BLUE DOLPHIN ENERGY CO
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
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[ √ ]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31,
2020
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:
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Title of Each Class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock
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BDCO
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OTCQX
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐ No ☒
Number
of shares of common stock, par value $0.01 per share outstanding as
of May 15, 2020: 12,693,514
1
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 3/31/20
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TABLE OF CONTENTS
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PART I.
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6
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ITEM 1.
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FINANCIAL STATEMENTS
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6
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Consolidated Balance Sheets (Unaudited)
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6
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Consolidated Statements of Operations (Unaudited)
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7
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Consolidated Statements of Cash Flows (Unaudited)
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8
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Notes to Consolidated Financial Statements
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9
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ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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37
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ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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49
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ITEM 4.
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CONTROLS AND PROCEDURES
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49
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PART II.
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50
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ITEM 1.
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LEGAL PROCEEDINGS
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50
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ITEM 1A.
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RISK FACTORS
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50
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ITEM 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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50
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ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
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50
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ITEM 4.
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MINE SAFETY DISCLOSURES
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51
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ITEM 5.
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OTHER INFORMATION
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51
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ITEM 6.
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EXHIBITS
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51
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SIGNATURES
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52
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2
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 3/31/20
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Glossary of Terms
Throughout
this Quarterly Report on Form 10-Q, we have used the following
terms:
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Affiliate
. Refers, either individually or collectively, to
certain related parties including Jonathan Carroll, Chairman and
Chief Executive Officer of Blue Dolphin, and his affiliates
(including C&C, Ingleside, and Lazarus Capital) and/or LEH and
its affiliates (including Lazarus Midstream, LMT, and LTRI).
Together, Jonathan Carroll and LEH own approximately 82% of Blue
Dolphin’s Common Stock.
AMT
. Alternative Minimum Tax.
Amended Pilot Line of Credit
. Line of Credit Agreement dated
May 3, 2019, between Pilot and NPS and subsequently amended on May
9, 2019 and May 10, 2019 and September 3, 2019, the last amendment
being Amendment No. 1; line of credit amount is $13.0
million.
Amended and Restated Operating Agreement
. Affiliate
agreement dated April 1, 2020 between Blue Dolphin, LE, LRM, NPS,
BDPL, BDPC, BDSC and LEH governing LEH’s operation and
management of the companies’ assets.
ARO
. Asset retirement obligations.
ASU
. Accounting Standards Update.
AGO
. Atmospheric gas oil, which is the heaviest product
boiled by a crude distillation tower operating at atmospheric
pressure. This fraction ordinarily sells as distillate fuel oil,
either in pure form or blended with cracked stocks. Certain
ethylene plants, called heavy oil crackers, can take AGO as
feedstock.
bbl
. Barrel; a unit of volume equal to 42 U.S.
gallons.
BDPC
. Blue Dolphin Petroleum Company, a wholly owned
subsidiary of Blue Dolphin.
BDPL
. Blue Dolphin Pipe Line Company, a wholly owned
subsidiary of Blue Dolphin.
BDSC
. Blue Dolphin Services Co., a wholly owned subsidiary
of Blue Dolphin.
bpd
. Barrel per day; a measure of the bbls of daily output
produced in a refinery or transported through a
pipeline.
Board
. Board of Directors of Blue Dolphin Energy
Company.
BOEM
. Bureau of Ocean Energy Management.
BSEE
. Bureau of Safety and Environmental
Enforcement.
C&C
. Carroll & Company Financial Holdings, L.P., an
affiliate of Jonathan Carroll.
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).
CAA
. Clean Air Act.
CDC
. Centers for Disease Control and
Prevention.
CERLA
. Comprehensive Environmental Response, Compensation,
and Liability Act of 1980.
CIP
. Construction in progress.
COVID-19
. An infectious disease first identified
in 2019 in Wuhan, the capital of
China's Hubei province; the disease has since spread
globally, resulting in the ongoing 2019–2020 coronavirus
pandemic.
CWA
. Clean Water Act.
Common Stock
. Blue Dolphin common stock, par value $0.01 per
share. Blue Dolphin has 20,000,000 shares of Common Stock
authorized.
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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.
Cost of Goods Sold
. Reflects the cost of crude oil and
condensate, fuel use, and chemicals.
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 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.
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.
EIA
. Energy Information Administration.
EPA
. Environmental Protection Agency.
Eagle Ford Shale
. A
hydrocarbon-producing geological
formation extending across South Texas from the Mexican border into
East Texas.
Exchange Act
. Securities
Exchange Act of 1934, as amended.
FASB
. Financial Accounting Standards Board.
FDIC
.
Federal Deposit Insurance
Corporation.
Feedstocks
. Crude oil and other hydrocarbons, such as
condensate 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.
GEL
. GEL Tex Marketing, LLC, a Delaware limited liability
company and an affiliate of Genesis Energy, LLC.
GEL Final Arbitration Award
.
Damages and attorney fees and related
expenses awarded to GEL by an arbitrator on August 11,
2017.
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3
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 3/31/20
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GEL Interim Payments
. Cash payments of $0.5 million at the
end of each calendar month by the Lazarus Parties to GEL until the
GEL Settlement Payment was made.
GEL Settlement
. When all conditions of the GEL Settlement
Agreement were met by the Lazarus Parties under the GEL Settlement
Agreement, and 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
arbitration proceedings between LE and GEL related to a contractual
dispute involving a crude oil supply and throughput services
agreement, each between LE and GEL dated August 12,
2011.
GEL Settlement Agreement
. Settlement Agreement dated July
20, 2018, between the Lazarus Parties and GEL outlining the terms
and conditions for a settlement, including: (i) the GEL Settlement
Payment by the GEL Settlement Date and (ii) GEL Interim
Payments.
GEL Settlement Date
. The effective date of the GEL
Settlement.
GEL Settlement Payment
. A lump sum cash payment of $10.0
million as paid by the Lazarus Parties to GEL under the GEL
Settlement Agreement.
Gross Profit (Deficit)
.
Calculated as total revenue less cost of goods
sold; reflected as a dollar ($) amount.
HOBM
. Heavy
oil-based mud blendstock; see also
“distillates.”
HUBZone . Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.
IBLA
. Interior Board of Land
Appeals.
INC
. Incident of Noncompliance
issued by BOEM and/or BSEE.
Ingleside
. Ingleside Crude,
LLC, an affiliate of Jonathan Carroll.
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.
IRC Section 382
. Title 26, Internal Revenue Code, Subtitle A
– Income Taxes, Subchapter C – Corporate Distributions
and Adjustments, Part V Carryovers, § 382. Limits NOL
carryforwards and certain built-in losses following ownership
change.
IRS
. Internal Revenue Service.
Jet fuel
. A high-quality kerosene product primarily used in
aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has
a carbon number distribution between 8 and 16 carbon atoms per
molecule; wide-cut or naphtha-type jet fuel (including Jet B) has
between 5 and 15 carbon atoms per molecule.
Lazarus Capital
. Lazarus Capital, LLC, an affiliate of
Jonathan Carroll.
Lazarus Midstream
. Lazarus Midstream Partners, L.P., an
affiliate of LEH.
Lazarus Parties
.
Blue
Dolphin, C&C, NPS,
LE, LEH, and Jonathan
Carroll.
LE
. Lazarus Energy, LLC, a wholly owned subsidiary of Blue
Dolphin.
LEH
. Lazarus Energy Holdings, LLC, an affiliate of Jonathan
Carroll and controlling shareholder of Blue Dolphin.
LEH Operating Fee
. A management fee paid to LEH under the
Amended and Restated Operating Agreement; calculated as 5% of all
consolidated operating costs, excluding crude costs, depreciation,
amortization and interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC
and BDSC; previously reflected within refinery operating expenses
in our consolidated statements of operations.
Leasehold interest
. The interest of a lessee under an oil
and gas lease.
Light crude
. 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.
LMT
. Lazarus Marine Terminal I, LLC, an affiliate of
LEH.
LRM
. Lazarus Refining & Marketing, LLC, a wholly owned
subsidiary of Blue Dolphin.
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LTRI
. Lazarus Texas Refinery I, an affiliate of
LEH.
NAAQS
. National Ambient Air Quality Standards.
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.
Natural Gas
. A naturally occurring
hydrocarbon gas mixture consisting primarily of methane,
but commonly including varying amounts of other higher alkanes, and
sometimes a small percentage of carbon dioxide, nitrogen, hydrogen
sulfide, or helium.
NPS
. Nixon Product Storage, LLC, a wholly owned subsidiary
of Blue Dolphin.
NOL
. Net operating losses.
NSR/PSD
. New Source Review/Prevention of Significant
Deterioration.
OPA 90
. Oil Pollution Act of 1990.
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.
OPEC
. Organization of Petroleum Exporting
Countries.
OSHA
. Occupational Safety and Health
Administration.
OSRO
. Oil Spill Response Organization.
Other conversion costs
. Represents the combination of direct
labor costs and manufacturing overhead costs. These are the costs
that are necessary to convert our raw materials into refined
products.
Other Operating Expenses
. Represents costs associated with
our natural gas processing, treating, and redelivery facility, as
well as our pipeline assets and leasehold interests in oil and gas
properties.
PCAOB
.
Public Company Accounting Oversight Board.
Petroleum
. A naturally occurring flammable liquid consisting
of a complex mixture of hydrocarbons of various molecular weights
and other liquid organic compounds. The name petroleum covers both
the naturally occurring unprocessed crude oils and petroleum
products that are made up of refined crude oil.
PHMSA
. Pipeline and Hazardous Materials Safety
Administration of the U.S. Department of
Transportation.
Pilot
. Pilot Travel Centers LLC, a Delaware limited
liability company.
Preferred Stock
. Blue Dolphin preferred stock, par value
$0.10 per share. Blue Dolphin has 2,500,000 shares of Preferred
Stock authorized and no shares of Preferred Stock issued and
outstanding.
Product Slate
. Represents type and quality of products
produced.
Propane
. A by-product of natural gas processing and
petroleum refining. Propane is one of a group of liquified
petroleum gases. Others include butane, propylene, butadiene,
butylene, isobutylene and mixtures thereof.
Refined Products
. Hydrocarbon compounds, such as jet fuel
and residual fuel, that are produced by a refinery.
Refinery
. Within the oil and gas industry, a refinery is an
industrial processing plant where crude oil, condensate, and
intermediate feeds are separated and transformed into petroleum
products.
Refining Gross Profit (Deficit) per Bbl
.
Calculated as refinery operations revenue
less total cost of goods sold divided by the volume, in bbls, of
refined products sold during the period; reflected as a dollar ($)
amount per bbl.
RCRA
. Federal Resource Conservation and Recovery
Act.
RFS2
. Second Renewable Fuels Standard.
ROU
. Right-of-use.
SEC
. Securities and Exchange Commission.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 3/31/20
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Segment Margin (Deficit)
. For our refinery operations and
tolling and terminaling business segments, represents net revenues
(excluding intercompany fees and sales) attributable to the
respective business segment less associated intercompany fees and
sales less associated operation costs and expenses.
SEMS
. Safety and Environmental Management
System.
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%.
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, or
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.
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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.
TMT
. Texas
margins tax; a form of business tax imposed on an entity’s
gross profit rather than on its net income.
Turnaround
. Scheduled large-scale maintenance activity
wherein an entire process unit is taken offline for a week or more
for comprehensive revamp and renewal.
USACOE
. U.S. Army Corps of Engineers.
USDA
. U.S. Department of Agriculture.
U.S. GAAP
. Accounting principles generally accepted in the
United States of America.
Veritex
. Veritex Community Bank, successor in interest to
Sovereign Bank by merger.
WHO
. World Health Organization.
WSJ Prime Rate
. A measure of the U.S. prime rate as defined
by the Wall Street Journal.
XBRL
. eXtensible Business Reporting Language.
Yield
. The percentage of refined products that is produced
from crude oil and other feedstocks.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 3/31/20
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Important Information Regarding Forward Looking
Statements
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Important Information Regarding Forward-Looking
Statements
This
report (including information incorporated by reference) contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act, including, but not limited to, those under
“Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” All
statements other than statements of historical fact, including
without limitation statements regarding expectations regarding
revenue, cash flows, capital expenditures, and other financial
items, our business strategy, goals and expectations concerning our
market position, future operations and profitability, are
forward-looking statements. Forward-looking statements may be
identified by use of the words “anticipate,”
“believe,” “could,” “estimate,”
“expect,” “intend,” “may,”
“plan,” “predict,” “project,”
“will,” “would” and similar terms and
phrases. Although we believe our assumptions concerning future
events are reasonable, several risks, uncertainties, and other
factors could cause actual results and trends to differ materially
from those projected, including but not limited to:
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Business
and Industry
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Refinery
and Tolling and Terminaling Operations
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Our going concern
status.
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Inadequate
liquidity to sustain operations due to defaults under our secured
loan agreements, margin deterioration, and historic net losses and
working capital deficits.
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Substantial debt in
current liabilities, which is currently in default.
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Ability to regain
compliance with the terms of our outstanding
indebtedness.
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Increased costs of
capital or a reduction in the availability of credit.
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Affiliate common
stock ownership and transactions that could cause conflicts of
interest.
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Operational hazards
inherent in refining and natural gas processing operations and in
transporting and storing crude oil and condensate and refined
products.
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Geographic
concentration of our assets and customers, creating significant
exposure to regional economy risks and other
conditions.
●
Competition from
companies having greater financial and other
resources.
●
Federal, state, and
local environmental, economic, health and safety, energy and other
policies and regulations, including those related to climate
change, and any changes therein, and any legal and regulatory
investigations, delays in obtaining necessary approvals and
permits, compliance costs or other factors beyond our
control.
●
Environmental laws
and regulations that could require us to make substantial capital
expenditures to remain in compliance or remediate current or future
contamination that could give rise to material
liabilities.
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Changes in
insurance markets impacting costs and the level and types of
coverage available.
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NOL carryforwards
to offset future taxable income for U.S. federal income tax
purposes that are subject to limitation.
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Direct or indirect
effects on our business resulting from actual or threatened
terrorist or activist incidents, cyber-security breaches, or acts
of war.
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The effects of
public health threats, pandemics and epidemics, such as the recent
outbreak of COVID-19, and the adverse impacts thereof on our
business, financial condition, results of operations, and
liquidity, including, but not limited to, our growth, operating
costs, supply chain, labor availability, logistical capabilities,
customer demand for our products, industry demand generally, crude
oil supply, margins, production and throughput capacity,
utilization, inventory value, cash position, taxes, the price of
our securities and trading markets with respect thereto, our
ability to access capital markets, and the global economy and
financial markets generally.
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Timing and extent
of changes in commodity prices and demand for refined
products.
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Availability and
costs of crude oil and other feedstocks.
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Price volatility of
fuel and utility services to operate the Nixon
facility.
●
Disruptions due to
equipment interruption or failure at the Nixon
facility.
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Changes in our cash
flow from operations and working capital requirements, shortfalls
of which Affiliates may not fund.
●
Ability to regain
compliance with the terms of our outstanding
indebtedness.
●
Key personnel loss,
labor relations, and workplace safety.
●
Loss of market
share by and a material change in profitability of our key
customers.
●
Contract
cancellation, non-renewal, or failure to perform by those in our
supply and distribution chains, and the ability to replace such
contracts and/or customers.
●
Changes in the cost
or availability of third-party vessels, pipelines, trucks, and
other means of delivering and transporting crude oil and
condensate, feedstocks, and refined products.
●
Sourcing of a
substantial amount, if not all, of our crude oil and condensate
from the Eagle Ford Shale.
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Geographic
concentration of our refining operations and customers within the
Eagle Ford Shale.
●
Weather conditions,
hurricanes or other natural disasters affecting operations by us or
our key customers or the areas in which our customers
operate.
●
The effect, impact,
potential duration or other implications of the recent outbreak of
COVID-19 and global crude oil production levels, and any
expectations we may have with respect thereto.
Pipeline and Facilities and Oil and Gas Assets
●
Assessment of civil
penalties by BOEM for failure to satisfy orders to provide
additional financial assurance (supplemental pipeline bonds) within
the time period prescribed.
●
Assessment of civil
penalties by BSEE for failure to decommission pipeline and platform
assets, as well as complete structural platform surveys, within the
time periods prescribed.
Common Stock
●
Decline in stock
price due to share sales by Affiliates.
●
Issuance of
additional shares of Common Stock and Preferred Stock, which
significantly dilute the equity ownership of current
holders.
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See
also the risk factors described in greater detail under “Item
1A.” of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 as filed with the SEC. All forward-looking
statements included in this report are based on information
available to us on the date of this report. We undertake no
obligation to revise or update any forward-looking statements as a
result of new information, future events, or
otherwise.
Unless
the context otherwise requires, references in this report to
“Blue Dolphin,” “we,” “us,”
“our,” or “ours” refer to Blue Dolphin
Energy Company, one or more of its consolidated subsidiaries, or
all of them taken as a whole.
