UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to______
Commission File No.
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(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:
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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.
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).
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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☐ | Smaller reporting company | ||
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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
Number of shares of common stock, par value $0.01 per share outstanding as of November 14, 2022:
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Blue Dolphin Energy Company |
| September 30, 2022 │Page 2 |
Glossary of Terms |
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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.
Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019, between Pilot and NPS and subsequently amended on May 9, 2019, May 10, 2019, and September 3, 2019, the last amendment being Amendment No. 1; original line of credit amount was $13.0 million; NPS repaid all obligations owed to Pilot on October 4, 2021.
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; three-year term effective April 1, 2020 expiring April 1, 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.
ARO. Asset retirement obligations.
ASU. Accounting Standards Update.
AGO. Atmospheric gas oil, which 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% 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; currently in default for failure to pay past due obligations at maturity.
BDSC. Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.
BDSC-LEH Office Sub-Lease Agreement. Office sublease agreement in Houston, Texas between BDSC and LEH; sixty-eight-month (68) term effective January 1, 2018 expiring August 31, 2023; includes 6-month rent abatement period; 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.
BDEC 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 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.
Blue Dolphin Energy Company |
| September 30, 2022│Page 3 |
Glossary of Terms |
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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 14,897,377 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.
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.
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.
Blue Dolphin Energy Company |
| September 30, 2022│Page 4 |
Glossary of Terms |
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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 (backhoe) rental agreement with option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.
Exchange Act. Securities Exchange Act of 1934, as amended.
FASB. Financial Accounting Standards Board.
FDIC. Federal Deposit Insurance Corporation.
Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, that are used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products.
Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.
Freeport facility. Consists of processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas; facility is currently inactive.
GNCU. Greater Nevada Credit Union.
Greenhouse gases. Molecules in the Earth’s atmosphere such as carbon dioxide, methane, and chlorofluorocarbons which warm the atmosphere because they absorb some of the thermal radiation emitted from the Earth’s surface.
Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) 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 tied 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 Sales Agreement. Product agreement for the sale of jet fuel between LE and LEH; one-year term effective April 1, 2022 expiring earliest to occur of March 31, 2023, 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.
Blue Dolphin Energy Company |
| September 30, 2022│Page 5 |
Glossary of Terms |
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June LEH Note. June 2017 promissory note between Blue Dolphin and LEH; for Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
Kissick Debt. Previously referred to as the ‘Notre Dame 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 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; under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments and security interest, as well as liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034; interest accrues at 16%; no covenants; matured January 2019; security includes subordinated deed of trust that encumbers the crude distillation tower and general assets of LE; currently in default for failure to pay past due obligations at maturity.
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; tied to payoff of LE Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LE Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.
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 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; loan 100% USDA-guaranteed; 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 in default for failing to make principal and interest payments, failing to replenish a $1.0 million payment reserve account, and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
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 accrues during deferral period; first payment due March 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 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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 6 |
Glossary of Terms |
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LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; tied to payoff of LRM Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.
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 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; loan 100% USDA-guaranteed; 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 in default for failing to make principal and interest payments and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.
LTRI. Lazarus Texas Refinery I, an affiliate of LEH.
March Carroll Note. March 2017 promissory note between Blue Dolphin and Lazarus Capital; reflects amounts owed to Jonathan Carroll under LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
March Ingleside Note. March 2017 promissory note between Blue Dolphin and Ingleside; represents periodic working capital to Blue Dolphin through conversion of accounts payable; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.
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 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; loan 90% USDA-guaranteed; 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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 7 |
Glossary of Terms |
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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 accrues during deferral period; first payment due March 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.
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.
Preferred Stock. Blue Dolphin preferred stock, par value $0.10 per share. Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding as of the filing date of this report.
Product slate. Represents type and quality of products produced.
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.
Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, that are produced by a refinery.
Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.
Refining gross profit (deficit) per bbl. Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.
ROU. Right-of-use.
SBA. Small Business Administration.
SEC. Securities and Exchange Commission.
Securities Act. The Securities Act of 1933, as amended.
