Notes to
Consolidated Financial Statements
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(1)
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Organization
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Nature of Operations
. Blue Dolphin Energy Company is a
publicly-traded Delaware corporation primarily engaged in the
refining and marketing of petroleum products. We also provide
tolling and storage terminaling services. Our assets, which are in
Nixon, Texas, primarily include a 15,000-bpd crude distillation
tower and more than 1.0 million bbls of petroleum storage tanks
(collectively the “Nixon Facility”). Pipeline
transportation and oil and gas operations are no longer
active.
Structure and Management
.
Blue Dolphin is controlled by
Lazarus Energy Holdings, LLC (“LEH”). LEH operates and
manages all Blue Dolphin properties pursuant to an Amended and
Restated Operating Agreement (the “Amended and Restated
Operating Agreement”). Jonathan Carroll is Chairman of the
Board of Directors (the “Board”), Chief Executive
Officer, and President of Blue Dolphin, as well as a majority owner
of LEH. Together, LEH and Jonathan Carroll owned 79.8% of our
common stock, par value $0.01 per share (the “Common
Stock”) at December 31, 2018. (See “Note (9)
Related-Party Transactions,” “Note (11) Long-Term Debt,
Net” and “Note (19) Commitments and Contingencies
– Financing Agreements” for additional disclosures
related to LEH, the Amended and Restated Operating Agreement, and
Jonathan Carroll.)
We have
the following active subsidiaries:
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”);
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Blue Dolphin
Petroleum Company, a Delaware corporation;
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Blue Dolphin
Services Co., a Texas corporation
(“BDSC”);
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Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”);
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Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”); and
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Nixon Product
Storage, LLC, a Delaware limited liability company
(“NPS”).
In June
2018, Blue Dolphin acquired 100% of the issued and outstanding
membership interests of NPS from Lazarus Midstream Partners, L.P.,
an affiliate of LEH, pursuant to an Assignment Agreement. The
assignment was accounted for as a combination of entities under
common control. See “Note (5) NPS Assignment” of this
Annual Report for further information related to the NPS
assignment.
See
“Part I, Item 1. Business” and “Part I, Item 2.
Properties” in this Annual Report for additional information
regarding our operating subsidiaries, principal facilities, and
assets.
Remainder
of Page Intentionally Left Blank
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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Going Concern
. Management has
determined that certain factors raise substantial doubt about our
ability to continue as a going concern. These factors include the
following:
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Consecutive Net Losses and
Working Capital Deficits
–
For the twelve months ended December 31, 2018, we reported net loss
of $0.5 million, or a loss of $0.05 per share. For the twelve
months ended December 31, 2017, we reported a net loss of $22.3
million, or a loss of $2.09 per share. The twelve months ended
December 31, 2017 included the net effect to our consolidated
statement of operations of the Final Arbitration Award, which was
an expense of $24.3 million, or $2.29 per share, in arbitration
award and associated fees. Excluding the Final
Arbitration Award, we would have reported net income for the twelve
months ended December 31, 2017 of $2.0 million, or income of $0.19
per share, reflecting a decline of $2.5 million, or $0.24 per
share, for 2018 compared to 2017 due to lower
margins.
At
December 31, 2018, we had a working capital deficit of $71.9
million. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31, 2018. At
December 31, 2017, we had a working capital deficit of $69.5
million. Excluding the current portion of long-term debt, we had a
working capital deficit of $30.0 million at December 31,
2017.
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Final Arbitration Award and
Settlement Agreement
– As
previously disclosed,
LE was
involved in arbitration proceedings (the “GEL
Arbitration”) with GEL Tex Marketing, LLC
(“GEL”), an affiliate of Genesis Energy, LP
(“Genesis”), related to a contractual dispute involving
a Crude Oil Supply and Throughput Services Agreement (the
“Crude Supply Agreement”) and a Joint Marketing
Agreement (the “Joint Marketing Agreement”), each
between LE and GEL and dated August 12, 2011. On August 11, 2017,
the arbitrator delivered its final award in the GEL Arbitration
(the “Final Arbitration Award”). The Final Arbitration
Award denied all of LE’s claims against GEL and granted
substantially all the relief requested by GEL in its counterclaims.
Among other matters,
the Final
Arbitration Award awarded damages and GEL’s attorneys’
fees and related expenses to GEL in the aggregate amount of $31.3
million.
After the initial $3.7
million payment to GEL in September 2017, LE has made payments to
GEL of $0.5 million per month. As of the date of this Annual
Report, LE has paid $11.7 million to GEL towards reducing the
outstanding balance of the Final Arbitration
Award.
A hearing on confirmation of the Final Arbitration
Award was scheduled to occur on September 18, 2017 in state
district court in Harris County, Texas. Prior to the scheduled
hearing, LE and GEL jointly notified the court that the hearing
would be continued for a period of no more than 90 days after
September 18, 2017 (the “Continuance Period”), to
facilitate settlement discussions between the parties.
On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a
Letter Agreement with GEL, effective September 18, 2017 (the
“GEL Letter Agreement”), confirming the parties’
agreement to the continuation of the confirmation hearing during
the Continuance Period, subject to the terms of the GEL Letter
Agreement. The GEL Letter Agreement was subsequently amended nine
times to extend the Continuance Period through July
2018.
LE,
NPS, and Blue Dolphin, together with LEH, Carroll & Company
Financial Holdings, L.P. (“C&C”), and Jonathan
Carroll (collectively referred to herein as the “Lazarus
Parties”), entered into that certain Settlement Agreement
with GEL, dated as of July 20, 2018 (as may be further amended,
restated, supplemented or otherwise modified from time to time, the
“Settlement Agreement”), whereby GEL and the Lazarus
Parties agreed to mutually release all claims against each other
and to file a stipulation of dismissal with prejudice in connection
with the GEL Arbitration (the “Settlement”), subject to
the terms and conditions set forth in the Settlement Agreement. The
Settlement is conditioned upon payment by the Lazarus Parties to
GEL of $10.0 million in cash (the “Settlement
Payment”). Until either the Settlement Payment is made or the
Settlement Agreement is terminated, the Lazarus Parties must pay
GEL $0.5 million in cash at the end of each calendar month (the
“Interim Payments”). The Interim Payments will not be
applied to reduce the amount of the Settlement Payment, but such
payments will reduce the Final Arbitration Award. At the time of
the Settlement, the difference between the Settlement Payment and
the amount we have accrued on our consolidated balance sheet for
arbitration award payable will be recognized as a gain on our
consolidated statement of operations. At December 31, 2018 and
2017, accrued arbitration award payable on our consolidated balance
sheet was $21.1 million and $27.1 million,
respectively.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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The
Settlement Agreement restricts the Lazarus Parties from taking
certain actions without the prior written consent of GEL,
including: (i) the incurrence of any debt not specifically excepted
in the Settlement Agreement, (ii) the establishment of any liens
not specifically excepted in the Settlement Agreement, (iii) the
disposition of any assets other than certain ordinary course sales
to unaffiliated third parties, payments to unaffiliated third-party
trade creditors and scheduled debt payments, (iv) the entrance into
any transactions with affiliates not specifically excepted in the
Settlement Agreement, (v) the failure to pay debts generally as
they become due, and (vi) the entrance into a bankruptcy,
reorganization or similar proceeding. A violation of any of the
restrictions in the Settlement Agreement, as well as the failure of
the Lazarus Parties to make Interim Payments as they become due,
will constitute an event of default under the Settlement Agreement
which, subject to certain cure periods, would allow GEL to
terminate the Settlement Agreement and enforce its rights under the
Final Arbitration Award.
The Lazarus Parties are exploring the possibility
of obtaining a commercial loan
or other financing
in an aggregate principal amount equal
to the Settlement Payment (the “Settlement Financing”),
subject to obtaining the consent of Veritex Community Bank
(“Veritex”), as lender under certain loan agreements
with the Lazarus Parties and their affiliates. Under the Settlement
Agreement, the Lazarus Parties are required to work in good faith
and take reasonable actions necessary to obtain the Settlement
Financing in accordance with the terms of the Settlement Agreement.
Prior to the consummation of the Settlement Financing, the Lazarus
Parties are required to: (i) cause NPS to consummate the Settlement
Financing and restrict its ability to commence a bankruptcy case,
(ii) assign to NPS certain tank leases that will constitute
collateral for the Settlement Financing, and (iii) cause NPS to
assume joint and several liability for all or a portion of the
Final Arbitration Award. The failure to achieve certain milestones
in connection with obtaining the Settlement Financing will
constitute an event of default under the Settlement Agreement,
which would allow GEL to terminate the Settlement Agreement and
enforce its rights under the Final Arbitration
Award.
Simultaneously
with the execution of the Settlement Agreement, Jonathan Carroll
and C&C entered into a Security Agreement pursuant to which
Jonathan Carroll and C&C agreed to secure up to $10.0 million
of LE’s obligations under the Final Arbitration Award with a
security interest in their equity in LEH.
Unless extended in writing by GEL, the Settlement
Agreement will terminate on July 31, 2019 if the Settlement Payment
is not made on or before such date, and the Settlement Agreement
may be terminated by GEL following the occurrence of an event of
default under the Settlement Agreement, as described above.
Pursuant to the Settlement Agreement, the parties agreed to
terminate the GEL Letter Agreement, and GEL agreed not to take any
action to execute or collect on the Final Arbitration Award and to
take all action necessary to continue the District Court Action
until the earlier of: (i) the date on which the Settlement Payment
is paid or (ii) the termination of the Settlement Agreement.
On February 1, 2019, GEL filed a proposed order granting a joint
motion to continue the District Court Action.
●
Defaults Under Veritex Secured
Loan Agreements
– LE and
LRM each have loans with a USDA guarantee of 100% through Veritex,
as successor in interest to Sovereign Bank by merger, in the
aggregate amount of $35.0 million.
–
Events
of Default
. Veritex delivered
to obligors notices of default under secured loan agreements with
Veritex, stating that the Final Arbitration Award constitutes an
event of default under the secured loan agreements. The occurrence
of an event of default permits Veritex to declare the amounts owed
under these loan agreements immediately due and payable, exercise
its rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available.
Veritex
has not accelerated or called due the secured loan agreements
considering the Settlement Agreement, which Veritex must ultimately
approve. Instead, Veritex has expressly reserved all of its rights,
privileges and remedies related to events of default under the
secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan agreements. The debt
associated with these loans was classified within the current
portion of long-term debt on our consolidated balance sheets at
December 31, 2018 and 2017 due to existing events of default
related to the Final Arbitration Award as well as the uncertainty
of LE and LRM’s ability to meet financial covenants in the
secured loan agreements in the future.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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Veritex has been working with LE and LRM and
continues to be aware and party to all discussions and arrangements
with GEL surrounding the Settlement. We
can provide no
assurance that the conditions necessary for consummation of the
Settlement will be met. If certain conditions are not met or the
Settlement Agreement is terminated, GEL may seek to enforce the
Final Arbitration Award against the Lazarus Parties. Further, we
can provide no assurance as to whether
Veritex, as first lienholder, will approve the Settlement. If
Veritex does not approve the Settlement, Veritex may exercise its
rights and remedies under the secured loan agreements. In either
case
: (i) our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations will be materially affected,
(ii) Blue Dolphin and its affiliates would likely be required to
seek protection under bankruptcy laws, and (iii) the trading prices
of our common stock and the value of an investment in our common
stock could significantly decrease, which could lead to holders of
our common stock losing their investment in our common stock in its
entirety.
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Financial
Covenant Defaults
. In addition
to existing events of default related to the Final Arbitration
Award, at December 31, 2018 LE and LRM were in violation of certain
financial covenants in secured loan agreements with Veritex.
Covenant defaults under the secured loan agreements would permit
Veritex to declare the amounts owed under these loan agreements
immediately due and payable, exercise its rights with respect to
collateral securing obligors’ obligations under these loan
agreements, and/or exercise any other rights and remedies
available. The debt associated with these loans was classified
within the current portion of long-term debt on our consolidated
balance sheets at December 31, 2018 and 2017 due to existing events
of default related to the Final Arbitration Award as well as the
uncertainty of LE and LRM’s ability to meet the financial
covenants in the future.
Veritex
has been working with LE and LRM and continues to be aware and
party to all discussions and arrangements with GEL
surrounding the executed settlement agreement and all
amendments and extensions with GEL. There can be no assurance that
Veritex will provide a waiver of events of default related to the
Final Arbitration Award, consent to the Settlement Agreement with
GEL, or provide future waivers of any financial covenant defaults,
which would have an adverse impact on our financial position and
results of operations.
Operating Risks
.
Successful
execution of our business strategy depends on several key factors,
including
the Settlement with GEL,
having adequate working capital, obtaining credit
to meet operational needs and regulatory requirements, maintaining
safe and reliable operations at the Nixon Facility, meeting
contractual obligations, and having favorable margins on refined
petroleum products. Management believes that it is continuing to
take the appropriate steps to improve our operations and financial
stability.
However, there can
be no assurance that our business strategy will be successful, that
LEH and its affiliates will continue to fund our working capital
needs, or that we will be able to obtain additional financing or
meet financial assurance (bonding) requirements on commercially
reasonable terms or at all. If Veritex does not approve the
Settlement or exercises its rights and remedies under the secured
loan agreements or if the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin and its affiliates would likely be required to seek
protection under bankruptcy laws. (See “Part I, Item 1.
Business – Business Strategy” in this Annual Report for
additional disclosures related to our business plan and initiatives
management has taken to date.)
For
additional disclosures related to the Final Arbitration Award, the
Settlement Agreement, defaults under secured loan agreements, our
business strategy, and risk factors that could materially affect
our future business, financial condition and results of operations,
refer to the following sections in this Annual Report:
●
Part I, Item 1.
Business – Business Strategy
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Part I, Item 1A.
Risk Factors
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Part I, Item 3.
Legal Proceedings
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Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations:
–
Final Arbitration
Award and Settlement Agreement
–
Liquidity and
Capital Resources
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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●
Part II, Item 8.
Financial Statements and Supplementary Data:
–
Note (9)
Related-Party Transactions
–
Note (11) Long-Term
Debt, Net
–
Note (19)
Commitments and Contingencies – Legal Matters
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(2)
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Basis of Presentation
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Our
consolidated financial statements include Blue Dolphin and its
subsidiaries. Significant intercompany transactions have been
eliminated in consolidation. The accompanying consolidated
financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) for
consolidated financial information pursuant to the rules and
regulations of the SEC under Regulation S-X and the instructions to
Form 10-K. In management’s opinion, all adjustments
considered necessary for a fair presentation have been included,
disclosures are adequate, and the presented information is not
misleading.
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(3)
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Significant Accounting Policies
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The
summary of significant accounting policies of Blue Dolphin is
presented to assist in understanding our consolidated financial
statements. Our consolidated financial statements and accompanying
notes are representations of management, who is responsible for
their integrity and objectivity. These accounting policies conform
to GAAP and have been consistently applied in the preparation of
our consolidated financial statements.
Use of Estimates
.
We have made several estimates and
assumptions related to the reporting of our consolidated assets and
liabilities and to the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with GAAP. We believe our current estimates are
reasonable and appropriate; however, actual results could differ
from those estimated.
Cash and Cash Equivalents
.
Cash and cash equivalents
represent liquid investments with an original maturity of three
months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at
times, may exceed insured deposit limits. We monitor the financial
condition of the financial institutions and have experienced no
losses associated with these accounts.
Restricted Cash
.
Restricted cash, current portion
primarily represents a payment reserve account held by Veritex as
security for payments under a loan agreement. Restricted cash,
noncurrent represents funds held in the Veritex disbursement
account for payment of construction related expenses to build new
petroleum storage tanks.
Accounts Receivable and Allowance for Doubtful Accounts
.
Accounts receivable are presented net of any necessary allowance(s)
for doubtful accounts. Receivables are recorded at the invoiced
amount and generally do not bear interest. An allowance for
doubtful accounts is established, when necessary, based
on past experience and other factors which, in management's
judgment, deserve consideration in estimating bad debts.
Management assesses collectability primarily based on
the current aging status of the customer's account, our
historical collection experience with the customer, and the
customer's financial condition. Based on a review of
these factors, management establishes or adjusts the allowance for
specific customers and the accounts receivable portfolio as a
whole. We had an allowance for doubtful accounts of $0.1
million and $0 at December 31, 2018 and 2017,
respectively.
Inventory
.
Our
inventory primarily consists of refined petroleum products, crude
oil and condensate, and chemicals. Inventory is valued at lower of
cost or net realizable value with cost being determined by the
average cost method, and net realizable value being determined
based on estimated selling prices less any associated delivery
costs. If the net realizable value of our refined petroleum
products inventory declines to an amount less than our average
cost, we record a write-down of inventory and an associated
adjustment to cost of goods sold. (See “Note (7)
Inventory” for additional disclosures related to our
inventory.)
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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Property and Equipment
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Refinery and Facilities
. Management expects to continue
making improvements to the crude distillation tower based on
operational needs and technological advances. Additions to refinery
and facilities assets are capitalized. Expenditures for repairs and
maintenance are expensed as incurred.
We record refinery and facilities at cost less any adjustments for
depreciation or impairment.
Adjustment of the asset and the
related accumulated depreciation accounts are made for the refinery
and facilities asset’s retirement and disposal, with the
resulting gain or loss included in the consolidated statements of
operations. For financial reporting purposes, depreciation of
refinery and facilities assets is computed using the straight-line
method using an estimated useful life of 25 years beginning when
the refinery and facilities assets are placed in service. As a
result of the Final Arbitration Award, which represents a
significant adverse change that could affect the value of a
long-lived asset, management performed potential impairment testing
of our refinery and facilities assets in the fourth quarter of
2018. Upon completion of that testing, we determined that no
impairment was necessary at December 31, 2018. We did not record
any impairment of our refinery and facilities assets for the
periods presented.
Pipelines and Facilities
. Our pipelines and facilities are
recorded at cost less any adjustments for depreciation or
impairment. Depreciation is computed using the straight-line method
over estimated useful lives ranging from 10 to 22 years. In
accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) guidance on accounting for the impairment or
disposal of long-lived assets, management performed periodic
impairment testing of our pipeline and facilities assets in the
fourth quarter of 2016. Upon completion of that testing, our
pipeline assets were fully impaired. All pipeline transportation
services to third parties have ceased, existing third-party wells
along our pipeline corridor have been permanently abandoned, and no
new third-party wells are being drilled near our
pipelines.
Oil and Gas Properties
. Our oil and gas properties are
accounted for using the full-cost method of accounting, whereby all
costs associated with acquisition, exploration and development of
oil and gas properties, including directly related internal costs,
are capitalized on a cost center basis. Amortization of
such costs and estimated future development costs are determined
using the unit-of-production method. All leases associated with our
oil and gas properties have expired, and our oil and gas properties
were fully impaired in 2011.
Construction in Progress
. Construction in progress
expenditures, including capitalized interest, relate to
construction and refurbishment activities at the Nixon Facility.
These expenditures are capitalized as incurred. Depreciation begins
once the asset is placed in service.
(See
“Note (8) Property, Plant and Equipment, Net” for
additional disclosures related to our refinery and facilities
assets, oil and gas properties, pipelines and facilities assets,
and construction in progress.)
Intangibles – Other
. Trade name, an intangible asset,
represents the “Blue Dolphin Energy Company” brand
name. We account for intangible assets under FASB ASC guidance
related to intangibles, goodwill, and other. Under the guidance, we
determined trade name to have an indefinite useful life, and we
test intangible assets with indefinite lives annually for
impairment. Management performed its regular annual impairment
testing of trade name in the fourth quarter of 2017. Upon
completion of that testing, our trade name asset was fully impaired
at December 31, 2017.
Debt Issue Costs
. We have debt issue costs related to
certain refinery and facilities assets debt. Debt issue costs are
capitalized and amortized over the term of the related debt using
the straight-line method, which approximates the effective interest
method. Debt issue costs are presented net with the related debt
liability. (See “Note (11) Long-Term Debt, Net” for
additional disclosures related to debt issue
costs.)
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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Revenue Recognition
.
We
adopted the provisions of FASB ASU (defined below) 2014-09,
Revenue from Contracts with
Customers (ASC 606)
, on January 1, 2018, as described
below in “New Pronouncements Adopted.” Accordingly, our
revenue recognition accounting policy has been revised to reflect
the adoption of this standard.
Refinery Operations Revenue
. Revenue from the sale of
refined petroleum products is recognized when product is sold to
the customer in fulfillment of performance obligations. Each load
of refined petroleum product is separately identifiable and
represents a distinct performance obligation to which the
transaction price is allocated. Performance obligations are met
when control is transferred to the customer. Control is transferred
to the customer when the product has been lifted or, in cases where
the product is not lifted immediately (bill and hold arrangements),
when the product is added to the customer’s bulk inventory as
stored at the Nixon Facility.
We
consider a variety of facts and circumstances in assessing the
point of control transfer, including but not limited to: whether
the purchaser can direct the use of the refined petroleum product,
the transfer of significant risks and rewards, our rights to
payment, and transfer of legal title. In each case, the term
between sale and when payment is due is not significant.
Transportation, shipping, and handling costs incurred are included
in cost of goods sold. Excise and other taxes that are collected
from customers and remitted to governmental authorities are not
included in revenue.
Tolling and Terminaling Revenue
. Tolling and terminaling
represents fees pursuant to: (i) tolling agreements, whereby a
customer agrees to pay a certain fee per gallon or barrel for
throughput volumes moving through the naphtha stabilizer unit and a
fixed monthly reservation fee for use of the naphtha stabilizer
unit and (ii) tank storage agreements, whereby a customer agrees to
pay a certain fee per tank based on tank size over a period of time
for the storage of products.
We
typically satisfy performance obligations for tolling and
terminaling operations with the passage of time. We determine the
transaction price at agreement inception based on the guaranteed
minimum amount of revenue over the term of the agreement. We
allocate the transaction price to the single performance obligation
that exists under the agreement, and we recognize revenue in the
amount for which we have a right to invoice. Generally,
payment terms do not exceed 30 days.
Revenue
from tank storage customers may, from time to time, include fees
for ancillary services, such as in-tank and tank-to-tank blending.
These services are considered optional to the customer, and the
price we charge for such services is not included in the fixed cost
under the customer’s tank storage agreement. Ancillary
services are considered a separate performance obligation by us
under the tank storage agreement. The performance obligation is
satisfied when the requested service has been performed in the
applicable period.
Income Taxes
.
We
account for income taxes under FASB ASC guidance related to income
taxes, which requires recognition of income taxes based on amounts
payable with respect to the current reporting period and the
effects of deferred taxes for the expected future tax consequences
of events that have been included in our financial statements or
tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of
each reporting date, management considers new evidence, both
positive and negative, to determine the realizability of deferred
tax assets. Management considers whether it is more likely than not
that a portion or all of the deferred tax assets will be realized,
which is dependent upon the generation of future taxable income
prior to the expiration of any net operating loss
(“NOL”) carryforwards. When management determines that
it is more likely than not that a tax benefit will not be realized,
a valuation allowance is recorded to reduce deferred tax assets. A
significant piece of objective negative evidence evaluated was
cumulative losses incurred over the three-year period ended
December 31, 2018. Such objective evidence limits the ability to
consider other subjective evidence, such as projections for future
growth. Based on this evaluation, we recorded a valuation allowance
against the deferred tax assets for which realization was not
deemed more likely than not as of December 31, 2018 and 2017. We
expect to recover deferred tax assets related to the Alternative
Minimum Tax (“AMT”) credit carryforwards. In addition,
we have NOL carryforwards that remain available for future
use.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-K 12/31/18
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Notes
to Consolidated Financial Statements
(Continued)
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The
benefit of an uncertain tax position is recognized in the financial
statements if it meets a minimum recognition threshold. A
determination is first made as to whether it is more likely than
not that the income tax position will be sustained, based upon
technical merits, upon examination by the taxing authorities. If
the income tax position is expected to meet the
more-likely-than-not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate settlement. At December
31, 2018 and 2017, there were no uncertain tax positions for which
a reserve or liability was necessary. (See “Note (17) Income
Taxes” for further information related to income
taxes.)
Impairment or Disposal of Long-Lived Assets
. In accordance
with FASB ASC guidance on accounting for the impairment or disposal
of long-lived assets, we periodically evaluate our long-lived
assets for impairment. Additionally, we evaluate our long-lived
assets when events or circumstances indicate that the carrying
value of these assets may not be recoverable. The carrying value is
not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of
the asset or group of assets. If the carrying value exceeds the sum
of the undiscounted cash flows, an impairment loss equal to the
amount by which the carrying value exceeds the fair value of the
asset or group of assets is recognized. Significant management
judgment is required in the forecasting of future operating results
that are used in the preparation of projected cash flows and,
should different conditions prevail or judgments be made, material
impairment charges could be necessary. As a result of the Final
Arbitration Award, which represents a significant adverse change
that could affect the value of a long-lived asset, management
performed potential impairment testing of our refinery and
facilities assets in the fourth quarter of 2018. Upon completion of
that testing, we determined that no impairment was necessary at
December 31, 2018. We did not record any impairment of our refinery
and facilities assets for the periods presented.
Asset Retirement Obligations
. FASB ASC guidance related to
asset retirement obligations (“AROs”) requires that a
liability for the discounted fair value of an ARO be recorded in
the period in which incurred, and the corresponding cost
capitalized by increasing the carrying amount of the related
long-lived asset. The liability is accreted towards its future
value each period, and the capitalized cost is depreciated over the
useful life of the related asset. If the liability is settled for
an amount other than the recorded amount, a gain or loss is
recognized.
Management
has concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facilities assets arises
and a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We
recorded an ARO liability related to future asset retirement costs
associated with dismantling, relocating, or disposing of our
offshore platform, pipeline systems, and related onshore
facilities, as well as for plugging and abandoning wells and
restoring land and sea beds. We developed these cost estimates for
each of our assets based upon regulatory requirements, structural
makeup, water depth, reservoir characteristics, reservoir depth,
equipment demand, current retirement procedures, and construction
and engineering consultations. Because these costs typically extend
many years into the future, estimating future costs are difficult
and require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis. (See “Note (12) Asset Retirement Obligations”
for additional information related to our AROs.)
Computation of Earnings Per Share
. We apply the provisions
of FASB ASC guidance for computing earnings per share
(“EPS”). The guidance requires the presentation of
basic EPS, which excludes dilution and is computed by dividing net
income available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. The
guidance requires dual presentation of basic EPS and diluted EPS on
the face of our consolidated statements of operations and requires
a reconciliation of the denominator of basic EPS and diluted EPS.
Diluted EPS is computed by dividing net income available to common
stockholders by the diluted weighted average number of common
shares outstanding, which includes the potential dilution that
could occur if securities or other contracts to issue shares of
common stock were converted to common stock that then shared in the
earnings of the entity.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
The
number of shares related to options, warrants, restricted stock,
and similar instruments included in diluted EPS is based on the
“Treasury Stock Method” prescribed in FASB ASC guidance
for computation of EPS. This method assumes theoretical repurchase
of shares using proceeds of the respective stock option or warrant
exercised, and, for restricted stock, the amount of compensation
cost attributed to future services that has not yet been recognized
and the amount of any current and deferred tax benefit that would
be credited to additional paid-in-capital upon the vesting of the
restricted stock, at a price equal to the issuer’s average
stock price during the related earnings period. Accordingly, the
number of shares includable in the calculation of EPS in respect of
the stock options, warrants, restricted stock, and similar
instruments is dependent on this average stock price and will
increase as the average stock price increases. (See “Note
(18) Earnings Per Share” for additional information related
to EPS.)
New Pronouncements Adopted
. The FASB issues an Accounting
Standards Update (“ASU”) to communicate changes to the
FASB ASC, including changes to non-authoritative SEC content.
Recently adopted ASUs include:
ASU 2018-09, Codification Improvements
. In July 2018, FASB
issued ASU 2018-09. This guidance affects a wide variety of topics
in the codification and represents changes to clarify, correct
errors in, or make minor improvements to the codification. The
amendments make the codification easier to understand and easier to
apply by eliminating inconsistencies and providing clarifications.
The amendments apply to all reporting entities within the scope of
the affected accounting guidance. Some of the amendments in ASU
2018-09 do not require transition guidance and will be effective
upon issuance. However, many of the amendments do have transition
guidance with effective dates for annual periods beginning after
December 15, 2018, for public business entities. Adoption of this
guidance did not have a significant impact on our consolidated
financial statements.
ASU 2014-09, Revenue from Contracts with Customers (ASC
606)
. We adopted this accounting pronouncement effective
January 1, 2018, using a modified retrospective approach, which
required us to apply the new revenue standard to: (i) all new
revenue contracts entered into after January 1, 2018 and (ii) all
existing revenue contracts as of January 1, 2018. In accordance
with this approach, our consolidated revenues for the periods prior
to January 1, 2018 will not be revised. In November 2018, FASB
issued ASU 2018-18,
Collaborative
Arrangements (Topic 808)
.
ASU 2018-18 clarifies the
interaction between ASC 808 and ASC 606. Our implementation
activities related to ASC 606 are complete, and we did not have any
material differences in the amount or timing of revenues as a
result of the adoption of ASC 606. Our largest revenue streams
consist of orders received from our customers for crude-oil derived
specialty products based on market prices. These revenues are
recognized at a point in time upon transfer of control of the
product in accordance with contractual terms. With respect to ASC
808, we are not party to a collaborative agreement with a third
party.
New Pronouncements Issued, Not Yet Effective
. The following
are recently issued, but not yet effective, ASU’s that may
influence our consolidated financial position, results of
operations, or cash flows:
ASUs 2018-20, 2018-11, 2018-10, and 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency and
comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. In December 2018, FASB
issued ASU 2018-20 to provide additional guidance related to sales
taxes and other similar taxes collected from lessees, certain
lessor costs, and recognition of
variable
payments for contracts with lease and non-lease components. In July
2018, FASB issued ASUs 2018-11 and 2018-10. ASU 2018-11 provides
entities with relief from the costs of implementing certain aspects
of ASU 2016-02 (codified as ASC 842). Specifically, under the
amendments in ASU 2018-11: (i) entities may elect not to recast the
comparative periods presented when transitioning to ASC 842 (Issue
1), and (ii) lessors may elect not to separate lease and non-lease
components when certain conditions are met (Issue 2). ASU 2018-10
made 16 separate amendments to ASC 842.
For a
public business entity, the amendments in ASUs 2018-11 and 2018-10
affect the amendments in ASU 2016-02, which are not yet effective,
but for which early adoption upon issuance is permitted. For
entities that early adopted Topic 842, the amendments are effective
upon issuance of ASUs 2018-20, 2018-11 and 2018-10, and the
transition requirements are the same as those in Topic 842. For
entities that have not adopted Topic 842, the effective date and
transition requirements will be the same as the effective date and
transition requirements in Topic 842. Adoption of this guidance
affects leases with a term of greater than 12-months and will
result in an increase of approximately $1.0 million in our total
assets and liabilities on our consolidated balance sheets.
We do
not expect adoption of this guidance to have a significant impact
on our consolidated statements of operations.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
ASU 2018-17, Consolidation (Topic 810)
. In October 2018,
FASB issued ASU 2018-17. This ASU provides targeted improvements to
related-party guidance for variable interest entities. In
particular, indirect interests held through related parties in
common control
arrangements
should be considered on a proportional basis for determining
whether fees paid to decision makers and service providers are
variable interests. For entities other than private companies, the
amendments in ASU 2018-17 are effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. We do not expect adoption of this guidance to have a
significant impact on our consolidated financial
statements.
ASU 2018-05, Income Taxes (Topic 740)
. In March
2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs
in ASC 740, Income Taxes, to reflect SAB 118, which provides
guidance for companies that are not able to complete their
accounting for the income tax effects of the Tax Cuts and Jobs Act
in the period of enactment. This guidance also includes
amendments to the XBRL Taxonomy. For public business
entities, the amendments in ASU 2018-05 are effective for fiscal
years ending after December 15, 2020. Early adoption is
permitted. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
Other new pronouncements issued but not yet effective are not
expected to have a material impact on our financial position,
results of operations, or liquidity.
|
(4)
|
Revenue
and Segment Information
|
We have
two reportable business segments: (i) Refinery Operations and (ii)
Tolling and Terminaling. Refinery operations relate to the refining
and marketing of petroleum products at our 15,000-bpd crude
distillation tower. Tolling and terminaling operations relate to
tolling and storage terminaling services under related-party and
third-party lease agreements. Both operations are conducted at the
Nixon Facility.
Revenue from Contracts with Customers
.
●
Disaggregation of Revenue
- Revenue is
presented in the table below under “Segment
Information” disaggregated by business segment because this
is the level of disaggregation that management has determined to be
beneficial to users of our financial statements.
●
Receivables from Contracts with
Customers
- Our receivables from contracts with customers
are reflected as receivables, net as presented on our consolidated
balance sheets.
●
Remaining Performance Obligations
- The
majority of our contracts with customers are spot contracts and
therefore have no remaining performance obligations.
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Segment Information
.
|
|
Twelve
Months December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues (excluding intercompany fees and sales)
|
$
337,038
|
$
3,723
|
$
-
|
$
340,761
|
$
258,449
|
$
-
|
$
258,449
|
|
Intercompany
fees and sales
|
(3,270
)
|
3,270
|
-
|
-
|
-
|
-
|
-
|
|
Operation costs and expenses
(1)
|
(331,220
)
|
(1,332
)
|
(444
)
|
(332,996
)
|
(273,671
)
|
(817
)
|
(274,488
)
|
|
Segment
contribution margin
|
$
2,548
|
$
5,661
|
$
(444
)
|
$
7,765
|
$
(15,222
)
|
$
(817
)
|
$
(16,039
)
|
|
General
and administrative expenses
|
(1,232
)
|
(245
)
|
(1,795
)
|
(3,272
)
|
(2,850
)
|
(1,172
)
|
(4,022
)
|
|
Depreciation
and amortization
|
(1,842
)
|
(91
)
|
-
|
(1,933
)
|
(1,799
)
|
(10
)
|
(1,810
)
|
|
Interest and other non-operating expenses,
net
(2)
|
|
|
|
(3,343
)
|
|
|
(457
)
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
|
(783
)
|
|
|
(22,328
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
|
260
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
$
(523
)
|
|
|
$
(22,328
)
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
$
1,124
|
$
905
|
$
-
|
$
2,029
|
$
4,082
|
$
-
|
$
4,082
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
$
41,116
|
$
28,446
|
$
1,115
|
$
70,677
|
$
71,708
|
$
1,700
|
$
73,408
|
Business
segment information for the periods indicated (and as of the dates
indicated) was as follows:
|
(1)
|
Operation
costs within Refinery Operations includes the arbitration award and
associated fees. Operation cost within Tolling and Terminaling
includes terminal operating expenses, an allocation of other costs
(e.g. insurance and maintenance), and associated refinery fuel use
costs. Operation cost within Corporate and Other includes expenses
associated with our pipeline assets and oil and gas leasehold
interests (such as accretion).
|
|
(2)
|
Reflects
FLNG Land II, Inc. easement revenue in 2017. See “Note (19)
Commitments and Contingencies – FLNG Easements” for
further discussion related to FLNG.
|
In June
2018, Blue Dolphin obtained 100% of the issued and outstanding
membership interest of NPS, a Delaware limited liability company,
from Lazarus Midstream Partners, L.P. (“Lazarus
Midstream”), an affiliate of LEH, pursuant to an Assignment
Agreement. The transaction represents transfer of a vacant shell
entity owned by Lazarus Midstream to Blue Dolphin for the nominal
fee of $10.00. The assignment of interest facilitates the Lazarus
Parties
exploring the possibility of
obtaining the Settlement Financing under the Settlement
Agreement.
The
assignment was accounted for as a combination of entities under
common control. Accordingly, the recognized assets and liabilities
of NPS were transferred at their carrying amounts at the date of
transfer and the results of operations are included for the twelve
months ended December 31, 2018. NPS did not have significant
assets, liabilities or results of operations for the twelve months
ended December 31, 2017. NPS holds a leasehold interest in
petroleum storage tanks at the Nixon Facility. NPS’ revenues
and expenses are included in our Tolling and Terminaling business
segment.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
|
(6)
|
Prepaid Expenses and Other Current Assets
|
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Prepaid
crude oil and condensate
|
$
1,166
|
$
913
|
|
Prepaid
insurance
|
437
|
294
|
|
Other
prepaids
|
183
|
-
|
|
|
|
|
|
|
$
1,786
|
$
1,207
|
Inventory
as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil and condensate
|
$
861
|
$
961
|
|
AGO
|
276
|
213
|
|
Naphtha
|
143
|
170
|
|
Chemicals
|
106
|
162
|
|
HOBM
|
102
|
1,558
|
|
Propane
|
17
|
17
|
|
LPG
mix
|
5
|
8
|
|
|
|
|
|
|
$
1,510
|
$
3,089
|
|
(8)
|
Property, Plant and Equipment, Net
|
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery
and facilities
|
$
63,058
|
$
51,432
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
747
|
653
|
|
|
64,371
|
52,651
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortization
|
(10,429
)
|
(8,495
)
|
|
|
53,942
|
44,156
|
|
|
|
|
|
Construction
in progress
|
10,755
|
20,441
|
|
|
|
|
|
|
$
64,697
|
$
64,597
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest, which is
recorded as part of the asset to which it relates, is depreciated
over the asset’s useful life. Interest cost capitalized,
which is currently included in construction in progress, was $1.3
million and $3.9 million at December 31, 2018 and 2017,
respectively. Capital expenditures at the Nixon Facility are being
funded by working capital derived from revenue from operations and
LEH and its affiliates (including Jonathan Carroll), as well as
from long-term debt from Veritex that was secured in 2015 for
expansion of the Nixon Facility. Unused amounts under the Veritex
loans are reflected in restricted cash (current and non-current
portions) on our consolidated balance sheets and will be available
for use once events of default associated with the Final
Arbitration Award are remedied.
See
“Note (11) Long-Term Debt, Net” for additional
disclosures related to borrowings for capital
spending.
|
(9)
|
Related-Party Transactions
|
Blue
Dolphin and certain of its subsidiaries are party to several
agreements with LEH and its affiliates. Management believes that
these related-party transactions were consummated on terms
equivalent to those that prevail in arm's-length
transactions.
Related Parties
.
LEH
. LEH is our controlling shareholder. Jonathan Carroll,
Chairman of the Board, Chief Executive Officer, and President of
Blue Dolphin, is the majority owner of LEH. Together, LEH and
Jonathan Carroll owned 79.8% of our Common Stock at December 31,
2018. Related-party agreements with LEH include: (i) an Amended and
Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet
Fuel Sales Agreement with LE, (iii) a Loan Agreement with BDPL,
(iv) an Amended and Restated Promissory Note with Blue Dolphin, (v)
a Debt Assumption Agreement with LE, and (vi) an office
sublease-agreement with BDSC. Additionally, in June 2018, Blue
Dolphin obtained 100% of the issued and outstanding membership
interest of NPS from Lazarus Midstream for the nominal fee of
$10.00 pursuant to an Assignment Agreement. (See “Note (5)
NPS Assignment” for further discussion related to the NPS
transaction.)
Ingleside Crude, LLC (“Ingleside”)
. Ingleside is
a related party of LEH and Jonathan Carroll. Blue Dolphin is party
to an Amended and Restated Promissory Note with
Ingleside.
Lazarus Marine Terminal I, LLC (“LMT”)
. LMT is a
related party of LEH and Jonathan Carroll. LE is party to a Dock
Tolling Agreement with LMT.
Jonathan Carroll
. Jonathan Carroll is Chairman of the Board,
Chief Executive Officer, and President of Blue Dolphin.
Related-party agreements with Jonathan Carroll include: (i) Amended
and Restated Guaranty Fee Agreements with LE and LRM and (ii) an
Amended and Restated Promissory Note with Blue Dolphin. The
guaranty fee agreements and the promissory note relate to LE and
LRM USDA-guaranteed loans.
Currently,
we depend on LEH and its affiliates (including Jonathan Carroll and
Ingleside) for financing when revenue from operations and
borrowings under bank facilities are insufficient to meet our
liquidity needs. Such borrowings are reflected in our consolidated
balance sheets in accounts payable, related party, and/or long-term
debt, related party.
Operations Related Agreements
.
Amended and Restated Operating Agreement
. LEH operates and
manages all Blue Dolphin properties pursuant to the Amended and
Restated Operating Agreement. The Amended and Restated Operating
Agreement, which was restructured in 2017 following cessation of
crude supply and marketing activities under the Crude Supply
Agreement and Joint Marketing Agreement with GEL, expires: (i)
April 1, 2020, (ii) upon written notice by either party to the
Amended and Restated Operating Agreement of a material breach by
the other party, or (iii) upon 90 days’ notice by the Board
if the Board determines that the Amended and Restated Operating
Agreement is not in our best interest. LEH receives an operating
fee of 5% of our direct operating expenses. Prior to the fourth
quarter of 2018, the 5% fee was calculated on expenses paid by LEH
on behalf of LE. During the fourth quarter of 2018 the fee was
changed to be calculated based on year to date operating expenses
incurred, regardless of whether they were paid for by LEH or LE.
The LEH operating fee was previously reflected within refinery
operating expenses in our consolidated statements of
operations.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Jet Fuel Sales Agreement
. LE sells jet fuel to LEH pursuant
to a Jet Fuel Sales Agreement. LEH resells the jet fuel purchased
from LE to a government agency. LEH bids for jet fuel contracts are
evaluated under preferential pricing terms due to its HUBZone
certification. The Jet Fuel Sales Agreement terminates on the
earliest to occur of: (a) a one-year term expiring March 31, 2019
plus a 30-day carryover or (b) delivery of a maximum quantity of
jet fuel as defined therein. Sales to LEH under the Jet Fuel Sales
Agreement are reflected within refinery operations revenue in our
consolidated statements of operations. (LRM previously leased
petroleum storage tanks to LEH for the storage of the jet fuel
under a Terminal Services Agreement. The Terminal Services
Agreement was terminated as described below).
Terminal Services Agreement
. Pursuant to a Terminal Services
Agreement, LEH leased petroleum storage tanks from LRM for the
storage of LEH purchased jet fuel under the Jet Fuel Sales
Agreement (as described above). The Terminal Services Agreement was
terminated in June 2017. Rental fees received from LEH under the
Terminal Services Agreement are reflected within tolling and
terminaling revenue in our consolidated statements of
operations.
Amended and Restated Tank Lease Agreement
. Pursuant to an
Amended and Restated Tank Lease Agreement with Ingleside, LE leased
petroleum storage tanks to meet periodic, additional storage needs.
The Amended and Restated Tank Lease Agreement was terminated in
July 2017. Rental fees owed to Ingleside under the tank lease
agreement are reflected within long-term debt, related party, net
of current portion in our consolidated balance sheets.
Dock Tolling Agreement
. In May 2016, LE entered a Dock
Tolling Agreement with LMT to facilitate loading and unloading of
petroleum products by barge at LMT’s dock facility in
Ingleside, Texas. The Dock Tolling Agreement has a five-year term
and may be terminated at any time by the agreement of both parties.
LE pays LMT a flat reservation fee monthly. The reservation fee
includes tolling volumes up to 84,000 gallons per day. Excess
tolling volumes are subject to an increased per gallon rate.
Amounts expensed as tolling fees under the Dock Tolling Agreement
are reflected in cost of goods sold in our consolidated statements
of operations.
Office Sub-Lease Agreement
. In January 2018, BDSC entered
into an Office Space Agreement with LEH to lease office space at
our headquarters building in Houston, Texas. The Office Space
Agreement has a term of sixty-eight (68) months expiring on August
31, 2023. Under the Office Space Agreement, LEH’s base rent
for 6,264 square feet is approximately $0.02 million per month. The
Office Space Agreement includes rent abatement
periods.
Financial Agreements
.
We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. During 2018 and
2017, LEH and its affiliates (Ingleside and Jonathan Carroll)
provided working capital to Blue Dolphin in the form of a term loan
and non-cash advances (such as conversion of accounts payable to
debt under promissory notes). Our long-term debt, related party is
currently in default.
There
can be no assurance that LEH and its affiliates will continue to
fund our working capital requirements. Outstanding principal and
accrued interest owed under these financial agreements are
reflected in long-term debt, related party, current portion in our
consolidated balance sheets.
BDPL Loan Agreement (
In Default
)
. BDPL has a 2016 loan agreement and
related security agreement with LEH as lender (the “BDPL Loan
Agreement”). The BDPL Loan Agreement is currently in default
due to non-payment. Key terms of the BDPL Loan Agreement are as
follow:
|
Principal
Amount:
|
$4.0
million
|
|
Maturity
Date:
|
August
2018
|
|
Principal
and Interest Payment:
|
$500,000
annually
|
|
Interest
Rate:
|
16.00%
|
The
proceeds of the BDPL Loan Agreement were used for working capital.
There are no financial maintenance covenants associated with the
BDPL Loan Agreement. The BDPL Loan Agreement is secured by certain
property owned by BDPL. Outstanding principal owed to LEH under the
BDPL Loan Agreement is reflected in long-term debt, related party,
current portion in our consolidated balance sheets. Accrued
interest under the BDPL Loan Agreement is reflected in interest
payable, related party, current portion in our consolidated balance
sheets.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Promissory
Notes (
In Default
)
.
Working capital provided to Blue Dolphin in the form of non-cash
advances whereby accounts payable, related party was converted to
debt under promissory notes are reflected below. The promissory
notes matured in January 2019. Interest, which is compounded
annually, is still accruing at a rate of 8.00%. The promissory
notes are currently in default due to non-payment.
●
June LEH Note
– The June LEH Note
reflects amounts owed to LEH at December 31, 2018 under the Amended
and Restated Operating Agreement.
●
March Ingleside Note
– The March
Ingleside Note reflects amounts owed to Ingleside at December 31,
2018 under the Amended and Restated Tank Lease
Agreement.
●
March Carroll Note
–The March
Carroll Note reflects amounts owed to Jonathan Carroll at December
31, 2018 under the guaranty fee agreements. Jonathan Carroll has
received no payments under the promissory note, either in cash or
common stock, since May 2017.
Amended and Restated Guaranty Fee Agreements
. Jonathan
Carroll was required to provide a guarantee for repayment of funds
borrowed and interest accrued under certain LE and LRM
USDA-guaranteed loans. For his personal guarantee, LE and LRM each
entered a Guaranty Fee Agreement with Jonathan Carroll whereby he
earns a fee equal to 2.00% per annum of the outstanding principal
balance owed under the loan agreements. Effective in April 2017,
the Guaranty Fee Agreements were amended and restated (the
“Amended and Restated Guaranty Fee Agreements”) to
reflect payment in cash and shares of Blue Dolphin Common Stock.
Amounts owed to Jonathan Carroll under Amended and Restated
Guaranty Fee Agreements are reflected within long-term debt,
related party, net of current portion in our consolidated balance
sheets.
Guaranty fees are recognized
monthly as incurred and are included in interest and other expense
in our consolidated statements of operations.
(See
“Note (11) Long-Term Debt, Net – Amended and Restated
Guaranty Fee Agreements” for a breakdown of guaranty fee
expenses for each secured loan agreement.) Jonathan Carroll has
received no payments under guaranty fee agreements, either in cash
or common stock, since May 2017.
Debt Assumption Agreement
. On September 18, 2017, LEH paid, on
LE’s behalf, certain obligations totaling $3.6 million to GEL
relating to the GEL Arbitration and the GEL Letter Agreement. In
exchange for such payments, LE agreed to assume $3.7 million of
LEH’s existing indebtedness pursuant to the Debt Assumption
Agreement, entered on November 14, 2017 and made effective
September 18, 2017, by and among LE, LEH and John Kissick. Debt
held by John Kissick, including the debt
associated with the
Debt Assumption Agreement, is reported in this Annual Report as the
Notre Dame Debt (defined below) and is reflected in long-term debt
less unamortized debt issue costs, current portion in our
consolidated balance sheets, as it is currently in default. (See
“Note (11) Long-Term Debt, Net” for further discussion
related to the Notre Dame Debt.)
Financial Statements Impact
.
Consolidated Balance Sheets
. Accounts receivable, related
party from LEH associated with the Jet Fuel Sales Agreement were $0
and $0.7 million at December 31, 2018 and 2017, respectively.
Accounts payable, related party to LMT associated with the Dock
Tolling Agreement were $1.5 million and $1.0 million at December
31, 2018 and 2017, respectively.
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Long-term
debt, related party associated with the BDPL Loan Agreement, the
March Ingleside Note, and the March Carroll Note as of the dates
indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LEH
|
$
4,611
|
$
4,000
|
|
Ingleside
|
1,283
|
1,169
|
|
Jonathan
Carroll
|
1,147
|
439
|
|
|
|
|
|
|
7,041
|
5,608
|
|
|
|
|
|
Less:
Long-term debt, related party,
current portion
|
(7,041
)
|
(4,000
)
|
|
|
|
|
|
|
$
-
|
$
1,608
|
Accrued
interest associated with the BDPL Loan Agreement was $1.5 million
and $0.9 million at December 31, 2018 and 2017, respectively.
Interest on the March Ingleside Note and the March Carroll Note is
compounded and reported as part of the outstanding
balance.
Consolidated Statements of Operations
. Revenue from related
parties was as follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
|
|
|
(in thousands, except percent
amounts)
|
|
Refinery
operations
|
|
|
|
|
|
LEH
|
$
98,571
|
28.9
%
|
$
81,094
|
31.3
%
|
|
Other
customers
|
238,467
|
70.0
%
|
174,453
|
67.5
%
|
|
Tolling
and terminaling
|
|
|
|
|
|
LEH
|
-
|
0.0
%
|
675
|
0.3
%
|
|
Other
customers
|
3,723
|
1.1
%
|
2,227
|
0.9
%
|
|
|
|
|
|
|
|
|
$
340,761
|
100.0
%
|
$
258,449
|
100.0
%
|
Fees
associated with the Dock Tolling Agreement with LMT totaled $0.6
million for both the twelve months ended December 31, 2018 and
2017. Lease payments under the office sub-lease agreement with LEH
totaled $0.03 million and $0.2 million for the twelve months ended
December 31, 2018 and 2017, respectively.
The LEH
operating fee for the twelve months ended December 31, 2018 totaled
$0.6 million compared to $0.8 million, a decrease of $0.2 million,
or 25%, compared to the same twelve-month period a year earlier.
The decrease in the LEH operating fee was due to the fee
restructure under the Amended and Restated Operating Agreement in
April 2017.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Interest
expense associated with the BDPL Loan Agreement, the Amended and
Restated Guaranty Fee Agreements, and the related-party promissory
notes (the June LEH Note, the March Ingleside Note, and the March
Carroll Note) for the periods indicated was as
follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
|
|
|
(in thousands)
|
|
Jonathan
Carroll
|
$
700
|
$
685
|
|
LEH
|
648
|
706
|
|
Ingleside
|
97
|
92
|
|
|
|
|
|
|
$
1,445
|
$
1,483
|
|
(10)
|
Accrued Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
revenue
|
$
434
|
$
450
|
|
Board
of director fees payable
|
273
|
207
|
|
Other
payable
|
265
|
116
|
|
Easement
payable
|
223
|
-
|
|
Accrued
rent
|
111
|
-
|
|
Customer
deposits
|
109
|
109
|
|
Insurance
|
61
|
68
|
|
Property
taxes
|
48
|
131
|
|
Excise
and income taxes payable
|
47
|
79
|
|
|
|
|
|
|
$
1,571
|
$
1,160
|
USDA Guaranteed Loans
. Certain of our long-term debt is
guaranteed by the United States Department of Agriculture (the
“USDA”). The USDA, acting through its agencies,
administers a federal rural credit program that makes direct loans
and guarantees portions of loans made and serviced by
USDA-qualified lenders for various purposes. Each USDA guarantee is
a full faith and credit obligation of the United States with the
USDA guaranteeing up to 100% of the principal amount of guaranteed
loans. The lender on each USDA guaranteed loan is required by
regulation to retain the unguaranteed portion of the guaranteed
loan, to service the entire underlying guaranteed loan, including
the USDA-guaranteed portion and the unguaranteed portion, and to
remain mortgage and/or secured party of record. The USDA-guaranteed
portion and the unguaranteed portion of the loan are to be secured
by the same collateral with equal lien priority. The
USDA-guaranteed portion of a loan cannot be paid later than, or in
any way be subordinated to, the related unguaranteed portion.
During 2015, LE and LRM obtained loans each with a USDA guarantee
of 100% through Sovereign as lender (now
Veritex, as successor in interest to Sovereign by
merger)
in the aggregate amount of $35.0 million. The LE
$25.0 million USDA-guaranteed loan is referenced herein as the
“First Term Loan Due 2034”. The LRM $10.0 million
USDA-guaranteed loan is referenced herein as the “Second Term
Loan Due 2034”.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Amended and Restated Guaranty Fee Agreements
. As a condition
of the First Term Loan Due 2034 and Second Term Loan Due 2034,
Jonathan Carroll was required to provide a guarantee for
r
epayment
of funds
borrowed and interest accrued under the USDA-guaranteed loans. LEH,
LRM and Blue Dolphin also cross-guaranteed the First Term Loan Due
2034 and Second Term Loan Due 2034. (See “Note (9)
Related-Party Transactions” for additional disclosures
related to LEH, Jonathan Carroll, and the Amended and Restated
Guaranty Fee Agreements.)
Guaranty
fees earned by Jonathan Carroll for the periods indicated were as
follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
|
|
|
(in
thousands)
|
|
First
Term Loan Due 2034
|
$
456
|
$
471
|
|
Second
Term Loan Due 2034
|
188
|
192
|
|
|
|
|
|
|
$
644
|
$
663
|
Defaults in USDA-Guaranteed Loan Agreements
. As described
elsewhere in this Annual Report, Veritex notified LE and LRM that
the Final Arbitration Award constitutes an event of default under
the First Term Loan Due 2034 and the Second Term Loan Due 2034. In
addition to existing events of default related to the Final
Arbitration Award, at December 31, 2018, LE and LRM were in
violation of the debt service coverage ratio, the current ratio,
and debt-to-net worth ratio financial covenants related to the
First Term Loan Due 2034 and Second Term Loan 2034. LE also failed
to replenish a payment reserve account as required under the First
Term Loan Due 2034. The occurrence of events of default under the
First Term Loan Due 2034 and Second Term Loan Due 2034 permits
Veritex to declare the amounts owed under the First Term Loan Due
2034 and Second Term Loan Due 2034 immediately due and payable,
exercise its rights with respect to collateral securing LE and
LRM’s obligations under the loan agreements, and/or exercise
any other rights and remedies available.
Veritex has not accelerated or called due the
First Term Loan Due 2034 and Second Term Loan Due 2034 considering
the Settlement Agreement, which Veritex must ultimately approve.
Instead, Veritex has expressly reserved
all its rights,
privileges and remedies related to events of default under the
First Term Loan Due 2034 and Second Term Loan Due 2034 and informed
LE and LRM that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements. Additionally, Veritex must ultimately approve the
Settlement. Any exercise by Veritex of its rights and remedies
under the First Term Loan Due 2034 and Second Term Loan Due 2034
would have a material adverse effect on our business, financial
condition, and results of operations and would likely require Blue
Dolphin to seek protection under bankruptcy laws. (See “Note
(1) Organization – “Going Concern” and “
– Operating Risks” for additional disclosures related
to the First Term Loan Due 2034 and Second Term Loan Due 2034, the
Final Arbitration Award and financial covenant
violations.)
Long-Term Debt, Net Outstanding Balances
. Long-term debt,
net represents the outstanding principal of long-term debt less
associated debt issue costs. [See “Note (9) Related-Party
Transactions” for additional disclosures with respect to
related-party long-term debt.] As described within this “Note
(11”) Long-Term Debt, Net,” certain of our long-term
debt is currently in default. Long-term debt, net as of the dates
indicated consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
First
Term Loan Due 2034 (in default)
|
$
22,550
|
$
23,199
|
|
Second
Term Loan Due 2034 (in default)
|
9,300
|
9,502
|
|
Notre
Dame Debt (in default)
|
4,978
|
4,978
|
|
|
41
|
-
|
|
|
$
36,869
|
$
37,679
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(34,863
)
|
(35,544
)
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(2,006
)
|
(2,135
)
|
|
|
|
|
|
|
$
-
|
$
-
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Unamortized
debt issue costs, which relate to secured loan agreements with
Veritex, as of the dates indicated consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Term Loan Due 2034 (in default)
|
$
1,674
|
$
1,674
|
|
Second
Term Loan Due 2034 (in default)
|
768
|
768
|
|
|
|
|
|
Less:
Accumulated amortization
|
(436
)
|
(307
)
|
|
|
|
|
|
|
$
2,006
|
$
2,135
|
Amortization
expense was $0.1 million for both the twelve months ended December
31, 2018 and 2017.
Accrued
interest associated with long-term debt, net is reflected as
interest payable, in default and interest payable, related party,
in default in our consolidated balance sheets. Accrued interest as
of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notre
Dame Debt (in default)
|
$
2,843
|
$
2,046
|
|
BDPL
Loan Agreement (related party, in default)
|
1,534
|
892
|
|
Second
Term Loan Due 2034 (in default)
|
53
|
49
|
|
First
Term Loan Due 2034 (in default)
|
43
|
40
|
|
|
|
|
|
|
4,473
|
3,027
|
|
|
|
|
|
Less:
Interest payable, current portion
|
(4,473
)
|
(3,027
)
|
|
|
|
|
|
Long-term
interest payable, net of current portion
|
$
-
|
$
-
|
At
December 31, 2018, our expected future debt payments are presented
as current due to defaults under the loan agreements:
|
Years Ending December
31,
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
$
43,910
|
$
(2,006
)
|
$
41,904
|
|
2020
|
-
|
-
|
-
|
|
2021
|
-
|
-
|
-
|
|
2022
|
-
|
-
|
-
|
|
2023
|
-
|
-
|
-
|
|
|
-
|
-
|
-
|
|
|
$
43,910
|
$
(2,006
)
|
$
41,904
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
First Term Loan Due 2034 (In Default)
. Key terms of the
First Term Loan Due 2034 are as follow:
|
Principal
Amount:
|
$25.0
million
|
|
Maturity
Date:
|
June
2034
|
|
Principal
and Interest Payment:
|
$0.2
million monthly
|
|
Interest
Rate:
|
Wall
Street Journal Prime Rate plus 2.75%
|
A
portion of the proceeds of the First Term Loan Due 2034 were used
to refinance approximately $8.5 million of debt owed under a
previous debt facility with American First National Bank. Remaining
proceeds are being used primarily to construct new petroleum
storage tanks at the Nixon Facility. The First Term Loan Due 2034,
which is 100% USDA-guaranteed, is secured by: (i) a first lien on
the Nixon Facility’s business assets (excluding accounts
receivable and inventory), (ii) assignment of all Nixon Facility
contracts, permits, and licenses, (iii) absolute assignment of
Nixon Facility rents and leases, including tank rental income, (iv)
a payment reserve account held by Veritex, and (v) a pledge of $5.0
million of a life insurance policy on Jonathan Carroll. The First
Term Loan Due 2034 contains representations and warranties,
affirmative, restrictive, and financial covenants, as well as
events of default which are customary for bank facilities of this
type.
Pursuant
to a construction rider in the First Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
Second Term Loan Due 2034 (In Default)
. Key terms of the
Second Term Loan Due 2034 are as follow:
|
Principal
Amount:
|
$10.0
million
|
|
Maturity
Date:
|
December
2034
|
|
Principal
and Interest Payment:
|
$0.1
million monthly
|
|
Interest
Rate:
|
Wall
Street Journal Prime Rate plus 2.75%
|
A
portion of the proceeds of the Second Term Loan Due 2034 were used
to refinance a previous bridge loan from Veritex in the amount of
$3.0 million, the funds of which were used to purchase idle
refinery equipment for refurbishment and use at the Nixon Facility.
Remaining proceeds are being used primarily to construct additional
new petroleum storage tanks at the Nixon Facility. The Second Term
Loan Due 2034, which is 100% USDA-guaranteed, is secured by: (i) a
second priority lien on the rights of LE in the crude distillation
tower and the other collateral of LE pursuant to a security
agreement; (ii) a first priority lien on the real property
interests of LRM; (iii) a first priority lien on all of LRM’s
fixtures, furniture, machinery and equipment; (iv) a first priority
lien on all of LRM’s contractual rights, general intangibles
and instruments, except with respect to LRM’s rights in its
leases of certain specified tanks, with respect to which Veritex
has a second priority lien in such leases subordinate to a prior
lien granted by LRM to Veritex to secure obligations of LRM under a
term loan that matured in 2017; and (v) all other collateral as
described in the security documents. The Second Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Pursuant
to a construction rider in the Second Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
Notre Dame Debt (In Default)
. LE entered a loan with Notre
Dame Investors, Inc. as evidenced by a promissory note that is
currently held by John Kissick (the “Notre Dame Debt”).
Key terms of the Notre Dame Debt are as follow:
|
Original
Principal Amount:
|
$8.0
million
|
|
Additional
Principal:
|
$3.7
million
|
|
Maturity
Date:
|
January
2018
|
|
Principal
and Interest Payment:
|
None;
payment rights subordinated to senior lender
|
|
Default
Interest Rate:
|
16.00%
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Pursuant
to a Sixth Amendment to the Notre Dame Debt, entered on November
14, 2017 and made effective September 18, 2017, the Notre Dame Debt
was amended to increase the principal amount by $3.7 million (the
“Additional Principal”). The Additional Principal was
used to make payments to GEL to reduce the balance of the Final
Arbitration Award in the amount of $3.6 million in accordance with
the GEL Letter Agreement. Pursuant to a Subordination Agreement
dated June 2015, the holder of the Notre Dame Debt agreed to
subordinate its right to payments, as well as any security interest
and liens on the Nixon Facility’s business assets, in favor
of Veritex as holder of the First Term Loan Due 2034. To date, no
payments have been made to Notre Dame Investors, Inc. under the
Notre Dame Debt.
The
Notre Dame Debt is secured by a Deed of Trust, Security Agreement
and Financing Statements (the “Subordinated Deed of
Trust”), which encumbers the crude distillation tower and
general assets of LE. There are no financial maintenance
covenants associated with the Notre Dame Debt.
Capital Leases
. Capital leases relate to equipment used at
the Nixon Facility as follow:
●
Boiler Equipment Lease
. In
2014, LRM entered a 36-month build-to-suit capital lease for the
purchase two new boilers for the Nixon Facility. One of the boilers
was placed in service during the second quarter of 2017. The other
boiler remains in construction in progress. The lease was paid off
in the first quarter of 2018.
●
Crane Lease
. In January 2018,
LE entered a 24-month capital lease for the purchase of a 20-ton
crane for use at the Nixon Facility. The lease requires a
negligible monthly payment and matures in January
2020.
A
summary of equipment held under long-term capital leases as of the
dates indicated follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boiler
equipment
|
$
-
|
$
539
|
|
Crane
|
94
|
-
|
|
Less:
accumulated depreciation
|
(14
)
|
(21
)
|
|
|
|
|
|
|
$
80
|
$
518
|
|
Years
Ending December 31,
|
|
|
(in thousands)
|
|
|
|
|
|
2019
|
$
41
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
-
|
|
2023
|
-
|
|
|
-
|
|
|
$
41
|
|
(12)
|
Asset Retirement Obligations
|
Refinery and Facilities
. Management has concluded that there
is no legal or contractual obligation to dismantle or remove the
refinery and facilities assets. Management believes that the
refinery and facilities assets have indeterminate lives under FASB
ASC guidance for estimating AROs because dates or ranges of dates
upon which we would retire these assets cannot reasonably be
estimated at this time. When a legal or contractual obligation to
dismantle or remove the refinery and facilities assets arises and a
date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Pipelines and Facilities and Oil and Gas Properties
. We have
AROs associated with the dismantlement and abandonment in place of
our pipelines and facilities assets, as well as the plugging and
abandonment of our oil and gas properties. We recorded a discounted
liability for the fair value of an ARO with a corresponding
increase to the carrying value of the related long-lived asset at
the time the asset was installed or placed in service. We
depreciate the amount added to property and equipment and recognize
accretion expense relating to the discounted liability over the
remaining life of the asset. Plugging and abandonment costs are
recorded during the period incurred or as information becomes
available to substantiate actual and/or probable
costs.
Changes
to our ARO liability for the periods indicated were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, at the beginning of the period
|
$
2,315
|
$
2,028
|
|
Accretion
expense
|
265
|
287
|
|
|
2,580
|
2,315
|
|
Less:
asset retirement obligations, current portion
|
(2,580
)
|
(2,315
)
|
|
|
|
|
|
Long-term
asset retirement obligations, at the end of the period
|
$
-
|
$
-
|
BDPL’s
Blue Dolphin Pipeline has been inactive since September 2012. Due
to the length of inactivity, BDPL is required by the Bureau of
Safety and Environmental Enforcement (“BSEE”) to: (i)
flush and fill the Blue Dolphin Pipeline, (ii) abandon-in-place a
portion of the Blue Dolphin Pipeline’s 20” segment and
certain smaller diameter connecting lateral lines that reside
offshore in federal waters and (iii) remove from federal waters the
GA-288C anchor platform. In April 2016, BDPL submitted
decommissioning permit applications to BSEE for three (3) pipeline
segments – Segments #13101, #9428, and #15635 – and the
GA-288C anchor platform. In June 2016, BDPL also submitted a
decommissioning permit application to the U.S. Army Corps of
Engineers for abandonment of Segment #9428. The permit applications
were granted by BSEE at varying dates between August 2016 and April
2017. Work must typically be completed within 120 days from the
date of permit approval. Abandonment timing primarily depends on
resource availability and weather conditions in the Gulf of Mexico.
Management anticipates performing abandonment work during 2019.
Weather conditions in the Gulf of Mexico during the winter months
is typically not conducive to abandonment operations. As of the
date of this Annual Report, decommissioning work has not yet been
completed.
For the
years ended December 31, 2018 and 2017, we recorded impairment
expense of $0 and $0.3 million, respectively. The impairment
expense for the year ended December 31, 2017 related to trade name.
At the time of the 2012 reverse acquisition, our trade name
valuation was tied to pipeline transportation and exploration and
production revenue and assumed, under the relief-from-royalty
approach, a growth rate of 2.2% annually. Although growth in these
operations did not materialize for economic reasons, management
believed there was value associated with Blue Dolphin’s
listing as a publicly-traded company. Given the decline in the
price per share of our common stock following the Final Arbitration
Award, we fully impaired the trade name asset. Trade name is not
associated with, nor is it material to, our refinery operations
business segment.
At
December 31, 2018 and 2017, we had 0 shares of treasury stock. In
May 2017, we issued 150,000 shares of treasury stock to Jonathan
Carroll as payment for amounts due under the March Carroll Note.
The issuance price of the treasury stock issued to Mr. Carroll was
$2.48 per share, which represents the preceding 30-day average
closing price of the Common Stock, in accordance with the Amended
and Restated Guaranty Fee Agreements. The shares of treasury stock
issued to Mr. Carroll are restricted per applicable securities
holding periods for affiliates. (See “Note (9) Related-Party
Transactions” and “Note (11) Long-Term Debt, Net
– Amended and Restated Guaranty Fee Agreements” for
additional disclosures related to Jonathan Carroll and the Amended
and Restated Guaranty Fee Agreements.)
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
|
(15)
|
Concentration of Risk
|
Bank Accounts
. Financial instruments that potentially
subject us to concentrations of risk consist primarily of cash,
trade receivables and payables. We maintain our cash balances at
financial institutions located in Houston, Texas. In the U.S., the
Federal Deposit Insurance Corporation (the “FDIC”)
insures certain financial products up to a maximum of $250,000 per
depositor. At December 31, 2018 and 2017, we had cash balances
(including restricted cash) of more than the FDIC insurance limit
per depositor in the amount of $1.2 million and $1.6 million,
respectively.
Key Supplier
.
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently provides us
with adequate amounts of crude oil and condensate on favorable
terms, and we expect the supplier to continue to do so for the
foreseeable future.
Our ability to
purchase adequate amounts of crude oil and condensate could be
adversely affected if the Settlement Agreement is terminated and
GEL seeks to confirm and enforce the Final Arbitration Award, as
well as other factors, including as
net losses, working
capital deficits, and financial covenant defaults in secured loan
agreements.
Significant Customers
. We routinely assess the financial
strength of our customers and have not experienced significant
write-downs in our accounts receivable balances. Therefore, we
believe that our accounts receivable credit risk exposure is
limited.
For the
twelve months ended December 31, 2018, we had 4 customers that
accounted for approximately 91% of our refined petroleum product
sales. LEH was 1 of these 4 significant customers and accounted for
approximately 29% of our refined petroleum product
sales. At December 31, 2018, these 4 customers
represented approximately $0.1 million in accounts
receivable. LEH represented approximately $0 in accounts
receivable. LEH purchases our jet fuel and resells the jet fuel to
a government agency. LEH bids for jet fuel contracts are evaluated
under preferential pricing terms due to its HUBZone certification.
(See “Note (9) Related-Party Transactions,” “Note
(11) Long-Term Debt, Net,” and “Note (19) Commitments
and Contingencies – Financing Agreements” for
additional disclosures related to LEH.)
For the
twelve months ended December 31, 2017, we had 3 customers that
accounted for approximately 70% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and accounted for
approximately 33% of our refined petroleum product
sales. At December 31, 2017, these 3 customers
represented approximately $1.3 million in accounts
receivable. LEH represented approximately $0.7 in
accounts receivable.
Refined Petroleum Product Sales
. Our refined petroleum
products are primarily sold in the U.S. However, with the opening
of the Mexican diesel market to private companies, we occasionally
sell low-sulfur diesel to customers that export to Mexico. Total
refined petroleum product sales by distillation (from light to
heavy) for the periods indicated consisted of the
following:
|
|
Twelve
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LPG
mix
|
$
3
|
0.0
%
|
$
123
|
0.0
%
|
|
Naphtha
|
82,982
|
24.6
%
|
60,408
|
23.6
%
|
|
Jet
fuel
|
98,570
|
29.2
%
|
81,094
|
31.7
%
|
|
HOBM
|
80,979
|
24.1
%
|
54,851
|
21.5
%
|
|
AGO
|
74,504
|
22.1
%
|
59,071
|
23.2
%
|
|
|
|
|
|
|
|
|
$
337,038
|
100.0
%
|
$
255,547
|
100.0
%
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
BDSC
leases our principal office space in Houston, Texas under a 2006
lease agreement. Effective January 1, 2018, BDSC entered an amended
lease agreement (the “Lease Amendment”) that extended
the lease period by sixty-eight (68) months expiring on August 31,
2023. Under the Lease Amendment, our base rent for 7,675 square
feet is approximately $0.02 million per month. LEH subleases
approximately 82% of this leased office space [see “Note (9)
Related-Party Transactions” related to the LEH office
sub-lease agreement]. The Lease Amendment includes an
allowance for lessee improvements, rent abatements, and a five-year
renewal option. For the twelve months ended December 31, 2018 and
2017, rent expense totaled $0.2 million.
At
December 31, 2018, future minimum lease commitments that are
non-cancelable under the Lease Amendment are as
follow:
Years
Ending December 31,
|
|
|
(in thousands)
|
|
|
2019
|
$
190
|
|
2020
|
230
|
|
2021
|
233
|
|
2022
|
237
|
|
2023
|
161
|
|
|
|
|
|
$
1,051
|
The Tax
Cuts and Jobs Act was signed into law in December 2017. The
principal element of the Tax Cuts and Jobs Act relevant to our
financial statements is a reduction in the U.S. federal corporate
tax rate from 34% to 21%, effective January 1, 2018. Other
provisions of the Tax Cuts and Jobs Act did not have a significant
impact on our financial statements for the twelve months ended
December 31, 2018 and 2017.
The
provision for income tax benefit (expense) as of the dates
indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$
108
|
$
-
|
|
State
|
43
|
-
|
|
Deferred
|
|
|
|
Impact
of change in enacted tax rates
|
-
|
(6,654
)
|
|
Change
in valuation allowance
|
109
|
6,654
|
|
Total
provision for income taxes
|
$
260
|
$
-
|
The
state of Texas has a Texas margins tax (“TMT”), which
is a form of business tax imposed on gross margin. Although TMT is
imposed on an entity’s gross profit rather than on its net
income, certain aspects of TMT make it like an income tax.
Accordingly, TMT is treated as an income tax for financial
reporting purposes. For the twelve months ended December 31, 2018
and 2017, we recognized income relating to state income tax of
$0.04 million and $0, respectively.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Effective Tax Rate
. Our effective tax rate was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Expected
tax rate
|
(
21.00
%)
|
(34.00
%)
|
|
Permanent
differences
|
0.00
%
|
0.00
%
|
|
State
tax
|
(5.10
%)
|
0.00
%
|
|
Federal
tax
|
(28.10
%)
|
0.00
%
|
|
Change
in valuation allowance
|
21.00
%
|
34.00
%
|
|
|
(33.2
%)
|
0.00
%
|
In
2018, our effective tax rate differed from the U.S. federal
statutory rate primarily due to AMT credits made refundable by the
Tax Cuts and Jobs Act. In 2017, our effective tax rate differed
from the U.S. federal statutory rate primarily due to re-measuring
deferred income taxes at the new statutory tax rate and the related
change of the valuation allowance over our deferred tax assets. At
the date of enactment of the Tax Cuts and Jobs Act, we re-measured
our deferred tax assets and liabilities using a rate of 21%, which
is the rate expected to be in place when such deferred assets and
liabilities are expected to reverse in the future. The
re-measurement was offset by a change in our valuation allowance,
resulting in there being no impact on our net deferred tax
assets.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss and capital loss carryforwards
|
$
11,260
|
$
9,767
|
|
Accrued
arbitration award payable
|
2,850
|
4,122
|
|
Business
interest expense
|
704
|
-
|
|
Start-up
costs (crude oil and condensate processing facility)
|
678
|
763
|
|
Asset
retirement obligations liability/deferred revenue
|
542
|
495
|
|
AMT
credit and other
|
108
|
217
|
|
Total
deferred tax assets
|
16,142
|
15,365
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(5,153
)
|
(4,415
)
|
|
Total
deferred tax liabilities
|
(5,153
)
|
(4,415
)
|
|
|
|
|
|
|
10,989
|
10,950
|
|
|
|
|
|
Valuation
allowance
|
(10,881
)
|
(10,950
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
108
|
$
-
|
Deferred Income Taxes
. Deferred income tax balances reflect
the effects of temporary differences between the carrying amounts
of assets and liabilities and their tax basis, as well as from NOL
carryforwards. We state those balances at the enacted tax rates we
expect will be in effect when taxes are paid. NOL carryforwards and
deferred tax assets represent amounts available to reduce future
taxable income.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
NOL Carryforwards
. Under IRC Section 382, a corporation that
undergoes an “ownership change” is subject to
limitations on its use of pre-change NOL carryforwards to offset
future taxable income. Within the meaning of IRC Section 382, an
“ownership change” occurs when the aggregate stock
ownership of certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than 50
percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three years). For
income tax purposes, we experienced ownership changes in 2005,
relating to a series of private placements, and in 2012, because of
a reverse acquisition, that limit the use of pre-change NOL
carryforwards to offset future taxable income. In general, the
annual use limitation equals the aggregate value of common stock at
the time of the ownership change multiplied by a specified
tax-exempt interest rate. The 2012 ownership change will subject
approximately $16.3 million in NOL carryforwards that were
generated prior to the ownership change to an annual use limitation
of approximately $0.6 million per year. Unused portions of the
annual use limitation amount may be used in subsequent years.
Because of the annual use limitation, approximately $6.7 million in
NOL carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were generated
after the 2012 ownership change and prior to 2018 are not subject
to an annual use limitation under IRC Section 382 and may be used
for a period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change. NOL
carryforwards that were generated after 2017 may only be used to
offset 80% of taxable income and are carried forward
indefinitely.
NOL
carryforwards that remained available for future use for the
periods indicated were as follow (amounts shown are net of NOLs
that will expire unused because of the IRC Section 382
limitation):
|
|
Net
Operating Loss Carryforward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
$
9,614
|
$
23,563
|
$
33,177
|
|
|
|
|
|
|
Net
operating losses
|
-
|
6,656
|
6,656
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
$
9,614
|
$
30,219
|
$
39,833
|
|
|
|
|
|
|
Net
operating losses
|
-
|
7,106
|
7,106
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$
9,614
|
$
37,325
|
$
46,939
|
Valuation Allowance
. As of each reporting date, management
considers new evidence, both positive and negative, to determine
the realizability of deferred tax assets. Management considers
whether it is more likely than not that some portion or all the
deferred tax assets will be realized, which is dependent upon the
generation of future taxable income prior to the expiration of any
NOL carryforwards. At December 31, 2018 and 2017, management
determined that cumulative losses incurred over the prior
three-year period provided significant objective evidence that
limited the ability to consider other subjective evidence, such as
projections for future growth. Based on this evaluation, we
recorded a valuation allowance against the deferred tax assets for
which realization was not deemed more likely than not as of
December 31, 2018 and 2017.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Twelve
Months Ended December 31,
|
|
|
|
|
|
Net
loss
|
$
(523
)
|
$
(22,328
)
|
|
|
|
|
|
Basic
and diluted loss per share
|
$
(0.05
)
|
$
(2.09
)
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
|
common
stock outstanding and potential
|
|
|
|
dilutive
shares of common stock
|
10,935,787
|
10,689,615
|
Diluted
EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares of common
stock outstanding. Diluted EPS for the twelve months ended December
31, 2018 and 2017 was the same as basic EPS as there were no stock
options or other dilutive instruments outstanding.
|
(19)
|
Commitments and Contingencies
|
Legal Matters
.
Final Arbitration Award and Settlement Agreement
. See "Part
I, Item 3. Legal Proceedings” and “Note (1)
Organization – Going Concern – Final Arbitration Award
and Settlement Agreement” for additional disclosures related
to the Final Arbitration Award and the Settlement
Agreement.
Veritex Secured Loan Agreement Events of Default
. See
“Note (1) Organization – Going Concern – Veritex
Secured Loan Agreement Events of Default” and “Note
(11) Long-Term Debt, Net” for disclosures related to defaults
under secured loan agreements.
Other Legal Matters
. We are involved in lawsuits, claims,
and proceedings incidental to the conduct of our business,
including mechanic’s liens, contract-related disputes,
administrative proceedings, and financial assurance (bonding)
requirements with regulatory bodies. Management is in discussion
with all concerned parties and does not believe that such matters
will have a material adverse effect on our financial position,
earnings, or cash flows.
However,
there can be no assurance that such discussions will result in a
manageable outcome or that we will be able to meet financial
assurance (bonding) requirements. If Veritex does not approve the
Settlement or exercises its rights and remedies under the secured
loan agreements or if the Settlement Agreement with GEL is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and Blue
Dolphin and its affiliates would likely be required to seek
protection under bankruptcy laws.
Amended and Restated Operating Agreement
. See “Note
(9) Related-Party Transactions” for additional disclosures
related to the Amended and Restated Operating
Agreement.
FLNG Easements
. BDPL and FLNG were parties to a Pipeline
Easement dated November 5, 2005 (the “FLNG Pipeline
Easement”) and the FLNG Master Easement Agreement (together
with the FLNG Pipeline Easement, the “FLNG Easements”).
The FLNG Easements provided FLNG and its affiliates: (i) a pipeline
easement and right of way across BDPL-owned property to certain
property owned by FLNG and (ii) rights of ingress and egress across
BDPL-owned property to the property owned by FLNG. Under the FLNG
Easements, FLNG made payments to us in the amount of $0.5 million
each year. The FLNG Easements were terminated in February
2017.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Financing Agreements
. See “Note (11) Long-Term Debt,
Net” for additional disclosures related to financing
agreements.
Guarantees
. LEH and Jonathan Carroll provided guarantees on
certain Blue Dolphin-related long-term debt. The maximum amount of
any guarantee is reduced as payments are made. See “Note (11)
Long-Term Debt, Net” for additional disclosures related to
guarantees.
Health, Safety and Environmental Matters
. Our operations are
subject to extensive federal, state, and local environmental,
health, and safety regulations governing, among other things, the
generation, storage, handling, use and transportation of petroleum
products and hazardous substances; the emission and discharge of
materials into the environment; waste management; characteristics
and composition of jet fuel and other products; and the monitoring,
reporting and control of air emissions. Our operations also require
numerous permits and authorizations under various environmental,
health, and safety laws and regulations. Failure to obtain and
comply with these permits or environmental, health, or safety laws
generally could result in fines, penalties or other sanctions, or a
revocation of our permits.
Nixon Facility Expansion
. We
have made and continue to make
capital and efficiency improvements at the Nixon Facility.
Therefore, we incurred and will continue to incur capital
expenditures related to these improvements, which include, among
other things, facility and land improvements and completion of a
petroleum storage tank.
Supplemental Pipeline Bonds
. In a letter dated March 30,
2018, the Bureau of Ocean Energy Management (“BOEM”)
ordered BDPL to provide additional supplemental bonds or acceptable
financial assurance of approximately $4.8 million (the
“Separate Orders”) within sixty (60) calendar days of
receipt of the letter. The Separate Orders relate to five (5)
existing pipeline rights-of-way. BOEM issued an INC for each
Separate Order dated June 8, 2018 and received by BDPL on June 11,
2018. BOEM asserts that the INCs authorize BOEM to impose financial
penalties on BDPL if it does not comply with the Separate Orders
within twenty (20) days. BOEM asserts that potential penalties
accrue for each day BDPL failed to comply after June 28,
2018. BDPL appealed the INCs on August 8, 2018. The
Interior Board of Land Appeals (the “IBLA”) has granted
four extension requests that extend BDPL’s deadline for
filing a Statement of Reasons with the IBLA until April 22, 2019.
The IBLA’s delay in issuing its order was due to the
government shutdown. BDPL’s pending appeal of the INCs does
not relieve BDPL of its obligations to provide additional financial
assurance in accordance with the Separate Orders, or of
BOEM’s authority to impose financial penalties.
BDPL
has initiated settlement discussions with BOEM to resolve the
Separate Orders and the INCs. There can be no assurance that BOEM
will: (i) accept a proposal for a reduced amount of supplemental
financial assurance, (ii) not require additional supplemental
pipeline bonds related to BDPL’s existing pipeline
rights-of-way, and/or (iii) not impose penalties under the INCs. As
a result, we are unable to predict the outcome of the Separate
Orders, the settlement discussions with BOEM or their ultimate
impact, if any, on our business, financial condition or results of
operations. Accordingly, we have not recorded a liability on our
consolidated balance sheet as of December 31, 2018. As of December
31, 2018 and 2017, BDPL maintained approximately $0.9 million in
credit and cash-backed pipeline rights-of-way bonds issued to the
BOEM. If BDPL is required by BOEM to provide significant additional
supplemental bonds or acceptable financial assurance or is assessed
significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-K 12/31/18
|