush and fill the Blue Dolphin Pipeline, (ii) abandon-in-place a
portion of the Blue Dolphin Pipeline’s 20” segment and
certain smaller diameter connecting lateral lines that reside
offshore in federal waters and (iii) remove from federal waters the
GA-288C anchor platform. In April 2016, BDPL submitted
decommissioning permit applications to BSEE for three (3) pipeline
segments – Segments #13101, #9428, and #15635 – and the
GA-288C anchor platform. In June 2016, BDPL also submitted a
decommissioning permit application to the U.S. Army Corps of
Engineers for abandonment of Segment #9428. The permit applications
were granted by BSEE at varying dates between August 2016 and April
2017. Work must typically be completed within 120 days from the
date of permit approval. Abandonment timing primarily depends on
resource availability and weather conditions in the Gulf of Mexico.
Management anticipates performing abandonment work during 2019.
Weather conditions in the Gulf of Mexico during the winter months
is typically not conducive to abandonment operations. As of the
date of this Annual Report, decommissioning work has not yet been
completed.
|
(13)
|
Impairment
|
For the
years ended December 31, 2018 and 2017, we recorded impairment
expense of $0 and $0.3 million, respectively. The impairment
expense for the year ended December 31, 2017 related to trade name.
At the time of the 2012 reverse acquisition, our trade name
valuation was tied to pipeline transportation and exploration and
production revenue and assumed, under the relief-from-royalty
approach, a growth rate of 2.2% annually. Although growth in these
operations did not materialize for economic reasons, management
believed there was value associated with Blue Dolphin’s
listing as a publicly-traded company. Given the decline in the
price per share of our common stock following the Final Arbitration
Award, we fully impaired the trade name asset. Trade name is not
associated with, nor is it material to, our refinery operations
business segment.
|
(14)
|
Treasury Stock
|
At
December 31, 2018 and 2017, we had 0 shares of treasury stock. In
May 2017, we issued 150,000 shares of treasury stock to Jonathan
Carroll as payment for amounts due under the March Carroll Note.
The issuance price of the treasury stock issued to Mr. Carroll was
$2.48 per share, which represents the preceding 30-day average
closing price of the Common Stock, in accordance with the Amended
and Restated Guaranty Fee Agreements. The shares of treasury stock
issued to Mr. Carroll are restricted per applicable securities
holding periods for affiliates. (See “Note (9) Related-Party
Transactions” and “Note (11) Long-Term Debt, Net
– Amended and Restated Guaranty Fee Agreements” for
additional disclosures related to Jonathan Carroll and the Amended
and Restated Guaranty Fee Agreements.)
72
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(15)
|
Concentration of Risk
|
Bank Accounts
. Financial instruments that potentially
subject us to concentrations of risk consist primarily of cash,
trade receivables and payables. We maintain our cash balances at
financial institutions located in Houston, Texas. In the U.S., the
Federal Deposit Insurance Corporation (the “FDIC”)
insures certain financial products up to a maximum of $250,000 per
depositor. At December 31, 2018 and 2017, we had cash balances
(including restricted cash) of more than the FDIC insurance limit
per depositor in the amount of $1.2 million and $1.6 million,
respectively.
Key Supplier
.
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future.
Our ability to
purchase adequate amounts of crude oil and condensate could be
adversely affected if the Settlement Agreement is terminated and
GEL seeks to confirm and enforce the Final Arbitration Award, as
well as other factors, including as
net losses, working
capital deficits, and financial covenant defaults in secured loan
agreements.
Significant Customers
. We routinely assess the financial
strength of our customers and have not experienced significant
write-downs in our accounts receivable balances. Therefore, we
believe that our accounts receivable credit risk exposure is
limited.
For the
twelve months ended December 31, 2018, we had 4 customers that
accounted for approximately 91% of our refined petroleum product
sales. LEH was 1 of these 4 significant customers and accounted for
approximately 29% of our refined petroleum product
sales. At December 31, 2018, these 4 customers
represented approximately $0.1 million in accounts
receivable. LEH represented approximately $0 in accounts
receivable. LEH purchases our jet fuel and resells the jet fuel to
a government agency. LEH bids for jet fuel contracts are evaluated
under preferential pricing terms due to its HUBZone certification.
(See “Note (9) Related-Party Transactions,” “Note
(11) Long-Term Debt, Net,” and “Note (19) Commitments
and Contingencies – Financing Agreements” for
additional disclosures related to LEH.)
For the
twelve months ended December 31, 2017, we had 3 customers that
accounted for approximately 70% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and accounted for
approximately 33% of our refined petroleum product
sales. At December 31, 2017, these 3 customers
represented approximately $1.3 million in accounts
receivable. LEH represented approximately $0.7 in
accounts receivable.
Refined Petroleum Product Sales
. Our refined petroleum
products are primarily sold in the U.S. However, with the opening
of the Mexican diesel market to private companies, we occasionally
sell low-sulfur diesel to customers that export to Mexico. Total
refined petroleum product sales by distillation (from light to
heavy) for the periods indicated consisted of the
following:
|
|
Twelve
Months Ended December 31,
|
|||
|
|
2018
|
2017
|
||
|
|
(in thousands)
|
|||
|
|
|
|
|
|
|
LPG
mix
|
$
3
|
0.0
%
|
$
123
|
0.0
%
|
|
Naphtha
|
82,982
|
24.6
%
|
60,408
|
23.6
%
|
|
Jet
fuel
|
98,570
|
29.2
%
|
81,094
|
31.7
%
|
|
HOBM
|
80,979
|
24.1
%
|
54,851
|
21.5
%
|
|
AGO
|
74,504
|
22.1
%
|
59,071
|
23.2
%
|
|
|
|
|
|
|
|
|
$
337,038
|
100.0
%
|
$
255,547
|
100.0
%
|
73
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(16)
|
Leases
|
BDSC
leases our principal office space in Houston, Texas under a 2006
lease agreement. Effective January 1, 2018, BDSC entered an amended
lease agreement (the “Lease Amendment”) that extended
the lease period by sixty-eight (68) months expiring on August 31,
2023. Under the Lease Amendment, our base rent for 7,675 square
feet is approximately $0.02 million per month. LEH subleases
approximately 82% of this leased office space [see “Note (9)
Related-Party Transactions” related to the LEH office
sub-lease agreement]. The Lease Amendment includes an
allowance for lessee improvements, rent abatements, and a five-year
renewal option. For the twelve months ended December 31, 2018 and
2017, rent expense totaled $0.2 million.
At
December 31, 2018, future minimum lease commitments that are
non-cancelable under the Lease Amendment are as
follow:
|
Years
Ending December 31,
|
|
|
(in thousands)
|
|
|
2019
|
$
190
|
|
2020
|
230
|
|
2021
|
233
|
|
2022
|
237
|
|
2023
|
161
|
|
|
|
|
|
$
1,051
|
|
(17)
|
Income Taxes
|
The Tax
Cuts and Jobs Act was signed into law in December 2017. The
principal element of the Tax Cuts and Jobs Act relevant to our
financial statements is a reduction in the U.S. federal corporate
tax rate from 34% to 21%, effective January 1, 2018. Other
provisions of the Tax Cuts and Jobs Act did not have a significant
impact on our financial statements for the twelve months ended
December 31, 2018 and 2017.
The
provision for income tax benefit (expense) as of the dates
indicated consisted of the following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$
108
|
$
-
|
|
State
|
43
|
-
|
|
Deferred
|
|
|
|
Impact
of change in enacted tax rates
|
-
|
(6,654
)
|
|
Change
in valuation allowance
|
109
|
6,654
|
|
Total
provision for income taxes
|
$
260
|
$
-
|
The
state of Texas has a Texas margins tax (“TMT”), which
is a form of business tax imposed on gross margin. Although TMT is
imposed on an entity’s gross profit rather than on its net
income, certain aspects of TMT make it like an income tax.
Accordingly, TMT is treated as an income tax for financial
reporting purposes. For the twelve months ended December 31, 2018
and 2017, we recognized income relating to state income tax of
$0.04 million and $0, respectively.
