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transportation and oil and gas operations are no longer
active.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 June 30, 2019. (See “Note (9) Related-Party
Transactions,” “Note (11) Long-Term Debt and Accrued
Interest” and “Note (18) 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:
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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.
(Lazarus
Midstream)
, 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 Quarterly Report for further information
related to the NPS assignment.
The
transaction represents transfer of a vacant shell entity owned by
Lazarus Midstream to Blue Dolphin for a nominal fee of
$10.00.
See
“Part I, Item 1. Business” and “Part I, Item 2.
Properties” in our 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-Q 6/30/19
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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:
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 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.
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 the Lazarus Parties paying GEL a
lump sum cash payment of $10.0 million (the “Settlement
Payment”) and $0.5 million in cash at the end of each
calendar month (the “Interim
Payments”).
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 or 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.
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.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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On May 6, 2019, the Lazarus Parties and GEL entered into a Fifth
Amendment to the Settlement Agreement (the “Fifth
Amendment”). The Fifth Amendment provided for, among other
things:
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GEL’s
consent to the Lazarus Parties entering into a $12.8 million Line
of Credit, Guarantee and Security Agreement between NPS and Pilot
Travel Centers LLC; ("Pilot")
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deferral
of an April 30, 2019 Interim Payment under the Settlement
Agreement, such deferred Interim Payment now being due in monthly
installments of $0.1 million on the last day of each of the months
June through October 2019 (the “Deferred Interim Installment
Payments”);
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Payment
of the Settlement Payment to be paid in one or more installment
payments, the sum total of such payments constituting the
Settlement Payment; and
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An
extension to October 31, 2019 of the date on which the Deferred
Interim Installment Payment and the Settlement Payment can be made
(the “Settlement Date”).
During the period May 7, 2019 to May 10, 2019, the Lazarus Parties
made multiple payments to GEL in the aggregate total amount of
$10.0 million, which payments represent the Settlement Payment.
Unless extended in writing by GEL, if the Lazarus Parties fail to
either timely make a Deferred Interim Installment Payment ($0.1
million each) or pay all of the remaining Interim Installment
Payments (totaling $0.3 million as of the filing date of this
Quarterly Report) on or before the Settlement Date, GEL may
terminate the Settlement Agreement.
Blue Dolphin can provide
no assurance that the Lazarus Parties will be able to timely make
the remaining Deferred Interim Installment Payments or that the
consummation of the Settlement will occur. If the Lazarus Parties
do not timely make the remaining Deferred Interim Installment
Payments or another event of default under the Settlement Agreement
occurs and the Settlement Agreement is terminated, GEL may seek to
enforce the Final Award against the Lazarus Parties, in which case,
Blue Dolphin and its affiliates would likely be required to seek
protection under bankruptcy laws.
As of the filing date of this Quarterly Report, GEL has received
the following amounts from the Lazarus Parties toward reducing the
outstanding balance of the Final Arbitration Award:
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Initial
payment (September 2017)
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$
3.7
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Interim
Payments (July 2018 to April 2019)
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8.0
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Settlement
Payment (May 2019)
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10.0
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Deferred
Interim Installment Payments (June 2019 to July 2019)
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0.2
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$
21.9
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The
Interim Payments did not reduce the amount of the Settlement
Payment, but such payments did reduce the Final Arbitration
Award.
At the time of the Settlement, the difference between
the amounts paid to GEL by the Lazarus Parties 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 June 30, 2019 and December 31, 2018,
accrued arbitration award payable on our consolidated balance sheet
was $9.5 million and $21.1 million, respectively.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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Defaults Under Veritex Secured Loan Agreements
. LE and LRM each have loans with Veritex
Community Bank (“Veritex”), as successor in interest to
Sovereign Bank (“Sovereign”) by merger, in the original
aggregate amount of $35.0 million. These Veritex loans are
guaranteed 100% by the United States Department of Agriculture
(“USDA”).
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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. 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.
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Financial Covenant
Defaults
. In addition to
existing events of default related to the Final Arbitration Award,
at June 30, 2019, 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 June 30, 2019 and December 31, 2018 due to existing
events of default related to the Final Arbitration Award as well as
the uncertainty of LE and LRM’s ability to meet financial
covenants in the secured loan agreements in the
future.
Veritex has been working with LE and LRM and continues to be aware
and party to all discussions and arrangements with GEL
surrounding the executed settlement agreement and all
amendments and extensions with GEL. In a notice to obligors dated
April 30, 2019 (the "Veritex Consent'), Veritex agreed to waive
certain covenant defaults and forbear from enforcing its remedies
under the secured loan agreements subject to: (i) the agreement and
concurrence of the USDA and (ii) the replenishment of a payment
reserve account in the amount of $1.0 million as required by one of
the secured loan agreements on or before August 31, 2019.
Any exercise by Veritex of its rights
and remedies under such secured loan agreements would have a
material adverse effect on
our business operations,
including crude oil and condensate procurement and our customer
relationships; financial condition; and results of operations.
Further, Blue Dolphin and its affiliates would likely be required
to seek protection under bankruptcy laws, and the trading prices of
our common stock and the value of an investment in our common stock
could significantly decrease, which could lead to holders of our
common stock losing their investment in our common stock in its
entirety. (See “Note (11) Long-Term Debt and Accrued
Interest” for additional disclosures related to Veritex and
the secured loan agreements.)
Consecutive Quarterly Net Losses and Working Capital
Deficits
. For the three months
ended June 30, 2019, we reported a net loss of $3.3 million, or a
loss of $0.30 per share. Comparatively, we reported income of $1.8
million, or income of $0.17 per share, for the three months ended
June 30, 2018. For the six months ended June 30, 2019, we reported
a net loss of $2.6 million, or a loss of $0.23 per share.
Comparatively, we reported income of $1.7 million, or income of
$0.15 per share, for the six months ended June 30,
2018.
We had a working capital deficit of $73.8 million and $71.9 million
at June 30, 2019 and December 31, 2018, respectively. Excluding the
current portion of long-term debt, we had a working capital deficit
of $31.8 million and $30.0 at June 30, 2019 at December 31, 2018,
respectively.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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Operating Risks
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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 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.
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 section in this Quarterly
Report:
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Item 1. Financial
Statements:
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Note (9)
Related-Party Transactions
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Note (11) Long-Term
Debt and Accrued Interest
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Note (18)
Commitments and Contingencies – Legal Matters
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Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations:
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Final Arbitration
Award and Settlement Agreement
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Liquidity and
Capital Resources
Refer
to the following sections in our Annual Report on Form 10-K for the
period ended December 31, 2018 (the “Annual
Report”):
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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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(2)
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Basis of Presentation
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The
accompanying unaudited consolidated financial statements, which
include Blue Dolphin and its subsidiaries, have been prepared in
accordance with GAAP for interim consolidated financial information
pursuant to the rules and regulations of the SEC under Article 10
of Regulation S-X and the instructions to Form 10-Q. Accordingly,
certain information and footnote disclosures normally included in
our audited financial statements have been condensed or omitted
pursuant to the SEC’s rules and regulations. Significant
intercompany transactions have been eliminated in the
consolidation. In management’s opinion, all adjustments
considered necessary for a fair presentation have been included,
disclosures are adequate, and the presented information is not
misleading.
The
consolidated balance sheet as of December 31, 2018 was derived from
the audited financial statements at that date. The accompanying
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in our Annual Report. Operating results for the three and
six months ended June 30, 2019 are not necessarily indicative of
the results that may be expected for the fiscal year ending
December 31, 2019, or for any other period.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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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
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Restricted cash, current portion
primarily represents a payment reserve account held by Veritex as
security for payments under a loan agreement. Restricted cash,
noncurrent represents funds held in the Veritex disbursement
account for payment of construction related expenses to complete
building new petroleum storage tanks.
Accounts Receivable and Allowance for Doubtful Accounts
.
Accounts receivable are presented net of any necessary allowance(s)
for doubtful accounts. Receivables are recorded at the invoiced
amount and generally do not bear interest. An allowance for
doubtful accounts is established, when necessary, based
on prior experience and other factors which, in management's
judgment, deserve consideration in estimating bad debts.
Management assesses collectability 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 at both June 30, 2019 and December 31, 2018.
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.)
Property and Equipment
.
Refinery and Facilities
. Management expects to continue
making improvements to the crude distillation tower based on
operational needs and technological advances. Additions to refinery
and facilities assets are capitalized. Expenditures for repairs and
maintenance are expensed as incurred.
We record refinery and facilities at cost less any adjustments for
depreciation or impairment.
Adjustment of the asset and the
related accumulated depreciation accounts are made for the refinery
and facilities asset’s retirement and disposal, with the
resulting gain or loss included in the consolidated statements of
operations. For financial reporting purposes, depreciation of
refinery and facilities assets is computed using the straight-line
method using an estimated useful life of 25 years beginning when
the refinery and facilities assets are placed in service. We did
not record any impairment of our refinery and facilities assets for
the periods presented.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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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.)
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 the 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 the sale and when payment is due is not significant.
Transportation, shipping, and handling costs incurred are included
in cost of goods sold. Excise and other taxes that are collected
from customers and remitted to governmental authorities are not
included in revenue.
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.
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/19
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Notes
to Consolidated Financial Statements
(Continued)
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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 June 30, 2019 and December 31,
2018. 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.
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 June 30,
2019 and December 31, 2018, there were no uncertain tax positions
for which a reserve or liability was necessary. (See “Note
(16) 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.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
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. The cost estimates for each of our
assets were developed based upon regulatory requirements,
structural makeup, water depth, reservoir characteristics,
reservoir depth, equipment demand, current retirement procedures,
and construction and engineering consultations. Estimating future
costs are difficult and require management to make judgments that
are subject to future revisions based upon numerous factors,
including changing technology, political, and regulatory
environments. We review our assumptions and estimates of future
abandonment costs on an annual basis. (See “Note (13) 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.
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
(17) 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:
ASUs 2019-01, 2018-20, 2018-11, 2018-10, and 2016-02,
Leases (Topic 842)
. In
February 2016, FASB amended its accounting guidance for leases.
Subsequently, FASB issued several clarifications and updates. The
guidance requires a lessee to recognize assets and liabilities on
the balance sheet arising from leases with terms greater than 12
months. While lessor guidance is relatively unchanged, certain
amendments were made to confirm with changes made to lessee
accounting and the amended revenue recognition guidance. The new
guidance continues to classify leases as either finance or
operating, with classification affecting the presentation and
pattern of expense and income recognition, in the statement of
operations. It also requires additional quantitative and
qualitative disclosures about leasing arrangements. We adopted the
new guidance on January 1, 2019 using the modified retrospective
approach, which was applied beginning on the adoption date.
Comparative information has not been restated and continues to be
reported under the accounting guidance in effect for those periods.
The adoption did not have a material effect on our consolidated
statements of operations or cash flows. On the adoption date we
recognized operating lease right-of-use assets, net of pre-existing
deferred rent, and operating lease liabilities on our consolidated
balance sheet of approximately $0.8 million and $0.9 million,
respectively.
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 were not 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.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
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:
ASU 2019-07,
Codification
Updates to SEC Sections
. In July 2019, FASB issued ASU
2019-07. This ASU amends certain SEC sections or paragraphs within
the FASB ASC. The amendments are being made pursuant to SEC Final
Rule Releases No. 33-10532, Disclosure Update and Simplification,
and Nos. 33-10231 and 33-10442, Investment Company Reporting
Modernization, and Miscellaneous Updates (SEC Update). The SEC
Final Rule Releases, which also require improvements to the
eXtensible
Business Reporting Language (“
XBRL”) taxonomy,
were made to improve, update, and simplify SEC regulations on
financial reporting and disclosure. For public companies, the
amendments in ASU 2019-07 are effective upon issuance. We do not
expect adoption of this guidance to have a significant impact on
our consolidated financial statements.
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 Staff Accounting Bulletin No.
118, which provides guidance for companies that are not able to
complete their accounting for the income tax effects of the Tax
Cuts and Jobs Act in the period of enactment. This
guidance also includes amendments to the XBRL
Taxonomy. For public business entities, the amendments
in ASU 2018-05 are effective for fiscal years ending after December
15, 2020. Early adoption is permitted. We do not expect
adoption of this guidance to have a significant impact on our
consolidated financial statements.
Other new pronouncements issued but not yet effective are not
expected to have a material impact on our financial position,
results of operations, or liquidity.
|
(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 presented as receivables, net on
our consolidated balance sheets.
Remaining Performance Obligations
. Most of our contracts
with customers are spot contracts and therefore have no remaining
performance obligations.
Segment Information
. Business segment information for the
periods indicated (and as of the dates indicated) was as
follows:
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues (excluding intercompany fees and sales)
|
$
77,257
|
$
1,088
|
$
-
|
$
78,345
|
$
88,265
|
$
850
|
$
-
|
$
89,115
|
|
Intercompany
fees and sales
|
(653
)
|
653
|
-
|
-
|
(875
)
|
875
|
-
|
-
|
|
Operation costs and expenses
(1)
|
(78,376
)
|
(363
)
|
(56
)
|
(78,795
)
|
(85,197
)
|
(47
)
|
(134
)
|
(85,378
)
|
|
Segment
contribution margin
|
$
(1,772
)
|
$
1,378
|
$
(56
)
|
$
(450
)
|
$
2,193
|
$
1,678
|
$
(134
)
|
$
3,737
|
|
General
and administrative expenses
|
(274
)
|
(62
)
|
(243
)
|
(579
)
|
(314
)
|
(62
)
|
(312
)
|
(688
)
|
|
Depreciation
and amortization
|
(483
)
|
(99
)
|
(51
)
|
(633
)
|
(417
)
|
(46
)
|
-
|
(463
)
|
Interest and other non-operating expenses, net
|
|
|
(1,637
)
|
|
|
|
(750
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
(3,299
)
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
$
(3,299
)
|
|
|
|
$
1,836
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
$
371
|
$
-
|
$
-
|
$
371
|
$
351
|
$
340
|
$
-
|
$
691
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
$
50,463
|
$
18,500
|
$
2,186
|
$
71,149
|
$
54,966
|
$
19,317
|
$
964
|
$
75,247
|
|
(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).
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Notes to Consolidated Financial Statements
(Continued)
|
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues (excluding intercompany fees and sales)
|
$
145,115
|
$
2,157
|
$
-
|
$
147,272
|
$
159,777
|
$
1,584
|
$
-
|
$
161,361
|
|
Intercompany
fees and sales
|
(1,259
)
|
1,259
|
-
|
-
|
(1,546
)
|
1,546
|
-
|
-
|
|
Operation costs and expenses
(1)
|
(143,678
)
|
(727
)
|
(113
)
|
(144,518
)
|
(155,348
)
|
(388
)
|
(244
)
|
(155,980
)
|
|
Segment
contribution margin
|
$
178
|
$
2,689
|
$
(113
)
|
$
2,754
|
$
2,883
|
$
2,742
|
$
(244
)
|
$
5,381
|
|
General
and administrative expenses
|
(606
)
|
(105
)
|
(538
)
|
(1,249
)
|
(708
)
|
(104
)
|
(690
)
|
(1,502
)
|
|
Depreciation
and amortization
|
(948
)
|
(198
)
|
(77
)
|
(1,223
)
|
(826
)
|
(92
)
|
-
|
(918
)
|
Interest and other non-operating expenses, net
|
|
|
(2,834
)
|
|
|
|
(1,493
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
(2,552
)
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
|
-
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
|
$
(2,552
)
|
|
|
|
$
1,685
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
$
411
|
$
83
|
$
-
|
$
494
|
$
687
|
$
544
|
$
-
|
$
1,231
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
$
50,463
|
$
18,500
|
$
2,186
|
$
71,149
|
$
54,966
|
$
19,317
|
$
964
|
$
75,247
|
|
(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).
|
In June
2018, Blue Dolphin obtained 100% of the issued and outstanding
membership interest of NPS from Lazarus Midstream 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 facilitated
the Lazarus Parties
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 three
and six months ended June 30, 2019. NPS did not have significant
assets, liabilities or results of operations for the three and six
months ended June 30, 2018. 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-Q 6/30/19
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
insurance
|
$
750
|
$
437
|
|
Prepaid
crude oil and condensate
|
350
|
1,166
|
|
Prepaid
easement renewal fees
|
132
|
-
|
|
Other
prepaids
|
51
|
183
|
|
|
|
|
|
|
$
1,283
|
$
1,786
|
Inventory
as of the dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil and condensate
|
$
1,086
|
$
861
|
|
AGO
|
463
|
276
|
|
Naphtha
|
141
|
143
|
|
Chemicals
|
84
|
106
|
|
Propane
|
18
|
17
|
|
LPG
mix
|
5
|
5
|
|
HOBM
|
-
|
102
|
|
|
|
|
|
|
$
1,797
|
$
1,510
|
|
(8)
|
Property, Plant and Equipment, Net
|
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery
and facilities
|
$
66,308
|
$
63,058
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
833
|
747
|
|
|
67,707
|
64,371
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortization
|
(11,575
)
|
(10,429
)
|
|
|
56,132
|
53,942
|
|
|
|
|
|
Construction
in progress
|
7,948
|
10,755
|
|
|
|
|
|
|
$
64,080
|
$
64,697
|
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 $0.7
million and $1.3 million at June 30, 2019 and December 31, 2018,
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.
See “Note (11) Long-Term Debt and Accrued
Interest” for additional disclosures related to borrowings
for capital spending.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
|
(9)
|
Related-Party Transactions
|
Related Parties
. 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-party transactions
consist of the following 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 June 30, 2019.
Related-party agreements with LEH include: (i) an Amended and
Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet
Fuel Sales Agreement with LE, (iii) a Loan Agreement with BDPL,
(iv) an Amended and Restated Promissory Note with Blue Dolphin, and
(v) 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 a management
fee calculated as 5% of certain of our direct operating expenses.
During the fourth quarter of 2018, the management 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
management fee was previously reflected within refinery operating
expenses in our consolidated statements of operations. The
management fee is currently reflected as the ‘LEH operating
fee’ in our consolidated statements of
operations.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
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, 2020
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.
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
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. LEH and its affiliates (Ingleside and Jonathan
Carroll) have 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).
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.
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% and is reported as part of the outstanding balance.
Promissory notes to
LEH, Ingleside and Jonathan Carroll, which are reflected within
long-term debt, related party, are currently in
default.
●
June LEH Note
. The June LEH Note
reflects amounts owed to LEH at June 30, 2019 under the Amended and
Restated Operating Agreement.
●
March Ingleside Note
. The March
Ingleside Note reflects amounts owed to Ingleside at June 30, 2019
under the Amended and Restated Tank Lease Agreement.
●
March Carroll Note
. The March Carroll
Note reflects amounts owed to Jonathan Carroll at June 30, 2019
under the guaranty fee agreements. See "Amended and Restated
Guranty Fee Agreements" below for additional
information.
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 50% in cash and 50% in 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.
As
previously disclosed, the GEL Letter Agreement (and its amendments)
and the Settlement Agreement prohibited the Lazarus Parties from
making payments to Jonathan Carroll pursuant to the Amended and
Restated Guaranty Fee Agreements. Once the Settlement occurs,
payment of outstanding amounts owed to Jonathan Carroll under the
guaranty fee agreements will be made and regular payments will
resume. Jonathan Carroll has received no payments under guaranty
fee agreements, either in cash or common stock, since May
2017.
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Financial Statements Impact
.
Consolidated Balance Sheets
. Accounts payable, related party
to LMT associated with the Dock Tolling Agreement were $1.8 million
and $1.5 million at June 30, 2019 and December 31, 2018,
respectively.
Long-term
debt, related party, current portion and interest payable, related
party, as of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands,
except percent amounts)
|
|
LEH
|
|
|
|
June
LEH Note (in default)
|
$
736
|
$
611
|
|
BDPL
Loan Agreement
(in
default)
|
5,854
|
5,534
|
|
LEH
total
|
6,590
|
6,145
|
|
Ingleside
|
|
|
|
March
Ingleside Note
(in
default)
|
1,333
|
1,283
|
|
Jonathan
Carroll
|
|
|
|
March
Carroll Note
(in
default)
|
1,515
|
1,147
|
|
|
|
|
|
|
9,438
|
8,575
|
|
|
|
|
|
Less:
Long-term debt, related party, current portion, in
default
|
(7,584
)
|
(7,041
)
|
|
Less:
Interest payable, related party
(in
default)
|
(1,854
)
|
(1,534
)
|
|
|
|
|
|
|
$
-
|
$
-
|
Consolidated Statements of Operations
. Revenue from related
parties was as follows:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
(in thousands, except percent
amounts)
|
|
Refinery
operations
|
|
|
|
|
|
|
|
|
|
LEH
|
$
24,173
|
30.2
%
|
$
25,549
|
28.6
%
|
$
44,982
|
30.2
%
|
$
46,116
|
28.6
%
|
|
Other
customers
|
53,084
|
68.3
%
|
62,716
|
70.4
%
|
100,133
|
68.3
%
|
113,661
|
70.4
%
|
|
Tolling
and terminaling
|
|
|
|
|
|
|
|
|
|
Other
customers
|
1,088
|
1.5
%
|
850
|
1.0
%
|
2,157
|
1.5
%
|
1,584
|
1.0
%
|
|
|
|
|
|
|
|
|
|
|
|
|
$
78,345
|
100.0
%
|
$
89,115
|
100.0
%
|
$
147,272
|
100.0
%
|
$
161,361
|
100.0
%
|
Fees
associated with the Dock Tolling Agreement with LMT totaled $0.2
million for both three-month periods ended June 30, 2019 and 2018.
Fees associated with the Dock Tolling Agreement with LMT totaled
$0.4 million for both six-month periods ended June 30, 2019 and
2018.
Lease
payments received under the office sub-lease agreement with LEH
totaled $0.01 million for the three months ended June 30, 2019 and
2018. Lease payments received under the office sub-lease agreement
with LEH totaled $0.02 million for the six months ended June 30,
2019 and 2018.
The LEH
operating fee totaled approximately $0.2 million in both
three-month periods ended June 30, 2019 and 2018. For both
six-month periods ended June 30, 2019 and 2018, the LEH operating
fee totaled approximately $0.3 million.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Interest
expense associated with the BDPL Loan Agreement, Amended and
Restated Guaranty Fee Agreements, and related-party promissory
notes (the June LEH Note, the March Ingleside Note, and the March
Carroll Note) for the periods indicated was as
follows:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
Jonathan
Carroll
|
|
|
|
|
|
Guaranty
Fee Agreements
|
|
|
|
|
|
First
Term Loan Due 2034
|
$
111
|
$
115
|
$
223
|
$
230
|
|
Second
Term Loan Due 2034
|
|
March
Carroll Note
(in
default)
|
28
|
15
|
53
|
16
|
|
LEH
|
|
|
|
|
|
BDPL
Loan Agreement
(in
default)
|
160
|
162
|
320
|
323
|
|
June
LEH Note
(in
default)
|
16
|
1
|
23
|
-
|
|
Ingleside
|
|
|
|
|
|
March
Ingleside Note
(in
default)
|
26
|
24
|
52
|
71
|
|
|
|
|
|
|
|
|
$
387
|
$
364
|
$
763
|
$
734
|
|
(10)
|
Accrued Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
revenue
|
$
1,023
|
$
434
|
|
Insurance
|
382
|
61
|
|
Board
of director fees payable
|
338
|
273
|
|
Property
taxes
|
121
|
48
|
|
Other
payable
|
167
|
265
|
|
Excise
and income taxes payable
|
64
|
47
|
|
Customer
deposits
|
10
|
109
|
|
Easement
payable
|
-
|
223
|
|
Accrued
rent
|
-
|
111
|
|
|
|
|
|
|
$
2,105
|
$
1,571
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
|
(11)
|
Long-Term Debt and Accrued Interest
|
Outstanding Balances
. Our Long-term debt consists of: (i) a
LE $25.0 million loan with Veritex (the “First Term Loan Due
2034”), (ii) a LRM $10.0 million loan with Veritex (the
“Second Term Loan Due 2034”), and (iii) a LE loan with
Notre Dame Investors, Inc. as evidenced by a promissory note that
is currently held by John Kissick (the “Notre Dame
Debt”). As described within this “Note (11”)
Long-Term Debt and Accrued Interest,” certain of our
long-term debt is currently in default. See “Note (9)
Related-Party Transactions” for additional disclosures
regarding long-term debt, related party and interest payable,
related party.
Long-term
debt, which represents outstanding principal and accrued interest,
as of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Term Loan Due 2034 (in default)
|
$
22,365
|
$
22,593
|
|
Second
Term Loan Due 2034 (in default)
|
9,184
|
9,353
|
|
Notre
Dame Debt (in default)
|
8,219
|
7,821
|
|
Capital
lease
|
-
|
41
|
|
|
|
|
|
|
$
39,768
|
$
39,808
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(34,355
)
|
(34,863
)
|
|
Less:
Unamortized debt issue costs
|
(1,942
)
|
(2,006
)
|
|
Less:
Interest payable (in default)
|
(3,471
)
|
(2,939
)
|
|
|
|
|
|
|
$
-
|
$
-
|
Unamortized
debt issue costs related to long-term debt 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
|
(500
)
|
(436
)
|
|
|
|
|
|
|
$
1,942
|
$
2,006
|
Amortization
expense was $0.03 million for the three months ended June 30, 2019
and 2018. Amortization expense was $0.06 million for the six months
ended June 30, 2019 and 2018.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Accrued interest related to long-term debt, which is reflected as
interest payable in our consolidated balance sheets, as of the
dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notre
Dame Debt (in default)
|
$
3,241
|
$
2,843
|
|
First
Term Loan Due 2034 (in default)
|
183
|
43
|
|
Second
Term Loan Due 2034 (in default)
|
47
|
53
|
|
|
|
|
|
|
3,471
|
2,939
|
|
|
|
|
|
Less:
Interest payable (in default)
|
(3,471
)
|
(2,939
)
|
|
|
|
|
|
Long-term
interest payable, net of current portion
|
$
-
|
$
-
|
USDA-Guaranteed Loans
. The First Term Loan Due 2034 and
Second Term Loan Due 2034 are guaranteed 100% by 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.
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, as well as a breakdown of guaranty fee
expenses incurred related to the First Term Loan Due 2034 and
Second Term Loan Due 2034.)
Defaults in USDA-Guaranteed Loan Agreements
. As described
elsewhere in this Quarterly 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 June 30, 2019, 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. 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.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
In the Veritex Consent, Veritex agreed to waive certain covenant
defaults and forbear from enforcing its remedies under the secured
loan agreements subject to: (i) the agreement and concurrence of
the USDA and (ii) the replenishment of the $1.0 payment reserve
account in the amount as required under the First Term Loan Due
2034 on or before August 31, 2019.
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.)
Key Terms of Long-Term Debt
.
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.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
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)
. 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%
|
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.
|
(12)
|
Line of Credit Payable
|
Line of
credit payable consists of a line of credit, guarantee and security
agreement between NPS and Pilot (the “Pilot Line of
Credit”). NPS and Pilot entered the Pilot Line of Credit on
May 3, 2019. The parties to the Pilot Line of Credit subsequently
entered into amendments to the Pilot Line of Credit on May 9, 2019
and May 10, 2019.
Line of
credit payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pilot
Line of Credit
|
$
12,902
|
$
-
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(625
)
|
-
|
|
Less:
Interest payable
|
(102
)
|
-
|
|
|
|
|
|
|
$
12,175
|
$
-
|
Key
terms of the Pilot Line of Credit are as follow:
|
Principal
Amount:
|
Up to
$12.8 million
|
|
Maturity
Date:
|
May
2020
|
|
Interest
Payment:
|
$0.2
million monthly
|
|
Interest
Rate:
|
12.00%
per annum
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
The
Pilot Line of Credit was primarily used to fund the Settlement
Payment to GEL. Remaining funds are being used to finance NPS'
purchase of crude oil from Pilot pursuant to certain purchase and
supply agreements and to provide working capital. The Pilot Line of
Credit contains customary affirmative and negative covenants and
events of default and is secured by (i) NPS receivables, (ii) NPS
assets, including a tank lease (the “Tank Lease”), and
(iii) LRM receivables. On May 3, 2019, as an inducement to
Pilot’s entry into the Pilot Line of Credit, Blue Dolphin and
Pilot entered into a Pledge Agreement (the “Pledge
Agreement”) whereby Blue Dolphin pledged its equity interests
in NPS to Pilot to secure NPS’ obligations under the Pilot
Line of Credit. Blue Dolphin, LE, LRM, and LEH have each guaranteed
NPS’ obligations under the Pilot Line of Credit. On May 10,
2019, LE, NPS, Pilot and Veritex entered into a Subordination and
Attornment Agreement (the “Subordination Agreement”),
providing that, if Veritex in its capacity as a secured lender of
LE and LRM were to foreclose on LE property that NPS was leasing
from LE pursuant to the Tank Lease, Veritex would permit the
continued performance of obligations under the Tank Lease so long
as certain conditions are met. The effectiveness of the
Subordination Agreement is subject to certain conditions, including
the agreement and concurrence of the USDA.
|
(13)
|
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.
Pipelines and Facilities and Oil and Gas Properties
. We have
AROs associated with the dismantlement and abandonment in place of
our pipelines and facilities assets, as well as the plugging and
abandonment of our oil and gas properties. We recorded a discounted
liability for the fair value of an ARO with a corresponding
increase to the carrying value of the related long-lived asset at
the time the asset was installed or placed in service, and we
depreciated the amount added to property and equipment and
recognized accretion expense relating to the discounted liability
over the remaining life of the asset. At December 31, 2018, the
liability was fully accreted.
Due to
the length of inactivity of our pipelines and facilities assets,
BDPL is required by the Bureau of Ocean Energy Management
(“BOEM”) to abandon-in-place certain pipelines and
remove an anchor platform in federal waters. BDPL has been in
communications with BOEM and the Bureau of Safety and Environmental
Enforcement (“BSEE”) related to abandonment operations
and associated pipeline financial assurance requirements.
Management anticipates performing certain abandonment operations
during 2019, however, timing depends on several factors, including
resource availability and weather. As of the date of this Quarterly
Report, decommissioning work has not yet commenced.
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
|
$
2,580
|
$
2,315
|
|
Accretion
expense
|
-
|
265
|
|
|
2,580
|
2,580
|
|
Less:
asset retirement obligations, current portion
|
(2,580
)
|
(2,580
)
|
|
|
|
|
|
Long-term
asset retirement obligations, at the end of the period
|
$
-
|
$
-
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
|
(14)
|
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 June 30, 2019 and December 31, 2018, we had cash
balances (including restricted cash) of more than the FDIC
insurance limit per depositor in the amount of $1.5 million and
$1.2 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 crude supply
contract with Pilot. In connection with the crude supply agreement,
Pilot stores its crude oil at the Nixon Facility pursuant to a
terminal services agreement. Pilot currently provides us with
adequate amounts of crude oil and condensate on favorable terms,
and we expect Pilot to continue to do so for the foreseeable
future.
Our ability to purchase
adequate amounts of crude oil and condensate could be adversely
affected if the Settlement Agreement is terminated and GEL seeks to
confirm and enforce the Final Arbitration Award, as well as other
factors, including
net losses, working capital deficits, and
financial covenant defaults in secured loan
agreements.
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
three months ended June 30, 2019, we had 4 customers that accounted
for approximately 98.7% of our refined petroleum product sales.
LEH, a related party, was 1 of these 4 significant customers and
accounted for approximately 31.3% of our refined petroleum product
sales. At June 30, 2019, these 4 customers represented
approximately $0.6 million in accounts receivable. LEH
represented approximately $0.5 million in accounts receivable. LEH
purchases our jet fuel and resells the jet fuel to a government
agency. LEH bids for jet fuel contracts are evaluated under
preferential pricing terms due to its HUBZone certification. (See
“Note (9) Related-Party Transactions,” “Note (11)
Long-Term Debt and Accrued Interest,” and “Note (18)
Commitments and Contingencies – Financing Agreements”
for additional disclosures related to LEH.)
For the
six months ended June 30, 2019, we had 4 customers that accounted
for approximately 98.0% of our refined petroleum product sales. LEH
was 1 of these 4 significant customers and accounted for
approximately 31.0% of our refined petroleum product
sales. At June 30, 2019, these 4 customers represented
approximately $0.6 million in accounts receivable. LEH
represented approximately $0.5 million in accounts
receivable.
For the
three months ended June 30, 2018, we had 5 customers that accounted
for approximately 96.7% of refinery operations
revenue. LEH was 1 of these 5 significant customers and
accounted for approximately 28.9% of refinery operations
revenue. At June 30, 2018, these 5 customers represented
approximately $0.7 million in accounts receivable. LEH
represented approximately $0 in accounts receivable.
For the
six months ended June 30, 2018, we had 4 customers that accounted
for approximately 86.8% of our refined petroleum product sales. LEH
was 1 of these 4 significant customers and accounted for
approximately 28.9% of our refined petroleum product
sales. At June 30, 2018, these 4 customers represented
approximately $0.7 million in accounts receivable. LEH
represented approximately $0 in accounts receivable.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
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:
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
(in thousands,
except percent amounts)
|
|
|
|
|
|
|
|
|
|
|
|
LPG
mix
|
$
1
|
0.0
%
|
$
-
|
0.0
%
|
$
9
|
0.0
%
|
$
3
|
0.0
%
|
|
Naphtha
|
15,416
|
20.3
%
|
23,648
|
26.8
%
|
29,211
|
20.1
%
|
39,966
|
25.0
%
|
|
Jet
fuel
|
24,173
|
30.7
%
|
25,549
|
28.9
%
|
44,982
|
31.0
%
|
46,116
|
28.9
%
|
|
HOBM
|
16,747
|
23.8
%
|
22,430
|
25.4
%
|
32,907
|
22.7
%
|
38,859
|
24.3
%
|
|
AGO
|
20,920
|
25.2
%
|
16,638
|
18.9
%
|
38,006
|
26.2
%
|
34,833
|
21.8
%
|
|
|
|
|
|
|
|
|
|
|
|
|
$
77,257
|
100.0
%
|
$
88,265
|
100.0
%
|
$
145,115
|
100.0
%
|
$
159,777
|
100.0
%
|
We
adopted the new lease accounting guidance using the modified
retrospective method and applied it to all leases based on the
contract terms in effect as of January 1, 2019. For existing
contracts, we carried forward our historical assessment of: (i)
whether contracts are or contain leases, (ii) lease classification,
and (iii) initial direct costs.
As of
June 30, 2019, leases were as follow:
●
Office Lease (Operating Lease)
. BDSC
has an office lease related to our principal office space in
Houston, Texas. The 68-month operating lease expires in 2023. BDSC
has the option to extend the lease term for one additional five (5)
year period if notice of intent to extend is provided to the lessor
at least twelve (12) months before the end of the current term. LEH
subleases a portion of this leased office space (see “Note
(9) Related-Party Transactions” related to the LEH office
sub-lease agreement). Sublease income received from LEH
totaled $0.01 million for both three-month periods ended June 30,
2019 and 2018. Sublease income received from LEH totaled $0.02
million for both six-month periods ended June 30, 2019 and
2018.
●
Crane (Finance Lease)
. In January 2018,
LE entered a 24-month lease for the purchase of a 20-ton crane for
use at the Nixon Facility. The lease requires a negligible monthly
payment and matures in January 2020.
●
Backhoe Rent-to-Own Agreement (Finance
Lease).
In May 2019,
LE entered into a 12-month
equipment rental agreement with the option to purchase the backhoe
at maturity. The backhoe is being used at the Nixon
Facility.
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
For
leases with terms greater than 12 months, including renewal options
when appropriate, we record the related right-of-use asset and
lease liability as the present value of the fixed lease payments
over the lease term. Since the leases do not provide a
readily-determinable discount rate, we use the incremental
borrowing rate to discount lease payments to present value. The
following table presents the lease-related assets and liabilities
recorded on the consolidated balance sheet:
|
|
Classification
on
Consolidated
Balance Sheet
|
|
|
|
|
|
|
Assets
|
|
|
|
Operating
lease right-of-use assets
|
Operating
lease right-of-use assets
|
$
787
|
|
Less:
Accumulated amortization on operating lease
assets
|
Operating lease right-of-use assets
|
(67
)
|
|
|
720
|
|
|
|
|
Finance
lease assets
|
Property
and equipment, net
|
180
|
|
Less:
Accumulated amortization on finance lease assets
|
Property
and equipment, net
|
(21
)
|
|
|
159
|
|
Total
lease assets
|
|
$
879
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
$
167
|
|
Finance
leases
|
Current
portion of lease liabilities
|
104
|
|
|
271
|
|
Noncurrent
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
654
|
|
Total
lease liabilities
|
|
$
925
|
|
Weighted average remaining lease term in years
|
|
Operating lease
|
4.17
|
|
Finance leases
|
0.80
|
|
Weighted average discount rate
|
|
|
Operating lease
|
8.25%
|
|
Finance leases
|
8.25%
|
The
following table presents information related to lease costs for
finance and operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Operating
lese costs
|
$
51
|
$
77
|
|
Finance
lease costs:
|
|
|
|
Depreciation
of leased assets
|
4
|
8
|
|
Interest
on lease liabilities
|
1
|
2
|
|
Total
lease cost
|
56
|
$
87
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
The
table below presents supplemental cash flow information related to
leases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
|
|
Operating
cash flows for operating lease
|
$
40
|
$
96
|
|
Operating
cash flows for finance leases
|
1
|
2
|
|
Financing
cash flows for finance leases
|
10
|
21
|
As of
June 30, 2019, maturities of lease liabilities for the periods
indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
$
82
|
$
31
|
$
113
|
|
2020
|
175
|
73
|
248
|
|
2021
|
194
|
-
|
194
|
|
2022
|
215
|
-
|
215
|
|
2023
|
155
|
-
|
155
|
|
|
|
|
|
|
|
$
821
|
$
104
|
$
925
|
As of
June 30, 2019, our future minimum annual lease commitments that are
non-cancelable for the periods indicated are as
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
$
114
|
|
2020
|
230
|
|
2021
|
233
|
|
2022
|
237
|
|
2023
|
161
|
|
|
|
|
|
$
975
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
The
provision for income tax benefit for the periods indicated was as
follows:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
Federal
|
$
-
|
$
-
|
$
-
|
$
108
|
|
State
|
-
|
-
|
-
|
-
|
|
Deferred
|
|
|
|
|
|
Change
in valuation allowance
|
-
|
-
|
-
|
109
|
|
|
|
|
|
|
|
Total
provision for income taxes
|
$
-
|
$
-
|
$
-
|
$
217
|
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.
Effective Tax Rate
. Beginning 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. 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:
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss and capital loss carryforwards
|
$
13,365
|
$
11,260
|
|
Accrued
arbitration award payable
|
1,256
|
2,850
|
|
Business
interest expense
|
1,299
|
704
|
|
Start-up
costs (crude oil and condensate processing facility)
|
636
|
678
|
|
Asset
retirement obligations liability/deferred revenue
|
541
|
542
|
|
AMT
credit and other
|
50
|
108
|
|
Total
deferred tax assets
|
17,147
|
16,142
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(5,564
)
|
(5,153
)
|
|
Total
deferred tax liabilities
|
(5,564
)
|
(5,153
)
|
|
|
|
|
|
|
11,583
|
10,989
|
|
|
|
|
|
Valuation
allowance
|
(11,533
)
|
(10,881
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
50
|
$
108
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
Deferred Income Taxes
. Deferred income tax balances reflect
the effects of temporary differences between the carrying amounts
of assets and liabilities and their tax basis, as well as from NOL
carryforwards. We state those balances at the enacted tax rates we
expect will be in effect when taxes are paid. NOL carryforwards and
deferred tax assets represent amounts available to reduce future
taxable income.
NOL Carryforwards
. Under IRC Section 382, a corporation that
undergoes an “ownership change” is subject to
limitations on its use of pre-change NOL carryforwards to offset
future taxable income. Within the meaning of IRC Section 382, an
“ownership change” occurs when the aggregate stock
ownership of certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than fifty
(50) percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three years). For
income tax purposes, we experienced ownership changes in 2005,
relating to a series of private placements, and in 2012, because of
a reverse acquisition, that limit the use of pre-change NOL
carryforwards to offset future taxable income. In general, the
annual use limitation equals the aggregate value of common stock at
the time of the ownership change multiplied by a specified
tax-exempt interest rate. The 2012 ownership change will subject
approximately $16.3 million in NOL carryforwards that were
generated prior to the ownership change to an annual use limitation
of approximately $0.6 million per year. Unused portions of the
annual use limitation amount may be used in subsequent years.
Because of the annual use limitation, approximately $6.7 million in
NOL carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were generated
after the 2012 ownership change and prior to 2018 are not subject
to an annual use limitation under IRC Section 382 and may be used
for a period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change. NOL
carryforwards 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, 2017
|
$
9,614
|
$
30,219
|
$
39,833
|
|
|
|
|
|
|
Net
operating losses
|
-
|
7,116
|
7,116
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
$
9,614
|
$
37,335
|
$
46,949
|
|
|
|
|
|
|
Net
operating losses
|
-
|
10,021
|
10,021
|
|
|
|
|
|
|
Balance
at June 30, 2019
|
$
9,614
|
$
47,356
|
$
56,970
|
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 June 30, 2019 and December 31, 2018,
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 June
30, 2019 and December 31, 2018.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
(in thousands,
except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
(3,299
)
|
$
1,836
|
$
(2,552
)
|
$
1,685
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
$
(0.30
)
|
$
0.17
|
$
(0.23
)
|
$
0.15
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
|
|
Weighted
average number of shares of
|
|
|
|
|
|
common
stock outstanding and potential
|
|
|
|
|
|
dilutive
shares of common stock
|
10,975,514
|
10,925,513
|
10,975,514
|
10,925,513
|
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 three and six months ended June
30, 2019 and 2018 was the same as basic EPS as there were no stock
options or other dilutive instruments outstanding.
|
(18)
|
Commitments and Contingencies
|
Legal Matters
.
Final Arbitration Award and Settlement Agreement
. See
“Note (1) Organization – Going Concern – Final
Arbitration Award and Settlement Agreement” and "Part II,
Item 1. Legal Proceedings” 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 – Defaults
under Secured Loan Agreements” and “Note (11) Long-Term
Debt and Accrued Interest” for disclosures related to
defaults under Veritex 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 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.
Financing Agreements
. See “Note (11) Long-Term Debt
and Accrued Interest” and “Note (12) Line of Credit
Payable” 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 and Accrued Interest” for additional
disclosures related to guarantees.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
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 Incident of
Noncompliance (“INC”) for each Separate Order dated
June 8, 2018 (the “June 2018 INCs”) and received by
BDPL on June 11, 2018. BOEM asserts that the June 2018 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 June 2018
INCs on August 8, 2018. The Interior Board of Land Appeals (the
“IBLA”) granted five extension requests that extended
BDPL’s deadline for filing a Statement of Reasons with the
IBLA until July 21, 2019. On July 21, 2019, BDPL filed an extension
request with the IBLA to further extend the deadline. Since the
IBLA did not act on BDPL’s extension request, the Statement
of Reasons was due on August 9, 2019. On August 9, 2019, BDPL filed
its Statement of Reasons with the IBLA as required. BDPL’s
pending appeal of the June 2018 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 been in discussions with BOEM to resolve the Separate Orders
and the June 2018 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 June
2018 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 June 30, 2019. As
of June 30, 2019 and December 31, 2018, 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
June 2018 INCs, we will experience a significant and material
adverse effect on our operations, liquidity, and financial
condition.
Idle Iron
. The Bureau of Safety and Enviromental Enforcement
("BSEE") requires operators to decommission wells and platforms
that have not been used in the past five (5) years for exploration
and development operations or as infrastructure to support such
operations. BDPL’s Blue Dolphin Pipeline has been inactive
since September 2012. Due to the length of inactivity, BSEE
required BDPL to: (i) flush and fill the Blue Dolphin Pipeline,
(ii) abandon-in-place a portion of the Blue Dolphin
Pipeline’s 20” segment and certain smaller diameter
connecting lateral lines that reside offshore in federal waters and
(iii) remove from federal waters the GA-288C anchor platform. In
April 2016, BDPL submitted decommissioning permit applications to
BSEE for three (3) pipeline segments – Segments #13101,
#9428, and #15635 – and the GA-288C anchor platform. In June
2016, BDPL also submitted a decommissioning permit application to
the U.S. Army Corps of Engineers ("USCOE") 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.
The USCOE withdrew
BDPL’s decommissioning permit application in April
2018.
In a
letter dated December 19, 2018, BSEE issued to BDPL an INC for its
failure to flush and fill Segment #13101 (the “December 2018
INC”) pursuant to the pipeline decommissioning approval
letter issued in March 2017. BSEE asserts that the December 2018
INC authorizes BSEE to impose financial penalties on BDPL if it
does not comply with the December 2018 INC within ten (10) days. As
of the date of this Quarterly Report, flushing of the pipeline
segment has not yet commenced and decommission work has not yet
begun. Management anticipates performing certain abandonment
operations during 2019, however, timing depends several factors,
including resource availability and weather.
BDPL
has been in discussions with BSEE to resolve the December 2018 INC.
There can be no assurance that BSEE will not impose penalties under
the December 2018 INC. As a result, we are unable to predict
BOEM’s response or the ultimate impact, if any, on our
business, financial condition or results of operations.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of June 30, 2019. As of June 30, 2019, BDPL
maintained $2.6 million in asset retirement obligations related to
abandonment of these assets. If BDPL is assessed significant
penalties under the December 2018 INC, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition.
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2019 (the Quarterly Report”), references to
“Blue Dolphin,” “we,” “us” and
“our” are to Blue Dolphin Energy Company and its
subsidiaries, unless otherwise indicated or the context otherwise
requires. You should read the following discussion together with
the financial statements and the related notes included elsewhere
in this Quarterly Report, as well as with the risk factors,
financial statements, and related notes included thereto in our
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2019 and our Annual Report on Form 10-K for the fiscal year
ended December 31, 2018 (the “Annual
Report”).
Forward Looking Statements
Certain
statements included in this Quarterly Report, including in this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” are forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1935. Forward-looking statements represent
management’s beliefs and assumptions based on currently
available information. Forward-looking statements relate to
matters such as our industry, business strategy, goals and
expectations concerning our market position, future operations,
margins, profitability, capital expenditures, liquidity and capital
resources, access to supplies of crude oil and condensate,
commitments and contingencies, and other financial and operating
information. We have used the words “anticipate,”
“assume,” “believe,” “budget,”
“continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “plan,” “potential,”
“predict,” “project,” “will,”
“future,” and similar terms and phrases to identify
forward-looking statements.
Forward-looking
statements reflect our current expectations regarding future
events, results, or outcomes. These expectations may or may not be
realized. Some of these expectations may be based upon assumptions
or judgments that prove to be incorrect. In addition, our business
and operations involve numerous risks and uncertainties, many of
which are beyond our control, which could result in our
expectations not being realized, or materially affect our financial
condition, results of operations and cash flows. Actual
events, results and outcomes may differ materially from our
expectations due to a variety of factors. Although it is not
possible to identify all these factors, they include, among others,
the following and other factors described under the heading
“Risk Factors” in the Annual Report and this Quarterly
Report:
Risks Related to Our Business and Industry
●
Failure to meet the
terms and conditions set forth in the Settlement Agreement could
have a material adverse effect on our business, financial
condition, and results of operations and could materially adversely
affect the value of an investment in our common stock. (See
“Part I, Item 1. Financial Statements – Note (1)
Organization – Going Concern – Final Arbitration Award
and Settlement Agreement” for disclosures related to the
Settlement Agreement).
●
Inadequate
liquidity to sustain operations due to the unfavorable outcome in
the arbitration of the contract-related dispute with GEL, net
losses, working capital deficits, and other factors, including
defaults under secured loan agreements, any of which could have a
material adverse effect on us.
●
Defaults under our
secured loan agreements could have a material adverse effect on our
business, financial condition, and results of operations and
materially adversely affect the value of an investment in our
common stock.
●
Our substantial
debt in the current portion of long-term debt, which is currently
in default, could adversely affect our financial health and make us
more vulnerable to adverse economic conditions.
●
Our business,
financial condition and operating results may be adversely affected
by increased costs of capital or a reduction in the availability of
credit.
●
LEH holds a
significant interest in us, and related-party transactions with LEH
and its affiliates may cause conflicts of interest that may
adversely affect us.
●
The dangers
inherent in oil and gas operations could expose us to potentially
significant losses, costs or liabilities and reduce our
liquidity.
●
The geographic
concentration of our assets creates a significant exposure to the
risks of the regional economy and other regional adverse
conditions.
●
Competition from
companies having greater financial and other resources could
materially and adversely affect our business and results of
operations.
●
Environmental laws
and regulations could require us to make substantial capital
expenditures to remain in compliance or to remediate current or
future contamination that could give rise to material
liabilities.
●
We are subject to
strict laws and regulations regarding personnel and process safety,
and failure to comply with these laws and regulations could have a
material adverse effect on our results of operations, financial
condition and profitability.
●
Our insurance
policies may be inadequate or expensive.
●
Our ability to use
net operating loss (“NOL”) carryforwards to offset
future taxable income for U.S. federal income tax purposes is
subject to limitation.
●
Terrorist attacks,
cyber-attacks, threats of war, or actual war may negatively affect
our operations, financial condition, results of operations, and
cash flows.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Risks Related to Our Operations
●
Management has
determined that there is, and the report of our independent
registered public accounting firm expresses, substantial doubt
about our ability to continue as a going concern.
●
Refining margins
are volatile, and a reduction in refining margins will adversely
affect the amount of cash we will have available for working
capital.
●
The price
volatility of crude oil, other feedstocks, refined petroleum
products, and fuel and utility services may have a material adverse
effect on our earnings, cash flows and liquidity.
●
Our future success
depends on our ability to acquire adequate crude oil levels on
favorable terms to operate the Nixon refinery.
●
Downtime at the
Nixon refinery could result in lost margin opportunity, increased
maintenance expense, increased inventory, and a reduction in cash
available for payment of our obligations.
●
We may have capital
needs for which our internally generated cash flows and other
sources of liquidity may not be adequate. Further, LEH and its
affiliates (including Jonathan Carroll) may, but are not required
to, fund our working capital requirements in the event our
internally generated cash flows and other sources of liquidity are
inadequate.
●
Our business may
suffer if any of the executive officers or other key personnel
discontinue employment with us. Furthermore, a shortage of skilled
labor or disruptions in our labor force may make it difficult for
us to maintain productivity.
●
Loss of market
share by a key customer, one of which is LEH, or consolidation
among our customer base could harm our operating
results.
●
The sale of refined
petroleum products to the wholesale market is our primary business,
and if we fail to maintain and grow the market share of our refined
petroleum products, our operating results could
suffer.
●
We are dependent on
third parties for the transportation of crude oil and condensate
into and refined petroleum products out of our Nixon Facility, and
if these third parties become unavailable to us, our ability to
process crude oil and condensate and sell refined petroleum
products to wholesale markets could be materially and adversely
affected.
●
Our suppliers
source a substantial amount, if not all, of our crude oil and
condensate from the Eagle Ford Shale and may experience
interruptions of supply from that region.
●
Our refining
operations and customers are primarily located within the Eagle
Ford Shale and changes in the supply/demand balance in this region
could result in lower refining margins.
●
Regulation of GHG
emissions could increase our operational costs and reduce demand
for our products.
Risks Related to Our Pipelines and Oil and Gas
Properties
●
Orders by BOEM to
increase bonds or other sureties to maintain compliance with
BOEM’s regulations, or the assessment of penalties for
failure to do so, could significantly impact our operations,
liquidity, and financial condition.
●
More stringent
requirements imposed by BOEM and BSEE related to the
decommissioning, plugging, and abandonment of wells, platforms, and
pipelines could materially increase our estimate of future
AROs.
Any one
of these factors or a combination of these factors could materially
affect our future results of operations and could influence whether
any forward-looking statements ultimately prove to be accurate. Our
forward-looking statements are not guarantees of future
performance, and actual results and future performance may differ
materially from those suggested in any forward-looking statements.
We do not intend to update these statements unless we are required
to do so.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Going
Concern
See
“Part I, Item 1. Financial Statements – Note (1)
Organization – Going Concern” regarding factors
m
anagement has determined raise
substantial doubt about our ability to continue as a going
concern.
Operating Risks
See
“Part I, Item 1. Financial Statements – Note (1)
Organization – Operating Risks” regarding factors that
have negatively impacted execution of our business
plan.
Company Overview
Blue
Dolphin 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 approximately 1.1 million bbls of petroleum
storage tanks (collectively the “Nixon Facility”).
Pipeline transportation and oil and gas operations are no longer
active. Blue Dolphin maintains a website at
http://www.blue-dolphin-energy.com
. Information on or
accessible through Blue Dolphin’s website is not incorporated
by reference in or otherwise made a part of this Quarterly
Report.
Major Influences on Results of Operations
Refinery Operations
As a
margin-based business, our refinery operations are primarily
affected by gross profit per bbl, product slate, and refinery
downtime.
Price Differentials per Bbl
Gross
profit per bbl, which reflects the dollar per bbl price difference
between crude oil and condensate (input) and refined petroleum
products (output), is the most significant driver of refining
margins, and they have historically been subject to wide
fluctuations. Our per bbl cost to acquire crude oil and condensate
and the dollar per bbl price for which our refined petroleum
products are ultimately sold depend on the economics of supply and
demand. Supply and demand are affected by numerous factors, most,
if not all, of which are beyond our control,
including:
●
Domestic and
foreign market conditions, political affairs, and economic
developments;
●
Import supply
levels and export opportunities;
●
Existing domestic
inventory levels;
●
Operating and
production levels of competing refineries;
●
Expansion and/or
upgrades of competitors’ facilities;
●
Governmental
regulations (e.g., mandated renewable fuels standards, proposed
climate change laws and regulations, and increased mileage
standards for vehicles);
●
Availability of and
access to transportation infrastructure;
●
Availability of
competing fuels (e.g., renewables); and
Product Slate
Management periodically determines whether to change the
refinery’s product mix, as well as maintain, increase, or
decrease inventory levels based on various factors. These factors
include the crude oil pricing market in the U.S. Gulf Coast region,
the refined petroleum products market in the same region, the
relationship between these two markets, fulfilling contract
demands, and other factors that may impact our operations,
financial condition, and cash flows.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Refinery Downtime
The safe and reliable operation of the refinery is key to our
financial performance and results of operations, and we are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Although operating at anticipated levels, the refinery is still in
a recommissioning phase and may require unscheduled downtime for
unanticipated reasons, including maintenance and repairs, voluntary
regulatory compliance measures, or cessation or suspension by
regulatory authorities.
Occasionally, the Nixon refinery experiences a temporary shutdown
due to power outages from high winds and thunderstorms. In such
cases, we must initiate a standard refinery start-up process, which
can last several days. We are typically able to resume normal
operations the next day. Any scheduled or unscheduled downtime will
result in lost margin opportunity, potential increased maintenance
expense and a reduction of refined petroleum products inventory,
which could reduce our ability to meet our payment
obligations.
Tolling and Terminaling Operations
The Nixon Facility’s petroleum storage tanks and
infrastructure are primarily suited for crude oil and condensate
and refined petroleum products, such as naphtha, jet fuel, diesel
and fuel oil. Our storage terminaling operations are primarily
affected by:
●
price
(in terms of storage fees) and available capacity;
●
industry
factors including changes in the prices of petroleum products that
affect demand for storage services; and
●
utilization
rates of our competitors (local demand).
Key Relationships
Relationship with LEH
Blue
Dolphin and certain of its subsidiaries are currently parties to a
variety of agreements with LEH and its affiliates and a
counter-party. Related-party agreements with LEH include: (i) an
Amended and Restated Operating Agreement with Blue Dolphin and LE,
(ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan Agreement
with BDPL, (iv) an Amended and Restated Promissory Note with Blue
Dolphin, and (v) an office sub-lease agreement with BDSC. In
addition, we currently rely on advances from LEH and its affiliates
(including Jonathan Carroll) to fund our working capital
requirements. There can be no assurances that LEH and its
affiliates will continue to fund our working capital requirements.
(See “Part I, Item 1. Financial Statements – Note (9)
Related-Party Transactions” for additional disclosures
related to agreements that we have in place with LEH and its
affiliates.)
Relationship with Crude Supplier
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month crude supply contract with Pilot Travel Centers
LLC ("Pilot"). In connection with the crude supply agreement, Pilot
stores its crude oil at the Nixon Facility pursuant to a terminal
services agreement. Pilot currently provides us with adequate
amounts of crude oil and condensate on favorable terms, and we
expect Pilot to continue to do so for the foreseeable future. Our
ability to purchase adequate amounts of crude oil and condensate
could be adversely affected if the Settlement Agreement is
terminated and GEL seeks to confirm and enforce the Final
Arbitration Award,
as well as other
factors, including
net losses, working capital deficits, and
financial covenant defaults in secured loan
agreements.
Management
believes that it is taking the appropriate steps to improve our
operations and financial stability. If our business strategy is
unsuccessful, it could affect our ability to acquire adequate
supplies of crude oil and condensate under the existing contract or
otherwise. Further, because our existing crude supply contract is a
month-to-month arrangement, there can be no assurance that crude
oil and condensate supplies will continue to be available under
this contract in the future.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Results of Operations
Certain
Prior Quarter amounts as defined herein have been reclassified in
order to conform to the Current Quarter presentation. Specifically,
certain changes to the presentation of prior period statements of
operations have been made to conform to the current period
presentation, primarily relating to: (i) a retitling from
‘cost of sales’ to ‘cost of goods sold,’
which includes all costs directly attributable to the generation of
the related revenue, as defined by GAAP and (ii) a breakout of the
‘LEH operating fee’ under the Amended and Restated
Operating Agreement, which was previously reported within
‘refinery operating expenses’. These changes had no
effect on the reported results of operations.
Consolidated Results
Three Months Ended June 30, 2019 (the “Current
Quarter”) Compared to June 30, 2018 (the “Prior
Quarter”)
.
Total Revenue from Operations
. For the Current Quarter, we
had total revenue from operations of $78.3 million compared to
total revenue from operations of $89.1 million for the Prior
Quarter, a decrease of 12%. Approximately 99% of our revenue is
derived from refinery operations while 1% is derived from tolling
and terminaling. Refinery operations revenue decreased
approximately $11.0 million in the Current Quarter compared to the
Prior Quarter. The decrease in refinery operations revenue was due
to lower commodity pricing per bbl on refined petroleum products
sold and lower sales volume in the Current Quarter compared to the
Prior Quarter. For the same period, tolling and terminaling revenue
increased approximately $0.2 million, or approximately 28%, as a
result of increased storage fees under new and renewed customer
agreements.
Total Cost of Goods Sold
. Total cost of goods sold was $78.6
million for the Current Quarter compared to $85.1 million for the
Prior Quarter. The nearly 8% decrease in total cost of goods sold
in the Current Quarter compared to the Prior Quarter related to
lower commodity prices per bbl for crude oil and chemicals and
decreased throughput volume.
Gross Profit (Loss) / Gross Margin (Deficit)
. For the
Current Quarter, we had a gross loss of $0.2 million, or a gross
deficit of less than 1%, compared to gross profit of $4.0 million,
or gross margin of nearly 5%, for the Prior Quarter. The
approximate $4.2 million decrease in gross profit between the
periods primarily related to negative margins per bbl on certain of
our refined petroleum products in the Current Quarter compared to
the Prior Quarter.
LEH Operating Fee
. The LEH operating fee under the Amended
and Restated Operating Agreement totaled approximately $0.2 million
in both the Current Quarter and the Prior Quarter. (See “Part
I, Item 1. Financial Statements – Note (9) Related-Party
Transactions” for additional disclosures related to the
Amended and Restated Operating Agreement.)
General and Administrative Expenses
. General and
administrative expenses totaled $0.6 million in the Current Quarter
compared to $0.7 million in the Prior Quarter, a decrease of nearly
16%. The decrease between the periods was primarily due to lower
legal expenses related to the GEL matter.
Depreciation and Amortization
. We recorded depreciation and
amortization expenses of $0.6 million in the Current Quarter
compared to $0.5 million in the Prior Quarter, an increase of
nearly 37%. The increase related to placement in service of a new
boiler and new petroleum storage tanks.
Other Expense.
Total other
expense was $1.6 million in the Current Quarter compared to $0.8
million in the Prior Quarter. Nearly all of other expense related
to interest expense associated with the secured loan agreements
with Veritex Community Bank (“Veritex”) and
related-party debt. The increase in the Current Quarter compared to
the Prior Quarter related to completion of certain construction in
progress for which interest was no longer
capitalized.
Net Income (Loss)
. For the Current Quarter, we reported net
loss of $3.3 million, or a loss of $0.30 per share, compared to net
income of $1.8 million, or income of $0.17 per share, for the Prior
Quarter. The increase in net loss between the periods was primarily
attributable to less favorable margins per bbl and lower sales
throughput volume, which was offset by slightly increased tank
rental revenue in the Current Quarter compared to the Prior
Quarter.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Six Months Ended June 30, 2019 (the “Current Six
Months”) Compared to June 30, 2018 (the “Prior Six
Months”)
.
Total Revenue from Operations
. For the Current Six Months,
we had total revenue from operations of $147.3 million compared to
total revenue from operations of $161.4 million for the Prior Six
Months, a decrease of nearly 9%. Approximately 99% of our revenue
is derived from refinery operations while 1% is derived from
tolling and terminaling. Refinery operations revenue decreased
approximately $14.7 million in the Current Six Months compared to
the Prior Six Months. The decrease in refinery operations revenue
was due to lower commodity pricing per bbl on refined petroleum
products sold in the Current Six Months compared to the Prior Six
Months. For the same period, tolling and terminaling revenue
increased approximately $0.6 million, or approximately 36%, as a
result of increased storage fees under new and renewed customer
agreements.
Total Cost of Goods Sold
. Total cost of goods sold was
$144.1 million for the Current Six Months compared to $155.6
million for the Prior Six Months. The 7% decrease in total cost of
goods sold in the Current Six Months compared to the Prior Six
Months related to lower commodity prices per bbl for crude oil and
chemicals.
Gross Profit / Gross Margin
. For the Current Six Months,
gross profit totaled $3.2 million, or gross margin of approximately
2%, compared to gross profit of $5.8 million, or gross margin of
nearly 4%, for the Prior Six Months. The decrease in gross profit
between the periods primarily related to less favorable margins per
bbl in the Current Six Months compared to the Prior Six
Months.
LEH Operating Fee
. The LEH operating fee under the Amended
and Restated Operating Agreement totaled approximately $0.3 million
in both the Current Six Months and the Prior Six Months. (See
“Part I, Item 1. Financial Statements – Note (9)
Related-Party Transactions” for additional disclosures
related to the Amended and Restated Operating
Agreement.)
General and Administrative Expenses
. General and
administrative expenses totaled $1.2 million in the Current Six
Months compared to $1.3 million in the Prior Six Months, a decrease
of approximately 7%. The decrease between the periods was primarily
due to lower legal expenses related to the GEL matter.
Depreciation and Amortization
. We recorded depreciation and
amortization expenses of $1.2 million in the Current Six Months
compared to $0.9 million in the Prior Six Months, an increase of
approximately 33%. The increase related to placement in service of
a new boiler and new petroleum storage tanks.
Other Expense.
Total other
expense was $2.8 million in the Current Six Months compared to $1.5
million in the Prior Six Months. Nearly all of other expense
related to interest expense associated with the secured loan
agreements with Veritex and related-party debt. The increase in the
Current Six Months compared to the Prior Six Months related to
completion of certain construction in progress for which interest
was no longer capitalized.
Income Tax Benefit
. We recognized an income tax benefit of
$0 in the Current Six Months compared to $0.2 million in the Prior
Six Months. Income tax benefit in the Prior Six Months related to a
refundable Alternative Minimum Tax that was paid in prior periods.
(See “Part I, Item 1. Financial Statements – Note (16)
Income Taxes” for additional disclosures related to income
taxes.)
Net Income (Loss)
. For the Current Six Months, we reported
net loss of $2.6 million, or a loss of $0.23 per share, compared to
net income of $1.7 million, or income of $0.15 per share, for the
Prior Six Months. The increase in net loss between the periods was
primarily attributable to less favorable margins per bbl, which was
partially offset by slightly increased tank rental revenue in the
Current Six Months compared to the Prior Six Months.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Non-GAAP Financial Measures
To supplement our consolidated results, management uses refining
gross profit per bbl, a non-GAAP financial measure, to help
investors evaluate our core operating results and allow for greater
transparency in reviewing our overall financial, operational and
economic performance. Refining gross profit per bbl is reconciled
to GAAP-based results below. Refining gross profit per bbl should
not be considered an alternative for GAAP results. Refining gross
profit per bbl is provided to enhance an overall understanding of
our core financial performance for the applicable periods and is an
indicator that management believes is relevant and useful. Refining
gross profit per bbl may differ from similar calculations used by
other companies within the petroleum industry, thereby limiting its
usefulness as a comparative measure. (See “Part I, Item 1.
Financial Statements” for comparative GAAP
results.)
Refining Gross Profit per Bbl –
For the Current
Quarter, we had a refining gross deficit of $1.18 per bbl compared
to a refining gross profit of $2.79 per bbl for the Prior Quarter,
reflecting a decrease of $3.97 per bbl. The decrease between the
periods primarily related to
negative margins
per bbl on certain of our refined petroleum products
in the
Current Quarter compared to the Prior Quarter. (See “Glossary
of Selected Energy and Financial Terms” in this Quarterly
Report for the definition of gross margin per bbl.)
For the
Current Six Months, we had refining gross profit of $0.49 per bbl
compared to a refining gross profit of $1.97 per bbl for the Prior
Six Months, reflecting a decrease of $1.48 per bbl. The decrease
between the periods primarily related to less favorable refining
margins per bbl in the Current Six Months compared to the Prior Six
Months.
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
(in
thousands except per bbl amounts)
|
|
|
|
|
|
|
|
Refinery
operations revenue
|
$
77,257
|
$
88,265
|
$
145,115
|
$
159,777
|
|
Less:
Total cost of goods sold
|
(78,556
)
|
(85,090
)
|
(144,072
)
|
(155,582
)
|
|
|
(1,299
)
|
3,175
|
1,043
|
4,195
|
|
|
|
|
|
|
|
Sales
(Bbls)
|
1,104
|
1,139
|
2,133
|
2,131
|
|
|
|
|
|
|
|
Gross
Margin per Bbl
|
$
(1.18
)
|
$
2.79
|
$
0.49
|
$
1.97
|
Remainder
of Page Intentionally Left Blank
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Refinery Operations Throughput and Production Data
Operational metrics
for the refinery for the periods indicated were as
follow:
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar
Days
|
91
|
91
|
181
|
181
|
|
Refinery
downtime
|
(7
)
|
(5
)
|
(18
)
|
(21
)
|
|
Operating
Days
|
84
|
86
|
163
|
160
|
|
|
|
|
|
|
|
Total
refinery throughput (bbls)
|
1,134,105
|
1,182,491
|
2,181,164
|
2,190,934
|
|
Operating
days:
|
|
|
|
|
|
bpd
|
13,501
|
13,750
|
13,381
|
13,693
|
|
Capacity
utilization rate
|
90.0
%
|
91.7
%
|
89.2
%
|
91.3
%
|
|
Calendar
days:
|
|
|
|
|
|
bpd
|
12,463
|
12,994
|
12,051
|
12,105
|
|
Capacity
utilization rate
|
83.1
%
|
86.6
%
|
80.3
%
|
80.7
%
|
|
|
|
|
|
|
|
Total
refinery production (bbls)
|
1,102,340
|
1,150,782
|
2,125,169
|
2,129,334
|
|
Operating
days:
|
|
|
|
|
|
bpd
|
13,123
|
13,381
|
13,038
|
13,308
|
|
Capacity
utilization rate
|
87.5
%
|
89.2
%
|
86.9
%
|
88.7
%
|
|
Calendar
days:
|
|
|
|
|
|
bpd
|
12,114
|
12,646
|
11,741
|
11,764
|
|
Capacity
utilization rate
|
80.8
%
|
84.3
%
|
78.3
%
|
78.4
%
|
|
Note:
|
The
small difference between total refinery throughput (volume
processed as input) and total refinery production (volume processed
as output) represents a combination of multiple factors including
refinery fuel use, elimination of some impurities originally
present in the crude oil, loss, and other factors.
|
During
the Current Quarter, the refinery experienced 7 days of downtime
primarily related to equipment repairs. During the Prior Quarter,
the refinery experienced 5 days of downtime primarily related to
repair and maintenance of the naphtha stabilizer unit. During the
Current Six Months, the refinery experienced 18 days of downtime
primarily related to a maintenance turnaround and equipment
repairs. During the Prior Six Months, the refinery experienced 21
days of downtime primarily related to repair and maintenance of the
naphtha stabilizer unit and short maintenance turnarounds scheduled
in January and March of 2018.
For the
Current Quarter compared to the Prior Quarter, total refinery
throughput bbls and total refinery production bbls decreased
slightly as a result of increased downtime. For the Current Six
Months compared to the Prior Six Months, total refinery throughput
bbls and total refinery production bbls were relatively
flat.
Refined Petroleum Product Sales Summary
.
See
“Part I, Item 1. Financial Statements – Note (14)
Concentration of Risk” for a discussion of refined petroleum
product sales.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Liquidity and Capital Resources
Overview
.
We
currently rely on revenue from operations, LEH and its affiliates
(including Jonathan Carroll), and borrowings under bank facilities
to meet our liquidity needs. Primary uses of cash include: (i)
payment to LEH for our direct operating expenses under the Amended
and Restated Operating Agreement, (ii) payments on long-term debt
and the Final Arbitration Award, (iii) purchase of crude oil and
condensate, and (iv) construction in progress.
As
discussed elsewhere within this “Liquidity and Capital
Resources” section, management has determined that there is
substantial doubt about our ability to continue as a going concern
due to consecutive quarterly net losses, inadequate working
capital, the Final Arbitration Award, and defaults under secured
loan agreements. See “Part I, Item 1. Financial Statements
– Note (1) Organization – Going Concern” for
additional disclosures related to the Final Arbitration Award, the
Settlement Agreement with GEL, defaults under secured loan
agreements, and the going concern.
Management believes that it is taking the
appropriate steps to improve our operations and financial
stability. If our business strategy is unsuccessful, it could
affect our ability to acquire adequate supplies of crude oil and
condensate under our existing contract or
otherwise.
Our results of operations and liquidity are highly dependent upon
the margins that we receive for our refined petroleum products.
T
he dollar per bbl price difference between crude oil and
condensate (input) and refined petroleum products (output), is the
most significant driver of refining margins, and they have
historically been subject to wide fluctuations.
There can be no assurance that margins for refined
petroleum products will be favorable, LEH and its affiliates will
continue to fund our working capital needs in periods of working
capital deficits, or we will be able to obtain additional financing
on commercially reasonable terms or at all. Further, if the
Settlement Agreement with GEL is terminated and GEL seeks to
confirm and enforce the Final Arbitration Award, our business,
financial condition, and results of operations will be materially
adversely affected, and Blue Dolphin would likely be required to
seek protection under bankruptcy laws.
Crude Oil and Condensate Supply
.
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate, which is primarily dependent
on our liquidity and access to capital. We currently have in place
a month-to-month crude supply contract with Pilot. In connection
with the crude supply agreement, Pilot stores its crude oil at the
Nixon Facility pursuant to a terminal services agreement. Pilot
currently provides us with adequate amounts of crude oil and
condensate on favorable terms, and we expect Pilot to continue to
do so for the foreseeable future. Our ability to purchase adequate
amounts of crude oil and condensate could be adversely affected if
the Settlement Agreement is terminated and GEL seeks to confirm and
enforce the Final Arbitration Award, as well as other factors,
including net losses, working capital deficits, and financial
covenant defaults in secured loan agreements.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Cash Flow
.
Our
cash flow from operations for the periods indicated was as
follows:
|
|
For
Three Months Ended June 30,
|
For Six
Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
cash, cash equivalents, and restricted cash
|
$
1,680
|
$
2,384
|
$
1,665
|
$
2,146
|
|
|
|
|
|
|
|
Cash
flow from operations
|
|
|
|
|
|
Adjusted
profit from operations
|
(2,509
)
|
2,410
|
(1,140
)
|
2,595
|
|
Change
in assets and current liabilities
|
(8,912
)
|
(2,091
)
|
(10,154
)
|
(1,475
)
|
|
|
|
|
|
|
|
Total
cash flow from operations
|
(11,421
)
|
319
|
(11,294
)
|
1,120
|
|
|
|
|
|
|
|
Cash
inflows (outflows)
|
|
|
|
|
|
Proceeds
from issuance of debt
|
12,402
|
-
|
12,402
|
-
|
|
Payments
on debt
|
(291
)
|
(235
)
|
(541
)
|
(475
)
|
|
Net
activity on related-party debt
|
(32
)
|
235
|
229
|
452
|
|
Capital
expenditures
|
(371
)
|
(691
)
|
(494
)
|
(1,231
)
|
|
|
|
|
|
|
|
Total
cash inflows (outflows)
|
11,708
|
(691
)
|
11,596
|
(1,254
)
|
|
|
|
|
|
|
|
Total
change in cash flows
|
287
|
(372
)
|
302
|
(134
)
|
|
|
|
|
|
|
|
Ending
cash, cash equivalents, and restricted cash
|
$
1,967
|
$
2,012
|
$
1,967
|
$
2,012
|
For the
Current Quarter, we experienced a cash flow deficit of $11.4
million compared to cash flow from operations of $0.3 million for
the Prior Quarter. The $11.7 million decrease in cash flow from
operations between the periods was primarily the result of payments
toward the accrued arbitration award.
Working Capital
.
We had a working capital deficit of $73.8 million and $71.9 million
at June 30, 2019 and December 31, 2018, respectively. Excluding the
current portion of long-term debt, we had a working capital deficit
of $31.8 million and $30.0 at June 30, 2019 at December 31, 2018,
respectively.
As
discussed elsewhere within this “Liquidity and Capital
Resources” section, the Final Arbitration Award has affected
our ability to obtain working capital through financing.
If the Settlement Agreement with GEL
is terminated and GEL seeks to confirm and enforce the Final
Arbitration Award: (i) our business operations, including crude oil
and condensate procurement and our customer relationships;
financial condition; and results of operations will be materially
affected, and (ii) Blue Dolphin and its affiliates would likely be
required to seek protection under bankruptcy
laws.
We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. There can be no
assurance that LEH and its affiliates (including Jonathan Carroll)
will continue to fund our working capital
requirements.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Capital Spending
.
Since
2015, the Nixon Facility has been undergoing a capital improvement
expansion project. Capital improvements have primarily related to
construction of new petroleum storage tanks to significantly
increase petroleum storage capacity. However, smaller efficiency
improvements have been made as well. Increased petroleum storage
capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000
bpd, and (iii) provides an opportunity to generate additional
tolling and terminaling revenue. When the expansion project is
complete, petroleum storage capacity at the Nixon Facility will
exceed 1.2 million bbls, an increase of more than 0.9 million
bbls.
For the
next 12 to 18 months, we expect to
continue to incur capital expenditures related to
facility and land improvements and completion of an unfinished
petroleum storage tank.
Capital spending at the Nixon
Facility is being funded by working capital derived from revenue
from operations and LEH and its affiliates (including Jonathan
Carroll), as well as from long-term debt from Veritex that was
secured in 2015 for expansion of the Nixon Facility. Unused amounts
under the Veritex loans are reflected in restricted cash (current
and non-current portions) on our consolidated balance sheets.
See “Part I, Item 1. Financial
Statements – Note (11) Long-Term Debt and Accrued
Interest” for additional disclosures related to borrowings
for capital spending.
We
account for our capital expenditures in accordance with GAAP. We
also distinguish between capital expenditures that are for
maintenance and those that are for expansion. We classify a capital
expenditure as maintenance if it maintains capacity or throughput.
A classification of expansion is used if the capital expenditure is
expected to increase capacity or throughput. The distinction
between maintenance and expansion is made consistent with our
accounting policies and is generally a straightforward process.
However, in certain circumstances the distinction can be a matter
of management judgment and discretion.
Budgeting
and approval of maintenance capital expenditures is done throughout
the year on a project-by-project basis. We budget for and make
maintenance capital expenditures that are necessary to maintain
safe and efficient operations, meet customer needs and comply with
operating policies and applicable law. We may budget for and make
additional maintenance capital expenditures that we expect to
produce economic benefits such as increasing efficiency and/or
lowering future expenses. Budgeting and approval of expansion
capital expenditures are generally made periodically on a
project-by-project basis in response to specific investment
opportunities identified by our business segments.
Contractual Obligations and Debt Agreements
.
See the
following notes under “Part I, Item 1. Financial
Statements” regarding:
●
GEL
. “Note (1) Organization – Going
Concern – Final Arbitration Award and Settlement
Agreement” for disclosures related to the Final Arbitration
Award to GEL and Settlement Agreement with GEL.
●
Related-Party
. “Note (9)
Related-Party Transactions” for a summary of the agreements
we have in place with related parties.
●
Long-Term Debt
. “Note (11)
Long-Term Debt and Accrued Interest” for a summary of our
long-term debt.
●
Short-Term Debt
. “Note (13) Line
of Credit Payable” for a summary of our short-term
debt.
●
Operating and Finance Leases
.
“Note (15) Leases” for disclosures related to our
operating and finance leases.
●
Supplemental Pipeline Bonds and Abandonment
Requirements
. “Note (18) Commitments and Contingencies
– Supplemental Pipeline Bonds” and “— Idle
Iron” for a discussion of supplemental pipeline bonding and
offshore pipeline and platform abandonment
requirements.
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/19
|
Indebtedness
.
The principal balances outstanding plus accrued interest on our
debt (including related-party) for the periods indicated were as
follow:
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
First
Term Loan Due 2034 (in default)
|
$
22,365
|
$
22,593
|
|
Pilot
Line of Credit
|
12,902
|
-
|
|
Second
Term Loan Due 2034 (in default)
|
9,184
|
9,353
|
|
Notre
Dame Debt (in default)
|
8,219
|
7,821
|
|
BDPL
Loan Agreement (in default)
|
5,854
|
5,534
|
|
March
Carroll Note (in default)
|
1,515
|
1,147
|
|
March
Ingleside Note (in default)
|
1,333
|
1,283
|
|
June
LEH Note (in default)
|
736
|
611
|
|
Capital
lease
|
-
|
41
|
|
|
$
62,108
|
$
48,383
|
|
|
|
|
|
Less:
Current portion of long-term debt
|
(54,114
)
|
(41,904
)
|
|
Less:
Unamortized debt issue costs
|
(2,567
)
|
(2,006
)
|
|
Less:
Interest payable and interest payable, related party
|
(5,427
)
|
(4,473
)
|
|
|
|
|
|
|
$
-
|
$
-
|
Principal
payments on long-term debt totaled $0.3 million in the Current
Quarter compared to $0.2 million in the Prior Quarter. Principal
payments on long-term debt totaled $0.5 million in the Current Six
Months compared to $0.5 million in the Prior Six Months. As of the
date of this Quarterly Report, LE and LRM were current on monthly
payments under the First Term Loan Due 2034 and Second Term Loan
Due 2034, as well as interest payments on the Pilot Line of Credit.
There have been no payments under the Notre Dame Debt to date and
no payments to Jonathan Carroll under the March Carroll Note since
May 2017.
See
“Part I, Item 1. Financial Statements – Note (9)
Related Party Transactions – Financial Agreements –
March Carroll Note” and "– Amended and Restated
Guaranty Fees" for additional disclosures related to payments to
Jonathan Carroll.
As
described elsewhere in this Quarterly Report, Veritex notified
obligors that the Final Arbitration Award constitutes an event of
default under the First Term Loan Due 2034 and Second Term Loan Due
2034. In addition to existing events of default related to the
Final Arbitration Award, at June 30, 2019, LE and LRM were in
violation of the debt service coverage ratio, the current ratio,
and debt to net worth ratio financial covenants related to the
secured loan agreements. LE also failed to replenish a payment
reserve account as required. The occurrence of events of default
under the secured loan agreements permits Veritex to declare the
amounts owed under the secured loan agreements immediately due and
payable, exercise its rights with respect to collateral securing
obligors’ obligations under the loan agreements, and/or
exercise any other rights and remedies available.
Veritex has not accelerated or called due the secured loan
agreements considering the Settlement Agreement. Instead, Veritex
has expressly reserved
all its rights, privileges and
remedies related to events of default under the secured loan
agreements and informed obligors that it would consider a final
confirmation of the Final Arbitration Award to be a material event
of default under the loan agreements.
Veritex has been working with LE and LRM and
continues to be aware and party to all discussions and arrangements
with GEL surrounding the executed settlement agreement and all
amendments and extensions with GEL. In a notice to obligors dated
April 30, 2019 (the "Veritex Consent'), Veritex agreed to waive
certain covenant defaults and forbear from enforcing its remedies
under the secured loan agreements subject to: (i) the agreement and
concurrence of the USDA and (ii) the replenishment of a payment
reserve account in the amount of $1.0 million as required by one of
the secured loan agreements on or before August 31, 2019. Any
exercise by Veritex of its rights and remedies under such secured
loan agreements would have a material adverse effect on
our
business operations, including crude oil and condensate procurement
and our customer relationships; financial condition; and results of
operations. Further, Blue Dolphin and its affiliates would likely
be required to seek protection under bankruptcy laws, and the
trading prices of our common stock and the value of an investment
in our common stock could significantly decrease, which could lead
to holders of our common stock losing their investment in our
common stock in its entirety.
See
“Part I, Item 1. Financial Statements – Note (1)
Organization – Going Concern” and “–
Operating Risks”, as well as “Note (11) Long-Term Debt
and Accrued Interest” for additional disclosures related to
long-term debt financial covenant violations and events of
default.
See
“Contractual Obligations and Debt Agreements –
Related-Party” within the Liquidity and Capital Resources
section for additional disclosures with respect to related-party
indebtedness.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Long-Lived Assets
.
See “Part I, Item 1. Financial
Statements – Note (3) Significant Accounting Policies –
Property and Equipment”.
Revenue Recognition
. See
“Part I, Item 1. Financial Statements – Note (3)
Significant Accounting Policies – Revenue
Recognition”.
Inventory
. See “Part I, Item 1. Financial Statements
– Note (3) Significant Accounting Policies –
Inventory”.
Asset Retirement Obligations
. See “Part I, Item 1.
Financial Statements – Note (3) Significant Accounting
Policies – Asset Retirement Obligations,”
“— Note (13) Asset Retirement Obligations,” and
“— Note (18) Commitments and Contingencies – Idle
Iron”.
Income Taxes
. See “Part I, Item 1. Financial
Statements – Note (3) Significant Accounting Policies –
Income Taxes” and “– Note (16) Income
Taxes”.
Recently Adopted Accounting Guidance
See “Part I, Item 1. Financial Statements – Note (3)
Significant Accounting Policies – New Pronouncements
Adopted”.
New Pronouncements Issued, Not Yet Effective
See “Part I, Item 1. Financial Statements – Note (3)
Significant Accounting Policies – New Pronouncements Issued,
Not Yet Effective”.