BLUE DOLPHIN ENERGY CO - Quarter Report: 2020 September (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark
One)
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[ √ ]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30,
2020
or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from
to
Commission
File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
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73-1268729
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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801 Travis Street, Suite 2100, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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713-568-4725
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock
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BDCO
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OTCQX
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐ No ☒
Number
of shares of common stock, par value $0.01 per share outstanding as
of November 16, 2020: 12,693,514
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Table of Contents
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PART
I.
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7
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ITEM
1.
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FINANCIAL
STATEMENTS
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7
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Consolidated
Balance Sheets (Unaudited)
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7
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Consolidated
Statements of Operations (Unaudited)
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8
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Consolidated
Statements of Cash Flows (Unaudited)
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9
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Notes
to Consolidated Financial Statements
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10
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ITEM
2.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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35
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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50
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ITEM
4.
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CONTROLS
AND PROCEDURES
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50
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PART
II.
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51
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ITEM
1.
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LEGAL
PROCEEDINGS
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51
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ITEM
1A.
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RISK
FACTORS
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52
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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53
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ITEM
3.
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DEFAULTS
UPON SENIOR SECURITIES
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53
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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53
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ITEM
5.
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OTHER
INFORMATION
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53
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ITEM
6.
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EXHIBITS
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53
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SIGNATURES
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54
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 2
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Glossary of Terms
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Glossary of Terms
Throughout
this Quarterly Report on Form 10-Q, we have used the following
terms:
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 3
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Glossary of Terms
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GEL
Settlement. When all conditions of the GEL Settlement
Agreement were met by the Lazarus Parties under the GEL Settlement
Agreement, and 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
arbitration proceedings between LE and GEL related to a contractual
dispute involving a crude oil supply and throughput services
agreement, each between LE and GEL dated August 12,
2011.
GEL
Settlement Agreement. Settlement Agreement dated July
20, 2018, between the Lazarus Parties and GEL outlining the terms
and conditions for a settlement, including: (i) the GEL Settlement
Payment by the GEL Settlement Date and (ii) GEL Interim
Payments.
GEL
Settlement Date. The effective date of the GEL
Settlement.
GEL
Settlement Payment. A lump sum cash payment of $10.0
million as paid by the Lazarus Parties to GEL under the GEL
Settlement Agreement.
Gross profit
(deficit). Calculated as total revenue less cost of goods
sold; reflected as a dollar ($) amount.
HOBM. Heavy oil-based
mud blendstock; see also
“distillates.”
HUBZone. Historically Underutilized Business Zones
program established by the SBA to help small businesses in both
urban and rural communities.
IBLA. Interior Board of Land
Appeals.
INC. Incident of Noncompliance issued by BOEM and/or
BSEE.
Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan
Carroll.
Intermediate petroleum
products. A petroleum product that might require
further processing before it is saleable to the ultimate consumer.
This further processing might be done by the producer or by another
processor. Thus, an intermediate petroleum product might be a final
product for one company and an input for another company that will
process it further.
IRC
Section 382. Title 26, Internal Revenue Code,
Subtitle A – Income Taxes, Subchapter C – Corporate
Distributions and Adjustments, Part V Carryovers, § 382.
Limits NOL carryforwards and certain built-in losses following
ownership change.
IRS. Internal Revenue
Service.
Jet
fuel. A high-quality kerosene product primarily used
in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1)
has a carbon number distribution between 8 and 16 carbon atoms per
molecule; wide-cut or naphtha-type jet fuel (including Jet B) has
between 5 and 15 carbon atoms per molecule.
Lazarus Capital. Lazarus
Capital, LLC, an affiliate of Jonathan Carroll.
Lazarus Midstream.
Lazarus Midstream Partners, L.P., an affiliate of
LEH.
Lazarus Parties. Blue
Dolphin, C&C, NPS, LE, LEH, and Jonathan
Carroll.
LE. Lazarus Energy, LLC,
a wholly owned subsidiary of Blue Dolphin.
LEH. Lazarus Energy
Holdings, LLC, an affiliate of Jonathan Carroll and controlling
shareholder of Blue Dolphin.
LEH
Operating Fee. A management fee paid to LEH under the
Amended and Restated Operating Agreement; calculated as 5% of all
consolidated operating costs, excluding crude costs, depreciation,
amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL,
BDPC and BDSC; previously reflected within refinery operating
expenses in our consolidated statements of
operations.
Leasehold interest. The
interest of a lessee under an oil and gas
lease.
Light
crude. A liquid petroleum that has a low density and
flows freely at room temperature. It has a low viscosity, low
specific gravity, and a high American Petroleum Institute gravity
due to the presence of a high proportion of light hydrocarbon
fractions.
LMT. Lazarus Marine
Terminal I, LLC, an affiliate of LEH.
LRM. Lazarus Refining
& Marketing, LLC, a wholly owned subsidiary of Blue
Dolphin.
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LTRI. Lazarus Texas
Refinery I, an affiliate of LEH.
NAAQS.
National Ambient Air Quality Standards.
Naphtha. A refined or
partly refined light distillate fraction of crude oil. Blended
further or mixed with other materials it can make high-grade motor
gasoline or jet fuel. It is also a generic term applied to the
lightest and most volatile petroleum fractions.
Natural gas.
A naturally occurring hydrocarbon gas mixture
consisting primarily of methane, but commonly including varying
amounts of other higher alkanes, and sometimes a small percentage
of carbon dioxide, nitrogen, hydrogen sulfide, or
helium.
Nixon
facility. Encompasses the 15,000-bpd crude
distillation tower, petroleum storage tanks, loading and unloading
facilities, and 56 acres of land in Nixon,
Texas.
Nixon
refinery. The 15,000-bpd crude distillation tower and
associated processing units in Nixon, Texas.
NPS. Nixon Product
Storage, LLC, a wholly owned subsidiary of Blue
Dolphin.
NOL. Net operating
losses.
NSR/PSD. New Source
Review/Prevention of Significant Deterioration.
OPA
90. Oil Pollution Act of 1990.
Operating days.
Represents the number of days in a period in which the crude
distillation tower operated. Operating days is calculated by
subtracting downtime in a period from calendar days in the same
period.
OPEC. Organization of
Petroleum Exporting Countries.
OSHA. Occupational
Safety and Health Administration.
OSRO. Oil Spill Response
Organization.
Other
conversion costs. Represents the combination of
direct labor costs and manufacturing overhead costs. These are the
costs that are necessary to convert our raw materials into refined
products.
Other
operating expenses. Represents costs associated with
our natural gas processing, treating, and redelivery facility, as
well as our pipeline assets and leasehold interests in oil and gas
properties.
PCAOB. Public Company
Accounting Oversight Board.
Petroleum. A naturally
occurring flammable liquid consisting of a complex mixture of
hydrocarbons of various molecular weights and other liquid organic
compounds. The name petroleum covers both the naturally occurring
unprocessed crude oils and petroleum products that are made up of
refined crude oil.
PHMSA. Pipeline and
Hazardous Materials Safety Administration of the U.S. Department of
Transportation.
Pilot. Pilot Travel
Centers LLC, a Delaware limited liability
company.
Preferred Stock. Blue
Dolphin preferred stock, par value $0.10 per share. Blue Dolphin
has 2,500,000 shares of Preferred Stock authorized and no shares of
Preferred Stock issued and outstanding.
Product slate.
Represents type and quality of products
produced.
Propane. A by-product of
natural gas processing and petroleum refining. Propane is one of a
group of liquified petroleum gases. Others include butane,
propylene, butadiene, butylene, isobutylene, and mixtures
thereof.
Refined products.
Hydrocarbon compounds, such as jet fuel and residual fuel, that are
produced by a refinery.
Refinery. Within the oil
and gas industry, a refinery is an industrial processing plant
where crude oil, condensate, and intermediate feeds are separated
and transformed into petroleum products.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 4
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Glossary of Terms
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Refining gross profit (deficit) per
bbl. Calculated
as refinery operations revenue less total cost of goods sold
divided by the volume, in bbls, of refined products sold during the
period; reflected as a dollar ($) amount per
bbl.
RCRA. Federal Resource
Conservation and Recovery Act.
RFS2. Second Renewable
Fuels Standard.
ROU.
Right-of-use.
SBA. Small Business
Administration.
SEC. Securities and
Exchange Commission.
Securities Act. The
Securities Act of 1933, as amended.
Segment margin
(deficit). For our refinery operations and tolling
and terminaling business segments, represents net revenues
(excluding intercompany fees and sales) attributable to the
respective business segment less associated intercompany fees and
sales less associated operation costs and
expenses.
SEMS. Safety and
Environmental Management System.
Sour
crude. Crude oil containing sulfur content of more
than 0.5%.
Stabilizer unit. A
distillation column intended to remove the lighter boiling
compounds, such as butane or propane, from a
product.
Sweet
crude. Crude oil containing sulfur content of less
than 0.5%.
Sulfur. Present at
various levels of concentration in many hydrocarbon deposits, such
as petroleum, coal, or natural gas. Also, produced as a by-product
of removing sulfur-containing contaminants from natural gas and
petroleum. Some of the most commonly used hydrocarbon deposits are
categorized per their sulfur content, with lower sulfur fuels
usually selling at a higher, or premium, price and higher sulfur
fuels selling at a lower, or discounted, price.
Throughput. The volume
processed through a unit or a refinery or transported through a
pipeline.
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TMT. Texas
margins tax; a form of business tax imposed on an entity’s
gross profit rather than on its net income.
Topping unit. A type of
petroleum refinery that engages in only the first step of the
refining process -- crude distillation. A topping unit uses
atmospheric distillation to separate crude oil and condensate into
constituent petroleum products. A topping unit has a refinery
complexity range of 1.0 to 2.0.
Total
refinery production. Refers to the volume processed
as output through the crude distillation tower. Refinery production
includes finished petroleum products, such as jet fuel, and
intermediate petroleum products, such as naphtha, HOBM and
AGO.
Turnaround. Scheduled
large-scale maintenance activity wherein an entire process unit is
taken offline for a week or more for comprehensive revamp and
renewal.
USACOE. U.S. Army Corps
of Engineers.
USDA. U.S. Department of
Agriculture.
U.S.
GAAP. Accounting principles generally accepted in the
United States of America.
Veritex. Veritex
Community Bank, successor in interest to Sovereign Bank by
merger.
WHO. World Health
Organization.
WSJ
prime rate. A measure of the U.S. prime rate as
defined by the Wall Street Journal.
XBRL. eXtensible
Business Reporting Language.
Yield. The percentage of
refined products that is produced from crude oil and other
feedstocks.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 5
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Important Information Regarding Forward Looking
Statements
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Important Information Regarding Forward-Looking
Statements
This
report (including information incorporated by reference) contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act, including, but not limited to, those under
“Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” All
statements other than statements of historical fact, including
without limitation statements regarding expectations regarding
revenue, cash flows, capital expenditures, and other financial
items, our business strategy, goals and expectations concerning our
market position, future operations and profitability, are
forward-looking statements. Forward-looking statements may be
identified by use of the words “anticipate,”
“believe,” “could,” “estimate,”
“expect,” “intend,” “may,”
“plan,” “predict,” “project,”
“will,” “would” and similar terms and
phrases. Although we believe our assumptions concerning future
events are reasonable, several risks, uncertainties, and other
factors could cause actual results and trends to differ materially
from those projected, including but not limited to:
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Business and Industry
●
Our going concern
status.
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The
effects
of public health threats, pandemics and epidemics, such as the
ongoing outbreak of COVID-19, and the adverse impacts thereof on
our business, financial condition, results of operations, and
liquidity, including, but not limited to, our growth, operating
costs, supply chain, labor availability, logistical capabilities,
customer demand for our products, industry demand generally, crude
oil supply, margins, production and throughput capacity,
utilization, inventory value, cash position, taxes, the price of
our securities and trading markets with respect thereto, our
ability to access capital markets, and the global economy and
financial markets generally.
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Inadequate
liquidity to sustain operations due to defaults under our secured
loan agreements, margin deterioration, and historic net losses and
working capital deficits.
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Substantial debt in
current liabilities, which is currently in default.
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Ability to regain
compliance with the terms of our outstanding
indebtedness.
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Increased costs of
capital or a reduction in the availability of credit.
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Affiliate common
stock ownership and transactions that could cause conflicts of
interest.
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Operational hazards
inherent in refining and natural gas processing operations and in
transporting and storing crude oil and condensate and refined
products.
●
Geographic
concentration of our assets and customers in West Texas, creating
significant exposure to regional economy risks and other
conditions.
●
Competition from
companies having greater financial and other
resources.
●
Environmental
laws and
regulations that could require us to make substantial capital
expenditures to remain in compliance or remediate current or future
contamination that could give rise to material
liabilities.
●
Changes in
insurance markets impacting costs and the level and types of
coverage available.
●
NOL carryforwards
to offset future taxable income for U.S. federal income tax
purposes that are subject to limitation.
●
Direct
or indirect effects on our business resulting from actual or
threatened terrorist or activist incidents, cyber-security
breaches, or acts of war.
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Refinery and Tolling and Terminaling
Operations
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Timing and extent
of changes in commodity prices and demand for refined
products.
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Availability and
costs of crude oil and other feedstocks.
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Price volatility of
fuel and utility services to operate the Nixon
facility.
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Disruptions due to
equipment interruption or failure at the Nixon
facility.
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Changes in our cash
flow from operations and working capital requirements, shortfalls
for which Affiliates may not fund.
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Ability to regain
compliance with the terms of our outstanding
indebtedness.
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Key personnel loss,
labor relations, and workplace safety.
●
Loss of market
share by and a material change in profitability of our key
customers.
●
Contract
cancellation, non-renewal, or failure to perform by those in our
supply and distribution chains, and the ability to replace such
contracts and/or customers.
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Changes in the cost
or availability of third-party vessels, pipelines, trucks, and
other means of delivering and transporting crude oil and
condensate, feedstocks, and refined products.
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Sourcing of a
substantial amount, if not all, of our crude oil and condensate
from the Eagle Ford Shale.
●
Geographic
concentration of our refining operations and customers within the
Eagle Ford Shale.
●
Weather conditions,
hurricanes or other natural disasters affecting operations by us or
our key customers or the areas in which our customers
operate.
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The effect, impact,
potential duration, or other implications of the ongoing outbreak
of COVID-19 and global crude oil production levels, and any
expectations we may have with respect thereto.
Pipeline and Facilities and Oil and Gas Assets
●
Assessment of civil
penalties by BOEM for our failure to satisfy orders to provide
additional financial assurance (supplemental pipeline bonds) within
the time period prescribed.
●
Assessment of civil
penalties by BSEE for our failure to decommission pipeline and
platform assets, as well as complete structural platform surveys,
within the time periods prescribed.
Common
Stock
●
Decline in stock
price due to share sales by Affiliates. Issuance of
additional shares of Common Stock and Preferred Stock, which
significantly dilute the equity ownership of current
holders.
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See
also the risk factors described in greater detail under “Item
1A.” of our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 and our Quarterly Reports on Form 10-Q for
the quarterly periods ended March 31, 2020 and June 30, 2020 as
filed with the SEC. All forward-looking statements included in this
report are based on information available to us on the date of this
report. We undertake no obligation to revise or update any
forward-looking statements as a result of new information, future
events, or otherwise.
Unless
the context otherwise requires, references in this report to
“Blue Dolphin,” “we,” “us,”
“our,” or “ours” refer to Blue Dolphin
Energy Company, one or more of its consolidated subsidiaries, or
all of them taken as a whole.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 6
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Financial Statements
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PART I
ITEM 1.
FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
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September 30,
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December
31,
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2020
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2019
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(in
thousands except share amounts)
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ASSETS
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CURRENT
ASSETS
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Cash
and cash equivalents
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$275
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$72
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Restricted
cash
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49
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49
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Accounts
receivable, net
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203
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446
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Accounts
receivable, related party
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-
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1,364
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Prepaid
expenses and other current assets
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1,617
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2,276
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Deposits
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124
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158
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Inventory
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862
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1,645
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Refundable
federal income tax
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100
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65
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Total
current assets
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3,230
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6,075
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LONG-TERM
ASSETS
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Total
property and equipment, net
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63,139
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63,893
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Operating
lease right-of-use assets, net
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538
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649
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Restricted
cash, noncurrent
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514
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547
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Surety
bonds
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230
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230
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Deferred
tax assets, net
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-
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50
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Total
long-term assets
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64,421
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65,369
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TOTAL
ASSETS
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$67,651
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$71,444
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT
LIABILITIES
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Long-term
debt less unamortized debt issue costs, current portion (in
default)
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$33,644
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$33,836
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Line
of credit payable less unamortized debt issue costs (in
default)
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9,621
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11,464
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Long-term
debt, related party, current portion (in default)
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12,173
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6,001
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Interest
payable (in default)
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5,615
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3,814
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Interest
payable, related party (in default)
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2,654
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2,174
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Accounts
payable
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3,240
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1,877
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Accounts
payable, related party
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155
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149
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Current
portion of lease liabilities
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251
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251
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Asset
retirement obligations, current portion
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2,386
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2,565
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Accrued
expenses and other current liabilities
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4,119
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3,333
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Total
current liabilities
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73,858
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65,464
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LONG-TERM
LIABILITIES
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Long-term
lease liabilities, net of current
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421
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564
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Deferred
revenues
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1,635
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1,930
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Long-term
debt, net of current portion
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300
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-
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Total
long-term liabilities
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2,356
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2,494
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TOTAL
LIABILITIES
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76,214
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67,958
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Commitments
and contingencies (Note 16)
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STOCKHOLDERS'
EQUITY (DEFICIT)
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Common
stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514
and 12,327,365
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shares
issued at September 30, 2020 and December 31, 2019,
respectively)
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127
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123
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Additional
paid-in capital
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38,457
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38,275
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Accumulated
deficit
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(47,147)
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(34,912)
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TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
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(8,563)
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3,486
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$67,651
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$71,444
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The
accompanying notes are an integral part of these consolidated
financial statements.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 7
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Financial Statements
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Consolidated Statements of Operations (Unaudited)
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Three Months
Ended September 30,
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Nine Months
Ended September 30,
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2020
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2019
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2020
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2019
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|
(in thousands,
except share and per-share amounts)
|
|||
|
REVENUE
FROM OPERATIONS
|
|
|
|
|
|
Refinery
operations
|
$41,929
|
$77,537
|
$120,185
|
$222,652
|
|
Tolling
and terminaling
|
1,001
|
1,096
|
3,214
|
3,253
|
|
Total
revenue from operations
|
42,930
|
78,633
|
123,399
|
225,905
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
|
|
Crude
oil, fuel use, and chemicals
|
41,789
|
74,163
|
118,292
|
213,714
|
|
Other
conversion costs
|
2,611
|
2,066
|
7,872
|
6,587
|
|
Total
cost of goods sold
|
44,400
|
76,229
|
126,164
|
220,301
|
|
|
|
|
|
|
|
Gross profit (deficit)
|
(1,470)
|
2,404
|
(2,765)
|
5,604
|
|
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
|
|
LEH
operating fee
|
169
|
144
|
506
|
477
|
|
Other
operating expenses
|
58
|
52
|
164
|
165
|
|
General
and administrative expenses
|
684
|
655
|
1,859
|
1,904
|
|
Depletion,
depreciation and amortization
|
690
|
632
|
1,992
|
1,855
|
|
|
|
|
|
|
|
Total
cost of operations
|
1,601
|
1,483
|
4,521
|
4,401
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
(3,071)
|
921
|
(7,286)
|
1,203
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
Easement,
interest and other income
|
70
|
1
|
170
|
2
|
|
Interest
and other expense
|
(1,652)
|
(1,883)
|
(5,104)
|
(4,718)
|
|
Gain
on extinguishment of debt
|
-
|
9,128
|
-
|
9,128
|
|
Total
other income (expense)
|
(1,582)
|
7,246
|
(4,934)
|
4,412
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
(4,653)
|
8,167
|
(12,220)
|
5,615
|
|
|
|
|
|
|
|
Income
tax expense
|
-
|
-
|
(15)
|
-
|
|
|
|
|
|
|
|
Net
income (loss)
|
$(4,653)
|
$8,167
|
$(12,235)
|
$5,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share:
|
|
|
|
|
|
Basic
|
$(0.37)
|
$0.74
|
$(0.98)
|
$0.51
|
|
Diluted
|
$(0.37)
|
$0.74
|
$(0.98)
|
$0.51
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
||||
|
Basic
|
12,693,514
|
10,975,514
|
12,534,493
|
10,975,514
|
|
Diluted
|
12,693,514
|
10,975,514
|
12,534,493
|
10,975,514
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 8
|
|
Financial Statements
|
|
|
Consolidated Statements of Cash Flows (Unaudited)
|
|
Nine Months
ended September 30,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Net
income (loss)
|
$(12,235)
|
$5,615
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depletion,
depreciation and amortization
|
1,992
|
1,855
|
|
Deferred
income tax
|
15
|
-
|
|
Amortization
of debt issue costs
|
316
|
409
|
|
Guaranty
fees paid in kind
|
457
|
471
|
|
Related-party
interest expense paid in kind
|
361
|
189
|
|
Deferred
revenues and expenses
|
(295)
|
-
|
|
Gain
on extinguishment of debt
|
-
|
(9,128)
|
|
Gain
on issuance of shares
|
(80)
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
Accounts
receivable
|
243
|
43
|
|
Accounts
receivable, related party
|
1,364
|
(321)
|
|
Prepaid
expenses and other current assets
|
659
|
522
|
|
Deposits
and other assets
|
34
|
32
|
|
Inventory
|
783
|
(224)
|
|
Accrued
arbitration award
|
-
|
(12,000)
|
|
Accounts
payable, accrued expenses and other liabilities
|
4,184
|
1,689
|
|
Accounts
payable, related party
|
6
|
513
|
|
Net
cash used in operating activities
|
(2,196)
|
(10,335)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Capital
expenditures
|
(1,085)
|
(1,458)
|
|
Net
cash used in investing activities
|
(1,085)
|
(1,458)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Proceeds
from debt
|
300
|
12,402
|
|
Payments
on debt
|
(2,351)
|
(1,312)
|
|
Net
activity on related-party debt
|
5,502
|
218
|
|
Net
cash provided by financing activities
|
3,451
|
11,308
|
|
Net
change in cash, cash equivalents, and restricted cash
|
170
|
(485)
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
668
|
1,665
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$838
|
$1,180
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Financing
of capital expenditures via accounts payable and finance
leases
|
$-
|
$86
|
|
Issuance
of shares to extinguish debt
|
$120
|
$-
|
|
Conversion
of related-party notes to common stock
|
$148
|
$-
|
|
Line
of credit closing costs included in principal balance
|
$-
|
$398
|
|
Interest
paid
|
$1,980
|
$2,261
|
|
Income
taxes paid
|
$-
|
$-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 9
|
|
Notes to Consolidated Financial Statements
|
|
|
|
Notes to Consolidated Financial Statements
|
(1)
Organization
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with more than 1.2 million bbls of petroleum storage tank capacity
in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware
corporation and is traded on the OTCQX under the ticker symbol
“BDCO”. Blue Dolphin has 20.0 million shares of Common
Stock and 2.5 million shares of Preferred Stock authorized. There
are approximately 12.7 million shares of Common Stock and no shares
of Preferred Stock issued and outstanding.
Our
assets are primarily organized in two segments: refinery operations
(owned by LE) and tolling and terminaling services (owned by LRM
and NPS). Subsidiaries that are reflected in corporate and other
include BDPL (inactive pipeline and facilities assets), BDPC
(inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See “Note (4)” to our
consolidated financial statements for more information about our
business segments.
Unless
the context otherwise requires, references in this report to
“we,” “us,” “our,” or
“ours,” refer to Blue Dolphin, one or more of its
consolidated subsidiaries or all of them taken as a
whole.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and has historically funded working capital requirements
during periods of working capital deficits, and an Affiliate is a
significant customer of our refined products. Blue Dolphin and
certain of its subsidiaries are currently parties to a variety of
agreements with Affiliates. See “Note (3)” to our
consolidated financial statements for additional disclosures
related to Affiliate agreements and arrangements and working
capital deficits.
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:
Defaults Under Secured Loan Agreements with Third Parties.
Our secured loan agreements with third parties that are in default
include loan agreements with Veritex in the original aggregate
principal amount of $35.0 million, which are guaranteed 100% by the
USDA, and a line of credit agreement with Pilot in the original
principal amount of $13.0 million. Certain of our related-party
debt is also in default. See “Note (3)” of our
consolidated financial statements for additional disclosures
related to related-party debt.
Veritex Loan Agreements. In April 2019, LE, Jonathan
Carroll, Blue Dolphin, LRM, and LE received notification from
Veritex that the bank agreed to waive certain covenant defaults and
forbear from enforcing its remedies under our secured loan
agreements subject to: (i) the agreement and concurrence of the
USDA and (ii) the replenishment of the payment reserve account on
or before August 31, 2019. Following the GEL Settlement, the
associated mutual releases became effective and GEL filed the
stipulation of dismissal of claims against LE. As of the date of
this report, LE had not replenished the payment reserve account and
the obligors were still in default under our secured loan
agreements with Veritex.
In
April 2020, LE and LRM were each granted a two-month deferment
period on their respective Veritex loans commencing from April 22,
2020 to June 22, 2020. During the deferment period, LE and LRM were
not obligated to make payments and interest continued to accrue at
the stated rates of the loans. Upon expiration of the deferment
period: (i) Veritex re-amortized the loan such that future payments
on principal and interest were adjusted based on the remaining
principal balances and loan terms, and (ii) all other terms of the
loans reverted to the original terms, and previous defaults were
reinstated. The deferment did not address LE’s requirement to
replenish the payment reserve account. Principal and interest
payments resumed on July 22, 2020. As of the filing date of this
report, we are current on required monthly payments under our
secured loan agreements with Veritex, but other defaults are
ongoing as noted below.
At
September 30, 2020, LE and LRM were in violation of the debt
service coverage ratio, current ratio, and debt to net worth ratio
financial covenants under our secured loan agreements with Veritex.
As a result, the debt associated with these loans was classified
within current portion of long-term debt on our consolidated
balance sheets at September 30, 2020 and December 31,
2019.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 10
|
|
Notes to Consolidated Financial Statements
|
|
|
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under our secured loan
agreements with Veritex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the
payments of the debt, and/or (iii) Veritex, as first lien holder,
will provide future default waivers. Defaults under our secured
loan agreements with Veritex 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. Any exercise by
Veritex of its rights and remedies under our 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, the trading price of our common stock and the
value of an investment in our common stock could significantly
decrease, which could lead to holders of our common stock losing
their investment in our common stock in its entirety.
Amended Pilot Line of Credit. On May 4, 2020, Pilot sent
NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a
guarantor and collectively guarantors, a notice demanding the
immediate payment of the unpaid principal amount and all interest
accrued and unpaid, and all other amounts owing or payable (the
“Obligations”) under the Amended Pilot Line of Credit.
Pursuant to the Amended Pilot Line of Credit, commencing on May 4,
2020, the Obligations began to accrue interest at a rate of
fourteen percent (14%) per annum. Failure of the borrower or any
guarantor to pay the past due Obligations constituted an event of
default. Pilot expressly retained and reserved all its rights and
remedies available to it at any time, including without limitation,
the right to exercise all rights and remedies available to Pilot
under the Amended Pilot Line of Credit or applicable law or equity.
Any exercise by Pilot of its rights and remedies under the Amended
Pilot Line of Credit 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.
Pursuant
to a June 1, 2020 letter, Pilot notified the borrower and
guarantors of its intent to apply Pilot’s payment obligations
to us under each of (a) the Terminal Services Agreement (covering
Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May, 2019,
between borrower and Pilot, and (b) the Terminal Services Agreement
(covering Tank No. 56), dated as of June 1, 2019, between the
borrower and Pilot, against our payment obligations to Pilot under
the Amended Pilot Line of Credit. Such setoff amounts only
partially satisfy the Obligations, and Pilot expressly retained and
reserved all its rights and remedies available to it at any time,
including, without limitation, the right to exercise all rights and
remedies available to Pilot under the Amended Pilot Line of Credit
or applicable law or equity. For the three and nine-month periods
ended September 30, 2020, the setoff amounts totaled $0.6 million
and $0.8 million, respectively.
The
borrower and guarantors continue in active dialogue with Pilot to
reach a negotiated settlement, and we believe that Pilot hopes to
continue to work with the borrower to settle the Obligations. The
borrower and guarantors are also working on the possible refinance
of amounts owing and payable under the Amended Pilot Line of
Credit. However, progress with potential lenders has been slow due
to the ongoing COVID-19 pandemic. Our ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, we could be forced to undertake
alternate financings, including a sale of additional common stock,
negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance
that we will be able to consummate any such transaction on terms
that are commercially reasonable, on terms acceptable to us or at
all. In the event we are unsuccessful in such endeavors, we may be
unable to pay the amounts outstanding under the Amended Pilot Line
of Credit, which may require us to seek protection under bankruptcy
laws. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
Notre Dame Debt. Pursuant to a 2015 subordination agreement,
the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034. No payments have been made
under the subordinated Notre Dame Debt.
See
“Note (10)” and “Note (11)” to our
consolidated financial statements for additional information
related to defaults under our secured loan agreements with Veritex,
Pilot, and the Notre Dame Debt and their potential effects on our
business, financial condition, and results of
operations.
Margin Deterioration and Volatility.
Throughout
2020, energy supply and demand patterns have been adversely
affected by reduced economic activity related to the COVID-19
pandemic. In some countries, including the U.S., recent increases
in COVID-19 cases have renewed fears of a second wave of COVID-19.
As a result, some countries have reinstated government-imposed
restrictions, although to a much lesser extent than in March and
April 2020, in order to stem the spread of the virus. Heightened
levels of uncertainty have renewed downward pressure on crude oil
and other commodity prices, and supply and demand are expected to
remain volatile into 2021. Accordingly, we can provide no
assurances that these events will not have a material adverse
effect on our financial position or results of
operations.
Net Losses and Working Capital Deficits.
Net Losses. Net loss for the three months ended September
30, 2020 was $4.7 million, or a loss of $0.37 per share, compared
to net income of $8.2 million, or income of $0.74 per share, for
the three months ended September 30, 2019. The increase in net loss
was the result of less favorable margins per bbl and lower sales
volume during the three months ended September 30, 2020 compared to
the same period in 2019. Net income in 2019 included a $9.1 million
gain on the extinguishment of debt related to the GEL
Settlement.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 11
|
|
Notes to Consolidated Financial Statements
|
|
|
Net
loss for the nine months ended September 30, 2020 was $12.2
million, or a loss of $0.98 per share, compared to net income of
$5.6 million, or income of $0.51 per share, for the nine months
ended September 30, 2019. The significant increase in net loss was
the result of less favorable margins per bbl and lower sales volume
during the nine-month period ended September 30, 2020 compared to
the same period a year earlier. Net income in 2019 included a $9.1
million gain on the extinguishment of debt related to the GEL
Settlement.
Working Capital Deficits. We had a working capital deficit
of $70.6 million and $59.4 million at September 30, 2020 and
December 31, 2019, respectively. Excluding the current portion of
long-term debt, we had a working capital deficit of $24.8 million
and $19.6 million at September 30, 2020 and December 31, 2019,
respectively. We had cash and cash equivalents and restricted cash
(current portion) of $0.3 million and $0.05 million, respectively,
at September 30, 2020. Comparatively, we had cash and cash
equivalents and restricted cash (current portion) of $0.07 million
and $0.05 million, respectively, at December 31, 2019.
Operating Risks
Successful
execution of our business strategy depends on several key factors,
including having adequate working capital 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 products. As discussed
under “Note (1) – Going Concern” above and
throughout this report, we are currently unable to estimate the
impact the ongoing COVID-19 pandemic will have on our future
financial position and results of operations. Under earlier state
and federal mandates that regulated business closures, our business
was deemed as an essential and, as such, has remained open. As U.S.
federal, state, and local officials contemplate renewed restrictive
mandates due to resurging coronavirus cases, we expect to continue
operating. However, such mandates, while necessary to address the
virus, will result in further business and operational disruptions,
including demand destruction, liquidity strains, supply chain
challenges, travel restrictions, controls on in-person gathering,
and workforce availability.
Management
believes that it has taken all prudent steps to mitigate risk,
avoid business disruptions, manage cash flow, and remain
competitive in a low oil price environment. Steps include managing
cash flow by optimizing receivables
and payables by prioritizing payments, managing inventory to avoid
buildup, monitoring discretionary spending, and delaying capital
expenditures. However, there can be no assurance that our
business strategy will be successful, that Affiliates will continue
to fund our working capital needs when we experience working
capital deficits, that we will meet regulatory requirements to
provide additional financial assurance (supplemental pipeline
bonds) and decommission offshore pipelines and platform assets,
that we will be able to obtain additional financing on commercially
reasonable terms or at all, or that margins on our refined products
will be favorable. Further, if Veritex and/or Pilot exercise their
rights and remedies under our secured loan agreements, our
business, financial condition, and results of operations will be
materially adversely affected.
(2)
Principles of Consolidation and Significant Accounting
Policies
Basis of Presentation
The
accompanying unaudited consolidated financial statements, which
include Blue Dolphin and its subsidiaries, have been prepared in
accordance with GAAP for interim consolidated financial information
pursuant to the rules and regulations of the SEC under Article 10
of Regulation S-X and the instructions to Form 10-Q. Accordingly,
certain information and footnote disclosures normally included in
our audited financial statements have been condensed or omitted
pursuant to the SEC’s rules and regulations. Significant
intercompany transactions have been eliminated in the
consolidation. In management’s opinion, all adjustments
considered necessary for a fair presentation have been included,
disclosures are adequate, and the presented information is not
misleading.
The
consolidated balance sheet as of December 31, 2019 was derived from
the audited financial statements at that date. The accompanying
consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019 as filed with the SEC. Operating results
for the three and nine months ended September 30, 2020 are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2020, or for any other period. As
discussed further below within this “Note (2) –
Significant Accounting Policies – Use of Estimates,”
the ongoing COVID-19 pandemic has resulted in significant economic
disruption globally. This disruption became more acute in the
latter half of March 2020; therefore, our operating results for the
three and nine months ended September 30, 2020 do not fully reflect
the impact this disruption has had, and will likely continue to
have, on us.
Significant Accounting Policies
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.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 12
|
|
Notes to Consolidated Financial Statements
|
|
|
Use of Estimates. The ongoing COVID-19 pandemic and certain
developments in the global oil markets have impacted and continue
to impact our business. Oil and gas businesses were designated as
‘essential’ businesses under state and federal mandates
and, as such, we have remained open throughout the pandemic. We
have instituted various initiatives throughout the company as part
of our business continuity programs, and we are working to mitigate
risk when disruptions occur. The uncertainty around the
availability and prices of crude oil, the prices and demand for our
refined products, and the general business environment is expected
to continue through the remainder of the year and beyond. Given
diminished expectations for the global economy, and speculation
regarding a second wave of the virus, we are unable to predict the
ultimate economic impact of COVID-19 on our business.
The
nature of our business requires that we make estimates and
assumptions in accordance with U.S. GAAP. These estimates and
assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. The ongoing
COVID-19 pandemic has impacted these estimates and assumptions and
will continue to do so.
We
assessed certain accounting matters that generally require
consideration of forecasted financial information in context with
the information reasonably available to us and the unknown future
impacts of COVID-19 as of September 30, 2020 and through the filing
date of this report. The accounting matters assessed included, but
were not limited to, our allowance for doubtful accounts, inventory
and related reserves, and the carrying value of long-lived
assets.
Cash and Cash Equivalents. Cash and cash equivalents
represent liquid investments with an original maturity of three
months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at
times, may exceed insured deposit limits. We monitor the financial
condition of the financial institutions and have experienced no
losses associated with these accounts.
Restricted Cash. Restricted cash, current portion primarily
represents a payment reserve account held by Veritex as security
for payments under a loan agreement. Restricted cash,
noncurrent represents funds held in the Veritex disbursement
account for payment of construction related expenses to 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 of the customer’s account
based on current aging status, collection history, and financial
condition. Based on a review of these factors,
management establishes or adjusts the allowance for specific
customers and the entire accounts receivable
portfolio. We had an allowance for doubtful accounts of
$0.1 million at both September 30, 2020 and December 31,
2019.
Inventory. Inventory primarily consists of refined products,
crude oil and condensate, and chemicals. Inventory is valued at
lower of cost or net realizable value with cost determined by the
average cost method, and net realizable value determined based on
estimated selling prices less associated delivery costs. If the net
realizable value of our refined products inventory declines to an
amount less than our average cost, we record a write-down of
inventory and an associated adjustment to cost of goods sold. See
“Note (7)” to our consolidated financial statements for
additional disclosures related to inventory.
Property and Equipment.
Refinery and Facilities. We typically make ongoing
improvements to the crude distillation tower based on operational
needs and technological advances. However, capital expenditures are
currently on hold due to COVID-19. Additions to refinery and
facilities assets are capitalized, and 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.
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 FASB ASC guidance we performed periodic impairment
testing of our pipeline and facilities assets in 2016. Upon
completion of testing, our pipeline assets were fully impaired at
December 31, 2016. 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. Although we planned to
decommission the offshore pipelines and platform assets in the
third quarter of 2020, decommissioning of these assets has been
delayed due to the ongoing impact of COVID-19, the hyperactive
hurricane season, and cash flow constraints. We cannot currently
estimate when decommissioning may occur.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 13
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|
Notes to Consolidated Financial Statements
|
|
|
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.
CIP. CIP expenditures, including capitalized interest,
relate to construction and refurbishment activities and equipment
for the Nixon facility. These expenditures are capitalized as
incurred. Depreciation begins once the asset is placed in service.
See “Note (8)” to our consolidated financial statements
for additional disclosures related to our refinery and facilities
assets, oil and gas properties, pipelines and facilities assets,
and CIP.
Leases. We evaluate if a contract is or contains a lease at
inception of the contract. If we determine that a contract is or
contains a lease, we recognize ROU asset and lease liability at the
commencement date of the lease based on the present value of lease
payments over the lease term. The present value of the lease
payments is determined by using the implicit rate when readily
determinable. If not determinable, we use the incremental borrowing
rate to discount lease payments to present value. Lease terms
include options to extend or terminate the lease when it is
reasonably certain that we will exercise those
options.
We
recognize ROU assets and lease liabilities for leasing arrangements
with terms greater than one year. We account for lease and
non-lease components in a contract as a single lease component for
all classes of underlying assets. We allocate the consideration in
these contracts based on pricing information contained in the
lease.
Expense
for an operating lease is recognized as a single lease cost on a
straight-line basis over the lease term and is reflected in the
appropriate income statement line item based on the leased
asset’s function. Amortization expense of a finance lease ROU
asset is recognized on a straight-line basis over the lesser of the
useful life of the leased asset or the lease term. However, if the
lease transfers ownership of the finance lease ROU asset to us at
the end of the lease term, the finance lease ROU asset is amortized
over the useful life of the leased asset. Amortization expense is
reflected in ‘depreciation and amortization expense.’
Interest expense is incurred based on the carrying value of the
lease liability and is reflected in ‘interest and other
expense.’
Revenue Recognition.
Refinery Operations Revenue. Revenue from the sale of
refined products is recognized when the product is sold to the
customer in fulfillment of performance obligations. Each load of
refined 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 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
revenue represents fees pursuant to: (i) 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 and
(ii) tolling agreements, whereby a customer agrees to pay a certain
fee per gallon or barrel for throughput volumes moving through the
naphtha stabilizer unit and a fixed monthly reservation fee for use
of the naphtha stabilizer unit.
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.
Deferred Revenue. We record deferred revenue when cash
payments are received or due in advance of our performance. An
increase in the deferred revenue balance reflects cash
payments received or due in advance of satisfying our performance
obligations, offset by recognized revenue that was included in the
deferred revenue balance at the beginning of the period. Deferred
revenue represents a liability as of the balance sheet date related
to a revenue producing activity for which revenue has not yet been
recognized. We record deferred revenue when we receive
consideration under a contract before achieving certain criteria
that must be met for revenue to be recognized in conformity with
GAAP.
|
Blue
Dolphin Energy Company
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|
September 30, 2020 │Page 14
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|
Notes to Consolidated Financial Statements
|
|
|
Income Taxes. Deferred income taxes are determined based on
the differences between the financial reporting and tax basis of
assets and liabilities, as well as operating losses and tax credit
carryforwards using currently enacted tax rates and laws in effect
for the year in which the differences are expected to reverse. We
record a valuation allowance against deferred income tax assets if
it is more likely than not that those assets will not be realized.
The provision for income taxes comprises our current tax liability
and change in deferred income tax assets and
liabilities.
Significant
judgment is required in evaluating uncertain tax positions and
determining its provision for income taxes. As of each reporting
date, we consider new evidence, both positive and negative, to
determine the realizability of deferred tax assets. We consider
whether it is more likely than not that a 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. When we determine 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 September 30, 2020. 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 September 30, 2020 and December 31, 2019. We expect to
recover deferred tax assets related to 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
September 30, 2020 and December 31, 2019, there were no uncertain
tax positions for which a reserve or liability was necessary. See
“Note (14)” to our consolidated financial statements
for more information related to income taxes.
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. The GEL Final Arbitration Award
represented a significant adverse change that could have affected
the value of certain of our long-lived assets, and management
performed potential impairment testing of our refinery and
facilities assets in 2019 and 2018. Upon completion of each
testing, no impairment was deemed necessary. In addition, the
market volatility of crude oil prices as a result of the ongoing
COVID-19 pandemic could have affected the value of certain of our
long-lived assets, and management performed impairment testing of
our refinery and facilities assets at September 30, 2020. No
impairment was deemed necessary based upon this testing, and we did
not record any impairment of our refinery and facilities assets for
the periods presented.
Asset Retirement Obligations. We record a liability for the
discounted fair value of an ARO in the period incurred, and we also
capitalize the corresponding cost by increasing the carrying amount
of the related long-lived asset. The liability is accreted towards
its future value each period, and 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.
We have
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further, we
believe that these assets have indeterminate lives because dates or
ranges of dates upon which we would retire these assets cannot
reasonably be estimated at this time. When a legal or contractual
obligation to dismantle or remove the refinery and facilities
assets arises and a date or range of dates can reasonably be
estimated for the retirement of these assets, we will estimate the
cost of performing the retirement activities and record a liability
for the fair value of that cost using present value
techniques.
We
recorded an ARO liability related to future asset retirement costs
associated with dismantling, relocating, or disposing of our
offshore platform, pipeline systems, and related onshore
facilities, as well as for plugging and abandoning wells and
restoring land and sea-beds. 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 (12)” to our consolidated financial
statements for additional information related to AROs.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 15
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|
Notes to Consolidated Financial Statements
|
|
|
Computation of Earnings Per Share. We present basic and
diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding for
the period. 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 restricted stock included in diluted EPS is based on the
“Treasury Stock Method.” We do not have issued options,
warrants, or similar instruments. See “Note (15)” to
our consolidated financial statements for additional information
related to EPS.
New Pronouncements Adopted. The FASB issues ASUs to
communicate changes to the FASB ASC, including changes to
non-authoritative SEC content. Recently adopted ASUs
include:
Income Taxes. In
March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740). This
guidance amended SEC paragraphs in ASC 740, Income Taxes, to
reflect Staff Accounting Bulletin No. 118, which provided guidance
for companies that were 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 included amendments to
the XBRL taxonomy. Although the amendments in ASU
2018-05 were effective for public business entities for fiscal
years ending after December 15, 2020, early adoption was
permitted. Adoption of this guidance did not have a
significant impact on our consolidated financial
statements.
Consolidation. In October 2018, FASB issued ASU
2018-17, Consolidation
(Topic 810). This ASU provided targeted improvements to
related-party guidance for variable interest entities. Indirect
interests held through related parties in common control
arrangements are 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 were effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Adoption of this guidance did not have a significant impact
on our consolidated financial statements.
Codification Updates to SEC Sections. In July 2019, FASB
issued ASU 2019-07, Codification Updates to SEC Sections, which
amended certain SEC sections or paragraphs within the FASB ASC. The
amendments were 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 required improvements to the 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 were effective upon issuance. Adoption of this guidance
did not have a significant impact on our consolidated financial
statements.
New Pronouncements Issued, Not Yet Effective.
Codification Improvements. In October 2020, FASB issued ASU
2020-10, Codification
Improvements. The amendments in this guidance affect a wide variety
of topics in the ASC by either clarifying the codification or
correcting unintended application of guidance. The changes are not
expected to have a significant effect on current accounting
practice or create a significant administrative cost to most
entities. For all reporting entities, the amendments in ASU 2020-10
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.
Remainder
of Page Intentionally Left Blank
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 16
|
|
Notes to Consolidated Financial Statements
|
|
|
(3)
Related-Party Transactions
Affiliate Operational Agreements Summary
Blue
Dolphin and certain of its subsidiaries are party to several
operational agreements with Affiliates. Management believes that
these related-party transactions were consummated on terms
equivalent to those that prevail in arm's-length transactions.
Related-party agreements related to Blue Dolphin’s operations
consist of the following:
|
Agreement/Transaction
|
Parties
|
Effective Date
|
Key Terms
|
|
Refinery
Equipment Purchase
|
LTRI -
LE
|
07/01/2019
|
LE
purchase of two (2) refurbished heat exchangers for $0.08 million
each
|
|
Dock
Tolling Agreement
|
LMT -
LE
|
05/24/2016
|
5-year
term cancellable by either party any time; LE paid flat reservation
fee for tolling volumes up to 84,000 gallons per day; excess
tolling volumes subject to increased per gallon rate; terminated
07/01/2019
|
|
Jet
Fuel Sales Agreement
|
LEH -
LE
|
04/01/2020
|
1-year
term expiring earliest to occur of 03/31/2021 plus 30-day carryover
or delivery of maximum jet fuel quantity; LEH bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification
|
|
Office
Sub-Lease Agreement
|
LEH -
BDSC
|
01/01/2018
|
68-month
term expiring 08/31/2023; office lease Houston, Texas; includes
6-month rent abatement period; rent approximately $0.02 million per
month
|
|
Amended
and Restated Operating Agreement
|
LEH
– Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and
BDSC
|
04/01/2020
|
3-year
term; expires 04/01/2023 or notice by either party at any time of
material breach or 90 days Board notice; LEH receives management
fee of 5% of all consolidated operating costs, excluding crude
costs, depreciation, amortization and interest, of Blue Dolphin,
LE, LRM, NPS, BDPL, BDPC and BDSC
|
Working Capital
We have
historically depended on Affiliates for financing when revenue from
operations and borrowings under bank facilities are insufficient to
meet our liquidity and working capital needs. Such borrowings are
reflected in our consolidated balance sheets in accounts payable,
related party, and/or long-term debt, related party.
Related-Party Long-Term Debt
|
Loan Description
|
Parties
|
Maturity Date
|
Interest Rate
|
Loan Purpose
|
|
March
Carroll Note (in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Jan
2019
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Jonathan Carroll
under the guaranty fee agreements
|
|
March
Ingleside Note (in
default)
|
Ingleside
– Blue Dolphin
|
Jan
2019
|
8.00%
|
Blue
Dolphin working capital
|
|
June
LEH Note (in
default)
|
LEH
– Blue Dolphin
|
Jan
2019
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under the
Amended and Restated Operating Agreement
|
|
BDPL-LEH
Loan Agreement (in
default)(1)
|
LEH -
BDPL
|
Aug
2018
|
16.00%
|
Blue
Dolphin working capital
|
|
Amended
and Restated Guaranty
Fee
Agreement(2)
|
Jonathan
Carroll - LE
|
--
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan
|
|
Amended
and Restated Guaranty
Fee
Agreement(2)
|
Jonathan
Carroll - LRM
|
--
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan
|
(1)
The original
principal amount of the BDPL-LEH Loan Agreement was $4.0
million.
(2)
As a condition for
our secured loan agreements with Veritex, Jonathan Carroll was
required to personally guarantee repayment of borrowed funds and
accrued interest. Under the guaranty fee agreements, Mr. Carroll is
entitled to receive guaranty fees. The fees are payable 50% in cash
and 50% in Common Stock. The Common Stock portion is paid
quarterly. For the foreseeable future, management does not intend
to pay Mr. Carroll the cash portion due to Blue Dolphin’s
working capital deficits. The cash portion will continue to accrue
and be added to the outstanding principal balance owed to Mr.
Carroll under the March Carroll Note.
Guarantees and Security
|
Loan Description
|
Guarantees
|
Security
|
|
BDPL-LEH
Loan Agreement
|
---
|
● Secured by certain
BDPL property
|
Covenants
The
BDPL-LEH Loan Agreement contains representations and warranties,
affirmative and negative covenants, and events of default that we
consider usual and customary for a credit facility of this type.
There are no covenants associated with the March Carroll Note,
March Ingleside Note, or June LEH Note.
Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
March
Carroll Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
--
|
|
March
Ingleside Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
June
LEH Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
BDPL-LEH
Loan Agreement (in
default)
|
Failure
of borrower to pay past due obligations; loan matured August
2018
|
---
|
|
Blue
Dolphin Energy Company
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September 30, 2020 │Page 17
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|
Notes to Consolidated Financial Statements
|
|
|
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts receivable, related party. Accounts receivable, related party
totaled $0 and $1.4 million at September 30, 2020 and December 31,
2019, respectively. At December 31, 2019, accounts receivable,
related party represented amounts owed from LEH for the sale of jet
fuel under the Jet Fuel Sales Agreement. Amounts are settled
under normal business terms. Amounts outstanding relating to
the Jet Fuel Sales Agreement can significantly vary period to
period based on the timing of the related sales and payments
received. See below for the total amount owed to LEH under
the June LEH Note and the BDPL-LEH Loan Agreement.
Accounts payable, related party. Accounts payable, related party to LTRI
related to the purchase of refinery equipment totaled $0.2 million
at both September 30, 2020 and December 31, 2019.
Long-term debt, related party, current portion (in default) and
accrued interest payable, related party.
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
LEH
|
|
|
|
June
LEH Note (in default)
|
$5,733
|
$-
|
|
BDPL-LEH
Loan Agreement
|
6,654
|
6,174
|
|
LEH
Total
|
12,387
|
6,174
|
|
Ingleside
|
|
|
|
March
Ingleside Note (in default)
|
1,067
|
1,004
|
|
Jonathan
Carroll
|
|
|
|
March
Carroll Note (in default)
|
1,373
|
997
|
|
|
14,827
|
8,175
|
|
|
|
|
|
Less:
Long-term debt, related party, current portion, in
default
|
(12,173)
|
(6,001)
|
|
Less:
Accrued interest payable, related party (in default)
|
(2,654)
|
(2,174)
|
|
|
$-
|
$-
|
Consolidated Statements of Operations.
Total revenue from operations.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||
|
|
2020
|
2019
|
2020
|
2019
|
||||
|
|
(in thousands,
except percent amounts)
|
|||||||
|
Refinery
operations
|
|
|
|
|
|
|
|
|
|
LEH
|
$11,942
|
27.8%
|
$25,034
|
31.8%
|
$34,244
|
27.8%
|
$70,016
|
31.0%
|
|
Third-Parties
|
29,987
|
69.9%
|
52,503
|
66.8%
|
85,941
|
69.6%
|
152,636
|
67.6%
|
|
Tolling and
terminaling
|
|
|
|
|
|
|
|
|
|
Third-Parties
|
1,001
|
2.3%
|
1,096
|
1.4%
|
3,214
|
2.6%
|
3,253
|
1.4%
|
|
|
$42,930
|
100.0%
|
$78,633
|
100.0%
|
$123,399
|
100.0%
|
$225,905
|
100.0%
|
Interest expense.
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
Jonathan
Carroll
|
|
|
|
|
|
Guaranty
Fee Agreements
|
|
|
|
|
|
First
Term Loan Due 2034
|
$108
|
$110
|
$324
|
$333
|
|
Second
Term Loan Due 2034
|
45
|
46
|
134
|
138
|
|
March
Carroll Note (in default)
|
23
|
33
|
66
|
86
|
|
LEH
|
|
|
|
|
|
BDPL-LEH
Loan Agreement (in default)
|
160
|
160
|
480
|
480
|
|
June
LEH Note (in default)
|
102
|
17
|
245
|
40
|
|
Ingleside
|
|
|
|
|
|
March
Ingleside Note (in default)
|
15
|
12
|
50
|
63
|
|
|
$453
|
$378
|
$1,299
|
$1,140
|
|
Blue
Dolphin Energy Company
|
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September 30, 2020 │Page 18
|
|
Notes to Consolidated Financial Statements
|
|
|
Other. Fees associated with the Dock Tolling Agreement with
LMT totaled $0 and $0.05 million for the three months ended
September 30, 2020 and 2019, respectively. Fees associated with the
Dock Tolling Agreement with LMT totaled $0 and $0.4 million for the
nine months ended September 30, 2020 and 2019,
respectively.
Lease
payments received under the office sub-lease agreement with LEH
totaled approximately $0.01 million for both three-month periods
ended September 30, 2020 and 2019. Lease payments received under
the office sub-lease agreement with LEH totaled approximately $0.03
million for both nine-month periods ended September 30, 2020 and
2019.
The LEH
operating fee was flat, totaling approximately $0.2 million for
both three-month periods ended September 30, 2020 and 2019. The LEH
operating fee was also relatively flat, totaling approximately
$0.05 million for both nine-month periods ended September 30, 2020
and 2019.
(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 third-party lease
agreements. Both operations are conducted at the Nixon facility.
Corporate and other includes BDSC, BDPL and BDPC.
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.
Contract Liabilities. Our contract liabilities from
contracts with customers consist of unearned revenue and are
included in accrued expenses and presented in “Note
(9)” to our consolidated financial statements.
Remaining Performance Obligations. Most of our contracts
with customers are spot contracts and therefore have no remaining
performance obligations.
Remainder
of Page Intentionally Left Blank
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 19
|
|
Notes to Consolidated Financial Statements
|
|
|
Segment Information.
Business segment information for the periods indicated (and as of
the dates indicated) was as follows:
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
Net
revenue (excluding intercompany fees and sales)
|
|
|
|
|
|
Refinery
operations
|
$41,929
|
$77,537
|
$120,185
|
$222,652
|
|
Tolling
and terminaling
|
1,001
|
1,096
|
3,214
|
3,253
|
|
Total
net revenue
|
42,930
|
78,633
|
123,399
|
225,905
|
|
|
|
|
|
|
|
Intercompany
fees and sales
|
|
|
|
|
|
Refinery
operations
|
(595)
|
(668)
|
(1,618)
|
(1,927)
|
|
Tolling
and terminaling
|
595
|
668
|
1,618
|
1,927
|
|
Total
intercompany fees
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Operation costs and expenses(1)
|
|
|
|
|
|
Refinery
operations
|
(43,691)
|
(76,088)
|
(124,942)
|
(219,766)
|
|
Tolling
and terminaling
|
(709)
|
(285)
|
(1,222)
|
(1,012)
|
|
Corporate
and other
|
(58)
|
(52)
|
(164)
|
(165)
|
|
Total
operation costs and expenses
|
(44,458)
|
(76,425)
|
(126,328)
|
(220,943)
|
|
|
|
|
|
|
|
Segment
contribution margin (deficit)
|
|
|
|
|
|
Refinery
operations
|
(2,357)
|
781
|
(6,375)
|
959
|
|
Tolling
and terminaling
|
887
|
1,479
|
3,610
|
4,168
|
|
Corporate
and other
|
(58)
|
(52)
|
(164)
|
(165)
|
|
Total
segment contribution margin (deficit)
|
(1,528)
|
2,208
|
(2,929)
|
4,962
|
|
|
|
|
|
|
|
General and administrative
expenses(2)
|
|
|
|
|
|
Refinery
operations
|
(414)
|
(292)
|
(1,045)
|
(898)
|
|
Tolling
and terminaling
|
(132)
|
(68)
|
(268)
|
(173)
|
|
Corporate
and other
|
(307)
|
(295)
|
(1,052)
|
(833)
|
|
Total
general and administrative expenses
|
(853)
|
(655)
|
(2,365)
|
(1,904)
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
Refinery
operations
|
(301)
|
(481)
|
(883)
|
(1,429)
|
|
Tolling
and terminaling
|
(338)
|
(99)
|
(956)
|
(297)
|
|
Corporate
and other
|
(51)
|
(52)
|
(153)
|
(129)
|
|
Total
depreciation and amortization
|
(690)
|
(632)
|
(1,992)
|
(1,855)
|
|
|
|
|
|
|
|
Interest
and other non-operating expenses, net
|
|
|
|
|
|
Refinery
operations
|
(679)
|
8,329
|
(2,171)
|
6,723
|
|
Tolling
and terminaling
|
(599)
|
(824)
|
(1,985)
|
(1,599)
|
|
Corporate
and other
|
(304)
|
(259)
|
(778)
|
(712)
|
|
Total
interest and other non-operating expenses, net
|
(1,582)
|
7,246
|
(4,934)
|
4,412
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
|
|
Refinery
operations
|
(3,751)
|
8,337
|
(10,474)
|
5,355
|
|
Tolling
and terminaling
|
(182)
|
488
|
401
|
2,099
|
|
Corporate
and other
|
(720)
|
(658)
|
(2,147)
|
(1,839)
|
|
Total
income (loss) before income taxes
|
(4,653)
|
8,167
|
(12,220)
|
5,615
|
|
|
|
|
|
|
|
Income
tax expense
|
-
|
-
|
(15)
|
-
|
|
|
|
|
|
|
|
Net income (loss)
|
$(4,653)
|
$8,167
|
$(12,235)
|
$5,615
|
(1)
Operation costs
include cost of goods sold. Also, operation costs within: (a)
tolling and terminaling includes terminal operating expenses and an
allocation of other costs (e.g. insurance and maintenance) and (b)
corporate and other includes expenses related to BDSC, BDPC and
BDPL.
(2)
General and
administrative expenses within refinery operations include the LEH
operating fee.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 20
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Capital
expenditures
|
|
|
|
Refinery
operations
|
$295
|
$1,375
|
|
Tolling
and terminaling
|
790
|
83
|
|
Corporate
and other
|
-
|
-
|
|
Total
capital expenditures
|
$1,085
|
$1,458
|
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Identifiable
assets
|
|
|
|
Refinery
operations
|
$47,169
|
$51,317
|
|
Tolling
and terminaling
|
18,815
|
18,401
|
|
Corporate
and other
|
1,667
|
1,726
|
|
Total
identifiable assets
|
$67,651
|
$71,444
|
(5)
Concentration of Risk
Bank Accounts
Financial
instruments that potentially subject us to concentrations of risk
consist primarily of cash, trade receivables and payables. We
maintain cash balances at financial institutions in Houston, Texas.
The FDIC insures certain financial products up to a maximum of
$250,000 per depositor. At both September 30, 2020 and December 31,
2019, we had cash balances (including restricted cash) that
exceeded the FDIC insurance limit per depositor of approximately
$0.3 million.
Key Supplier
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate. We have a long-term crude
supply agreement in place with Pilot. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Effective
March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a
Pilot affiliate. Either party may terminate the crude supply
agreement by providing the other party 60 days prior written
notice. Pilot also stores
crude oil at the Nixon facility under two terminal services
agreements. Under the terminal services agreements, Pilot stores
crude oil at the Nixon facility at a specified rate per bbl of the
storage tank’s shell capacity. Although the initial term of
the terminal services agreement expired April 30, 2020, the
agreement renewed on a one-year evergreen basis. Either party may
terminate the terminal services agreement by providing the other
party 60 days prior written notice. However, the terminal services
agreement will automatically terminate upon expiration or
termination of the crude supply agreement.
Beginning
on June 1, 2020, Pilot began applying payment obligations owed to
us under the two terminal services agreements against our payment
obligations owed to Pilot under the Amended Pilot Line of Credit.
For the three and nine-month periods ended September 30, 2020, the
setoff amounts totaled $0.6 million and $0.8 million, respectively.
See “Note (1) Organization – Going Concern” to
our consolidated financial statements for additional disclosures
related to defaults in our debt obligations.
Our
financial health could be materially and adversely affected by
defaults in our secured loan agreements, margin deterioration and
volatility, historic net losses and working capital deficits, as
well as termination of the crude supply agreement or terminal
services agreement with Pilot, which could impact our ability to
acquire crude oil and condensate. In addition, sustained periods of
low crude oil prices due to market volatility associated with the
COVID-19 pandemic has resulted in significant financial constraints
on producers, which in turn has resulted in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations. During the three-
and nine-month periods ended September 30, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 21
|
|
Notes to Consolidated Financial Statements
|
|
|
Significant Customers
We
routinely assess the financial strength of our customers and have
not experienced significant write-downs in accounts receivable
balances. We believe that our accounts receivable credit risk
exposure is limited.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable at Date
Indicated
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
September 30,
2020
|
4
|
80%
|
$0
|
|
|
|
|
|
|
September 30,
2019
|
4
|
97%
|
$0.6
million
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
September 30,
2020
|
4
|
82%
|
$0
|
|
|
|
|
|
|
September 30,
2019
|
4
|
97%
|
$0.6
million
|
One of
our significant customers is an Affiliate. The Affiliate, LEH,
purchases our jet fuel under a Jet Fuel Sales Agreement and bids on
jet fuel contracts under preferential pricing terms due to a
HUBZone certification. LEH accounted for nearly 28% and 32% of our
total revenue from operations for the three months ended September
30, 2020 and 2019, respectively. LEH accounted for nearly 28% and
31% of our total revenue from operations for the nine months ended
September 30, 2020 and 2019, respectively. LEH represented $0 in
accounts receivable at September 30, 2020. LEH represented $0.3
million in accounts receivable at September 30, 2019.
Amounts
outstanding relating to the Jet Fuel Sales Agreement can
significantly vary period to period based on the timing of the
related sales and payments received. The amounts are settled under
normal business terms. The total amount owed to LEH under the June
LEH Note and the BDPL-LEH Loan Agreement totaled $12.4 million and
$6.2 million at September 30, 2020 and December 31, 2019,
respectively. See “Note (3)” and “Note
(16)” to our consolidated financial statements for additional
disclosures related to transactions with Affiliates.
Concentration of Customers. Our customers are concentrated
on refined petroleum product wholesalers. This customer
concentration may impact our overall exposure to credit risk,
either positively or negatively, as our customers are likely
similarly affected by economic changes. This includes the
uncertainties related to the COVID-19 pandemic and the associated
volatility in the global oil markets. Historically, we have had no
significant problems collecting our accounts
receivable.
Refined Product Sales. We sell our products primarily in the
U.S. within PADD 3. Occasionally we sell refined products to
customers that export to Mexico. Total refined product sales by
distillation (from light to heavy) for the periods indicated
consisted of the following:
|
|
Three Months Ended September 30,
|
Nine Months Ended Ended September 30,
|
||||||
|
|
2020
|
2019
|
2020
|
2019
|
||||
|
|
(in
thousands, except percent amounts)
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
LPG
mix
|
$-
|
0.0%
|
$8
|
0%
|
$-
|
0.0%
|
$17
|
0%
|
|
Naphtha
|
7,847
|
18.7%
|
14,147
|
18.2%
|
22,523
|
18.7%
|
43,358
|
19.5%
|
|
Jet
fuel
|
11,942
|
28.5%
|
25,035
|
32.3%
|
34,244
|
28.5%
|
70,017
|
31.4%
|
|
HOBM
|
12,196
|
29.1%
|
17,044
|
22.0%
|
31,077
|
25.9%
|
49,951
|
22.5%
|
|
AGO
|
9,944
|
23.7%
|
21,303
|
27.5%
|
32,341
|
26.9%
|
59,309
|
26.6%
|
|
|
$41,929
|
100.0%
|
$77,537
|
100.0%
|
$120,185
|
100.0%
|
$222,652
|
100.0%
|
An
Affiliate, LEH, purchases all of our jet fuel. See “Note
(3)” and “Note (16)” to our consolidated
financial statements for additional disclosures related to
Affiliate transactions.
(6)
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Prepaid
insurance
|
$1,099
|
$417
|
|
Prepaid
crude oil and condensate
|
374
|
1,651
|
|
Prepaid
easement renewal fees
|
104
|
121
|
|
Other
prepaids
|
40
|
87
|
|
|
$1,617
|
$2,276
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 22
|
|
Notes to Consolidated Financial Statements
|
|
|
(7)
Inventory
Inventory
as of the dates indicated consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Crude
oil and condensate
|
$493
|
$959
|
|
Chemicals
|
143
|
120
|
|
AGO
|
118
|
440
|
|
Naphtha
|
88
|
95
|
|
Propane
|
13
|
26
|
|
LPG
mix
|
7
|
5
|
|
|
$862
|
$1,645
|
Due to
fluctuating commodity prices, we recorded a net realizable value
adjustment to inventory of approximately $0.3 million and $0.3
million at September 30, 2020 and December 31, 2019,
respectively.
(8)
Property, Plant and Equipment, Net
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
September
30,
|
December
31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Refinery
and facilities
|
$71,855
|
$66,317
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
903
|
833
|
|
|
73,324
|
67,716
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortiation
|
(14,577)
|
(12,739)
|
|
|
58,747
|
54,977
|
|
|
|
|
|
CIP
|
4,392
|
8,916
|
|
|
$63,139
|
$63,893
|
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest is recorded as
part of the asset it relates to and is depreciated over the
asset’s useful life. Capitalized interest cost, which is
included in CIP, was $0 and $0.7 million at September 30, 2020 and
December 31, 2019. Capital expenditures for expansion at the Nixon
facility were funded by long-term debt from Veritex, revenue from
operations, and working capital from Affiliates. At September 30,
2020, unused amounts for capital expenditures derived from Veritex
loans were reflected in restricted cash (current and non-current
portions) on our consolidated balance sheets. See “Note
(10)” to our consolidated financial statements for additional
disclosures related to working capital deficits and borrowings for
capital spending.
(9)
Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Unearned
revenue from contracts with customers
|
$2,441
|
$1,990
|
|
Insurance
|
525
|
159
|
|
Unearned
contract renewal income
|
500
|
500
|
|
Property,
fuel and other taxes
|
389
|
183
|
|
Other
payable
|
186
|
228
|
|
Board
of director fees payable
|
68
|
263
|
|
Customer
deposits
|
10
|
10
|
|
|
$4,119
|
$3,333
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 23
|
|
Notes to Consolidated Financial Statements
|
|
|
(10)
Third-Party Long-Term Debt
Loan Agreements Summary
|
Loan Description
|
Parties
|
Original Principal Amount
(in millions)
|
Maturity Date
|
Monthly Principal and Interest Payment
|
Interest Rate
|
Loan Purpose
|
|
Veritex
Loans(1)
|
|
|
|
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
LE-Veritex
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ
Prime + 2.75%
|
Refinance
loan; capital improvements
|
|
LRM
Term Loan Due 2034
(in default)
|
LRM-Veritex
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ
Prime + 2.75%
|
Refinance
bridge loan; capital improvements
|
|
Notre
Dame Debt (in
default)(2)(3)
|
LE-Kissick
|
$11.7
|
Jan
2018
|
No
payments to date; payment rights subordinated
|
16.00%
|
Working
capital; reduced balance of GEL Final Arbitration
Award
|
|
SBA
EIDLs
|
|
|
|
|
|
|
|
LE Term
Loan Due 2050(4)
|
LE-SBA
|
$0.15
|
Aug
2050
|
$0.0007
million
|
3.75%
|
Working
capital
|
|
NPS
Term Loan Due 2050(4)
|
NPS-SBA
|
$0.15
|
Aug
2050
|
$0.0007
million
|
3.75%
|
Working
capital
|
(1)
Proceeds were
placed in a disbursement account whereby Veritex makes payments for
construction related expenses. Amounts held in the disbursement
account are reflected on our consolidated balance sheets as
restricted cash (current portion) and restricted cash, noncurrent.
At September 30, 2020, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.5 million. At
December 31, 2019, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.6
million.
(2)
LE originally
entered into a loan agreement with Notre Dame Investors, Inc. in
the principal amount of $8.0 million. The debt is currently held by
John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame
Debt was amended to increase the principal amount by $3.7 million;
the additional principal was used to reduce the GEL Final
Arbitration Award by $3.6 million.
(3)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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 LE Term Loan Due
2034.
(4)
Payments are
deferred for the first twelve (12) months of the loan; interest
accrues during the deferral period. SBA EIDLs are not
forgivable.
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Third-party
long-term debt (outstanding principal and accrued interest), as of
the dates indicated was as follows:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
$22,424
|
$21,776
|
|
LRM Term Loan Due 2034 (in
default)
|
9,299
|
9,031
|
|
SBA
EIDLs
|
|
|
|
LE
Term Loan Due 2050
|
150
|
-
|
|
NPS
Term Loan Due 2050
|
150
|
-
|
|
Notre Dame Debt (in
default)
|
9,214
|
8,617
|
|
|
41,237
|
39,424
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(33,644)
|
(33,836)
|
|
Less:
Unamortized debt issue costs
|
(1,781)
|
(1,877)
|
|
Less: Accrued interest payable (in
default)
|
(5,512)
|
(3,711)
|
|
|
$300
|
$-
|
Unamortized
debt issue costs associated with the Veritex loans as of the dates
indicated consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
$1,674
|
$1,674
|
|
LRM Term Loan Due 2034 (in
default)
|
768
|
768
|
|
|
|
|
|
Less:
Accumulated amortization
|
(661)
|
(565)
|
|
|
$1,781
|
$1,877
|
Amortization
expense was $0.03 million for both three-month periods ended
September 30, 2020 and 2019. Amortization expense was $0.09 million
for both nine-month periods ended September 30, 2020 and
2019.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 24
|
|
Notes to Consolidated Financial Statements
|
|
|
Accrued
interest related to third-party long-term debt, reflected as
accrued interest payable in our consolidated balance sheets, as of
the dates indicated consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt (in
default)
|
$4,236
|
$3,639
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
879
|
25
|
|
LRM Term Loan Due 2034 (in
default)
|
397
|
47
|
|
|
5,512
|
3,711
|
|
Less:
Accrued interest payable (in default)
|
(5,512)
|
(3,711)
|
|
Long-term
Interest Payable, Net of Current Portion
|
$-
|
$-
|
Payment Deferments
Veritex Loans. In April 2020, LE and LRM were each granted a
two-month deferment period on their respective Veritex loans
commencing from April 22, 2020 to June 22, 2020. During the
deferment period, LE and LRM were not obligated to make payments
and interest continued to accrue at the stated rates of the loans.
Upon expiration of the deferment period: (i) Veritex re-amortized
the loan such that future payments on principal and interest were
adjusted based on the remaining principal balances and loan terms,
and (ii) all other terms of the loans reverted to the original
terms, and previous defaults were reinstated. The deferment did not
address LE’s requirement to replenish the $1.0 million
payment reserve account. Principal and interest payments resumed on
July 22, 2020. As of the filing date of this report, we are current
on required monthly payments under our secured loan agreements with
Veritex, but other defaults are ongoing as noted below under
“Defaults”.
SBA EIDLs. Payments under the SBA loans are deferred for the
first twelve (12) months. Interest accrues during the deferral
period. Principal and interest payments begin in August
2021.
Guarantees and Security
|
Loan Description
|
Guarantees
|
Security
|
|
Veritex
Loans(1)
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
●
100%
USDA-guarantee
●
Jonathan Carroll
personal guarantee
●
LEH, LRM and Blue
Dolphin cross-guarantee
|
●
First priority lien
on Nixon facility’s business assets (excluding accounts
receivable and inventory)
●
Assignment of all
Nixon facility contracts, permits, and licenses
●
Absolute assignment
of Nixon facility rents and leases, including tank rental
income
●
$1.0 million
payment reserve account held by Veritex
●
$5.0 million life
insurance policy on Jonathan Carroll
|
|
LRM
Term Loan Due 2034 (in
default)
|
●
100%
USDA-guarantee
●
Jonathan Carroll
personal guarantee
●
LEH, LE and Blue
Dolphin cross-guarantee
|
●
Second priority
lien on rights of LE in crude distillation tower and other
collateral of LE
●
First priority lien
on real property interests of LRM
●
First priority lien
on all LRM fixtures, furniture, machinery, and
equipment
●
First priority lien
on all LRM contractual rights, general intangibles, and
instruments, except with respect to LRM rights in its leases of
certain specified tanks for which Veritex has second priority
lien
●
All other
collateral as described in the security documents
|
|
Notre
Dame Debt (in
default)(2)
|
---
|
●
Subordinated deed
of trust that encumbers the crude distillation tower and general
assets of LE
|
|
SBA
EIDLs
|
|
|
|
LE Term
Loan Due 2050
|
---
|
●
Business assets
(e.g. machinery and equipment, furniture, fixtures, etc.) as more
fully described in the security agreement
|
|
NPS
Term Loan Due 2050
|
---
|
●
Business assets
(e.g. machinery and equipment, furniture, fixtures, etc.) as more
fully described in the security agreement
|
(1)
As a condition of
the LE Term Loan Due 2034 and LRM Term Loan Due 2034, Jonathan
Carroll was required to personally guarantee repayment of borrowed
funds and accrued interest.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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 LE Term Loan Due
2034.
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 U.S. with the USDA guaranteeing up to 100% of the principal
amount. The lender for a USDA-guaranteed loan, in our case Veritex,
is required by regulations to retain both the guaranteed and
unguaranteed portions of the loan, to service the entire underlying
loan, and to remain mortgage and/or secured party of record. Both
the guaranteed and unguaranteed portions 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. See
“Note (3)” and “Note (16)” to our
consolidated financial statements for additional disclosures
related to Affiliate agreements and transactions, including
long-term debt guarantees.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 25
|
|
Notes to Consolidated Financial Statements
|
|
|
Covenants
The
Veritex loans and SBA EIDLs contain representations and warranties,
affirmative and negative covenants, and events of default that we
consider usual and customary for credit facilities of this type.
There are no covenants associated with the Notre Dame
Debt.
Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
Veritex
Loans
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; failure to replenish $1.0 million payment reserve
account; events of default under other secured loan agreements with
Veritex
|
Financial
covenants:
●
debt service
coverage ratio, current ratio, and debt to net worth
ratio
|
|
LRM
Term Loan Due 2034 (in
default)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; events of default under other secured loan agreements
with Veritex
|
Financial
covenants:
●
debt service
coverage ratio, current ratio, and debt to net worth
ratio
|
|
Notre
Dame Debt (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
|
|
|
As
reflected in the table above and elsewhere in this report, we are
in default under the LE Term Loan Due 2034, LRM Term Loan Due 2034,
and the Notre Dame Debt. Defaults under the LE Term Loan Due 2034
and LRM Term Loan Due 2034 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 the LE Term Loan Due 2034, LRM Term Loan Due 2034,
and the Notre Dame Debt was classified within the current portion
of long-term debt on our consolidated balance sheets at September
30, 2020 and December 31, 2019.
Any
exercise by Veritex of its rights and remedies under our 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. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under our secured loan
agreements with Vertitex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the
payments of the debt, and/or (iii) Veritex, as first lien holder,
will provide future default waivers. Defaults under our secured
loan agreements and any exercise by Veritex of its rights and
remedies related to such defaults may have a material adverse
effect on the trading prices of our common stock and on the value
of an investment in our common stock, and holders of our common
stock could lose their investment in our common stock in its
entirety. See “Note (1)” and “Note (11)” to
our consolidated financial statements for additional information
regarding defaults under our secured loan agreements and their
potential effects on our business, financial condition, and results
of operations.
(11)
Line of Credit Payable
Line of Credit Agreement Summary
|
Line of Credit Description
|
Original
Principal Amount
(in millions)
|
Maturity Date
|
Monthly Principal and Interest Payment
|
Interest Rate
|
Loan Purpose
|
|
|
|
|
|
|
|
|
Amended
Pilot Line of Credit
(in
default)
|
$13.0
|
May
2020
|
----
|
14.00%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
|
|
|
|
|
|
|
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Line of
credit payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Amended Pilot Line of Credit (in
default)
|
$9,724
|
$11,786
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
-
|
(219)
|
|
Less:
Interest payable, short-term
|
(103)
|
(103)
|
|
|
$9,621
|
$11,464
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 26
|
|
Notes to Consolidated Financial Statements
|
|
|
Guarantees and Security
|
Loan Description
|
Guarantees
|
Security
|
|
Amended
Pilot Line of Credit (in
default)
|
●
Blue Dolphin
pledged its equity interests in NPS to Pilot to secure NPS’
obligations;
●
Blue Dolphin, LE,
LRM, and LEH have each guaranteed NPS’
obligations.
|
● NPS
receivables;
● NPS assets,
including a tank lease (the “Tank Lease”);
● LRM
receivables.
|
In an
Agreement Regarding Attornment of Tank Leases dated April 30, 2019
between Veritex, LE, NPS, and Pilot, Veritex in its capacity as a
secured lender of LE and LRM, agreed to permit the continued
performance of obligations under a certain tank lease agreement if
it were to foreclose on LE property that NPS was leasing from LE so
long as certain conditions were met. The effectiveness of the
Agreement Regarding Attornment of Tank Leases was subject to
certain conditions, including the agreement and concurrence of the
USDA that the Agreement Regarding Attornment of Tank Leases does
not impair or void the LE Term Loan Due 2034 and LRM Term Loan Due
2034 or any associated guarantees. Veritex used commercially
reasonable efforts to obtain such USDA concurrence, however, as of
the filing date of this report such USDA concurrence had not been
provided.
Covenants
The
Amended Pilot Line of Credit contains customary affirmative and
negative covenants and events of default.
Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
Amended
Pilot Line of Credit (in
default)
|
Failure
of borrower or any guarantor to pay past due obligations; loan
matured May 2020
|
---
|
|
|
|
|
As
reflected in the table above and elsewhere in this report, we are
in default under the Amended Pilot Line of Credit. On May 4, 2020,
Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin,
each a guarantor and collectively guarantors, a notice demanding
the immediate payment of the unpaid principal amount and all
interest accrued and unpaid, and all other amounts owing or payable
(the “Obligations”) under the Amended Pilot Line of
Credit. Pursuant to the Amended Pilot Line of Credit, commencing on
May 4, 2020, the Obligations began to accrue interest at a rate of
fourteen percent (14%) per annum. Failure of the borrower or any
guarantor to pay the past due Obligations constituted an event of
default. Pilot expressly retained and reserved all its rights and
remedies available to it at any time, including without limitation,
the right to exercise all rights and remedies available to Pilot
under the Amended Pilot Line of Credit or applicable law or equity.
Any exercise by Pilot of its rights and remedies under the Amended
Pilot Line of Credit 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.
Pursuant
to a June 1, 2020 letter, Pilot notified the borrower and
guarantors of its intent to apply Pilot’s payment obligations
to us under each of (a) the Terminal Services Agreement (covering
Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May, 2019,
between borrower and Pilot, and (b) the Terminal Services Agreement
(covering Tank No. 56), dated as of June 1, 2019, between the
borrower and Pilot, against our payment obligations to Pilot under
the Amended Pilot Line of Credit. Such setoff amounts only
partially satisfy the Obligations, and Pilot expressly retained and
reserved all its rights and remedies available to it at any time,
including, without limitation, the right to exercise all rights and
remedies available to Pilot under the Amended Pilot Line of Credit
or applicable law or equity. For the three and nine-month periods
ended September 30, 2020, the setoff amounts totaled $0.6 million
and $0.8 million, respectively.
The
borrower and guarantors continue in active dialogue with Pilot to
reach a negotiated settlement, and we believe that Pilot hopes to
continue to work with the borrower to settle the Obligations. The
borrower and guarantors are also working on the possible refinance
of amounts owing and payable under the Amended Pilot Line of
Credit. However, progress with potential lenders has been slow due
to the ongoing COVID-19 pandemic. Our ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, we could be forced to undertake
alternate financings, including a sale of additional common stock,
negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance
that we will be able to consummate any such transaction on terms
that are commercially reasonable, on terms acceptable to us or at
all. In the event we are unsuccessful in such endeavors, we may be
unable to pay the amounts outstanding under the Amended Pilot Line
of Credit, which may require us to seek protection under bankruptcy
laws. In such a case, the trading price of our common stock and the
value of an investment in our common stock could significantly
decrease, which could lead to holders of our common stock losing
their investment in our common stock in its entirety.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 27
|
|
Notes to Consolidated Financial Statements
|
|
|
(12)
AROs
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 decommissioning 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 September 30, 2020 and December 31, 2019, the liability was
fully accreted. See “Note (16)” to our consolidated
financial statements for disclosures related to decommissioning of
our offshore pipelines and platform assets and related
risks.
ARO
liability as of the dates indicated was as follows:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
AROs,
at the beginning of the period
|
$2,565
|
$2,565
|
|
Liabilities
settled
|
(179)
|
-
|
|
|
2,386
|
2,565
|
|
Less:
AROs, current portion
|
(2,386)
|
(2,565)
|
|
Long-term
AROs, at the end of the period
|
$-
|
$-
|
Liabilities
settled reflects preparatory costs in the period associated with
decommissioning our offshore pipelines and platform
assets.
(13)
Lease Obligations
Lease Obligations
Operating Lease
Office Lease. BDSC has an office lease related to our
headquarters office 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. An Affiliate, LEH, subleases a portion of
this office space. Sublease income received from LEH
totaled approximately $0.01 million for both the three months ended
September 30, 2020 and 2019. Sublease income received from LEH
totaled approximately $0.03 million for both the nine months ended
September 30, 2020 and 2019. See “Note (3)” to our
consolidated financial statements for additional disclosures
related to the Affiliate sub-lease.
Finance Leases
Crane. 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
required a negligible monthly payment and matured in January
2020.
Backhoe Lease Agreement. In October 2020, LE entered into a
new 5-year finance lease agreement to purchase a backhoe. LE
previously rented the backhoe under a rent-to-own agreement that
matured. The new lease, which includes a rental credit applied as a
down payment, requires a negligible monthly payment and matures in
October 2025. The backhoe continues to be used at the Nixon
Facility.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 28
|
|
Notes to Consolidated Financial Statements
|
|
|
The
following table presents the lease-related assets and liabilities
recorded on the consolidated balance sheet:
|
|
|
September
30,
|
December
31,
|
|
|
Balance Sheet Location
|
2020
|
2019
|
|
|
|
(in
thousands)
|
|
|
Assets
|
|
|
|
|
Operating
lease ROU assets
|
Operating
lease ROU assets
|
$787
|
$787
|
|
Less:
Accumulated amortization on operating lease assets
|
Operating lease ROU assets
|
(249)
|
(138)
|
|
|
538
|
649
|
|
|
|
|
|
|
|
Finance
lease assets
|
Property
and equipment, net
|
86
|
180
|
|
Less:
Accumulated amortization on finance lease assets
|
Property
and equipment, net
|
(16)
|
(34)
|
|
|
70
|
146
|
|
|
|
|
|
|
|
Total
lease assets
|
|
608
|
795
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
190
|
175
|
|
Finance
leases
|
Current
portion of lease liabilities
|
61
|
76
|
|
|
251
|
251
|
|
|
Noncurrent
|
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
421
|
564
|
|
Total
lease liabilities
|
|
$672
|
$815
|
|
Weighted
average remaining lease term in years
|
|
|
Operating
lease
|
2.92
|
|
Weighted
average discount rate
|
|
|
Operating
lease
|
8.25%
|
|
Finance
leases
|
8.25%
|
The
following table presents information related to lease costs for
operating and finance leases:
|
|
Three
Months Ended
|
Nine
Months Ended
|
||
|
|
September
30,
|
September
30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in thousands)
|
|||
|
|
|
|
|
|
|
Operating
lease costs
|
$51
|
$51
|
$154
|
$154
|
|
Finance
lease costs:
|
|
|
|
|
|
Depreciation
of leased assets
|
3
|
4
|
13
|
12
|
|
Interest
on lease liabilities
|
-
|
2
|
3
|
4
|
|
Total
lease cost
|
$54
|
$57
|
$170
|
$170
|
The
table below presents supplemental cash flow information related to
leases as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in thousands)
|
|||
|
Cash
paid for amounts included in the measurement
|
|
|
|
|
|
of
lease liabilities:
|
|
|
|
|
|
Operating
cash flows for operating lease
|
$44
|
$40
|
$130
|
$81
|
|
Operating
cash flows for finance leases
|
$-
|
$2
|
$4
|
$4
|
|
Financing
cash flows for finance leases
|
$5
|
$13
|
$17
|
$35
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 29
|
|
Notes to Consolidated Financial Statements
|
|
|
As of
September 30, 2020, maturities of lease liabilities for the periods
indicated were as follows:
|
September
30,
|
Operating Lease
|
Financing Leases
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
2021
|
$190
|
$61
|
$251
|
|
2022
|
209
|
-
|
209
|
|
2023
|
212
|
-
|
212
|
|
|
|
|
|
|
|
$611
|
$61
|
$672
|
Future
minimum annual lease commitments that are
non-cancelable:
|
|
Operating
|
|
September 30,
|
Lease
|
|
|
(in thousands)
|
|
2021
|
$232
|
|
2022
|
236
|
|
2023
|
220
|
|
|
$688
|
(14)
Income Taxes
Tax Provision
The
provision for income tax benefit (expense) for the periods
indicated was as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
Federal
|
$-
|
$-
|
$(15)
|
$-
|
|
State
|
-
|
-
|
-
|
-
|
|
Deferred
|
|
|
|
|
|
Federal
|
975
|
(1,833)
|
2,566
|
(1,190)
|
|
State
|
-
|
|
-
|
|
|
Change
in valuation allowance
|
(975)
|
1,833
|
(2,566)
|
1,190
|
|
|
|
|
|
|
|
Total
provision for income taxes
|
$-
|
$-
|
$(15)
|
$-
|
The TMT
is treated as an income tax for financial reporting
purposes.
Remainder
of Page Intentionally Left Blank
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 30
|
|
Notes to Consolidated Financial Statements
|
|
|
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
Deferred
tax assets:
|
|
|
|
NOL
and capital loss carryforwards
|
$14,854
|
$12,463
|
|
Business
interest expense
|
2,995
|
1,923
|
|
Start-up
costs (crude oil and condensate processing facility)
|
530
|
594
|
|
ARO
liability/deferred revenue
|
501
|
539
|
|
AMT
credit
|
-
|
50
|
|
Other
|
1
|
11
|
|
Total
deferred tax assets
|
18,881
|
15,580
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(6,968)
|
(6,183)
|
|
Total
deferred tax liabilities
|
(6,968)
|
(6,183)
|
|
|
11,913
|
9,397
|
|
|
|
|
|
Valuation
allowance
|
(11,913)
|
(9,347)
|
|
|
|
|
|
Deferred
tax assets, net
|
$-
|
$50
|
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. NOL carryforwards that remained available
for future use for the periods indicated were as follow (amounts
shown are net of NOLs that will expire unused because of the IRC
Section 382 limitation):
|
|
Net Operating Loss Carryforward
|
||
|
|
Pre-Ownership Change
|
Post-Ownership Change
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
Balance
at December 31, 2018
|
$9,614
|
$37,335
|
$46,949
|
|
|
|
|
|
|
Net
operating losses
|
-
|
5,723
|
5,723
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
9,614
|
43,058
|
52,672
|
|
|
|
|
|
|
Net
operating losses
|
-
|
11,384
|
11,384
|
|
|
|
|
|
|
Balance at September 30, 2020
|
$9,614
|
$54,442
|
$64,056
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 31
|
|
Notes to Consolidated Financial Statements
|
|
|
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 September 30, 2020 and December 31, 2019,
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
September 30, 2020 and December 31, 2019.
(15)
Earnings Per Share
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
|
|
Net
income (loss)
|
$(4,653)
|
$8,167
|
$(12,235)
|
$5,615
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
$(0.37)
|
$0.74
|
$(0.98)
|
$0.51
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
|
|
Weighted
average number of shares of
|
|
|
|
|
|
common
stock outstanding and potential
|
|
|
|
|
|
dilutive
shares of common stock
|
12,693,514
|
10,975,514
|
12,534,493
|
10,975,215
|
Diluted
EPS is computed by dividing net income available to common
stockholders by the weighted average number of shares of common
stock outstanding. Diluted EPS for the three and nine months ended
September 30, 2020 and 2019 was the same as basic EPS as there were
no stock options or other dilutive instruments
outstanding.
(16)
Commitments and Contingencies
Amended and Restated Operating Agreement
See
“Note (3)” to our consolidated financial statements for
additional disclosures related to operation and management of all
Blue Dolphin properties by an Affiliate under the Amended and
Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL
has pipelines and platform assets that are subject to BSEE’s
idle iron regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101. Management met with BSEE on August
15, 2019 to address BDPL’s plans with respect to
decommissioning its offshore pipelines and platform assets. BSEE
proposed that BDPL re-submit permit applications for pipeline and
platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020),
and develop and implement a safe boarding plan for submission with
such permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within twelve (12) months (no later than
August 15, 2020). BDPL timely submitted permit applications
for decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. Decommissioning of the offshore pipelines and platform assets
is on hold due to financial constraints associated with COVID-19.
We are also awaiting approval of regulatory permits on certain
segments and/or fairways, which approvals are required prior to
work commencement. We cannot currently estimate when
decommissioning may occur.
In
April 2020, BSEE issued another INC to BDPL for failure to perform
the required structural surveys for the GA-288C Platform. BDPL
requested an extension to the INC related to the structural
platform surveys, and BSEE approved BDPL’s extension request.
The required platform surveys were completed, and the INC was
resolved in June 2020.
Lack of
permit approvals does not relieve BDPL of its obligations to remedy
the BSEE INCs or of BSEE’s authority to impose financial
penalties. If BDPL fails to complete decommissioning of the
offshore pipelines and platform assets and/or remedy the INCs
within a timeframe determined to be prudent by BSEE, BDPL could be
subject to regulatory oversight and enforcement, including but not
limited to failure to correct an INC, civil penalties, and
revocation of BDPL’s operator designation, which could have a
material adverse effect on our earnings, cash flows and
liquidity.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 32
|
|
Notes to Consolidated Financial Statements
|
|
|
We are
currently unable to predict the outcome of the BSEE INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of September 30, 2020. At September 30, 2020 and
December 31, 2019, BDPL maintained $2.4 million and $2.6 million,
respectively, in AROs related to abandonment of these
assets.
Defaults Under Secured Loan Agreements with Third
Parties
See
“Note (1),” “Note (3),” “Note
(10),” and “Note (11)” to our consolidated
financial statements for additional disclosures related to defaults
under our secured and unsecured debt agreements.
Financing Agreements and Guarantees
Indebtedness. See “Note (1),” “Note
(3),” “Note (10),” and “Note (11)” to
our consolidated financial statements for disclosures related to
Affiliate and third-party indebtedness and defaults
thereto.
Guarantees. Affiliates provided guarantees on certain debt
of Blue Dolphin and its subsidiaries. The maximum amount of any
guarantee is equal to the principal amount and accrued interest,
which amounts are reduced as payments are made. See “Note
(1),” “Note (3),” “Note (10),” and
“Note (11)” to our consolidated financial statements
for additional disclosures related to Affiliate and third-party
guarantees associated with indebtedness and defaults
thereto.
Health, Safety and Environmental Matters
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.
Legal Matters
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds). To cover the various obligations of lessees and
rights-of-way holders operating in federal waters of the Gulf of
Mexico, BOEM evaluates an operator’s financial ability to
carry out present and future obligations to determine whether the
operator must provide additional security beyond the statutory
bonding requirements. Such obligations include the cost of plugging
and abandoning wells and decommissioning pipelines and platforms at
the end of production or service activities. Once plugging and
abandonment work has been completed, the collateral backing the
financial assurance is released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. See “Note (16) –
BSEE Offshore Pipelines and Platform
Decommissioning”.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of September 30, 2020. At both September 30, 2020
and December 31, 2019, BDPL maintained approximately $0.9 million
in credit and cash-backed pipeline rights-of-way bonds issued to
BOEM.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 33
|
|
Notes to Consolidated Financial Statements
|
|
|
Resolved - GEL Settlement. As previously disclosed, GEL was
awarded the GEL Final Arbitration Award in the aggregate amount of
$31.3 million. In July 2018, the Lazarus Parties and GEL entered
into the GEL Settlement Agreement. The GEL Settlement Agreement was
subsequently amended five (5) times to extend the GEL Settlement
Payment Date and/or modify certain terms related to the GEL Interim
Payments or the GEL Settlement Payment. During the period September
2017 to August 2019, GEL received the following amounts from the
Lazarus Parties to reduce the outstanding balance of the GEL Final
Arbitration Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed the stipulation of dismissal of claims against LE,
and (iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At both September 30,
2020 and December 31, 2019, the accrued arbitration award payable
was $0.
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, and
administrative proceedings. 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. If Veritex and/or
Pilot exercise their rights and remedies due to defaults under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
Share Issuances (Sales of Unregistered Securities)
We are
obligated to issue shares of our Common Stock to: (i) non-employee
directors for services rendered to the Board and (ii) to Jonathan
Carroll pursuant to the Guaranty Fee Agreements. Set forth below is
information regarding the sale or issuance of Common Stock related
to these obligations during the three and nine months ended
September 30, 2020:
●
On April 30, 2020,
we issued an aggregate of 231,065 restricted shares of Common Stock
to Jonathan Carroll, which represents payment of the common stock
component of guaranty fees for the period November 2019 through
March 2020. The average cost basis was $0.69, the low was $0.52,
and the high was $1.07. For the foreseeable future, management does
not intend on paying Mr. Carroll the cash portion of guaranty fees
due to Blue Dolphin’s working capital deficits. The cash
portion will continue to be accrued and added to the principal
balance of the March Carroll Note. See “Note (3)” to
our consolidated financial statements for additional disclosures
related to Affiliates and working capital deficits, as well as for
information related to the guaranty fee agreements.
●
On April 30, 2020,
we also issued an aggregate of 135,084 restricted shares of Common
Stock to certain of our non-employee, independent directors, which
represents payment for services rendered to the Board for the three
month periods ended September 30, 2018, March 31, 2019, September
30, 2019, and March 31, 2020. The average cost basis was $0.97, the
low was $0.57, and the high was $1.18.
The
sale and issuance of these securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act. We recognized a gain on the issuance of shares of
$0 and $0.1 million for the three and nine months ended September
30, 2020, respectively.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 34
|
|
Management’s Discussion and Analysis
|
|
|
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management’s Discussion and Analysis is our analysis of our
financial performance, financial condition, and significant trends
that may affect future performance. All statements in this section,
other than statements of historical fact, are forward-looking
statements that are inherently uncertain. See “Important
Information Regarding Forward-Looking Statements” for a
discussion of the factors that could cause actual results to differ
materially from those projected in these statements. You should
read the following discussion together with the financial
statements and the related notes included elsewhere in this
Quarterly Report, as well as with the business strategy, risk
factors, and financial statements and related notes included
thereto in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2019 and our Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, 2020 and June 30,
2020.
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with more than 1.2 million bbls of petroleum storage tank capacity
in Nixon, Texas. Our assets are primarily organized in two
segments: refinery operations (owned by LE) and tolling and
terminaling services (owned by LRM and NPS). Active subsidiaries
that are reflected in corporate and other include BDPL (inactive
pipeline assets), BDPC (inactive leasehold interests in oil and gas
wells), and BDSC (administrative services). See “Note
(4)” to our consolidated financial statements for more
information related to our business segments and properties. Blue
Dolphin was formed in 1986 as a Delaware corporation and is traded
on the OTCQX under the ticker symbol
“BDCO”.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and has historically funded working capital requirements
during periods of working capital deficits, and an Affiliate is a
significant customer of our refined products. Blue Dolphin and
certain of its subsidiaries are currently parties to a variety of
agreements with Affiliates. See “Note (3)” to our
consolidated financial statements for additional disclosures
related to Affiliate agreements and arrangements and risks
associated with working capital deficits.
Business Operations Update
We
continue to proactively address the known impacts of COVID-19.
Facility-dependent personnel, including those needed to maintain
the Nixon facility, are reporting to the facility under strict
protocols that are designed to ensure personnel health and safety.
We are also supporting non-facility-dependent personnel through
remote work and virtual meeting technology, and we are encouraging
all personnel to follow local guidance. All non-essential business
travel and attendance at conferences, trainings, and other
gatherings have been suspended.
Uncertainty
around the availability and prices of crude oil, the prices and
demand for our refined products, and the general business
environment remains as COVID-19 cases in the U.S. and around the
world begin to resurge. Some countries have renewed mandates,
including stay-at-home orders and business closures, to prevent the
further spread of COVID-19. Such mandates, while necessary to
address the virus, will result in further business and operational
disruptions, including demand destruction, liquidity strains,
supply chain challenges, travel restrictions, controls on in-person
gathering, and workforce availability.
The oil
and gas industry has been adversely impacted by crude oil price
volatility and demand for refined petroleum products. Although
commodity prices recovered slightly during the second quarter,
overall market prices were volatile during the third quarter of
2020 and are expected to remain volatile into 2021. The prices at
which we acquire crude oil and sell our refined products
significantly impact our revenue, cost of goods sold, operating
income, and liquidity. Also, when market prices of crude oil and
refined products fall below our inventory carrying value, we must
write down our inventory value and adjust cost of goods sold. Given
diminished expectations for the global economy amid the ongoing
pandemic and resultant recession, we cannot predict the ultimate
economic impact of COVID-19 on our business.
Remainder
of Page Intentionally Left Blank
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 35
|
|
Management’s Discussion and Analysis
|
|
|
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:
Defaults Under Secured Loan Agreements with Third
Parties. We are currently in
default under certain of our secured loan agreements with third
parties. Certain of our related-party debt is also in
default. As a result, the debt
associated with these loans was classified within the current
portion of long-term debt on our consolidated balance sheets at
September 30, 2020 and December 31, 2019. See “Note
(1),” “Note (3),” “Note (10),” and
“Note (11)” to our consolidated financial statements
for additional disclosures related to third-party and related-party
debt, defaults on such debt, and the potential effects of such
defaults on our business, financial condition, and results of
operations.
Third-Party Defaults
●
Veritex Loans
– Defaults under the LE Term Loan Due 2034 and LRM Term Loan
Due 2034 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. Any exercise by Veritex of its rights and
remedies under our 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. Veritex exercising its rights
would also adversely impact the trading price of our common stock
and the value of an investment in our common stock, which could
lead to holders of our common stock losing their investment in its
entirety. We can provide no assurance that: (i) our assets or cash
flow will be sufficient to fully repay borrowings under our secured
loan agreements with Vertitex, either upon maturity or if
accelerated, (ii) LE and LRM will be able to refinance or
restructure the payments of the debt, and/or (iii) Veritex, as
first lien holder, will provide future default waivers. The
borrowers continue in active dialogue with Veritex. As of the
filing date of this report, payments under the Veritex loans were
current, but other defaults remain outstanding as noted in the
table above.
●
Amended Pilot Line
of Credit – On May 4, 2020, Pilot sent NPS, as borrower, and
LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively
guarantors, a notice demanding the immediate payment of the unpaid
principal amount and all interest accrued and unpaid, and all other
amounts owing or payable (the “Obligations”) under the
Amended Pilot Line of Credit. Pursuant to the Amended Pilot Line of
Credit, commencing on May 4, 2020, the Obligations began to accrue
interest at a default rate of fourteen percent (14%) per annum.
Failure of the borrower or any guarantor of paying the past due
Obligations constituted an event of default. Pilot expressly
retained and reserved all its rights and remedies available to it
at any time, including without limitation, the right to exercise
all rights and remedies available to Pilot under the Amended Pilot
Line of Credit or applicable law or equity. Any exercise by Pilot
of its rights and remedies under the Amended Pilot Line of Credit
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.
Pursuant to a June
1, 2020 letter, Pilot notified the borrower and guarantors of its
intent to apply Pilot’s payment obligations to us under each
of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71,
72, 73, 77, and 78), dated as of May, 2019, between borrower and
Pilot, and (b) the Terminal Services Agreement (covering Tank No.
56), dated as of June 1, 2019, between the borrower and Pilot,
against our payment obligations to Pilot under the Amended Pilot
Line of Credit. Such setoff amounts only partially satisfy the
Obligations, and Pilot expressly retained and reserved all its
rights and remedies available to it at any time, including, without
limitation, the right to exercise all rights and remedies available
to Pilot under the Amended Pilot Line of Credit or applicable law
or equity. For the three and nine-month periods ended September 30,
2020, the setoff amounts totaled $0.6 million and $0.8 million,
respectively.
The
borrower and guarantors continue in active dialogue with Pilot to
reach a negotiated settlement, and we believe that Pilot hopes to
continue working with the borrower to settle the Obligations. The
borrower and guarantors are also working on the possible refinance
of amounts owing and payable under the Amended Pilot Line of
Credit. However, progress with potential lenders has been slow due
to the ongoing COVID-19 pandemic. Our ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, we could be forced to undertake
alternate financings, including a sale of additional common stock,
negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance
that we will be able to consummate any such transaction on terms
that are commercially reasonable, on terms acceptable to us or at
all. In the event we are unsuccessful in such endeavors, we may be
unable to pay the amounts outstanding under the Amended Pilot Line
of Credit, which may require us to seek protection under bankruptcy
laws. In such a case, the trading price of our common stock and the
value of an investment in our common stock could significantly
decrease, which could lead to holders of our common stock losing
their investment in our common stock in its entirety.
●
Notre Dame Debt
– Pursuant to a 2015 subordination agreement, the holder of
the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034. No payments have been made under the
subordinated Notre Dame Debt.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 36
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Management’s Discussion and Analysis
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Related-Party Defaults
Affiliates
control approximately 82% of the voting power of our Common Stock,
an Affiliate operates and manages all Blue Dolphin properties, an
Affiliate is a significant customer of our refined products, and we
borrow from Affiliates during periods of working capital deficits.
Replated party debt, which is currently in default, represents such
working capital borrowings.
Margin Deterioration and Volatility. Steps taken globally in March 2020 to address
COVID-19 and the associated Russia-OPEC price war caused oil and
refined product prices, demand, and production levels to decline
sharply. Governmental mandates to slow the spread of the virus
included travel restrictions, stay-at-home orders, and public
gathering bans. Beginning late in the second quarter of
2020, governmental authorities worldwide began lifting restrictions
in an effort to jump start economies. Although oil prices saw a
slight uptick due to partial business re-openings, a resurgence of
the virus led to price volatility during the third quarter of 2020.
Oil prices and demand are expected to
remain volatile for the foreseeable future as governments reissue
restrictive mandates and cold weather becomes a factor in the
virus’ spread. We are currently unable to estimate the impact
these events will have on our future financial position and results
of operations. We believe margins will remain weak for the
remainder of 2020 and into 2021. Accordingly, we can provide no
assurances that these events will not have a material adverse
effect on our financial position or results of
operations.
Net Losses and Working Capital Deficits.
Net Losses
Net
loss for the three months ended September 30, 2020 was $4.7
million, or a loss of $0.37 per share, compared to net income of
$8.2 million, or income of $0.74 per share, for the three months
ended September 30, 2019. The increase in net loss was the result
of less favorable margins per bbl and lower sales volume in the
three-month period ended September 30, 2020 compared to the
three-month period ended September 30, 2019. Net loss for the nine
months ended September 30, 2020 was $12.2 million, or a loss of
$0.98 per share, compared to net income of $5.6 million, or income
of $0.51 per share, for the nine months ended September 30, 2019.
The significant increase in net loss was the result of less
favorable margins per bbl and lower sales volume in the nine-month
period ended September 30, 2020 compared to the same period a year
earlier. Both the three- and nine-month periods ended September 30,
2019 included a gain on the extinguishment of debt of $9.1
million.
Working Capital Deficits
We had
a working capital deficit of $70.6 million and $59.4 million at
September 30, 2020 and December 31, 2019, respectively. Excluding
the current portion of long-term debt, we had a working capital
deficit of $24.8 million and $19.6 million at September 30, 2020
and December 31, 2019, respectively. We had cash and cash
equivalents and restricted cash (current portion) of $0.3 million
and $0.05 million, respectively, at September 30, 2020.
Comparatively, we had cash and cash equivalents and restricted cash
(current portion) of $0.07 million and $0.05 million, respectively,
at December 31, 2019.
Operating Risks
Successful execution of our business strategy depends on several
key factors, including, having adequate working capital 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 products. As
discussed under “Going Concern” within this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and throughout this report, we are
currently unable to estimate the impact the COVID-19 pandemic will
have on our future financial position and results of operations.
Under earlier state and federal mandates that regulated business
closures, our business was deemed as an essential business and, as
such, has remained open. As U.S. federal, state, and local
officials contemplate renewed restrictive mandates due to resurging
coronavirus cases, we expect to continue operating. However, such
mandates, while necessary to address the virus, will result in
further business and operational disruptions, including demand
destruction, liquidity strains, supply chain challenges, travel
restrictions, controls on in-person gathering, and workforce
availability.
Management believes that it has taken all prudent steps to mitigate
risk, avoid business disruptions, manage cash flow, and remain
competitive in a low oil price environment. Steps include managing
cash flow by optimizing receivables and payables by prioritizing
payments, managing inventory to avoid buildup, monitoring
discretionary spending, and delaying capital expenditures. However,
there can be no assurance that our business strategy will be
successful, that Affiliates will continue to fund our working
capital needs when we experience working capital deficits, that we
will meet regulatory requirements to provide additional financial
assurance (supplemental pipeline bonds) and decommission offshore
pipelines and platform assets, that we will be able to obtain
additional financing on commercially reasonable terms or at all, or
that margins on our refined products will be favorable. Further, if
Veritex and/or Pilot exercise their rights and remedies under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 37
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Management’s Discussion and Analysis
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Business Strategy
Considering the uncertainty surrounding the COVID-19 pandemic,
which has weakened the commodity price environment, we remain
focused on safe and reliable operations and cash
conservation.
●
Operational Improvements –
In the second quarter of 2020, we
safely completed a 13-day planned maintenance turnaround and
concluded the 5-year capital improvement expansion project
of the Nixon facility. The turnaround focused on resolving crude
heater issues while the expansion project involved the construction
of nearly 1.0 million bbls of new petroleum storage tanks, smaller
efficiency improvements to the refinery, and acquisition of
refurbished refinery equipment for future deployment. The increase
in petroleum storage capacity has helped with de-bottlenecking the
Nixon refinery. In the future, additional petroleum storage
capacity will allow for increased refinery throughput of up to
approximately 30,000 bpd while deployment of various refurbished
refinery equipment will help improve processing capacity and
increase the Nixon refinery’s complexity.
●
Cash
Conservation – Although in place pre-pandemic, we have
further tightened our cash conservation program to manage cash flow
and remain competitive in a low oil price environment. This
includes optimizing receivables and payables by prioritizing
payments, managing inventory to avoid buildup, monitoring
discretionary spending, and delaying capital expenditures. Despite
this focus, management is keeping in mind the overall safety of our
operations and personnel, as well as the impact to our business
over the long-term.
As discussed above under “Going Concern” and
”Operating Risks” within this Management’s
Discussion and Analysis of Financial Condition and Results of
Operations many uncertainties remain with respect to COVID-19 and
the global oil markets, and it is currently difficult to accurately
forecast and plan future business activities. There can be no
assurance that our business strategy will be successful, that
Affiliates will continue to fund our working capital needs when we
experience working capital deficits, that we will meet regulatory
requirements to provide additional financial assurance
(supplemental pipeline bonds) and decommission offshore pipelines
and platform assets, that we will be able to obtain additional
financing on commercially reasonable terms or at all, or that
margins on our refined products will be favorable. If Veritex
and/or Pilot exercise their rights and remedies under our secured
loan agreements, our business,
financial condition, and results of operations will be materially
adversely affected.
We regularly engage in discussions with third parties regarding the
possible purchase of assets and operations that are strategic and
complementary to our existing operations or to explore new business
opportunities. As noted above, management has determined that
conditions exist that raise substantial doubt about our ability to
continue as a going concern due to defaults under our secured loan
agreements with third parties, margin deterioration and volatility,
and historic net losses and working capital deficits. A
‘going concern’ opinion could impair our ability to
finance our operations through the sale of equity, incurring debt,
or other financing alternatives. Our ability to continue as a going
concern will depend on sustained positive operating margins and
working capital to sustain operations, including the purchase of
crude oil and condensate and payments on our secured debt
agreements with third parties. If we are unable to achieve these
goals, our business would be jeopardized, and we may
have to seek protection under
bankruptcy laws. In such a case, the trading price of our
common stock and the value of an investment in our common stock
could significantly decrease, which could lead to holders of our
common stock losing their investment in our common stock in its
entirety.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
|
Property
|
|
Key Products
Handled
|
|
Operating Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
● Crude distillation
tower (15,000 bpd)
● Petroleum storage
tanks
● Loading and
unloading facilities
● Land (56
acres)
|
|
Crude
Oil
Refined
Products
|
|
LE
|
|
Nixon,
Texas
|
Capital Improvement Expansion Project. In the second quarter
of 2020, we safely completed a 5-year capital improvement expansion
project of the Nixon facility. The expansion project involved the
construction of nearly 1.0 million bbls of new petroleum storage
tanks, smaller efficiency improvements to the refinery, and
acquisition of refurbished refinery equipment for future
deployment. The increase in petroleum storage capacity has helped
with de-bottlenecking the Nixon refinery. In the future, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd while deployment of
various refurbished refinery equipment will help improve processing
capacity and increase the Nixon refinery’s complexity. The
total cost of the project, which was funded through the Veritex
loans, was approximately $32.5 million.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 38
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Management’s Discussion and Analysis
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Crude Oil and Condensate Supply. Operation of
the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate. We have a long-term crude
supply agreement in place with Pilot. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Effective
March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a
Pilot affiliate. Either party may terminate the crude supply
agreement by providing the other party 60 days prior written
notice. Pilot also stores crude oil at the Nixon facility under two
terminal services agreements. Under the terminal services
agreements, Pilot stores crude oil at the Nixon facility at a
specified rate per bbl of the storage tank’s shell capacity.
Although the initial term of the terminal services agreement
expired April 30, 2020, the agreement renewed on a one-year
evergreen basis. Either party may terminate the terminal services
agreement by providing the other party 60 days prior written
notice. However, the terminal services agreement will automatically
terminate upon expiration or termination of the crude supply
agreement.
Beginning
on June 1, 2020, Pilot began applying payment obligations owed to
us under the two terminal services agreements against our payment
obligations owed to Pilot under the Amended Pilot Line of Credit.
For the three and nine-month periods ended September 30, 2020, the
setoff amounts totaled $0.6 million and $0.8 million, respectively.
See ‘going concern’ within “Note (1)” to
our consolidated financial statements for additional disclosures
related to defaults in our debt obligations.
Our
financial health could be materially and adversely affected by
defaults in our secured loan agreements, margin deterioration and
volatility, historic net losses and working capital deficits, as
well as termination of the crude supply agreement or terminal
services agreement with Pilot, which could impact our ability to
acquire crude oil and condensate. In addition, sustained periods of
low crude oil prices due to market volatility associated with the
COVID-19 pandemic has resulted in significant financial constraints
on producers, which in turn has resulted in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations. During the three-
and nine-month periods ended September 30, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints.
Products and Markets. Our market is the Gulf Coast region of
the U.S., which is represented by the EIA as Petroleum
Administration for PADD 3. We sell our products primarily in
the U.S. within PADD 3. Occasionally, we sell refined products to
customers that export to Mexico.
The
Nixon refinery’s product slate is moderately adjusted based
on market demand. We currently produce a single finished product
– jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an
Affiliate, which is HUBZone certified. Our intermediate products
are primarily sold in nearby markets to wholesalers and refiners as
a feedstock for further blending and processing. See “Note
(3)” and “Note (16)” to our consolidated
financial statements for additional disclosures related to
Affiliates arrangements and transactions.
Customers. Customers
for our refined products include distributors, wholesalers and
refineries primarily in the lower portion of the Texas Triangle
(the Houston - San Antonio - Dallas/Fort Worth area). We have bulk
term contracts in place with most of our customers, including
month-to-month, six months, and up to one-year terms. Certain of
our contracts require our customers to prepay and us to sell fixed
quantities and/or minimum quantities of finished and intermediate
petroleum products. Many of these arrangements are subject to
periodic renegotiation on a forward-looking basis, which could
result in higher or lower relative prices on future sales of our
refined products. See “Note (5)” to our consolidated
financial statements for disclosures related to concentration of
risk associated with significant customers.
Competition. Many of our competitors are
substantially larger than us and are engaged on a national or
international level in many segments of the oil and gas industry,
including exploration and production, gathering and transportation,
and marketing. These competitors may have greater flexibility in
responding to or absorbing market changes occurring in one or more
of these business segments. We compete primarily based on cost. Due
to the low complexity of our simple “topping unit”
refinery, we can be relatively nimble in adjusting our refined
products slate because of changing commodity prices, market demand,
and refinery operating costs.
Safety and Downtime. Our
refinery operations are operated in a manner materially consistent
with industry safe practices and standards. These operations are
subject to regulations under OSHA, the EPA, and comparable state
and local requirements. Together, these regulations are designed
for personnel safety, process safety management, and risk
management, as well as to prevent or minimize the probability and
consequences of an accidental release of toxic, reactive,
flammable, or explosive chemicals. Storage tanks used for
refinery operations are designed for crude oil and condensate and
refined products, and most are equipped with appropriate controls
that minimize emissions and promote safety. Our refinery operations
have response and control plans, spill prevention and other
programs to respond to emergencies.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 39
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Management’s Discussion and Analysis
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The Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typical reason is excessive
heat or power outages from high winds and thunderstorms. Planned
turnarounds are used to repair, restore, refurbish, or
replace refinery equipment. Refineries typically undergo a major
turnaround every three to five years. Since the Nixon refinery was
placed back in service in 2012 (commonly referred to as
“recommissioning”), turnarounds are needed more
frequently for unanticipated maintenance or repairs.
We are particularly vulnerable to disruptions in our operations
because all our refining operations are conducted at a single
facility. Any scheduled or unscheduled downtime will result in lost
margin opportunity, potential increased maintenance expense, and a
reduction of refined products inventory, which could reduce our
ability to meet our payment obligations.
Tolling and Terminaling Operations
Our
tolling and terminaling segment consists of the following assets
and operations:
|
Property
|
|
Key Products
Handled
|
|
Operating Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
● Petroleum storage
tanks
● Loading and
unloading facilities
|
|
Crude
Oil
Refined
Products
|
|
LRM,
NPS
|
|
Nixon,
Texas
|
Capital Improvement Expansion Project. As previously noted,
we completed a 5-year capital improvement expansion project of the
Nixon facility in the second quarter of 2020. Tolling and
terminaling capital improvements primarily related to construction
of new petroleum storage tanks to significantly increase petroleum
storage capacity. Increased petroleum storage capacity will provide
an opportunity to generate additional tolling and terminaling
revenue.
Products and Customers. The
Nixon facility’s petroleum storage tanks and infrastructure
are primarily suited for crude oil and condensate and refined
products, such as naphtha, jet fuel, diesel, and fuel oil. Storage
customers are typically refiners in the lower portion of the
Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon
facility via pipeline or from third parties via truck. Contract
terms range from month-to-month to three years.
Operations Safety. Our tolling and terminal operations are
operated in a manner materially consistent with industry safe
practices and standards. These operations are subject to
regulations under OSHA and comparable state and local regulations.
Storage tanks used for terminal operations are designed for crude
oil and condensate and refined products, and most are equipped with
appropriate controls that minimize emissions and promote safety.
Our terminal operations have response and control plans, spill
prevention and other programs to respond to
emergencies.
Inactive Operations
We own
certain other pipeline and facilities assets and have leasehold
interests in oil and gas properties. These assets, which are shown
below and included in corporate and other, are not operational and
are fully impaired.
|
Property
|
|
Operating Subsidiary
|
|
|
Location
|
|
|
|
|
|
|
|
|
Freeport
facility
● Crude oil and
natural gas separation and dehydration
● Natural gas
processing, treating, and redelivery
● Vapor recovery
unit
● Two onshore
pipelines
● Land (162
acres)
|
|
BDPL
|
|
|
Freeport,
Texas
|
|
Offshore
Pipelines (Trunk Line and Lateral Lines)
|
|
BDPL
|
|
|
Gulf of
Mexico
|
|
Oil and
Gas Leasehold Interests
|
|
BDPC
|
|
|
Gulf of
Mexico
|
We
fully impaired our pipeline assets at December 31, 2016 and our oil
and gas properties at December 31, 2011. Our pipeline and oil and
gas properties had no revenue during the three and nine months
ended September 30, 2020 and 2019. See “Note (16)” to
our consolidated financial statements related to pipelines and
platform decommissioning requirements and related
risks.
Pipeline and Facilities Safety.
Although
our pipeline and facility assets are inactive, they require upkeep
and maintenance and are subject to safety regulations under OSHA,
PHMSA, BOEM, BSEE, and comparable state and local regulations. We
have response and control plans, spill prevention and other
programs to respond to emergencies related to these
assets.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 40
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Management’s Discussion and Analysis
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Results of Operations
A
discussion and analysis of the factors contributing to our
consolidated financial results of operations is presented below.
The financial statements, together with the following information,
are intended to provide investors with a reasonable basis for
assessing our historical operations, but they should not serve as
the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of
operations and liquidity are highly dependent upon the margins that
we receive for our refined products. The dollar per bbl price
difference between crude oil and condensate (input) and refined
products (output) is the most significant driver of refining
margins, and they have historically been subject to wide
fluctuations. Steps taken to address the COVID-19 pandemic globally
and nationally and the actions of members of the OPEC and other
producer countries with respect to oil production and pricing
significantly impacted supply and demand in global oil and gas
markets, causing oil prices to decline sharply, as well as other
changes to the economic outlook in the near term. Such developments
included, but are not limited to, government-imposed temporary
business closures and voluntary shelter-at-home directives as well
as developments in production discussions between global oil
producers, and the effect thereof. Oil prices as well as demand are
expected to continue to be volatile as a result of the near-term
over-supply and the ongoing COVID-19 pandemic as changes in oil
inventories, industry demand and global and national economic
performance are reported, and we cannot predict when prices and
demand will improve and stabilize. We are currently unable to
estimate the impact these events will have on our future financial
position and results of operations. Accordingly, we can provide no
assurances that these events will not continue to have a material
adverse effect on our financial position or results of
operations.
How We Evaluate Our Operations. Management uses certain
financial and operating measures to analyze segment performance.
These measures are significant factors in assessing our operating
results and profitability and include: segment contribution margin
(deficit), and refining gross profit (deficit) per bbl, tank rental
revenue, operation costs and expenses, refinery throughput and
production data, and refinery downtime. Segment contribution margin
(deficit) and refining gross profit (deficit) per bbl are non-GAAP
measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit
(Deficit) per Bbl
Segment
contribution margin (deficit) is used to evaluate both refinery
operations and tolling and terminaling while refining gross profit
(deficit) per bbl is a refinery operations benchmark. Both measures
supplement our financial information
presented in accordance with U.S. GAAP. Management uses these
non-GAAP measures to analyze our results of operations, assess
internal performance against budgeted and forecasted amounts, and
evaluate future impacts to our financial performance as a result of
capital investments. Non-GAAP measures have important limitations
as analytical tools. These non-GAAP measures, which are defined in
our glossary of terms, should not be considered a substitute for
GAAP financial measures. We believe these measures may help
investors, analysts, lenders, and ratings agencies analyze our
results of operations and liquidity in conjunction with our U.S.
GAAP results. See “Non-GAAP Reconciliations” within
this “Item 2.” and the financial statements within
“Item 1.” for a reconciliation of Non-GAAP measures to
U.S. GAAP.
Tank Rental Revenue
Tolling
and terminaling revenue primarily represents tank rental storage
fees associated with customer tank rental agreements. As a result,
tank rental revenue is one of the measures management uses to
evaluate the performance of our tolling and terminaling business
segment.
Operation Costs and Expenses
We
manage operating expenses in tandem with meeting environmental and
safety requirements and objectives and maintaining the integrity of
our assets. Operating expenses are comprised primarily of labor
expenses, repairs and other maintenance costs, and utility costs.
Expenses for refinery operations generally remain stable across
broad ranges of throughput volumes, but they can fluctuate from
period to period depending on the mix of activities performed
during that period and the timing of those expenses. Operation
costs for tolling and terminaling operations are relatively
fixed.
Refinery Throughput and Production Data
The
amount of revenue we generate from our refinery operations business
segment primarily depends on the volumes of crude oil and refined
products that we handle through our processing assets and the
volume sold to customers. These volumes are affected by the supply
and demand of, and demand for, crude oil and refined products in
the markets served directly or indirectly by our assets, as well as
refinery downtime.
Refinery Downtime
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Any scheduled or unscheduled downtime will
result in lost margin opportunity, potential increased maintenance
expense, and a reduction of refined products inventory, which could
reduce our ability to meet our payment obligations.
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 41
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Management’s Discussion and Analysis
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Consolidated Results.
Our consolidated results of operations include certain other
unallocated corporate activities and the elimination of
intercompany transactions and therefore do not equal the sum of the
operating results of our refinery operations and tolling and
terminaling business segments.
|
Three Months Ended September 30, 2020 Versus September 30, 2019 (Q3
2020 Versus Q3 2019)
Overview. Net loss for Q3 2020 was $4.7 million, or a loss
of $0.37 per share, compared to net income of $8.2 million, or
income of $0.74 per share, in Q3 2019. The increase in net loss was
the result of unfavorable margins per bbl and significantly lower
sales volume. The Q3 2019 included a gain on the extinguishment of
debt of $9.1 million.
Total Revenue from Operations. Total revenue from operations for Q3
2020 decreased $35.7 million, or 45%, to $42.9 million compared to
$78.6 million for Q3 2019. The significant decrease related to a
decline in refinery operations revenue as a result of lower
commodity pricing per bbl on refined products sold due to market
fluctuations associated with the COVID-19 pandemic and
significantly lower sales volumes in 2020. Tolling and terminaling
revenue decreased $0.1 million between the periods to $1.0
million.
Total Cost of Goods Sold. Total cost of goods sold was $44.4
million for Q3 2020 compared to $76.2 million for Q3 2019. The
$31.8 million decrease related to lower commodity prices per bbl
for crude oil and chemicals due to market fluctuations associated
with the COVID-19 pandemic and significant refinery downtime in
2020, which resulted in lower sales volumes.
Gross Profit (Deficit). Gross deficit was $1.5 million for Q3
2020 compared to a gross profit of $2.4 million for Q3 2019. The
significant decrease in gross profit between the periods primarily
related to lower margins per bbl due to market fluctuations
associated with the COVID-19 pandemic in 2020.
General and Administrative Expenses. General and administrative expenses
were relatively flat at $0.7 million for both Q3 2020 and Q3
2019.
Depletion, Depreciation and Amortization. Depletion, depreciation, and
amortization expenses for Q3 2020 totaled approximately $0.7
million compared to approximately $0.6 million in Q3 2019. The
nearly 9% increase primarily related to placing a petroleum storage
tank in service.
Total Other Income (Expense). Total
other expense in Q3 2020 was $1.6 million compared to total other
income of $7.2 million in Q3 2019, representing a decrease of $8.8
million. Total other expense in Q3 2020 primarily related to
interest expense associated with our secured loan agreements with
Veritex, related-party debt, and the line of credit with Pilot.
Total other income in Q3 2019 included a $9.1 million gain on the
extinguishment of debt related to the GEL Settlement, which was
offset by interest and other expense of $1.9
million.
|
|
|
Nine Months Ended September 30, 2020 Versus September 30, 2019 (9
Months 2020 Versus 9 Months 2019)
Overview. Net loss for 9 Months 2020 was $12.2 million, or a
loss of $0.98 per share, compared to net income of $5.6 million, or
income of $0.51 per share, in 9 Months 2019. The significant
increase in net loss was the result of unfavorable margins per bbl
and significantly lower sales volume. The 9 Months 2019 included a
gain on the extinguishment of debt of $9.1 million.
Total Revenue from Operations. Total revenue from operations for 9
Months 2020 decreased $102.5 million, or 45%, to $123.4 million
compared to $225.9 million for 9 Months 2019. The significant
decrease in refinery operations revenue was the result of lower
commodity pricing per bbl on refined products sold due to market
fluctuations associated with the COVID-19 pandemic and
significantly lower sales volumes in 2020. Tolling and terminaling
revenue remained relatively flat between the periods at
approximately $3.2 million.
Total Cost of Goods Sold. Total cost of goods sold was $126.2
million for 9 Months 2020 compared to $220.3 million for 9 Months
2019. The $94.1 million, or nearly 43%, decrease related to lower
commodity prices per bbl for crude oil and chemicals due to market
fluctuations associated with the COVID-19 pandemic and significant
refinery downtime in 2020, which resulted in lower sales
volumes.
Gross Profit (Deficit). Gross deficit was $2.8 million for 9
Months 2020 compared to gross profit of $5.6 million for 9 Months
2019. The significant decrease in gross profit between the periods
primarily related to lower margins per bbl due to market
fluctuations associated with the COVID-19 pandemic in
2020.
General and Administrative Expenses. General and administrative expenses
were relatively flat at approximately $1.9 million for 9 Months
2020 compared to 9 Months 2019.
Depletion, Depreciation and Amortization. Depletion, depreciation, and
amortization expenses for 9 Months 2020 totaled $2.0 million
compared to $1.9 million for 9 Months 2019. The 7% increase
primarily related to placing a petroleum storage tank in
service.
Total Other Expense. Total
other expense in 9 Months 2020 was $4.9 million compared to total
other income of $4.4 million in 9 Months 2019, representing a
decrease of $9.3 million. Total other expense in 9 Months 2020
primarily related to interest expense associated with our secured
loan agreements with Veritex, related-party debt, and the line of
credit with Pilot. Total other income in 9 Months 2019 included a
$9.1 million gain on the extinguishment of debt related to the GEL
Settlement, which was offset by interest and other expense of $4.7
million.
|
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 42
|
|
Management’s Discussion and Analysis
|
|
|
Refinery Operations. Our refinery operations business
segment is owned by LE. Assets within this segment consist of a
light sweet-crude, 15,000-bpd crude distillation tower, petroleum
storage tanks, loading and unloading facilities, and approximately
56 acres of land. Refinery operations revenue is derived from
refined product sales.
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
|
|
|
|
|
|
Refined
product sales
|
$41,929
|
$77,537
|
$120,185
|
$222,652
|
|
Less:
Total cost of goods sold
|
(44,400)
|
(76,229)
|
(126,164)
|
(220,301)
|
|
Gross
profit (deficit)
|
(2,471)
|
1,308
|
(5,979)
|
2,351
|
|
|
|
|
|
|
|
Sales
(Bbls)
|
1,021
|
1,181
|
2,818
|
3,314
|
|
|
|
|
|
|
|
Gross Profit (Deficit) per Bbl
|
$(2.42)
|
$1.11
|
$(2.12)
|
$0.71
|
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
Net revenue (1)
|
$41,929
|
$77,537
|
$120,185
|
$222,652
|
|
Intercompany
fees and sales
|
(595)
|
(668)
|
(1,618)
|
(1,927)
|
|
Operation
costs and expenses
|
(43,691)
|
(76,088)
|
(124,942)
|
(219,766)
|
|
Segment Contribution Margin (Deficit)
|
$(2,357)
|
$781
|
$(6,375)
|
$959
|
(1)
Net revenue
excludes intercompany crude sales.
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
|
|
|
|
|
Calendar
|
92
|
92
|
274
|
273
|
|
Operating
|
(81)
|
(90)
|
(237)
|
(253)
|
|
Refinery Downtime (Days)
|
11
|
2
|
37
|
20
|
|
|
|
|
|
|
|
Refinery Throughput
|
|
|
|
|
|
bpd
|
11,407
|
13,312
|
12,178
|
13,357
|
|
bbls
|
923,930
|
1,198,102
|
2,886,073
|
3,379,266
|
|
Capacity
utilization rate
|
76.0%
|
88.7%
|
81.2%
|
89.0%
|
|
|
|
|
|
|
|
Refinery Production
|
|
|
|
|
|
bpd
|
11,144
|
12,997
|
11,885
|
13,023
|
|
bbls
|
902,641
|
1,169,745
|
2,816,746
|
3,294,914
|
|
Capacity
utilization rate
|
74.3%
|
86.6%
|
79.2%
|
86.8%
|
Q3 2020 Versus Q3 2019
●
Refining gross
deficit per bbl was $2.42 for Q3 2020 compared to a gross profit
per bbl of $1.11 in Q3 2019, representing a decrease of $3.53 per
bbl. The significant
decrease related to lower margins due to market fluctuations
associated with the COVID-19 pandemic and significant refinery
downtime in 2020.
●
Segment
contribution margin decreased approximately $3.1 million to a
deficit of $2.3 million in Q3 2020 compared to profit of $0.8
million in Q3 2019. The decrease related to lower margins per bbl
due to market fluctuations associated with the COVID-19 pandemic
and lower sales volume in 2020.
●
Refinery downtime
increased significantly to 11 days in Q3 2020 compared to 2 days in
Q3 2019. Refinery downtime in 2020 related to a maintenance
turnaround, lack of crude due to cash constraints, and an equipment
repair while refinery downtime in Q3 2019 primarily related to
equipment repairs. Significant refinery downtime in Q3 2020
negatively impacted refinery throughput, refinery production, and
capacity utilization rate.
9 Months 2020 Versus 9 Months 2019
●
Refining gross
deficit per bbl was $2.12 for 9 Months 2020 compared to gross
profit per bbl of $0.71 in 9 Months 2019, representing a decrease
of $2.83 per bbl. The
significant decrease related to lower margins due to market
fluctuations associated with the COVID-19 pandemic and significant
refinery downtime in 2020.
●
Segment
contribution margin decreased approximately $7.3 million to a loss
of $6.3 million in 9 Months 2020 compared to profit of $1.0 million
in 9 Months 2019. The significant decrease related to lower margins
per bbl due to market fluctuations associated with the COVID-19
pandemic and lower sales volume in 2020.
Refinery
downtime increased significantly to 37 days in 9 Months 2020
compared to 20 days in 9 Months 2019. Refinery downtime in 2020
related to a maintenance turnaround, lack of crude due to cash
constraints, and an equipment repair, while 2019 downtime related
to a maintenance turnaround and equipment repairs. Significant
refinery downtime in 9 Months 2020 negatively impacted refinery
throughput, refinery production, and capacity utilization
rate.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 43
|
|
Management’s Discussion and Analysis
|
|
|
Tolling and Terminaling. Our tolling and terminaling
business segment is owned by LRM and NPS. Assets within this
segment include petroleum storage tanks and loading and unloading
facilities. Tolling and terminaling revenue is derived from tank
storage rental fees, tolling and reservation fees for use of the
naphtha stabilizer, and fees collected for ancillary services, such
as in-tank blending.
|
|
Three Months Ended
|
Nine Months Ended
|
||
|
|
September 30,
|
September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
Net revenue (1)
|
$1,001
|
$1,096
|
$3,214
|
$3,253
|
|
Intercompany
fees and sales
|
595
|
668
|
1,618
|
1,927
|
|
Operation
costs and expenses
|
(709)
|
(285)
|
(1,222)
|
(1,012)
|
|
Segment Contribution Margin (Deficit)
|
$887
|
$1,479
|
$3,610
|
$4,168
|
(1)
Net revenue
excludes intercompany crude sales.
Q3 2020 Versus Q3 2019
●
Tolling and
terminaling net revenue decreased nearly 9% in Q3 2020 compared to
Q3 2019 primarily as a result of decreased fees collected for
ancillary services, such
as in-tank and tank-to-tank blending.
●
Intercompany fees
and sales, which reflect fees associated with an intercompany
tolling agreement tied to naphtha volumes, decreased in Q3 2020
compared to Q3 2019. Naphtha sales volumes decreased between the
periods.
●
Segment
contribution margin in Q3 2020 decreased nearly 40% to
approximately $0.9 million compared to approximately $1.5 million
Q3 2019. The decrease related to lower intercompany fees and sales
tied to naphtha.
9 Months 2020 Versus 9 Months 2019
●
Tolling and
terminaling net revenue decreased 1% in 9 Months 2020 compared to 9
Months 2019 primarily as a result of decreased fees collected for
ancillary services.
●
Intercompany fees
and sales decreased in 9 Months 2020 compared to 9 Months 2019 as a
result of lower naphtha sales volumes.
●
Segment
contribution margin decreased $0.6 million, or 13%, between the
periods. The decrease related to lower intercompany fees and sales
tied to naphtha as well as decreased fees associated with ancillary
services.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 44
|
|
Management’s Discussion and Analysis
|
|
|
Non-GAAP Reconciliations.
|
Reconciliation of Segment Contribution Margin
(Deficit)
|
|
|
|
Three
Months Ended September 30,
|
|||||||
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
|
Refinery Operations
|
Tolling and Terminaling
|
Corporate and Other
|
Total
|
|
|||
|
|
(in
thousands)
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Segment
contribution margin
|
$(2,357)
|
$781
|
$887
|
$1,479
|
$(58)
|
$(52)
|
$(1,528)
|
$2,208
|
|
General and administrative
expenses(1)
|
(414)
|
(292)
|
(132)
|
(68)
|
(307)
|
(295)
|
$(853)
|
$(655)
|
|
Depreciation
and amortization
|
(301)
|
(481)
|
(338)
|
(99)
|
(51)
|
(52)
|
$(690)
|
$(632)
|
|
Interest
and other non-operating income (expenses), net
|
(679)
|
8,329
|
(599)
|
(824)
|
(304)
|
(259)
|
$(1,582)
|
$7,246
|
|
Income
(loss) before income taxes
|
(3,751)
|
8,337
|
(182)
|
488
|
(720)
|
(658)
|
(4,653)
|
8,167
|
|
Income
tax benefit
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Income (loss) before income taxes
|
$(3,751)
|
$8,337
|
$(182)
|
$488
|
$(720)
|
$(658)
|
$(4,653)
|
$8,167
|
|
|
Nine
Months September June 30,
|
|||||||
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
|
Refinery Operations
|
Tolling and Terminaling
|
Corporate and Other
|
Total
|
|
|||
|
|
(in
thousands)
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Segment
contribution margin
|
$(6,375)
|
$959
|
$3,610
|
$4,168
|
$(164)
|
$(165)
|
$(2,929)
|
$4,962
|
|
General and administrative
expenses(1)
|
(1,045)
|
(898)
|
(268)
|
(173)
|
(1,052)
|
(833)
|
$(2,365)
|
$(1,904)
|
|
Depreciation
and amortization
|
(883)
|
(1,429)
|
(956)
|
(297)
|
(153)
|
(129)
|
$(1,992)
|
$(1,855)
|
|
Interest
and other non-operating income (expenses), net
|
(2,171)
|
6,723
|
(1,985)
|
(1,599)
|
(778)
|
(712)
|
$(4,934)
|
$4,412
|
|
Income
(loss) before income taxes
|
(10,474)
|
5,355
|
401
|
2,099
|
(2,147)
|
(1,839)
|
(12,220)
|
5,615
|
|
Income
tax benefit
|
-
|
-
|
-
|
-
|
(15)
|
-
|
(15)
|
-
|
|
Income (loss) before income taxes
|
$(10,474)
|
$5,355
|
$401
|
$2,099
|
$(2,162)
|
$(1,839)
|
$(12,235)
|
$5,615
|
(1)
General and
administrative expenses within refinery operations include the LEH
operating fee.
Remainder
of Page Intentionally Left Blank
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 45
|
|
Management’s Discussion and Analysis
|
|
|
Capital Resources and Liquidity
Considering this period of extreme economic disruption,
combined with the weaker commodity price environment, we remain
focused on the safe and reliable operation of the Nixon facility
and cash conservation. Our primary cash requirements relate to: (i)
purchasing crude oil and condensate for the operation of the Nixon
refinery, (ii) reimbursing LEH for direct operating expenses and
paying the LEH operating fee under the Amended and Restated
Operating Agreement and (iii) servicing debt. In instances where we
experience a working capital deficit, we have historically relied
on Affiliates to meet our liquidity needs. While we believe that we
can fund our operations through revenue from operations and
Affiliate financing, we may not be able to, among other things, (i)
maintain our current general and administrative spending levels;
(ii) fund certain obligations as they become due; and (iii) respond
to competitive pressures or unanticipated capital
requirements. We cannot
provide any assurance that financing will be available to us in the
future on acceptable terms.
We had
a working capital deficit of $70.6 million and $59.4 million at
September 30, 2020 and December 31, 2019, respectively. Excluding
the current portion of long-term debt, we had a working capital
deficit of $24.8 million and $19.6 million at September 30, 2020
and December 31, 2019, respectively. During the three and nine-month periods ended
September 30, 2020, we received two small loans totaling $0.3
million in the aggregate under federal or other governmental
programs to support our operations as a result of the COVID-19
pandemic.
The future impact that COVID-19 will have on our business, cash
flows, sources of liquidity, financial condition and results of
operations will depend on future developments, including, among
other things, volatility in the global capital markets, the
ultimate geographic spread and severity of the virus, the
consequences of governmental and other measures designed to prevent
the spread of the virus, the development of effective treatments,
the duration of the outbreak, actions taken by governmental
authorities, customers, suppliers and other third parties,
workforce availability, and the timing and extent to which normal
economic and operating conditions resume. A sustained period
of low crude oil prices due to market volatility associated with
the COVID-19 pandemic may also result in significant financial
constraints on producers, which could result in long term crude oil
supply constraints and increased transportation costs. A failure to
acquire crude oil and condensate when needed will have a material
effect on our business results and operations. As a result, we may
have to seek protection under
bankruptcy laws. In such a case, the trading price of our
common stock and the value of an investment in our common stock
could significantly decrease, which could lead to holders of our
common stock losing their investment in our common stock in its
entirety.
Debt Overview.
|
Total Debt
|
|
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
$22,424
|
$21,776
|
|
LRM Term Loan Due 2034 (in
default)
|
9,299
|
9,031
|
|
Amended Pilot Line of Credit (in
default)
|
9,724
|
11,786
|
|
Notre Dame Debt (in
default)
|
9,214
|
8,617
|
|
Related-Party
Debt
|
|
|
|
BDPL Loan Agreement (in
default)
|
6,654
|
6,174
|
|
March Ingleside Note (in
default)
|
1,067
|
1,004
|
|
March Carroll Note (in
default)
|
1,373
|
997
|
|
June LEH Note (in
default)
|
5,733
|
-
|
|
LE
Term Loan Due 2050
|
150
|
-
|
|
NPS
Term Loan Due 2050
|
150
|
-
|
|
Total
Debt
|
65,788
|
59,385
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(55,438)
|
(51,301)
|
|
Less:
Unamortized debt issue costs
|
(1,781)
|
(2,096)
|
|
Less: Accrued interest payable (in
default)
|
(8,269)
|
(5,988)
|
|
|
$300
|
$-
|
Net
cash provided by financing activities was $3.5 million in 9 Months
2020 compared to $11.3 million in 9 Months 2019. Net proceeds from
the issuance of debt was $0.3 million in 9 Months 2020 compared to
$12.4 million in 9 Months 2019.
Principal
payments on long-term debt totaled $0.9 million in Q3 2020 compared
to $0.8 million in Q3 2019. Principal payments on long-term debt
totaled $2.4 million in 9 Months 2020 compared to $1.3 million in 9
Months 2019. As of the filing date of this report, we are current
on required monthly payments under our secured loan agreements with
Veritex, but other defaults remain outstanding as noted below. No
payments have been made under the subordinated Notre Dame
Debt.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 46
|
|
Management’s Discussion and Analysis
|
|
|
Debt Defaults. The majority of our debt is in default.
Defaults under our secured loan agreements with third parties
include Veritex financial covenant violations, a Pilot event of
default and debt acceleration, and a Notre Dame Debt event of
default. We also have defaults under secured and unsecured
related-party debt. See Going Concern within this
Management’s Discussion and Analysis section, as well as
“Note (1),” “Note (3),” “Note
(10),” and “Note (11)” to our consolidated
financial statements for additional disclosures related to
Affiliate and third-party debt agreements, including debt
guarantees, and defaults in our debt obligations.
Concentration of Customers. Our operations have a
concentration of customers who are refined petroleum product
wholesalers. This concentration of customers may impact our overall
exposure to credit risk, either positively or negatively, in that
these customers may be similarly affected by changes in economic or
other conditions including the uncertainties concerning COVID-19
and volatility in the global oil markets. Historically, we have not
had any significant problems collecting our accounts
receivable.
Contractual Obligations.
Related-Party
|
Agreement/Transaction
|
Parties
|
Type
|
Effective Date
|
Interest Rate
|
Key Terms
|
|
Amended
and Restated Guaranty Fee
Agreement
|
Jonathan
Carroll - LE
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Amended
and Restated Guaranty Fee
Agreement
|
Jonathan
Carroll - LRM
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
March
Carroll Note (in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; matured 01/01/2019; interest still
accruing
|
|
March
Ingleside Note (in
default)
|
Ingleside
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Ingleside under
previous Amended and Restated Tank Lease Agreement; matured
01/01/2019; interest still accruing
|
|
June
LEH Note (in
default)
|
LEH
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under the
Amended and Restated Operating Agreement; reflects amounts owed to
Jonathan Carroll under guaranty fee agreements; matured 01/01/2019;
interest still accruing
|
|
BDPL-LEH
Loan Agreement (in
default)
|
LEH -
BDPL
|
Debt
|
08/15/2016
|
16.00%
|
2-year
term; $4.0 million principal amount; $0.5 million annual payment;
proceeds used for working capital; no financial maintenance
covenants; secured by certain BDPL property
|
Third-Party Debt
|
Loan Description
|
Parties
|
Original Principal Amount
(in millions)
|
Maturity Date
|
Monthly Principal and Interest Payment
|
Interest Rate
|
Loan Purpose
|
|
Veritex
Loans(1)
|
|
|
|
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
LE-Veritex
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ
Prime + 2.75%
|
Refinance
loan; capital improvements
|
|
LRM
Term Loan Due 2034
(in default)
|
LRM-Veritex
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ
Prime + 2.75%
|
Refinance
bridge loan; capital improvements
|
|
Notre
Dame Debt (in
default)(2)(3)
|
LE-Kissick
|
$11.7
|
Jan
2018
|
No
payments to date; payment rights subordinated
|
16.00%
|
Working
capital; reduced balance of GEL Final Arbitration
Award
|
|
Amended
Pilot Line of Credit
(in default)
|
NPS-Pilot
|
$13.0
|
May
2020
|
---
|
14.00%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
|
SBA
EIDLs
|
|
|
|
|
|
|
|
LE Term
Loan Due 2050(4)
|
LE-SBA
|
$0.15
|
Aug
2050
|
$0.0007
million
|
3.75%
|
Working
capital
|
|
NPS
Term Loan Due 2050(4)
|
NPS-SBA
|
$0.15
|
Aug
2050
|
$0.0007
million
|
3.75%
|
Working
capital
|
(1)
Proceeds were
placed in a disbursement account whereby Veritex makes payments for
construction related expenses. Amounts held in the disbursement
account are reflected on our consolidated balance sheets as
restricted cash (current portion) and restricted cash, noncurrent.
At September 30, 2020, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.5 million. At
December 31, 2019, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.6
million.
(2)
LE originally
entered into a loan agreement with Notre Dame Investors, Inc. in
the principal amount of $8.0 million. The debt is currently held by
John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame
Debt was amended to increase the principal amount by $3.7 million;
the additional principal was used to reduce the GEL Final
Arbitration Award by $3.6 million.
(3)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their 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 LE Term Loan Due
2034.
(4)
Payments are
deferred for the first twelve (12) months of the loan; interest
accrues during the deferral period. SBA EIDLs are not
forgivable.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 47
|
|
Management’s Discussion and Analysis
|
|
|
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
To
cover the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms at the end of production or
service activities. Once plugging and abandonment work has been
completed, the collateral backing the financial assurance is
released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. See “Note (16) –
BSEE Offshore Pipelines and Platform
Decommissioning”.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of September 30, 2020. At both September 30, 2020
and December 31, 2019, BDPL maintained approximately $0.9 million
in credit and cash-backed pipeline rights-of-way bonds issued to
BOEM.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL
has pipelines and platform assets that are subject to BSEE’s
idle iron regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101. Management met with BSEE on August
15, 2019 to address BDPL’s plans with respect to
decommissioning its offshore pipelines and platform assets. BSEE
proposed that BDPL re-submit permit applications for pipeline and
platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020),
and develop and implement a safe boarding plan for submission with
such permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within twelve (12) months (no later than
August 15, 2020). BDPL timely submitted permit applications
for decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. Decommissioning of the offshore pipelines and platform assets
is on hold due to financial constraints associated with COVID-19.
We are also awaiting approval of regulatory permits on certain
segments and/or fairways, which approvals are required prior to
work commencement. We cannot currently estimate when
decommissioning may occur.
In
April 2020, BSEE issued another INC to BDPL for failure to perform
the required structural surveys for the GA-288C Platform. BDPL
requested an extension to the INC related to the structural
platform surveys, and BSEE approved BDPL’s extension request.
The required platform surveys were completed, and the INC was
resolved in June 2020.
Lack of
permit approvals does not relieve BDPL of its obligations to remedy
the BSEE INCs or of BSEE’s authority to impose financial
penalties. If BDPL fails to complete decommissioning of the
offshore pipelines and platform assets and/or remedy the INCs
within a timeframe determined to be prudent by BSEE, BDPL could be
subject to regulatory oversight and enforcement, including but not
limited to failure to correct an INC, civil penalties, and
revocation of BDPL’s operator designation, which could have a
material adverse effect on our earnings, cash flows and
liquidity.
We are
currently unable to predict the outcome of the BSEE INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of September 30, 2020. At September 30, 2020 and
December 31, 2019, BDPL maintained $2.4 million and $2.6 million,
respectively, in AROs related to abandonment of these
assets.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 48
|
|
Management’s Discussion and Analysis
|
|
|
Sources and Use of
Cash.
|
Components of Cash Flows
|
|
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
|
(in
thousands)
|
|||
|
Cash Flows Provided By (Used In):
|
||||
|
Operating
activities
|
$1,878
|
$832
|
$(2,196)
|
$(10,335)
|
|
Investing
activities
|
(177)
|
(964)
|
(1,085)
|
(1,458)
|
|
Financing
activities
|
(1,463)
|
(655)
|
3,451
|
11,308
|
|
Increase
(Decrease) in Cash and Cash Equivalents
|
$238
|
$(787)
|
$170
|
$(485)
|
Cash Flow 2020 Compared to 2019
We had
cash flow from operations of approximately $1.8 million for Q3 2020
compared to cash flow of approximately $0.8 million for Q3 2019.
The approximate $1.0 million increase in cash flow from operations
between the periods related to a decline in inventory levels and
increases in accounts payable. The cash flow deficit for 9 Months
2020 primarily related to loss from operations. The cash flow
deficit from operations for 9 Months 2019 was primarily the result
of payments toward the accrued arbitration award with
GEL.
2020 Capital Expenditures
During
Q3 2020, capital expenditures totaled $0.2 million compared to $1.0
million during Q3 2019. During 9 Months 2020, capital expenditures
totaled $1.1 million compared to $1.5 million during 9 Months 2019.
Expenditures during 9 Months 2020 primarily related
to:
●
Completion of Nixon
Facility Expansion Project – We completed a 5-year expansion
project involving the construction of nearly 1.0 million bbls of
new petroleum storage tanks, smaller efficiency improvements to the
refinery, and acquisition of refurbished refinery equipment for
future deployment. The increase in petroleum storage capacity has
helped with de-bottlenecking the Nixon refinery. In the future,
additional petroleum storage capacity will allow for increased
refinery throughput of up to approximately 30,000 bpd while
deployment of various refurbished refinery equipment will help
improve processing capacity and increase the Nixon refinery’s
complexity. The total cost of the project, which was funded through
the Veritex loans, was approximately $32.5 million.
●
Maintenance
Turnaround and Repairs – We completed a 13-day, planned
maintenance turnaround that primarily involved replacing a key
component of the crude heater. We also made equipment repairs.
These costs were expensed as maintenance and repair.
We
account for our capital expenditures in accordance with GAAP. We
also classify capital expenditures as ‘maintenance’ if
it maintains capacity or throughput or as ‘expansion’
if it increases capacity or throughput capabilities. Although
classification is generally a straightforward process, in certain
circumstances the determination is a matter of management judgment
and discretion.
We
budget for maintenance capital expenditures throughout the year on
a project-by-project basis. Projects are determined based on
maintaining safe and efficient operations, meeting customer needs,
complying with operating policies and applicable law, and producing
economic benefits, such as increasing efficiency and/or lowering
future expenses.
Future Expected Capital Expenditures
We
remain focused on the safe and reliable operation of the Nixon
facility. In view of the uncertainty surrounding the COVID-19
pandemic, combined with the weaker commodity price environment, we
anticipate new capital expenditures to be minimal over the next
twelve (12) months. However, capital spending using remaining funds
under a loan from Veritex will continue until the funds are
depleted. Unused amounts under the Veritex loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets. See “Note (10)” to our
consolidated financial statements for additional disclosures
related to borrowings for capital spending.
Off-Balance Sheet Arrangements. None.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 49
|
|
Management’s Discussion and Analysis and Internal
Controls
|
|
|
Accounting
Standards.
Critical Accounting Policies and Estimates
Our
significant accounting policies and recent accounting developments
are described in “Note (2)” to our consolidated
financial statements. The ongoing COVID-19 pandemic and certain
developments in the global oil markets have impacted and continue
to impact our business. Our business was designated as an essential
business and, as such, has remained open. We have instituted
various initiatives throughout the company as part of our business
continuity programs, and we are working to mitigate risk when
disruptions occur. The uncertainty around the availability and
prices of crude oil, the prices and demand for our refined
products, and the general business environment is expected to
continue through the remainder of the year and beyond. Given
diminished expectations for the global economy, and speculation
regarding a prolonged slowdown and recession, we are unable to
predict the ultimate economic impact of COVID-19 on our
business.
The
nature of our business requires that we make estimates and
assumptions in accordance with U.S. GAAP. These estimates and
assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. The ongoing
COVID-19 pandemic has impacted these estimates and assumptions and
will continue to do so.
We
assessed certain accounting matters that generally require
consideration of forecasted financial information in context with
the information reasonably available to us and the unknown future
impacts of COVID-19 as of September 30, 2020 and through the filing
date of this report. The accounting matters assessed included, but
were not limited to, our allowance for doubtful accounts, inventory
and related reserves, and the carrying value of long-lived
assets.
New Accounting Standards and Disclosures
New
accounting standards and disclosures are discussed in “Note
(2)” to our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under
the supervision of, and with the participation of our management,
including our Chief Executive Officer (principal executive officer
and principal financial officer), we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). As previously
reported in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2019, based on our evaluation, our Chief
Executive Officer (principal executive officer, principal financial
officer, and principal accounting officer) concluded that our
disclosure controls and procedures were ineffective due to certain material weaknesses and/or
significant deficiencies as described below:
|
●
|
Significant deficiency – There is currently not a process in
place for formal review of manual journal entries.
|
|
●
|
Material weakness – The company currently lacks resources to
handle complex accounting transactions. This can result in errors
related to the recording, disclosure and presentation of
consolidated financial information in quarterly, annual, and other
filings.
|
These
disclosure controls and procedures remained ineffective as of the
end of the period covered by this Quarterly Report. Management
continues to evaluate internal processes to take corrective
actions. Corrective actions may include implementing formal policies, improving processes,
documenting procedures, and better defining segregation of duties
to improve financial reporting. These actions will be subject to
ongoing senior management review, as well as Audit Committee
oversight. Although we plan to complete remediation efforts as
quickly as possible, we cannot at this time estimate how long it
will take, and our initiatives may not prove to be successful in
fully remediating the identified weakness and
deficiency.
Changes in Internal Control over Financial Reporting
There
have been no change in our internal control over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the three and nine months ended
September 30, 2020 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting. See the above section “Evaluation of Disclosure
Controls and Procedures” for a discussion related to current
ineffective disclosure controls and procedures.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 50
|
|
Legal Proceedings
|
|
|
PART II
ITEM 1. LEGAL PROCEEDINGS
BOEM Additional Financial Assurance (Supplemental Pipeline
Bonds)
To
cover the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms at the end of production or
service activities. Once plugging and abandonment work has been
completed, the collateral backing the financial assurance is
released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. See “Note (16) –
BSEE Offshore Pipelines and Platform
Decommissioning”.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are
currently unable to predict the outcome of the BOEM INCs.
Accordingly, we have not recorded a liability on our consolidated
balance sheet as of September 30, 2020. At both September 30, 2020
and December 31, 2019, BDPL maintained approximately $0.9 million
in credit and cash-backed pipeline rights-of-way bonds issued to
BOEM.
Resolved - GEL Settlement
As
previously disclosed, GEL was awarded the GEL Final Arbitration
Award in the aggregate amount of $31.3 million. In July 2018, the
Lazarus Parties and GEL entered into the GEL Settlement Agreement.
The GEL Settlement Agreement was subsequently amended five (5)
times to extend the GEL Settlement Payment Date and/or modify
certain terms related to the GEL Interim Payments or the GEL
Settlement Payment. During the period September 2017 to August
2019, GEL received the following amounts from the Lazarus Parties
to reduce the outstanding balance of the GEL Final Arbitration
Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed the stipulation of dismissal of claims against LE,
and (iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At both September 30,
2020 and December 31, 2019, accrued arbitration award payable was
$0.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 51
|
|
Legal Proceedings (Continued) and Risk Factors
|
|
Other Legal Matters
From
time to time, we are involved in legal matters incidental to the
routine operation of our business. Such legal matters include
mechanic’s liens, contract-related disputes, and
administrative proceedings. As of the filing date of this report,
we were involved in a contract-related dispute with a
counter-party. Management is working to resolve the dispute
amicably, however, the potential outcome is unknown. Management
does not believe that the contract-related dispute or other matters
will have a material adverse effect on our financial position,
earnings, or cash flows. However, there can be no assurance that
management's efforts will result in a manageable outcome. If
Veritex and/or Pilot exercise their rights and remedies due to
defaults under our secured loan agreements, our business, financial
condition, and results of operations will be materially adversely
affected.
In
addition to the other information set forth in this Quarterly
Report, careful consideration should be given to the risk factors
discussed under “Part I, Item 1A. Risk Factors” and
elsewhere in our Annual Report for the fiscal year ended December
31, 2019 and our Quarterly Reports for the three month periods
ended March 31, 2020 and June 30, 2020 as filed with the SEC. These
risks and uncertainties could materially and adversely affect our
business, financial condition and results of operations. Our
operations could also be affected by additional factors that are
not presently known to us or by factors that we currently consider
immaterial to our business. Except as noted below, there have been
no material changes in our assessment of our risk factors from
those set forth in our Annual Report for the fiscal year ended
December 31, 2019, as well as our Quarterly Reports for the three
month periods ended March 31, 2020 and June 30, 2020.
The ongoing COVID-19 pandemic, and actions taken in response
thereto, as well as certain developments in the global oil markets
have had, and will likely continue to have, material adverse
consequences for general economic, financial and business
conditions, and could materially and adversely affect our business,
financial condition, results of operations and cash flows and those
of our customers and suppliers.
The
ongoing COVID-19 pandemic, and actions taken in response thereto,
have resulted in significant economic disruption globally,
including in the United States. Governmental authorities around the
world have taken actions, such as stay-at-home orders and other
social distancing measures, to prevent the spread of COVID-19.
These measures have resulted in significant business and
operational disruptions, including demand destruction, business
closures, liquidity strains, supply chain challenges, travel
restrictions, controls on in-person gathering, and limitations on
workforce availability. In some countries, including the U.S.,
recent increases in COVID-19 cases have renewed fears of a second
wave of COVID-19. As a result, some countries have reinstated
government-imposed restrictions, although to a much lesser extent
than in March and April 2020, in order to stem the spread of the
virus. Heightened levels of uncertainty have renewed downward
pressure on crude oil and other commodity prices, and supply and
demand are expected to remain volatile into 2021.
Concerns
over the negative effects of COVID-19 on economic and business
prospects across the world have contributed to increased market and
oil price volatility and have diminished expectations for the
global economy. These factors, coupled with the emergence of
decreasing business and consumer confidence and increasing
unemployment resulting from the COVID-19 outbreak and the recent
abrupt oil price decline, may precipitate a prolonged economic
slowdown and recession. Our refinery utilization and operating
margins and other aspects of our business have been adversely
impacted by these developments. Any such prolonged period of
economic slowdown or recession, or a protracted period of depressed
prices for crude oil and our refined products or reduced margins
for the refined products we produce and sell could have significant
adverse consequences for our financial condition and the financial
condition of our customers and suppliers, and could diminish our
liquidity and negatively affect our ability to obtain adequate
crude oil volumes and to market certain of our products at
favorable prices, or at all.
Due to
declines in the market prices of products held in our inventories,
in future periods we may record an inventory write-down to cost of
goods sold to value certain of our inventories at the lower of cost
or market, which charge may be material. This expected inventory
valuation write-down will have a negative effect on our earnings.
Depending on future movements of refined product prices, future
inventory valuation adjustments could have a negative or positive
effect on our financial performance. In addition, a sustained
period of low crude oil prices may also result in significant
financial constraints on our crude oil supplier, which could result
in long term crude oil supply constraints and higher transportation
costs for our business. Such conditions could also result in an
increased risk that our customers may be unable to fully fulfill
their obligations in a timely manner, or at all. Any of the
foregoing events or conditions, or other unforeseen consequences of
COVID-19, could significantly adversely affect our business and
financial condition and the business and financial condition of our
customers.
The
future impact that COVID-19 will have on our business, results of
operations, financial condition, cash flows, and stock price will
depend on future developments, including, among others, volatility
in the global capital markets, the ultimate geographic spread and
severity of the virus, the consequences of governmental and other
measures designed to prevent the spread of the virus, the
development of effective treatments, the duration of the outbreak,
actions taken by governmental authorities, customers, suppliers and
other third parties, workforce availability, and the timing and
extent to which normal economic and operating conditions resume. A
sustained period of low crude oil prices due to market volatility
associated with the COVID-19 pandemic may also result in
significant financial constraints on producers, which could result
in long term crude oil supply constraints and increased
transportation costs. A failure to acquire crude oil and condensate
when needed will have a material effect on our business results and
operations.
|
Blue
Dolphin Energy Company
|
|
September 30, 2020 │Page 52
|
|
Unregistered Sales of Equity Securities and Exhibits
|
|
|
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See
“Part I, Item. 1. Financial Statements – Note
(10)” and “Note (11)” for disclosures related to
defaults on our debt.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM 5.
OTHER INFORMATION
SBA EIDLs
On August 29, 2020, LE and NPS executed the standard loan documents
required to secure an EIDL through the SBA for COVID-19 pandemic
relief. The principal amount of the loans is $0.3 million in the
aggregate. Proceeds were used for working capital purposes.
Interest on each loan accrues at the rate of 3.75% per annum and
will accrue from the date of loans. Installment payments, including
principal and interest, total $.001 million per month in the
aggregate and are due beginning twelve (12) months from the date of
the loans. The balance of principal and interest is payable over a
30-year term. SBA EIDLs are not forgivable.
ITEM 6. EXHIBITS
Exhibits Index
|
No.
|
Description
|
|
|
|
|
Loan
Authorization and Agreement between Nixon Product Storage, LLC and
the Small Business Administration dated August 29,
2020.
|
|
|
Loan
Authorization and Agreement between Lazarus Energy, LLC and the
Small Business Administration dated August 29, 2020.
|
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31.1*
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Jonathan
P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
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32.1*
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Jonathan
P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
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101.INS*
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XBRL
Instance Document.
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101.SCH*
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XBRL
Taxonomy Schema Document.
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101.CAL*
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XBRL
Calculation Linkbase Document.
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101.LAB*
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XBRL
Label Linkbase Document.
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101.PRE*
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XBRL
Presentation Linkbase Document.
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101.DEF*
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XBRL
Definition Linkbase Document.
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*
Filed
herewith
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 53
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Signature Page
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SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
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BLUE DOLPHIN ENERGY COMPANY
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(Registrant)
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November
16, 2020
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By:
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/s/
JONATHAN P. CARROLL
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Jonathan
P. Carroll
Chief
Executive Officer, President,
Assistant
Treasurer and Secretary
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
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Blue
Dolphin Energy Company
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September 30, 2020 │Page 54
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