74
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Effective Tax Rate
. Our effective tax rate was as
follows:
|
|
December 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Expected
tax rate
|
(
21.00
%)
|
(34.00
%)
|
|
Permanent
differences
|
0.00
%
|
0.00
%
|
|
State
tax
|
(5.10
%)
|
0.00
%
|
|
Federal
tax
|
(28.10
%)
|
0.00
%
|
|
Change
in valuation allowance
|
21.00
%
|
34.00
%
|
|
|
(33.2
%)
|
0.00
%
|
In
2018, our effective tax rate differed from the U.S. federal
statutory rate primarily due to AMT credits made refundable by the
Tax Cuts and Jobs Act. In 2017, our effective tax rate differed
from the U.S. federal statutory rate primarily due to re-measuring
deferred income taxes at the new statutory tax rate and the related
change of the valuation allowance over our deferred tax assets. At
the date of enactment of the Tax Cuts and Jobs Act, we re-measured
our deferred tax assets and liabilities using a rate of 21%, which
is the rate expected to be in place when such deferred assets and
liabilities are expected to reverse in the future. The
re-measurement was offset by a change in our valuation allowance,
resulting in there being no impact on our net deferred tax
assets.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
December
31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss and capital loss carryforwards
|
$
11,260
|
$
9,767
|
|
Accrued
arbitration award payable
|
2,850
|
4,122
|
|
Business
interest expense
|
704
|
-
|
|
Start-up
costs (crude oil and condensate processing facility)
|
678
|
763
|
|
Asset
retirement obligations liability/deferred revenue
|
542
|
495
|
|
AMT
credit and other
|
108
|
217
|
|
Total
deferred tax assets
|
16,142
|
15,365
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(5,153
)
|
(4,415
)
|
|
Total
deferred tax liabilities
|
(5,153
)
|
(4,415
)
|
|
|
|
|
|
|
10,989
|
10,950
|
|
|
|
|
|
Valuation
allowance
|
(10,881
)
|
(10,950
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
108
|
$
-
|
Deferred Income Taxes
. Deferred income tax balances reflect
the effects of temporary differences between the carrying amounts
of assets and liabilities and their tax basis, as well as from NOL
carryforwards. We state those balances at the enacted tax rates we
expect will be in effect when taxes are paid. NOL carryforwards and
deferred tax assets represent amounts available to reduce future
taxable income.
75
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
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 certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than 50
percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three years). For
income tax purposes, we experienced ownership changes in 2005,
relating to a series of private placements, and in 2012, because of
a reverse acquisition, that limit the use of pre-change NOL
carryforwards to offset future taxable income. In general, the
annual use limitation equals the aggregate value of common stock at
the time of the ownership change multiplied by a specified
tax-exempt interest rate. The 2012 ownership change will subject
approximately $16.3 million in NOL carryforwards that were
generated prior to the ownership change to an annual use limitation
of approximately $0.6 million per year. Unused portions of the
annual use limitation amount may be used in subsequent years.
Because of the annual use limitation, approximately $6.7 million in
NOL carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were generated
after the 2012 ownership change and prior to 2018 are not subject
to an annual use limitation under IRC Section 382 and may be used
for a period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change. NOL
carryforwards that were generated after 2017 may only be used to
offset 80% of taxable income and are carried forward
indefinitely.
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 IRC Section 382
limitation):
|
|
Net
Operating Loss Carryforward
|
||
|
|
Pre-Ownership
Change
|
Post-Ownership Change
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
Balance
at December 31, 2016
|
$
9,614
|
$
23,563
|
$
33,177
|
|
|
|
|
|
|
Net
operating losses
|
-
|
6,656
|
6,656
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
$
9,614
|
$
30,219
|
$
39,833
|
|
|
|
|
|
|
Net
operating losses
|
-
|
7,106
|
7,106
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$
9,614
|
$
37,325
|
$
46,939
|
Valuation Allowance
. As of each reporting date, management
considers new evidence, both positive and negative, to determine
the realizability of deferred tax assets. Management considers
whether it is more likely than not that some portion or all the
deferred tax assets will be realized, which is dependent upon the
generation of future taxable income prior to the expiration of any
NOL carryforwards. At December 31, 2018 and 2017, management
determined that cumulative losses incurred over the prior
three-year period provided significant objective evidence that
limited 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
December 31, 2018 and 2017.
76
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(18)
|
Earnings Per Share
|
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
2018
|
2017
|
|
Net
loss
|
$
(523
)
|
$
(22,328
)
|
|
|
|
|
|
Basic
and diluted loss per share
|
$
(0.05
)
|
$
(2.09
)
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
|
common
stock outstanding and potential
|
|
|
|
dilutive
shares of common stock
|
10,935,787
|
10,689,615
|
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 twelve months ended December
31, 2018 and 2017 was the same as basic EPS as there were no stock
options or other dilutive instruments outstanding.
|
(19)
|
Commitments and Contingencies
|
Legal Matters
.
Final Arbitration Award and Settlement Agreement
. See "Part
I, Item 3. Legal Proceedings” and “Note (1)
Organization – Going Concern – Final Arbitration Award
and Settlement Agreement” for additional disclosures related
to the Final Arbitration Award and the Settlement
Agreement.
Veritex Secured Loan Agreement Events of Default
. See
“Note (1) Organization – Going Concern – Veritex
Secured Loan Agreement Events of Default” and “Note
(11) Long-Term Debt, Net” for disclosures related to defaults
under secured loan agreements.
Other Legal Matters
. We are involved in lawsuits, claims,
and proceedings incidental to the conduct of our business,
including mechanic’s liens, contract-related disputes,
administrative proceedings, and financial assurance (bonding)
requirements with regulatory bodies. Management is in discussion
with all concerned parties and does not believe that such matters
will have a material adverse effect on our financial position,
earnings, or cash flows.
However,
there can be no assurance that such discussions will result in a
manageable outcome or that we will be able to meet financial
assurance (bonding) requirements. If Veritex does not approve the
Settlement or exercises its rights and remedies under the secured
loan agreements or if the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin and its affiliates would likely be required to seek
protection under bankruptcy laws.
Amended and Restated Operating Agreement
. See “Note
(9) Related-Party Transactions” for additional disclosures
related to the Amended and Restated Operating
Agreement.
FLNG Easements
. BDPL and FLNG were parties to a Pipeline
Easement dated November 5, 2005 (the “FLNG Pipeline
Easement”) and the FLNG Master Easement Agreement (together
with the FLNG Pipeline Easement, the “FLNG Easements”).
The FLNG Easements provided FLNG and its affiliates: (i) a pipeline
easement and right of way across BDPL-owned property to certain
property owned by FLNG and (ii) rights of ingress and egress across
BDPL-owned property to the property owned by FLNG. Under the FLNG
Easements, FLNG made payments to us in the amount of $0.5 million
each year. The FLNG Easements were terminated in February
2017.
77
|
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DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Financing Agreements
. See “Note (11) Long-Term Debt,
Net” for additional disclosures related to financing
agreements.
Guarantees
. LEH and Jonathan Carroll provided guarantees on
certain Blue Dolphin-related long-term debt. The maximum amount of
any guarantee is reduced as payments are made. See “Note (11)
Long-Term Debt, Net” for additional disclosures related to
guarantees.
Health, Safety and Environmental Matters
. Our operations 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. Our 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.
Nixon Facility Expansion
. We
have made and continue to make
capital and efficiency improvements at the Nixon Facility.
Therefore, we incurred and will continue to incur capital
expenditures related to these improvements, which include, among
other things, facility and land improvements and completion of a
petroleum storage tank.
Supplemental Pipeline Bonds
. In a letter dated March 30,
2018, the Bureau of Ocean Energy Management (“BOEM”)
ordered BDPL to provide additional supplemental bonds or acceptable
financial assurance of approximately $4.8 million (the
“Separate Orders”) within sixty (60) calendar days of
receipt of the letter. The Separate Orders relate to five (5)
existing pipeline rights-of-way. BOEM issued an INC for each
Separate Order dated June 8, 2018 and received by BDPL on June 11,
2018. BOEM asserts that the INCs authorize BOEM to impose financial
penalties on BDPL if it does not comply with the Separate Orders
within twenty (20) days. BOEM asserts that potential penalties
accrue for each day BDPL failed to comply after June 28,
2018. BDPL appealed the INCs on August 8, 2018. The
Interior Board of Land Appeals (the “IBLA”) has granted
four extension requests that extend BDPL’s deadline for
filing a Statement of Reasons with the IBLA until April 22, 2019.
The IBLA’s delay in issuing its order was due to the
government shutdown. BDPL’s pending appeal of the INCs does
not relieve BDPL of its obligations to provide additional financial
assurance in accordance with the Separate Orders, or of
BOEM’s authority to impose financial penalties.
BDPL
has initiated settlement discussions with BOEM to resolve the
Separate Orders and the INCs. There can be no assurance that BOEM
will: (i) accept a proposal for a reduced amount of supplemental
financial assurance, (ii) not require additional supplemental
pipeline bonds related to BDPL’s existing pipeline
rights-of-way, and/or (iii) not impose penalties under the INCs. As
a result, we are unable to predict the outcome of the Separate
Orders, the settlement discussions with BOEM or their ultimate
impact, if any, on our business, financial condition or results of
operations. Accordingly, we have not recorded a liability on our
consolidated balance sheet as of December 31, 2018. As of December
31, 2018 and 2017, BDPL maintained approximately $0.9 million in
credit and cash-backed pipeline rights-of-way bonds issued to the
BOEM. If BDPL is required by BOEM to provide significant additional
supplemental bonds or acceptable financial assurance or is assessed
significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition.
78
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
I
TEM
9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to
be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”) is recorded, processed, summarized and reported within
the time periods specified by SEC rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to management, including the
Chief Executive Officer (principal executive officer) and the Chief
Financial Officer (historically our principal financial officer) to
allow timely decisions regarding required disclosure. Following the
resignation of our Chief Financial Officer, our Chief Executive
Officer also serves as our principal financial officer. Under the
supervision of, and with the participation of our management,
including our Chief Executive 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 Exchange Act, as
of the end of the period covered by this Annual Report. Based on
our evaluation, our Chief Executive Officer (principal executive
officer and principal financial officer) concluded that our
disclosure controls and procedures were effective as of the end of
the period covered by this Annual Report to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act, are recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms.
Management’s Report on Internal Control over Financial
Reporting
Management’s Responsibility
.
Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. A company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the
United States.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management’s Assessment
.
Management, under the supervision and with the
participation of our Chief Executive Officer (principal executive
officer and principal financial officer), assessed the
effectiveness of our internal controls over financial reporting at
December 31, 2018. In making this assessment, management used
the criteria set forth by the 2013 Committee of Sponsoring
Organizations of the Treadway Commission Framework and SOX
Compliance. Relating to such evaluation, management concluded that
our internal controls over financial reporting were effective at
December 31, 2018.
Changes in Internal Control over Financial
Reporting
. During the period
covered by this Annual Report there have been no changes in our
internal control over financial reporting that materially affected,
or is reasonably likely to materially affect, our internal control
over financial reporting.
Exemption from Management's Report on Internal Control over
Financial Reporting
. This
Annual Report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to
rules of the SEC that permit us to provide only management’s
attestation in this Annual Report.
79
|
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DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
None.
Remainder
of Page Intentionally Left Blank
80
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Structure and Management
Blue
Dolphin is a Delaware corporation that was formed in 1986. Blue
Dolphin is controlled by Lazarus Energy Holdings, LLC
(“LEH”). LEH operates and manages all Blue Dolphin
properties pursuant to an Amended and Restated Operating Agreement
(the “Amended and Restated Operating Agreement”).
Jonathan Carroll is Chairman of the Board of Directors (the
“Board”), Chief Executive Officer, and President of
Blue Dolphin, as well as a majority owner of LEH. Together, LEH and
Jonathan Carroll owned 79.8% of our common stock, par value $0.01
per share (the “Common Stock) at December 31, 2018. (See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (9) Related-Party Transactions, Note (11) Long-Term
Debt, Net and Note (19) Commitments and Contingencies –
Financing Agreements” for additional disclosures related to
LEH, the Amended and Restated Operating Agreement, and Jonathan
Carroll.)
Board Composition
The amended and restated bylaws of Blue Dolphin provide that the
Board shall consist of five members, with the precise number to be
determined from time to time by the Board, except that no decrease
in the number shall have the effect of shortening the term of an
incumbent director. The Board currently has five (5) directors,
each serving until the next annual meeting of stockholders to be
held by Blue Dolphin.
The
following sets forth, at April 1, 2019, each director’s name,
age, principal occupation and directorships during the past five
(5) years, as well as their relevant knowledge and experience that
led to their appointment to the Board:
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
Knowledge and Experience
|
|
|
|
|
Jonathan P. Carroll
, 57
Blue
Dolphin Energy Company
Chairman of the Board
(since 2014)
Chief Executive Officer, President,
Assistant Treasurer and Secretary
(since 2012)
Lazarus
Energy Holdings, LLC (“LEH”)
President and majority owner
(since 2006)
Together,
LEH and Jonathan Carroll owned 79.8% of our outstanding Common
Stock at December 31, 2018.
Mr.
Carroll has served on Blue Dolphin’s Board since 2014. He is
currently Chairman of the Board. Since 2004, he has served on the
Board of Trustees of the Salient Fund Group, and has served on the
compliance, audit and nominating committees of several of
Salient’s private and public closed-end and mutual funds. Mr.
Carroll previously served on the Board of Directors of the General
Partner of LRR Energy, L.P. (NYSE: LRE) from January 2014 until its
merger with
Vanguard
Natural Resources, LLC in October 2015.
|
Mr.
Carroll earned a Bachelor of Arts degree in Human Biology and a
Bachelor of Arts degree in Economics from Stanford University, and
he completed a Directed Reading in Economics at Oxford University.
Based on his educational and professional experiences, Mr. Carroll
possesses particular knowledge and experience in business
management, finance and business development that strengthen the
Board’s collective qualifications, skills and
experience.
|
|
|
|
|
|
|
|
|
|
81
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
|
Knowledge and Experience
|
|
|
|
|
|
Ryan A. Bailey
, 43
Children’s
Health System of Texas
Head of Investments
(since 2014)
The
Meadows Foundation
Investment Officer/Interim Chief Investment Officer
(2006 to
2014)
Mr.
Bailey was appointed to Blue Dolphin’s Board in November
2015. He is currently a member of the Audit and Compensation
Committees. He also serves as an advisor and mentor to Texas Wall
Street Women, a non-profit member organization; is a member of the
advisory board of Solovis, Inc., an investment software company;
and serves as a Board member for the Texas Hedge Fund
Association.
|
|
Mr.
Bailey earned a Bachelor of Arts in Economics from Yale University
and completed a graduate course in tax planning from the Yale
School of Management. He holds professional credentialing as a
Chartered Financial Analyst (CFA), Financial Risk Manager (FRM),
Chartered Alternative Investment Analyst (CAIA) and Chartered
Market Technician (CMT). Based on his educational and professional
experiences, Mr. Bailey possesses particular knowledge and
experience in finance, financial analysis and modeling, investment
management, risk assessment and strategic planning that strengthen
the Board’s collective qualifications, skills and
experience.
|
|
|
|
|
|
Amitav Misra
, 41
Arundo
Analytics, Inc.
General Manager Americas
(since November 2018)
Vice President of Marketing
(since 2017)
Cardinal
Advisors
Founder and Partner
(2014 to 2017)
Taxa,
Inc.
President, Director and Chief Operating Officer
(2012 to
2014)
EnerNOC,
Inc.
Channel Manager
(2011 to 2012)
Mr.
Misra has served on Blue Dolphin’s Board since 2014. He is
currently a member of the Audit and Compensation Committees. Mr.
Misra serves as an advisor to several energy technology and private
investment companies. He is also a director of the Houston Center
for Literacy, a non-profit organization.
|
|
Mr.