Segment contribution margin (deficit). For the refinery operations segment, represents refined product sales minus intercompany processing fees minus refinery operations costs and expenses. For the tolling and terminaling segment, represents storage tank rental and ancillary services fees plus intercompany processing fees minus tolling and terminaling costs and expenses. Intercompany processing fees are associated with an intercompany tolling agreement tied to naphtha volumes.
Significant customer. A customer who represents more than 10% of our total revenue from operations.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 8 |
Glossary of Terms |
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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.
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 of 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.
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; 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; lenders of USDA-guaranteed loans are 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 the loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.
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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 9 |
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:
Business and Industry
| · | Our going concern status. |
| · | Financial challenges due to defaults under our secured loan agreements, margin volatility, historical net losses, and working capital and equity deficits. |
| · | Substantial debt in current liabilities, all of which is currently in default. |
| · | Ability to regain compliance with the terms of our outstanding indebtedness. |
| · | Increased costs of capital or a reduction in the availability of credit. |
| · | Restrictive covenants in our debt instruments that limit our ability to undertake certain types of transactions. |
| · | Public health threats, pandemics, and epidemics, such as COVID-19, and the adverse impacts on our business, financial condition, results of operations, and liquidity. |
| · | Affiliate Common Stock ownership and transactions that could cause conflicts of interest. |
| · | Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products. |
| · | Geographical concentration of our assets and customers in West Texas. |
| · | Competition from companies with more significant financial and other resources. |
| · | Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities. |
| · | Strict laws and regulations regarding personnel and process safety. |
| · | Market changes in insurance that impact premium costs and available coverages. |
| · | NOL carryforwards to offset future taxable income for U.S. federal income tax purposes that are subject to limitation. |
| · | Industry technological developments that outpace our ability to keep up. |
| · | Actual or potential terrorist threats, activist incidents, cyber-security breaches, or acts of war that could affect our business. |
| · | Actual or potential security threats. |
| · | Uncertainty regarding the impact of current and future sanctions imposed by governments and other authorities, including the United States, the European Union, and the United Kingdom in response to the Russian military conflict with Ukraine. |
| · | General economic, political, or regulatory developments, including inflation, interest rates, or changes in governmental policies relating to refined petroleum products, crude oil, or taxation. |
Downstream and Midstream Operations
| · | Commodity price and refined product demand volatility, which can adversely affect our refining margins. |
| · | Crude oil, other feedstocks, and fuel and utility services price volatility. |
| · | Availability and cost of crude oil and other feedstocks to operate the Nixon facility. |
Blue Dolphin Energy Company |
| September 30, 2022 │Page 10 |
Important Information Regarding Forward Looking Statements |
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| · | Equipment failure and maintenance, which lead to operational downtime. |
| · | Potential impairment in the carrying value of long-lived assets, which could negatively affect our operating results. |
| · | Failure to effectively execute new business strategies, such as renewable fuels. |
| · | Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund. |
| · | Critical personnel loss, labor actions, and workplace safety issues. |
| · | Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer. |
| · | Increases in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting our crude oil and condensate, feedstocks, and refined products. |
| · | Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. |
| · | Geographical concentration of our refining operations and customers within the Eagle Ford Shale. |
| · | Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers. |
| · | Assessment of penalties by regulatory agencies, such as OSHA and the TCEQ, for violations. |
| · | Regulatory changes and other measures for the reduction of greenhouse gas emissions, including carbon dioxide. |
| · | Our ability to effect and integrate potential acquisitions. |
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 prescribed. |
|
|
|
| · | Assessment of civil penalties by BSEE for our failure to decommission pipeline and platform assets within the time prescribed. |
|
|
|
| · | Our estimates of future AROs related to our pipeline and facilities assets, which may increase. |
Common Stock
| · | Fluctuations in our stock price that may result in a substantial investment loss. |
|
|
|
| · | Declines in our stock price due to share sales. |
|
|
|
| · | Dilution of the equity of current stockholders and the potential decline of our stock price due to the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue. |
|
|
|
| · | The potential sale of shares in accordance with Rule 144, which may adversely affect the market. |
|
|
|
| · | The lack of dividend payments. |
|
|
|
| · | Failure to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act. |
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, 2021 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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 11 |
Financial Statements |
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PART I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
|
| September 30, |
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| December 31, |
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| 2022 |
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| 2021 |
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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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| $ |
| ||
Restricted cash |
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| ||
Accounts receivable, net |
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Prepaid expenses and other current assets |
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| ||
Deposits |
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Inventory |
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Total current assets |
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LONG-TERM ASSETS |
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Total property and equipment, net |
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Operating lease right-of-use assets, net |
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Surety bonds |
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| ||
Total long-term assets |
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TOTAL ASSETS |
| $ |
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| $ |
| ||
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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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| $ |
| ||
Long-term debt, related party, current portion (in default) |
|
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| ||
Interest payable |
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| ||
Interest payable, related party |
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| ||
Accounts payable |
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| ||
Accounts payable, related party |
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| ||
Current portion of lease liabilities |
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| ||
Income taxes payable |
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| ||
Asset retirement obligations, current portion |
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| ||
Accrued expenses and other current liabilities |
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| ||
Total current liabilities |
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LONG-TERM LIABILITIES |
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Asset retirement obligations |
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Long-term lease liabilities, net of current |
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Unearned contract renewal income, net of current |
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Long-term debt, net of current portion |
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Total long-term liabilities |
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TOTAL LIABILITIES |
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Commitments and contingencies (Note 15) |
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STOCKHOLDERS' EQUITY (DEFICIT) |
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Common stock ($ |
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shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively) |
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| ||
Additional paid-in capital |
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Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) |
|
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| ( | ) | |
|
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|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
| $ |
|
| $ |
| ||
(1) Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At both September 30, 2022 and December 31, 2021, there were no shares of preferred stock issued and outstanding.
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 12 |
Financial Statements |
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Consolidated Statements of Operations(Unaudited)
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| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
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| 2022 |
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| 2021 |
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| 2022 |
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| 2021 |
| ||||
|
| (in thousands, except share and per-share amounts) |
| |||||||||||||
REVENUE FROM OPERATIONS |
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| ||||
Refinery operations |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Tolling and terminaling |
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| ||||
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Total revenue from operations |
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| ||||
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COST OF GOODS SOLD |
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Crude oil, fuel use, and chemicals |
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| ||||
Other conversion costs |
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| ||||
Total cost of goods sold |
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Gross profit (loss) |
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| ( | ) | |||
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COST OF OPERATIONS |
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LEH operating fee, related party |
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| ||||
Other operating expenses |
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| ||||
General and administrative expenses |
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| ||||
Depletion, depreciation and amortization |
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| ||||
Impairment of assets |
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| ||||
Bad debt expense |
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| ||||
Accretion of asset retirement obligations |
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| ||||
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Total cost of operations |
|
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| ||||
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Gain (loss) from operations |
|
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| ( | ) |
|
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| ( | ) | ||
|
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OTHER INCOME (EXPENSE) |
|
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Easement, interest and other income |
|
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| ||||
Interest and other expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Gain on extinguishment of debt |
|
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| ||||
Total other expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
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Gain (loss) before income taxes |
|
|
|
|
| ( | ) |
|
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|
| ( | ) | ||
|
|
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|
|
Income tax expense |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
|
|
|
|
|
|
|
|
|
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|
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|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
Diluted |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
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|
|
|
|
|
|
| ||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 13 |
Financial Statements |
|
|
Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)
Three and Nine Months Ended September 30, 2022
|
|
|
|
|
| Additional |
|
|
|
|
|
| ||||||||
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares Issued |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
| (in thousands except share amounts) |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance at December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Balance at March 31, 2022 |
|
| 12,693,514 |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | ||
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Common stock issued for services |
|
|
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| |||||
Common stock issued for extinguishment |
|
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|
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of related-party debt |
|
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|
| |||||
Net income |
|
| - |
|
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|
|
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| ||||
|
|
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|
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|
|
Balance at June 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
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|
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|
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Common stock issued for extinguishment of related-party debt |
|
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| |||||
Net income |
|
| - |
|
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|
| ||||
|
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|
|
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|
|
|
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|
|
Balance at September 30, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| ||||
Three and Nine Months Ended September 30, 2021
|
|
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|
|
| Additional |
|
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|
|
|
| |||||
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
|
| ||||||||
|
| Shares Issued |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
|
| (in thousands except share amounts) |
| |||||||||||||||||
|
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|
| |||||
Balance at December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Net loss |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 14 |
Financial Statements |
|
|
Consolidated Statements of Cash Flows (Unaudited)
|
| Nine Months Ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
| OPERATING ACTIVITIES |
|
|
|
|
|
| ||
| Net income (loss) |
| $ |
|
| $ | ( | ) | |
| Adjustments to reconcile net income (loss) to net cash |
|
|
|
|
|
|
|
|
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization |
|
|
|
|
|
| ||
Accretion of asset retirement obligations |
|
|
|
|
|
| ||
Amortization of debt issue costs |
|
|
|
|
|
| ||
Guaranty fees paid in kind |
|
|
|
|
|
| ||
Related-party interest expense paid in kind |
|
|
|
|
|
| ||
Deferred revenues and expenses |
|
| ( | ) |
|
| ( | ) |
Loss on issuance of shares |
|
|
|
|
|
| ||
Bad debt (recovery of bad debt) |
|
|
|
|
|
| ||
Impairment of assets |
|
|
|
|
|
| ||
Gain on extinguishment of debt |
|
|
|
|
| ( | ) | |
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| ( | ) |
|
|
| |
Prepaid expenses and other current assets |
|
| ( | ) |
|
|
| |
Deposits and other assets |
|
| - |
|
|
|
| |
Inventory |
|
| ( | ) |
|
| ( | ) |
Accounts payable, accrued expenses and other liabilities |
|
|
|
|
|
| ||
Net cash provided by operating activities |
|
|
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| ||
|
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|
|
| INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| ( | ) |
|
|
| |
Net cash used in investing activities |
|
| ( | ) |
|
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| |
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| FINANCING ACTIVITIES |
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Proceeds from debt |
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Payments on debt principal |
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| ( | ) |
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| ( | ) |
Net activity on related-party debt |
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| ( | ) |
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Net cash provided by (used in) financing activities |
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| ( | ) |
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Net change in cash, cash equivalents, and restricted cash |
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| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
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| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
| $ |
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| $ |
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Supplemental Information: |
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| Non-cash investing and financing activities: |
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Financing of line of credit via related-party debt |
| $ |
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| $ |
| ||
Issuance of shares for services and/or to extinguish debt |
| $ |
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| $ |
| ||
Related-party debt settled through related-party accounts receivable |
| $ |
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| $ |
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Line of credit financed by offsetting tank leases less interest |
| $ |
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| $ |
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Interest paid |
| $ |
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| $ |
| ||
Income taxes paid (refunded) |
| $ |
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| $ |
| ||
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 15 |
Notes to Consolidated Financial Statements |
Notes to Consolidated Financial Statements
(1) Organization
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 1.2 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.
Affiliates
Affiliates controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin assets and funds working capital requirements during periods of working capital deficits. In addition, 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, arrangements, and risks associated with working capital deficits.
Going Concern
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits, as discussed more fully below. 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 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. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing a petition for bankruptcy.
Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2022 and December 31, 2021. See “Notes (3) and (10)” 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 – As of the filing date of this report, LE and LRM were in default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for failing to make required monthly principal and interest payments and failing to satisfy financial covenants. In addition, LE was in default under the LE Term Loan Due 2034 for failing to replenish a $ |
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· | GNCU Loan – As of the filing date of this report, NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy financial covenants. |
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· | Kissick Debt – Under a 2015 subordination agreement, John Kissick agreed to subordinate his 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. To date, LE has made no payments under the subordinated Kissick Debt. To date, Mr. Kissick has taken no action due to the non-payment. As of the filing date of this report, there were defaults under the Kissick Debt related to payment of past due obligations at maturity. |
Blue Dolphin Energy Company |
| September 30, 2022 │Page 16 |
Notes to Consolidated Financial Statements |
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We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their 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. Management maintains ongoing dialogue with lenders regarding existing defaults and continues to actively discuss potential restructuring and refinancing opportunities. See “Note (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 Defaults
· | Notes and Loan Agreement – As of the filing date of this report, Blue Dolphin was in default related to past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. Affiliates controlled approximately |
Substantial Current Debt
Excluding accrued interest, we had current debt of $
Margin Volatility. 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 refining margins may have a material adverse effect on our earnings, cash flows, and liquidity.
In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and thereafter the U.S. economy experienced pronounced adverse effects as the virus spread globally. Considerable progress was made to combat COVID-19 and its multiple variants. While domestic demand and refining margins improved during the nine months ended September 30, 2022, the future impact of COVID-19 remains unknown. Based on recent outbreaks in China, a global resurgence of the virus could negatively impact population health, commodity prices, and oil and product demand and supply worldwide.
In February 2022, Russia invaded neighboring Ukraine. The military conflict caused turmoil in global commodity markets, injecting even more uncertainty into a global economy recovering from the effects of COVID-19. As Russia is a major international producer and exporter of crude oil, sanctions imposed on Russia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the three and nine months ended September 30, 2022 compared to the same periods a year earlier. However, the long term effect of the military conflict remains unclear due to uncertainty surrounding the war’s duration and the level and length of international sanctions on Russia.
Recent data indicates a sharp rise in inflation in the U.S. and globally. Current and future inflationary effects may be driven by, among other things, supply chain disruptions, governmental stimulus, or fiscal policies, and increasing demand for certain goods and services as recovery from the COVID-19 pandemic continues. We have observed higher costs for feedstocks, labor, and materials used in our business. We cannot predict the effect of rising interest rates, concerns of a recession, and higher inflation on demand for our refined petroleum products.
COVID-19, the Russian military conflict with Ukraine, and inflation continue to evolve, and the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence.
Historic Net Losses and Working Capital and Equity Deficits
Net Income (Losses). Although we historically had net losses, we had net income of $
Blue Dolphin Energy Company |
| September 30, 2022 │Page 17 |
Notes to Consolidated Financial Statements |
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Working Capital Deficits. Historically, we had working capital and equity deficits. Although we had $
Cash and cash equivalents totaled $
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. COVID-19, the Russian military conflict with Ukraine, and inflation continue to evolve, and 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 confidence.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing inventory levels based on demand, managing cash flow, and delaying capital expenditures. To safeguard personnel, we offer remote work where possible and request that personnel practice social distancing, mask-wearing, and other site-specific precautionary measures when needed. We also encourage personnel to receive vaccines.
We can provide no guarantees that: our business strategy will be successful, favorable refining margins will continue, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if third parties 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, 2021 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, 2021 as filed with the SEC. Operating results for the three months and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or for any other period.
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, 2022 │Page 18 |
Notes to Consolidated Financial Statements |
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Use of Estimates. The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual results could differ from those estimates. Uncertainty concerning COVID-19, the Russian military conflict with Ukraine, inflation, volatility in commodity prices, and severe weather impacts associated with climate change have impacted and likely will continue to impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us as of September 30, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, AROs, inventory and related reserves, deferred tax asset reserves, 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. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts. Restricted cash, current portion reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:
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| September 30, |
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| December 31, |
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| 2022 |
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| 2021 |
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| (in thousands) |
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Cash and cash equivalents |
| $ |
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| $ |
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Restricted cash |
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| $ |
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| $ |
| ||
The increase in cash and cash equivalents at September 30, 2022 was the result of market-driven inventory management. Management anticipates that the cash reserve will be utilized in the near term to repay past-due amounts owed to Veritex.
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 $
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
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
Blue Dolphin Energy Company |
| September 30, 2022 │Page 19 |
Notes to Consolidated Financial Statements |
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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 have been fully impaired since 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 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 (previously referred to under GAAP as capital 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) storage tank 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. We determine deferred income taxes based on: (i) temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities and (ii) operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which we expect the differences to reverse. Our provision for income taxes consists of our current tax liability and the change in deferred income tax assets and liabilities.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 20 |
Notes to Consolidated Financial Statements |
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Management uses significant judgment in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to assess the realizability of deferred tax assets. We weigh whether there is a more than 50% probability of realizing a portion or all the deferred tax assets. Realization depends on the generation of future taxable income before the expiration of any NOL carryforwards. We record a valuation allowance against deferred income tax assets if there is a more than 50% probability of not realizing some portion of the asset. We recognize an uncertain tax positions benefit in our financial statements if deferred tax assets meet a minimum recognition threshold. First, we determine whether there is a more than 50% probability that our income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If we meet the criteria, we record a
A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended September 30, 2022. 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, 2022 and December 31, 2021. In addition, we have NOL carryforwards that remain available for future use. See “Note (13)” 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 re-assess 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.
Commodity price market volatility associated with COVID-19, the Russian military conflict with Ukraine, and inflation could affect the value of certain of our long-lived assets. Management evaluated refinery and facilities assets for impairment as of December 31, 2021. We did not record any impairment of our long-lived assets for the periods presented. However, impairment may be required in the future if losses are material, or as new opportunities arise, such as reconfiguration of the Nixon refinery into a renewable fuels facility.
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 certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. 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. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” 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 months ended September 30, 2022, 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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 21 |
Notes to Consolidated Financial Statements |
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(3) Related-Party Transactions
Affiliate Operational Agreements Summary
Blue Dolphin and certain of its subsidiaries are parties to several operational agreements with Affiliates, including the Amended and Restated Operating Agreement, BDSC-LEH Office Sub-Lease Agreement, and the Jet Fuel Sales Agreement.
Working Capital
We historically relied on Affiliates for funding during periods of working capital deficits. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party. During the three and nine months ended September 30, 2022, continued liquidity improvement tied to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations.
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaling $
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
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LEH |
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June LEH Note (in default) |
| $ |
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| $ |
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BDPL-LEH Loan Agreement (in default) |
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LEH Total |
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Ingleside |
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March Ingleside Note (in default) |
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Jonathan Carroll |
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March Carroll Note (in default) |
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Less: Long-term debt, related party, current portion (in default) |
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Less: Accrued interest payable, related party (in default) |
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As indicated in the table below, the $
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| June LEH Note |
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Balance at December 31, 2021 |
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Related-party receivables settled against related-party provided working capital |
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Blue Dolphin operating costs and related LEH management fee under |
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Amended and Restated Operating Agreement |
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Balance at September 30, 2022 |
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The $
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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 22 |
Notes to Consolidated Financial Statements |
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Consolidated Statements of Operations.
Total revenue from operations.
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Third-Parties |
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| % |
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| % |
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| % |
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| % | ||||||||
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| $ |
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| % |
| $ |
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| % |
| $ |
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| % |
| $ |
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| % | ||||||||
Interest expense.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Jonathan Carroll |
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| ||||
Guaranty Fee Agreements |
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| ||||
First Term Loan Due 2034 (in default) |
| $ |
|
| $ |
|
| $ |
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| $ |
| ||||
Second Term Loan Due 2034 (in default) |
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March Carroll Note (in default) |
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| ||||
LEH |
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BDPL-LEH Loan Agreement (in default) |
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| ||||
June LEH Note (in default) |
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| ||||
Ingleside |
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March Ingleside Note (in default) |
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| ||||
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Other. BDSC received sublease income from LEH totaling $
The LEH operating fee, related party increased to approximately $
(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.
Blue Dolphin Energy Company |
| September 30, 2022 │Page 23 |
Notes to Consolidated Financial Statements |
|
|
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.
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
|
|
|
|
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|
|
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| ||||
Refinery operations |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Tolling and terminaling |
|
|
|
|
|
|
|
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|
| ||||
Total revenue from operations |
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| ||||
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|
Intercompany processing fees(1) |
|
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|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total intercompany processing fees |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
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|
|
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|
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|
|
Operation costs and expenses(2) |
|
|
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|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total operation costs and expenses |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
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|
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|
Segment contribution margin (deficit) |
|
|
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|
|
|
|
|
|
Refinery operations |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Tolling and terminaling |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total segment contribution margin (deficit) |
|
|
|
|
|
|
|
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|
|
| ( | ) | |||
|
|
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|
|
General and administrative expenses(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total general and administrative expenses |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
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|
Depreciation and amortization |
|
|
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|
|
|
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|
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|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total depreciation and amortization |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
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|
Interest and other non-operating expenses, net(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinery operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Tolling and terminaling |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total interest and other non-operating expenses, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
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Income (loss) before income taxes |
|
|
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|
Refinery operations |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Tolling and terminaling |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate and other |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total income (loss) before income taxes |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Income tax expense |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
(1) | Fees associated with an intercompany tolling agreement tied to naphtha volumes. |
(2) | 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. |
(3) | General and administrative expenses within refinery operations include the LEH operating fee, impairment expense, and bad debt expense. |
(4) | Corporate and other within interest and other non-operating expenses, net primarily reflects interest expense for the LE Amended and Restated Guaranty Fee Agreement, LRM Amended and Restated Guaranty Fee Agreement, June LEH Note, March Carroll Note, and March Ingleside Note. See “Note (3), ”“Note (15),” and “Note (16)” to our consolidated financial statements for additional information regarding guaranty fee agreements. |
Blue Dolphin Energy Company |
| September 30, 2022 │Page 24 |
Notes to Consolidated Financial Statements |
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Refinery operations |
| $ | 56 |
|
| $ | - |
|
| $ |
|
| $ | - |
| |
Tolling and terminaling |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Corporate and other |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Total capital expenditures |
| $ |
|
| $ | - |
|
| $ |
|
| $ | - |
| ||
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
| (in thousands) |
| |||||
Identifiable assets |
|
|
|
|
|
| ||
Refinery operations |
| $ | 71,582 |
|
| $ | 44,939 |
|
Tolling and terminaling |
|
| 17,151 |
|
|
| 19,878 |
|
Corporate and other |
|
| 1,067 |
|
|
| 1,278 |
|
Total identifiable assets |
| $ |
|
| $ |
| ||
(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 $
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 Tartan. The volume-based Crude Supply Agreement expires when we receive
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews 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.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.
Significant Customers
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2022 |
|
| 2 |
|
|
| % |
| $ | 0 |
| |
September 30, 2021 |
|
| 3 |
|
|
| % |
| $ | 0 |
| |
Nine Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at September 30, |
| |||
|
|
|
|
|
|
|
|
|
| |||
September 30, 2022 |
|
| 2 |
|
|
| % |
| $ |
| ||
September 30, 2021 |
|
| 3 |
|
|
| % |
| $ |
| ||
Blue Dolphin Energy Company |
| September 30, 2022 │Page 25 |
Notes to Consolidated Financial Statements |
|
|
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. For the three months ended September 30, 2022 and 2021, the Affiliate accounted for approximately
Concentration of Customers. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or negatively, which impacts our overall exposure to credit risk. Economic changes include the uncertainties related to COVID-19, the Russian military conflict with Ukraine, inflation, and the associated volatility in the global commodities 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 other countries, such as low sulfur diesel 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 September 30, |
| ||||||||||||||||||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||||||||||||||||||
|
| (in thousands, except percent amounts) |
|
| (in thousands, except percent amounts) |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
LPG mix |
| $ | - |
|
|
| 0.0 | % |
| $ | 9 |
|
|
| 0.0 | % |
| $ | - |
|
|
| 0.0 | % |
| $ | 21 |
|
|
| 0.0 | % |
Naphtha |
|
|
|
|
| % |
|
|
|
|
| % |
|
|
|
|
| % |
|
|
|
|
| % | ||||||||
Jet fuel |
|
|
|
|
| % |
|
|
|
|
| % |
|
|
|
|
| % |
|
|
|
|
| % | ||||||||
HOBM |
|
|
| |||||||||||||||||||||||||||||