BLUE DOLPHIN ENERGY CO - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2023

or

For the transition period from             to______

Commission File No. 0-15905

713-568-4725

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  None 

Securities registered pursuant to Section 12(b) of the Act:

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.

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 14, 2023: 14,921,968

TABLE OF CONTENTS

Glossary of Terms

Throughout this Quarterly Report on Form 10-Q, we have used the following terms:

Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH owned approximately 83% of the Common Stock as of the filing date of this report.

AMT. Alternative Minimum Tax.

ARO.  Asset retirement obligations.

Assignment Agreement.  Pursuant to an Assignment Agreement effective between LEH, Ingleside, and Lazarus Capital, the March Carroll Note and March Ingleside Note were assigned to LEH under the June LEH Note effective December 31, 2022.

ASU.  Accounting Standards Update.

AGO.  Atmospheric gas oil (also known as atmospheric tower bottoms) is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.

bbl. Barrel; a unit of volume equal to 42 U.S. gallons.

BDPC.  Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue Dolphin.

BDPL.  Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue Dolphin.

BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016, between BDPL and LEH in the original principal amount of $4.0 million; interest accrues at 16.00% annually; guaranteed by certain BDPL property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; matured August 2018; as of the filing date of this report, in forbearance related to past defaults pursuant to the LEH Forbearance Agreement.

BDSC.  Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.

BDSC-LEH Amended Office Space Agreement.  Office sublease agreement in Houston, Texas between BDSC and LEH; extended term effective September 1, 2023 and expiring August 31, 2024; rent approximately $0.003 million per month.

Blue Dolphin.  Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.

bpd.  Barrel per day; a measure of the bbls of daily output produced in a refinery or transported through a pipeline.

Blue Dolphin Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1, 2023, between Blue Dolphin and Jonathan Carroll; related to payoff of Blue Dolphin Term Loan Due 2051; fee paid equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051; fees payable 100% in cash.

Blue Dolphin Term Loan Due 2051 (as modified).  An EIDL dated May 4, 2021 between Blue Dolphin and the SBA in the original principal amount of $0.5 million; the note was modified in February 2022 to increase the principal amount by $1.5 million to $2.0 million; additional principal used for working capital; interest accrues at 3.75%; maturity date May 2051; monthly principal and interest payment $0.01 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due and paid in November 2023; loan not forgivable; security includes all tangible and intangible personal property, including, but not limited to inventory, equipment, instruments, chattel paper, documents, letter of credit rights, accounts, deposit accounts, commercial tort claims, general intangibles, and as-extracted collateral; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

Board. Board of Directors of Blue Dolphin.

BOEM.  Bureau of Ocean Energy Management.

BSEE.  Bureau of Safety and Environmental Enforcement.

Capacity utilization rate. A percentage measure that indicates the amount of available capacity used in the Nixon refinery.  With respect to the crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd).

CARES Act.  Coronavirus Aid, Relief and Economic Security Act, which was passed by Congress in March 2020, to provide economic assistance related to the onset of the COVID-19 pandemic.

CIP.  Construction in progress.

COVID-19.  An infectious disease caused by a coronavirus called SARS-CoV-2; first identified in 2019 in Wuhan, the capital of China's Hubei province; the disease spread globally, resulting in a pandemic.

Common Stock.  Blue Dolphin common stock, par value $0.01 per share.  Blue Dolphin has 20,000,000 shares of Common Stock authorized and 14,921,968 shares of Common Stock issued and outstanding as of the filing date of this report.

Complexity.  A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.

Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.

Cost of goods sold.  Reflects the cost of crude oil and condensate, fuel use, and chemicals.

Crude distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process refines crude oil and other inputs into intermediate and finished petroleum products; commonly referred to as a crude distillation unit or an atmospheric distillation unit.

Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before use as fuels or conversion to other products.