Misra earned a Bachelor of Arts in Economics from Stanford
University and holds FINRA Series 79 and Series 63 licenses. Mr.
Misra possesses particular knowledge and experience in economics,
business development, private equity, and strategic planning that
strengthen the Board’s collective qualifications, skills and
experience.
|
|
|
|
|
|
Christopher T. Morris
, 57
Impact
Partners LLC
President
(since 2017)
Tatum
(a Randstad Company)
New York Managing Partner
(2013 to 2017)
MPact
Partners LLC
President
(2011 to 2013)
Freddie
Mac
Vice President (various divisions)
(2000 to
2010)
Mr.
Morris has served on Blue Dolphin’s Board since 2012; he is
currently Chairman of the Audit and Compensation
Committees.
|
|
Mr.
Morris earned a Bachelor of Arts in Economics from Stanford
University and a Masters in Business Administration from the
Harvard Business School. Based on his educational and professional
experiences, Mr. Morris possesses particular knowledge and
experience in business management, finance, strategic planning and
business development that strengthen the Board’s collective
qualifications, skills and experience.
|
|
|
|
|
|
|
|
|
82
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
|
Knowledge and Experience
|
|
Herbert N. Whitney
, 78
Wildcat
Consulting, LLC
Founder and President
(since 2006)
Mr.
Whitney has served on Blue Dolphin’s Board since 2012. He
previously served on the Board of Directors of Blackwater Midstream
Corporation, the Advisory Board of Sheetz, Inc., as Chairman of the
Board of Directors of Colonial Pipeline Company, and as Chairman of
the Executive Committee of the Association of Oil
Pipelines.
|
|
Mr.
Whitney has more than 40 years of experience in pipeline
operations, crude oil supply, product supply, distribution and
trading, as well as marine operations and logistics having served
as the President of CITGO Pipeline Company and in various general
manager positions at CITGO Petroleum Corporation. He earned his
Bachelor of Science in Civil Engineering from Kansas State
University. Based on his educational and professional experiences,
he possesses extensive knowledge in the supply and distribution of
crude oil and petroleum products, which strengthens the
Board’s collective qualifications, skills and
expertise.
|
|
|
|
|
This table shows, as of April 1, 2019, the name and age of each
executive officer, as well as their principal occupation during the
past five (5) years:
|
Name
|
Position
|
Since
|
Age
|
|
|
|
|
|
|
Jonathan P. Carroll
|
Chief
Executive Officer, President, Assistant Treasurer, and
Secretary
|
2014
|
57
|
|
Jonathan P. Carroll
was
appointed Chairman of the Board of Blue Dolphin in 2014, and he was
appointed Chief Executive Officer, President, Assistant Treasurer
and Secretary of Blue Dolphin in 2012. He has also served as
President of LEH since 2006 and is its majority owner. Together,
LEH and Jonathan Carroll owned 79.8% of Blue Dolphin’s Common
Stock at December 31, 2018. Before founding LEH, Mr. Carroll was a
private investor focused on direct debt and equity investments,
primarily in distressed assets. Since 2004, he has served on the
Board of Trustees of Salient Fund Group, and has served on the
compliance, audit and nominating committees of several of
Salient’s private and public closed-end and mutual funds. Mr.
Carroll previously served on the Board of Directors of the General
Partner of LRR Energy, L.P. (NYSE: LRE) from January 2014 until its
merger with Vanguard Natural Resources, LLC in October 2015. He
earned a Bachelor of Arts degree in Human Biology and a Bachelor of
Arts degree in Economics from Stanford University, and he completed
a Directed Reading in Economics at Oxford
University.
|
Mr. Tommy L. Byrd served as our Chief Financial Officer from 2015
to 2018 and as our Interim Chief Financial Officer from 2012 to
2015. He served as our Treasurer and Assistant Secretary from 2012
to 2018. Mr. Byrd resigned effective December 31,
2018.
Family Relationships between Directors and Officers
At
March 31, 2019, there were no family relationships between any of
our directors or executive officers.
Structure and Meetings of the Board and Board
Committees
Board
The
Board consists of Messrs. Carroll, Bailey, Misra, Morris and
Whitney with Mr. Carroll serving as Chairman. During 2018, the
Board met four (4) times. The Board has two standing committees,
the Audit Committee and the Compensation Committee. In 2013, the
Board formed a Special Committee of the Board to oversee a
potential conversion of Blue Dolphin from a Delaware
“C” corporation to a Delaware MLP. The Special
Committee of the Board was dissolved in March 2018 (see
“Master Limited Partnership Conversion Special
Committee” below).
83
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Audit Committee
The
Audit Committee consists of Messrs. Morris, Bailey, and Misra with
Mr. Morris serving as Chairman. During 2018, the Audit Committee
met four (4) times. The Board has affirmatively determined that all
members of the Audit Committee are independent, and that Messrs.
Morris and Bailey qualify as Audit Committee Financial Experts. The
Audit Committee's duties include overseeing financial reporting and
internal control functions. The Audit Committee’s written
charter is available on our corporate website (
http://www.blue-dolphin-energy.com
).
Compensation Committee
The
Compensation Committee consists of Messrs. Morris, Bailey, and
Misra with Mr. Morris serving as Chairman. During 2018, the
Compensation Committee did not meet. The Board has affirmatively
determined that all members of the Compensation Committee are
independent. The Compensation Committee’s duties include
setting and overseeing our compensation policies, as well as
reviewing and recommending to the Board for its approval all
compensation for the Chief Executive Officer, other senior
executives, and directors. The Compensation Committee’s
written charter is available on our corporate website (
http://www.blue-dolphin-energy.com
).
Master Limited Partnership ("MLP") Conversion Special
Committee
The MLP
Conversion Special Committee was formed by the Board in 2013 to
determine the feasibility of optimizing stockholder value by
potentially converting Blue Dolphin from a publicly traded
“C” corporation to a publicly traded MLP. Due to a
shift in market conditions, the MLP Conversion Special Committee
was dissolved in March 2018. The MLP Conversion Special Committee
did not meet during 2018 and 2017.
Nominating Committee
Given
the size of the Board, the Board adopted a “Board Nomination
Procedures” policy in lieu of appointing a standing
nominating committee. The policy is used by independent members of
the Board when choosing nominees to stand for election. The Board
will consider for possible nomination qualified nominees
recommended by stockholders. As addressed in the “Board
Nomination Procedures” policy, the way independent directors
evaluate nominees for director as recommended by a stockholder is
the same as that for nominees received from other
sources.
The
Board endeavors to nominate qualified directors that will make
important contributions to the Board and to Blue Dolphin. The Board
generally requires that nominees be persons of sound ethical
character, can represent all stockholders fairly, have demonstrated
professional achievements, have meaningful experience, and have a
general appreciation of the major business issues facing Blue
Dolphin. The Board also considers issues of diversity and
background in its selection process, recognizing that it is
desirable for its membership to have differences in viewpoints,
professional experiences, educational backgrounds, skills, race,
gender, age and national origin.
Corporate Governance
Leadership Structure
Blue
Dolphin is led by Jonathan P. Carroll, who has served as Chairman
of the Board since 2014 and as our Chief Executive Officer and
President since 2012. Having a single leader is commonly utilized
by other public companies in the U.S., and we believe it is
effective for Blue Dolphin as well. This leadership structure,
whereby a single person sets the tone and has primary
responsibility for managing our operations, demonstrates to our
personnel, customers and stockholders that we are under strong
leadership and eliminates the potential for confusion or
duplication of efforts. We do not believe that appointing an
independent Board chairman, or a permanent lead director, would
improve the performance of the Board.
84
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|
|
FORM
10-K 12/31/18
|
Risk Oversight
The
Board has responsibility for risk oversight, with reviews of
certain areas being conducted by the relevant committees of the
Board. These committees then provide oral reports to the full
board. The oversight responsibility of the Board and its committees
is enabled by management reporting processes that are designed to
provide visibility to the board about the identification,
assessment, and management of critical risks and management’s
risk mitigation strategies. These areas of focus include strategic,
operational, financial and reporting, compliance, and other risks.
The Board and Audit Committee meet in executive session with
representatives of outside advisors as required.
Code of Ethics and Code of Conduct
In
compliance with the Sarbanes-Oxley Act of 2002, the Board adopted a
code of ethics policy in 2003 and a code of conduct policy in 2005.
The Audit Committee established procedures to enable anyone who has
a concern about our conduct, policies, accounting, internal
controls over financial reporting, and/or auditing matters to
communicate that concern directly to the Chairman of the Audit
Committee. The code of ethics and code of conduct policies are
available to any stockholder, without charge, upon written request
to Blue Dolphin Energy Company, Attention: Audit Committee
Chairman, 801 Travis Street, Suite 2100, Houston, Texas 77002. Our
code of ethics and code of conduct policies are available on our
website (
http://www.blue-dolphin-energy.com
).
Any amendments or waivers to provisions of our code of ethics and
code of conduct policies will be incorporated in revised policies
as posted on our website. During 2018, there were no substantive
amendments to our Code of Ethics and Code of Conduct
policies.
Communicating with Directors
Since
the Board does not receive a large volume of correspondence from
stockholders, there is no formal process by which stockholders can
communicate directly with the Board at this time. Instead, any
stockholder who desires to contact the Board or specific members of
the Board may do so by writing to: Blue Dolphin Energy Company,
Attention: Secretary for the Board, 801 Travis Street, Suite 2100,
Houston, Texas 77002. Currently, all communications addressed in
such manner are sent directly to the indicated directors. In the
future, if the Board adopts a formal process for determining how
communications are to be relayed to directors, that process will be
disclosed on Form 8-K as filed with the SEC.
Remainder
of Page Intentionally Left Blank
85
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Executive Compensation Policy and Procedures
LEH
manages and operates all Blue Dolphin properties pursuant to an
Amended and Restated Operating Agreement (the “Amended and
Restated Operating Agreement”). Under the Amended and
Restated Operating Agreement, LEH provides us with executive
personnel in the capacities of Chief Executive Officer and Chief
Financial Officer. All personnel work for and are paid directly by
LEH. Blue Dolphin is billed by LEH for such personnel services at
cost plus a 5% markup. (See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (9) Related-Party
Transactions – Amended and Restated Operating
Agreement” for additional disclosures related to the Amended
and Restated Operating Agreement.
Compensation for Named Executives
Pursuant
to the Amended and Restated Operating Agreement, compensation paid
to our principal executive officer, principal financial officer,
and the most highly compensated executive officers other than the
principal executive officer and principal financial officer whose
annual salary exceeded $100,000 (collectively, the “Named
Executive Officers”) for the periods indicated was as
follows:
SUMMARY
COMPENSATION TABLE
|
Name and Principal Position
|
|
Year
|
Salary
|
Total
|
|
|
|
|
(in
thousands)
|
|
|
Jonathan
P. Carroll
|
|
2018
|
$
-
|
$
-
|
|
Chief
Executive Officer and President
|
|
2017
|
$
-
|
$
-
|
|
Tommy L. Byrd
(1)
|
|
2018
|
$
177
|
$
177
|
|
Chief
Financial Officer
|
|
2017
|
$
100
|
$
100
|
(1)
Mr. Byrd resigned
effective December 31, 2018.
Compensation Risk Assessment
LEH’s
approach to compensation practices and policies applicable for
executive and non-executive personnel throughout our organization
is consistent with the base pay market median for each position.
LEH believes its practices and policies in this regard are not
reasonably likely to have a materials adverse effect on
us.
Outstanding Equity Awards
None.
Director Compensation Policy and Procedures
Although
Jonathan Carroll is a director of Blue Dolphin, his services as
Chief Executive Officer are provided pursuant to the Amended and
Restated Operating Agreement (see above under “Executive
Compensation Policy and Procedures.” Therefore, we do not
have any directors that are also personnel of Blue Dolphin. The
Compensation Committee reviews and recommends to the Board for its
approval all compensation for the directors.
86
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Compensation for Non-Employee Directors
The
annual retainer payable to non-employee directors serving on the
Board is $40,000 per year. Payments are earned in Common Stock and
cash on a quarterly rotating basis, as follow:
|
Fair
Market Value
|
|
Period
Services Rendered
|
|
Payment
Method
|
|
|
|
|
|
|
|
$10,000
|
|
January
1 – March 31 (First Quarter)
|
|
Common
stock
|
|
$10,000
|
|
April 1
– June 30 (Second Quarter)
|
|
Cash
|
|
$10,000
|
|
July 1
– September 30 (Third Quarter)
|
|
Common
stock
|
|
$10,000
|
|
October
1 – December 31 (Fourth Quarter)
|
|
Cash
|
For the
first and third quarters, the number of shares of Common Stock to
be issued is determined by the closing price of Blue
Dolphin’s Common Stock on the last trading day in the
respective quarterly period and such closing price is the cost
basis for such issuance. The shares of Common Stock are subject to
resale restrictions applicable to restricted securities and
securities held by affiliates under federal securities
laws.
Non-employee
directors also earn additional compensation for serving on the
Audit Committee. The chairman of the Audit Committee earns an
additional $2,500 in cash in each of the second and fourth quarters
of the year, for a total of $5,000 annually. Members of the Audit
Committee earn an additional $1,250 in cash in each of the second
and fourth quarters of the year, for a total of $2,500 annually.
During 2018 and 2017, no additional compensation was earned by
non-employee directors for serving on the MLP Conversion Special
Committee. Non-employee directors serving on the Compensation
Committee do not earn any additional compensation. Non-employee
directors are reimbursed for reasonable out-of-pocket expenses
related to in-person meeting attendance.
Due to
consecutive net losses, inadequate working capital, the Final
Arbitration Award, and defaults under secured loan agreements,
independent, non-employee directors have not been paid the cash
portion of their compensation since 2015 and the common stock
portion of their compensation following the first quarter 2018
service period. Unpaid cash fees are reflected within accrued
expenses and other current liabilities on our consolidated balance
sheets. (See “Part II, Item 8. Financial Statements and
Supplementary Data, Note (10) Accrued Expenses and Other Current
Liabilities” within this Annual Report for additional
disclosures related to board of director fees
payable.)
Accrued
and unpaid compensation that each independent, non-employee
director earned for Board and committee service for the periods
indicated was as follows:
|
|
Years Ended December 31,
|
|||||
|
|
2018
|
2017
|
||||
|
|
|
|
|
|
|
|
|
Name
|
Cash
|
Stock
(1)(2)
|
Total
|
Cash
|
Stock
(1)(2)
|
Total
|
|
|
|
|
|
|
|
|
|
Christopher
T. Morris
|
$
25,000
|
$
20,000
|
$
45,000
|
$
25,000
|
$
20,000
|
$
45,000
|
|
Ryan
A. Bailey
|
22,500
|
20,000
|
42,500
|
22,500
|
20,000
|
42,500
|
|
Amitav
Misra
|
22,500
|
20,000
|
42,500
|
22,500
|
20,000
|
42,500
|
|
Herbert
N. Whitney
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
$
70,000
|
$
60,000
|
$
130,000
|
$
70,000
|
$
60,000
|
$
130,000
|
|
(1)
|
At
December 31, 2018, Messrs. Morris, Bailey, Misra and Whitney had
total restricted awards of Common Stock outstanding of 75,026,
60,676, 66,767 and 9,683, respectively. At December 31, 2017,
Messrs. Morris, Bailey, Misra and Whitney had total restricted
awards of Common Stock outstanding of 58,359, 44,009, 50,100 and
9,683, respectively.
|
|
(2)
|
–
At
March 31, 2018, the grant date market value basis was $0.60 per
share.
–
At
September 30, 2017, the grant date market value basis was $0.28 per
share.
–
At
March 31, 2017, the grant date market value basis was $3.50 per
share.
|
87
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
I
TEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The
table below sets forth information at December 31, 2018 with
respect to persons or groups known to us to be the beneficial
owners of more than five percent (5%) of our common stock. Unless
otherwise indicated, each named party has sole voting and
dispositive power with respect to such shares.
|
Title of Class
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of
Class
(1)
|
|
|
|
|
|
|
Common Stock
|
Lazarus Energy Holdings, LLC
|
8,426,456
|
76.8%
|
|
|
801 Travis Street, Suite 2100
|
|
|
|
|
Houston, Texas 77002
|
|
|
|
|
|
|
|
(1)
Based upon
10,975,514 shares of Common Stock issued and outstanding at
December 31, 2018.
Security Ownership of Management
The
table below sets forth information at December 31, 2018 with
respect to: (i) directors, (ii) executive officers and (iii)
directors and executive officers as a group beneficially owning our
common stock. Unless otherwise indicated, each of the following
persons has sole voting and dispositive power with respect to such
shares.
|
Title of Class
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of
Class
(1)
|
|
|
|
|
|
|
Common Stock
|
Jonathan P. Carroll
(2)
|
8,763,300
|
79.8%
|
|
Common Stock
|
Christopher T. Morris
|
75,026
|
*
|
|
Common Stock
|
Amitav Misra
|
66,767
|
*
|
|
Common Stock
|
Ryan A. Bailey
|
60,676
|
*
|
|
Common Stock
|
Herbert N. Whitney
|
9,683
|
---
|
|
Common Stock
|
Tommy L. Byrd
|
---
|
---
|
|
|
|
|
|
|
Directors/Nominees and Executive Officers as a Group (6
Persons)
|
8,975,452
|
81.8%
|
|
(1)
Based upon
10,975,514 shares of Common Stock issued and outstanding at
December 31, 2018. At December 31, 2018, there were no options
outstanding, no options exercisable or no shares of common stock
reserved for issuance under the 2000 Stock Incentive
Plan.
(2)
Includes 8,426,456
shares issued to Lazarus Energy Holdings, LLC (“LEH”).
Mr. Carroll and his affiliates have an approximate 60% ownership
interest in LEH.
* Less
than 1%.
88
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors, executive
officers and stockholders who own more than ten percent (10%) of
our Common Stock to file reports of stock ownership and changes in
ownership with the SEC and to furnish us with copies of all such
reports as filed. Based solely on a review of the copies of the
Section 16(a) reports furnished to us, we are unaware of any late
filings made during the twelve months ended December 31, 2018 and
2017.
Equity Compensation Plan Information
None.
Related-Party Transactions
See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (9) Related-Party Transactions” for disclosures
related to relationships we have with related parties.
Director Independence
The
Board has affirmatively determined that each of its members, except
for Messrs. Carroll and Whitney, are independent and have no
material relationship with us (either directly or indirectly or as
a stockholder or officer of an organization that has a relationship
with us), and that all members of the Audit and Compensation
Committees are independent, pursuant to OTCQX and SEC rules. Mr.
Whitney currently serves as a consultant to LEH.
Fees
paid to UHY by us for the periods indicated were as
follow:
|
|
Years
Ended December 31,
|
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
Audit
fees
|
$
138
|
$
268
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
|
$
138
|
$
268
|
Audit
fees for 2018 and 2017 related to the audit of our consolidated
financial statements and the review of our quarterly reports that
are filed with the SEC. The amount of audit fees paid during 2017
includes a portion of amounts paid during 2017 for services
rendered during 2016. The Audit Committee pre-approves, on an
annual basis, all audit services provided to us by our registered
public accounting firm. Such approval is in the form of an
engagement letter. Non-audit services must also be pre-approved by
the Audit Committee prior to engagement of such
services.
Remainder
of Page Intentionally Left Blank
89
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
Exhibits and Financial Statement Schedules
Following
is a list of documents filed as part of this Annual
Report:
●
consolidated
balance sheets, consolidated statements of operations, consolidated
statements of shareholders’ equity, and consolidated
statements of cash flows, which appear in “Part II, Item 8.
Financial Statements and Supplementary Data” of this Annual
Report; and
●
exhibits as listed
in the exhibit index of this Annual Report, which is incorporated
herein by reference.
Not
applicable.
Exhibits Index
|
No.
|
Description
|
|
Amended
and Restated Certificate of Incorporation of Blue Dolphin
(incorporated by reference to Exhibit 3.1 filed with Blue
Dolphin’s Form 8-K on June 2, 2009, Commission File No.
000-15905)
|
|
Amended
and Restated By-Laws of Blue Dolphin (incorporated by reference to
Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on December
26, 2007, Commission File No. 000-15905)
|
|
4.1
|
Specimen
Stock Certificate (incorporated by reference to exhibits filed with
Blue Dolphin’s Form 10-K on March 30, 1990, Commission File
No. 000-15905)
|
|
Form of
Promissory Note issued pursuant to the Note and Warrant Purchase
Agreement dated September 8, 2004 (incorporated by reference to
Exhibit 4.1 filed with Blue Dolphin’s Form 8-K on September
14, 2004, Commission File No. 000-15905)
|
|
Promissory
Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin
dated July 31, 2009 (incorporated by reference to Exhibit 10.1
filed with Blue Dolphin’s Form 8-K on August 6, 2009,
Commission File No. 000-15905)
|
|
Blue
Dolphin 2000 Stock Incentive Plan (incorporated by reference to
Appendix 1 filed with Blue Dolphin’s Proxy Statement on Form
DEF 14A on April 20, 2000, Commission File No.
000-15905)
|
|
First
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Appendix B filed with Blue
Dolphin’s Proxy Statement on Form DEF 14A on April 16, 2003,
Commission File No. 000-15905)
|
|
Second
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Appendix A filed with Blue
Dolphin’s Proxy Statement on Form DEF 14A on April 27, 2006,
Commission File No. 000-15905)
|
|
Fourth
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Exhibit B filed with Blue
Dolphin’s Proxy Statement on Form DEFA on December 28, 2011,
Commission File No. 000-15905)
|
|
|
|
|
|
Master
Easement Agreement effective as of December 11, 2013 by and between
Blue Dolphin Pipe Line Company and FLNG Land, II, Inc.
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on November 5, 2014, Commission File No.
000-15905)
|
|
|
|
|
90
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Letter
of Intent effective as of December 11, 2013 by and between Blue
Dolphin Pipe Line Company and Freeport LNG Expansion, L.P
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 8-K on November 5, 2014, Commission File No.
000-15905)
|
|
|
|
|
|
Management
Agreement by and between Lazarus Energy Holdings, LLC, Lazarus
Energy, LLC and Blue Dolphin effective as of February 15, 2012
(incorporated by reference to Exhibit 10.2 filed with Amendment No.
1 to Blue Dolphin’s Form 8-K on March 14, 2012, Commission
File No. 000-15905)
|
|
|
|
|
|
Amendment
No. 1 to Management Agreement dated May 12, 2014 by and among
Lazarus Energy Holdings, LLC, Blue Dolphin and Lazarus Energy, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on May 16, 2014, Commission File No.
000-15905)
|
|
|
|
|
|
Crude
Oil Supply and Throughput Services Agreement by and between GEL Tex
Marketing, LLC and Lazarus Energy, LLC dated as of August 12, 2011
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on June 30, 2012, Commission File No.
000-15905)
|
|
|
|
|
|
Joint
Marketing Agreement by and between GEL Tex Marketing, LLC and
Lazarus Energy, LLC dated as of August 12, 2011 (incorporated by
reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q
on June 30, 2012, Commission File No. 000-15905)
|
|
Letter
Agreement dated September 12, 2011 between GEL Tex Marketing, LLC,
Milam Services, Inc., 1st International Bank, Lazarus Energy LLC
and Lazarus Energy Holdings LLC (incorporated by reference to
Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q on March 31,
2012, Commission File No. 000-15905)
|
|
Acknowledgment
Letter between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated
June 1, 2012 (incorporated by reference to Exhibit 10.4 filed with
Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File
No. 000-15905)
|
|
Letter
Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC
dated June 25, 2012 (incorporated by reference to Exhibit 10.5
filed with Blue Dolphin’s Form 10-Q on June 30, 2012,
Commission File No. 000-15905)
|
|
Letter
Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC
dated July 30, 2012 (incorporated by reference to Exhibit 10.6
filed with Blue Dolphin’s Form 10-Q on June 30, 2012,
Commission File No. 000-15905)
|
|
Letter
Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC
dated August 1, 2012 (incorporated by reference to Exhibit 10.7
filed with Blue Dolphin’s Form 10-Q on June 30, 2012,
Commission File No. 000-15905)
|
|
Letter
Agreement dated June 10, 2012 between Lazarus Energy Holdings, LLC
and Blue Dolphin Energy Company (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on June 14,
2012, Commission File No. 000-15905)
|
|
Letter
Agreement dated December 20, 2012 between Lazarus Energy, LLC, GEL
Tex Marketing, LLC and Milam Services, Inc. (incorporated by
reference to Exhibit 10.35 filed with Blue Dolphin’s Form
10-K on March 30, 2013, Commission File No. 000-15905)
|
|
|
|
|
|
Letter
Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and
Milam Services, Inc. dated February 21, 2013 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q
on August 14, 2013, Commission File No. 000-15905)
|
|
|
|
|
|
Letter
Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and
Milam Services, Inc. dated February 21, 2013 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q
on May 15, 2013, Commission File No. 000-15905)
|
|
|
|
|
91
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Letter
Agreement Regarding Certain Advances and Related Agreement between
Lazarus Energy, LLC, GEL TEX Marketing, LLC, and Milam Services,
Inc., effective October 24, 2013 (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on November
14, 2013, Commission File No. 000-15905)
|
||
|
|
||
|
Promissory
Note between Lazarus Energy LLC as maker and Notre Dame Investors
Inc. as Payee in the Principal Amount of $8,000,000 dated June 1,
2006 (incorporated by reference to Exhibit 10.6 filed with Blue
Dolphin’s Form 10-Q on March 31, 2012, Commission File No.
000-15905)
|
||
|
|
|
|
|
Subordination
Agreement effective August 21, 2008 by Notre Dame Investors, Inc.
in favor of First International Bank (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on March 31,
2012, Commission File No. 000-15905)
|
||
|
|
|
|
|
Intercreditor
and Subordination Agreement dated September 29, 2008 by and between
Notre Dame Investors, Inc., Richard Oberlin, Lazarus Energy LLC and
First International Bank (incorporated by reference to Exhibit 10.3
filed with Blue Dolphin’s Form 10-Q on March 31, 2012,
Commission File No. 000-15905)
|
||
|
|
|
|
|
Intercreditor
and Subordination Agreement dated August 12, 2011 by and among John
H. Kissick, Lazarus Energy LLC and Milam Services, Inc.
(incorporated by reference to Exhibit 10.7 filed with Blue
Dolphin’s Form 10-Q on March 31, 2012, Commission File No.
000-15905)
|
||
|
|
|
|
|
First
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of July 1, 2013 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q
on November 14, 2013, Commission File No. 000-15905)
|
||
|
|
|
|
|
Second
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form
10-K on March 31, 2015, Commission File No. 000-15905)
|
||
|
Loan
and Security Agreement dated March 2, 2014 by and between Lazarus
Refining & Marketing, LLC and Sovereign Bank (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K
on May 8, 2014, Commission File No. 000-15905)
|
|
|
|
|
|
Deed of
Trust, Security Agreement, Assignment of Leases, Assignment of
Rents, and Financing Statement dated May 2, 2014 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K
on May 8, 2014, Commission File No. 000-15905)
|
|
|
|
|
|
Guaranty
Agreement dated May 2, 2014 by Jonathan P. Carroll and Ingleside
Crude LLC for the benefit of Sovereign Bank (incorporated by
reference to Exhibit 10.3 filed with Blue Dolphin’s Form 8-K
on May 8, 2014, Commission File No. 000-15905)
|
|
|
|
|
|
Pledge
Agreement dated May 2, 2014 between Sovereign Bank and Lazarus
Energy Holdings, LLC. (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission
File No. 000-15905)
|
|
|
|
|
|
Promissory
Note payable to Sovereign Bank dated May 2, 2014 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on May 8, 2014, Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment dated May 2, 2014 by Lazarus Refining & Marketing,
LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment dated May 2, 2014 by Lazarus Refining & Marketing,
LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
92
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Loan
Modification Agreement dated March 25, 2015, by and between Lazarus
Refining & Marketing, LLC, and Sovereign Bank (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K
on March 31, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Second
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form
10-K on March 31, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Loan
Agreement among Sovereign Bank, Lazarus Energy, LLC and Jonathan
Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus Refining
& Marketing, LLC, and Lazarus Energy Holdings dated June 22,
2015 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Promissory
Note between Lazarus Energy, LLC and Sovereign Bank for the
principal sum of $25,000,000 dated June 22, 2015 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Security
Agreement of Lazarus Energy, LLC in favor of Sovereign Bank dated
June 22, 2015 (incorporated by reference to Exhibit 10.3 filed with
Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Lazarus Energy,
LLC dated June 22, 2015 (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
|
|
Security
Agreement of Lazarus Energy, LLC for the benefit of Lazarus
Refining & Marketing, LLC dated June 22, 2015 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Loan
and Security Agreement between Sovereign Bank and Lazarus Refining
& Marketing, LLC dated June 22, 2015 (incorporated by reference
to Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on June
26, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Promissory
Note between Lazarus Refining & Marketing, LLC and Sovereign
Bank for the principal sum of $3,000,000 dated June 22, 2015
(incorporated by reference to Exhibit 10.7 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
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Pledge
Agreement by Lazarus Refining & Marketing, LLC in favor of
Sovereign Bank dated June 22, 2015 (incorporated by reference to
Exhibit 10.8 filed with Blue Dolphin’s Form 8-K on June 26,
2015, Commission File No. 000-15905)
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|
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|
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Collateral
Assignment executed by Blue Dolphin Pipe Line Company for the
benefit of Sovereign Bank dated June 22, 2015 (incorporated by
reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
|
|
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Guaranty
Agreement by Jonathan Pitts Carroll, Sr., Blue Dolphin Energy
Company, Lazarus Energy, LLC and Sovereign Bank dated June 22, 2015
(incorporated by reference to Exhibit 10.10 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
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|
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|
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Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Energy, LLC
dated June 22, 2015 (incorporated by reference to Exhibit 10.11
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
|
|
|
|
|
|
Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Refining
& Marketing, LLC dated June 22, 2015 (incorporated by reference
to Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on June
26, 2015, Commission File No. 000-15905)
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93
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Amendment
No. 2. to Operating Agreement by and between Lazarus Energy
Holdings, LLC, Blue Dolphin, and Lazarus Energy, LLC effective as
of June 1, 2015 (incorporated by reference to Exhibit 10.1 filed
with Blue Dolphin’s Form 10-Q on August 14, 2015, Commission
File No. 000-15905)
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|
|
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Loan
Agreement among Sovereign Bank, Lazarus Refining & Marketing,
LLC, Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company,
Lazarus Energy, LLC, and Lazarus Energy Holdings dated December 4,
2015 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
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Promissory
Note between Lazarus Refining & Marketing, LLC and Sovereign
Bank for the principal sum of $10,000,000 dated December 4, 2015
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
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Security
Agreement of Lazarus Refining & Marketing, LLC in favor of
Sovereign Bank dated December 4, 2015 (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
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Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Lazarus Refining
& Marketing, LLC dated December 4, 2015 (incorporated by
reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
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Construction
Rider to Loan Agreement dated December 4, 2015 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
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Absolute
Assignment of Leases and Rents dated December 4, 2015 (incorporated
by reference to Exhibit 10.6 filed with Blue Dolphin’s Form
8-K on December 10, 2015, Commission File No.
000-15905)
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Indemnification
Agreement dated December 4, 2015 (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
|
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Pledge
Agreement by Lazarus Energy Holdings, LLC in favor of Sovereign
Bank dated December 4, 2015 (incorporated by reference to Exhibit
10.8 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
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Collateral
Assignment of Key Agreements dated December 4, 2015 (incorporated
by reference to Exhibit 10.9 filed with Blue Dolphin’s Form
8-K on December 10, 2015, Commission File No.
000-15905)
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First
Amendment to Lazarus Energy, LLC Loan Agreement and Loan Documents
dated December 4, 2015 (incorporated by reference to Exhibit 10.10
filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
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First
Amendment to Lazarus Energy, LLC Deed of Trust, Mortgage, Security
Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing dated December 4, 2015 (incorporated by reference to
Exhibit 10.11 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
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Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Refining
& Marketing, LLC dated December 4, 2015 (incorporated by
reference to Exhibit 10.12 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
|
|
|
Loan
and Security Agreement by and between Lazarus Energy Holdings, LLC
and Blue Dolphin Pipe Line Company dated August 15, 2016
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on August 19, 2016, Commission File No.
000-15905)
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Promissory
Note by and between Lazarus Energy Holdings, LLC and Blue Dolphin
Pipe Line Company dated August 15, 2016 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on August
19, 2016, Commission File No. 000-15905)
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94
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
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Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Blue Dolphin Pipe
Line Company dated August 15, 2016 (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on August 19,
2016, Commission File No. 000-15905)
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Collateral
Assignment of Master Easement Agreement by Blue Dolphin Pipe Line
Company for the benefit of Lazarus Energy Holdings, LLC dated
August 15, 2016 (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 8-K on August 19, 2016, Commission
File No. 000-15905)
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Promissory
Note dated March 31, 2017, of Blue Dolphin Energy Company in favor
of Lazarus Energy Holdings, LLC (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on May 15,
2017, Commission File No. 000-15905)
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Amended
and Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Ingleside Crude, LLC (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q
on May 15, 2017, Commission File No. 000-15905)
|
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|
Amended
and Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Capital, LLC (Jonathan Carroll)
(incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on May 15, 2017, Commission File No.
000-15905)
|
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Amended
and Restated Operating Agreement effective as of April 1, 2017,
between Lazarus Energy Holdings, LLC, Lazarus Energy, LLC, and Blue
Dolphin Energy Company (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on May 15, 2017,
Commission File No. 000-15905)
|
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|
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Amended
and Restated Promissory Note dated June 30, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Energy Holdings, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on October 12, 2017, Commission File No.
000-15905)
|
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Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing, LLC (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
|
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Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing LLC (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
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Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Energy, LLC (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on October 12, 2017,
Commission File No. 000-15905)
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Letter
Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue
Dolphin Energy Company, Lazarus Energy Holdings, LLC, and Jonathan
Carroll effective September 18, 2017 (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on November
16, 2017, Commission File No. 000-15905)
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Amendment
to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated November 1, 2017 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on
November 16, 2017, Commission File No. 000-15905)
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Second
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated November 28,
2017
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10.76
|
Third
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated December 27,
2017
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95
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Fourth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated February 1, 2018
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on May 15, 2018, Commission File No.
000-15905)
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Fifth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated February 28, 2018
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 10-Q on May 15, 2018, Commission File No.
000-15905)
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Debt
Assumption Agreement by and among Lazarus Energy Holdings, LLC,
Lazarus Energy, LLC, and John H. Kissick dated effective September
18, 2017 (incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on November 16, 2017, Commission File No.
000-15905)
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Sixth
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of September 18, 2017 (incorporated by
reference to Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q
on November 16, 2017, Commission File No. 000-15905)
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|
Sixth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated March 26, 2018
(incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on May 15, 2018, Commission File No.
000-15905)
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|
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|
Seventh
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated April 27, 2018
(incorporated by reference to Exhibit 10.4 filed with Blue
Dolphin’s Form 10-Q on May 15, 2018, Commission File No.
000-15905)
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|
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|
|
Eighth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated May 23, 2018
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on November 14, 2018, Commission File No.
000-15905)
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|
Ninth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated June 29, 2018
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 10-Q on November 14, 2018, Commission File No.
000-15905)
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Settlement
Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue
Dolphin Energy Company, Lazarus Energy Holdings, LLC, Nixon Product
Storage, LLC, Carroll & Company Financial Holdings, L.P. and
Jonathan Carroll dated July 20, 2018 (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on July 25,
2018, Commission File No. 000-15905)
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First
Amendment to Settlement Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, Nixon Product Storage, LLC, Carroll & Company
Financial Holdings, L.P. and Jonathan Carroll dated October 17,
2018 (incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 10-Q on November 14, 2018, Commission File No.
000-15905)
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Second
Amendment to Settlement Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, Nixon Product Storage, LLC, Carroll & Company
Financial Holdings, L.P. and Jonathan Carroll dated November 15,
2018 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on November 23, 2018, Commission File No.
000-15905)
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Third
Amendment to Settlement Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, Nixon Product Storage, LLC, Carroll & Company
Financial Holdings, L.P. and Jonathan Carroll dated December 19,
2018 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on December 21, 2018, Commission File No.
000-15905)
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96
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
|
10.89
|
Fourth
Amendment to Settlement Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, Nixon Product Storage, LLC, Carroll & Company
Financial Holdings, L.P. and Jonathan Carroll dated March 21, 2019
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on December 21, 2018, Commission File No.
000-15905)
|
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Code of
Ethics applicable to the Chairman, Chief Executive Officer and
Senior Financial Officer (incorporated by reference to Exhibit 14.1
filed with Blue Dolphin’s Form 10-KSB on March 25, 2005,
Commission File No. 000-15905)
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List of
Subsidiaries of Blue Dolphin
|
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Consent
of UHY LLP
|
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31.1
**
|
Jonathan
P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002
|
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32.1
**
|
Jonathan
P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
|
Amended
and Restated Audit Committee Charter adopted by the Board of
Directors of Blue Dolphin on November 4, 2015 (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on November 18, 2015, Commission File No.
000-15905)
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Amended
and Restated Audit Committee Charter as reviewed by the Board of
Directors of Blue Dolphin on November 15, 2018 (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on November 15, 2018, Commission File No.
000-15905)
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99.3
|
Compensation
Committee Charter adopted by the Board of Directors of Blue Dolphin
on November 4, 2015 (incorporated by reference to Appendix B filed
with Blue Dolphin’s Proxy Statement on Form DEF 14A on
November 18, 2015, Commission File No. 000-15905)
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99.4
|
Compensation
Committee Charter as reviewed by the Board of Directors of Blue
Dolphin on November 15, 2018 (incorporated by reference to Appendix
B filed with Blue Dolphin’s Proxy Statement on Form DEF 14A
on November 15, 2018, Commission File No. 000-15905)
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101.INS**
|
XBRL
Instance Document
|
|
101.SCH**
|
XBRL
Taxonomy Schema Document
|
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101.CAL**
|
XBRL
Calculation Linkbase Document
|
|
101.LAB**
|
XBRL
Label Linkbase Document
|
|
101.PRE**
|
XBRL
Presentation Linkbase Document
|
|
101.DEF**
|
XBRL
Definition Linkbase Document
|
_______________
*
Management Compensation Plan
**
Filed herewith
97
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
|
S
IGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
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BLUE DOLPHIN ENERGY COMPANY
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(Registrant)
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April
1, 2019
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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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Pursuant
to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
JONATHAN P. CARROLL
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Jonathan
P. Carroll
|
|
Chairman
of the Board, Chief Executive Officer, President, Assistant
Treasurer and Secretary
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
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April
1, 2019
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/s/
RYAN A. BAILEY
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Ryan A.
Bailey
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Director
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April
1, 2019
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/s/
AMITAV MISRA
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Amitav
Misra
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Director
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April
1, 2019
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/s/
CHRISTOPHER T. MORRIS
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Christopher
T. Morris
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Director
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April
1, 2019
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/s/
HERBERT N. WHITNEY
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Director
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April
1, 2019
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Herbert
N. Whitney
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98
TABLE OF CONTENTS
Part I, Item 3. Legal ProceedingsPart Ii, Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations:Part Ii, Item 8. Financial Statements and Supplementary Data:Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary