(Exact name of registrant as specified in its charter)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to______
Commission File No.
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(Exact name of registrant as specified in its charter) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☐ | Smaller reporting company | ||
| Emerging growth company | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of shares of common stock, par value $0.01 per share outstanding as of May 15, 2023:
Table of Contents |
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Blue Dolphin Energy Company | March 31, 2023 │Page 2 |
| Table of Contents |
Glossary of Terms |
Glossary of Terms
Throughout this Quarterly Report on Form 10-Q, we have used the following terms:
Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH owned approximately 83% of the Common Stock as of the filing date of this report.
AMT. Alternative Minimum Tax.
Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019, between Pilot and NPS and subsequently amended on May 9, 2019, May 10, 2019, and September 3, 2019, the last amendment being Amendment No. 1; original line of credit amount was $13.0 million; NPS repaid all obligations owed to Pilot in October 2021. ARO. Asset retirement obligations.
Assignment Agreement. Pursuant to an Assignment Agreement effective between LEH, Ingleside, and Lazarus Capital, the March Carroll Note and March Ingleside Note were assigned to LEH under the June LEH Note effective December 31, 2022.
ASU. Accounting Standards Update.
AGO. Atmospheric gas oil (also known as atmospheric tower bottoms) 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.
BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016, between BDPL and LEH in the original principal amount of $4.0 million; interest accrues at 16.00% annually; guaranteed by certain BDPL property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; matured August 2018; as of the filing date of this report, in forbearance related to past defaults pursuant to the BDPL Forbearance Agreement.
BDPL Forbearance Agreement. Payment agreement between LEH and BDPL effective May 9, 2023; under the payment agreement, LEH and BDPL agreed to modify the payment terms of the BDPL-LEH Loan Agreement to satisfy in full BDPL’s $8.3 million obligation to LEH under the BDPL-LEH Loan Agreement by April 2027. Effective May 9, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the BDPL-LEH Loan Agreement decreased from 16.00% to 8.00% per year.
BDSC. Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.
BDSC-LEH Office Sub-Lease Agreement. Office sublease agreement in Houston, Texas between BDSC and LEH; sixty-eight-month (68) term effective January 1, 2018 expiring August 31, 2023; includes 6-month rent abatement period; rent approximately $0.003 million per month.
Blue Dolphin. Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.
bpd. Barrel per day; a measure of the bbls of daily output produced in a refinery or transported through a pipeline.
Blue Dolphin Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1, 2023, between Blue Dolphin and Jonathan Carroll; related to payoff of Blue Dolphin Term Loan Due 2051; fee paid equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051; fees payable 100% in cash. |
| Blue Dolphin Term Loan Due 2051 (as modified). An EIDL dated May 4, 2021 between Blue Dolphin and the SBA in the original principal amount of $0.5 million; the note was modified in February 2022 to increase the principal amount by $1.5 million to $2.0 million; additional principal used for working capital; interest accrues at 3.75%; maturity date May 2051; monthly principal and interest payment $0.01 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due November 2023; loan not forgivable; security includes all tangible and intangible personal property, including, but not limited to inventory, equipment, instruments, chattel paper, documents, letter of credit rights, accounts, deposit accounts, commercial tort claims, general intangibles, and as-extracted collateral; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
Board. Board of Directors of Blue Dolphin.
BOEM. Bureau of Ocean Energy Management.
BSEE. Bureau of Safety and Environmental Enforcement.
Capacity utilization rate. A percentage measure that indicates the amount of available capacity used in the Nixon refinery. 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).
CARES Act. Coronavirus Aid, Relief and Economic Security Act, which was passed by Congress in March 2020, to provide economic assistance related to the onset of the COVID-19 pandemic.
CIP. Construction in progress.
COVID-19. An infectious disease caused by a coronavirus called SARS-CoV-2; first identified in 2019 in Wuhan, the capital of China's Hubei province; the disease spread globally, resulting in a pandemic.
Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue Dolphin has 20,000,000 shares of Common Stock authorized and 14,921,968 shares of Common Stock issued and outstanding as of the filing date of this report.
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 refines 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 use as fuels or conversion to other products.
Crude Supply Agreement. Crude Supply Agreement between Pilot and LE dated May 7, 2019, as amended on November 11, 2019, which agreement was assigned by Pilot to Tartan pursuant to an Assignment of Contract dated March 20, 2020.
Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.
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Blue Dolphin Energy Company | March 31, 2023 │Page 3 |
| Table of Contents |
Glossary of Terms |
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 are 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 based on 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.
DLA. Defense Logistics Agency.
Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including severe weather, power failures, and preventive maintenance.
EIA. Energy Information Administration.
EIDL. Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19.
EPA. Environmental Protection Agency.
Eagle Ford Shale. A hydrocarbon-producing geological formation extending across South Texas from the Mexican border into East Texas.
Equipment Loan Due 2025. Installment sales contract dated October 13, 2020 between LE and Texas First in the original principal amount of $0.7 million; loan represents conversion of prior equipment rental agreement for a backhoe with an option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
Exchange Act. Securities Exchange Act of 1934, as amended.
FASB. Financial Accounting Standards Board.
FDIC. Federal Deposit Insurance Corporation.
Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products.
Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.
Freeport facility. Consists of processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas; facility is currently inactive.
GNCU. Greater Nevada Credit Union.
Greenhouse gases. Molecules in the Earth’s atmosphere, such as carbon dioxide, methane, and chlorofluorocarbons, that warm the atmosphere because they absorb some of the thermal radiation emitted from the Earth’s surface.
Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) 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.
Intercompany processing fees. Fees associated with an intercompany tolling agreement related to naphtha volumes. |
| Intermediate petroleum products. A petroleum product that might require further processing before being saleable to the ultimate consumer; 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.
Jet Fuel Purchase Agreements. Product agreements for the purchase of jet fuel from LEH to LE; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE expects to sell the products back to LEH under the Jet Fuel Sales Agreement.
Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel by LE to LEH; one-year term effective April 1, 2023 expiring earliest to occur of March 31, 2024, plus 30-day carryover, or delivery of maximum jet fuel quantity; LEH is awarded jet fuel contracts under preferential pricing terms due to being HUBZone certified.
June LEH Note. June 2017 promissory note between Blue Dolphin and LEH; for Blue Dolphin working capital; reflected amounts owed to LEH under the Second Amended and Restated Operating Agreement; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; pursuant to the Assignment Agreement, balances previously due under the March Carroll Note and March Ingleside Note were added to the balance due under the June LEH Note; pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note; as a result, the debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied.
Kissick Debt. Loan agreement originally entered into between LE and Notre Dame Investors, Inc. in the original principal amount of $8.0 million; debt held by John Kissick (the “Kissick Noteholder”) as of the date of this report; pursuant to a 2017 sixth amendment, the Kissick Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce LE’s prior obligation to GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC; subject to the Kissick Subordination Agreement; security includes subordinated deed of trust that encumbers the crude distillation tower and general assets of LE; interest accrues at 16.00%; no covenants; matured January 2019; as of the filing date of this report, in forbearance related to past defaults pursuant to the Kissick Forbearance Agreement; as of the filing date of this report, LE sought Veritex’s consent related to the Kissick Subordination Agreement.
Kissick Forbearance Agreement. Payment agreement between LE and Kissick Noteholder effective April 30, 2023; under the payment agreement, Kissick Noteholder and LE agreed to modify the payment terms of the Kissick Debt to satisfy in full LE’s $11.2 million obligation to Kissick Noteholder under the Kissick Debt by March 2025. Effective April 30, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the Kissick Debt decreased from 16.00% to 6.25% per year.
Kissick Subordination Agreement. Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments, as well as rights to security interest and liens, in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034, (ii) LE not making payments on the subordinated debt, and (iii) obtain consent from Sovereign (now Veritex) prior to receipt of payments related to the subordinated debt; as of the filing date of this report, LE was seeking Veritex’s consent under the Kissick Subordination Agreement related to the Kissick Forbearance Agreement.
Lazarus Capital. Lazarus Capital, LLC, an affiliate of Jonathan Carroll.
LE. Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin.
LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; related to payoff of LE Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash.
LE-Ingleside Master Service Agreement. Master Service Agreement between LE and Ingleside effective March 1, 2023 for storage of product intended for customer receipt by barge; three-year term; tank rental $0.50 per bbl per month. |
Blue Dolphin Energy Company | March 31, 2023 │Page 4 |
| Table of Contents |
Glossary of Terms |
LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE, Veritex, and guarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; security includes first priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory), assignment of all Nixon facility contracts, permits, and licenses, absolute assignment of Nixon facility rents and leases, including storage tank rental income, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.
LE Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
LEH. Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin as of the date of this report.
LEH Operating Fee. A management fee paid to LEH under the Second Amended and Restated Operating Agreement; calculated as 5.00% 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.
LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; related to payoff of LRM Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash.
LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015, between LRM, Veritex, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; security includes second priority lien on rights of LE in crude distillation tower and other collateral of LE, first priority lien on real property interests of LRM, first priority lien on all LRM fixtures, furniture, machinery, and equipment, first priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified storage tanks for which Veritex has a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.
LTRI. Lazarus Texas Refinery I, an affiliate of LEH.
March Carroll Note. March 2017 promissory note between Blue Dolphin and Lazarus Capital; reflected amounts owed to Jonathan Carroll under LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; note assigned to LEH; see “Assignment Agreement;” as of March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the assigned March Carroll Note; see “June LEH Note.” |
| March Ingleside Note. March 2017 promissory note between Blue Dolphin and Ingleside; represented periodic working capital to Blue Dolphin through conversion of accounts payable; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; note assigned to LEH; see “Assignment Agreement;” as of March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the assigned March Ingleside Note; see “June LEH Note.”
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.
Nixon facility. Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas.
Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas.
NOL. Net operating losses.
NPS. Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin.
NPS Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1, 2023, between NPS and Jonathan Carroll; related to payoff of NPS Term Loan Due 2031; fee paid equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031; fees payable 100% in cash.
NPS-LEH Terminal Services Agreement. Terminal Services Agreement between NPS and LEH effective November 1, 2022 for the storage of jet fuel by LEH; one-year term with one-year automatic renewals; tank rental approximately $0.2 million per month.
NPS Term Loan Due 2031. Loan Agreement dated September 20, 2021, between NPS, GNCU, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at 5.75%; maturity date October 2031; monthly principal and interest payment $0.1 million; interest-only payments first thirty-six (36) months; first principal payment due November 2024; purpose of loan working capital; security includes deed of trust lien on approximately 56 acres of land and improvements owned by LE, leasehold deed of trust lien on certain property leased by NPS from LE, and assignment of leases and rents and certain personal property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
NPS Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., related machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
Operating days. Represents the number of days in a period in which the crude distillation tower operated. Operating days are calculated by subtracting downtime in a period from calendar days in the same period.
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. |
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| Table of Contents |
Glossary of Terms |
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 $0.10 per share. Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding as of the filing date of this report.
Product slate. Represents type and quality of products produced.
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.
Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, produced by a refinery.
Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.
Refinery operations gross profit (deficit). Calculated as refinery operations revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.
Refining gross profit (deficit) per bbl. Calculated as refinery operations gross profit (deficit) divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.
ROU. Right-of-use.
SBA. Small Business Administration.
SEC. Securities and Exchange Commission.
Second Amended and Restated Operating Agreement. Affiliate agreement between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets; one-year term effective April 1, 2023 expiring April 1, 2024 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC.
Securities Act. The Securities Act of 1933, as amended.
Significant customer. A customer who represents more than 10% of our total revenue from operations.
Sour crude. Crude oil containing sulfur content greater than 0.5%.
Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product.
Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized based on their sulfur content, with lower sulfur fuels selling at a higher, premium price and higher sulfur fuels selling at a lower, discounted price.
Sweet crude. Crude oil containing sulfur content less than 0.5%.
Tartan. Tartan Oil LLC, an affiliate of Pilot.
Texas First. Texas First Rentals, LLC.
TCEQ. Texas Commission on Environmental Quality. |
| Throughput. The volume processed through a unit or a refinery or transported through a pipeline.
Tolling and terminaling gross profit (deficit). Calculated as tolling and terminaling revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.
TMT. Texas margins tax; a form of business tax imposed on an entity’s gross profit rather than on its net income.
Topping unit. A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.
Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO.
Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit, and sometimes the entire plant, 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.
Veritex Forbearance Agreement. Forbearance Agreement dated and effective November 18, 2022 between LE, LRM, Veritex, and guarantors (as defined therein); the forbearance period terminates on September 30, 2023.
WSJ Prime rate. The base rate on corporate loans posted by at least 70% of the ten largest U.S. as published by the Wall Street Journal. Effective May 4, 2023, the WSJ Prime rate increased to 8.25%.
XBRL. eXtensible Business Reporting Language.
Yield. The percentage of refined products that is produced from crude oil and other feedstocks. |
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| Table of Contents |
Important Information Regarding Forward-Looking Statements |
Important Information Regarding Forward-Looking Statements
This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals, and expectations concerning our market position, future operations, and profitability, are forward-looking statements. Forward-looking statements may be identified by 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:
Business and Industry |
| · | Geographical concentration of our refining operations and customers within the Eagle Ford Shale. | ||
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| · | Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers. | |
· | Our going concern status. |
| · | Failing to effectively execute new business strategies, such as renewable fuels. | |
· | Substantial debt in current liabilities, certain of which is currently in default. |
| · | Our ability to effect and integrate potential acquisitions. | |
· | Continued inability to meet financial covenants under secured loan agreements. |
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· | Ability to satisfy the terms of forbearance agreements. |
| Legal, Government, and Regulatory | ||
· | Restrictive covenants in our debt instruments that limit our ability to undertake certain types of transactions. |
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· | Increased costs of capital or a reduction in the availability of credit. |
| · | Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities. | |
· | Instability and volatility in the capital, credit, and commodity markets, and bank failures or other events affecting financial institutions. |
| · | Strict laws and regulations regarding personnel and process safety. | |
· | Public health threats, pandemics, and epidemics, such as COVID-19, and the adverse impacts on our business, financial condition, results of operations, and liquidity. |
| · | Uncertainty regarding the impact of current and future sanctions imposed by governments and other authorities, including the United States, the European Union, and the United Kingdom in response to the Russian military conflict with Ukraine. | |
· | Affiliate Common Stock ownership and transactions that could cause conflicts of interest. |
| · | General economic, political, or regulatory developments, including recession, inflation, interest rates, or changes in governmental policies relating to refined petroleum products, crude oil, or taxation. | |
· | Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products. |
| · | Assessment of penalties by regulatory agencies, such as BOEM, BSEE, OSHA and the TCEQ for violations. | |
· | Geographical concentration of our assets and customers in Texas. |
| · | Our estimates of future AROs related to our pipeline and facilities assets, which may increase. | |
· | Competition from companies with more significant financial and other resources. |
| · | Regulatory changes and other measures related to greenhouse gas emissions, climate change, and an ongoing desire to transition to greater renewable energy solutions. | |
· | Market changes in insurance that impact premium costs and available coverages. |
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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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· | Industry technological developments that outpace our ability to keep up. |
| · | A terrorist attack or armed conflict. | |
Downstream and Midstream Operations
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| · · | Increased activism against oil and gas companies. Actual or potential cybersecurity threats or loss of data privacy. | ||
· | Commodity price and refined product demand volatility, which can adversely affect our refining margins. |
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· | Crude oil, other feedstocks, and fuel and utility services price volatility. |
| Common Stock | ||
· | Availability and cost of crude oil and other feedstocks to operate the Nixon facility. |
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· | Equipment failure and maintenance, which lead to operational downtime. |
| · | Fluctuations in our stock price that may result in a substantial investment loss. | |
· | Potential impairment in the carrying value of long-lived assets, which could negatively affect our operating results. |
| · | Increasing attention to environmental, social, and governance (ESG) matters. | |
· | Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund. |
| · | Declines in our stock price due to share sales. | |
· | Critical personnel loss, labor actions, and workplace safety issues. |
| · | Dilution of the equity of current stockholders and the potential decline of our stock price due to the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue. | |
· | Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer. |
| · | The potential sale of shares in accordance with Rule 144, which may adversely affect the market. | |
· | Increases in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting our crude oil and condensate, feedstocks, and refined products. |
| · | The lack of dividend payments. | |
· | Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. |
| · | Failing to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act. | |
See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements 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.
Blue Dolphin Energy Company | March 31, 2023 │Page 7 |
| Table of Contents |
Financial Statements |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
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| March 31, |
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| December 31, |
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| 2022 |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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Accounts receivable, net |
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Accounts receivable, related party |
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Prepaid expenses and other current assets |
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Deposits |
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Inventory |
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Total current assets |
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LONG-TERM ASSETS |
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Total property and equipment, net |
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Operating lease right-of-use assets, net |
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Restricted cash, noncurrent |
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Surety bonds |
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Total long-term assets |
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TOTAL ASSETS |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Long-term debt less unamortized debt issue costs, current portion |
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Long-term debt, related party, current portion |
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Interest payable |
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Interest payable, related party |
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Accounts payable |
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Accounts payable, related party |
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Current portion of lease liabilities |
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Income taxes payable |
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Asset retirement obligations, current portion |
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Accrued expenses and other current liabilities |
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Total current liabilities |
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LONG-TERM LIABILITIES |
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Unearned contract renewal income, net of current |
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Long-term debt, net of current portion |
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Long-term debt, related party, net of current portion |
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Long-term interest payable, net of current portion |
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Long-term interest payable, related party, net of current portion |
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Total long-term liabilities |
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TOTAL LIABILITIES |
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Commitments and contingencies (Note 15) |
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STOCKHOLDERS' EQUITY |
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Common stock ($ |
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shares issued at March 31, 2023 and December 31, 2022)(1) |
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Additional paid-in capital |
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Accumulated deficit |
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TOTAL STOCKHOLDERS' EQUITY |
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
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(1) | Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At March 31, 2023 and December 31, 2022, there were no shares of preferred stock issued and outstanding. |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2023 │Page 8 |
| Table of Contents |
Financial Statements |
Consolidated Statements of Operations (Unaudited)
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| Three Months Ended March 31, |
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| 2023 |
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| 2022 |
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REVENUE FROM OPERATIONS |
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Refinery operations |
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Tolling and terminaling |
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Total revenue from operations |
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COST OF GOODS SOLD |
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Crude oil, fuel use, and chemicals |
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Other conversion costs |
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Total cost of goods sold |
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Gross profit |
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COST OF OPERATIONS |
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LEH operating fee, related party |
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Other operating expenses |
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General and administrative expenses |
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Depreciation and amortization |
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Accretion of asset retirement obligations |
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Total cost of operations |
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Income from operations |
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OTHER INCOME (EXPENSE) |
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Easement, interest and other income |
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Interest and other expense |
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Total other income (expense) |
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Income before income taxes |
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Income tax expense |
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Net Income |
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Income per common share: |
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Basic |
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Diluted |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2023 │Page 9 |
| Table of Contents |
Financial Statements |
Consolidated Statements of Stockholders’ Equity (Deficit)(Unaudited)
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| Additional |
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| Total |
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| Paid-In |
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| Shares Issued |
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| Par Value |
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| Deficit |
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Balance at December 31, 2022 |
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Net income |
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Balance at March 31, 2023 |
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| Additional |
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| Paid-In |
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Balance at December 31, 2021 |
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Net income |
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Balance at March 31, 2022 |
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The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2023 │Page 10 |
| Table of Contents |
Financial Statements |
Consolidated Statements of Cash Flows (Unaudited)
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| Three Months Ended March 31, |
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OPERATING ACTIVITIES |
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Net income |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization |
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Accretion of asset retirement obligations |
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Amortization of debt issue costs |
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Guaranty fees paid in kind |
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Related-party interest expense paid in kind |
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Deferred revenues and expenses |
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Changes in operating assets and liabilities |
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Accounts receivable |
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Accounts receivable, related party |
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Prepaid expenses and other current assets |
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Inventory |
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Accounts payable, accrued expenses and other liabilities |
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Accounts payable, related party |
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Net cash provided by operating activities |
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FINANCING ACTIVITIES |
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Proceeds from debt |
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Payments on debt principal |
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Net activity on related-party debt |
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Net cash used in financing activities |
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Net change in cash, cash equivalents, and restricted cash |
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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
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Supplemental Information: |
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Non-cash investing and financing activities: |
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Interest paid |
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The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | March 31, 2023 │Page 11 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Notes to Consolidated Financial Statements
(1) Organization
Company Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.
Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled approximately
Going Concern
In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations significantly improved for the three months ended March 31, 2023 versus the three months ended March 31, 2022, management determined that certain factors continue to present substantial doubt about our ability to continue as a going concern. These factors include significant current debt, which impacts our ability to meet debt covenants, and historical net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
Our significant current debt is the result of certain third-party loan agreements being classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2023 and December 31, 2022. Excluding accrued interest, we had current debt of $
Forbearance Agreements.
Veritex Forbearance Agreement. Pursuant to the Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18, 2022 through September 30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants. As part of the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $
Blue Dolphin Energy Company | March 31, 2023 │Page 12 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly payments of $0.5 million beginning in April 2023, continuing on the first of each month through February 2025. On March 1, 2025, LE shall make a final payment of $0.4 million to Kissick Noteholder. As part of the Kissick Forbearance Agreement, LE paid Kissick Noteholder $0.5 million in each of April and May 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to past defaults. As noted above, LE was seeking Veritex’s consent under the Kissick Subordination Agreement. See “Note (16)” for additional disclosures related to the Kissick Forbearance Agreement.
BDPL Forbearance Agreement. Pursuant to the BDPL Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the BDPL Forbearance Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest shall be incurred throughout the agreement term, including the interest-only payment period. As part of the BDPL Loan Agreement, BDPL paid LEH $0.05 million in May 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults. See “Note (16)” for additional disclosures related to the BDPL Forbearance Agreement.
Other Defaults. As of March 31, 2023 and the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available.
Favorable Refining Margins. The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting $
Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. While refining margins and liquidity improved significantly during the three months ended March 31, 2023 compared to the same period a year ago, the general outlook for the oil and natural gas industry for 2023 remains unclear given uncertainty surrounding the capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, COVID-19, the recession, and inflation. We can provide no assurances that refining margins and demand will remain at current levels.
Working Capital Improvements. Although we experienced net losses during three of the last five years, our financials continue to improve. We had $
We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. In April 2023, we entered into the Kissick Forbearance Agreement; in May 2023, we entered into the BDPL Forbearance Agreement; and in November 2022, we entered into the Veritex Forbearance Agreement. During Q1 2022, we successfully secured an additional $1.5 million in working capital through CARES Act loans. We also continue to explore opportunities to obtain capital and/or refinance debt.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and maintaining operation of the Nixon refinery.
Working Capital. As noted above, we have historically had working capital deficits primarily due to having significant current debt. Having sufficient working capital is necessary to meet contractual, operational, regulatory, and safety needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Second Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. To avoid business disruptions and manage cash flow, we optimize receivables and payables by prioritizing payments, optimize inventory levels based on demand, monitor discretionary spending, and carefully manage capital expenditures.
Blue Dolphin Energy Company | March 31, 2023 │Page 13 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Refining Margins. Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. To remain competitive in a volatile commodity price environment, we adjust throughput and production based on market conditions and adjust our product slate based on commodities pricing.
Nixon Refinery Operation. We maintain relationships with suppliers that source and repair key components of the Nixon refinery. We expect our suppliers to maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases, increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to mitigate supply-based risks that could cause a business disruption.
The capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, COVID-19, the recession, and inflation continue to evolve, and the extent to which these factors may impact working capital, commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if lenders exercise their rights and remedies under secured loan agreements that are in default, or if Tartan terminates the Crude Supply Agreement, our business, financial condition, and results of operations will be materially adversely affected.
(2) Principles of Consolidation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements, 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, 2022 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, 2022 as filed with the SEC. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or for any other period.
Significant Accounting Policies
A summary of significant Blue Dolphin accounting policies 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 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. Although commodity price volatility, the Russian-Ukrainian military conflict, COVID-19, recession, inflation, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of March 31, 2023 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
Blue Dolphin Energy Company | March 31, 2023 │Page 14 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Cash, Cash Equivalents, and Restricted Cash. 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. Although management historically deemed this a normal business risk, options to limit risk are being evaluated given current capital, credit, and commodity markets and financial institution health. Restricted cash, non-current portion at March 31, 2023 and December 31, 2022 reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:
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| March 31, |
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| December 31, |
| ||
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| 2023 |
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| 2022 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Restricted cash, noncurrent |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
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 $
Financial Instruments. Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that fluctuate with the prime rate.
Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. 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 typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of
Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from
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 refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Blue Dolphin Energy Company | March 31, 2023 │Page 15 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) terminal services agreements whereby a customer agrees to pay a certain fee per storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer. The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a straight-line basis over the term of the supply contract.
Income Taxes. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes.
Income taxes are calculated utilizing the applicable rates on items included in the determination of income for income tax purposes. Our effective tax rate may be different than what would be expected if the federal and state statutory rates were applied to income from continuing operations primarily because of amounts expensed for financial reporting that are not deductible for tax purposes.
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
Blue Dolphin Energy Company | March 31, 2023 │Page 16 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Deferred Taxes. Deferred income tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when we are unable to conclude that realization of the deferred income tax assets is more likely than not.
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we reassess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.
The capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, the recession, inflation, and COVID-19 could affect the value of certain of our long-lived assets. Management evaluated refinery and facilities assets for impairment as of March 31, 2023 and December 31, 2022. We did not record any impairment of our long-lived assets for the periods presented. However, impairment may be required in the future if losses are material, or as new opportunities arise, such as reconfiguration of the Nixon refinery into a renewable fuels facility.
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (11)” 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. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (14)” to our consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted. During the three months ended March 31, 2023, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our financial position, results of operations, or liquidity.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | March 31, 2023 │Page 17 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(3) Related-Party Transactions
Affiliate Agreements
Financial and Operational Agreements. Blue Dolphin and certain of its subsidiaries are parties to several financial and operational agreements with Affiliates.
Agreement/Transaction | Parties | Effective Date | Key Terms |
Blue Dolphin Guaranty Fee Agreement | Blue Dolphin Jonathan Carroll | 01/01/2023 | Related to payoff of Blue Dolphin $2.0 million SBA loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051 as consideration for providing his personal guarantee. |
Jet Fuel Purchase Agreements(1) | LE LEH | 04/21/2023 | Product agreements for the purchase of jet fuel from LEH to LE; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE expects to sell the products back to LEH under the Jet Fuel Sales Agreement. |
Jet Fuel Sales Agreement(1) | LE LEH | 04/01/2023 | Sale of jet fuel by LE to LEH; 1-year term expiring earliest to occur of 03/31/2024 plus 30-day carryover or delivery of maximum jet fuel quantity; LEH is awarded jet fuel contracts under preferential pricing terms due to being HUBZone certified. |
LE Amended and Restated Guaranty Fee Agreement | LE Jonathan Carroll | 01/01/2023 | Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034 as consideration for providing his personal guarantee. |
LE Master Services Agreement(1) | LE Ingleside | 03/01/2023 | For storage of products intended for customer receipt by barge; tank rental fee $0.1 million per month. |
LRM Amended and Restated Guaranty Fee Agreement | LRM Jonathan Carroll | 01/01/2023 | Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034 as consideration for providing his personal guarantee. |
NPS Guaranty Fee Agreement | NPS Jonathan Carroll | 01/01/2023 | Related to payoff of NPS $10.0 million GNCU loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031 as consideration for providing his personal guarantee. |
NPS Terminal Services Agreement | NPS LEH | 11/01/2022 | For LEH storage of jet fuel at the Nixon facility; tank rental fee $0.2 million per month; 1-year term on an evergreen basis; either party may cancel upon 60 days’ prior written notice. |
Office Sub-Lease Agreement | BDSC LEH | 01/01/2018 | 68-month term expiring 08/31/2023; office lease Houston, Texas; includes 6-month rent abatement period; rent approximately $0.01 million per month |
Second Amended and Restated Operating Agreement(1) | Blue Dolphin LE LRM NPS BDPL BDPC BDSC LEH | 04/01/2023 | 1-year term; expires 04/01/2024 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 |
| (1) | See “Note (16) Subsequent Events” for additional disclosures. |
Debt Agreements. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with Affiliates:
Loan Description | Parties | Maturity Date | Interest Rate | Loan Purpose |
June LEH Note (1) | Blue Dolphin LEH | Jan 2019 | 8.00% | Blue Dolphin working capital; reflects amounts owed to LEH under the Second Amended and Restated Operating Agreement |
BDPL-LEH Loan Agreement (in default) | BDPL LEH | Aug 2018 | 16.00% | Original principal amount of $4.0 million; Blue Dolphin working capital |
| (1) | See “Note (16) Subsequent Events” for additional disclosures. |
Pursuant to the Assignment Agreement, the March Ingleside Note and March Carroll Note were assigned to and assumed by LEH under the June LEH Note effective December 31, 2022.
Forbearance and Defaults.
BDPL Forbearance Agreement.
Blue Dolphin Energy Company | March 31, 2023 │Page 18 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Other Defaults. Pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note. As a result, the debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022, were also satisfied.
Covenants, Guarantees and Security.
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the June LEH Note. Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.
See “Notes (1) and (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations. See also “Note (16) Subsequent Events” for additional disclosures related to the BDPL Forbearance Agreement and June LEH Note.
Related-Party Financial Impact
Working Capital. We historically relied on Affiliates for funding during periods of working capital deficits. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party. Profitability from favorable refining margins and increased product demand improved cash flow from operations in the three months ended March 31, 2023. Continued favorable market conditions will increasingly enable us to meet our needs through cash flow from operations.
Consolidated Balance Sheets.
Accounts receivable, related party. Accounts receivable, related party related to the sale of jet fuel to LEH totaled $
Accounts payable, related party. Accounts payable, related party totaled $
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
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| March 31, |
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| December 31, |
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| 2023 |
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| 2022 |
| ||
|
| (in thousands) |
| |||||
| LEH |
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|
|
|
|
| ||
June LEH Note |
| $ |
|
| $ |
| ||
BDPL-LEH Loan Agreement (in default) |
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|
|
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LEH Total |
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| ||
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| Less: Long-term debt, related party, current portion |
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| ( | ) | |
| Less: Accrued interest payable, related party |
|
|
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| ( | ) | |
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| $ |
|
| $ |
| ||
Amounts Blue Dolphin owed to LEH under the June LEH Note and Seconded and Amended Restated Operating Agreement were net settled against amounts LEH owed to LE under the Jet Fuel Sales Agreement. At March 31, 2023, amounts owed by Blue Dolphin to LEH resulted in payoff of the June LEH Note. As a result, the debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022, were also satisfied. Excess amounts owed by LEH to LE were reflected in accounts receivable, related party on our consolidated balance sheet.
Consolidated Statements of Operations.
Total revenue from operations.
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| Three Months Ended March 31, |
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Refinery operations |
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LEH |
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Third-Parties |
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| Tolling and terminaling |
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LEH |
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Third-Parties |
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Blue Dolphin Energy Company | March 31, 2023 │Page 19 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Interest expense.
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| Three Months Ended March 31, |
| |||||
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| 2023 |
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| 2022 |
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| (in thousands) |
| |||||
| Jonathan Carroll |
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Guaranty Fee Agreements |
|
|
|
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| ||
First Term Loan Due 2034 (in default) |
| $ | 102 |
|
| $ | 107 |
|
Second Term Loan Due 2034 (in default) |
|
| 43 |
|
|
| 45 |
|
Blue Dolphin Term Loan Due 2051 |
|
| 10 |
|
|
| -- |
|
NPS Term Loan Due 2031 |
|
| 50 |
|
|
| -- |
|
| LEH |
|
|
|
|
|
|
|
|
BDPL-LEH Loan Agreement (in default) |
|
| 160 |
|
|
| 160 |
|
June LEH Note |
|
| - |
|
|
| 276 |
|
|
| $ | 365 |
|
| $ | 588 |
|
Other. BDSC received sublease income from LEH totaling $
(4) Revenue and Segment Information
We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer at the Nixon refinery. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Contract Balances
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
| Accounts receivable (including related-party), beginning of period |
| $ |
|
| $ |
| ||
| Accounts receivable (including related-party), end of period |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Unearned revenue, beginning of period |
| $ |
|
| $ |
| ||
| Unearned revenue, end of period |
|
|
|
|
|
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 20 |
| Table of Contents |
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, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Refinery operations |
| $ |
|
| $ |
| ||
Tolling and terminaling |
|
|
|
|
|
| ||
Total revenue from operations |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Intercompany processing fees(1) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
|
|
|
|
| ||
Total intercompany processing fees |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Costs of good sold(2) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
Total costs of goods sold |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
|
|
|
|
|
|
Refinery operations |
|
|
|
|
|
| ||
Tolling and terminaling |
|
|
|
|
|
| ||
Total gross profit |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Other operating and general and administrative expenses(3) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
Total other operating and general and administrative expenses |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
Total depreciation and amortization |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Interest and other non-operating expenses, net |
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
Total interest and other non-operating expenses, net |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Income (loss) before income taxes |
|
|
|
|
|
|
|
|
Refinery operations |
|
|
|
|
|
| ||
Tolling and terminaling |
|
|
|
|
|
| ||
Corporate and other |
|
| ( | ) |
|
| ( | ) |
Total income before income taxes |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Income tax expense |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Net income |
| $ |
|
| $ |
| ||
(1) | Fees associated with an intercompany tolling agreement related to naphtha volumes. |
(2) | Cost of goods sold within tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance). |
(3) | Other operating and general and administrative expenses within refinery operations include the LEH operating fee, related party, and accretion of asset retirement obligations. |
Blue Dolphin Energy Company | March 31, 2023 │Page 21 |
| Table of Contents |
Notes to Consolidated Financial Statements |
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
| Capital expenditures |
|
|
|
|
|
| ||
Refinery operations |
| $ |
|
| $ |
| ||
Tolling and terminaling |
|
|
|
|
|
| ||
Corporate and other |
|
|
|
|
|
| ||
Total capital expenditures |
| $ |
|
| $ |
| ||
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
|
|
|
| ||
| Identifiable assets |
|
|
|
|
|
| ||
Refinery operations |
| $ |
|
| $ |
| ||
Tolling and terminaling |
|
|
|
|
|
| ||
Corporate and other |
|
|
|
|
|
| ||
Total identifiable assets |
| $ |
|
| $ |
| ||
(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 $
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, non-exclusive crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. For the three months ended March 31, 2023 and 2022, we received approximately
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses and working capital deficits, and margin volatility. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations. To mitigate these risks, we have established relationships with other crude suppliers.
Blue Dolphin Energy Company | March 31, 2023 │Page 22 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Customers
Significant Customers. We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at March 31, |
| |||
|
|
|
|
|
|
|
|
|
| |||
March 31, 2023 |
|
|
|
|
| % |
| $ |
| |||
March 31, 2022 |
|
|
|
|
| % |
| $ |
| |||
One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to HUBZone certification. For the three months ended March 31, 2023 and 2022, the Affiliate accounted for approximately
Customer Concentration. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or negatively, which impacts our overall exposure to credit risk. Economic changes include the uncertainties related to the Russian military conflict with Ukraine, COVID-19, recession, inflation, and the associated volatility in the global commodities markets. Historically, we have had no significant problems collecting our accounts receivable.
Refined Product Sales
We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| (in thousands, except percent amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
LPG mix |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Naphtha |
|
|
|
|
| % |
|
|
|
|
| % | ||||
Jet fuel |
|
|
|
|
| % |
|
|
|
|
| % | ||||
HOBM |
|
|
|
|
| % |
|
|
|
|
| % | ||||
AGO |
|
|
|
|
| % |
|
|
|
|
| % | ||||
|
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements.
(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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Prepaid crude oil and condensate |
| $ |
|
| $ |
| ||
Prepaid insurance |
|
|
|
|
|
| ||
Other prepaids |
|
|
|
|
|
| ||
Prepaid easement renewal fees |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 23 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(7) Inventory
Inventory as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
HOBM |
| $ |
|
| $ |
| ||
Crude oil and condensate |
|
|
|
|
|
| ||
Naphtha |
|
|
|
|
|
| ||
AGO |
|
|
|
|
|
| ||
Chemicals |
|
|
|
|
|
| ||
Propane |
|
|
|
|
|
| ||
LPG mix |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Refinery and facilities |
| $ |
|
| $ |
| ||
Land |
|
|
|
|
|
| ||
Other property and equipment |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortiation |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
CIP |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
(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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Unearned revenue from contracts with customers |
| $ |
|
| $ |
| ||
Unearned contract renewal income |
|
|
|
|
|
| ||
Accrued fines and penalties |
|
|
|
|
|
| ||
Taxes payable |
|
|
|
|
|
| ||
Other payable |
|
|
|
|
|
| ||
Customer deposits |
|
|
|
|
|
| ||
Insurance |
|
|
|
|
|
| ||
Board of director fees payable |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 24 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(10) Third-Party Long-Term Debt
Loan Agreements
Loan Description |
Parties | Principal (in millions) | Origination / Maturity | Monthly Principal and Interest Payment |
Interest Rate |
Loan Purpose |
Veritex Loans |
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) (1) | LE Veritex | $ | $ | Refinance loan; capital improvements | ||
LRM Term Loan Due 2034 (in default) (1) | LRM Veritex | $ | $ | Refinance bridge loan; capital improvements | ||
Kissick Debt (in default)(2)(3)(4) | LE Kissick | $ | $ | Working capital | ||
GNCU Loan |
|
|
|
|
|
|
NPS Term Loan Due 2031(in default) (5) | NPS GNCU | $ | $ | Working capital | ||
SBA EIDLs |
|
|
|
|
|
|
Blue Dolphin Term Loan Due 2051 (as modified)(6) | Blue Dolphin SBA | $ | $ | Working capital | ||
LE Term Loan Due 2050(7) | LE SBA | $ | $ | Working capital | ||
NPS Term Loan Due 2050(7) | NPS SBA | $ | $ | Working capital | ||
Equipment Loan Due 2025(8) | LE Texas First | $ | $ | Equipment Lease Conversion |
(1) | At both March 31, 2023 and December 31, 2022, restricted cash, noncurrent, representing amounts held by Veritex in a payment reserve account, was $ |
(2) | Original principal amount was $ |
(3) | Pursuant to the Kissick Forbearance Agreement, |
(4) | Subject to the Kissick Subordination Agreement. |
(5) | Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First payment due in November 2024. |
(6) | Original principal amount was $ |
(7) | Payments deferred for thirty (30) months; first payment due February 2023; interest accrued during deferral period; loan not forgivable. |
(8) | In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility. |
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
| Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ |
|
| $ |
| ||
LRM Term Loan Due 2034 (in default) |
|
|
|
|
|
| ||
Kissick Debt (in default) |
|
|
|
|
|
| ||
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
|
|
|
|
| ||
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
|
|
|
|
| ||
LE Term Loan Due 2050 |
|
|
|
|
|
| ||
NPS Term Loan Due 2050 |
|
|
|
|
|
| ||
Equipment Loan Due 2025 |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt, net |
|
| ( | ) |
|
| ( | ) |
Less: Unamortized debt issue costs |
|
| ( | ) |
|
| ( | ) |
Less: Accrued interest payable |
|
| ( | ) |
|
| ( | ) |
|
| $ |
|
| $ |
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 25 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
| Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ |
|
| $ |
| ||
LRM Term Loan Due 2034 (in default) |
|
|
|
|
|
| ||
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Less: Accumulated amortization |
|
| ( | ) |
|
| ( | ) |
|
| $ |
|
| $ |
| ||
Amortization expense was $
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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Kissick Debt (in default) |
| $ |
|
| $ |
| ||
Veritex Loans |
|
|
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) |
|
|
|
|
|
| ||
LRM Term Loan Due 2034 (in default) |
|
|
|
|
|
| ||
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
|
|
|
|
| ||
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
|
|
|
|
| ||
LE Term Loan Due 2050 |
|
|
|
|
|
| ||
NPS Term Loan Due 2053 |
|
|
|
|
|
| ||
Equipment Loan Due 2025 |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Less: Accrued interest payable (in default) |
|
| ( | ) |
|
| ( | ) |
Long-term Interest Payable, Net of Current Portion |
| $ |
|
| $ |
| ||
The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 was classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2023 and December 31, 2022. Although the debt associated with the Kissick Debt was classified within the current portion of long-term debt on our consolidated balance sheet at December 31, 2022, the Kissick Debt was reclassified to long-term debt, net of current portion at March 31, 2023 as a result of the Kissick Forbearance Agreement.
Forbearance and Defaults
Veritex Forbearance Agreement. Pursuant to the Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18, 2022 through September 30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with past financial covenants. As part of the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $
Blue Dolphin Energy Company | March 31, 2023 │Page 26 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make
Other Defaults. As of March 31, 2023 and the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could 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 secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading price 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 “Notes (1) and (3)” 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.
Guarantees and Security
Loan Description | Guarantees | Security |
Veritex Loans |
|
|
LE Term Loan Due 2034 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees
| · 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 · $5.0 million life insurance policy on Jonathan Carroll |
LRM Term Loan Due 2034 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees
| · 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 · Substantially all assets |
Kissick Debt (in default)(2) | --- | · Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE |
GNCU Loan |
|
|
NPS Term Loan Due 2031 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees | · Deed of trust lien on approximately 56 acres of land and improvements owned by LE · Leasehold deed of trust lien on certain property leased by NPS from LE · Assignment of leases and rents and certain personal property |
SBA EIDLs |
|
|
Blue Dolphin Term Loan Due 2051 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
LE Term Loan Due 2050 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
NPS Term Loan Due 2050 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
Equipment Loan Due 2025 | --- | · First priority security interest in the equipment (backhoe). |
(1) | Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. |
(2) | Subject to the Kissick Subordination Agreement. |
Blue Dolphin Energy Company | March 31, 2023 │Page 27 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(11) AROs
Refinery and Facilities
Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that 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 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 decommissioning our pipelines and facilities assets, as well as plugging and abandoning 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. We recorded an additional increase in liability during the twelve months ended December 31, 2022 due to a further change in timing; BSEE mandated that decommissioning must occur prior to June 1, 2023. We will recognize accretion expense through the anticipated decommissioning date. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
ARO liability as of the dates indicated was as follows:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
AROs, at the beginning of the period |
| $ |
|
| $ |
| ||
Changes in estimates of existing obligations |
|
|
|
|
|
| ||
Accretion expense |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Less: AROs, current portion |
|
| ( | ) |
|
| ( | ) |
Long-term AROs, at the end of the period |
| $ |
|
| $ |
| ||
See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.
Blue Dolphin Energy Company | March 31, 2023 │Page 28 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(12) Lease Obligations
Lease Obligations
Office Lease. We maintain our corporate headquarters in Houston, Texas. The
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $
Tank Lease. LE leases tanks from Ingleside under the LE Master Services Agreement. Lease expense associated with the LE Master Services Agreement totaled $
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
|
|
|
| March 31, |
|
| December 31, |
| ||
| Balance Sheet Location |
| 2023 |
|
| 2022 |
| |||
|
|
|
| (in thousands) |
|
|
|
| ||
Assets |
|
|
|
|
|
|
|
| ||
Operating lease ROU assets |
| Operating lease ROU assets |
| $ |
|
| $ |
| ||
Less: Accumulated amortization on operating lease assets |
| Operating lease ROU assets |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
Total lease assets |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
Operating lease |
| Current portion of lease liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
Operating lease |
| Long-term lease liabilities, net of current |
|
|
|
|
|
| ||
Total lease liabilities |
|
|
| $ |
|
| $ |
| ||
| Weighted average remaining lease term in years |
| |||
Operating lease |
|
|
| |
Weighted average discount rate |
|
|
|
|
Operating lease |
|
| % | |
The following table presents information related to lease costs incurred for operating and finance leases:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Operating lease costs |
| $ |
|
| $ |
| ||
Short-term lease expense, related party |
|
| 100 |
|
|
| -- |
|
Total lease cost |
| $ |
|
| $ |
| ||
The table below presents supplemental cash flow information related to leases as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
Operating cash flows for operating lease |
| $ |
|
| $ |
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 29 |
| Table of Contents |
Notes to Consolidated Financial Statements |
As of March 31, 2023, maturities of lease liabilities for the periods indicated were as follows:
| March 31, |
| Operating Lease |
| |
|
| (in thousands) |
| |
|
|
|
| |
2024 |
| $ |
| |
|
| $ |
| |
Future minimum annual lease commitments that are non-cancelable:
|
| Operating |
| |
March 31, |
| Lease |
| |
|
| (in thousands) |
| |
2024 |
| $ |
| |
|
| $ |
| |
(13) Income Taxes
The Inflation Reduction Act ("IRA") was enacted into law in August 2022.
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
| Current |
|
|
|
|
|
| ||
Federal |
| $ | (115 | ) |
| $ | - |
|
State |
|
| ( | ) |
|
| ( | ) |
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
| ( | ) |
|
| ( | ) |
State |
|
|
|
|
|
| ||
Change in valuation allowance |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
| $ | ( | ) |
| $ | ( | ) |
GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.
Deferred income taxes as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
| Deferred tax assets: |
|
|
|
|
|
| ||
NOL and capital loss carryforwards |
| $ |
|
| $ |
| ||
Business interest expense |
|
|
|
|
|
| ||
Start-up costs (crude oil and condensate processing facility) |
|
|
|
|
|
| ||
ARO liability/deferred revenue |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
| Total deferred tax assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis differences in property and equipment |
|
| ( | ) |
|
| ( | ) |
| Total deferred tax liabilities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| Valuation allowance |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| Deferred tax assets, net |
| $ |
|
| $ |
| ||
Blue Dolphin Energy Company | March 31, 2023 │Page 30 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Deferred Income Taxes
Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.
NOL Carryforwards
Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than
The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $
NOL Carryforwards Available for Use. 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, 2021 |
| $ |
|
| $ |
|
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses used and expired |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2022 |
| $ |
|
| $ |
|
| $ |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses used and expired |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at March 31, 2023 |
| $ |
|
| $ |
|
| $ |
| |||
Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At March 31, 2023 and December 31, 2022, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of March 31, 2023 and December 31, 2022.
We have NOL carryforwards that remain available for future use. At March 31, 2023 and December 31, 2022, there were no uncertain tax positions for which a reserve or liability was necessary.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | March 31, 2023 │Page 31 |
| Table of Contents |
Notes to Consolidated Financial Statements |
(14) Earnings and Dividends Per Share
A reconciliation between basic and diluted income per share for the periods indicated was as follows:
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands, |
| |||||
|
| except share and per share amounts) |
| |||||
|
|
|
|
|
|
| ||
Net income |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share |
| $ |
|
| $ |
| ||
Basic and diluted shares used in computing earnings per share |
|
|
|
|
|
| ||
Diluted EPS for the three months ended March 31, 2023 and 2022 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding.
Shareholders are entitled to receive such dividends as may be declared by our Board out of funds legally available for such purpose. However, no dividend may be declared or paid unless after-tax profit was made in the preceding fiscal year, we are in compliance with covenants in our secured loan agreements, we are current on all required debt payments, and we have received prior written concurrence from certain of our lenders.
(15) Commitments and Contingencies
Second Amended and Restated Operating Agreement
See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the Second Amended and Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer 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 failing to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued a second INC to BDPL for failing to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020.
In August 2022, BSEE issued a third INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. In March 2023, BSEE issued a fourth INC to BDPL for failing to perform the required structural surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension until May 30, 2023 for completing the required surveys. BDPL is determining the feasibility of meeting BSEE’s May and June deadlines based on several factors, including vessel availability, sea conditions in the Gulf of Mexico, and completion of required pre-clearance operations, including the surveys. However, decommissioning is not likely to occur by BSEE’s deadline. If BDPL fails to remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of March 31, 2023 and December 31, 2022. At both March 31, 2023 and December 31, 2022, BDPL maintained $
Defaults Under Secured Loan Agreements with Third Parties and Related Parties
See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.
Blue Dolphin Energy Company | March 31, 2023 │Page 32 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Financing Agreements and Guarantees
Indebtedness. See “Notes (1), (3), and (10)” 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 “Notes (1), (3), and (10)” 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
The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failing to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.
Legal Matters
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved Matters.
Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day.
On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code (“TBCC”) of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential compromise of the dispute. The parties entered a Forbearance and Accommodation Agreement on January 12, 2023, with the forbearance period terminating on February 28, 2023. As part of the Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.481 million on January 13, 2023.
On March 31, 2023, NPS and Pilot executed an Amendment to the Forbearance and Accommodation Agreement (“March 31 Amendment") with the forbearance term extending to June 15, 2023. The March 31 Amendment required an additional payment by Pilot to NPS of approximately $1.08 million on April 3, 2023 and requires a conditional payment of $0.18 million on June 1, 2023. Pilot made the April 2023 payment.
Pursuant to the March 31 Amendment all deadlines in the Texas Action have been tolled through June 15, 2023.
As of the filing date of this report, no settlement has been reached.
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.
Blue Dolphin Energy Company | March 31, 2023 │Page 33 |
| Table of Contents |
Notes to Consolidated Financial Statements |
BDPL historically maintained $
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 did not record a liability on our consolidated balance sheets as of March 31, 2023 and December 31, 2022. At both March 31, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, $
OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the Nixon refinery. Under the agreement, we paid penalties totaling $
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $
Pilot Dispute Related to Set-Off Payments. In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If lenders 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.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that management’s efforts will result in a manageable outcome.
(16) Subsequent Events
BDPL Forbearance Agreement
Pursuant to the BDPL Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the BDPL Forbearance Agreement, BDPL agreed to make
Blue Dolphin Energy Company | March 31, 2023 │Page 34 |
| Table of Contents |
Notes to Consolidated Financial Statements |
Kissick Forbearance Agreement
Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement,
Jet Fuel Purchase Agreements
Reflects two transactions for the purchase of jet fuel from LEH to LE under Jet Fuel Purchase Agreements.
Jet Fuel Sales Agreement
Effective April 1, 2023, LE entered into a renewed Jet Fuel Sales Agreement with LEH.
LE Amended and Restated Master Services Agreement
On March 14, 2023, LE entered a Master Services Agreement with Ingleside effective March 1, 2023 for storage of products intended for customer receipt by barge.
Satisfaction of Debt
Pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note; as a result, debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied. All encumbrances that lender or assignee has or may have against Blue Dolphin were thereby terminated.
Second Amended and Restated Operating Agreement
The Second Amended and Restated Operating Agreement renewed effective April 1, 2023; the agreement was executed on March 14, 2023. The renewal term begins on the effective date and expires upon the earliest to occur of the following: (a) upon the first anniversary of the effective date, which termination date shall be April 1, 2024, (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 Second Amended and Restated Operating Agreement is not in the best interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and/or BDSC. With the exception of the term length, terms of the Second Amended and Restated Operating Agreement were the same as the Amended and Restated Operating Agreement. 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.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | March 31, 2023 │Page 35 |
| Table of Contents |
Management’s Discussion and Analysis |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is management’s perspective of our current financial condition and results of operations, as well as 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 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, 2022.
Overview and Outlook
Company 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 more than 1.25 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). 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). Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.
Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements– Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Going Concern
In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations dramatically improved for the three months ended March 31, 2023 (“Q1 2023”) versus the three months ended March 31, 2022 (“Q1 2022”), management determined that certain factors continue to present substantial doubt about our ability to continue as a going concern. Factors include significant current debt, which impacts our ability to meet debt covenants, and historical net losses and working capital and equity deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Management is working to alleviate these factors by entering into forbearance agreements with lenders, maximizing operation of the Nixon refinery given favorable refining margins, and pursuing opportunities to obtain capital and/or refinance debt. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing a petition for bankruptcy.
Business Operations Update
Our financial results continue to be favorably impacted by the ongoing recovery in the worldwide demand for petroleum-based transportation fuels, particularly jet fuel, while the worldwide supply of those products remained constrained. This supply and demand imbalance contributed to increases in the market prices of petroleum-based transportation fuels (as well as crude oil and other feedstocks that are processed to make these products) and thus in refining margins. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the crude oil and petroleum-based products markets resulting from the Russian-Ukrainian military conflict. Some refineries closed over the past two years and other refineries ceased crude oil processing in favor of transitioning to renewable fuel production. These negative impacts to the supply of petroleum-based products were exacerbated by the Russian-Ukrainian military conflict which began in the first quarter of 2022. Due to the conflict, countries and private market participants responded by refraining from purchasing and transporting Russian crude oil and petroleum-based products; however, some of the initial uncertainties and related impacts began to dissipate during the second half of 2022. Our operations were primarily impacted by these events through commodity price fluctuations.
The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting $16.8 million in net income in Q1 2023. Our operating results for Q1 2023, including operating results by segment, can be found within ‘—Results of Operations.’
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Management’s Discussion and Analysis |
Our operations generated $13.8 million in cash during Q1 2023. At March 31, 2023, we had $12.5 million in liquidity. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within ‘—Liquidity and Capital Resources.’
General Trends and Outlook
The economic effects from the COVID-19 pandemic on our business were and may again be significant. Although our business has recovered since the onset of the pandemic in March 2020, there continues to be uncertainty and unpredictability about the lingering impacts of COVID-19 to the worldwide economy, including in connection with the spread of variants and resulting restrictions, that could negatively affect our business, financial condition, results of operations , and liquidity in future periods. Additionally, many uncertainties remain surrounding the capital, credit, and commodity markets, financial institution health, the global supply and demand imbalance in the petroleum-based products market due to the Russian-Ukrainian military conflict, inflation, and a global economic recession. While it is difficult to predict the ultimate economic impacts that these factors may have on our operations and financial results, we have noted key factors below that impacted our results of operations during Q1 2023, and will likely impact our results of operations during the remainder of the year:
· | Jet fuel commodity pricing and demand. |
· | Light crude oil commodity pricing and demand. |
If refining margins become unfavorable for an extended period, reducing available working capital, and we are unable to raise additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operating.
Liquidity and Access to Capital Markets
We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. In April 2023, we entered into the Kissick Forbearance Agreement; in May 2023, we entered into the BDPL Forbearance Agreement; and in November 2022, we entered into the Veritex Forbearance Agreement. During Q1 2022, we successfully secured an additional $1.5 million in working capital through CARES Act loans.
There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all, or refinance existing debt. If we are unable to refinance or restructure debt, certain of which is currently in default, or forbear or waive defaults and lenders exercise their rights with respect to the debt, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as those related to COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operations.
Changes in Regulations
Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other GHG emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.
Business Strategy and Accomplishments
Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:
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Optimize Existing Asset Base |
| · | Maintain safe operations and enhance health, safety, and environmental systems. |
| · | Plan and manage turnarounds and downtime. | |
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Improve Operational Efficiencies |
| · | Reduce or streamline variable costs incurred in production. |
| · | Increase throughput capacity and optimize product slate. | |
| · | Increase tolling and terminaling revenue. | |
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Seize Market Opportunities |
| · | Leverage existing infrastructure to engage in renewable energy projects. |
| · | Take advantage of market opportunities as they arise. | |
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Management’s Discussion and Analysis |
Optimize Existing Asset Base
The Nixon facility experienced 3 days of downtime during Q1 2023 compared to 6 days of downtime during Q1 2022. Downtime in Q1 2023 related to maintenance and repairs; downtime in Q1 2022 related to maintenance and repairs and crude deficiencies associated with cash constraints. During the period, we continued to focus on improvements in day-to-day plant operations and identifying safety and mechanical process improvements to optimize plant operations.
Improve Operational Efficiencies
We continued to carefully manage product mix, product inventory levels, and crude acquisition during Q1 2023. While refinery throughput and production decreased during Q1 2023 compared to Q1 2022, sales volume increased during the same period as we reduced our inventory buildup from the end of 2022.
Seize Market Opportunities
Due to higher commodity prices and increased sales volume, gross profit significantly increased during Q1 2023 compared to Q1 2022. Gross profit totaled $20.5 million in Q1 2023 compared to $6.6 million for the same period a year earlier, reflecting an increase of $13.9 million.
In 2021, we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green energy growth. Rising demand for green energy is attributable to a variety of factors, including growing public support, U.S. governmental actions to increase energy independence, and environmental concerns related to climate change. During Q1 2023, management continued to have discussions with potential commercial partners. Management expects to continue with these efforts throughout 2023. As discussed throughout this report, our ‘going concern’ opinion may impact our renewable energy endeavors. Furthermore, reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects.
Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful. If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, or seeking 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.
Downstream Operations
Our refinery operations segment consists of the following assets and operations:
Property |
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Location | ||||||
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Nixon facility · Crude distillation tower (15,000 bpd) · Petroleum storage tanks (operations support) · Loading and unloading facilities · Land (56 acres) |
| Crude Oil Refined Products |
| LE |
| Nixon, Texas | ||||||
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, non-exclusive crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. For Q1 2023 and Q1 2022, we received approximately 1.0 million bbls, or 4.1%, and 1.1 million bbls, or 4.3%, respectively, of the contracted volume under the Crude Supply Agreement. As of March 31, 2023, we received approximately 14.6 million bbls, or 58.9%, of the total allowable contracted volume under the Crude Supply Agreement. During Q1 2023, the vast majority of our crude was sourced from Tartan under the Crude Supply Agreement. During Q1 2022, all of our crude oil was sourced from Tartan under the Crude Supply Agreement. At March 31, 2023, accounts payable for crude oil and condensate was $0.
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Management’s Discussion and Analysis |
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, significant current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations. To mitigate these risks, we have established relationships with other crude suppliers.
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 other countries, such as distillate to Mexico.
The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. An Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to HUBZone certification. The product sales agreement with the Affiliate has a one-year term expiring the earliest to occur of March 31, 2024 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.
Customers
Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require 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.
Competition
Many of our competitors are 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
We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Most of our storage tanks are equipped with leak detection devices. We also have response and control plans in place for spill prevention and emergencies.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.
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Management’s Discussion and Analysis |
Midstream Operations
Our tolling and terminaling segment consists of the following assets and operations:
Property |
| Key Products Handled |
| Operating Subsidiary |
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Location |
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Nixon facility · Petroleum storage tanks and terminal services · Loading and unloading facilities |
| Crude Oil Refined Products |
| LRM, NPS |
| Nixon, Texas |
Products and Customers
The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Our storage customers are typically from 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 midstream operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to OSHA regulations and comparable state and local regulators. 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.
Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in ‘corporate and other.’ Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three months ended March 31, 2023 and 2022. See “Part I, Item 1. Financial Statements – Note (15)” related to pipelines and platform decommissioning requirements and related risks.
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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 |
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| Freeport, Texas |
Offshore Pipelines (Trunk Line and Lateral Lines) |
| BDPL |
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| Gulf of Mexico |
Oil and Gas Leasehold Interests |
| BDPC |
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| Gulf of Mexico |
Pipeline and Facilities Safety
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.
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Blue Dolphin Energy Company | March 31, 2023 │Page 40 |
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Management’s Discussion and Analysis |
Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be read in conjunction with our financial statements in “Part I, Item 1. Financial Statements.” The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations
Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally result in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
While refining margins improved significantly over the past twelve months primarily due to increased commodity prices and demand, the general outlook for the oil and natural gas industry for 2023 remains unclear given uncertainty surrounding the capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, the recession, inflation, and COVID-19. We can provide no assurances that refining margins and demand will remain at current levels.
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, storage 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.
Refinery Operations Gross Profit (Deficit), Refining Gross Profit (Deficit) per Bbl, and Tolling and Terminaling Gross Profit (Deficit)
We use refinery operations gross profit (deficit) and tolling and terminaling gross profit (deficit) to evaluate the performance of our downstream and midstream operations. We use refining gross profit (deficit) per bbl as a downstream benchmark. All three measures supplement GAAP financial information presented. Management uses refinery operations gross profit (deficit), tolling and terminaling gross profit (deficit), and refining gross profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial performance considering potential capital investments. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity.
Storage Tank Rental Revenue and Ancillary Services Fees
Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees under terminal services agreements. As a result, tank rental revenue and ancillary services fees combined are one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.
Operation Costs and Expenses
We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs and expenses for tolling and terminaling operations are relatively fixed.
Refinery Throughput and Production Data
The amount of revenue we generate from the refinery operations business segment primarily depends on the volumes of crude oil that we process into refined products and the volume of refined products 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.
Blue Dolphin Energy Company | March 31, 2023 │Page 41 |
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Management’s Discussion and Analysis |
Consolidated Results
Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Q1 2023 Versus Q1 2022
Overview. Net income for Q1 2023 was $16.8 million, or income of $1.12 per share, compared to net income of $3.5 million, or income of $0.27 per share, in Q1 2022. The $13.3 million, or $0.85 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand.
Total Revenue from Operations. Total revenue from operations increased 4% to $114.6 million for Q1 2023 from $109.8 million for Q1 2022. Higher commodity prices and sales volume contributed to the increase in refinery operations revenue in Q1 2023. Refinery operations revenue in Q1 2023 would have been higher if not for an unplanned curtailment of crude deliveries in March 2023 under the Crude Supply Agreement, which adversely impacted refinery production. Tolling and terminaling operations revenue more than doubled between the periods, increasing from $0.9 million in Q1 2022 to $2.0 million in Q1 2023; however, the increase was primarily related to overlapping terminal services fees as Pilot exited its terminal services agreement with NPS for the storage of jet fuel.
Total Cost of Goods Sold. Total cost of goods sold decreased nearly 8% to $96.2 million for Q1 2023 from $104.1 million for Q1 2022. The decrease related to lower crude acquisition costs and lower throughput. Lower throughput in Q1 2023 was the result of an unplanned curtailment in crude deliveries in March 2023 under the Crude Supply Agreement.
Total Gross Profit. Gross profit totaled $20.5 million for Q1 2023 compared to gross profit of $6.6 million for Q1 2022. Gross profit in Q1 2023 was the result of favorable commodity prices and improved refinery uptime compared to the same period a year earlier. Gross profit in Q1 2023 would have been higher if not for an unplanned curtailment of crude deliveries in March 2023 under the Crude Supply Agreement, which adversely impacted refinery production.
Total General and Administrative Expenses. General and administrative expenses increased $0.6 million, or 93%, from $0.6 million in Q1 2022 to $1.2 million in Q1 2023. The increase primarily related to higher legal fees related to the Pilot dispute.
Total Depreciation and Amortization. Depreciation and amortization expenses remained flat at $0.7 million for both Q1 2023 and Q1 2022.
Total Other Income (Expense). Total other expense in Q1 2023 totaled $1.3 million compared to total other expense of $1.6 million in Q1 2022, representing a decrease of $0.3 million, or 16%. The decrease was due to lower related party interest expense in Q1 2023 compared to Q1 2022. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.
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Downstream Operations
Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.
Q1 2023 Versus Q1 2022
Refinery Downtime. Refinery downtime decreased from 6 days in Q1 2022 to 3 days in Q1 2023. Refinery downtime in Q1 2023 related to maintenance and repairs. Refinery downtime in Q1 2022 related to crude deficiencies associated with cash constraints (1 day) and maintenance and repairs (5 days).
Refinery Operations Gross Profit. Refining gross profit was $18.3 million for Q1 2023 compared to gross profit of $5.7 million in Q1 2022, representing an increase of $12.6 million. The increase in Q1 2023 related to favorable refining margins and improved product demand compared to the same period a year earlier. Refining gross profit in Q1 2022 was the result of lower margins and COVID-19 market fluctuations.
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Management’s Discussion and Analysis |
Refining Gross Profit per Bbl. On a per bbl basis, refining gross profit was $15.91 for Q1 2023 compared to gross profit of $5.48 for Q1 2022, representing an increase of $10.43 per bbl. The increase related to favorable commodity prices and increased refined product demand.
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| March 31, |
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Refinery operations revenue |
| $ | 114,640 |
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| $ | 109,757 |
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Less: intercompany processing fees(1) |
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| (576 | ) |
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| (653 | ) |
Less: cost of goods sold |
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| (95,799 | ) |
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Refinery operations gross profit |
| $ | 18,265 |
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| $ | 5,646 |
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Sales (bbls) |
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| 1,148 |
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| 1,031 |
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Refining gross profit per bbl |
| $ | 15.91 |
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| $ | 5.48 |
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(1)
Fees associated with an intercompany tolling agreement related to naphtha volumes.
Midstream Operations
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 storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer.
Q1 2023 Versus Q1 2022
Tolling and Terminaling Revenue. Tolling and terminaling revenue, which consists of storage tank rental and ancillary services fees, more than doubled from $0.9 million in Q1 2022 to $2.0 million in Q1 2023. The $1.1 million increase related to a temporary increase in terminal service fees associated with Pilot and a new related-party customer. The increase in storage tank rental fees was offset slightly by a decrease in intercompany processing fees related to naphtha volumes.
Tolling and Terminaling Gross Profit. Tolling and terminaling gross profit increased approximately $1.2 million from approximately $1.0 million in Q1 2022 to $2.2 million in Q1 2023. The increase related to temporary terminal service fees, which was offset by lower naphtha processing fees and operation costs and expenses.
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| March 31, |
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| 2023 |
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| 2022 |
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Tolling and terminaling revenue |
| $ | 2,021 |
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| $ | 926 |
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Intercompany processing fees(1) |
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| 576 |
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| 653 |
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Less: cost of goods sold |
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| (358 | ) |
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| (619 | ) |
Tolling and terminaling gross profit |
| $ | 2,239 |
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| $ | 960 |
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(1) | Fees associated with an intercompany tolling agreement related to naphtha volumes. |
Reconciliation.
Gross Profit (Deficit) by Segment.
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| 2023 |
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|
| 2022 |
| ||||||||
|
| Refinery Operations |
|
| Tolling and Terminaling |
|
| Corporate and Other |
|
| Total |
| ||||||||||||||||||||
|
| (in thousands) |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Revenue |
| $ | 114,640 |
|
| $ | 109,757 |
|
| $ | 2,021 |
|
| $ | 926 |
|
| $ | - |
|
| $ | - |
|
| $ | 116,661 |
|
| $ | 110,683 |
|
Intercompany processing fees |
|
| (576 | ) |
|
| (653 | ) |
|
| 576 |
|
|
| 653 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Cost of goods sold |
|
| (95,799 | ) |
|
| (103,458 | ) |
|
| (358 | ) |
|
| (619 | ) |
|
| - |
|
|
| - |
|
|
| (96,157 | ) |
|
| (104,077 | ) |
Gross profit |
|
| 18,265 |
|
|
| 5,646 |
|
|
| 2,239 |
|
|
| 960 |
|
|
| - |
|
|
| - |
|
|
| 20,504 |
|
|
| 6,606 |
|
Other operating and general and administrative expenses(1) |
|
| (478 | ) |
|
| (282 | ) |
|
| (470 | ) |
|
| (70 | ) |
|
| (530 | ) |
|
| (442 | ) |
|
| (1,478 | ) |
|
| (794 | ) |
Depreciation and amortization |
|
| (304 | ) |
|
| (307 | ) |
|
| (342 | ) |
|
| (342 | ) |
|
| (51 | ) |
|
| (52 | ) |
|
| (697 | ) |
|
| (701 | ) |
Interest and other non-operating expenses, net |
|
| (677 | ) |
|
| (717 | ) |
|
| (470 | ) |
|
| (418 | ) |
|
| (183 | ) |
|
| (457 | ) |
|
| (1,330 | ) |
|
| (1,592 | ) |
Income (loss) before income taxes |
|
| 16,806 |
|
|
| 4,340 |
|
|
| 957 |
|
|
| 130 |
|
|
| (764 | ) |
|
| (951 | ) |
|
| 16,999 |
|
|
| 3,519 |
|
Income tax expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (131 | ) |
|
| (41 | ) |
|
| (246 | ) |
|
| (41 | ) |
Net income (loss) |
| $ | 16,806 |
|
| $ | 4,340 |
|
| $ | 957 |
|
| $ | 130 |
|
| $ | (895 | ) |
| $ | (992 | ) |
| $ | 16,753 |
|
| $ | 3,478 |
|
(1) | Other operating and general and administrative expenses within refinery operations include the LEH operating fee, related party and accretion of asset retirement obligations. |
|
|
Blue Dolphin Energy Company | March 31, 2023 │Page 43 |
| Table of Contents |
Management’s Discussion and Analysis |
Capital Resources and Liquidity
We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Profitability from favorable refining margins and increased product demand improved cash flow from operations in Q1 2023. Continued favorable market conditions will increasingly enable us to meet our needs through cash flow from operations. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Second Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.
We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. In April 2023, we entered into the Kissick Forbearance Agreement; in May 2023, we entered into the BDPL Forbearance Agreement; and in November 2022, we entered into the Veritex Forbearance Agreement. During Q1 2022, we successfully secured an additional $1.5 million in working capital through CARES Act loans. We also continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.
Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, the capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, the recession, inflation, and COVID-19 continue to evolve, and the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence.
If refining margins become unfavorable for an extended period, reducing available working capital, and we are unable to raise additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operating.
Working Capital
We had $13.9 million and $45.2 million in working capital deficits at March 31, 2023 and December 31, 2022, respectively, representing a $31.3 million improvement. Excluding the current portion of long-term debt, we had $22.8 million and $2.1 million in working capital at March 31, 2023 and December 31, 2022, respectively, representing an improvement of $20.7 million. The significant improvement in working capital between the three month periods was primarily due to favorable refining margins and increased gross profit. Continued favorable market conditions will enable us to continue meeting our needs through cash flow from operations.
Cash and cash equivalents totaled $12.5 million and $0.05 million at March 31, 2023 and December 31, 2022, respectively, representing an increase of $12.0 million. Restricted cash, noncurrent totaled $1.0 million at both March 31, 2023 and December 31, 2022; restricted cash related to a Veritex payment reserve account. Our inventory level at March 31, 2023 decreased significantly from December 31, 2022 as we sold refined product inventory. Accounts receivable, related party related to the sale of jet fuel to LEH totaled $11.6 million and $0 at March 31, 2023 and December 31, 2022. The significant increase between the periods related to timing differences as LEH managed the transition of jet fuel purchases and deliveries from an intermediary and then directly to the DLA.
Sources and Use of Cash
Components of Cash Flows
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Cash Flows Provided By (Used In): |
|
|
|
|
|
| ||
Operating activities |
| $ | 13,783 |
|
| $ | 937 |
|
Financing activities |
|
| (1,771 | ) |
|
| (888 | ) |
Increase in Cash and Cash Equivalents |
| $ | 12,012 |
|
| $ | 49 |
|
Cash Flow from Operations. We had cash flow from operations of $13.8 million for Q1 2023 compared to $0.9 million for Q1 2022. The $12.8 million improvement in cash flow from operations between the periods was due to favorable refining margins, improved product demand as the impact lessened from COVID-19, and improved refinery uptime.
Capital Expenditures. Capital expenditures totaled $0 for both Q1 2023 and Q1 2022. Due to continued uncertainties surrounding commodity pricing and refined product demand, the capital, credit, and commodity markets, financial institution health, the Russian military conflict with Ukraine, the recession, inflation, and COVID-19, we anticipate continuing to limit capital expenditures over the next twelve months. However, to the extent we are able to capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.
Blue Dolphin Energy Company | March 31, 2023 │Page 44 |
| Table of Contents |
Management’s Discussion and Analysis |
We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.
Debt and Lease Obligations
Debt Agreements.
Related-Party Agreements Summary. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with Affiliates:
Loan Description | Parties | Maturity Date | Interest Rate | Loan Purpose |
June LEH Note | Blue Dolphin LEH | Jan 2019 | 8.00% | Blue Dolphin working capital; reflects amounts owed to LEH under the Second Amended and Restated Operating Agreement |
BDPL-LEH Loan Agreement (in default) | BDPL LEH | Aug 2018 | 16.00% | Original principal amount of $4.0 million; Blue Dolphin working capital |
Pursuant to the Assignment Agreement, the March Ingleside Note and March Carroll Note were assigned to and assumed by LEH under the June LEH Note effective December 31, 2022. Pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note; as a result, debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied. All encumbrances that lender or assignee has or may have against Blue Dolphin were thereby terminated.
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the June LEH Note.
Third-Party Agreements Summary. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with third parties:
Loan Description |
Parties | Principal (in millions) | Origination / Maturity | Monthly Principal and Interest Payment |
Interest Rate |
Loan Purpose |
Veritex Loans |
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) (1) | LE Veritex | $25.0 | Jun 2015 / Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements |
LRM Term Loan Due 2034 (in default) (1) | LRM Veritex | $10.0 | Dec 2015 / Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements |
Kissick Debt (in default)(2) | LE Kissick | $11.7 | Jun 2006 / Jan 2018 | $0.5 million | 6.25% | Working capital |
GNCU Loan (in default) |
|
|
|
|
|
|
NPS Term Loan Due 2031(3) | NPS GNCU | $10.0 | Oct 2021 / Oct 2031 | $0.1 million | 5.75% | Working capital |
SBA EIDLs |
|
|
|
|
|
|
Blue Dolphin Term Loan Due 2051 (as modified)(4) | Blue Dolphin SBA | $2.0 | May 2021 / Jun 2051 | $0.01 million | 3.75% | Working capital |
LE Term Loan Due 2050(5) | LE SBA | $0.15 | Aug 2020 / Aug 2050 | $0.0007 million | 3.75% | Working capital |
NPS Term Loan Due 2050(5) | NPS SBA | $0.15 | Aug 2020 / Aug 2050 | $0.0007 million | 3.75% | Working capital |
Equipment Loan Due 2025(6) | LE Texas First | $0.07 | Oct 2020 / Oct 2025 | $0.0013 million | 4.50% | Equipment Lease Conversion |
(1) | At both March 31, 2023 and December 31, 2022, restricted cash, noncurrent, represented amounts held by Veritex in a $1.0 million payment reserve account. |
(2) | Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million. |
(3) | Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First payment due in November 2024. |
(4) | Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due November 2023; interest accrues during deferral period; loan not forgivable. |
(5) | Payments deferred for thirty (30) months; first payment due February 2023; interest accrued during deferral period; loan not forgivable. |
(6) | In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility. |
Blue Dolphin Energy Company | March 31, 2023 │Page 45 |
| Table of Contents |
Management’s Discussion and Analysis |
Guarantees and Security.
Loan Description | Guarantees | Security |
Veritex Loans |
|
|
LE Term Loan Due 2034 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees
| · 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 · $5.0 million life insurance policy on Jonathan Carroll |
LRM Term Loan Due 2034 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees
| · 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 · Substantially all assets |
Kissick Debt (in default)(2) | --- | · Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE |
GNCU Loan |
|
|
NPS Term Loan Due 2031 (in default) | · USDA · Jonathan Carroll(1) · Affiliate cross-guarantees | · Deed of trust lien on approximately 56 acres of land and improvements owned by LE · Leasehold deed of trust lien on certain property leased by NPS from LE · Assignment of leases and rents and certain personal property |
BDPL-LEH Loan Agreement (in default) | · -- | · Certain BDPL property |
June LEH Note | · --- | · --- |
SBA EIDLs |
|
|
Blue Dolphin Term Loan Due 2051 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
LE Term Loan Due 2050 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
NPS Term Loan Due 2050 | --- | · Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
Equipment Loan Due 2025 | --- | · First priority security interest in the equipment (backhoe). |
| (1) | Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. |
| (2) | Subject to the Kissick Subordination Agreement. |
Lease Agreements.
Office Lease. We maintain our corporate headquarters in Houston, Texas. The 68-month operating lease, with BDSC as lessee, expires in August 2023. BDSC is currently in discussions with lessor related to extending the lease.
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.008 million for both Q1 2023 and Q1 2022.
Tank Lease. LE leases tanks from Ingleside under the LE Master Services Agreement. Lease expense associated with the LE Master Services Agreement totaled $0.1 million in Q1 2023.
Outstanding Principal, Debt Issue Costs, and Accrued Interest. Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | March 31, 2023 │Page 46 |
| Table of Contents |
Management’s Discussion and Analysis |
Outstanding Principal and Accrued Interest.
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ | 20,359 |
|
| $ | 20,801 |
|
LRM Term Loan Due 2034 (in default) |
|
| 8,557 |
|
|
| 8,671 |
|
Kissick Debt (in default) |
|
| 11,206 |
|
|
| 11,006 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 9,976 |
|
|
| 9,975 |
|
LEH |
|
|
|
|
|
|
|
|
June LEH Note |
|
| - |
|
|
| 1,211 |
|
BDPL-LEH Loan Agreement (in default) |
|
| 8,254 |
|
|
| 8,094 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 2,095 |
|
|
| 2,082 |
|
LE Term Loan Due 2050 |
|
| 162 |
|
|
| 162 |
|
NPS Term Loan Due 2050 |
|
| 162 |
|
|
| 162 |
|
Equipment Loan Due 2025 |
|
| 34 |
|
|
| 38 |
|
|
|
| 60,805 |
|
|
| 62,202 |
|
|
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt, net |
|
| (36,674 | ) |
|
| (47,366 | ) |
Less: Unamortized debt issue costs |
|
| (2,098 | ) |
|
| (2,149 | ) |
Less: Accrued interest payable |
|
| (10,737 | ) |
|
| (10,365 | ) |
|
| $ | 11,296 |
|
| $ | 2,322 |
|
The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 was classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2023 and December 31, 2022. Although the debt associated with the Kissick Debt and BDPL-LEH Loan Agreement were classified within the current portion of long-term debt on our consolidated balance sheet at December 31, 2022, both were reclassified to long-term debt, net of current portion at March 31, 2023 as a result of the Kissick Forbearance Agreement and the BDPL Forbearance Agreement, respectively.
Debt Issue Costs. Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
|
| March 31, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ | 1,674 |
|
| $ | 1,674 |
|
LRM Term Loan Due 2034 (in default) |
|
| 768 |
|
|
| 768 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 730 |
|
|
| 730 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization |
|
| (1,074 | ) |
|
| (1,023 | ) |
|
| $ | 2,098 |
|
| $ | 2,149 |
|
Amortization expense was $0.05 million for both three-month periods ended March 31, 2023 and 2022.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | March 31, 2023 │Page 47 |
| Table of Contents |
Management’s Discussion and Analysis |
Accrued Interest. 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, |
| ||
|
| 2023 |
|
| 2022 |
| ||
|
| (in thousands) |
| |||||
Kissick Debt (in default) |
| $ | 6,228 |
|
| $ | 6,028 |
|
LEH |
|
|
|
|
|
|
|
|
June LEH Note |
|
| - |
|
|
| - |
|
BDPL-LEH Loan Agreement (in default) |
|
| 4,254 |
|
|
| 4,094 |
|
Veritex Loans |
|
|
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) |
|
| 54 |
|
|
| 53 |
|
LRM Term Loan Due 2034 (in default) |
|
| 64 |
|
|
| 66 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 95 |
|
|
| 82 |
|
LE Term Loan Due 2050 |
|
| 12 |
|
|
| 12 |
|
NPS Term Loan Due 2053 |
|
| 12 |
|
|
| 12 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 18 |
|
|
| 17 |
|
Equipment Loan Due 2025 |
|
| - |
|
|
| 1 |
|
|
|
| 10,737 |
|
|
| 10,365 |
|
Less: Accrued interest payable (in default) |
|
| (5,710 | ) |
|
| (10,365 | ) |
Long-term Interest Payable, Net of Current Portion |
| $ | 5,027 |
|
| $ | - |
|
Future Debt Payments. Future annual debt payments, certain of which are reflected as current due to defaults, are as follows:
Years Ending December 31, |
| Principal |
|
| Debt Issue Costs |
|
| Total |
| |||
|
| (in thousands) |
| |||||||||
2023 |
| $ | 38,722 |
|
| $ | (2,098 | ) |
| $ | 36,624 |
|
2024 |
|
| 16 |
|
|
| - |
|
|
| 16 |
|
2025 |
|
| 5 |
|
|
| - |
|
|
| 5 |
|
2026 |
|
| - |
|
|
| - |
|
|
| - |
|
2027 |
|
| 34 |
|
|
| - |
|
|
| 34 |
|
Subsequent to 2027 |
|
| 2,266 |
|
|
| - |
|
|
| 2,266 |
|
|
| $ | 41,043 |
|
| $ | (2,098 | ) |
| $ | 38,945 |
|
Total Debt and Lease Obligations. The table below summarizes our principal contractual debt and lease obligations at March 31, 2023, by expected settlement period.
|
|
|
|
| Between |
|
| Between |
|
|
|
|
|
|
| |||||
|
| Less than |
|
| 1 and 3 |
|
| 3 and 5 |
|
| 5 Years |
|
|
|
| |||||
|
| 1 Year |
|
| Years |
|
| Years |
|
| and Later |
|
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Long-term debt less unamortized debt issue costs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Third-party |
| $ | 36,652 |
|
| $ | 5,189 |
|
| $ | 139 |
|
| $ | 1,990 |
|
| $ | 43,970 |
|
Related-party |
|
| - |
|
|
| 3,000 |
|
|
| 1,000 |
|
|
| - |
|
|
| 4,000 |
|
Total long-term debt less debt issue costs |
|
| 36,652 |
|
|
| 8,189 |
|
|
| 1,139 |
|
|
| 1,990 |
|
|
| 47,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations |
|
| 99 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 36,751 |
|
| $ | 8,189 |
|
| $ | 1,139 |
|
| $ | 1,990 |
|
| $ | 48,069 |
|
(1) | Excludes interest payable; at March 31, 2023, interest payable and interest payable, related party was estimated to be $5.7 million (less than 1 year), $5.0 million (between 1 and 3 years), $0.7 million (between 3 and 5 years), and $0.5 million (5 years and later). |
Blue Dolphin Energy Company | March 31, 2023 │Page 48 |
| Table of Contents |
Management’s Discussion and Analysis |
Forbearance and Defaults.
Veritex Forbearance Agreement. Pursuant to the Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18, 2022 through September 30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants. As part of the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. In the event that LE and LRM pay off all amounts due under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 on or before September 30, 2023, Veritex also agreed to waive late fees totaling approximately $0.4 million in the aggregate. The Veritex Forbearance Agreement shall terminate on the first to occur of September 30, 2023, borrowers failing to make a payment when due, breach, or any new event of default. As of March 31, 2023, LE and LRM were in compliance with the Veritex Forbearance Agreement. However, as of the filing date of this report, LE was not in compliance with the Veritex Forbearance Agreement for failing to obtain consent under the Kissick Subordination Agreement. Although LE was seeking Veritex’s consent, the Veritex Forbearance Agreement was in default as of the filing date of this report.
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly payments of $0.5 million beginning in April 2023, continuing on the first of each month through February 2025. On March 1, 2025, LE shall make a final payment of $0.4 million to Kissick Noteholder. As part of the Kissick Forbearance Agreement, LE paid Kissick Noteholder $0.5 million in each of April and May 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to past defaults. As noted above, LE was seeking Veritex’s consent under the Kissick Subordination Agreement.
BDPL Forbearance Agreement. Pursuant to the BDPL Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the BDPL Forbearance Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest shall be incurred throughout the agreement term, including the interest-only payment period. As part of the BDPL Loan Agreement, BDPL paid LEH $0.05 million in May 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults.
Other Defaults. As of the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could 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. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading price 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.
Proceeds from Debt. Net proceeds from the issuance of debt totaled $0 and $1.5 million in Q1 2023 and Q1 2022, respectively. Proceeds in Q1 2022 represented additional principal under the Blue Dolphin Term Loan Due 2051.
Debt Payments. A summary of principal, interest, and late fee payments to related party and third party lenders follow:
Veritex Loans (in default). Principal, interest, late fees, and other payments (described below) to Veritex totaled $1.1 million in Q1 2023. Interest and late fee payments to Veritex totaled $0.8 million in Q1 2022.
GNCU Loan (in default). Required interest-only payments to GNCU totaled $0.1 million and $0.3 million in Q1 2023 and Q1 2022, respectively. As of the filing date of this report, NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy financial covenants.
Kissick Debt (in default). As part of the Kissick Forbearance Agreement, LE paid Kissick Noteholder $0.5 million in each of April and May 2023.
Blue Dolphin Energy Company | March 31, 2023 │Page 49 |
| Table of Contents |
Management’s Discussion and Analysis |
June LEH Note. Amounts Blue Dolphin owed to LEH under the June LEH Note and Seconded and Amended Restated Operating Agreement were net settled against amounts LEH owed to LE under the Jet Fuel Sales Agreement. At March 31, 2023, amounts owed by Blue Dolphin to LEH resulted in payoff of the June LEH Note and assigned March Ingleside Note and March Carroll Note.
BDPL-LEH Loan Agreement (in default). Payments to LEH totaled $0 in both Q1 2023 and Q1 2022. At March 31, 2023, BDPL was in default under the BDPL-LEH Loan Agreement for failure to pay past due payment obligations at maturity (loan matured August 2018). As part of the BDPL Forbearance Agreement, BDPL paid LEH $0.05 million in May 2023.
SBA Loans. Required interest-only payments to the SBA totaled $0.003 million in Q1 2023 related to the LE Term Loan Due 2050 and NPS Term Loan Due 2050. No payments were required under the Blue Dolphin Term Loan Due 2051 in Q1 2022 due to a COVID-related payment deferral.
Equipment Loan Due 2025. Principal and interest payments to Texas First totaled $0.004 million in both Q1 2023 and Q1 2022.
We can provide no assurance that: (i) our assets or cash flow from operations and financing activities will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure their respective debt, and/or (iii) lenders will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading price of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders regarding defaults and potential restructuring and refinance opportunities.
Concentration of Customers Risk
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended |
| Number Significant Customers |
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| % Total Revenue from Operations |
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| Portion of Accounts Receivable at March 31, |
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March 31, 2023 |
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| 3 |
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| 65.7 | % |
| $11.6 million |
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March 31, 2022 |
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| 3 |
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| 64.9 | % |
| $ | 0 |
|
One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to HUBZone certification. For the three months ended March 31, 2023 and 2022, the Affiliate accounted for approximately 30.3% and 31.2% of total revenue from operations, respectively.
See “Part I, Item 2. Financial Statements – Notes (3) and (16)” for additional disclosures related to Affiliate agreements and arrangements for additional disclosures related to Affiliate risk.
Regulatory Activities
OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations prior to December 31, 2022. Most of the remaining violations were remediated on a progressive schedule prior to March 31, 2023. Work on the final outstanding violation was completed in April 2023.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. In May 2022, management met with the TCEQ to review the alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in a June 2022 letter. On March 29, 2023, TCEQ requested a follow-up meeting to review LRM's submissions to date. Management met with the TCEQ in April 2023 and is awaiting further follow-up from the TCEQ. We recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of March 31, 2023 and December 31, 2022. We cannot currently estimate when the TCEQ hazardous waste matter will be resolved or predict the outcome of the violations.
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 conduct 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.
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Management’s Discussion and Analysis |
BDPL 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. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, 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 did not record a liability on our consolidated balance sheets as of March 31, 2023 and December 31, 2022. At both March 31, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
BSEE Offshore Pipelines and Platform Decommissioning. BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer 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 failing to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued a second INC to BDPL for failing to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020.
In August 2022, BSEE issued a third INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. In March 2023, BSEE issued a fourth INC to BDPL for failing to perform the required structural surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension until May 30, 2023 for completing the required surveys. BDPL is determining the feasibility of meeting BSEE’s May and June deadlines based on several factors, including vessel availability, sea conditions in the Gulf of Mexico, and completion of the required pre-clearance operations, including the surveys. However, decommissioning is not likely to occur by BSEE’s deadline. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of March 31, 2023 and December 31, 2022. At both March 31, 2023 and December 31, 2022, BDPL maintained $3.7 million in AROs related to abandonment of these assets, which amount does not include potential penalties.
Off-Balance Sheet Arrangements
None.
Accounting Standards
Critical Accounting Policies and Estimates.
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.
Blue Dolphin Energy Company | March 31, 2023 │Page 51 |
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Management’s Discussion and Analysis |
Estimates. 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. Although commodity price volatility, the Russian-Ukrainian military conflict, COVID-19, recession, inflation, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of March 31, 2023 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures.
New Pronouncements Adopted. During the three months ended March 31, 2023, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our financial position, results of operations, or liquidity.
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Blue Dolphin Energy Company | March 31, 2023 │Page 52 |
| Table of Contents |
Controls and Procedures |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
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”). Based on our evaluation, our Chief Executive Officer (principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Blue Dolphin Energy Company | March 31, 2023 │Page 53 |
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Legal Proceedings |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved Matters
Pilot Dispute Related to Terminal Services Agreement
Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day.
On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code (“TBCC”) of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential compromise of the dispute. The parties entered a Forbearance and Accommodation Agreement on January 12, 2023, with the forbearance period terminating on February 28, 2023. As part of the Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.481 million on January 13, 2023.
On March 31, 2023, NPS and Pilot executed an Amendment to the Forbearance and Accommodation Agreement (“March 31 Amendment") with the forbearance term extending to June 15, 2023. The March 31 Amendment required an additional payment by Pilot to NPS of approximately $1.08 million on April 3, 2023 and requires a conditional payment of $0.18 million on June 1, 2023. Pilot made the April 2023 payment.
Pursuant to the March 31 Amendment all deadlines in the Texas Action have been tolled through June 15, 2023.
As of the filing date of this report, no settlement has been reached.
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 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. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, 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.
Blue Dolphin Energy Company | March 31, 2023 │Page 54 |
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Legal Proceedings |
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of March 31, 2023 and December 31, 2022. At both March 31, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
Pilot Dispute Related to Set-Off Payments
In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements
We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If lenders 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.
Counterparty Contract-Related Dispute
As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably; however, the potential outcome is unknown. Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that management’s efforts will result in a manageable outcome.
ITEM 1A. RISK FACTORS
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 on Form 10-K for the fiscal year ended December 31, 2022 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 on Form 10-K for the fiscal year ended December 31, 2022.
Instability and volatility in the capital, credit, and commodity markets in the global economy, and bank failures or other events affecting financial institutions, could negatively impact our business, financial condition, results of operations, and cash flows.
Our business, financial condition and results of operations could be negatively impacted by difficult conditions and volatility in the capital, credit, and commodities markets both domestically and abroad. We could also be adversely impacted if any financial institution with whom we have a relationship fails. We could lose funds held in banks in which our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor; or we may not be able to successfully obtain additional financing on favorable terms, or at all, to restructure or refinance existing debt or to obtain additional capital to new business opportunities; or we or our customers may experience financial difficulties causing us to fail to meet our financial obligations when due. If we are unable to meet our financial obligations, we may not be able to: (i) purchase crude oil and condensate to operate the Nixon refinery, (ii) reimburse LEH for direct operating expenses and paying the LEH operating fee under the Second Amended and Restated Operating Agreement, (iii) service debt, (iv) maintain and improve the Nixon facility through capital expenditures, and (v) meet regulatory compliance requirements, any of which could negatively impact our business, financial condition, results of operations, and cash flows, and expose us to potential events of default (if not cured or waived) under existing secured loan agreements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See “Part I, Item. 1. Financial Statements – Notes (3) and (10)” for disclosures related to defaults on our debt.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Blue Dolphin Energy Company | March 31, 2023 │Page 55 |
| Table of Contents |
Legal Proceedings |
ITEM 5. OTHER INFORMATION
LE Amended and Restated Master Services Agreement
On March 14, 2023, LE entered a Master Services Agreement with Ingleside effective March 1, 2023 for storage of products intended for customer receipt by barge. The agreement had a three-year term. The tank rental fee was $0.1 million per month. On May 9, 2023, LE and Ingleside amended and restated the Master Services Agreement (the “LE Amended and Restated Master Services Agreement” to change the term to 1 year. All other terms remained the same.
Satisfaction of Debt
Pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note. As a result, the debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied. All encumbrances that lender or assignee has or may have against Blue Dolphin were thereby terminated.
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Blue Dolphin Energy Company | March 31, 2023 │Page 56 |
| Table of Contents |
Exhibits |
ITEM 6. EXHIBITS
Exhibits Index
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101.INS* |
| XBRL Instance Document. |
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101.SCH* |
| XBRL Taxonomy Schema Document. |
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101.CAL* |
| XBRL Calculation Linkbase Document. |
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101.LAB* |
| XBRL Label Linkbase Document. |
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101.PRE* |
| XBRL Presentation Linkbase Document. |
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101.DEF* |
| XBRL Definition Linkbase Document. |
* | Filed herewith |
Blue Dolphin Energy Company | March 31, 2023 │Page 57 |
| Table of Contents |
Signature Page |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BLUE DOLPHIN ENERGY COMPANY |
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May 15, 2023 | By: | /s/ JONATHAN P. CARROLL |
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| Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
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Blue Dolphin Energy Company | March 31, 2023 │Page 58 |