BLUE DOLPHIN ENERGY CO - Annual Report: 2014 (Form 10-K)

 

 

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		73-1268729
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

801 Travis Street, Suite 2100 Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		OTCQX

 

 

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PART I
	ITEM 1	BUSINESS			7
	ITEM 1A.	RISK FACTORS			15
	ITEM 1B.	UNRESOLVED STAFF COMMENTS			22
	ITEM 2.	PROPERTIES			22
	ITEM 3.	LEGAL PROCEEDINGS			23
	ITEM 4.	MINE SAFETY DISCLOSURES			23
PART II
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES			24
	ITEM 6.	SELECTED FINANCIAL DATA			24
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS			25
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			38
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			40
			Report of Independent Registered Public Accounting Firm		41
			Consolidated Balance Sheets		42
			Consolidated Statements of Operations		43
			Consolidated Statements of Stockholders’ Equity		44
			Consolidated Statements of Cash Flows		45
			Notes to Consolidated Financial Statements		46
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			73
	ITEM 9A.	CONTROLS AND PROCEDURES			73
	ITEM 9B.	OTHER INFORMATION			74
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			75
	ITEM 11.	EXECUTIVE COMPENSATION			79
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTER			81
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			82
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES			82
PART IV
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES			83
SIGNATURES					87

 

 

●	our dependence on Lazarus Energy Holdings, LLC (“LEH”) for financing and management of our property and the property of our subsidiaries;

●	capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate;

●	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;

●	dangers inherent in oil and gas operations that could cause disruptions and expose us to potentially significant losses, costs or liabilities and reduce our liquidity;

●	geographic concentration of our assets, which creates a significant exposure to the risks of the regional economy;

●	competition from companies having greater financial and other resources;

●	laws and regulations regarding personnel and process safety, as well as environmental, health and safety, for which failure to comply may result in substantial fines, criminal sanctions, permit revocations, injunctions, facility shutdowns and/or significant capital expenditures;

●	insurance coverage that may be inadequate or expensive;

●	related party transactions with LEH and its affiliates, which may cause conflicts of interest; and

●	loss of executive officers or key employees, as well as a shortage of skilled labor or disruptions in our labor force, which may make it difficult to maintain productivity.

●	volatility of crude oil, other feedstocks, refined petroleum products, and fuel and utility services;

●	volatility of refining margins;

●	potential downtime at the Nixon Facility, which could result in lost margin opportunity, increased maintenance expense, increased inventory, and a reduction in cash available for payment of our obligations;

●	loss of market share by a key customer or consolidation among our customer base;

●	failure to grow or maintain the market share for our refined petroleum products;

●	our reliance on third-parties for the transportation of crude oil and condensate into and refined petroleum products out of the Nixon Facility;

●	our dependence on Genesis Energy, LLC (“Genesis”) and its affiliates for financing, crude oil and condensate sourcing, inventory risk management, hedging, and refined petroleum product marketing;

●	interruptions in the supply of crude oil and condensate sourced in the Eagle Ford Shale;

●	changes in the supply/demand balance in the Eagle Ford Shale could result in lower refining margins;

●	hedging of our refined petroleum products and crude oil and condensate inventory, which may limit our gains and expose us to other risks;

●	availability and cost of Renewable Identification Numbers and Renewable Fuel Standard mandates; and

●	regulation of greenhouse gas emissions, which could increase our operational costs and reduce demand for our products.

 

●	asset retirement obligations for our pipelines and facilities assets and oil and gas properties.

 

 

 

Distillates.  The result of crude distillation and therefore any refined oil product.  Distillate is more commonly used as an abbreviated form of middle distillate.  There are mainly four (4) types of distillates: (i) very light oils or light distillates (e.g., natural gasoline, kerosene, and light and heavy naphtha), (ii) light oils or middle distillates (e.g., kerosene, light and heavy diesel), (iii) medium oils, and (iv) heavy fuel oils.

 

 

 

 

 

 

 

 

ITEM 1.

BUSINESS

(i)

issued 8,426,456 shares of our common stock, par value $0.01 per share (the “Common Stock”) to Lazarus Energy Holdings, LLC (“LEH”) as consideration.  As a result, LEH, our controlling shareholder, owns approximately 81% of our Common Stock.  Jonathan P. Carroll, Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH; and

(ii)

entered into a Management Agreement dated and effective February 12, 2012 with LEH.  Pursuant to the Management Agreement, LEH manages our property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business.  On May 12, 2014, the Management Agreement was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating Agreement” (the “Operating Agreement”).

●	LE, a Delaware limited liability company (petroleum processing assets);

●	Lazarus Refining & Marketing, LLC, a Delaware limited liability company (petroleum storage and terminaling) (“LRM”);

●	Blue Dolphin Pipe Line Company, a Delaware corporation (pipeline operations) (“BDPL”);

●	Blue Dolphin Petroleum Company, a Delaware corporation (exploration and production activities);

●	Blue Dolphin Services Co., a Texas corporation (administrative services);

●	Blue Dolphin Exploration Company, a Delaware corporation (inactive); and

●	Petroport, Inc., a Delaware corporation (inactive).

 

 

 

 

 

 

 

 

 

●

Transportation/Mobile Sources – The EPA and the National Highway Traffic Safety Administration (“NHTSA”) have taken steps to enable the production of clean vehicles through reduced GHG emissions and improved fuel use from on-road vehicles and engines.   On August 28, 2012, the EPA and NHTSA finalized standards to extend the light-duty vehicle GHG National Program for model years 2017-2025.  The agencies also adopted first-ever GHG regulations for heavy-duty engines and vehicles.  The EPA is also responsible for developing and implementing regulations to ensure that transportation fuel sold in the United States contains a minimum volume of renewable fuel.  [See “Part I. Item 1. Business – Governmental Regulation – Fuel Quality Requirements” of this report for additional information related to RFS.]  On May 31, 2014, the Nixon Facility ceased production of NRLM, a transportation-related diesel fuel product.

●

Stationary Sources – On May 13, 2010, the EPA set GHG emissions thresholds to define when permits under the New Source Review Prevention of Significant Deterioration (“PSD”) and Title V Operating Permit programs are required for new and existing industrial facilities. This final rule "tailors" permitting programs to apply to certain stationary sources of GHG emissions and establishes a schedule that initially focuses the CAA’s permitting programs on the largest sources with the most CAA permitting experience. The rule then expands to cover the largest sources of GHG that may not have been previously covered by the CAA for other pollutants. Also in its final rule, the EPA committed to undertake another rulemaking, to begin in 2011 and conclude no later than July 1, 2012 related to possibly phasing in GHG permitting and whether certain smaller sources can be permanently excluded from permitting.   To date, the EPA has issued no further rulings on this matter.  The adoption of any regulations that require reporting of GHGs or otherwise limit emissions of GHGs from the Nixon Facility could require us to incur significant costs and expenses or changes in operations, which could adversely affect our operations and financial condition.

 

●	Personnel serving in capacities equivalent to the capacities of corporate executive officers, including Chief Executive Officer and interim Chief Financial Officer, as well as general manager and environmental, health and safety; and

●	Personnel providing administrative and professional services, including accounting, human resources, insurance, and regulatory compliance.

The Securities and Exchange Commission (the “SEC”) maintains and makes available public records, which includes reports filed by regulated companies and individuals, through conventional and electronic reading rooms. The SEC’s conventional reading room is located at 100 F Street, Northeast, Washington, D.C. 20549 and can be reached at (202) 551-8300. The SEC’s electronic reading room, which maintains records created by the SEC on or after November 1, 1996, is available online at http://www.sec.gov/foia/efoiapg.htm. Reports filed with the SEC by regulated entities and individuals are available at http://www.sec.gov/edgar/searchedgar/webusers.htm. We also make our public filings available on our website (http://www.blue-dolphin-energy.com) as soon as reasonably practicable after such material is filed, or furnished, to the SEC. A copy of our filings will also be furnished free of charge upon request.