Crude Supply Agreement. Crude Supply Agreement between Pilot and LE dated May 7, 2019, as amended on November 11, 2019, which agreement was assigned by Pilot to Tartan pursuant to an Assignment of Contract dated March 20, 2020. Pursuant to a letter dated October 31, 2023, and received by LE on November 2, 2023, Tartan provided the required 60 days’ notice of its intention to terminate the Crude Supply Agreement effective December 31, 2023. There were no penalties associated with the termination.

Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.

Distillates.  The result of crude distillation and therefore any refined oil product.  Distillate is more commonly used as an abbreviated form of middle distillate.  There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM, reduced crude, and AGO).

Distillation. The first step in the refining process whereby crude oil and condensate are heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower based on their densities (from lightest to heaviest). They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities.

DLA.  Defense Logistics Agency.

Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including severe weather, power failures, and preventive maintenance.

EIA.  Energy Information Administration.

EIDL.  Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19.

EPA.  Environmental Protection Agency.

Eagle Ford Shale. A hydrocarbon-producing geological formation extending across South Texas from the Mexican border into East Texas.

Equipment Loan Due 2025.  Installment sales contract dated October 13, 2020 between LE and Texas First in the original principal amount of $0.7 million; loan represents conversion of prior equipment rental agreement for a backhoe with an option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

Exchange Act.  Securities Exchange Act of 1934, as amended.

FASB.  Financial Accounting Standards Board.

FDIC. Federal Deposit Insurance Corporation.

Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, used as basic input materials in a refining process.  Feedstocks are transformed into one or more finished products.

Finished petroleum products.  Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.

Freeport facility.  Consists of processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas; facility is currently inactive.

GNCU.  Greater Nevada Credit Union.

Greenhouse gases.  Molecules in the Earth’s atmosphere, such as carbon dioxide, methane, and chlorofluorocarbons, that warm the atmosphere because they absorb some of the thermal radiation emitted from the Earth’s surface.

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.

Intercompany processing fees. Fees associated with an intercompany tolling agreement related to naphtha volumes.

Intermediate petroleum products.  A petroleum product that might require further processing before being saleable to the ultimate consumer; 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.

Jet Fuel Purchase Agreements.  Product agreements for the purchase of jet fuel from LEH by LE; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE sold the products back to LEH under the Jet Fuel Sales Agreement.

Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel by LE to LEH; one-year term effective April 1, 2023 expiring earliest to occur of March 31, 2024, plus 30-day carryover, or delivery of maximum jet fuel quantity; LEH sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.

June LEH Note. June 2017 promissory note between Blue Dolphin and LEH; for Blue Dolphin working capital; reflected amounts owed to LEH under the Second Amended and Restated Operating Agreement; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; pursuant to the Assignment Agreement, balances previously due under the March Carroll Note and March Ingleside Note were added to the balance due under the June LEH Note; pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note; as a result, the debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied.

Kissick Debt.  Loan agreement originally entered into between LE and Notre Dame Investors, Inc. in the original principal amount of $8.0 million; debt held by John Kissick (the “Kissick Noteholder”) as of the date of this report; pursuant to a 2017 sixth amendment, the Kissick Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce LE’s prior obligation to GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC; subject to the Kissick Subordination Agreement;  security includes subordinated deed of trust that encumbers the crude distillation tower and general assets of LE; interest accrues at 16.00%; no covenants; matured January 2019; as of the filing date of this report, in forbearance related to past defaults pursuant to the Kissick Forbearance Agreement.

Kissick Forbearance Agreement.  Payment agreement between LE and Kissick Noteholder effective April 30, 2023; under the payment agreement, Kissick Noteholder and LE agreed to modify the payment terms of the Kissick Debt to satisfy in full LE’s $11.2 million obligation to Kissick Noteholder under the Kissick Debt by March 2025. Effective April 30, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the Kissick Debt decreased from 16.00% to 6.25% per year.

Kissick Subordination Agreement. Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034.

Lazarus Capital.  Lazarus Capital, LLC, an affiliate of Jonathan Carroll.

LE.  Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin.

LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; related to payoff of LE Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash.

LE Amended and Restated Master Service Agreement.  Master Service Agreement between LE and Ingleside executed May 11, 2023 (effective March 1, 2023) for storage of product intended for customer receipt by barge; three-year term; tank rental $0.50 per bbl per month.

LE Term Loan Due 2034.  Loan Agreement dated June 22, 2015, between LE, Veritex, and guarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; security includes 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 storage tank rental income, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.

LE Term Loan Due 2050.  An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

LEH.  Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin as of the date of this report.

LEH Forbearance Agreement.  Payment agreement between LEH and BDPL effective May 9, 2023; under the payment agreement, LEH and BDPL agreed to modify the payment terms of the BDPL-LEH Loan Agreement to satisfy in full BDPL’s $8.3 million obligation to LEH under the BDPL-LEH Loan Agreement by April 2027. Effective May 9, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the BDPL-LEH Loan Agreement decreased from 16.00% to 8.00% per year.

LEH Operating Fee.  A management fee paid to LEH under the Second Amended and Restated Operating Agreement; calculated as 5.00% 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.

LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; related to payoff of LRM Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash.

LRM Term Loan Due 2034.  Loan Agreement dated December 4, 2015, between LRM, Veritex, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; security includes 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 storage tanks for which Veritex has a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.

LTRI.  Lazarus Texas Refinery I, an affiliate of LEH.

March Carroll Note. March 2017 promissory note between Blue Dolphin and Lazarus Capital; reflected amounts owed to Jonathan Carroll under LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; note assigned to LEH; see “Assignment Agreement;”as of March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the assigned March Carroll Note; see “June LEH Note.”

March Ingleside Note. March 2017 promissory note between Blue Dolphin and Ingleside; represented periodic working capital to Blue Dolphin through conversion of accounts payable; interest accrued at 8.00% compounded annually; no covenants; matured January 2019; note assigned to LEH; see “Assignment Agreement;” as of March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the assigned March Ingleside Note; see “June LEH Note.”

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 Nixon refinery, 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.

NOL.  Net operating losses.

NPS.  Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin.

NPS Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1, 2023, between NPS and Jonathan Carroll; related to payoff of NPS Term Loan Due 2031; fee paid equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031; fees payable 100% in cash.

NPS-LEH Terminal Services Agreement. Terminal Services Agreement between NPS and LEH effective November 1, 2022; enables LE to store its jet fuel, which LEH lifts as needed; one-year term with one-year automatic renewals; tank rental approximately $0.2 million per month.

NPS Term Loan Due 2031.  Loan Agreement dated September 20, 2021, between NPS, GNCU, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at 5.75%; maturity date October 2031; monthly principal and interest payment $0.1 million; interest-only payments first thirty-six (36) months; first principal payment due November 2024; purpose of loan working capital; security includes deed of trust lien on approximately 56 acres of land and improvements owned by LE, leasehold deed of trust lien on certain property leased by NPS from LE, and assignment of leases and rents and certain personal property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.

NPS Term Loan Due 2050.  An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., related machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

Operating days. Represents the number of days in a period in which the crude distillation tower operated. Operating days are calculated by subtracting downtime in a period from calendar days in the same period.

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.

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.

Pilot Forbearance and Accommodation Agreement. Forbearance and Accommodation Agreement dated January 12, 2023 between NPS and Pilot regarding the sale of in-tank jet fuel following Pilot’s termination of a terminal services agreement. Under the Pilot Forbearance and Accommodation Agreement, the parties agreed to explore a potential compromise to the dispute; the forbearance period terminated on February 28, 2023. Under the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023. 

Pilot Forbearance Amendment. An amendment to the Pilot Forbearance and Accommodation Agreement dated March 31, 2023; the amendment extended the forbearance period and all deadlines associated with unresolved legal claims to June 15, 2023. Under the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all stored jet fuel in April 2023. On June 16, 2023, following expiration of the Pilot Forbearance and Accommodation Agreement, the parties extended the deadline for responses to outstanding discovery requests related to legal claims to August 31, 2023. On August 28, 2023 the parties filed a joint motion to stay this case. The parties anticipate attending mediation in December 2023 to settle all outstanding disputes. If, upon conclusion of the mediation there is no resolution, then either party may individually or jointly move for the court to lift the stay and enter a new scheduling order and trial setting.

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 as of the filing date of this report.

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, 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.

Refinery operations gross profit (deficit).  Calculated as refinery operations revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.

Refining gross profit (deficit) per bbl.  Calculated as refinery operations gross profit (deficit) divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.

ROU.  Right-of-use.

SBA.  Small Business Administration.

SEC. Securities and Exchange Commission.

Second Amended and Restated Operating Agreement.  Affiliate agreement between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets; one-year term effective April 1, 2023 expiring April 1, 2024 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC.

Securities Act.  The Securities Act of 1933, as amended.

Significant customer. A customer who represents more than 10% of our total revenue from operations.

Sour crude. Crude oil containing sulfur content greater than 0.5%.

Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product.

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 based on their sulfur content, with lower sulfur fuels selling at a higher, premium price and higher sulfur fuels selling at a lower, discounted price.

Sweet crude. Crude oil containing sulfur content less than 0.5%.

Tartan.  Tartan Oil LLC, an affiliate of Pilot.

Texas First.  Texas First Rentals, LLC.

TCEQ.  Texas Commission on Environmental Quality.

Throughput.  The volume processed through a unit or a refinery or transported through a pipeline.

Tolling and terminaling gross profit (deficit).  Calculated as tolling and terminaling revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.

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, and sometimes the entire plant, 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.

Veritex Forbearance Agreement. Forbearance Agreement dated and effective November 18, 2022 between LE, LRM, Veritex, and guarantors (as defined therein); the Veritex Forbearance Agreement was superseded by the Veritex First Amended Forbearance Agreement.

Veritex First Amended Forbearance Agreement. Amendment to the Veritex Forbearance Agreement dated and effective September 30, 2023 between LE, LRM, Veritex, and guarantors (as defined therein); pursuant to the Veritex First Amended Forbearance Agreement, Veritex agreed to forbear existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through and including December 29, 2023; additionally, Veritex agreed to forbear from testing borrower’s compliance with financial covenants under the loans.

WSJ Prime rate.  The base rate on corporate loans posted by at least 70% of the ten largest U.S. as published by the Wall Street Journal.  Effective July 27, 2023, the WSJ Prime rate increased to 8.50%.

XBRL.  eXtensible Business Reporting Language.

Yield.  The percentage of refined products that is produced from crude oil and other feedstocks.

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:

Business and Industry

Downstream and Midstream Operations

Legal, Government, and Regulatory

Security

Common Stock

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, 2022 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report.  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.

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Consolidated Balance Sheets (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 

Consolidated Statements of Income (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Stockholders’ Equity (Deficit)(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

(1) Organization

Company Overview

Blue Dolphin was formed in 1986 as a Delaware corporation.  The company is an independent downstream energy company operating in the Gulf Coast region of the United States.  Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas.  Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”

Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries 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.

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report.  An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and 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, arrangements, and risks associated with working capital deficits.

Going Concern

In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. Management determined that certain factors may present substantial doubt about our ability to continue as a going concern. These factors include significant current debt, which impacts our ability to meet debt covenants, and historical working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options, including selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, filing bankruptcy, or ceasing operating.

Our significant current debt is the result of certain third-party loan agreements being classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2023 and December 31, 2022. Excluding accrued interest, we had current debt of $38.4 million and $47.4 million as of September 30, 2023 and December 31, 2022, respectively. Our significant current debt at September 30, 2023 consisted of bank debt to Veritex and GNCU and investor debt to John Kissick.

Forbearance Agreements.

Veritex First Amended Forbearance Agreement. Pursuant to the Veritex First Amended Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for an extended period beginning effective September 30, 2023 and terminating on December 29, 2023.  During the extended forbearance period, Veritex also agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants. See “Note (16)” to our consolidated financial statements for additional information regarding the Veritex First Amended Forbearance Agreement.

Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt.  Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly payments of $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid Kissick Noteholder $1.5 million and $3.5 million for the three and nine months ended September 30, 2023, respectively. As of the filing date of this report, the Kissick Debt was in forbearance related to past defaults.

LEH Forbearance Agreement.  Pursuant to the LEH Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement.  Under the terms of the LEH Forbearance Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.2 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults.

Other Defaults. As of September 30, 2023 and the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations.  Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. 

Refining Margins. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity 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. The general outlook for the oil and natural gas industry for the remainder of 2023 remains unclear given general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, uncertainty in the Middle East related to, among other things, Israeli-Hamas armed conflicts, and the continued conflict between Russia and Ukraine.

Net income for the three months ended September 30, 2023 totaled $7.1 million, or $0.47 per share, compared to net income of $6.4 million, or $0.43 per share, for the three months ended September 30, 2022. The $0.7 million, or $0.04 per share, increase in net income between the periods was the result of higher refining margins. Net income for the nine months ended September 30, 2023 totaled $22.3 million, or $1.49 per share, compared to net income of $23.3 million, or $1.69 per share, for the nine months ended September 30, 2022. The $1.0 million, or $0.20 per share, decrease in net income between the periods was the result of weaker refining margins and lower refinery throughput, production, and sales volumes for the nine months ended September 30, 2023. We can provide no assurances that refining margins and demand will remain at current levels.

Working Capital Improvements. We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. During 2023, we entered into the Veritex First Amended Forbearance Agreement, LEH Forbearance Agreement, and Kissick Forbearance Agreement. During 2022, we secured $1.5 million in working capital through CARES Act loans and entered into our first forbearance with Veritex. We had $10.3 million and $45.2 million in working capital deficits at September 30, 2023 and December 31, 2022, respectively, representing a $34.9 million improvement.  Excluding the current portion of long-term debt, we had $28.0 million and $2.1 million in working capital at September 30, 2023 and December 31, 2022, respectively, representing an improvement of $25.9 million. The significant improvement in working capital over the previous nine months was due to decreases in the current portion of long-term debt, accounts payable, and accrued interest payable. The improvement was also due to a significant increase in cash from operations and inventory. See “Note (16)” to our consolidated financial statements for additional information regarding the Veritex First Amended Forbearance Agreement.

There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.  If we are unable to raise additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to manage business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.

Operating Risks

Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and maintaining operation of the Nixon refinery.

Working Capital.  As noted above, we have historically had working capital deficits primarily due to having significant current debt.  Having sufficient working capital is necessary to meet contractual, operational, regulatory, and safety needs.  Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Second Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. To avoid business disruptions and manage cash flow, we optimize receivables and payables by prioritizing payments, monitor discretionary spending, carefully manage capital expenditures, and, when able, optimize inventory levels based on demand.

Refining Margins.  Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected.  Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes.  Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. To remain competitive in a volatile commodity price environment, we adjust throughput and production based on market conditions and adjust our product slate based on commodities pricing.

Nixon Refinery Operation.  We maintain relationships with suppliers that source and repair key components of the Nixon refinery.  We expect our suppliers to maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases, increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to mitigate supply-based risks that could cause a business disruption.

Capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence.  We can provide no guarantees that: our business strategy will be successful; Affiliates will continue to fund our working capital needs if we experience working capital deficits; we will meet regulatory requirements to provide additional supplemental pipeline bonds and abandon offshore assets; we can obtain additional financing on commercially reasonable terms or at all; or margins on our refined products will be favorable.  Further, if lenders exercise their rights and remedies under secured loan agreements that are in default, or if we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, 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, 2022 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or for any other period.

Significant Accounting Policies

A summary of significant Blue Dolphin accounting policies is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.

Use of Estimates.  The nature of our business requires that we make estimates and assumptions in accordance with U.S.GAAP.  These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Although commodity price volatility, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of certainty.

We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of September 30, 2023 and through the filing date of this report.  The accounting matters assessed included, but not limited to, our allowance for doubtful accounts, inventory valuation, and the carrying value of long-lived assets.

Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. Although management historically deemed this a normal business risk, options to limit risk are being evaluated given current capital, credit, and commodity markets and financial institution health.  Restricted cash, non-current portion at September 30, 2023 and December 31, 2022 reflected amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:

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 and $0.06 million at September 30, 2023 and December 31, 2022, respectively.

Financial Instruments.  Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that fluctuate with the prime rate.

Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals.  Inventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs.  If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.

Property and Equipment.

Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements.  We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred.  We record refinery and facilities at cost less any adjustments for depreciation or impairment.  We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations.  For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service.  We did not record any impairment of our refinery and facilities assets for the periods presented.

Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment.  We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016.  During the twelve months ended December 31, 2021, we recorded an additional impairment of $1.1 million due to a change in the estimated future cost and timing of decommissioning these assets. During the twelve months ended December 31, 2022, we recorded an additional impairment of $0.1 million due to an additional change in the timing of decommissioning these assets.   During the three and nine months ended September 30, 2023, we recorded an additional impairment of $0.3 million due to a change in estimated future costs of decommissioning our pipeline and facilities assets.

Because our pipelines and facilities assets have been inactive for an extended period, BOEM mandated that they be decommissioned. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements.  Management worked with a consultant to develop a decommissioning plan, and BDPL submitted its decommissioning plan to the agency on November 8, 2023. . Separately, management is exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE).As a result of updated decommissioning bids, our ARO estimate increased by $0.3 million at September 30, 2023.

Based on updated estimates for pipeline decommissioning, platform removal, and associated costs, as well as resource availability and projected weather conditions, we believe decommissioning and remediation of all associated INCs will be completed by the end of the third quarter of 2024.  However, BDPL’s work plan does not relieve BDPL of its obligations to comply with BSEE’s mandate or of BSEE’s authority to impose financial penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2023 and December 31, 2022.  At September 30, 2023 and December 31, 2022, BDPL maintained $4.1 million and $3.7 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.

Due to BDPL’s failure to complete decommissioning of the offshore pipeline and platform assets and remedy associated INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.

Construction in Progress (CIP). CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility.  These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service.  See “Note (8)” to our consolidated financial statements for additional disclosures related to refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.

Leases.  We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use.  For finance leases, we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’

Revenue Recognition.

Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer.  We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted.  Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load. 

We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant.  We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.

Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) terminal services agreements whereby a customer agrees to pay a certain fee per storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.

We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending.  These services are considered optional to the customer.  The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.

Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date.  We record unearned revenue, which usually consists of customer prepayments, when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.

Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a straight-line basis over the term of the supply contract.

Income Taxes. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes.

Income taxes are calculated utilizing the applicable rates on items included in the determination of income for income tax purposes. Our effective tax rate may be different than what would be expected if the federal and state statutory rates were applied to income from continuing operations primarily because of amounts expensed for financial reporting that are not deductible for tax purposes.

The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At September 30, 2023 and December 31, 2022, we had no uncertain tax positions for which a reserve or liability was necessary.

Deferred Taxes. Deferred income tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when we are unable to conclude that realization of the deferred income tax assets is more likely than not.

Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we reassess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized.  Management uses significant judgment in forecasting future operating results and projected cash flows.  If conditions or assumptions change, material impairment charges could be necessary.

Management evaluated refinery and facilities assets for impairment considering shifts in the capital, credit, and commodity markets, recession and inflation, and armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products.  As of September 30, 2023 and December 31, 2022, we did not record any impairment of our long-lived assets. However, impairment may be required in the future if external events or circumstances change or if internal conditions shift materially.

Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.

Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets.  Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.

Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing of certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory permitting requirements, asset structural integrity, water depth, third-party equipment availability, and mobilization/demobilization costs.  We review our assumptions and estimates of future abandonment costs on an annual basis.  See “Note (11)” to our consolidated financial statements for additional information related to AROs.

Computation of Earnings Per Share. We present basic and diluted EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period.  We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding.  Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings.  We do not currently have issued options, warrants, or similar instruments.  Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive.  See “Note (14)” to our consolidated financial statements for additional information related to EPS.

New Pronouncements Adopted. During the three and nine months ended September 30, 2023, we did not adopt any ASUs.

New Pronouncements Issued, Not Yet Effective.  No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our financial position, results of operations, or liquidity.

(3) Related-Party Transactions

Affiliate Agreements

Financial and Operational Agreements.  Blue Dolphin and certain of its subsidiaries are currently parties to several financial and operational agreements with Affiliates.

Debt Agreements.  Blue Dolphin was a party to the June LEH Note with LEH at December 31, 2022.  BDPL was a party to the BDPL-LEH Loan Agreement with LEH at September 30, 2023 and December 31, 2022.  Summaries of the debt agreements follow:

June LEH Note. Pursuant to the Assignment Agreement, the March Ingleside Note and March Carroll Note were assigned to and assumed by LEH under the June LEH Note effective December 31, 2022.  Pursuant to a payoff letter dated March 31, 2023, Blue Dolphin fully satisfied the debt and defaults associated with the June LEH Note; as a result, debt and defaults under the March Ingleside Note and March Carroll Note that were assigned to LEH effective December 31, 2022 were also satisfied.  All encumbrances that lender or assignee had against Blue Dolphin were thereby terminated.

Forbearance and Defaults.

LEH Forbearance Agreement.  Pursuant to the LEH Forbearance Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Forbearance Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.2 million and $0.3 million for the three and nine months ended September 30, 2023, respectively. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults.

Covenants, Guarantees and Security.

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.  Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.

See “Notes (1) and (10)” 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.

Related-Party Financial Impact

Working Capital. We historically relied on Affiliates for funding during periods of working capital deficits.  We reflected such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party.

Consolidated Balance Sheets.

Accounts receivable, related party.  Accounts receivable, related party for the sale of jet fuel to LEH totaled $2.0 million and $0 at September 30, 2023 and December 31, 2022, respectively. Amounts Blue Dolphin owed to LEH under the Second Amended and Restated Operating Agreement were net settled against amounts LEH owed to LE under the Jet Fuel Sales Agreement. Excess amounts owed by LEH to LE were reflected in accounts receivable, related party on our consolidated balance sheet.

Accounts payable, related party.  Accounts payable, related party totaled approximately $0.6 million and $0.2 million at September 30, 2023 and December 31, 2022.  Accounts payable, related party at September 30, 2023 reflected tank rental fees owed by LE to Ingleside under the LE Amended and Restated Master Services Agreement plus amounts owed to LTRI for previously purchased refinery equipment.  Accounts payable, related party at December 31, 2022 reflects amounts owed to LTRI for previously purchased refinery equipment. 

Long-term debt, related party, net of current portion and accrued interest payable, related party, net of current portion.

Consolidated Statements of Operations.

Total revenue from operations.

Interest expense.

Other.  BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended September 30, 2023 and 2022.  Sublease income from LEH totaled $0.03 million for both nine-month periods ended September 30, 2023 and 2022.

The LEH operating fee, related party totaled $0.1 million for the three-month period ended September 30, 2023 compared to approximately $0.3 million for the three-month period ended September 30, 2022. The LEH operating fee, related party totaled approximately $0.4 million for the nine-month period ended September 30, 2023 compared to approximately $0.6 million for the nine-month period ended September 30, 2022.  The decrease in both comparative periods related to lower refinery operating expenses on lower throughput and lower inventory impairment.

Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million and $0.9 million for the three-month period ended September 30, 2023 and nine-month period ended September 30, 2023, respectively.

(4) Revenue and Segment Information

We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending) and tolling and reservation fees for use of the naphtha stabilizer at the Nixon refinery. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.

Revenue from Contracts with Customers

Disaggregation of Revenue.  We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.

Receivables from Contracts with Customers.  We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.

Contract Liabilities.  Our contract liabilities consist of unearned revenue from customers in the form of prepayments.  We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets.  See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.

Remaining Performance Obligations.  Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.

Contract Balances

Segment Information

Business segment information for the periods indicated (and as of the dates indicated) was as follows: