Principles of Consolidation and Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2023

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

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.

Cash, Cash Equivalents, and Restricted Cash

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:

	March 31,		December 31,
	2023		2022
	(in thousands)
Cash and cash equivalents	$	12,533	$	520
Restricted cash, noncurrent		1,000		1,001
	$	13,533	$	1,521

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts.  Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts.  Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management’s judgment, deserve consideration in estimating bad debts.  Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition.  Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio.  We had an allowance for doubtful accounts of $0.06 million at both March 31, 2023 and December 31, 2022.

Financial Instruments

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. 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 25 years; we depreciate refinery and facilities assets when placed in service.  We did not record any impairment of our refinery and facilities assets for the periods presented.

Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment.  We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016.  During the twelve months ended December 31, 2021, we recorded an additional impairment of $1.1 million due to a change in the estimated future cost and timing of decommissioning these assets. During the twelve months ended December 31, 2022, we recorded an additional impairment of $0.1 million due to an additional change in the timing of decommissioning these assets.  No impairment was recorded during the three months ended March 31, 2023. Our pipelines and facilities assets are inactive.  Decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the impact of COVID-19. BSEE mandated that decommissioning occur prior to June 1, 2023. BDPL is determining the feasibility of meeting BSEE’s decommissioning deadline based on several factors, including vessel availability, sea conditions in the Gulf of Mexico, and completion of required pre-clearance operations. 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.

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.

Leases

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. 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

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 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 benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At March 31, 2023 and December 31, 2022, we had no uncertain tax positions for which a reserve or liability was necessary.

Deferred Taxes

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

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

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

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

New Pronouncements Adopted. During the three months ended March 31, 2023, we did not adopt any ASUs.

New Pronouncements Issued, Not Yet Effective

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.