 

 

 

 

Our ability to use NOL carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation.

 

 

 

 

 

●

We review, on an ongoing basis, our compliance with relevant federal, state and local environmental laws. During the course of our review, we may discover that we are not in compliance with existing environmental regulations. To the extent that we are out of compliance, we may incur significant liabilities, costs and capital expenditures to comply with such environmental regulations, which are complex and change frequently. Costs of compliance are often unpredictable, and there can be no assurance that the future costs will not be material. It is possible that we may identify additional costs in the future, which could result in additional obligations and expenses, including fines and penalties;

●

On September 12, 2012, the EPA published final amendments to NSPS for petroleum refineries to be effective November 13, 2012. These amendments include standards for emissions of nitrogen oxides from process heaters and work practice standards and monitoring requirements for flares. We continue to evaluate the regulation and amended standards, as may be applicable to the operations at our refinery. We cannot currently predict costs we may incur, if any, to comply with the amended NSPS, but the costs could be material; and

●

New environmental regulations became effective in June 2014 that require most refineries to produce transportation-related fuels for highway and non-highway use at 15 ppm sulfur. In order to meet the lower sulfur content requirement for NRLM in the United States, the Nixon Facility will require capital upgrades in excess of approximately $50 million. In order to complete the required capital upgrades, we will have to finance such capital expenditures primarily through the issuance of debt and/or equity, which would result in dilution to existing stockholders and/or subject us to higher debt levels. The Nixon Facility can continue to sell diesel with high sulfur content in the United States to other refineries and blenders as a feedstock and to other countries as a finished petroleum product. There can be no assurance that we can: (i) obtain financing for capital expenditures at rates or at terms acceptable to us, if at all, (ii) sell diesel with a higher sulfur content in the United States to other refineries and blenders as feedstock or overseas as a finished petroleum product, or (iii) sell higher sulfur diesel content at prices that we deem reasonable or at all.

 

 

 

 

 

 

●	changes in global and local economic conditions;

●	domestic and foreign demand for fuel products, especially in the United States, China and India;

●	worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa and Latin America;

●	the level of foreign and domestic production of crude oil, other feedstocks, and refined petroleum products and the volume of crude oil, feedstocks, and refined petroleum products imported into the United States;

●	availability of and access to transportation infrastructure;

●	capacity utilization rates of refineries in the United States;

●	the ability of the members of the Organization of Petroleum Exporting Countries to affect oil prices and maintain production controls;

●	development and marketing of alternative and competing fuels;

●	commodities speculation;

●	natural disasters (such as hurricanes and tornadoes), accidents, interruptions in transportation, inclement weather or other events that can cause unscheduled shutdowns or otherwise adversely affect our refineries;

●	federal and state government regulations and taxes; and

●	local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets.

 

 

 

 

 

 

 

We are exposed to commodity price risk related to our refined petroleum products and crude oil and condensate inventories. The spread between the cost of crude oil and condensate and refined petroleum product sales prices is the primary factor affecting our operations, liquidity and financial condition. Our feedstock acquisition costs and refined petroleum products sales prices depend on numerous factors beyond our control. These factors include the supply of and demand for crude oil, gasoline, and refined petroleum products. Supply and demand for these products depend on various factors, including changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, availability of imports and exports, marketing of competitive fuels, and government regulation.

 

 

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

 

Property		Business Segment(s)		Acres		Owned / Leased		Location
Nixon Facility		Refinery Operations		56		Owned		Nixon, Wilson County, Texas
Freeport Facility		Pipeline Transportation		193		Owned		Freeport, Brazoria County, Texas
Pipelines and Oil and Gas Properties		Pipeline Transportation		--		Owned/Leasehold Interests		Gulf of Mexico
Corporate Headquarters		Corporate and Other		--		Lease		Houston, Harris County, Texas

 

●

Nixon Facility – Located in Nixon, Wilson County, Texas, the 15,000 bpd Nixon Facility is a 56 acre crude oil and condensate processing facility that consists of a distillation unit, naphtha stabilizer unit, depropanizer unit, approximately 120,000 bbls of crude oil and condensate storage capacity, approximately 178,000 bbls of refined petroleum products storage capacity and related loading and unloading facilities and utilities. The Nixon Facility is currently undergoing upgrades and refurbishment of certain components, including the naphtha stabilizer and depropanizer units. The Nixon Facility is pledged as collateral under a Security Agreement as discussed in Part II, Item 8 “Financial Statements and Supplementary Data – Note (13) Long-Term Debt” of this report.

 

●

Freeport Facility – Located in Freeport, Brazoria County, Texas, the Freeport Facility encompasses approximately 193 acres of land and includes pipeline easements and right-of-ways, crude oil and natural gas separation and dehydration facilities, a vapor recovery unit and two onshore pipelines.  The two onshore pipelines consist of approximately 4 miles of the 20-inch Blue Dolphin Pipeline and a 16-inch natural gas pipeline that connects the Freeport Facility to the Dow Chemical Plan Complex in Freeport, Texas.

●	Pipelines and Oil and Gas Properties –The following provides a summary of our offshore pipelines, all of which are located in the Gulf of Mexico:

 

Pipeline		Location		Ownership		Miles		Natural Gas Capacity (MMcf/d)
Blue Dolphin Pipeline(1)		Gulf of Mexico		100%		38		180
GA 350 Pipeline		Gulf of Mexico		100%		13		65
Omega Pipeline(2)		Gulf of Mexico		100%		18		110

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(1)	Currently inactive.

(2)	Currently abandoned in place.

 

o

Blue Dolphin Pipeline System (“Blue Dolphin Pipeline”) – The Blue Dolphin Pipeline consists of 16-inch and 20-inch pipeline segments, including a trunk line and lateral lines, that span approximately 38 miles and run from an offshore anchor platform in Galveston Area Block 288 to our Freeport Facility.  The Blue Dolphin Pipeline has an aggregate capacity of approximately 180 MMcf of natural gas and 7,000 bbls of crude oil and condensate per day.  The Blue Dolphin Pipeline is currently inactive;

o

Galveston Area Block 350 Pipeline (the “GA 350 Pipeline”) – The GA 350 Pipeline is an 8-inch, 13 mile offshore pipeline extending from Galveston Area Block 350 to a subsea interconnect and tie-in with a transmission pipeline in Galveston Area Block 391.  The GA-350 Pipeline has a capacity of approximately 65 MMcf of gas per day; and

o

Omega Pipeline (the “Omega Pipeline”) – The Omega Pipeline is a 12-inch, 18 mile offshore pipeline that originates in the High Island Area, East Addition Block A-173 and extends to West Cameron Block 342, where it was previously connected to the High Island Offshore System. The Omega Pipeline was abandoned in place in 1997.  Reactivation of the Omega Pipeline is dependent upon future drilling activity in its vicinity and the successful attraction of producer/shippers to the system. When it was active, the Omega Pipeline had a capacity of approximately 110 MMcf of gas per day.

●

Corporate Headquarters – Our company headquarters is located downtown in Houston, Harris County, Texas.  We lease 13,878 square feet of office space, 7,389 square feet of which is used and paid for by LEH.  Our office lease is discussed more fully in Part II, Item 8 “Financial Statements and Supplementary Data – Note (17) Leases” of this report.

 

 

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

We have not declared or paid any dividends on our Common Stock since our incorporation.  We currently intend to retain earnings for our capital needs and expansion of our business and do not anticipate paying cash dividends on the Common Stock in the foreseeable future. We expect that any loan agreements we enter into in the future will likely contain restrictions on the payment of dividends on our Common Stock. Future policy with respect to dividends will be determined by the Board based upon our earnings and financial condition, capital requirements and other considerations.

 

ITEM 6.

SELECTED FINANCIAL DATA

 

 

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

●	Naphtha Stabilizer and Depropanizer Units – improve the overall quality of the naphtha that we produce, allow higher recovery of lighter products that can be sold as LPG mix, and increase the amount of throughput that can be processed by the Nixon Facility; and

●	Boilers – reduce fuel gas usage since the new boilers will be more energy efficient and have the ability to operate using natural gas. This will, in turn, reduce emissions of combustion-related pollutants and potential operational downtime.

 

(i)

issued 8,426,456 shares of our Common Stock to Lazarus Energy Holdings, LLC (“LEH”) as consideration.  As a result, LEH, our controlling shareholder, owns approximately 81% of our Common Stock.  Jonathan P. Carroll, Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH; and

(ii)

entered into a Management Agreement dated and effective February 12, 2012 with LEH.  Pursuant to the Management Agreement, LEH manages our property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business.  On May 12, 2014, the Management Agreement was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating Agreement” (the “Operating Agreement”).

●

Crude Supply Agreement – Pursuant to the Crude Supply Agreement, GEL, an affiliate of Genesis, is the exclusive supplier of crude oil and condensate to the Nixon Facility. We have the ability to purchase crude oil and condensate from other suppliers with the prior consent of GEL. GEL supplies crude oil and condensate to LE at cost plus freight expense and any costs associated with GEL’s hedging. All crude oil and condensate supplied to LE pursuant to the Crude Supply Agreement is paid for pursuant to the terms of the Joint Marketing Agreement as described below. In addition, GEL has a first right of refusal to use three storage tanks at the Nixon Facility during the term of the Crude Supply Agreement. Subject to certain termination rights, the Crude Supply Agreement had an initial term of three years expiring on August 12, 2014. In accordance with the terms of the October 2013 Letter Agreement, LE agreed not to terminate the Crude Supply Agreement and GEL agreed to automatically renew the Crude Supply Agreement at the end of the initial term for successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written notice.

●

Construction and Funding Agreement – Pursuant to the Construction and Funding Agreement, LE engaged Milam to provide construction services on a turnkey basis in connection with the construction, installation and refurbishment of certain equipment at the Nixon Facility (the “Project”). Milam made advances in excess of their obligation for certain construction and operating costs at the Nixon Facility. All amounts advanced to LE pursuant to the terms of the Construction and Funding Agreement bear interest at a rate of 6% per annum. In March 2012 (the month after initial operation of the Nixon Facility occurred), LE began paying Milam, in accordance with the provisions of the Joint Marketing Agreement, a minimum monthly payment of $150,000 (the “Base Construction Payment”) as repayment of interest and amounts advanced to LE under the Construction and Funding Agreement. If, however, the Gross Profits (as defined below) of LE in any given month (calculated as the revenue from the sale of products from the Nixon Facility minus the cost of crude oil and condensate) are insufficient to make this payment, then there is a deficit amount, which shall accrue interest (the “Deficit Amount”). If there is a Deficit Amount, then 100% of the gross profits in subsequent calendar months will be paid to Milam until the Deficit Amount has been satisfied in full and all previous $150,000 monthly payments have been made.   So long as the Construction and Funding Agreement remains in effect, LE is prohibited from:  (i) incurring any debt (except debt that is subordinated to amounts owed to Milam or GEL); (ii) selling, discounting or factoring its accounts receivable or its negotiable instruments outside the ordinary course of business while no default exists; (iii) suffering any change of control or merging with or into another entity; and (iv) certain other conditions listed therein. As of the date hereof, Milam can terminate the Construction and Funding Agreement by written notice at any time. If Milam terminates the Construction and Funding Agreement, then Milam and LE are required to execute a forbearance agreement, the form of which has previously been agreed to as Exhibit J of the Construction and Funding Agreement.

In accordance with the terms of the October 2013 Letter Agreement, GEL agreed to advance to LE monies not to exceed approximately $186,934 to pay for certain equipment and services at the Nixon Facility.  All amounts advanced or paid by GEL or its affiliates pursuant to the October 2013 Letter Agreement constitute Obligations, as defined in the Construction and Funding Agreement, by LE to Milam under the Construction and Funding Agreement.

 

●

Joint Marketing Agreement – The Joint Marketing Agreement sets forth the terms of an agreement between LE and GEL pursuant to which the parties will jointly market and sell the output produced at the Nixon Facility and share the Gross Profits (as defined below) from such sales. Pursuant to the Joint Marketing Agreement, GEL is responsible for all product transportation scheduling. LE is responsible for entering into contracts with customers for the purchase and sale of output produced at the Nixon Facility and handling all billing and invoicing relating to the same. However, all payments for the sale of output produced at the Nixon Facility will be made directly to GEL as collection agent and all customers must satisfy GEL’s customer credit approval process. Subject to certain amendments and clarifications (as described below), the Joint Marketing Agreement also provides for the sharing of “Gross Profits” (defined as the total revenue from the sale of output from the Nixon Facility minus the cost of crude oil and condensate pursuant to the Crude Supply Agreement) as follows:

(a)

First, prior to the date on which Milam has recouped all amounts advanced to LE under the Construction and Funding Agreement (the “Investment Threshold Date”), the Base Construction Payment of $150,000 shall be paid to GEL (for remittance to Milam) each calendar month to satisfy amounts owed under the Construction and Funding Agreement, with a catch-up in subsequent months if there is a Deficit Amount until such Deficit Amount has been satisfied in full.

(b)

Second, prior to and as of the Investment Threshold Date, LE is entitled to receive weekly payments to cover direct expenses in operating the Nixon Facility (the “Operations Payments”) in an amount not to exceed $750,000 per month plus the amount of any accounting fees. If Gross Profits are less than $900,000, then LE’s Operations Payments shall be reduced to equal to the difference between the Gross Profits for such monthly period and the proceeds discussed in (a) above; if Gross Profits are negative, then LE does not get an Operations Payment and the negative balance becomes a Deficit Amount which is added to the total due and owing under the Construction Funding Agreement and such Deficit Amount must be satisfied before any allocation of Gross Profit in the future may be made to LE.

(c)	Third, prior to the Investment Threshold Date and subject to the payment of the Base Construction Payment by LE and the Operations Payments by GEL, pursuant to (a) and (b) above, an amount shall be paid to GEL from Gross Profits equal to transportation costs, tank storage fees (if applicable), financial statement preparation fees (collectively, the “GEL Expense Items”), after which GEL shall be paid 80% of the remaining Gross Profits (any percentage of Gross Profits distributed to GEL, the “GEL Profit Share”) and LE shall be paid 20% of the remaining Gross Profits (any percentage of Gross Profits distributed to LE, the “LE Profit Share”); provided, however, that in the event that there is a forbearance payment of Gross Profits required by LE under a forbearance agreement with a bank, then 50% of the LE Profit Share shall be directly remitted by GEL to the bank on LE’s behalf until such forbearance amount is paid in full; and provided further that, if there is a Deficit Amount due under the Construction and Funding Agreement and a forbearance payment of Gross Profits that would otherwise be due and payable to the bank for such period, then GEL shall receive 80% of the Gross Profit and 10% shall be payable to the bank and LE shall not receive any of the LE Profit Share until such time as the Deficit Amount is reduced to zero.
(d)	Fourth, after the Investment Threshold Date and after the payment to GEL of the GEL Expense Items, 30% of the remaining Gross Profit up to $600,000 (the “Threshold Amount”) shall be paid to GEL as the GEL Profit Share and LE shall be paid 70% of the remaining Gross Profit as the LE Profit Share. Any amount of remaining Gross Profit that exceeds the Threshold Amount for such calendar month shall be paid to GEL and LE in the following manner: (i) GEL shall be paid 20% of the remaining Gross Profits over the Threshold Amount as the GEL Profit Share and (ii) LE shall be paid 80% of the remaining Gross Profits over the Threshold Amount as the LE Profit Share.

(e)	After the Investment Threshold Date, if GEL sustains losses, it can recoup those losses by a special allocation of 80% of Gross Profits until such losses are covered in full, after which the prevailing Gross Profits allocation shall be reinstated.

 

●	Amendments and Clarifications to the Joint Marketing Agreement – The Joint Marketing Agreement was amended and clarified to allow GEL to provide LE with Operations Payments during months in which LE incurred Deficit Amounts.

(a)

In July and August 2012, we entered into amendments to the Joint Marketing Agreement whereby GEL and Milam agreed that Deficit Amounts would be added to our obligations amount under the Construction and Funding Agreement. In addition, the parties agreed to amend the priority of payments to reflect that, to the extent that there are available funds in a particular month, AFNB shall be paid one-tenth of such funds, provided that we will not participate in available funds until Deficit Amounts added to the Construction and Funding Agreement are paid in full.

(b)

In December 2012, GEL made Operations Payments and other payments to or on behalf of LE in which the aggregate amount exceeded the amount payable to LE in the month of December 2012 under the Joint Marketing Agreement (the “Overpayment Amount”). In December 2012, we entered into an amendment to the Joint Marketing Agreement whereby GEL and Milam agreed that Gross Profits payable to LE would be redirected to GEL as payment for the Overpayment Amount until such Overpayment Amount has been satisfied in full. Such redistributions shall not reduce the distributions of Gross Profit that GEL or Milam are otherwise entitled to under the Joint Marketing Agreement.

(c)

In February 2013, Milam paid a vendor $64,358 (the “Settlement Payment”), which represented amounts outstanding by LE for services rendered at the Nixon Facility plus the vendor’s legal fees.  In addition, Milam and GEL incurred legal fees and expenses related to settling the matter.  In a letter agreement between LE, GEL and Milam dated February 21, 2013, the parties agreed to modify the Joint Marketing Agreement such that, from and after January 1, 2013, the Gross Profit shall be distributed first to GEL, prior to any other distributions or payments to the parties to the Joint Marketing Agreement until GEL has received aggregate distributions as provided in the December 2012 Letter Agreement plus the Settlement Payment and Milam and GEL incurred legal fees and expenses.

(d)

In February 2013, GEL agreed to advance to LE the funds necessary to pay for the actual costs incurred for the scheduled maintenance turnaround at the Nixon Facility and capital expenditures relating to an electronic product meter, lab equipment and certain piping in an amount equal to the actual costs of the refinery turnaround and capital expenditures, not to exceed $840,000 in the aggregate.  In a letter agreement between LE, GEL and Milam dated February 21, 2013, the parties agreed that all amounts advanced by GEL or its affiliates to LE pursuant to the letter agreement shall constitute obligations under the Construction and Funding Agreement.

 

 

 

●

Revenue from Operations – Revenue from operations primarily consists of refined petroleum product sales. Revenue from refined petroleum product sales is recognized when title passes. Title passage occurs when refined petroleum products are sold or delivered in accordance with the terms of the respective sales agreements.  Revenue is recognized when sales prices are fixed or determinable and collectability is reasonably assured. Customers assume the risk of loss when title is transferred. Transportation, shipping and handling costs incurred are included in cost of refined petroleum products sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.

 

●	Cost of Refined Products Sold – Cost of refined products sold primarily includes purchased crude oil and condensate costs, as well as transportation, freight and storage costs.

 

●

Refinery Operating Expenses – Refinery operating expenses are the direct operating expenses of the refinery, including direct costs of labor, maintenance materials and services, chemicals and catalysts, utilities and other direct operating expenses of the Nixon Facility.  Refinery operating expenses are considered Services under the Operating Agreement.

 

●	General and Administrative Expense – General and administrative expenses primarily include corporate costs, such accounting and legal fees, office lease expenses and administrative expenses.

 

●

Depletion, Depreciation and Amortization – Depletion, depreciation and amortization represent an allocation to expense within the statement of operations of the carrying value of capital and intangible assets. The value is allocated based on the straight-line method over the estimated useful life of the related asset.

 

●

Other (Income) Expense – Other (income) expense primarily represents income from storage tank rental fees and revenue from FLNG Land, II, Inc., a Delaware corporation (“FLNG”), pursuant to a Master Easement Agreement whereby BDPL is providing FLNG with uninterrupted pedestrian and vehicular ingress and egress to and from State Highway 332, across the certain property of BDPL to certain property of FLNG.

 

●

Income Tax Benefit (Expense) – Income tax benefit (expense) represents income tax expense for the period comprised of the increase (decrease) during the period for domestic deferred tax assets and liabilities attributable to continuing operations, as well as an income tax provision for federal and state income tax expense related to the current year period.

 

●	Net Income (Loss) – Represents total revenue from operations less total cost of operations, total other income (expense) and income tax expense, current.

 

 

 

●	Operating Days – The number of days in a calendar period in which the Nixon Facility operated.  Downtime is excluded from operating days.

●	Downtime – Scheduled or unscheduled periods in which the Nixon Facility is not operable.  Downtime may be required for a variety of reasons, including maintenance, inspection and equipment repair, voluntary regulatory compliance measures, and cessation or suspension by regulatory authorities.

●	Total Refinery Throughput – Refers to the volume processed as input through the Nixon Facility.  Refinery throughput includes crude oil and condensate and other feedstocks.

●	Total Refinery Production – Refers to the volume processed as output through the Nixon Facility.  Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, LPG and atmospheric gas oil.

●	Fuel and Energy Losses – Represents crude oil and condensate volumes used to power the Nixon Facility and energy losses that occur as part of normal refinery operations, such as evaporation from oil-water separators and small steam or condensate leaks.

●

Capacity Utilization Rate –A percentage measure that indicates the amount of available capacity that is being used at the Nixon Facility. The rate is calculated by dividing total refinery throughput on a bpd basis or total refinery production on a bpd basis by the total capacity of the Nixon Facility, which is currently 15,000 bpd.

●	Refinery Operating Income – Refinery operating income is a function of refined petroleum product sales less cost of refined petroleum products sold and refinery operating expenses.

●

Refinery Operating Income Per Barrel Sold– Refinery operating income per barrel sold is a general indication of the amount, on a per barrel basis, for which the Nixon Facility was able to sell its refined petroleum products above its cost of refined petroleum products sold and refinery operating expenses.  Refinery operating income per barrel sold is calculated by subtracting cost of refined products sold and refinery operating expenses from refined petroleum product sales and dividing the difference by total refined petroleum product sales (bbl) for the respective periods presented.

●

Earnings Before Interest, Income Taxes and Depreciation (“EBITDA”) – Earnings is adjusted for: (i) income taxes and (ii) interest income (expense), depreciation and amortization. We exclude interest expense (or income) and other expenses or income not pertaining to the operations of our segments from EBITDA.

 

 

 

 ______________________

 

(1)

See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Non-GAAP Performance Measures” of this report for a reconciliation of this non-GAAP financial measure to the applicable GAAP financial measure within our consolidated balance sheets and/or statements of operations.

 

 

 

 

 

 

 

 

(1)	Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion expenses.  Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as accounting fees, director fees and legal expense.
(2)	Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.

 

---

(1)	Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion expenses.  Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as accounting fees, director fees and legal expense.
(2)	Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.

 

 

The principal balance outstanding on the Refinery Note was $8,648,980 and $9,057,937 at December 31, 2014 and 2013, respectively. The principal balance outstanding on the Sovereign Loan was $1,638,898 and $0 at December 31, 2014 and 2013, respectively. The principal balance outstanding on the Notre Dame Debt was $1,300,000 at December 31, 2014 and 2013. The principal balance outstanding on a capital lease was $466,401 and $0 at December 31, 2014 and 2013, respectively. See “Part II, Item 8. Financial Statements and Supplementary Data - Note (13) Long-Term Debt” of this report for additional disclosures related to our long-term debt obligations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm		41
Consolidated Balance Sheets at December 31, 2014 and 2013		42
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013		43
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013		44
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013		45
Notes to Consolidated Financial Statements		46