7
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Financial Statements |
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
|
(in thousands
except share amounts)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
269
|
$
72
|
|
Restricted
cash
|
49
|
49
|
|
Accounts
receivable, net
|
1,325
|
446
|
|
Accounts
receivable, related party (Note 3)
|
-
|
1,364
|
|
Prepaid
expenses and other current assets (Note 6)
|
780
|
2,276
|
|
Deposits
|
174
|
158
|
|
Inventory
(Note 7)
|
813
|
1,645
|
|
Refundable
federal income tax (Note 14)
|
100
|
65
|
|
Total
current assets
|
3,510
|
6,075
|
|
|
|
|
|
LONG-TERM
ASSETS
|
|
|
|
Total
property and equipment, net (Note 8)
|
63,509
|
63,893
|
|
Operating
lease ROU assets (Note 13)
|
613
|
649
|
|
Restricted
cash, noncurrent
|
547
|
547
|
|
Surety
bonds (Note 16)
|
230
|
230
|
|
Deferred
tax assets, net (Note 14)
|
-
|
50
|
|
Total
long-term assets
|
64,899
|
65,369
|
|
|
|
|
|
TOTAL
ASSETS
|
68,409
|
71,444
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Long-term
debt less unamortized debt issue costs, current portion, in default
(Note 10)
|
33,580
|
33,836
|
|
Line
of credit payable, less umamortized debt issue costs (Note
11)
|
11,243
|
11,464
|
|
Long-term
debt, related party, current portion, in default (Note
3)
|
7,572
|
6,001
|
|
Current
portion of lease liabilities (Note 13)
|
250
|
251
|
|
Interest
payable (in default) (Note 10)
|
4,033
|
3,814
|
|
Interest
payable, related party (in default) (Note 3)
|
2,334
|
2,174
|
|
Accounts
payable
|
1,425
|
1,877
|
|
Accounts
payable, related party (Note 3)
|
149
|
149
|
|
Asset
retirement obligations (Note 12)
|
2,550
|
2,565
|
|
Accrued
expenses and other current liabilities (Note 9)
|
2,801
|
3,333
|
|
Total
current liabilities
|
65,937
|
65,464
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Long-term
lease liabilities, net of current portion (Note 13)
|
518
|
564
|
|
Deferred
revenue
|
1,808
|
1,930
|
|
Total
long-term liabilities
|
2,326
|
2,494
|
|
|
|
|
|
TOTAL
LIABILITIES
|
68,263
|
67,958
|
|
|
|
|
|
Commitments
and contingencies (Note 16)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
Common
Stock shares issued and outstanding (12,327,365 at both March 31,
2020 and December 31, 2019)
|
123
|
123
|
|
Additional
paid-in capital
|
38,275
|
38,275
|
|
Accumulated
deficit
|
(38,252
)
|
(34,912
)
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
146
|
3,486
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
68,409
|
$
71,444
|
The
accompanying notes are an integral part of these consolidated
financial statements.
8
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Financial Statements |
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
|
(in thousands
except share and per-share amounts)
|
|
|
|
|
|
|
REVENUE
FROM OPERATIONS
|
|
|
|
Refinery
operations (Note 4)
|
$
60,897
|
$
67,858
|
|
Tolling
and terminaling (Note 4)
|
1,103
|
1,069
|
|
Total
revenue from operations
|
62,000
|
68,927
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
Crude
oil, fuel use, and chemicals
|
59,720
|
63,187
|
|
Other
conversion costs
|
2,368
|
2,329
|
|
Total
costs of goods sold
|
62,088
|
65,516
|
|
|
|
|
|
Gross
profit (deficit)
|
(88
)
|
3,411
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
LEH
operating fee (Note 3)
|
147
|
150
|
|
Other
operating expenses
|
59
|
57
|
|
General
and administrative expenses
|
644
|
670
|
|
Depletion,
depreciation and amortization
|
633
|
590
|
|
Total
cost of operations
|
1,483
|
1,467
|
|
|
|
|
|
Income
(loss) from operations
|
(1,571
)
|
1,944
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Easement,
interest and other income
|
20
|
-
|
|
Interest
and other expense
|
(1,774
)
|
(1,197
)
|
|
Total
other income (expense) (Note 3)
|
(1,754
)
|
(1,197
)
|
|
|
|
|
|
Income
(loss) before income taxes
|
(3,325
)
|
747
|
|
|
|
|
|
Income
tax expense
|
(15
)
|
-
|
|
|
|
|
|
Net
income (loss)
|
$
(3,340
)
|
$
747
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share (Note 15):
|
|
|
|
Basic
|
$
(0.27
)
|
$
0.07
|
|
Diluted
|
$
(0.27
)
|
$
0.07
|
|
|
|
|
|
Weighted
average number of common shares outstanding (Note 15):
|
12,327,365
|
10,975,514
|
|
Basic
|
12,327,365
|
10,975,514
|
|
Diluted
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
9
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Financial Statements |
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Cash
flows used in operating activities:
|
|
|
|
Net
income (loss)
|
$
(3,340
)
|
$
747
|
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
Depletion,
depreciation and amortization
|
633
|
590
|
|
Deferred
income tax
|
15
|
-
|
|
Amortization
of debt issue costs
|
220
|
32
|
|
Guaranty
fees paid in kind
|
153
|
-
|
|
Deferred
revenues and expenses
|
(122
)
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
Changes
in accounts receivable
|
(879
)
|
(739
)
|
|
Changes
in accounts receivable, related party
|
1,364
|
(482
)
|
|
Changes
in prepaid expenses and other current assets
|
1,496
|
910
|
|
Changes
in deposits and other assets
|
(16
)
|
-
|
|
Changes
in inventory
|
832
|
(333
)
|
|
Changes
in accrued arbitration award
|
-
|
(1,500
)
|
|
Changes
in accounts payable, accrued expenses and other
liabilities
|
(683
)
|
593
|
|
Changes
in accounts payable, related party
|
-
|
151
|
|
Net
cash used in operating activities
|
(327
)
|
(31
)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Cash
flows from (used in) investing activities:
|
|
|
|
Capital
expenditures
|
(198
)
|
(123
)
|
|
Net
cash used in investing activities
|
(198
)
|
(123
)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Cash
flows from (used in) financing activities:
|
|
|
|
Payments
on debt
|
(696
)
|
(250
)
|
|
Net
activity on related-party debt
|
1,418
|
419
|
|
Net
cash provided by financing activities
|
722
|
169
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
197
|
15
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
668
|
1,665
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
865
|
$
1,680
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Financing
of guaranty fees via long-term debt, related party
|
$
153
|
$
158
|
|
Interest
paid
|
$
937
|
$
361
|
|
Income
taxes paid (received)
|
$
-
|
$
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
10
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Notes to Consolidated Financial Statements
(1)
Organization
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a
Delaware corporation and is traded on the OTCQX under the ticker
symbol “BDCO”. Blue Dolphin has 20.0 million shares of
Common Stock and 2.5 million shares of Preferred Stock authorized.
There are no shares of Preferred Stock issued and
outstanding.
Our
assets are primarily organized in two segments: refinery operations
(owned by LE) and tolling and terminaling services (owned by LRM
and NPS). Subsidiaries that are reflected in corporate and other
include BDPL (inactive pipeline and facilities assets), BDPC
(inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See “Note (4)” to our
consolidated financial statements for more information about our
business segments.
Unless
the context otherwise requires, references in this report to
“we,” “us,” “our,” or
“ours,” refer to Blue Dolphin, one or more of its
consolidated subsidiaries or all of them taken as a
whole.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Note (3)” to our consolidated
financial statements for additional disclosures related to
Affiliate agreements and arrangements and working capital
deficits.
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:
Defaults Under Secured Loan Agreements with Third Parties
.
Defaults under our secured loan agreements with third parties
include loan agreements with Veritex in the original aggregate
principal amount of $35.0 million, which are guaranteed 100% by the
USDA, and a line of credit agreement with Pilot in the principal
amount of $13.0 million. Certain of our related-party debt is also
in default. See “Note (3)” of our consolidated
financial statements for disclosures related to related-party
debt.
Veritex Loan Agreements
. In September 2017, LE, Jonathan
Carroll, Blue Dolphin, LRM, and LE received notification from
Veritex regarding events of default under our secured loan
agreements, including, but not limited to, the occurrence of the
GEL Final Arbitration Award, associated material adverse effect
conditions, failure by LE to replenish a $1.0 million payment
reserve account, and the occurrence of events of default under our
other secured loan agreements with Veritex. Further, Veritex
informed obligors that it would consider a final confirmation of
the GEL Final Arbitration Award to be a material event of default
under the loan agreements. Veritex did not accelerate or call due
our secured loan agreements considering then ongoing settlement
discussions between GEL and the Lazarus Parties. Instead, Veritex
expressly reserved all its rights, privileges and remedies related
to events of default.
In
April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE
received notification from Veritex that the bank agreed to waive
certain covenant defaults and forbear from enforcing its remedies
under our secured loan agreements subject to: (i) the agreement and
concurrence of the USDA and (ii) the replenishment of the payment
reserve account on or before August 31, 2019. Following the GEL
Settlement, the associated mutual releases became effective and GEL
filed a stipulation of dismissal of claims against LE. As of the
date of this report, LE had not replenished the payment reserve
account and obligors were still in default under our other secured
loan agreements with Veritex.
At
March 31, 2020, LE and LRM were in violation of the debt service
coverage ratio, current ratio, and debt to net worth ratio
financial covenants under our secured loan agreements with Veritex.
As a result, the debt associated with these loans was classified
within current portion of long-term debt on our consolidated
balance sheets at March 31, 2020 and December 31, 2019. We were
current on required monthly payments under our secured loan
agreements with Veritex as of the filing date of this
report.
11
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under our secured loan
agreements with Veritex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the
payments of the debt, and/or (iii) Veritex, as first lien holder,
will provide future default waivers. Defaults under our secured
loan agreements with Veritex 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. Any exercise by
Veritex of its rights and remedies under our secured loan
agreements would have a material adverse effect on our business
operations, including crude oil and condensate procurement and our
customer relationships; financial condition; and results of
operations. Further, the trading price 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.
Amended Pilot Line of Credit
. On May 4, 2020, Pilot sent
NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a
guarantor and collectively guarantors, a notice demanding the
immediate payment of the unpaid principal amount and all interest
accrued and unpaid, and all other amounts owing or payable under
the Amended Pilot Line of Credit. Pursuant to the Amended Pilot
Line of Credit, commencing on May 4, 2020, all amounts outstanding
under the Amended Pilot Line of Credit began to accrue interest at
a rate of fourteen percent (14%) per annum. Failure of the borrower
or any guarantor of paying the past due obligations constituted an
event of default. Pilot expressly retained and reserved all its
rights and remedies available to it at any time, including without
limitation, the right to exercise all rights and remedies available
to Pilot under the Amended Pilot Line of Credit or applicable law
or equity. Any exercise by Pilot of its rights and remedies under
the Amended Pilot Line of Credit would have a material adverse
effect on our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations.
The
borrower and guarantors are attempting to reach a negotiated
settlement with Pilot, and Pilot hopes to continue to work with the
borrower to settle its obligations under the Amended Pilot Line of
Credit. Additionally, the borrower and guarantors are working with
a lender on the possible refinance of amounts owing and payable
under the Amended Pilot Line of Credit. Our ability to repay,
refinance, replace or otherwise extend this credit facility is
dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. Given the current financial markets, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity, or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We can provide no
assurance that we will be able to consummate any such transaction
on terms that are commercially reasonable, on terms acceptable to
us or at all. In the event we were unsuccessful in such endeavors,
we may be unable to pay the amounts outstanding under the Amended
Pilot Line of Credit, which may require us to seek protection under
bankruptcy laws. In such a case, the trading price 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
“Note (10)” and “Note (11)” to our
consolidated financial statements for additional information
related to defaults under our secured loan agreements with Veritex
and Pilot and their potential effects on our business, financial
condition, and results of operations.
Margin Deterioration and Volatility
. Steps taken to address
the COVID-19 pandemic globally and nationally and the actions of
members of the OPEC and other producer countries with respect to
oil production and pricing significantly impacted supply and demand
in global oil and gas markets, causing oil prices to decline
sharply, as well as other changes to the economic outlook in the
near term. Such subsequent developments included, but are not
limited to, government-imposed temporary business closures and
voluntary shelter-at-home directives as well as developments in
production discussions between global oil producers, and the effect
thereof. Oil prices as well as demand are expected to continue to
be volatile as a result of the near-term over-supply and the
ongoing COVID-19 pandemic as changes in oil inventories, industry
demand and global and national economic performance are reported,
and we cannot predict when prices and demand will improve and
stabilize. We are currently unable to estimate the impact these
events will have on our future financial position and results of
operations. However, we expect margins will likely remain weak
during the second quarter of 2020 until global demand begins to
recover. Accordingly, we can provide no assurances that these
events will not have a material adverse effect on our financial
position or results of operations.
Net Losses and Working Capital Deficits
. Net loss for the
three months ended March 31, 2020 was $3.3 million, or a loss of
$0.27 per share, compared to net income of $0.7 million, or income
of $0.07 per share, for the three months ended March 31, 2019. The
significant decrease was the result of less favorable margins per
bbl.
We had
a working capital deficit of $62.4 million and $59.4 million at
March 31, 2020 and December 31, 2019, respectively. Excluding the
current portion of long-term debt, we had a working capital deficit
of $21.3 million and $19.6 million at March 31, 2020 and December
31, 2019, respectively. We had cash and cash equivalents and
restricted cash (current portion) of $0.3 million and $0.05
million, respectively, at March 31, 2020. Comparatively, we had
cash and cash equivalents and restricted cash (current portion) of
$0.07 million and $0.05 million, respectively, at December 31,
2019.
Operating Risks
Successful
execution of our business strategy depends on several key factors,
including, having adequate working capital 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 products. As discussed
under ‘going concern’ above and throughout this report,
we are currently unable to estimate the impact the COVID-19
pandemic will have on our future financial position and results of
operations. Our business was deemed as an essential business and,
as such, has remained open. We have instituted various initiatives
throughout the company as part of our business continuity programs,
and we are working to mitigate risk when disruptions occur.
Management believes that it is taking all prudent steps, however,
there can be no assurance that our business strategy will be
successful, that Affiliates will continue to fund our working
capital needs when we experience working capital deficits, that we
will meet regulatory requirements to provide additional financial
assurance (supplemental pipeline bonds) and decommission offshore
pipelines and platform assets, that we will be able to obtain
additional financing on commercially reasonable terms or at all, or
that margins on our refined products will be favorable. Further, if
Veritex and/or Pilot exercise their rights and remedies under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
12
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(2)
Principles of Consolidation and Significant Accounting
Policies
Basis of Presentation
The
accompanying unaudited consolidated financial statements, which
include Blue Dolphin and its subsidiaries, have been prepared in
accordance with GAAP for interim consolidated financial information
pursuant to the rules and regulations of the SEC under Article 10
of Regulation S-X and the instructions to Form 10-Q. Accordingly,
certain information and footnote disclosures normally included in
our audited financial statements have been condensed or omitted
pursuant to the SEC’s rules and regulations. Significant
intercompany transactions have been eliminated in the
consolidation. 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.
The
consolidated balance sheet as of December 31, 2019 was derived from
the audited financial statements at that date. The accompanying
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 as filed with the SEC. Operating results
for the three months ended March 31, 2020 are not necessarily
indicative of the results that may be expected for the fiscal year
ending December 31, 2020, or for any other period. As discussed
further below within this “Note (2)” under ‘use
of estimates,’ the recent outbreak of COVID-19 and its
development into a pandemic in March 2020 has resulted in
significant economic disruption globally. This disruption became
more acute in the latter half of March 2020; therefore, our
operating results for the three months ended March 31, 2020 do not
fully reflect the impact this disruption has had, and will likely
continue to have, on us.
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
. The outbreak of COVID-19 and its
development into a pandemic in March 2020 and certain developments
in the global oil markets have impacted and continue to impact our
business. Our business was designated as an essential business and,
as such, has remained open. We have instituted various initiatives
throughout the company as part of our business continuity programs,
and we are working to mitigate risk when disruptions occur. Many
uncertainties remain with respect to COVID-19, including its
resulting economic effects, and we are unable to predict the
ultimate economic impacts from COVID-19 on our business and how
quickly national economies can recover once the pandemic subsidies.
However, the adverse impacts of the economic effects from COVID-19
and uncertainty in the global oil markets on our business have been
and will likely continue to be significant.
The
nature of our business requires that we make estimates and
assumptions in accordance with U.S. GAAP. These estimates and
assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. The COVID-19
outbreak has impacted these estimates and assumptions and will
continue to do so. Our estimates at the end of the first quarter
assumed no material impact from the disruptions caused by
COVID-19.
We
assessed certain accounting matters that generally require
consideration of forecasted financial information in context with
the information reasonably available to us and the unknown future
impacts of COVID-19 as of March 31, 2020 and through the filing
date of this report. The accounting matters assessed included, but
were not limited to, our allowance for doubtful accounts, inventory
and related reserves and the carrying value of long-lived assets.
While there was not a material impact to our consolidated financial
statements as of and for the three months ended March 31, 2020, our
future assessment of the magnitude and duration of COVID-19, as
well as other factors, could result in material impacts to our
consolidated financial statements in future reporting
periods.
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 complete
building 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 prior experience and other factors which, in management's
judgment, deserve consideration in estimating bad debts.
Management assesses collectability of the customer’s account
based on current aging status, collection history, and financial
condition. Based on a review of these factors,
management establishes or adjusts the allowance for specific
customers and the entire accounts receivable
portfolio. We had an allowance for doubtful accounts of
$0.1 million at both March 31, 2020 and December 31,
2019.
13
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Inventory
. Inventory primarily consists of refined products,
crude oil and condensate, and chemicals. Inventory is valued at
lower of cost or net realizable value with cost determined by the
average cost method, and net realizable value determined based on
estimated selling prices less associated delivery costs. If the net
realizable value of our refined 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)” to our consolidated financial statements for
additional disclosures related to inventory.
Property and Equipment
.
Refinery and Facilities
. We plan to continue making
improvements to the crude distillation tower based on operational
needs and technological advances. Additions to refinery and
facilities assets are capitalized, and 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. 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 FASB ASC guidance we performed periodic impairment
testing of our pipeline and facilities assets in 2016. Upon
completion of that testing, our pipeline assets were fully impaired
at December 31, 2016. 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. We plan to decommission
the offshore pipelines and platform assets in the third quarter of
2020.
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.
CIP
. CIP expenditures, including capitalized interest,
relate to construction and refurbishment activities and equipment
for the Nixon Facility. These expenditures are capitalized as
incurred. Depreciation begins once the asset is placed in service.
See “Note (8)” to our consolidated financial statements
for additional disclosures related to our refinery and facilities
assets, oil and gas properties, pipelines and facilities assets,
and CIP.
Leases.
We evaluate if a contract is or contains a lease at
inception of the contract. If we determine that a contract is or
contains a lease, we recognize ROU asset and lease liability at the
commencement date of the lease based on the present value of lease
payments over the lease term. The present value of the lease
payments is determined by using the implicit rate when readily
determinable. If not determinable, we use the incremental borrowing
rate to discount lease payments to present value. Lease terms
include options to extend or terminate the lease when it is
reasonably certain that we will exercise those
options.
We
recognize ROU assets and lease liabilities for leasing arrangements
with terms greater than one year. We account for lease and
non-lease components in a contract as a single lease component for
all classes of underlying assets. We allocate the consideration in
these contracts based on pricing information contained in the
lease.
Expense
for an operating lease is recognized as a single lease cost on a
straight-line basis over the lease term and is reflected in the
appropriate income statement line item based on the leased
asset’s function. Amortization expense of a finance lease ROU
asset is recognized on a straight-line basis over the lesser of the
useful life of the leased asset or the lease term. However, if the
lease transfers ownership of the finance lease ROU asset to us at
the end of the lease term, the finance lease ROU asset is amortized
over the useful life of the leased asset. Amortization expense is
reflected in ‘depreciation and amortization expense.’
Interest expense is incurred based on the carrying value of the
lease liability and is reflected in ‘interest and other
expense.’
Revenue Recognition
.
Refinery Operations Revenue
. Revenue from the sale of
refined products is recognized when the product is sold to the
customer in fulfillment of performance obligations. Each load of
refined 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 product, the
transfer of significant risks and rewards, our rights to payment,
and transfer of legal title. In each case, the term between the
sale and when payment is due is not significant. 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.
14
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Tolling and Terminaling Revenue
. Tolling and terminaling
revenue represents fees pursuant to: (i) 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 and
(ii) tolling agreements, whereby a customer agrees to pay a certain
fee per gallon or barrel for throughput volumes moving through the
naphtha stabilizer unit and a fixed monthly reservation fee for use
of the naphtha stabilizer unit.
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.
Deferred Revenue
. We record deferred revenue when cash
payments are received or due in advance of our performance. An
increase in the deferred revenue balance reflects cash
payments received or due in advance of satisfying our performance
obligations, offset by recognized revenue that was included in the
deferred revenue balance at the beginning of the period. Deferred
revenue represents a liability as of the balance sheet date related
to a revenue producing activity for which revenue has not yet been
recognized. We record deferred revenue when we receive
consideration under a contract before achieving certain criteria
that must be met for revenue to be recognized in conformity with
GAAP.
Income Taxes
. Deferred income taxes are determined based on
the differences between the financial reporting and tax basis of
assets and liabilities, as well as operating losses and tax credit
carryforwards using currently enacted tax rates and laws in effect
for the year in which the differences are expected to reverse. We
record a valuation allowance against deferred income tax assets if
it is more likely than not that those assets will not be realized.
The provision for income taxes comprises our current tax liability
and change in deferred income tax assets and
liabilities.
Significant
judgment is required in evaluating uncertain tax positions and
determining its provision for income taxes. As of each reporting
date, we consider new evidence, both positive and negative, to
determine the realizability of deferred tax assets. We consider
whether it is more likely than not that a 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. When we determine 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 March 31, 2020. Such
objective evidence limits the ability to consider other subjective
evidence, such as projections for future growth. Based on this
evaluation, we recorded a valuation allowance against the deferred
tax assets for which realization was not deemed more likely than
not as of March 31, 2020 and December 31, 2019. We expect to
recover deferred tax assets related to AMT credit carryforwards. In
addition, we have NOL carryforwards that remain available for
future use.
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 March
31, 2020 and December 31, 2019, there were no uncertain tax
positions for which a reserve or liability was necessary. See
“Note (14)” to our consolidated financial statements
for more information related to income taxes.
Impairment or Disposal of Long-Lived Assets
. We periodically
evaluate our long-lived assets for impairment. Additionally, we
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. The GEL Final Arbitration Award
represented a significant adverse change that could have affected
the value of certain of our long-lived assets, and management
performed potential impairment testing of our refinery and
facilities assets in 2019 and 2018. Upon completion of that
testing, no impairment was deemed necessary and we did not record
any impairment of our refinery and facilities assets for the
periods presented.
Asset Retirement Obligations
. We record a liability for the
discounted fair value of an ARO in the period incurred, and we also
capitalize the corresponding cost by increasing the carrying amount
of the related long-lived asset. The liability is accreted towards
its future value each period, and 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.
15
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
We have
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further, we
believe that these assets have indeterminate lives 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. Cost estimates for each of our assets
were developed based upon regulatory requirements, structural
makeup, water depth, reservoir characteristics, reservoir depth,
equipment demand, current retirement procedures, and construction
and engineering consultations. 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)” to our consolidated financial
statements for additional information related to AROs.
Computation of Earnings Per Share
. We present basic and
diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding for
the period. 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. The number of shares related
to restricted stock included in diluted EPS is based on the
“Treasury Stock Method.” We do not have issued options,
warrants, or similar instruments. See “Note (15)” to
our consolidated financial statements for additional information
related to EPS.
New Pronouncements Adopted
. The FASB issues an ASU to
communicate changes to the FASB ASC, including changes to
non-authoritative SEC content. Recently adopted ASUs
include:
Codification Updates to SEC Sections
. In July 2019, FASB
issued ASU 2019-07, Codification Updates to SEC Sections, which
amended certain SEC sections or paragraphs within the FASB ASC. The
amendments were made pursuant to SEC Final Rule Releases No.
33-10532, Disclosure Update and Simplification, and Nos. 33-10231
and 33-10442, Investment Company Reporting Modernization, and
Miscellaneous Updates (SEC Update). The SEC Final Rule Releases,
which required improvements to the XBRL taxonomy, were made to
improve, update, and simplify SEC regulations on financial
reporting and disclosure. For public companies, the amendments in
ASU 2019-07 were effective upon issuance. Adoption of this guidance
did not have a significant impact on our consolidated financial
statements.
Consolidation
. In October 2018, FASB issued ASU
2018-17,
Consolidation
(Topic 810). This ASU provided targeted improvements to
related-party guidance for variable interest entities. Indirect
interests held through related parties in common control
arrangements are 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 were effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Adoption of this guidance did not have a significant impact
on our consolidated financial statements.
New Pronouncements Issued, Not Yet Effective
.
Income Taxes
.
In
March 2018, FASB issued ASU 2018-05,
Income Taxes (Topic 740). This
guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect
Staff Accounting Bulletin No. 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.
16
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(3)
Related-Party Transactions
Working Capital
Currently,
we depend on Affiliates for financing when revenue from operations
and borrowings under bank facilities are insufficient to meet our
liquidity and working capital needs. Such borrowings are reflected
in our consolidated balance sheets in accounts payable, related
party, and/or long-term debt, related party.
Affiliate Agreements/Transactions
Blue
Dolphin and certain of its subsidiaries are party to several
agreements with Affiliates. Management believes that these
related-party transactions were consummated on terms equivalent to
those that prevail in arm's-length transactions. Related-party
transactions consist of the following:
|
Agreement/Transaction
|
Parties
|
Type
|
Effective
Date
|
Interest
Rate
|
Key
Terms
|
|
Amended
and Restated Guaranty Fee Agreement
(1)
|
Jonathan
Carroll - LE
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Amended
and Restated Guaranty Fee Agreement
(1)
|
Jonathan
Carroll - LRM
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Refinery
Equipment Purchase
|
LTRI -
LE
|
Operations
|
07/01/2019
|
---
|
LE
purchase of two (2) refurbished heat exchangers for $0.08 million
each
|
|
Dock
Tolling Agreement
|
LMT -
LE
|
Operations
|
05/24/2016
|
---
|
5-year
term cancellable by either party any time; LE paid flat reservation
fee for tolling volumes up to 84,000 gallons per day; excess
tolling volumes subject to increased per gallon rate; terminated
07/01/2019
|
|
Jet
Fuel Sales Agreement
|
LEH -
LE
|
Operations
|
04/01/2020
|
---
|
1-year
term expiring earliest to occur of 03/31/2021 plus 30-day carryover
or delivery of maximum jet fuel quantity; LEH bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification
|
|
March
Carroll Note
(in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; matured 01/01/2019; interest still
accruing
|
|
March
Ingleside Note
(in
default)
|
Ingleside
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Ingleside under
previous Amended and Restated Tank Lease Agreement; matured
01/01/2019; interest still accruing
|
|
June
LEH Note
(in
default)
|
LEH
– Blue Dolphin
|
Debt
|
03/312017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under the
Amended and Restated Operating Agreement; reflects amounts owed to
Jonathan Carroll under guaranty fee agreements; matured 01/01/2019;
interest still accruing
|
|
Office
Sub-Lease Agreement
|
LEH -
BDSC
|
Operations
|
01/01/2018
|
---
|
68-month
term expiring 08/31/2023; office lease Houston, Texas; includes
6-month rent abatement period; rent approximately $0.02 million per
month
|
|
Amended
and Restated Operating Agreement
|
LEH
– Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and
BDSC
|
Debt
|
04/01/2020
|
---
|
3-year
term; expires 04/01/2023 or notice by either party at any time of
material breach or 90 days Board notice; LEH receives management
fee of 5% of all consolidated operating costs, excluding crude
costs, depreciation, amortization and interest of Blue Dolphin, LE,
LRM, NPS, BDPL, BDPC and BDSC
|
|
Loan
and Security Agreement
(in
default)
|
LEH -
BDPL
|
Debt
|
08/15/2016
|
16.00%
|
2-year
term; $4.0 million principal amount; $0.5 million annual payment;
proceeds used for working capital; no financial maintenance
covenants; secured by certain BDPL property
|
(1)
On April 30, 2020,
we issued an aggregate of 231,065 restricted shares of Common Stock
to Jonathan Carroll, which represents payment of the common stock
component of guaranty fees for the period November 2019 through
March 2020. The average cost basis was $0.69, the low was $0.52,
and the high was $1.07. For the foreseeable future, management does
not intend on paying Mr. Carroll the cash portion of guaranty fees
due to Blue Dolphin’s working capital deficits. The cash
portion will continue to be accrued and added to the principal
balance of the March Carroll Note.
17
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Related-Party Financial Impact
Consolidated Balance Sheets
.
Accounts receivable, related party
.
Accounts receivable, related party
totaled $0 and $1.4 million at March 31, 2020 and December 31,
2019, respectively. At December 31, 2019, accounts receivable,
related party represented amounts owed from LEH for the sale of jet
fuel under the Jet Fuel Sales Agreement. Amounts are paid
under normal business terms. Amounts outstanding relating to
the Jet Fuel Sales Agreement can vary significantly period to
period based on the timing of the related sales and payments
received. See below for the total amount owed to LEH under
the June LEH Note and the BDPL Loan Agreement.
Accounts payable, related party
.
Accounts payable, related party to LTRI
related to the purchase of refinery equipment totaled $0.2 million
at both March 31, 20020 and December 31, 2019.
Long-term debt, related party, current portion (in default) and
accrued interest payable, related party.
|
|
March
31,
|
December
31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
LEH
|
|
|
|
June LEH Note (in
default)
|
$
1,375
|
$
-
|
|
BDPL Loan
Agreement
|
6,334
|
6,174
|
|
LEH
Total
|
7,709
|
6,174
|
|
Ingleside
|
|
|
|
March Ingleside
Note (in default)
|
1,024
|
1,004
|
|
Jonathan
Carroll
|
|
|
|
March Carroll Note
(in default)
|
1,173
|
997
|
|
|
9,906
|
8,175
|
|
|
|
|
|
Less: Long-term
debt, related party, current portion, in default
|
(7,572
)
|
(6,001
)
|
|
Less: Accrued
interest payable, related party (in default)
|
(2,334
)
|
(2,174
)
|
|
|
$
-
|
$
-
|
18
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Consolidated Statements of Operations
.
Total revenue from operations.
|
|
Three Months Ended March 31,
|
|||
|
|
2020
|
2019
|
||
|
|
(in thousands, except percent amounts)
|
|||
|
Refinery
operations
|
|
|
|
|
|
LEH
|
$
17,715
|
28.6
%
|
$
20,809
|
30.2
%
|
|
Third-Parties
|
43,182
|
69.6
%
|
47,049
|
68.3
%
|
|
Tolling
and terminaling
|
|
|
|
|
|
Third-Parties
|
1,103
|
1.8
%
|
1,069
|
1.5
%
|
|
|
$
62,000
|
100.0
%
|
$
68,927
|
100.0
%
|
Interest expense.
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Jonathan
Carroll
|
|
|
|
Guaranty
Fee Agreements
|
|
|
|
First
Term Loan Due 2034
|
$
108
|
$
112
|
|
Second
Term Loan Due 2034
|
45
|
46
|
|
March
Carroll Note (in default)
|
23
|
25
|
|
LEH
|
|
|
|
BDPL
Loan Agreement (in default)
|
160
|
160
|
|
June
LEH Note (in default)
|
25
|
6
|
|
Ingleside
|
|
|
|
March
Ingleside Note (in default)
|
20
|
26
|
|
|
$
381
|
$
375
|
19
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Other.
Fees associated with the Dock Tolling Agreement with
LMT totaled $0 and $0.2 million for the three months ended March
31, 2020 and 2019, respectively. Lease payments received under the
office sub-lease agreement with LEH totaled approximately $0.01
million for both three-month periods ended March 31, 2020 and 2019.
The LEH operating fee was flat, totaling approximately $0.2 million
for both three-month periods ended March 31, 2020 and
2019.
(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 third-party lease
agreements. Both operations are conducted at the Nixon facility.
Corporate and other includes BDSC, BDPL and BDPC.
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 presented as receivables, net on
our consolidated balance sheets.
Contract Liabilities
. Our contract liabilities from
contracts with customers are included in accrued expenses and
presented in “Note (9)” to our consolidated financial
statements.
Remaining Performance Obligations
. Most of our contracts
with customers are spot contracts and therefore have no remaining
performance obligations.
Remainder
of Page Intentionally Left Blank
20
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Segment Information
.
Business segment information for the periods indicated (and as of
the dates indicated) was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Net
revenue (excluding intercompany fees and sales)
|
|
|
|
Refinery
operations
|
$
60,897
|
$
67,858
|
|
Tolling
and terminaling
|
1,103
|
1,069
|
|
Total
net revenue
|
62,000
|
68,927
|
|
|
|
|
|
Intercompany
fees and sales
|
|
|
|
Refinery
operations
|
(617
)
|
(606
)
|
|
Tolling
and terminaling
|
617
|
606
|
|
Total
intercompany fees
|
-
|
-
|
|
|
|
|
|
Operation costs and expenses
(1)
|
|
|
|
Refinery
operations
|
(61,833
)
|
(65,152
)
|
|
Tolling
and terminaling
|
(255
)
|
(364
)
|
|
Corporate
and other
|
(59
)
|
(57
)
|
|
Total
operation costs and expenses
|
(62,147
)
|
(65,573
)
|
|
|
|
|
|
Segment
contribution margin (deficit)
|
|
|
|
Refinery
operations
|
(1,553
)
|
2,100
|
|
Tolling
and terminaling
|
1,465
|
1,311
|
|
Corporate
and other
|
(59
)
|
(57
)
|
|
Total
segment contribution margin (deficit)
|
(147
)
|
3,354
|
|
|
|
|
|
General and administrative
expenses
(2)
|
|
|
|
Refinery
operations
|
(304
)
|
(332
)
|
|
Tolling
and terminaling
|
(68
)
|
(43
)
|
|
Corporate
and other
|
(419
)
|
(445
)
|
|
Total
general and administrative expenses
|
(791
)
|
(820
)
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
Refinery
operations
|
(288
)
|
(465
)
|
|
Tolling
and terminaling
|
(294
)
|
(99
)
|
|
Corporate
and other
|
(51
)
|
(26
)
|
|
Total
depreciation and amortization
|
(633
)
|
(590
)
|
|
|
|
|
|
Interest
and other non-operating expenses, net
|
|
|
|
Refinery
operations
|
(741
)
|
(783
)
|
|
Tolling
and terminaling
|
(770
)
|
(196
)
|
|
Corporate
and other
|
(243
)
|
(218
)
|
|
Total
interest and other non-operating expenses, net
|
(1,754
)
|
(1,197
)
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
Refinery
operations
|
(2,886
)
|
520
|
|
Tolling
and terminaling
|
333
|
973
|
|
Corporate
and other
|
(772
)
|
(746
)
|
|
Total
income (loss) before income taxes
|
(3,325
)
|
747
|
|
|
|
|
|
Income
tax expense
|
(15
)
|
-
|
|
|
|
|
|
Net income (loss)
|
$
(3,340
)
|
$
747
|
(1)
Operation costs
include cost of goods sold. Also, operation costs within: (a)
tolling and terminaling includes terminal operating expenses and an
allocation of other costs (e.g. insurance and maintenance) and (b)
corporate and other includes expenses related to BDSC, BDPC and
BDPL.
(2)
General and
administrative expenses within refinery operations include the LEH
operating fee.
21
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
|
|
March 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
Capital
expenditures
|
|
|
|
Refinery
operations
|
$
6
|
$
40
|
|
Tolling
and terminaling
|
192
|
83
|
|
Corporate
and other
|
-
|
-
|
|
Total
capital expenditures
|
198
|
123
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
Refinery
operations
|
48,418
|
50,340
|
|
Tolling
and terminaling
|
18,407
|
18,880
|
|
Corporate
and other
|
1,584
|
2,429
|
|
Total
identifiable assets
|
$
68,409
|
$
71,649
|
(5)
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 cash balances at financial institutions in Houston, Texas.
The FDIC insures certain financial products up to a maximum of
$250,000 per depositor. At both March 31, 2020 and December 31,
2019, we had cash balances (including restricted cash) that
exceeded the FDIC insurance limit per depositor of approximately
$0.3 million.
Key Supplier
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate. We have a long-term crude
supply agreement in place with Pilot. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Pilot may
terminate the crude supply agreement by providing the other party
60 days prior written notice. We may terminate the agreement upon
the expiration of the initial term or at any time during a renewal
term by giving Pilot 60 days prior written notice.
Pilot
also stores crude oil at the Nixon facility under a terminal
services agreement. Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. Although the initial
term of the terminal services agreement expired April 30, 2020, the
agreement renewed on a one-year evergreen basis. Either party may
terminate the terminal services agreement by providing the other
party 60 days prior written notice. However, the terminal services
agreement will automatically terminate upon expiration or
termination of the crude supply agreement.
Our
financial health could be materially and adversely affected by
defaults in our secured loan agreements, margin deterioration and
volatility, historic net losses and working capital deficits, as
well as termination of the crude supply agreement or terminal
services agreement with Pilot, which could impact our ability to
acquire crude oil and condensate. In addition, a sustained period
of low crude oil prices due to market volatility associated with
the COVID-19 pandemic may also result in significant financial
constraints on producers, which could result in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations.
22
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Significant Customers
We
routinely assess the financial strength of our customers and have
not experienced significant write-downs in accounts receivable
balances. We believe that our accounts receivable credit risk
exposure is limited.
|
|
Number
Significant
Customers
|
% Total
Revenue
from
Operations
|
Portion
of Accounts
Receivable
March 31
|
|
|
|
|
|
|
Three Months March
31, 2020
|
4
|
94
%
|
$0.6
million
|
|
|
|
|
|
|
Three Months March
31, 2019
|
4
|
96
%
|
$0.8
million
|
One of
our significant customers is an Affiliate. The Affiliate, LEH,
purchases our jet fuel under a Jet Fuel Sales Agreement and bids on
jet fuel contracts under preferential pricing terms due to a
HUBZone certification. LEH accounted for nearly 29% and 30% of our
total revenue from operations for the three months ended March 31,
2020 and 2019, respectively. LEH represented $0 in accounts
receivable at both March 31, 2020 and March 31, 2019.
Amounts
outstanding relating to the Jet Fuel Sales Agreement can vary
significantly period to period based on the timing of the related
sales and payments received. The amounts are paid under normal
business terms. The total amount owed to LEH under the June LEH
Note and the BDPL Loan Agreement totaled $7.6 million and $6.2
million at March 31, 2020 and December 31, 2019, respectively. See
“Note (3)” and “Note (16)” to our
consolidated financial statements for additional disclosures
related to transactions with Affiliates.
Concentration of Customers
. Our operations have a
concentration of customers who are refined petroleum product
wholesalers. These concentrations of customers may impact our
overall exposure to credit risk, either positively or negatively,
in that these customers may be similarly affected by changes in
economic or other conditions including the uncertainties concerning
COVID-19 and volatility in the global oil markets. Historically, we
have not had any significant problems collecting our accounts
receivable.
23
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Refined Product Sales
. We sell our products primarily in the
U.S. within PADD 3. Occasionally we sell refined products to
customers that export to Mexico. Total refined product sales by
distillation (from light to heavy) for the periods indicated
consisted of the following:
|
|
Year Ended March 31,
|
|||
|
|
2020
|
2019
|
||
|
|
(in thousands,
except percent amounts)
|
|||
|
|
|
|
|
|
|
LPG
mix
|
$
-
|
0.0
%
|
$
8
|
0
%
|
|
Naphtha
|
11,515
|
18.9
%
|
13,795
|
20.3
%
|
|
Jet
fuel
|
17,715
|
29.1
%
|
20,809
|
30.7
%
|
|
HOBM
|
15,191
|
24.9
%
|
16,160
|
23.8
%
|
|
AGO
|
16,476
|
27.1
%
|
17,086
|
25.2
%
|
|
|
$
60,897
|
100.0
%
|
$
67,858
|
100.0
%
|
An
Affiliate, LEH, purchases our jet fuel. See “Note (3)”
and “Note (16)” to our consolidated financial
statements for additional disclosures related to Affiliate
transactions.
(6)
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Prepaid
crude oil and condensate
|
$
379
|
$
1,651
|
|
Other
prepaids
|
191
|
87
|
|
Prepaid
easement renewal fees
|
115
|
121
|
|
Prepaid
insurance
|
95
|
417
|
|
|
$
780
|
$
2,276
|
24
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(7)
Inventory
Inventory
as of the dates indicated consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Crude
oil and condensate
|
$
554
|
$
959
|
|
Chemicals
|
157
|
120
|
|
AGO
|
56
|
440
|
|
Naphtha
|
29
|
95
|
|
Propane
|
15
|
26
|
|
LPG
mix
|
2
|
5
|
|
|
$
813
|
$
1,645
|
At
March 31, 2020 and December 31, 2019, we recorded a write-down of
inventory to its net realizable value of approximately $0.2 million
and $0.1 million, respectively.
25
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(8)
Property, Plant and Equipment, Net
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Refinery
and facilities
|
$
66,317
|
$
66,317
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
833
|
833
|
|
|
67,716
|
67,716
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and
amortiation
|
(13,321
)
|
(12,739
)
|
|
|
54,395
|
54,977
|
|
|
|
|
|
CIP
|
9,114
|
8,916
|
|
|
$
63,509
|
$
63,893
|
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest is recorded as
part of the asset it relates to and is depreciated over the
asset’s useful life. Capitalized interest cost, which is
included in CIP, was $0.7 million at both March 31, 2020 and
December 31, 2019. Capital expenditures for expansion at the Nixon
facility are funded by long-term debt from Veritex, revenue from
operations, and working capital from Affiliates. Unused amounts for
capital expenditures derived from Veritex loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets. See “Note (10)” to our
consolidated financial statements for additional disclosures
related to working capital deficits and borrowings for capital
spending.
(9)
Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Unearned
revenue from contracts with customers
|
$
1,697
|
$
1,990
|
|
Unearned
contract renewal income
|
500
|
500
|
|
Taxes
payable
|
252
|
183
|
|
Insurance
|
169
|
159
|
|
Board
of director fees payable
|
123
|
263
|
|
Other
payable
|
50
|
228
|
|
Customer
deposits
|
10
|
10
|
|
|
$
2,801
|
$
3,333
|
Remainder
of Page Intentionally Left Blank
26
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(10)
Third-Party Long-Term Debt
Loan Agreements
|
Loan
Description
|
Original
Principal Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
USDA-Guaranteed
Loans
|
|
|
|
|
|
|
First Term Loan Due
2034 (
in
default
)
|
$
25.0
|
Jun
2034
|
$0.2
million
|
WSJ Prime +
2.75%
|
Refinance loan;
capital improvements
|
|
Second Term Loan
Due 2034 (
in
default
)
|
$
10.0
|
Dec
2034
|
$0.1
million
|
WSJ Prime +
2.75%
|
Refinance bridge
loan; capital improvements
|
|
Notre Dame Debt
(
in default
)
|
$
11.7
(1)
|
Jan
2018
|
No payments to
date; payment rights subordinated
(2)
|
16.00
%
|
Working capital;
reduce balance of GEL Final Arbitration Award
|
(1)
Original principal
amount was $8.0 million; pursuant to a 2017 sixth amendment, the
Notre Dame Debt was amended to increase the principal amount by
$3.7 million; the additional principal was used to reduce the GEL
Final Arbitration Award by $3.6 million.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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.
Guarantees and Security
|
Loan
Description
|
Guarantees
|
Security
|
|
USDA-Guaranteed
Loans
|
|
|
|
First
Term Loan Due 2034 (
in
default
)
|
●
100%
USDA-guarantee;
●
Jonathan Carroll
personal guarantee
(1)
;
●
LEH,
LRM and Blue Dolphin cross-guarantee
|
●
first priority lien
on Nixon facility’s business assets (excluding accounts
receivable and inventory);
●
assignment of all
Nixon facility contracts, permits, and licenses;
●
absolute assignment
of Nixon facility rents and leases, including tank rental
income;
●
$1.0 million
payment reserve account held by Veritex; and
●
$5.0 million life
insurance policy on Jonathan Carroll.
|
|
Second
Term Loan Due 2034 (
in
default
)
|
●
100%
USDA-guarantee;
●
Jonathan Carroll
personal guarantee
(1)
;
●
LEH, LE and Blue
Dolphin cross-guarantee
|
●
second priority
lien on rights of LE in crude distillation tower and other
collateral of LE;
●
first priority lien
on real property interests of LRM;
●
first priority lien
on all LRM fixtures, furniture, machinery and
equipment;
●
first priority lien
on all LRM contractual rights, general intangibles and instruments,
except with respect to LRM rights in its leases of certain
specified tanks for which Veritex has second priority lien;
and
●
all other
collateral as described in the security documents.
|
|
Notre
Dame Debt (
in
default
)
|
---
|
●
Subordinated deed
of trust that encumbers the crude distillation tower and general
assets of LE
(2).
|
(1)
As a condition of
the First Term Loan Due 2034 and Second Term Loan Due 2034,
Jonathan Carroll was required to personally guarantee repayment
borrowed funds and accrued interest.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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.
The
USDA, acting through its agencies, administers a federal rural
credit program that makes direct loans and guarantees portions of
loans made and serviced by USDA-qualified lenders for various
purposes. Each USDA guarantee is a full faith and credit obligation
of the U.S. with the USDA guaranteeing up to 100% of the principal
amount. The lender for a USDA-guaranteed loan, in our case Veritex,
is required by regulations to retain both the guaranteed and
unguaranteed portions of the loan, to service the entire underlying
loan, and to remain mortgage and/or secured party of record. Both
the guaranteed and unguaranteed portions of the loan are to be
secured by the same collateral with equal lien priority. The
USDA-guaranteed portion of a loan cannot be paid later than, or in
any way be subordinated to, the related unguaranteed portion. See
“Note (3)” and “Note (16)” to our
consolidated financial statements for additional disclosures
related to Affiliate agreements and transactions, including
long-term debt guarantees.
27
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Representations, Warranties, Covenants, and Defaults
The
First Term Loan Due 2034 and Second Term Loan Due 2034 contain
representations and warranties, affirmative and negative covenants,
and events of default that we consider usual and customary for bank
facilities of this type. Specifically, the First Term Loan Due 2034
and Second Term Loan Due 2034 contain debt service coverage ratio,
current ratio, and debt to net worth ratio financial covenants. The
First Term Loan Due 2034 also requires that a $1.0 million payment
reserve account be maintained. There are no financial maintenance
covenants associated with the Notre Dame Debt.
Proceeds
available for use under the First Term Loan Due 2034 and Second
Term Loan Due 2034 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.
As
described elsewhere in this report, we are in default under our
secured loan agreements. Defaults include events of default and
financial covenant violations. Defaults under our secured loan
agreements 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 March 31, 2020 and December 31,
2019.
Events of Default
. In September 2017, LE, Jonathan Carroll,
Blue Dolphin, LRM, and LE received notification from Veritex
regarding events of default under our secured loan agreements,
including, but not limited to, the occurrence of the GEL Final
Arbitration Award, associated material adverse effect conditions,
failure by LE to replenish a $1.0 million payment reserve account,
and the occurrence of events of default under our other secured
loan agreements with Veritex. Further, Veritex informed obligors
that it would consider a final confirmation of the GEL Final
Arbitration Award to be a material event of default under the loan
agreements. Veritex did not accelerate or call due our secured loan
agreements considering then ongoing settlement discussions between
GEL and the Lazarus Parties. Instead, Veritex expressly reserved
all its rights, privileges and remedies related to events of
default.
In
April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE
received notification from Veritex that the bank agreed to waive
certain covenant violations and forbear from enforcing its remedies
under our secured loan agreements subject to: (i) the agreement and
concurrence of the USDA and (ii) the replenishment of the payment
reserve account on or before August 31, 2019. Following the GEL
Settlement, the associated mutual releases became effective and GEL
filed a stipulation of dismissal of claims against LE. As of the
date of this report, LE had not replenished the payment reserve
account and obligors were still in default under our other secured
loan agreements with Veritex.
Financial Covenant Violations
.
At March 31, 2020, LE and LRM were
in violation of the debt service coverage ratio, current ratio, and
debt to net worth ratio financial covenants under our secured loan
agreements with Veritex. Any exercise by Veritex of its rights and
remedies under our secured loan agreements would have a material
adverse effect on our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations. In such a case, the trading
price of our common stock and the value of an investment in our
common stock could significantly decrease, which could lead to
holders of our common stock losing their investment in our common
stock in its entirety.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under our secured loan
agreements with Vertitex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the
payments of the debt, and/or (iii) Veritex, as first lien holder,
will provide future default waivers. Defaults under our 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. See “Note (1)” and “Note (11)” to
our consolidated financial statements for additional information
regarding defaults under our secured loan agreements and their
potential effects on our business, financial condition, and results
of operations.
28
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Third-party
long-term debt (outstanding principal and accrued interest), as of
the dates indicated was as follows:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due 2034
(in
default)
|
$
21,586
|
$
21,776
|
|
Second Term Loan Due 2034
(in
default)
|
8,953
|
9,031
|
|
Notre Dame Debt
(in
default)
|
8,816
|
8,617
|
|
|
39,355
|
39,424
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(33,580
)
|
(33,836
)
|
|
Less:
Unamortized debt issue costs
|
(1,845
)
|
(1,877
)
|
|
Less: Accrued interest payable
(in
default)
|
(3,930
)
|
(3,711
)
|
|
|
$
-
|
$
-
|
Unamortized
debt issue costs associated with USDA-guaranteed loans as of the
dates indicated consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due 2034
(in
default)
|
$
1,674
|
$
1,674
|
|
Second Term Loan Due 2034
(in
default)
|
768
|
768
|
|
|
|
|
|
Less:
Accumulated amortization
|
(597
)
|
(565
)
|
|
|
$
1,845
|
$
1,877
|
Amortization
expense was $0.03 million for both three-month periods ended March
31, 2020 and 2019.
29
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Accrued
interest related to third-party long-term debt, reflected as
accrued interest payable in our consolidated balance sheets, as of
the dates indicated consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt
(in
default)
|
$
3,838
|
$
3,639
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due 2034
(in
default)
|
41
|
25
|
|
Second Term Loan Due 2034
(in
default)
|
51
|
47
|
|
|
3,930
|
3,711
|
|
Less:
Accrued interest payable (in default)
|
(3,930
)
|
(3,711
)
|
|
Long-term
Interest Payable, Net of Current Portion
|
$
-
|
$
-
|
As a
result of new ASU guidance related to leases, capital leases are
now reported in “Note (13)” as finance leases. See
“Note (1),” “Note (3),” and “Note
(11”) to our consolidated financial statements for
information related to third-party debt, related-party debt and
debt obligations associated with Pilot.
(11)
Line of Credit Payable
Line of Credit Agreement
|
Line of Credit
Description
|
Principal
Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
|
|
|
|
|
|
|
Amended Pilot Line
of Credit (
in
default
)
|
$
13.0
|
May
2020
|
----
|
14.00
%
|
GEL Settlement
Payment, NPS purchase of crude oil from Pilot, and working
capital
|
Under
the Amended Pilot Line of Credit, NPS was required to make monthly
interest only payments to Pilot in each of September and October
2019 in the amount of $0.1 million. The required payments were
made.
On May
4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue
Dolphin, each a guarantor and collectively guarantors, a notice
demanding the immediate payment of the unpaid principal amount and
all interest accrued and unpaid, and all other amounts owing or
payable under the Amended Pilot Line of Credit. Pursuant to the
Amended Pilot Line of Credit, commencing on May 4, 2020, all
amounts outstanding under the Amended Pilot Line of Credit began to
accrue interest at a rate of fourteen percent (14%) per annum.
Failure of the borrower or any guarantor of paying the past due
obligations constituted an event of default. Pilot expressly
retained and reserved all its rights and remedies available to it
at any time, including without limitation, the right to exercise
all rights and remedies available to Pilot under the Amended Pilot
Line of Credit or applicable law or equity. Any exercise by Pilot
of its rights and remedies under the Amended Pilot Line of Credit
would have a material adverse effect on our business operations,
including crude oil and condensate procurement and our customer
relationships; financial condition; and results of
operations.
The
borrower and guarantors are attempting to reach a negotiated
settlement with Pilot, and Pilot hopes to continue to work with the
borrower to settle its obligations under the Amended Pilot Line of
Credit. Additionally, the borrower and guarantors are working with
a lender on the possible refinance of amounts owing and payable
under the Amended Pilot Line of Credit. Our ability to repay,
refinance, replace or otherwise extend this credit facility is
dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. Given the current financial markets, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity, or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We can provide no
assurance that we will be able to consummate any such transaction
on terms that are commercially reasonable, on terms acceptable to
us or at all. In the event we were unsuccessful in such endeavors,
we may be unable to pay the amounts outstanding under the Amended
Pilot Line of Credit, which may require us to seek protection under
bankruptcy laws. In such a case, the trading price 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.
30
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Guarantees and Security
|
Loan
Description
|
Guarantees
|
Security
|
|
Amended
Pilot Line of Credit
(in
default)
|
●
Blue Dolphin
pledged its equity interests in NPS to Pilot to secure NPS’
obligations;
●
Blue Dolphin, LE,
LRM, and LEH have each guaranteed NPS’
obligations.
|
●
NPS
receivables;
●
NPS assets,
including a tank lease (the “Tank Lease”);
●
LRM
receivables.
|
Representations, Warranties, and Covenants
The
Amended Pilot Line of Credit contains customary affirmative and
negative covenants and events of default. In a April 30, 2019,
Agreement Regarding Attornment of Tank Leases between Veritex, LE,
NPS, and Pilot, Veritex in its capacity as a secured lender of LE
and LRM, agreed to permit the continued performance of obligations
under a certain tank lease agreement if it were to foreclose on LE
property that NPS was leasing from LE so long as certain conditions
were met. The effectiveness of the Agreement Regarding Attornment
of Tank Leases was subject to certain conditions, including the
agreement and concurrence of the USDA.
Line of
credit payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
|
|
|
|
Amended Pilot Line of Credit
(in
default)
|
$
11,378
|
$
11,786
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(32
)
|
(219
)
|
|
Less:
Interest payable, short-term
|
(103
)
|
(103
)
|
|
|
$
11,243
|
$
11,464
|
31
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(12)
AROs
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.
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, and we
depreciated the amount added to property and equipment and
recognized accretion expense relating to the discounted liability
over the remaining life of the asset. At March 31, 2020 and
December 31, 2019, the liability was fully accreted. See
“Note (16)” to our consolidated financial statements
for disclosures related to decommissioning of our offshore
pipelines and platform assets and related risks.
ARO
liability as of the dates indicated was as follows:
|
|
March
31,
|
December
31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
AROs,
at the beginning of the period
|
$
2,565
|
$
2,565
|
|
Libilities
settled
|
(15
)
|
-
|
|
|
2,550
|
2,565
|
|
Less:
AROs, current portion
|
(2,550
)
|
(2,565
)
|
|
Long-term
AROs, at the end of the period
|
$
-
|
$
-
|
32
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(13)
Lease Obligations
Lease Obligations
Operating Lease
Office Lease
. BDSC has an office lease related to our
headquarters office in Houston, Texas. The 68-month operating lease
expires in 2023. BDSC has the option to extend the lease term for
one additional five (5) year period if notice of intent to extend
is provided to the lessor at least twelve (12) months before the
end of the current term. An Affiliate, LEH, subleases a portion of
this office space. Sublease income received from LEH
totaled approximately $0.01 million for both the three months ended
March 31, 2020 and 2019. See “Note (3)” to our
consolidated financial statements for additional disclosures
related to the Affiliate sub-lease.
Finance Lease
Crane
. In January 2018, LE entered a 24-month lease for the
purchase of a 20-ton crane for use at the Nixon facility. The lease
required a negligible monthly payment and matured in January
2020.
Backhoe Rent-to-Own Agreement
.
In May 2019,
LE entered into a 12-month
equipment rental agreement with the option to purchase the backhoe
at maturity. The backhoe is being used at the Nixon
facility.
The
following table presents the lease-related assets and liabilities
recorded on the consolidated balance sheet:
|
|
|
March 31,
|
December 31,
|
|
|
Balance Sheet Location
|
2020
|
2019
|
|
|
|
(in thousands)
|
|
|
Assets
|
|
|
|
|
Operating
lease ROU assets
|
Operating
lease ROU assets
|
$
787
|
$
787
|
|
Less:
Accumulated amortization on operating lease assets
|
Operating
lease ROU assets
|
(174
)
|
(138
)
|
|
|
613
|
649
|
|
|
|
|
|
|
|
Finance
lease assets
|
Property
and equipment, net
|
180
|
180
|
|
Less:
Accumulated amortization on finance lease assets
|
Property
and equipment, net
|
(40
)
|
(34
)
|
|
|
140
|
146
|
|
|
|
|
|
|
|
Total
lease assets
|
|
753
|
795
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
180
|
175
|
|
Finance
leases
|
Current
portion of lease liabilities
|
70
|
76
|
|
|
250
|
251
|
|
|
Noncurrent
|
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
518
|
564
|
|
Total
lease liabilities
|
|
$
768
|
$
815
|
33
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
|
Weighted
average remaining lease term in years
|
|
|
Operating
lease
|
3.42
|
|
Finance
leases
|
0.17
|
|
Weighted
average discount rate
|
|
|
Operating
lease
|
8.25
%
|
|
Finance
leases
|
8.25
%
|
34
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
The
following table presents information related to lease costs for
operating and finance leases:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
|
|
|
|
Operating
lease costs
|
$
51
|
$
51
|
|
Finance
lease costs:
|
|
|
|
Depreciation
of leased assets
|
6
|
4
|
|
Interest
on lease liabilities
|
2
|
1
|
|
Total
lease cost
|
$
59
|
$
56
|
The
table below presents supplemental cash flow information related to
leases as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
2019
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
|
|
Operating
cash flows for operating lease
|
$
88
|
$
57
|
|
Operating
cash flows for finance leases
|
$
2
|
$
1
|
|
Financing
cash flows for finance leases
|
$
6
|
$
9
|
35
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
As of
March 31, 2020, maturities of lease liabilities for the periods
indicated were as follows:
|
March 31,
|
Operating Lease
|
Financing Leases
|
Total
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
2020
|
$
180
|
$
70
|
$
250
|
|
2021
|
199
|
-
|
199
|
|
2022
|
220
|
-
|
220
|
|
2023
|
99
|
-
|
99
|
|
|
|
|
|
|
|
$
698
|
$
70
|
$
768
|
Future
minimum annual lease commitments that are
non-cancelable:
|
|
Operating
|
|
March 31,
|
Lease
|
|
|
(in
thousands)
|
|
2020
|
$
231
|
|
2021
|
234
|
|
2022
|
238
|
|
2023
|
101
|
|
|
$
804
|
36
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(14)
Income Taxes
Tax Provision
The
provision for income tax benefit (expense) for the periods
indicated was as follows:
|
|
Year
Ended March 31,
|
|
|
Current
|
|
|
|
Federal
|
$
(15
)
|
$
-
|
|
State
|
-
|
-
|
|
Deferred
|
|
|
|
Federal
|
698
|
(157
)
|
|
State
|
-
|
|
|
Change
in valuation allowance
|
(698
)
|
157
|
|
Total
provision for income taxes
|
$
(15
)
|
$
-
|
The
state of Texas, TMT is treated as an income tax for financial
reporting purposes.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
Deferred
tax assets:
|
|
|
|
NOL
and capital loss carryforwards
|
$
13,057
|
$
12,463
|
|
Business
interest expense
|
2,295
|
1,923
|
|
Start-up
costs (crude oil and condensate processing facility)
|
573
|
594
|
|
ARO
liability/deferred revenue
|
535
|
539
|
|
AMT
credit
|
-
|
50
|
|
Other
|
5
|
11
|
|
Total
deferred tax assets
|
16,465
|
15,580
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(6,422
)
|
(6,183
)
|
|
Total
deferred tax liabilities
|
(6,422
)
|
(6,183
)
|
|
|
10,043
|
9,397
|
|
|
|
|
|
Valuation
allowance
|
(10,043
)
|
(9,347
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
-
|
$
50
|
37
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
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.
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 fifty
(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
. 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, 2018
|
9,614
|
37,335
|
46,949
|
|
|
|
|
|
|
Net
operating losses
|
-
|
5,723
|
5,723
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
$
9,614
|
$
43,058
|
$
52,672
|
|
|
|
|
|
|
Net
operating losses
|
-
|
2,829
|
2,829
|
|
|
|
|
|
|
Balance at March 31, 2020
|
$
9,614
|
$
45,887
|
$
55,501
|
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 March 31, 2020 and December 31, 2019,
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 March
31, 2020 and December 31, 2019.
38
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
(15)
Earnings Per Share
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(
in
thousands, except share and per share amounts)
|
|
|
|
|
|
|
Net
income (loss)
|
$
(3,340
)
|
$
747
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
$
(0.27
)
|
$
0.07
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
common
stock outstanding and potential
dilutive shares of
common stock
dilutive
shares of common stock
|
12,327,365
|
10,975,514
|
Diluted
EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares of common
stock outstanding. Diluted EPS for the three months ended March 31,
2020 and 2019 was the same as basic EPS as there were no stock
options or other dilutive instruments outstanding.
(16)
Commitments and Contingencies
Amended and Restated Operating Agreement
See
“Note (3)” to our consolidated financial statements for
additional disclosures related to operation and management of all
Blue Dolphin properties by an Affiliate under the Amended and
Restated Operating Agreement.
Defaults Under Secured Loan Agreements with Third
Parties
See
“Note (1),” “Note (3),” “Note
(10),” and “Note (11)” to our consolidated
financial statements for additional disclosures related to defaults
under our secured and unsecured debt agreements.
Financing Agreements and Guarantees
Indebtedness
. See “Note (1),” “Note
(3),” “Note (10),” and “Note (11)” to
our consolidated financial statements for disclosures related to
Affiliate and third-party indebtedness and defaults
thereto.
Guarantees
. Affiliates provided guarantees on certain debt
of Blue Dolphin and its subsidiaries. The maximum amount of any
guarantee is equal to the principal amount and accrued interest,
which amounts are reduced as payments are made. See “Note
(1),” “Note (3),” “Note (10),” and
“Note (11)” to our consolidated financial statements
for additional disclosures related to Affiliate and third-party
guarantees associated with indebtedness and defaults
thereto.
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.
39
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Legal Matters
Resolved - GEL Settlement
. As previously disclosed, GEL was
awarded the GEL Final Arbitration Award in the aggregate amount of
$31.3 million. In July 2018, the Lazarus Parties and GEL entered
into the GEL Settlement Agreement. The GEL Settlement Agreement was
subsequently amended five (5) times to extend the GEL Settlement
Payment Date and/or modify certain terms related to the GEL Interim
Payments or the GEL Settlement Payment. During the period September
2017 to August 2019, GEL received the following amounts from the
Lazarus Parties to reduce the outstanding balance of the GEL Final
Arbitration Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$
3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$
22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed a stipulation of dismissal of claims against LE, and
(iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At both March 31, 2020
and December 31, 2019, the accrued arbitration award payable was
$0.
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
. 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 statutory
bonding requirements. Such obligations include the cost of plugging
and abandoning wells and decommissioning pipelines and platforms at
the end of production or service activities. Once plugging and
abandonment work has been completed, the collateral backing the
financial assurance is released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs. BDPL reasonably expects that successful
completion of its decommissioning obligations (discussed within
this “Note (16)” under ‘BSEE Offshore Pipelines
and Platform Decommissioning’) prior to BSEE’s August
2020 deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of March 31, 2020. At March 31, 2020 and December
31, 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
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, and
administrative proceedings. 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. If Veritex and/or
Pilot exercise their rights and remedies due to defaults under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
40
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Notes to Consolidated Financial Statements |
Nixon Facility Expansion
We
have
made and will 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,
installation of new and/or refurbished refinery process equipment,
and completion of a petroleum storage tank.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL
has pipelines and platform assets that are subject to BSEE’s
idle iron regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101. Management met with BOEM and BSEE
on August 15, 2019 to address BDPL’s plans with respect to
decommissioning its offshore pipelines and platform assets. BSEE
proposed that BDPL re-submit permit applications for pipeline and
platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020),
and develop and implement a safe boarding plan for submission with
such permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within 12 months (no later than August 15,
2020). BDPL timely submitted permit applications for
decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. In April 2020, BSEE issued an INC to BDPL for failure to
perform the required structural surveys for the GA-288C Platform.
BDPL requested an extension to the INC related to the structural
platform surveys, and BSEE approved BDPL’s extension request.
Completion of the platform surveys are required by May 30, 2020
with associated reports due to BSEE by June 8, 2020. BDPL expects
to complete approved, permitted decommissioning work by the BSEE
August 2020 deadline.
BSEE’s
deadline to complete decommissioning of BDPL’s offshore
pipelines and platform assets, as well as to complete the
structural platform surveys, does not relieve BDPL of its
obligations to remedy the BSEE INCs or of BSEE’s authority to
impose financial penalties. There can be no assurance that we will
be able to meet BSEE’s time tables. If BDPL fails to complete
decommissioning of the offshore pipelines and platform assets
and/or structural surveys of the platform are not completed by the
allowable time frames, BDPL will be subject to vigorous regulatory
oversight and enforcement, including but not limited to failure to
correct an INC, civil penalties, and revocation of BDPL’s
operator designation, which may have a material adverse effect on
our earnings, cash flows and liquidity.
We are
currently unable to predict the outcome of the BSEE INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of March 31, 2020. As of March 31, 2020, we
maintained $2.6 million in AROs related to abandonment of these
assets.
(17)
Subsequent Events
Sales of Unregistered Securities
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us that were not registered under the Securities
Act of 1933 and subsequent to the three months ended March 31,
2020:
On
April 30, 2020, we issued an aggregate of 231,065 restricted shares
of Common Stock to Jonathan Carroll, which represents payment of
the common stock component of guaranty fees for the period November
2019 through March 2020. The average cost basis was $0.69, the low
was $0.52, and the high was $1.07. For the foreseeable future,
management does not intend on paying Mr. Carroll the cash portion
of guaranty fees due to Blue Dolphin’s working capital
deficits. The cash portion will continue to be accrued and added to
the principal balance of the March Carroll Note. See “Note
(3)” to our consolidated financial statements for additional
disclosures related to Affiliates and working capital deficits, as
well as for information related to the guaranty fee
agreements.
On
April 30, 2020, we also issued an aggregate of 135,084 restricted
shares of Common Stock to certain of our non-employee, independent
directors, which represents payment for services rendered to the
Board for the three month periods ended September 30, 2018, March
31, 2019, September 30, 2019, and March 31, 2020. The average cost
basis was $0.97, the low was $0.57, and the high was
$1.18.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act.
Amended and Restated Operating Agreement
The
Amended and Restated Operating Agreement was set to expire on April
1, 2020. However, the Amended and Restated Operating Agreement was
renewed and approved by the Board on May 14, 2020 with an effective
date of April 1, 2020. Key terms of the Amended and Restated
Operating Agreement follow:
Term
. The term begins on the effective date and expires upon
the earliest to occur of the following: (a) upon the third
anniversary of the effective date, which termination date shall be
April 1, 2023, (b) upon written notice of either party upon
the material breach of the agreement by the other party, or (c)
upon 90 days’ notice by the Board if the Board determines
that the Amended and Restated Operating Agreement is not in the
best interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and/or
BDSC.
Compensation
. For services rendered: (a) Blue Dolphin, LE,
LRM, NPS, BDPL, BDPC and BDSC shall reimburse LEH at cost for all
direct expenses, either paid directly by LEH or financed with
LEH’s credit card. Amounts payable to LEH shall be invoiced
by LEH weekly, but may be reimbursed sooner and (b) Blue Dolphin
shall also pay to LEH a management fee equal to 5% of all
consolidated operating costs, excluding crude costs, depreciation,
amortization and interest.
The
foregoing summarizes the material terms of the Amended and Restated
Operating Agreement. This summary does not purport to be complete
and is qualified in its entirety by reference to the full text of
the agreement, which is filed as Exhibit 10.1 to this
report.
Together,
Jonathan Carroll and LEH own approximately 82% of Blue
Dolphin’s Common Stock.
See
“Note (3)” of our consolidated financial statements and
“Part II, Item 5. Other Information” for additional
disclosures related to Affiliate transactions, including the
Amended and Restated Operating Agreement.
41
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Management’s Discussion and Analysis is our analysis of our
financial performance, financial condition, and significant trends
that may affect future performance. All statements in this section,
other than statements of historical fact, are forward-looking
statements that are inherently uncertain. See “Important
Information Regarding Forward-Looking Statements” for a
discussion of the factors that could cause actual results to differ
materially from those projected in these statements. You should
read the following discussion together with the financial
statements and the related notes included elsewhere in this
Quarterly Report, as well as with the business strategy, risk
factors, and financial statements and related notes included
thereto in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019.
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Our assets are primarily organized in two
segments: refinery operations (owned by LE) and tolling and
terminaling services (owned by LRM and NPS). Active subsidiaries
that are reflected in corporate and other include BDPL (inactive
pipeline assets), BDPC (inactive leasehold interests in oil and gas
wells), and BDSC (administrative services). See “Note
(4)” to our consolidated financial statements for more
information related to our business segments and properties. Blue
Dolphin was formed in 1986 as a Delaware corporation and is traded
on the OTCQX under the ticker symbol
“BDCO”.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Note (3)” to our consolidated
financial statements for additional disclosures related to
Affiliate agreements and arrangements and risks associated with
working capital deficits.
Business Operations Update
The
recent outbreak of COVID-19 and its development into a pandemic in
March 2020 has resulted in significant economic disruption
globally, including in the United States. Governmental authorities
around the world have taken actions, such as stay-at-home orders
and other social distancing measures, to prevent the spread of
COVID-19 that has restricted travel, public gatherings, and the
overall level of individual movement and in-person interaction
across the globe. This has, in turn, significantly reduced global
economic activity and negatively impacted many businesses. Airlines
have dramatically reduced flights and motor vehicle usage has
significantly declined at a time when seasonal driving patterns
typically result in an increase of consumer demand for certain
refined petroleum products.
As a
result of the COVID-19 pandemic, there has also been a decline in
the demand for, and thus also the market prices of, crude oil, and
most of our refined products. In addition, global crude oil
production levels have not declined despite lower demand and
storage capacity constraints for crude oil and refined products,
which has intensified the decline in crude oil prices and has
contributed to an increase in crude oil price volatility. The
decrease in demand for refined petroleum products coupled with the
decline in the price of crude oil has resulted in a significant
decrease in the price of refined petroleum products. The purchase
price of crude oil and the selling price of refined products impact
our revenue, cost of goods sold, operating income, and liquidity.
In addition, declines in the market prices of crude oil and refined
products below their inventory carrying values results in a write
down in the value of our inventories and an adjustment to cost of
goods sold.
Many
uncertainties remain with respect to COVID-19, including its
resulting economic effects, and we are unable to predict the
ultimate economic impacts from COVID-19 on our business and how
quickly national economies can recover once the pandemic subsides.
However, the adverse impact of the economic effects on us have been
and will likely continue to be significant. We believe we have
proactively addressed many of the known impacts of COVID-19 to the
extent possible and we will strive to continue to do so, but there
can be no assurance that these or other measures will be fully
effective.
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:
Defaults Under Secured Loan Agreements with Third
Parties
. Defaults under our
secured loan agreements with third parties include loans with
Veritex in the original aggregate principal amount of $35.0
million, which are guaranteed 100% by the USDA, and a line of
credit agreement with Pilot in the principal amount of $13.0
million. Certain of our related-party debt is also in default. See
“Note (3)” of our consolidated financial statements for
disclosures related to related-party debt.
42
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Veritex Loan Agreements
In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE
received notification from Veritex regarding events of default
under our secured loan agreements, including, but not limited to,
the occurrence of the GEL Final Arbitration Award, associated
material adverse effect conditions, failure by LE to replenish a
$1.0 million payment reserve account, and the occurrence of events
of default under our other secured loan agreements with Veritex.
Further, Veritex informed obligors that it would consider a final
confirmation of the GEL Final Arbitration Award to be a material
event of default under the loan agreements. Veritex did not
accelerate or call due our secured loan agreements considering then
ongoing settlement discussions between GEL and the Lazarus Parties.
Instead, Veritex expressly reserved all its rights, privileges and
remedies related to events of default.
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE
received notification from Veritex that the bank agreed to waive
certain covenant defaults and forbear from enforcing its remedies
under our secured loan agreements subject to: (i) the agreement and
concurrence of the USDA and (ii) the replenishment of the payment
reserve account on or before August 31, 2019. Following the GEL
Settlement, the associated mutual releases became effective and GEL
filed a stipulation of dismissal of claims against LE. As of the
date of this report, LE had not replenished the payment reserve
account and obligors were still in default under our other secured
loan agreements with Veritex.
At March 31, 2020, LE and LRM were in violation of the debt service
coverage ratio, current ratio, and debt to net worth ratio
financial covenants under our secured loan agreements with Veritex.
As a result, the debt associated with these loans was classified
within the current portion of long-term debt on our consolidated
balance sheets at March 31, 2020 and December 31, 2019. We were
current on required monthly payments under our secured loan
agreements with Veritex as of the filing date of this
report.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under our secured loan
agreements with Veritex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the
payments of the debt, and/or (iii) Veritex, as first lien holder,
will provide future default waivers. Defaults under our secured
loan agreements with Veritex 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. Any exercise by
Veritex of its rights and remedies under our secured loan
agreements would have a material adverse effect on our business
operations, including crude oil and condensate procurement and our
customer relationships; financial condition; and results of
operations. Further, the trading price 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.
Amended Pilot Line of Credit
On May 4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and
Blue Dolphin, each a guarantor and collectively guarantors, a
notice demanding the immediate payment of the unpaid principal
amount and all interest accrued and unpaid, and all other amounts
owing or payable under the Amended Pilot Line of Credit. Pursuant
to the Amended Pilot Line of Credit, commencing on May 4, 2020, all
amounts outstanding under the Amended Pilot Line of Credit began to
accrue interest at a rate of fourteen percent (14%) per annum.
Failure of the borrower or any guarantor of paying the past due
obligations constituted an event of default. Pilot expressly
retained and reserved all its rights and remedies available to it
at any time, including without limitation, the right to exercise
all rights and remedies available to Pilot under the Amended Pilot
Line of Credit or applicable law or equity. Any exercise by Pilot
of its rights and remedies under the Amended Pilot Line of Credit
would have a material adverse effect on our business operations,
including crude oil and condensate procurement and our customer
relationships; financial condition; and results of
operations.
The borrower and guarantors are attempting to reach a negotiated
settlement with Pilot, and Pilot hopes to continue to work with the
borrower to settle its obligations under the Amended Pilot Line of
Credit. Additionally, the borrower and guarantors are working with
a lender on the possible refinance of amounts owing and payable
under the Amended Pilot Line of Credit. Our ability to repay,
refinance, replace or otherwise extend this credit facility is
dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. Given the current financial markets, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity, or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We can provide no
assurance that we will be able to consummate any such transaction
on terms that are commercially reasonable, on terms acceptable to
us or at all. In the event we were unsuccessful in such endeavors,
we may be unable to pay the amounts outstanding under the Amended
Pilot Line of Credit, which may require us to seek protection under
bankruptcy laws. In such a case, the trading price 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 “Note (10)” and “Note (11)” to our
consolidated financial statements for additional information
related to defaults under our secured loan agreements with Veritex
and Pilot and their potential effects on our business, financial
condition, and results of operations.
43
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Margin Deterioration and Volatility
. Steps taken to address the COVID-19 pandemic
globally and nationally and the actions of members of the OPEC and
other producer countries with respect to oil production and pricing
significantly impacted supply and demand in global oil and gas
markets, causing oil prices to decline sharply, as well as other
changes to the economic outlook in the near term. Such developments
included, but are not limited to, government-imposed temporary
business closures and voluntary shelter-at-home directives as well
as developments in production discussions between global oil
producers, and the effect thereof. Oil prices as well as demand are
expected to continue to be volatile as a result of the near-term
over-supply and the ongoing COVID-19 pandemic as changes in oil
inventories, industry demand and global and national economic
performance are reported, and we cannot predict when prices and
demand will improve and stabilize. We are currently unable to
estimate the impact these events will have on our future financial
position and results of operations. However, we expect margins will
likely remain weak during the second quarter 2020 until global
demand begins to recover. Accordingly, we can provide no assurances
that these events will not have a material adverse effect on our
financial position or results of operations.
Net Losses and Working Capital Deficits
. Net loss for the three months ended March 31,
2020 was $3.3 million, or a loss of $0.27 per share, compared to
net income of $0.7 million, or income of $0.07 per share, for the
three months ended March 31, 2019. The significant decrease was the
result of less favorable margins per bbl.
We had a working capital deficit of $62.4 million and $59.4 million
at March 31, 2020 and December 31, 2019, respectively. Excluding
the current portion of long-term debt, we had a working capital
deficit of $21.3 million and $19.6 million at March 31, 2020 and
December 31, 2019, respectively. We had cash and cash equivalents
and restricted cash (current portion) of $0.3 million and $0.05
million, respectively, at March 31, 2020. Comparatively, we had
cash and cash equivalents and restricted cash (current portion) of
$0.07 million and $0.05 million, respectively, at December 31,
2019.
Operating Risks
Successful execution of our business strategy depends on several
key factors, including, having adequate working capital 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 products. As
discussed under ‘going concern’ above and throughout
this report, we are currently unable to estimate the impact the
COVID-19 pandemic will have on our future financial position and
results of operations. Our business was deemed as an essential
business and, as such, has remained open. We have instituted
various initiatives throughout the company as part of our business
continuity programs, and we are working to mitigate risk when
disruptions occur. Management believes that it is taking all
prudent steps, however, there can be no assurance that our business
strategy will be successful, that Affiliates will continue to fund
our working capital needs when we experience working capital
deficits, that we will meet regulatory requirements to provide
additional financial assurance (supplemental pipeline bonds) and
decommission offshore pipelines and platform assets, that we will
be able to obtain additional financing on commercially reasonable
terms or at all, or that margins on our refined products will be
favorable. Further, if Veritex and/or Pilot exercise their rights
and remedies under our secured loan agreements, our business,
financial condition, and results of operations will be materially
adversely affected.
Business Strategy
Our primary business objective is to improve our financial profile.
However, as discussed above under ‘going concern’ and
‘operating risks,’ many uncertainties remain with
respect to COVID-19 and the global oil markets, and it is difficult
to accurately forecast and plan future business activities. We are
executing the following strategies, modified as necessary, to
reflect current economic and market conditions and other
circumstances:
|
|
|
|
|
Optimizing Existing Asset Base
|
|
●
Operating
safely and enhancing health, safety and environmental
systems.
●
Planning
and managing turnarounds and downtime.
|
|
|
|
|
|
|
|
|
|
Improving Operational Efficiencies
|
|
●
Reducing
or streamlining variable costs incurred in production.
●
Increasing
throughput capacity and optimizing product slate.
●
Increasing
tolling and terminaling revenue.
|
|
|
|
|
|
|
|
|
|
Seizing Market Opportunities
|
|
●
Taking
advantage of market opportunities as they arise.
|
|
|
|
|
There can be no assurance that our business strategy will be
successful, that Affiliates will continue to fund our working
capital needs when we experience working capital deficits, that we
will meet regulatory requirements to provide additional financial
assurance (supplemental pipeline bonds) and decommission offshore
pipelines and platform assets, that we will be able to obtain
additional financing on commercially reasonable terms or at all, or
that margins on our refined products will be favorable. If Veritex
and/or Pilot exercise their rights and remedies under our secured
loan agreements,
our business,
financial condition, and results of operations will be materially
adversely affected.
44
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
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. As noted above, management has determined that conditions
exist that raise substantial doubt about our ability to continue as
a going concern due to defaults under our secured loan agreements
with third parties, margin deterioration and volatility, and
historic net losses and working capital deficits. 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 on sustained positive operating margins and working
capital to sustain operations, including the purchase of crude oil
and condensate and payments on our secured debt agreements with
third parties. If we are unable to achieve these goals, our
business would be jeopardized, and we may not be able to
continue.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
|
Property
|
|
Key Products
Handled
|
|
Operating Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
●
Crude distillation
tower (15,000 bpd)
●
Petroleum storage
tanks
●
Loading and
unloading facilities
●
Land (56
acres)
|
|
Crude
Oil
Refined
Products
|
|
LE
|
|
Nixon,
Texas
|
|
|
|
|
|
|
|
|
Capital Improvement Expansion Project
. Since 2015, the Nixon
facility has been undergoing a capital improvement expansion
project. Refinery operations capital improvements have primarily
related to construction of new petroleum storage tanks. However,
smaller efficiency improvements have been made as well. In the
short-term, increased petroleum storage capacity has helped with
de-bottlenecking the refinery. In the long-term, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd.
Crude Oil and Condensate Supply
.
Operation of
the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate. We have a long-term crude
supply agreement in place with Pilot. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Pilot may
terminate the crude supply agreement at any time by providing us 60
days prior written notice. We may terminate the agreement upon the
expiration of the initial term or at any time during a renewal term
by giving Pilot 60 days prior written notice.
Pilot
also stores crude oil at the Nixon facility under a terminal
services agreement. Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. Although the initial
term of the terminal services agreement expired April 30, 2020, the
agreement renewed on a one-year evergreen basis. Either party may
terminate the terminal services agreement by providing the other
party 60 days prior written notice. However, the terminal services
agreement will automatically terminate upon expiration or
termination of the crude supply agreement.
Our
financial health could be materially and adversely affected by
defaults under our secured loan agreements, margin deterioration
and volatility, historic net losses and working capital deficits,
as well as termination of the crude supply agreement or terminal
services agreement with Pilot, which could impact our ability to
acquire crude oil and condensate. In addition, a sustained period
of low crude oil prices due to market volatility associated with
the COVID-19 pandemic may also result in significant financial
constraints on producers, which could result in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations.
45
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Products and Markets
. Our market is the Gulf Coast region of
the U.S., which is represented by the EIA as Petroleum
Administration for PADD 3. We sell our products primarily in
the U.S. within PADD 3. Occasionally, we sell refined products to
customers that export to Mexico.
The
Nixon refinery’s product slate is moderately adjusted based
on market demand. We currently produce a single finished product
– jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an
Affiliate, which is HUBZone certified. Our intermediate products
are primarily sold in nearby markets to wholesalers and refiners as
a feedstock for further blending and processing. See “Note
(3)” and “Note (16)” to our consolidated
financial statements for additional disclosures related to
Affiliates arrangements and transactions.
Customer
s
.
Customers
for our refined products include distributors, wholesalers and
refineries primarily in the lower portion of the Texas Triangle
(the Houston - San Antonio - Dallas/Fort Worth area). We have bulk
term contracts in place with most of our customers, including
month-to-month, six months, and up to one-year terms. Certain of
our contracts require 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 on a forward-looking basis, which could
result in higher or lower relative prices on future sales of our
refined products. See “Note (5)” to our consolidated
financial statements for disclosures related to concentration of
risk associated with significant customers.
Competition
.
Many of our competitors are
substantially larger than us and are engaged on a national or
international level in many segments of the oil and gas industry,
including exploration and production, gathering and transportation,
and marketing. These competitors may have greater flexibility in
responding to or absorbing market changes occurring in one or more
of these business segments. We compete primarily based on cost. Due
to the low complexity of our simple “topping unit”
refinery, we can be relatively nimble in adjusting our refined
products slate because of changing commodity prices, market demand,
and refinery operating costs.
Safety and Downtime
. Our
refinery operations are operated in a manner materially consistent
with industry safe practices and standards. These operations are
subject to regulations under OSHA, the EPA, and comparable state
and local requirements. Together, these regulations are designed
for personnel safety, process safety management, and risk
management, as well as to prevent or minimize the probability and
consequences of an accidental release of toxic, reactive,
flammable, or explosive chemicals.
Storage tanks used for
refinery operations are designed for crude oil and condensate and
refined products, and most are equipped with appropriate controls
that minimize emissions and promote safety. Our refinery operations
have response and control plans, spill prevention and other
programs to respond to emergencies.
The Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typical reason is excessive
heat or power outages from high winds and thunderstorms. Planned
t
urnarounds are used to repair, restore, refurbish, or
replace refinery equipment. Refineries typically undergo a major
turnaround every three to five years. Since the Nixon refinery was
placed back in service in 2012 (commonly referred to as
“recommissioning”), turnarounds are needed more
frequently for unanticipated maintenance or repairs.
We are particularly vulnerable to disruptions in our operations
because all our refining operations are conducted at a single
facility. Any scheduled or unscheduled downtime will result in lost
margin opportunity, potential increased maintenance expense, and a
reduction of refined products inventory, which could reduce our
ability to meet our payment obligations.
Tolling and Terminaling Operations
Our
tolling and terminaling segment consists of the following assets
and operations:
|
Property
|
|
Key Products
Handled
|
|
Operating Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
●
Petroleum storage
tanks
●
Loading and
unloading facilities
|
|
Crude
Oil
Refined
Products
|
|
LRM,
NPS
|
|
Nixon,
Texas
|
|
|
|
|
|
|
|
|
Capital Improvement Expansion Project
. As previously noted,
the Nixon facility has been undergoing a capital improvement
expansion project since 2015. Tolling and terminaling capital
improvements have primarily related to construction of new
petroleum storage tanks to significantly increase petroleum storage
capacity. Increased petroleum storage capacity will provide an
opportunity to generate additional tolling and terminaling
revenue.
Products and Customers
.
The
Nixon facility’s petroleum storage tanks and infrastructure
are primarily suited for crude oil and condensate and refined
products, such as naphtha, jet fuel, diesel and fuel oil. Storage
c
ustomers are typically refiners in the lower portion of the
Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon
facility via pipeline or from third parties via truck. Contract
terms range from month-to-month to three years.
Operations Safety
. Our tolling and terminal operations are
operated in a manner materially consistent with industry safe
practices and standards. These operations are subject to
regulations under OSHA and comparable state and local regulations.
Storage tanks used for terminal operations are designed for crude
oil and condensate and refined products, and most are equipped with
appropriate controls that minimize emissions and promote safety.
Our terminal operations have response and control plans, spill
prevention and other programs to respond to
emergencies.
46
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Inactive Operations
We own
certain other pipeline and facilities assets and have leasehold
interests in oil and gas properties. These assets, which are shown
below and included in corporate and other, are not operational and
are fully impaired.
|
Property
|
|
Operating Subsidiary
|
|
|
Location
|
|
|
|
|
|
|
|
|
Freeport
facility
●
Crude oil and
natural gas separation and dehydration
●
Natural gas
processing, treating, and redelivery
●
Vapor recovery
unit
●
Two onshore
pipelines
●
Land (162
acres)
|
|
BDPL
|
|
|
Freeport,
Texas
|
|
Offshore
Pipelines (Trunk Line and Lateral Lines)
|
|
BDPL
|
|
|
Gulf of
Mexico
|
|
Oil and
Gas Leasehold Interests
|
|
BDPC
|
|
|
Gulf of
Mexico
|
|
|
|
|
|
|
|
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 three months ended March
31, 2020 and 2019. See “Note (16)” to our consolidated
financial statements related to pipelines and platform
decommissioning requirements and related risks.
Pipeline and Facilities Safety
.
Although
our pipeline and facility assets are inactive, they require upkeep
and maintenance and are subject to safety regulations under OSHA,
PHMSA, BOEM, BSEE, and comparable state and local regulations. We
have response and control plans, spill prevention and other
programs to respond to emergencies related to these
assets.
Remainder
of Page Intentionally Left Blank
47
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Results of Operations
A
discussion and analysis of the factors contributing to our
consolidated financial results of operations is presented below.
The financial statements, together with the following information,
are intended to provide investors with a reasonable basis for
assessing our historical operations, but they should not serve as
the only criteria for predicting future performance.
Major Influences on Results of Operations
. Our results of
operations and liquidity are highly dependent upon the margins that
we receive for our refined products. The dollar per bbl price
difference between crude oil and condensate (input) and refined
products (output) is the most significant driver of refining
margins, and they have historically been subject to wide
fluctuations. Steps taken to address the COVID-19 pandemic globally
and nationally and the actions of members of the OPEC and other
producer countries with respect to oil production and pricing
significantly impacted supply and demand in global oil and gas
markets, causing oil prices to decline sharply, as well as other
changes to the economic outlook in the near term. Such developments
included, but are not limited to, government-imposed temporary
business closures and voluntary shelter-at-home directives as well
as developments in production discussions between global oil
producers, and the effect thereof. Oil prices as well as demand are
expected to continue to be volatile as a result of the near-term
over-supply and the ongoing COVID-19 pandemic as changes in oil
inventories, industry demand and global and national economic
performance are reported, and we cannot predict when prices and
demand will improve and stabilize. We are currently unable to
estimate the impact these events will have on our future financial
position and results of operations. Accordingly, we can provide no
assurances that these events will not have a material adverse
effect on our financial position or results of
operations.
How We Evaluate Our Operations
. Management uses certain
financial and operating measures to analyze segment performance.
These measures are significant factors in assessing our operating
results and profitability and include: segment contribution margin
(deficit), and refining gross profit (deficit) per bbl, tank rental
revenue, operation costs and expenses, refinery throughput and
production data, and refinery downtime. Segment contribution margin
(deficit) and refining gross profit (deficit) per bbl are non-GAAP
measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit
(Deficit) per Bbl
Segment
contribution margin (deficit) is used to evaluate both refinery
operations and tolling and terminaling while refining gross profit
(deficit) per bbl is a refinery operations benchmark. Both measures
supplement our financial information
presented in accordance with U.S. GAAP. Management uses these
non-GAAP measures to analyze our results of operations, assess
internal performance against budgeted and forecasted amounts, and
evaluate future impacts to our financial performance as a result of
capital investments. Non-GAAP measures have important limitations
as analytical tools. These non-GAAP measures, which are defined in
our glossary of terms, should not be considered a substitute for
GAAP financial measures. We believe these measures may help
investors, analysts, lenders, and ratings agencies analyze our
results of operations and liquidity in conjunction with our U.S.
GAAP results. See “Non-GAAP Reconciliations” within
this “Item 2.” and the financial statements within
“Item 1.” for a reconciliation of Non-GAAP measures to
U.S. GAAP.
Tank Rental Revenue
Tolling
and terminaling revenue primarily represents tank rental storage
fees associated with customer tank rental agreements. As a result,
tank rental revenue is one of the measures management uses to
evaluate the performance of our tolling and terminaling business
segment.
Operation Costs and Expenses
We
manage operating expenses in tandem with meeting environmental and
safety requirements and objectives and maintaining the integrity of
our assets. Operating expenses are comprised primarily of labor
expenses, repairs and other maintenance costs, and utility costs.
Expenses for refinery operations generally remain stable across
broad ranges of throughput volumes, but they can fluctuate from
period to period depending on the mix of activities performed
during that period and the timing of those expenses. Operation
costs for tolling and terminaling operations are relatively
fixed.
Refinery Throughput and Production Data
The
amount of revenue we generate from our refinery operations business
segment primarily depends on the volumes of crude oil and refined
products that we handle through our processing assets and the
volume sold to customers. These volumes are affected by the supply
and demand of, and demand for, crude oil and refined products in
the markets served directly or indirectly by our assets, as well as
refinery downtime.
Refinery Downtime
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Any scheduled or unscheduled downtime will
result in lost margin opportunity, potential increased maintenance
expense, and a reduction of refined products inventory, which could
reduce our ability to meet our payment obligations.
48
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Consolidated
Results
.
|
Highlights (in millions)
|
|
|
|
|
Three Months Ended March 31, 2020 (“Q1 2020”) Versus
March 31, 2019 (“Q1 2019”)
Overview
. Net loss for Q1 2020 was $3.3 million, or a loss
of $0.27 per share, compared to net income of $0.7 million, or
income of $0.07 per share, Q1 2019. The significant decrease was
the result of less favorable margins per bbl.
Total Revenue from Operations
.
Total revenue from operations for Q1
2020 decreased $6.9 million, or approximately 10%, to $62.0 million
compared to $68.9 million for Q1 2019. The decrease in refinery
operations revenue was the result of lower commodity pricing per
bbl on refined products sold due to market fluctuations associated
with the COVID-19 pandemic in Q1 2020. Tolling and terminaling
revenue increased approximately 3% as a result of increased tank
rental storage fees and fees collected for ancillary
services.
Total Cost of Goods Sold
.
Total cost of goods sold was $62.1
million for Q1 2020 compared to $65.5 million for Q1 2019. The $3.4
million, or 5%, decrease related to lower commodity prices per bbl
for crude oil and chemicals due to market fluctuations associated
with the COVID-19 pandemic in Q1 2020.
Gross Profit (Deficit)
.
We had a gross deficit of $0.1
million for Q1 2020 compared to gross profit of $3.4 million for Q1
2019. The significant decrease in gross profit between the periods
primarily related to lower margins per bbl due to market
fluctuations associated with the COVID-19 pandemic in Q1
2020.
General and Administrative Expenses
.
General and administrative expenses
for Q1 2020 compared to Q1 2019 were relatively flat at nearly $0.7
million and primarily consisted of insurance, taxes, and
professional fees.
Depletion, Depreciation and Amortization
.
Depletion, depreciation and
amortization expenses remained stable in Q1 2020 compared to Q1
2019 at approximately $0.6 million in both periods.
Total Other Income (Expense)
.
Total
other expense was $1.8 million in Q1 2020 compared to an expense of
$1.2 million in Q1 2019. Other expense primarily related to
interest expense associated with our secured loan agreements with
Veritex, related-party debt, and the line of credit with Pilot.
Interest expense increased in Q1 2020 compared to Q1 2019 as a
result of completion of certain CIP for which interest was no
longer being capitalized and the addition of the line of credit
with Pilot.
Remainder of Page Intentionally Left Blank
49
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Refinery Operations
. Our refinery operations business
segment is owned by LE. Assets within this segment consist of a
light sweet-crude, 15,000-bpd crude distillation tower, petroleum
storage tanks, loading and unloading facilities, and approximately
56 acres of land. Refinery operations revenue is derived from
refined product sales.
|
Highlights (in millions, except per bbl and throughput
amounts)
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Refined
product sales
|
$
60,897
|
$
67,858
|
|
Less:
Total cost of goods sold
|
(62,088
)
|
(65,516
)
|
|
Gross
profit (deficit)
|
(1,191
)
|
2,342
|
|
|
|
|
|
Sales
(Bbls)
|
1,141
|
1,029
|
|
|
|
|
|
Gross Profit (Deficit) per Bbl
|
$
(1.04
)
|
$
2.28
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
Net revenue
(2)
|
$
60,897
|
$
67,858
|
|
Intercompany
fees and sales
|
(617
)
|
(606
)
|
|
Operation
costs and expenses
|
(61,833
)
|
(65,302
)
|
|
Segment Contribution Margin (Deficit)
|
$
(1,553
)
|
$
1,950
|
50
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Calendar
|
91
|
90
|
|
Operating
|
(88
)
|
(79
)
|
|
Refinery Downtime (Days)
|
3
|
11
|
|
|
|
|
|
|
|
|
|
Refinery Throughput
|
|
|
|
bpd
|
13,452
|
13,254
|
|
bbls
|
1,183,746
|
1,047,059
|
|
Capacity
utilization rate
|
89.7
%
|
88.4
%
|
|
|
|
|
|
Refinery Production
|
|
|
|
bpd
|
13,183
|
12,947
|
|
bbls
|
1,160,091
|
1,022,829
|
|
Capacity
utilization rate
|
87.9
%
|
86.3
%
|
(1)
See “How We
Evaluate Our Operations” and “Non-GAAP
Reconciliations” within “Item 2.” for further
information regarding this non-GAAP measure.
(2)
Net revenue
excludes intercompany crude sales.
Q1 2020 Versus Q1 2019
●
Refining gross
deficit per bbl was $1.04 for Q1 2020 compared to a refining gross
profit per bbl of $2.28 in Q1 2019, representing a decrease of
$3.32 per bbl.
The
significant decrease related to lower margins due to market
fluctuations including ones associated with the COVID-19 pandemic
in Q1 2020.
●
Segment
contribution margin decreased approximately $3.6 million to a loss
of $1.6 million in Q1 2020 compared to a profit of $2.0 million in
Q1 2019. The significant decrease related to lower margins per bbl
due to market fluctuations associated with the COVID-19 pandemic in
Q1 2020.
●
Refinery downtime
in Q1 2020 improved by 8 days compared to Q1 2019; refinery
downtime in 2020 related to a boiler repair while refinery downtime
in Q1 2019 related to a maintenance turnaround and equipment
repairs.
●
On a bpd basis,
both refinery throughput and refinery production increased nearly
2% in Q1 2020 compared to Q1 2019. On a total bbls basis, refinery
throughput and refinery production improved approximately 13% in Q1
2020 compared to Q1 2019. The improvement primarily related to less
refinery downtime.
51
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Tolling and Terminaling
. Our tolling and terminaling
business segment is owned by LRM and NPS. Assets within this
segment include petroleum storage tanks and loading and unloading
facilities. Tolling and terminaling revenue is derived from tank
storage rental fees, tolling and reservation fees for use of the
naphtha stabilizer, and fees collected for ancillary services, such
as in-tank blending.
|
Highlights (in millions)
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Net revenue
(2)
|
$
1,103
|
$
1,069
|
|
Intercompany fees and sales
|
617
|
606
|
|
Operation costs and expenses
|
(255
)
|
(364
)
|
|
Segment contribution margin














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|
$
1,465
|
$
1,311
|
(1)
See “How We
Evaluate Our Operations” and “Non-GAAP
Reconciliations” within “Item 2.” for further
information regarding this non-GAAP measure.
(2)
Net revenue
excludes intercompany crude sales.
Q1 2020 Versus Q1 2019
●
Tolling and
terminaling net revenue increased approximately 3% in Q1 2020
compared to Q1 2019 primarily as a result of increased tank storage
rental fees and fees collected for ancillary services.
●
Intercompany fees
and sales, which reflect fees associated with an intercompany
tolling agreement tied to naphtha volumes, increased slightly in Q1
2020 compared to Q1 2019. Although naphtha sales volumes decreased,
naphtha production volumes increased slightly in Q1 2020 compared
to Q1 2019.
●
Segment
contribution margin increased nearly $0.2 million, or nearly 12%,
to approximately $1.5 million in Q1 2020 compared to approximately
$1.3 million Q1 2019. The improvement in segment contribution
margin related to increased tank storage rental fees and fees
collected for ancillary services and lower op
eration costs
and expenses.
52
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Non-GAAP Reconciliations
.
|
Reconciliation of Segment Contribution Margin
(Deficit)
|
|
|
|
Three Months Ended March 31,
|
|
|
|||
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
|
Refinery Operations
|
Tolling and Terminaling
|
Corporate and Other
|
|||
|
|
(in thousands)
|
|||||
|
|
|
|
|
|
|
|
|
Segment
contribution margin
|
$
(1,553
)
|
$
1,950
|
$
1,465
|
$
1,311
|
$
(59
)
|
$
(57
)
|
|
General and administrative
expenses
(1)
|
(304
)
|
(332
)
|
(68
)
|
(43
)
|
(419
)
|
(295
)
|
|
Depreciation
and amortization
|
(288
)
|
(465
)
|
(294
)
|
(99
)
|
(51
)
|
(26
)
|
|
Interest
and other non-operating income (expenses), net
|
(741
)
|
(783
)
|
(770
)
|
(196
)
|
(243
)
|
(218
)
|
|
Income
(loss) before income taxes
|
(2,886
)
|
370
|
333
|
973
|
(772
)
|
(596
)
|
|
Income
tax benefit
|
-
|
-
|
-
|
-
|
(15
)
|
-
|
|
Income (loss) before income taxes
|
$
(2,886
)
|
$
370
|
$
333
|
$
973
|
$
(787
)
|
$
(596
)
|
(1)
General and
administrative expenses within refinery operations include the LEH
operating fee.
53
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Capital Resources and Liquidity
Our
primary cash requirements relate to: (i) purchasing crude oil and
condensate for the operation of the Nixon refinery, (ii)
reimbursing LEH for direct operating expenses and paying the LEH
operating fee under the Amended and Restated Operating Agreement,
(iii) servicing debt, and (iv) completing construction in progress.
In instances where we experience a working capital deficit, we have
historically relied on Affiliates to meet our liquidity needs.
While we believe that we can fund our operations through revenue
from operations and Affiliate financing, we may not be able to,
among other things, (i) maintain our current general and
administrative spending levels; (ii) fund certain obligations as
they become due; and (iii) respond to competitive pressures or
unanticipated capital requirements. We cannot provide any assurance
that financing will be available to us in the future on acceptable
terms.
We had a working capital deficit of $62.5 million and $59.4 million
at March 31, 2020 and December 31, 2019, respectively. Excluding
the current portion of long-term debt, we had a working capital
deficit of $21.3 million and $19.6 million at March 31, 2020 and
December 31, 2019, respectively.
During Q1 2020, we did not receive funding under
any federal or other governmental programs to support our
operations as a result of the COVID-19 pandemic. The future impact
that COVID-19 will have on our business, cash flows, liquidity,
financial condition and results of operations will depend on future
developments, including, among other things, volatility in the
global capital markets, the ultimate geographic spread and severity
of the virus, the consequences of governmental and other measures
designed to prevent the spread of the virus, the development of
effective treatments, the duration of the outbreak, actions taken
by governmental authorities, customers, suppliers and other third
parties, workforce availability, and the timing and extent to which
normal economic and operating conditions
resume.
Debt Overview
.
|
Total Debt
|
|
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due 2034
(in
default)
|
$
21,586
|
$
21,776
|
|
Second Term Loan Due 2034
(in
default)
|
8,953
|
9,031
|
|
Amended Pilot Line of Credit
(in
default)
|
11,378
|
11,786
|
|
Notre Dame Debt
(in
default)
|
8,816
|
8,617
|
|
Related-Party
Debt
|
|
|
|
BDPL Loan Agreement
(in
default)
|
6,334
|
6,174
|
|
March Ingleside Note
(in
default)
|
1,024
|
1,004
|
|
March Carroll Note
(in
default)
|
1,173
|
997
|
|
June LEH Note
(in
default)
|
1,375
|
-
|
|
Total
Debt
|
60,639
|
59,385
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(52,395
)
|
(51,301
)
|
|
Less:
Unamortized debt issue costs
|
(1,877
)
|
(2,096
)
|
|
Less: Accrued interest payable
(in
default)
|
(6,367
)
|
(5,988
)
|
|
|
$
-
|
$
-
|
54
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Principal
payments on long-term debt totaled $0.7 million in Q1 2020 compared
to $0.3 million in Q1 2019. As of the filing date of this report,
we were current on required monthly payments under our secured loan
agreements with Veritex. No payments have been made under
subordinated loan agreements.
On
April 30, 2020, we issued an aggregate of 231,065 restricted shares
of Common Stock to Jonathan Carroll, which represents payment of
the common stock component of guaranty fees for the period November
2019 through March 2020. The average cost basis was $0.69, the low
was $0.52, and the high was $1.07. For the foreseeable future,
management does not intend on paying Mr. Carroll the cash portion
of guaranty fees due to Blue Dolphin’s working capital
deficits. The cash portion will continue to be accrued and added to
the principal balance of the March Carroll Note. See “Note
(3)” to our consolidated financial statements for additional
disclosures related to Affiliates and working capital deficits, as
well as for information related to the guaranty fee
agreements.
On
April 30, 2020, we also issued an aggregate of 135,084 restricted
shares of Common Stock to certain of our non-employee, independent
directors, which represents payment for services rendered to the
Board for the three month periods ended September 30, 2018, March
31, 2019, September 30, 2019, and March 31, 2020. The average cost
basis was $0.97, the low was $0.57, and the high was
$1.18.
Debt Defaults
. All of our debt is in default. Defaults under
our secured loan agreements with third parties include Veritex
events of default and financial covenant violations and a Pilot
event of default and debt acceleration. See ‘going
concern’ withing this Management’s Discussion and
Analysis section, as well as “Note (1),” “Note
(3),” “Note (10),” and “Note (11)” to
our consolidated financial statements for additional disclosures
related to Affiliate and third-party debt agreements, including
debt guarantees, and defaults in our debt obligations.
Concentration of Customers
. Our operations have a
concentration of customers who are refined petroleum product
wholesalers. These concentrations of customers may impact our
overall exposure to credit risk, either positively or negatively,
in that these customers may be similarly affected by changes in
economic or other conditions including the uncertainties concerning
COVID-19 and volatility in the global oil markets. Historically, we
have not had any significant problems collecting our accounts
receivable.
Contractual Obligations
.
Related-Party
|
Agreement/Transaction
|
Parties
|
Type
|
Effective
Date
|
Interest
Rate
|
Key
Terms
|
|
Amended
and Restated Guaranty Fee Agreement
|
Jonathan
Carroll - LE
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Amended
and Restated Guaranty Fee Agreement
|
Jonathan
Carroll - LRM
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
March
Carroll Note
(in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; matured 01/01/2019; interest still
accruing
|
|
March
Ingleside Note
(in
default)
|
Ingleside
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Ingleside under
previous Amended and Restated Tank Lease Agreement; matured
01/01/2019; interest still accruing
|
|
June
LEH Note
(in
default)
|
LEH
– Blue Dolphin
|
Debt
|
03/312017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under the
Amended and Restated Operating Agreement; reflects amounts owed to
Jonathan Carroll under guaranty fee agreements; matured 01/01/2019;
interest still accruing
|
|
Loan
and Security Agreement
(in
default)
|
LEH -
BDPL
|
Debt
|
08/15/2016
|
16.00%
|
2-year
term; $4.0 million principal amount; $0.5 million annual payment;
proceeds used for working capital; no financial maintenance
covenants; secured by certain BDPL property
|
Third-Party Debt
|
Loan
Description
|
Original
Principal Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
USDA-Guaranteed
Loans
|
|
|
|
|
|
|
First
Term Loan Due 2034 (
in
default
)
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ
Prime + 2.75%
|
Refinance
loan; capital improvements
|
|
Second
Term Loan Due 2034 (
in
default
)
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ
Prime + 2.75%
|
Refinance
bridge loan; capital improvements
|
|
Notre
Dame Debt (
in
default
)
|
$11.7
(1)
|
Jan
2018
|
No
payments to date; payment rights subordinated
(2)
|
16.00%
|
Working
capital; reduce balance of GEL Final Arbitration Award
|
|
Amended
Pilot Line of Credit (
in
default
)
|
$13.0
|
May
2020
|
----
|
14.00%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
(1)
Original principal
amount was $8.0 million; pursuant to a 2017 sixth amendment, the
Notre Dame Debt was amended to increase the principal amount by
$3.7 million; the additional principal was used to reduce the GEL
Final Arbitration Award by $3.6 million.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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.
Remainder
of Page Intentionally Left Blank
55
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
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 statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and pipelines and platforms 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.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs. BDPL reasonably expects that successful
completion of its decommissioning obligations (discussed within
this “Note (16)” under ‘BSEE Offshore Pipelines
and Platform Decommissioning’) prior to BSEE’s August
2020 deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of March 31, 2020. At March 31, 2020 and December
31, 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL
has pipelines and platform assets that are subject to BSEE’s
idle iron regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101. Management met with BOEM and BSEE
on August 15, 2019 to address BDPL’s plans with respect to
decommissioning its offshore pipelines and platform assets. BSEE
proposed that BDPL re-submit permit applications for pipeline and
platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020),
and develop and implement a safe boarding plan for submission with
such permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within 12 months (no later than August 15,
2020). BDPL timely submitted permit applications for
decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. In April 2020, BSEE issued an INC to BDPL for failure to
perform the required structural surveys for the GA-288C Platform.
BDPL requested an extension to the INC related to the structural
platform surveys, and BSEE approved BDPL’s extension request.
Completion of the platform surveys are required by May 30, 2020
with associated reports due to BSEE by June 8, 2020. BDPL expects
to complete approved, permitted decommissioning work by the BSEE
August 2020 deadline.
BSEE’s
deadline to complete decommissioning of BDPL’s offshore
pipelines and platform assets, as well as to complete the
structural platform surveys, does not relieve BDPL of its
obligations to remedy the BSEE INCs or of BSEE’s authority to
impose financial penalties. There can be no assurance that we will
be able to meet BSEE’s time tables. If BDPL fails to complete
decommissioning of the assets and/or structural surveys of the
platform by the allowable deadlines, BDPL will be subject to
vigorous regulatory oversight and enforcement, including but not
limited to failure to correct an INC, civil penalties, and
revocation of BDPL’s operator designation, which may have a
material adverse effect on our earnings, cash flows and
liquidity.
We are
currently unable to predict the outcome of the BSEE INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of March 31, 2020. As of March 31, 2020, we
maintained $2.6 million in AROs related to abandonment of these
assets.
56
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis |
Sources and Use of
Cash
.
|
Components of Cash Flows
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Cash Flows Provided By (Used In):
|
|
|
|
Operating
activities
|
$
(327
)
|
$
(31
)
|
|
Investing
activities
|
(198
)
|
(123
)
|
|
Financing
activities
|
722
|
169
|
|
Increase
(Decrease) in Cash and Cash Equivalents
|
$
197
|
$
15
|
Q1 2020 Versus Q1 2019
We had
a cash flow deficit from operations of $0.3 million for Q1 2020
compared to cash flow deficit from operations of approximately
$0.03 million for Q1 2019. The decrease in cash flow from
operations primarily related to loss from operations.
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.
Capital Improvement Expansion Project
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. However, smaller
efficiency improvements have been made as well. In the short-term,
increased petroleum storage capacity has helped with
de-bottlenecking the refinery. In the long-term, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd. Increased petroleum
storage capacity for tolling and terminaling operations provides an
opportunity to generate additional tolling and terminaling
revenue.
Q1 2020 Capital Expenditures
During
Q1 2020, capital expenditures totaled $0.7 million compared to $0.3
million during Q1 2019. Expenditures during Q1 2020 primarily
related to work on a petroleum storage tank. Work on the remaining
petroleum storage tank under the Nixon capital improvement
expansion project is nearly complete.
Future Expected Capital Expenditures
For the
next 12 to 18 months, we expect to continue to incur capital
expenditures related to facility and land improvements,
installation of new and/or refurbished refinery process equipment,
and completion of an unfinished petroleum storage tank. Capital
spending is being funded by cash flow from operations, Affiliates,
and available funding under a loan from Veritex that was secured in
2015. Unused amounts under the Veritex loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets. See “Note (10)” to our
consolidated financial statements for additional disclosures
related to borrowings for capital spending.
Off-Balance Sheet Arrangements
.
None.
57
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Management’s Discussion and Analysis and Internal Controls |
Accounting
Standards
.
Critical Accounting Policies and Estimates
Our
significant accounting policies, recent accounting developments are
described in “Note (2)” to our consolidated financial
statements. The nature of our business requires that we make
estimates and assumptions in accordance with U.S. GAAP. These
estimates and assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. The
COVID-19 outbreak has impacted these estimates and assumptions and
will continue to do so. Our estimates at the end of the first
quarter assumed no material impact from the disruptions caused by
COVID-19. While there was not a material impact to our consolidated
financial statements as of and for the three months ended March 31,
2020, our future assessment of the magnitude and duration of
COVID-19, as well as other factors, could result in material
impacts to our consolidated financial statements in future
reporting periods.
New Accounting Standards and Disclosures
New
accounting standards and disclosures are discussed in “Note
(2)” to our consolidated financial statements.
Not
applicable.
Evaluation of Disclosure Controls and Procedures
Under
the supervision of, and with the participation of our management,
including our Chief Executive Officer (principal executive officer
and principal financial officer), we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). As previously
reported in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019, based on our evaluation, our Chief
Executive Officer (principal executive officer, principal financial
officer, and principal accounting officer) concluded that our
disclosure controls and procedures were ineffective
due to certain material weaknesses and/or
significant deficiencies as described below:
|
●
|
Significant deficiency – There is currently not a process in
place for formal review of manual journal entries.
|
|
●
|
Material weakness – The company currently lacks resources to
handle complex accounting transactions. This can result in errors
related to the recording, disclosure and presentation of
consolidated financial information in quarterly, annual, and other
filings.
|
These
disclosure controls and procedures remained ineffective as of the
end of the period covered by this Quarterly Report. Management is
currently evaluating internal processes in order to take corrective
actions. Corrective actions may include
implementing formal policies, improving processes,
documenting procedures, and better defining segregation of duties
to improve financial reporting. These actions will be subject to
ongoing senior management review, as well as Audit Committee
oversight. Although we plan to complete remediation efforts as
quickly as possible, we cannot at this time estimate how long it
will take, and our initiatives may not prove to be successful in
fully remediating the identified weakness and
deficiency.
Changes in Internal Control over Financial Reporting
There
have been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the three months ended March 31,
2020 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
(See the above section “Evaluation of Disclosure Controls and
Procedures” for a discussion related to current ineffective
disclosure controls and procedures.)
Remainder
of Page Intentionally Left Blank
58
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Legal Proceedings |
Resolved - GEL Settlement
As
previously disclosed, GEL was awarded the GEL Final Arbitration
Award in the aggregate amount of $31.3 million. In July 2018, the
Lazarus Parties and GEL entered into the GEL Settlement Agreement.
The GEL Settlement Agreement was subsequently amended five (5)
times to extend the GEL Settlement Payment Date and/or modify
certain terms related to the GEL Interim Payments or the GEL
Settlement Payment. During the period September 2017 to August
2019, GEL received the following amounts from the Lazarus Parties
to reduce the outstanding balance of the GEL Final Arbitration
Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$
3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$
22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed a stipulation of dismissal of claims against LE, and
(iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At both March 31, 2020
and December 31, 2019, accrued arbitration award payable was
$0.
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
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 statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms at the end of production or
service activities. Once plugging and abandonment work has been
completed, the collateral backing the financial assurance is
released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs. BDPL reasonably expects that successful
completion of its decommissioning obligations (discussed within
this “Note (16)” under ‘BSEE Offshore Pipelines
and Platform Decommissioning’) prior to BSEE’s August
2020 deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of March 31, 2020. At March 31, 2020 and December
31, 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
59
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Legal Proceedings and Risk Factors |
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, and administrative proceedings.
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. If Veritex and/or Pilot exercise their rights and remedies
due to defaults under our secured loan agreements, our business,
financial condition, and results of operations will be materially
adversely affected.
In
addition to the other information set forth in this Quarterly
Report, careful consideration should be given to the risk factors
discussed under “Part I, Item 1A. Risk Factors” and
elsewhere in our Annual Report for the fiscal year ended December
31, 2019 as filed with the SEC. These risks and uncertainties could
materially and adversely affect our business, financial condition
and results of operations. Our operations could also be affected by
additional factors that are not presently known to us or by factors
that we currently consider immaterial to our business. Except as
noted below, there have been no material changes in our assessment
of our risk factors from those set forth in our Annual Report for
the fiscal year ended December 31, 2019.
The recent outbreak of COVID-19 and certain developments in the
global oil markets have had, and may continue to have, material
adverse consequences for general economic, financial and business
conditions, and could materially and adversely affect our business,
financial condition, results of operations and cash flows and those
of our customers and suppliers.
The
recent outbreak of COVID-19 and the responses of governmental
authorities and companies and the self-imposed restrictions by many
individuals across the world to stem the spread of the virus have
significantly reduced global economic activity, as there has been a
dramatic decrease in the number of businesses open for operation
and substantially fewer people across the world traveling to work
or leaving their home to purchase goods and services. This has also
resulted in, for example, a dramatic reduction in airline flights
and has reduced the number of automobiles on the road. As a result,
there has been a decline in the demand for the refined products
that we produce and sell.
Concerns
over the negative effects of COVID-19 on economic and business
prospects across the world have contributed to increased market and
oil price volatility and have diminished expectations for the
global economy. These factors, coupled with the emergence of
decreasing business and consumer confidence and increasing
unemployment resulting from the COVID-19 outbreak and the recent
abrupt oil price decline, may precipitate a prolonged economic
slowdown and recession. Our refinery utilization and operating
margins and other aspects of our business have been adversely
impacted by these developments. Any such prolonged period of
economic slowdown or recession, or a protracted period of depressed
prices for crude oil and our refined products or reduced margins
for the refined products we produce and sell could have significant
adverse consequences for our financial condition and the financial
condition of our customers and suppliers, and could diminish our
liquidity and negatively affect our ability to obtain adequate
crude oil volumes and to market certain of our products at
favorable prices, or at all.
Due to
declines in the market prices of products held in our inventories,
in future periods we may record an inventory write-down to cost of
goods sold to value certain of our inventories at the lower of cost
or market, which charge may be material. This expected inventory
valuation write-down will have a negative effect on our earnings.
Depending on future movements of refined product prices, future
inventory valuation adjustments could have a negative or positive
effect on our financial performance. In addition, a sustained
period of low crude oil prices may also result in significant
financial constraints on our crude oil supplier, which could result
in long term crude oil supply constraints and higher transportation
costs for our business. Such conditions could also result in an
increased risk that our customers may be unable to fully fulfill
their obligations in a timely manner, or at all. Any of the
foregoing events or conditions, or other unforeseen consequences of
COVID-19, could significantly adversely affect our business and
financial condition and the business and financial condition of our
customers.
The
future impact that COVID-19 will have on our business, results of
operations, financial condition, cash flows, and stock price will
depend on future developments, including, among others, volatility
in the global capital markets, the ultimate geographic spread and
severity of the virus, the consequences of governmental and other
measures designed to prevent the spread of the virus, the
development of effective treatments, the duration of the outbreak,
actions taken by governmental authorities, customers, suppliers and
other third parties, workforce availability, and the timing and
extent to which normal economic and operating conditions
resume.
60
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Unregistered Sales of Equity Securities, Defaults upon Senior Securities and Other Information |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us that were not registered under the Securities
Act of 1933 and subsequent to the three months ended March 31,
2020:
On
April 30, 2020, we issued an aggregate of 231,065 restricted shares
of Common Stock to Jonathan Carroll, which represents payment of
the common stock component of guaranty fees for the period November
2019 through March 2020. The average cost basis was $0.69, the low
was $0.52, and the high was $1.07. For the foreseeable future,
management does not intend on paying Mr. Carroll the cash portion
of guaranty fees due to Blue Dolphin’s working capital
deficits. The cash portion will continue to be accrued and added to
the principal balance of the March Carroll Note. See “Note
(3)” to our consolidated financial statements for additional
disclosures related to Affiliates and working capital deficits, as
well as for information related to the guaranty fee
agreements.
On
April 30, 2020, we also issued an aggregate of 135,084 restricted
shares of Common Stock to certain of our non-employee, independent
directors, which represents payment for services rendered to the
Board for the three month periods ended September 30, 2018, March
31, 2019, September 30, 2019, and March 31, 2020. The average cost
basis was $0.97, the low was $0.57, and the high was
$1.18.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act.
See
“Part I, Item. 1. Financial Statements – Note (10) and
Note (11)” for disclosures related to defaults on our
debt.
Not
applicable.
Amended and Restated Operating Agreement
The
Amended and Restated Operating Agreement was set to expire on April
1, 2020. However, the Amended and Restated Operating Agreement was
renewed and approved by the Board on May 14, 2020 with an effective
date of April 1, 2020. Key terms of the Amended and Restated
Operating Agreement follow:
Term
. The term begins on the effective date and expires upon
the earliest to occur of the following: (a) upon the third
anniversary of the effective date, which termination date shall be
April 1, 2023, (b) upon written notice of either party upon
the material breach of the agreement by the other party, or (c)
upon 90 days’ notice by the Board if the Board determines
that the Amended and Restated Operating Agreement is not in the
best interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and/or
BDSC.
Compensation
. For services rendered: (a) Blue Dolphin, LE,
LRM, NPS, BDPL, BDPC and BDSC shall reimburse LEH at cost for all
direct expenses, either paid directly by LEH or financed with
LEH’s credit card. Amounts payable to LEH shall be invoiced
by LEH weekly, but may be reimbursed sooner and (b) Blue Dolphin
shall also pay to LEH a management fee equal to 5% of all
consolidated operating costs, excluding crude costs, depreciation,
amortization and interest.
The
foregoing summarizes the material terms of the Amended and Restated
Operating Agreement. This summary does not purport to be complete
and is qualified in its entirety by reference to the full text of
the agreement, which is filed as Exhibit 10.1 to this
report.
Together,
Jonathan Carroll and LEH own approximately 82% of Blue
Dolphin’s Common Stock.
See
“Note (3)” and “Note 17”) of our
consolidated financial statements for additional disclosures
related to the Amended and Restated Operating
Agreement.
61
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
| Exhibits |
Exhibits Index
|
No.
|
Description
|
|
10.1
|
Amended
and Restated Operating Agreement effective as of April 1, 2020,
between Lazarus Energy Holdings, LLC, Blue Dolphin Energy Company,
Lazarus Energy, LLC, Lazarus Refining & Marketing, LLC, Nixon
Product Storage, LLC, Blue Dolphin Pipe Line Company, Blue Dolphin
Petroleum Company, and Blue Dolphin Services Co.
|
|
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.
|
|
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.
|
|
101.INS*
|
XBRL
Instance Document.
|
|
101.SCH*
|
XBRL
Taxonomy Schema Document.
|
|
101.CAL*
|
XBRL
Calculation Linkbase Document.
|
|
101.LAB*
|
XBRL
Label Linkbase Document.
|
|
101.PRE*
|
XBRL
Presentation Linkbase Document.
|
|
101.DEF*
|
XBRL
Definition Linkbase Document.
|
*
Filed
herewith
Remainder
of Page Intentionally Left Blank
62
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 3/31/20
|
|
Signature Page
|
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
BLUE DOLPHIN ENERGY COMPANY
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 15,
2020
|
|
By:
|
/s/
JONATHAN P. CARROLL
|
|
|
|
|
Jonathan
P. Carroll
Chief
Executive Officer, President,
Assistant
Treasurer and Secretary
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
|
63
TABLE OF CONTENTS
Part IItem 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits