10-Q 1 bdco_10q.htm FORM 10-Q bdco_10q.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2023

 

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. 0-15905

 

bdco_10qimg1.jpg

Blue Dolphin Energy Company

 

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

73-1268729

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

801 Travis Street, Suite 2100, Houston, Texas

 

77002

(Address of principal executive offices)

 

(Zip Code)

 

713-568-4725

(Registrant’s telephone number, including area code)

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

BDCO

OTCQX

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer  

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No ☒

 

Number of shares of common stock, par value $0.01 per share outstanding as of November 14, 2023: 14,921,968

 

 

 

 

Table of Contents 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

13

 

 

 

 

 

 

 

Consolidated Balance Sheets (Unaudited)

 

13

 

 

Consolidated Statements of Operations (Unaudited)

 

14

 

 

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

 

15

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

16

 

 

Notes to Consolidated Financial Statements

 

17

 

 

 

 

 

 

ITEM 2.

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

 

40

 

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

57

 

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

57

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

58

 

 

 

 

 

 

ITEM 1A.

RISK FACTORS

 

59

 

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

60

 

 

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

60

 

 

 

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

60

 

 

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

60

 

 

 

 

 

 

ITEM 6.

EXHIBITS

 

61

 

 

 

 

 

 

SIGNATURES

 

 62

 

 

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Table of Contents

 

Glossary of Terms

 

Glossary of Terms

 

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

 

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

 

AMT. Alternative Minimum Tax.

 

ARO.  Asset retirement obligations.

 

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

 

ASU.  Accounting Standards Update.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Board. Board of Directors of Blue Dolphin.

 

BOEM.  Bureau of Ocean Energy Management.

 

BSEE.  Bureau of Safety and Environmental Enforcement.

  

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Table of Contents

 

Glossary of Terms

 

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

 

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

 

CIP.  Construction in progress.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

DLA.  Defense Logistics Agency.

 

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

 

EIA.  Energy Information Administration.

  

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Glossary of Terms 

 

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

 

EPA.  Environmental Protection Agency.

 

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

 

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

 

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

 

FASB.  Financial Accounting Standards Board.

 

FDIC. Federal Deposit Insurance Corporation.

 

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

 

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

 

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

 

GNCU.  Greater Nevada Credit Union.

 

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

 

Gross profit (deficit).  Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount.

 

HOBM.  Heavy oil-based mud blendstock; see also “distillates.”

 

HUBZone.  Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.

 

IBLA.  Interior Board of Land Appeals.

 

INC.  Incident of Noncompliance issued by BOEM and/or BSEE.

 

Ingleside.  Ingleside Crude, LLC, an affiliate of Jonathan Carroll.

 

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

 

Intermediate petroleum products.  A petroleum product that might require further processing before being saleable to the ultimate consumer; further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company that will process it further.

 

IRC Section 382.  Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following ownership change.

 

IRS.  Internal Revenue Service.

 

Jet fuel. A high-quality kerosene product primarily used in aviation.  Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.

 

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

  

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Table of Contents

 

Glossary of Terms 

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

LE Term Loan Due 2034.  Loan Agreement dated June 22, 2015, between LE, Veritex, and guarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; security includes first priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory), assignment of all Nixon facility contracts, permits, and licenses, absolute assignment of Nixon facility rents and leases, including storage tank rental income, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.

 

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

  

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Glossary of Terms 

  

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

 

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

 

LEH Operating Fee.  A management fee paid to LEH under the Second Amended and Restated Operating Agreement; calculated as 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC; previously reflected within refinery operating expenses in our consolidated statements of operations.

 

Leasehold interest. The interest of a lessee under an oil and gas lease.

 

Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.

 

LMT.  Lazarus Marine Terminal I, LLC, an affiliate of LEH.

 

LRM.  Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue Dolphin.

 

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

 

LRM Term Loan Due 2034.  Loan Agreement dated December 4, 2015, between LRM, Veritex, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; security includes second priority lien on rights of LE in crude distillation tower and other collateral of LE, first priority lien on real property interests of LRM, first priority lien on all LRM fixtures, furniture, machinery, and equipment, first priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified storage tanks for which Veritex has a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently under Veritex Forbearance Agreement.

 

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

 

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

 

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

 

Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials it can make high-grade motor gasoline or jet fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions.

 

Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily of methane, but commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium.

 

Nixon facility.  Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas.

  

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Glossary of Terms 

  

Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas.

 

NOL.  Net operating losses.

 

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

 

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

 

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

 

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

 

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

 

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

 

OSHA.  Occupational Safety and Health Administration.

 

OSRO.  Oil Spill Response Organization.

 

Other conversion costs.  Represents the combination of direct labor costs and manufacturing overhead costs.  These are the costs that are necessary to convert our raw materials into refined products.

 

Other operating expenses. Represents costs associated with our natural gas processing, treating, and redelivery facility, as well as our pipeline assets and leasehold interests in oil and gas properties.

 

Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.

 

PHMSA.  Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation.

 

Pilot.  Pilot Travel Centers LLC, a Delaware limited liability company.

 

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

  

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Glossary of Terms 

  

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

 

Preferred Stock.  Blue Dolphin preferred stock, par value $0.10 per share.  Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding as of the filing date of this report.

 

Product slate.  Represents type and quality of products produced.

 

Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.

 

Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, produced by a refinery.

 

Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.

 

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

 

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

 

ROU.  Right-of-use.

 

SBA.  Small Business Administration.

 

SEC. Securities and Exchange Commission.

 

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

 

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

 

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

 

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

 

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

 

Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized based on their sulfur content, with lower sulfur fuels selling at a higher, premium price and higher sulfur fuels selling at a lower, discounted price.

 

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

 

Tartan.  Tartan Oil LLC, an affiliate of Pilot.

 

Texas First.  Texas First Rentals, LLC.

 

TCEQ.  Texas Commission on Environmental Quality.

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 9

 

 

Table of Contents

 

Glossary of Terms 

  

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

 

TMT.  Texas margins tax; a form of business tax imposed on an entity’s gross profit rather than on its net income.

 

Topping unit. A type of petroleum refinery that engages in only the first step of the refining process  crude distillation.  A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.

 

Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO.

 

Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit, and sometimes the entire plant, is taken offline for a week or more for comprehensive revamp and renewal.

 

USACOE.  U.S. Army Corps of Engineers.

 

USDA.  U.S. Department of Agriculture.

 

U.S. GAAP.  Accounting principles generally accepted in the United States of America.

 

Veritex. Veritex Community Bank, successor in interest to Sovereign Bank by merger.

 

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

 

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

 

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

 

XBRL.  eXtensible Business Reporting Language.

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 10

 

 

Table of Contents

 

Important Information Regarding Forward Looking Statements

 

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.

·

Substantial debt in current liabilities, certain of which is currently in default.

·

Continued inability to meet financial covenants under secured loan agreements.

·

Ability to satisfy the terms of our various forbearance agreements.

·

Restrictive covenants in our debt instruments that limit our ability to undertake certain types of transactions.

·

Increased costs of capital or a reduction in the availability of credit.

·

Instability of financial and other markets.

·

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 Texas.

·

Competition from companies with more significant financial and other resources.

·

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.

 

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.

·

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.

·

Inventory write-downs due to declines in commodity prices, which has a negative impact on our operating income and working capital.

·

Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund.

·

Lack of succession planning, 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.

·

Failing to effectively execute new business strategies, such as renewable fuels.

·

Our ability to effect and integrate potential acquisitions.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 11

 

 

Table of Contents

 

Important Information Regarding Forward Looking Statements

 

Legal, Government, and Regulatory

 

·

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.

·

Uncertainty surrounding armed conflicts and terrorist attacks in the United States and other parts of the world, and related responses government responses.

·

General economic, political, or regulatory developments, including recession, inflation, interest rates, taxation, and policy changes that impact our business.

·

Assessment of penalties by regulatory agencies, such as BOEM, BSEE, OSHA and the TCEQ for violations.

·

Our estimates of future AROs related to our pipeline and facilities assets, which may increase.

·

Regulatory changes and other measures related to greenhouse gas emissions, climate change, and an ongoing desire to transition to greater renewable energy solutions.

 

Security

 

·

Increased activism against oil and gas companies.

·

Actual or potential cybersecurity threats or loss of data privacy.

 

Common Stock

 

·

Fluctuations in our stock price that may result in a substantial investment loss.

·

Increasing attention to environmental, social, and governance (ESG) matters.

·

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.

·

Failing 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, 2022 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report.  All forward-looking statements included in this report are based on information available to us on the date of this report.  We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

 

Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 12

 

 

Table of Contents

 

Financial Statements 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Consolidated Balance Sheets (Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

 

 

 

 

 

 

 

(in thousands except share amounts)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$11,471

 

 

$520

 

Accounts receivable, net

 

 

223

 

 

 

1,148

 

Accounts receivable, related party

 

 

1,963

 

 

 

-

 

Prepaid expenses and other current assets

 

 

2,871

 

 

 

3,466

 

Deposits

 

 

110

 

 

 

110

 

Inventory

 

 

28,359

 

 

 

19,844

 

Total current assets

 

 

44,997

 

 

 

25,088

 

 

 

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Total property and equipment, net

 

 

55,601

 

 

 

57,436

 

Operating lease right-of-use assets, net

 

 

215

 

 

 

149

 

Restricted cash, noncurrent

 

 

1,000

 

 

 

1,001

 

Surety bonds

 

 

230

 

 

 

230

 

Total long-term assets

 

 

57,046

 

 

 

58,816

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$102,043

 

 

$83,904

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Long-term debt less unamortized debt issue costs, current portion

 

$38,369

 

 

$42,155

 

Long-term debt, related party, current portion

 

 

-

 

 

 

5,211

 

Interest payable

 

 

3,836

 

 

 

6,271

 

Interest payable, related party

 

 

-

 

 

 

4,094

 

Accounts payable

 

 

1,164

 

 

 

2,161

 

Accounts payable, related party

 

 

600

 

 

 

155

 

Current portion of operating lease liabilities

 

 

199

 

 

 

156

 

Income taxes payable

 

 

612

 

 

 

307

 

Asset retirement obligations, current portion

 

 

4,074

 

 

 

3,710

 

Accrued expenses and other current liabilities

 

 

6,468

 

 

 

6,114

 

Total current liabilities

 

 

55,322

 

 

 

70,334

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Unearned contract renewal income, net of current

 

 

355

 

 

 

660

 

Long-term debt, net of current portion

 

 

5,211

 

 

 

2,322

 

Long-term debt, related party, net of current portion

 

 

4,000

 

 

 

-

 

Long-term interest payable, related party, net of current portion

 

 

4,309

 

 

 

-

 

Total long-term liabilities

 

 

13,875

 

 

 

2,982

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

69,197

 

 

 

73,316

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock ($0.01 par value, 20,000,000 shares authorized; 14,921,968

 

 

 

 

 

 

 

 

shares issued at September 30, 2023 and December 31, 2022) (1)

 

 

149

 

 

 

149

 

Additional paid-in capital

 

 

39,758

 

 

 

39,758

 

Accumulated deficit

 

 

(7,061)

 

 

(29,319)

TOTAL STOCKHOLDERS' EQUITY

 

 

32,846

 

 

 

10,588

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$102,043

 

 

$83,904

 

 

(1)

Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At September 30, 2023 and December 31, 2022, 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, 2023   │Page 13

 

 

Table of Contents

 

Financial Statements 

 

Consolidated Statements of Income (Unaudited)

 

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except share and per-share amounts)

 

REVENUE FROM OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$101,598

 

 

$127,349

 

 

$283,505

 

 

$372,314

 

Tolling and terminaling

 

 

956

 

 

 

920

 

 

 

4,588

 

 

 

2,760

 

Total revenue from operations

 

 

102,554

 

 

 

128,269

 

 

 

288,093

 

 

 

375,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil, fuel use, and chemicals

 

 

87,795

 

 

 

113,664

 

 

 

244,927

 

 

 

332,378

 

Other conversion costs

 

 

3,593

 

 

 

4,570

 

 

 

9,606

 

 

 

9,242

 

Total cost of goods sold

 

 

91,388

 

 

 

118,234

 

 

 

254,533

 

 

 

341,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

11,166

 

 

 

10,035

 

 

 

33,560

 

 

 

33,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH operating fee, related party

 

 

149

 

 

 

258

 

 

 

396

 

 

 

568

 

Other operating expenses

 

 

(65)

 

 

57

 

 

 

95

 

 

 

125

 

General and administrative expenses

 

 

1,112

 

 

 

564

 

 

 

3,230

 

 

 

1,835

 

Depreciation and amortization

 

 

699

 

 

 

699

 

 

 

2,094

 

 

 

2,099

 

Impairment of assets

 

 

324

 

 

 

114

 

 

 

324

 

 

 

114

 

Bad debt expense

 

 

-

 

 

 

62

 

 

 

-

 

 

 

62

 

Accretion of asset retirement obligations

 

 

-

 

 

 

34

 

 

 

59

 

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations

 

 

2,219

 

 

 

1,788

 

 

 

6,198

 

 

 

4,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

8,947

 

 

 

8,247

 

 

 

27,362

 

 

 

28,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

 

30

 

 

 

-

 

 

 

82

 

 

 

-

 

Interest and other expense

 

 

(1,573)

 

 

(1,730)

 

 

(4,574)

 

 

(4,990)

Total other income (expense)

 

 

(1,543)

 

 

(1,730)

 

 

(4,492)

 

 

(4,990)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

7,404

 

 

 

6,517

 

 

 

22,870

 

 

 

23,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

(339)

 

 

(68)

 

 

(612)

 

 

(224)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$7,065

 

 

$6,449

 

 

$22,258

 

 

$23,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.47

 

 

$0.43

 

 

$1.49

 

 

$1.69

 

Diluted

 

$0.47

 

 

$0.43

 

 

$1.49

 

 

$1.69

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

14,921,968

 

 

 

14,825,763

 

 

 

14,921,968

 

 

 

13,797,701

 

Diluted

 

 

14,921,968

 

 

 

14,825,763

 

 

 

14,921,968

 

 

 

13,797,701

 

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 14

 

 

Table of Contents

 

Financial Statements 

  

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

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Shares Issued

 

 

 

Par Value

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Total

Stockholders'

 Equity

 

 

 

 

 

 

(in thousands except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

 

14,921,968

 

 

$149

 

 

$39,758

 

 

$(29,319)

 

$10,588

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

22,258

 

 

 

22,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2023

 

 

14,921,968

 

 

$149

 

 

$39,758

 

 

$(7,061)

 

$32,846

 

 

 

 

Common Stock

 

 

 

 

 

Total 

 

 

 

Shares Issued

 

 

Par Value

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

 Stockholders'

Equity

(Deficit)

 

 

 

 

 

 

(in thousands except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

12,693,514

 

 

$127

 

 

$38,457

 

 

$(62,211)

 

$(23,627)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued for payment of debt

 

 

1,951,416

 

 

 

19

 

 

 

1,142

 

 

 

-

 

 

 

1,161

 

Common stock issued for services

 

 

252,447

 

 

 

3

 

 

 

129

 

 

 

-

 

 

 

132

 

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,337

 

 

 

23,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2022

 

 

14,897,377

 

 

$149

 

 

$39,728

 

 

$(38,874)

 

$1,003

 

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 15

 

 

Table of Contents

  

Financial Statements 

  

Consolidated Statements of Cash Flows (Unaudited)

 

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES 

CONSOLIDATED CASH FLOW STATEMENT

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$22,258

 

 

$23,337

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,094

 

 

 

2,099

 

Accretion of asset retirement obligations

 

 

59

 

 

 

100

 

Amortization of debt issue costs

 

 

153

 

 

 

153

 

Guaranty fees paid in kind

 

 

-

 

 

 

456

 

Related-party interest expense paid in kind

 

 

-

 

 

 

538

 

Deferred revenues and expenses

 

 

(305)

 

 

(427)

Loss on issuance of shares

 

 

-

 

 

 

357

 

Bad debt

 

 

-

 

 

 

62

 

Impairment of fixed assets

 

 

324

 

 

 

114

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

925

 

 

 

(23)

Accounts receivable, related party

 

 

(1,963)

 

 

-

 

Prepaid expenses and other current assets

 

 

595

 

 

 

(2,769)

Inventory

 

 

(8,515)

 

 

(16,498)

Accounts payable, accrued expenses and other liabilities

 

 

(2,758)

 

 

3,148

 

Accounts payable, related party

 

 

445

 

 

 

-

 

Net cash provided by operating activities

 

 

13,312

 

 

 

10,647

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(102)

 

 

(102)

Net cash used in investing activities

 

 

(102)

 

 

(102)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

-

 

 

 

1,500

 

Payments on debt principal

 

 

(1,049)

 

 

(12)

Net activity on related-party debt

 

 

(1,211)

 

 

(5,796)

Net cash used in financing activities

 

 

(2,260)

 

 

(4,308)

Net change in cash, cash equivalents, and restricted cash

 

 

10,950

 

 

 

6,237

 

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

1,521

 

 

 

57

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD

 

$12,471

 

 

$6,294

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of shares for services and/or to extinguish debt

 

$-

 

 

$936

 

Right of use assets financed via operating lease

 

$215

 

 

$-

 

Interest paid

 

$5,737

 

 

$1,893

 

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 16

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

Notes to Consolidated Financial Statements 

 

(1) Organization

 

Company Overview

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

 

Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services).  See “Note (4)” to our consolidated financial statements for more information about our business segments.

 

Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.

 

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report.  An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products.  Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

 

Going Concern

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

 

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

 

Forbearance Agreements.

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 17

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

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

 

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

 

Refining Margins. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. The general outlook for the oil and natural gas industry for the remainder of 2023 remains unclear given general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, uncertainty in the Middle East related to, among other things, Israeli-Hamas armed conflicts, and the continued conflict between Russia and Ukraine.

 

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

 

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

 

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

 

Operating Risks

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 18

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

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

 

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

 

Capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence.  We can provide no guarantees that: our business strategy will be successful; Affiliates will continue to fund our working capital needs if we experience working capital deficits; we will meet regulatory requirements to provide additional supplemental pipeline bonds and abandon offshore assets; we can obtain additional financing on commercially reasonable terms or at all; or margins on our refined products will be favorable.  Further, if lenders exercise their rights and remedies under secured loan agreements that are in default, or if we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our business, financial condition, and results of operations will be materially adversely affected.

 

(2)   Principles of Consolidation and Significant Accounting Policies

 

Basis of Presentation

The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.

 

The consolidated balance sheet as of December 31, 2022 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023, or for any other period.

 

Significant Accounting Policies

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

 

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 19

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

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

 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$11,471

 

 

$520

 

Restricted cash, noncurrent

 

 

1,000

 

 

 

1,001

 

 

 

$12,471

 

 

$1,521

 

 

Accounts Receivable and Allowance for Doubtful Accounts.  Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts.  Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management’s judgment, deserve consideration in estimating bad debts.  Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition.  Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio.  We had an allowance for doubtful accounts of $0 and $0.06 million at September 30, 2023 and December 31, 2022, respectively.

 

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

 

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

 

Property and Equipment.

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

 

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 20

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

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

 

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

 

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

 

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

 

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

 

Revenue Recognition.

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

 

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

 

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

 

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

 

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 21

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 22

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

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

 

New Pronouncements Issued, Not Yet EffectiveNo new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our financial position, results of operations, or liquidity.

 

(3) Related-Party Transactions

 

Affiliate Agreements

 

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

 

Agreement/Transaction

Parties

Effective Date

Key Terms

Blue Dolphin Guaranty Fee Agreement

Blue Dolphin

Jonathan Carroll

01/01/2023

Related to payoff of Blue Dolphin $2.0 million SBA loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051 as consideration for providing his personal guarantee.

Jet Fuel Purchase Agreements

LE

LEH

04/21/2023

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

Jet Fuel Sales Agreement

LE

LEH

04/01/2023

Sale of jet fuel by LE to LEH; 1-year term expiring earliest to occur of 03/31/2024 plus 30-day carryover or delivery of maximum jet fuel quantity; LEH sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.

LE Amended and Restated Guaranty Fee Agreement

LE

Jonathan Carroll

01/01/2023

Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034 as consideration for providing his personal guarantee.

LE Amended and Restated Master Services Agreement

LE

Ingleside

03/01/2023

For storage of products intended for customer receipt by barge; tank rental fee $0.1 million per month.

LRM Amended and Restated Guaranty Fee Agreement

LRM

Jonathan Carroll

01/01/2023

Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034 as consideration for providing his personal guarantee.

NPS Guaranty Fee Agreement

NPS

Jonathan Carroll

01/01/2023

Related to payoff of NPS $10.0 million GNCU loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031 as consideration for providing his personal guarantee.

NPS Terminal Services Agreement

NPS

LEH

11/01/2022

For LEH storage of jet fuel at the Nixon facility; tank rental fee $0.2 million per month; 1-year term on an evergreen basis; either party may cancel upon 60 days’ prior written notice.

Office Sub-Lease Agreement

BDSC

LEH

05/31/23

12-month extension of prior office sublease; term expires 08/31/2024; office lease Houston, Texas; rent approximately $0.003 million per month

Second Amended and Restated Operating Agreement

Blue Dolphin

LE         LRM

NPS      BDPL

BDPC   BDSC

LEH

04/01/2023

1-year term; expires 04/01/2024 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

 

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

 

Loan Description

Parties

Maturity Date

Interest Rate

Loan Purpose

June LEH Note

Blue Dolphin

LEH

Jan 2019

8.00%

Blue Dolphin working capital; reflected amounts owed to LEH under the Second Amended and Restated Operating Agreement

BDPL-LEH Loan Agreement (in forbearance)

BDPL

LEH

Aug 2018

16.00%

Original principal amount of $4.0 million; Blue Dolphin working capital

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 23

 

 

Table of Contents

 

 

Notes to Consolidated Financial Statements

   

Forbearance and Defaults.

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

 

Covenants, Guarantees and Security.

The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type.  Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.

 

See “Notes (1) and (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.

 

Related-Party Financial Impact

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

 

Consolidated Balance Sheets.

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

 

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

 

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

LEH

 

 

 

 

 

 

June LEH Note (debt satisfied)

 

$-

 

 

$1,211

 

BDPL-LEH Loan Agreement (in forbearance)

 

 

8,309

 

 

 

8,094

 

LEH Total

 

 

8,309

 

 

 

9,305

 

 

 

 

 

 

 

 

 

 

Less:  Long-term debt, related party, current portion

 

 

-

 

 

 

(5,211)

Less:  Accrued interest payable, related party

 

 

-

 

 

 

(4,094)

 

 

$8,309

 

 

$-

 

 

Consolidated Statements of Operations.

Total revenue from operations.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

Refinery operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH

 

$33,060

 

 

 

36.9%

 

$48,264

 

 

 

37.6%

 

$93,824

 

 

 

32.6%

 

$134,119

 

 

 

35.8%

Third-Parties

 

 

68,538

 

 

 

60.7%

 

 

79,085

 

 

 

61.7%

 

 

189,681

 

 

 

65.8%

 

 

238,195

 

 

 

63.5%

Tolling and terminaling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH

 

 

540

 

 

 

0.8%

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.0%

 

 

-

 

 

 

-

 

Third-Parties

 

 

416

 

 

 

1.6%

 

 

920

 

 

 

0.7%

 

 

4,588

 

 

 

1.6%

 

 

2,760

 

 

 

0.7%

 

 

$102,554

 

 

 

100.0%

 

$128,269

 

 

 

100.0%

 

$288,093

 

 

 

100.0%

 

$375,074

 

 

 

100.0%

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 24

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

Interest expense.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

Jonathan Carroll

 

 

 

 

 

 

 

 

 

 

 

 

Guaranty Fee Agreements

 

 

 

 

 

 

 

 

 

 

 

 

Tied to First Term Loan Due 2034

 

$101

 

 

$108

 

 

$304

 

 

$324

 

Tied to Second Term Loan Due 2034

 

 

42

 

 

 

45

 

 

 

126

 

 

 

135

 

Tied to Blue Dolphin Term Loan Due 2051

 

 

10

 

 

 

-

 

 

 

30

 

 

 

-

 

Tied to NPS Term Loan Due 2031

 

 

50

 

 

 

-

 

 

 

150

 

 

 

-

 

LEH

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BDPL-LEH Loan Agreement (in forbearance)

 

 

167

 

 

 

160

 

 

 

491

 

 

 

480

 

June LEH Note (debt satisfied)

 

 

-

 

 

 

137

 

 

 

-

 

 

 

522

 

 

 

$370

 

 

$450

 

 

$1,101

 

 

$1,461

 

 

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

 

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

 

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

 

(4) Revenue and Segment Information

 

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

 

Revenue from Contracts with Customers

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

 

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

 

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

 

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

 

Contract Balances

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Accounts receivable (including related-party), beginning of period

 

$1,148

 

 

$126

 

Accounts receivable (including related-party), end of period

 

 

2,186

 

 

 

1,148

 

 

 

 

 

 

 

 

 

 

Unearned revenue, beginning of period

 

$3,888

 

 

$4,388

 

Unearned revenue, end of period

 

 

3,859

 

 

 

3,888

 

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 25

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

Segment Information

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

 

 

 

 Three Months Ended

 

 

 Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$101,598

 

 

$127,349

 

 

$283,505

 

 

$372,314

 

Tolling and terminaling

 

 

956

 

 

 

920

 

 

 

4,588

 

 

 

2,760

 

Total revenue from operations

 

 

102,554

 

 

 

128,269

 

 

 

288,093

 

 

 

375,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany processing fees(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(930)

 

 

(663)

 

 

(2,101)

 

 

(1,991)

Tolling and terminaling

 

 

930

 

 

 

663

 

 

 

2,101

 

 

 

1,991

 

Total intercompany processing fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs of good sold(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(90,985)

 

 

(117,655)

 

 

(253,317)

 

 

(339,849)

Tolling and terminaling

 

 

(403)

 

 

(580)

 

 

(1,216)

 

 

(1,772)

Total costs of goods sold

 

 

(91,388)

 

 

(118,235)

 

 

(254,533)

 

 

(341,621)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

9,683

 

 

 

9,031

 

 

 

28,087

 

 

 

30,474

 

Tolling and terminaling

 

 

1,483

 

 

 

1,003

 

 

 

5,473

 

 

 

2,979

 

Total gross profit

 

 

11,166

 

 

 

10,034

 

 

 

33,560

 

 

 

33,453

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating and general and administrative expenses(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(374)

 

 

(426)

 

 

(1,193)

 

 

(1,021)

Tolling and terminaling

 

 

(306)

 

 

(132)

 

 

(932)

 

 

(255)

Corporate and other

 

 

(840)

 

 

(530)

 

 

(1,979)

 

 

(1,527)

Total other operating and general and administrative expenses

 

 

(1,520)

 

 

(1,088)

 

 

(4,104)

 

 

(2,803)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(303)

 

 

(305)

 

 

(911)

 

 

(918)

Tolling and terminaling

 

 

(342)

 

 

(342)

 

 

(1,026)

 

 

(1,026)

Corporate and other

 

 

(54)

 

 

(52)

 

 

(157)

 

 

(155)

Total depreciation and amortization

 

 

(699)

 

 

(699)

 

 

(2,094)

 

 

(2,099)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other non-operating expenses, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(847)

 

 

(972)

 

 

(2,456)

 

 

(2,392)

Tolling and terminaling

 

 

(502)

 

 

(321)

 

 

(1,462)

 

 

(1,148)

Corporate and other

 

 

(194)

 

 

(437)

 

 

(574)

 

 

(1,450)

Total interest and other non-operating expenses, net

 

 

(1,543)

 

 

(1,730)

 

 

(4,492)

 

 

(4,990)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

8,159

 

 

 

7,328

 

 

 

23,527

 

 

 

26,143

 

Tolling and terminaling

 

 

333

 

 

 

208

 

 

 

2,053

 

 

 

550

 

Corporate and other

 

 

(1,088)

 

 

(1,019)

 

 

(2,710)

 

 

(3,132)

Total income before income taxes

 

 

7,404

 

 

 

6,517

 

 

 

22,870

 

 

 

23,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(339)

 

 

(68)

 

 

(612)

 

 

(224)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$7,065

 

 

$6,449

 

 

$22,258

 

 

$23,337

 

 

(1)

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

(2)

Cost of goods sold within tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance).

(3)

General and administrative expenses within refinery operations includes the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 26

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$-

 

 

$56

 

 

$102

 

 

$102

 

Tolling and terminaling

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Corporate and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total capital expenditures

 

$-

 

 

$56

 

 

$102

 

 

$102

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

 (in thousands)

 

Identifiable assets

 

 

 

 

 

 

Refinery operations

 

$84,218

 

 

$64,359

 

Tolling and terminaling

 

 

16,568

 

 

 

17,836

 

Corporate and other

 

 

1,257

 

 

 

1,709

 

Total identifiable assets

 

$102,043

 

 

$83,904

 

 

(5) Concentration of Risk

 

Bank Accounts

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor.  At September 30, 2023 and December 31, 2022, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $11.7 million and $0.9 million, respectively. Instability and volatility in the capital, credit, and commodity markets, as well as with financial institutions, could adversely affect our cash balances (including restricted cash) in excess of FDIC insurance limits per depositor. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

 

Key Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We currently operate under a crude supply agreement with Tartan. Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the Crude Supply Agreement and terminal services agreement. The effective date of the termination is December 31, 2023.  Management has continued to develop crude supplier relationships over the past year.  As a result, management believes that available alternative suppliers will be able to provide us with adequate amounts of crude oil and condensate following agreement termination and for the foreseeable future.

 

Under the volume-based Crude Supply Agreement, Tartan was to deliver 24.8 million net bbls of crude oil. For the nine months ended September 30, 2023 and 2022, volume delivered under the Crude Supply Agreement, as a percentage of the total net bbls of crude oil deliverable, was 66.8% and 50.3%, respectively. During the three and nine months ended September 30, 2023, substantially all our crude was sourced from Tartan.  During the three and nine months ended September 30, 2022, all our crude oil was sourced from Tartan. At September 30, 2023, accounts payable for crude oil and condensate was $0.

 

See “Note (16)” to our consolidated financial statements for additional information regarding the Crude Supply Agreement and terminal services agreement.

 

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, 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, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 27

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

  

Customers

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, 2023

 

 

3

 

 

 

73.5%

 

$2.1 million

 

September 30, 2022

 

 

2

 

 

 

64.4%

 

$

0

 

 

Nine Months Ended

 

Number

Significant

Customers

 

 

% Total

Revenue from Operations

 

 

Portion of

Accounts Receivable at September 30,

 

 

 

 

 

 

 

 

 

 

 

September 30, 2023

 

 

3

 

 

 

72.6%

 

$2.1 million

 

September 30, 2022

 

 

2

 

 

 

60.9%

 

$

0

 

 

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.  The jet fuel, which is stored at the Nixon Facility, is lifted by the Affiliate as needed.  For the three months ended September 30, 2023 and 2022, the Affiliate accounted for 32.2% and 37.6% of total revenue from operations, respectively. For the nine months ended September 30, 2023 and 2022, the Affiliate accounted for 32.6% and 35.8% of total revenue from operations, respectively.  Accounts receivable by the Affiliate represented $2.0 million at September 30, 2023.

 

Customer Concentration.  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 uncertainties related to commodity price volatility, recession and inflation, and armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products.  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 naphtha and distillate 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,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LPG mix

 

$37

 

 

 

0.0%

 

$-

 

 

 

0.0%

 

$149

 

 

 

0.1%

 

$-

 

 

 

0.0%

Naphtha

 

 

27,659

 

 

 

27.2%

 

 

25,571

 

 

 

20.1%

 

 

57,562

 

 

 

20.3%

 

 

80,707

 

 

 

21.7%

Jet fuel

 

 

33,060

 

 

 

32.5%

 

 

48,264

 

 

 

37.9%

 

 

93,824

 

 

 

33.1%

 

 

134,119

 

 

 

36.0%

HOBM

 

 

16,047

 

 

 

15.8%

 

 

19,143

 

 

 

15.0%

 

 

59,732

 

 

 

21.1%

 

 

63,045

 

 

 

16.9%

AGO

 

 

24,795

 

 

 

24.5%

 

 

34,371

 

 

 

27.0%

 

 

72,238

 

 

 

25.4%

 

 

94,443

 

 

 

25.4%

 

 

$101,598

 

 

 

100.0%

 

$127,349

 

 

 

100.0%

 

$283,505

 

 

 

100.0%

 

$372,314

 

 

 

100.0%

 

An Affiliate, LEH, purchases all our jet fuel.  See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements.

 

(6) Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Prepaid insurance

 

$1,381

 

 

$1,066

 

Prepaid crude oil and condensate

 

 

1,288

 

 

 

2,183

 

Other prepaids

 

 

165

 

 

 

163

 

Prepaid easement renewal fees

 

 

37

 

 

 

54

 

 

 

$2,871

 

 

$3,466

 

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 28

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

(7) Inventory

 

Inventory as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

HOBM

 

$13,941

 

 

$14,879

 

Jet

 

 

8,555

 

 

 

-

 

Naphtha

 

 

3,538

 

 

 

1,056

 

Crude oil and condensate

 

 

987

 

 

 

3,458

 

AGO

 

 

162

 

 

 

301

 

Chemicals

 

 

136

 

 

 

116

 

Propane

 

 

37

 

 

 

27

 

LPG mix

 

 

3

 

 

 

7

 

 

 

$27,359

 

 

$19,844

 

 

(8) Property, Plant and Equipment, Net

 

Property, plant and equipment, net, as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Refinery and facilities

 

$72,675

 

 

$72,675

 

Land

 

 

566

 

 

 

566

 

Other property and equipment

 

 

913

 

 

 

913

 

 

 

 

74,154

 

 

 

74,154

 

 

 

 

 

 

 

 

 

 

Less:  Accumulated depreciation and amortiation

 

 

(22,323)

 

 

(20,387)

 

 

 

51,831

 

 

 

53,767

 

 

 

 

 

 

 

 

 

 

CIP

 

 

3,770

 

 

 

3,669

 

 

 

$55,601

 

 

$57,436

 

 

(9) Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Unearned revenue from contracts with customers

 

$3,859

 

 

$3,888

 

Insurance

 

 

777

 

 

 

568

 

Unearned contract renewal income

 

 

480

 

 

 

480

 

Accrued fines and penalties

 

 

522

 

 

 

407

 

Taxes payable

 

 

279

 

 

 

64

 

Other payable

 

 

200

 

 

 

324

 

Board of director fees payable

 

 

188

 

 

 

210

 

Customer deposits

 

 

163

 

 

 

173

 

 

 

$6,468

 

 

$6,114

 

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 29

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

(10) Third-Party Long-Term Debt

 

Loan Agreements

 

Loan Description

 

Parties

Principal

(in millions)

Origination / Maturity

Monthly Principal

and Interest Payment

 

Interest Rate

 

Loan Purpose

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance) (1)

LE

Veritex

$25.0

Jun 2015 / Jun 2034

$0.2 million

WSJ Prime + 2.75%

Refinance loan; capital improvements

LRM Term Loan Due 2034 (in forbearance) (1)

LRM

Veritex

$10.0

Dec 2015 / Dec 2034

$0.1 million

WSJ Prime + 2.75%

Refinance bridge loan; capital improvements

Kissick Debt(in forbearance)(2)(3)(4)

LE

Kissick

$11.7

Jun 2006 / Jan 2018

$0.5 million

6.25%

Working capital

GNCU Loan

 

 

 

 

 

 

NPS Term Loan Due 2031(in default) (5)

NPS

GNCU

$10.0

Oct 2021 / Oct 2031

$0.1 million

5.75%

Working capital

SBA EIDLs

 

 

 

 

 

 

Blue Dolphin Term Loan Due 2051 (as modified)(6)

Blue Dolphin

SBA

$2.0

May 2021 / Jun 2051

$0.01 million

3.75%

Working capital

LE Term Loan Due 2050(7)

LE

SBA

$0.15

Aug 2020 / Aug 2050

$0.0007 million

3.75%

Working capital

NPS Term Loan Due 2050(7)

NPS

SBA

$0.15

Aug 2020 / Aug 2050

$0.0007 million

3.75%

Working capital

Equipment Loan Due 2025(8)

LE

Texas First

$0.07

Oct 2020 / Oct 2025

$0.0013 million

4.50%

Equipment Lease Conversion

 

(1)

At both September 30, 2023 and December 31, 2022, restricted cash, noncurrent, representing amounts held by Veritex in a payment reserve account, was $1.0 million.

(2)

Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million.

(3)

Pursuant to the Kissick Forbearance Agreement, LE began making monthly payments of $0.5 million to Kissick Noteholder in April 2023; as modified, interest on outstanding principal and accrued and unpaid interest decreased from 16.00% to 6.25% per year.

(4)

Subject to the Kissick Subordination Agreement.

(5)

Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First payment due in November 2024.

(6)

Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable.

(7)

Payments deferred for thirty (30) months; first payment due and paid in February 2023; interest accrued during deferral period; loan not forgivable.

(8)

In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.

 

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

$20,074

 

 

$20,801

 

LRM Term Loan Due 2034 (in forbearance)

 

 

8,351

 

 

 

8,671

 

Kissick Debt (in forbearance)

 

 

8,521

 

 

 

11,006

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

9,975

 

 

 

9,975

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

2,137

 

 

 

2,082

 

LE Term Loan Due 2050

 

 

161

 

 

 

162

 

NPS Term Loan Due 2050

 

 

161

 

 

 

162

 

Equipment Loan Due 2025

 

 

33

 

 

 

38

 

 

 

 

49,413

 

 

 

52,897

 

 

 

 

 

 

 

 

 

 

Less: Current portion of long-term debt, net

 

 

(38,369)

 

 

(42,155)

Less: Unamortized debt issue costs

 

 

(1,997)

 

 

(2,149)

Less: Accrued interest payable

 

 

(3,836)

 

 

(6,271)

 

 

$5,211

 

 

$2,322

 

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 30

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

    

Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

$1,674

 

 

$1,674

 

LRM Term Loan Due 2034 (in forbearance)

 

 

768

 

 

 

768

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031  (in default)

 

 

730

 

 

 

730

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

(1,175)

 

 

(1,023)

 

 

$1,997

 

 

$2,149

 

 

Amortization expense was $0.05 million for both three-month periods ended September 30, 2023 and 2022.  Amortization expense was $0.1 million for both nine-month periods ended September 30, 2023 and 2022.

 

Accrued interest related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Kissick Debt (in forbearance)

 

$3,544

 

 

$6,028

 

Veritex Loans

 

 

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

 

49

 

 

 

53

 

LRM Term Loan Due 2034 (in forbearance)

 

 

67

 

 

 

66

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

17

 

 

 

17

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

137

 

 

 

82

 

LE Term Loan Due 2050

 

 

11

 

 

 

12

 

NPS Term Loan Due 2053

 

 

11

 

 

 

12

 

Equipment Loan Due 2025

 

 

-

 

 

 

1

 

 

 

 

3,836

 

 

 

6,271

 

Less: Accrued interest payable

 

 

(3,836)

 

 

(6,271)

Long-term Interest Payable, Net of Current Portion

 

$-

 

 

$-

 

 

The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2023 and December 31, 2022.  Although the debt associated with the Kissick Debt was classified within the current portion of long-term debt on our consolidated balance sheet at December 31, 2022, the Kissick Debt was reclassified to long-term debt, net of current portion at September 30, 2023 as a result of the Kissick Forbearance Agreement.

 

Forbearance and Defaults

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

 

Under the Veritex Forbearance Agreement, which expired on September 30, 2023, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex Forbearance Agreement was superseded by the Veritex First Amended Forbearance Agreement. 

 

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

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 31

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

Other Defaults. As of September 30, 2023 and the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations.  Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.  In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.

 

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure the debt, and/or (iii) third parties will provide future forbearances or default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. 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 our business, the trading price 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. If the debt associated with secured loan agreements is accelerated and we are unable to refinance or restructure the debt or obtain default waivers, we may have to consider other options, including selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, filing bankruptcy, or ceasing operating. See “Notes (1) and (3)” 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.

 

Guarantees and Security

 

Loan Description

Guarantees

Security

Veritex Loans

 

 

LE Term Loan Due 2034 (in forbearance)

•       USDA

 

•       Jonathan Carroll(1)

 

·       Affiliate cross-guarantees

 

•       First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory)

 

•       Assignment of all Nixon facility contracts, permits, and licenses

 

•       Absolute assignment of Nixon facility rents and leases, including tank rental income

 

•       $5.0 million life insurance policy on Jonathan Carroll

 

LRM Term Loan Due 2034 (in forbearance)

•      USDA

 

•       Jonathan Carroll(1)

 

•       Affiliate cross-guarantees

 

•       Second priority lien on rights of LE in crude distillation tower and other collateral of LE

 

•       First priority lien on real property interests of LRM

 

•       First priority lien on all LRM fixtures, furniture, machinery, and equipment

 

•       First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien

 

•       Substantially all assets

 

Kissick Debt (in forbearance)(2)

---

•       Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE

 

GNCU Loan

 

 

NPS Term Loan Due 2031 (in default)

•       USDA

 

•       Jonathan Carroll(1)

 

•       Affiliate cross-guarantees

 

•      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

 

•      Assignment of leases and rents and certain personal property

 

SBA EIDLs

 

 

Blue Dolphin Term Loan Due 2051

---

•      Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)

 

LE Term Loan Due 2050

---

•      Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)

 

NPS Term Loan Due 2050

---

•      Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)

 

Equipment Loan Due 2025

---

•      First priority security interest in the equipment (backhoe).

 

 

 

(1)

Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest.

 

(2)

Subject to the Kissick Subordination Agreement.

 

(11) AROs

 

Refinery and Facilities

Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

 

Pipelines and Facilities and Oil and Gas Properties

We have AROs associated with decommissioning our pipelines and facilities assets, as well as plugging and abandoning our oil and gas properties.  We recorded a discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipment. We recorded an additional increase in liability during the twelve months ended December 31, 2022 due to a further change in timing.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 32

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

   

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

 

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

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

 

ARO liability as of the dates indicated was as follows:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

AROs, at the beginning of the period

 

$3,710

 

 

$3,461

 

Changes in estimates of existing obligations

 

 

323

 

 

 

114

 

Liabilities settled nine months ended September 30, 2023

 

 

(18)

 

 

-

 

Accretion expense nine months ended September 30, 2023

 

 

59

 

 

 

135

 

 

 

 

 

 

 

 

 

 

Less:  AROs, current portion

 

 

(4,074)

 

 

(3,710)

Long-term AROs, at the end of the period

 

$-

 

 

$-

 

 

See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.

 

(12) Lease Obligations

 

Lease Obligations

Office Lease.  We maintain our corporate headquarters in Houston, Texas.  In May 2023, BDSC signed a 12-month extension to its existing operating lease. The extended term commenced on September 1, 2023 and expires on August 31, 2024. Under the amended agreement, the annual rent was reduced from $31.00 per square foot to $30.00 per square foot, resulting in a monthly base rental amount of $0.02 million.

 

An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended September 30, 2023 and 2022.  Sublease income from LEH totaled $0.03 million for both nine-month periods ended September 30, 2023 and 2022.  See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

 

Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million and $0.9 million for the three-month period ended September 30, 2023 and nine-month period ended September 30, 2023, respectively.  Due to its one-year term, the lease is being treated as short term.  As a result, the lease was not recorded on our balance sheet. See “Note (3)” to our consolidated financial statements for additional disclosures related to the LE Amended and Restated Master Services Agreement.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 33

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

 

 

 

 

 

September 30,

 

 

December 31,

 

 

Balance Sheet Location

 

2023

 

 

2022

 

 

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

Operating lease ROU assets

 

Operating lease ROU assets

 

$1,003

 

 

$787

 

Less: Accumulated amortization on operating lease assets

 

Operating lease ROU assets

 

 

(788)

 

 

(638)

 

 

 

 

 

 

 

 

 

 

 

Total lease assets

 

 

 

 

215

 

 

 

149

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating lease

 

Current portion of lease liabilities

 

 

199

 

 

 

156

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

Operating lease

 

Long-term lease liabilities, net of current

 

 

-

 

 

 

-

 

Total lease liabilities

 

 

 

$199

 

 

$156

 

 

Weighted average remaining lease term in years

 

Operating lease(1)

 

 

0.92

 

Weighted average discount rate

 

 

 

 

Operating lease

 

 

8.25%

 

 

(1)

Pursuant to a May 2023 amendment, the operating lease term was extended by twelve (12) months.

 

The following table presents information related to lease costs incurred for operating and finance leases:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease costs

 

$55

 

 

$51

 

 

$158

 

 

$154

 

Short-term lease expense, related party

 

 

300

 

 

 

-

 

 

 

700

 

 

 

-

 

Total lease cost

 

$355

 

 

$51

 

 

$858

 

 

$154

 

 

The table below presents supplemental cash flow information related to leases as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

(in thousands)

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows for operating lease

 

$57

 

 

$50

 

 

$172

 

 

$151

 

 

As of September 30, 2023, maturities of lease liabilities for the periods indicated were as follows:

 

September 30,

 

Operating

Lease

 

 

 

 (in thousands)

 

 

 

 

 

2024

 

$199

 

 

 

$199

 

 

Future minimum annual lease commitments that are non-cancelable:

 

 

 

Operating

 

September 30,

 

 Lease

 

 

 

 (in thousands)

 

2024

 

$211

 

 

 

$211

 

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 34

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

(13) Income Taxes

 

The Inflation Reduction Act ("IRA") was enacted into law in August 2022.  The IRA imposes a 15% alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable corporations” and are therefore exempt from payment of an alternative minimum tax.

 

Tax Provision

The provision for income tax benefit (expense) for the periods indicated was as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

 

(in thousands)

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$(262)

 

$-

 

 

$(382)

 

$-

 

State

 

 

(77)

 

 

(68)

 

 

(230)

 

 

(224)

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(1,277)

 

 

(1,257)

 

 

(4,373)

 

 

(5,152)

Change in valuation allowance

 

 

1,277

 

 

 

1,257

 

 

 

4,373

 

 

 

5,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total provision for income taxes

 

$(339)

 

$(68)

 

$(612)

 

$(224)

 

GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.

 

Deferred income taxes as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

NOL and capital loss carryforwards

 

$7,526

 

 

$11,088

 

Business interest expense

 

 

2,793

 

 

 

3,524

 

Start-up costs (crude oil and condensate processing facility)

 

 

275

 

 

 

339

 

ARO liability/deferred revenue

 

 

856

 

 

 

779

 

Other

 

 

62

 

 

 

43

 

Total deferred tax assets

 

 

11,512

 

 

 

15,773

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Basis differences in property and equipment

 

 

(8,328)

 

 

(8,216)

Total deferred tax liabilities

 

 

(8,328)

 

 

(8,216)

 

 

 

3,184

 

 

 

7,557

 

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(3,184)

 

 

(7,557)

 

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

$-

 

 

$-

 

 

Deferred Income Taxes

Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards.  We record the balances based on tax rates we expect to be in effect when paid.  NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

 

NOL Carryforwards

Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 35

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of approximately $0.6 million per year.  We may use any unused portions of the limitation in subsequent years.  Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused.  NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards that were generated beginning in 2018 may only be used to offset 80% of taxable income and are carried forward indefinitely.

 

NOL Carryforwards Available for Use. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):

 

 

 

Net Operating Loss Carryforward

 

 

 

 

 

 

Pre-

Ownership

Change

 

 

Post-

Ownership

Change

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

$7,897

 

 

$65,511

 

 

$73,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses used and expired

 

 

(6,127)

 

 

(22,384)

 

 

(28,511)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2022

 

$1,770

 

 

$43,127

 

 

$44,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses used and expired

 

 

(638)

 

 

(15,560)

 

 

(16,198)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2023

 

$1,132

 

 

$27,567

 

 

$28,699

 

 

Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets.  This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At September 30, 2023 and December 31, 2022, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of September 30, 2023 and December 31, 2022. 

 

We have NOL carryforwards that remain available for future use. At September 30, 2023 and December 31, 2022, there were no uncertain tax positions for which a reserve or liability was necessary. 

 

(14) Earnings and Dividends Per Share

 

A reconciliation between basic and diluted income per share for the periods indicated was as follows:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands,

 

 

(in thousands,

 

 

 

except share and per share amounts)

 

 

except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$7,065

 

 

$6,449

 

 

$22,258

 

 

$23,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

$0.47

 

 

$0.43

 

 

$1.49

 

 

$1.69

 

Basic and diluted shares used in computing earnings per share

 

 

14,921,968

 

 

 

14,825,763

 

 

 

14,921,968

 

 

 

13,797,701

 

 

Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding plus dilutive instruments.  Diluted EPS for the three and nine months ended September 30, 2023 and 2022 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.

 

Shareholders are entitled to receive such dividends as may be declared by our Board out of funds legally available for such purpose. However, no dividend may be declared or paid unless after-tax profit was made in the preceding fiscal year, we are in compliance with covenants in our secured loan agreements, we are current on all required debt payments, and we have received prior written concurrence from certain of our lenders.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 36

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

(15) Commitments and Contingencies

 

Second Amended and Restated Operating Agreement

See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the Second Amended and Restated Operating Agreement.

 

Offshore Pipelines and Platform Requirements

BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations.  Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations.  Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

 

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

 

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

 

Due to BDPL’s failure to comply with BSEE requirements, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.

 

Inspections.  In March 2023, BSEE issued BDPL an INC for failing to perform required 2021 and 2022 structural surveys for the GA-288C platform, and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023.  Although BDPL requested a second extension, BSEE denied BDPL’s request.  BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023. Because BDPL failed to comply with the INC within the allotted timeframe, on October 24, 2023 BSEE proposed an administrative civil penalty of approximately $0.2 million.  The proposed administrative civil penalty will be finalized 30 days following the date of notice.  We recorded a liability for the maximum proposed amount of approximately $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of September 30, 2023. See “Note (16)” to our consolidated financial statements for additional information regarding the BSEE civil penalty.

 

Defaults Under Secured Loan Agreements with Third Parties and Related Parties

See “Notes (1), (3), (10), and (16)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.

 

Financing Agreements and Guarantees

Indebtedness.  See “Notes (1), (3), and (10)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.

 

Guarantees.  Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries.  The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made.  See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.

 

Health, Safety and Environmental Matters

The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failing to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 37

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

Legal Matters

In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes.  We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

 

Unresolved Matters.

Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.

 

On October 28, 2022, Pilot commenced an action and application for a temporary restraining order against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the temporary restraining order was denied the same day.

 

On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS agreed to forbear from exercising its remedies under the Texas Business and Commerce Code while the parties explored a potential compromise of the dispute pursuant to the Pilot Forbearance and Accommodation Agreement, with a forbearance period terminating on February 28, 2023. As part of the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023. 

 

On March 31, 2023, NPS and Pilot executed the Pilot Forbearance Amendment, extending the forbearance period and all deadlines in the unresolved Texas Action to June 15, 2023.  As part of the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all 185,000 bbls of stored jet fuel in April 2023. On June 16, 2023, following expiration of the Pilot Forbearance and Accommodation Agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to August 31, 2023. On August 28, 2023 the parties filed a joint motion to stay this case. The parties anticipate attending mediation in December 2023 to settle all outstanding disputes. If, upon conclusion of the mediation there is no resolution, then either party may individually or jointly move for the court to lift the stay and enter a new scheduling order and trial setting.

 

BOEM Supplemental Pipeline Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL historically maintained $0.9 million in pipeline bonds with BOEM for the decommissioning of its trunk pipeline offshore in federal waters.  Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way.  In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.  Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to the abandonment of BDPL’s offshore pipelines and platform may help in future discussions with BOEM related to the INCs. Abandonment of these assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.

 

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. 

 

We are currently unable to predict the outcome of the supplemental pipeline bond INCs.  Accordingly, we did not record a liability on our consolidated balance sheets as of September 30, 2023 and December 31, 2022.  At both September 30, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. However, as noted below, we may need to secure a new bonding relationship. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 38

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

RLI Surety Bonds.   For more than twenty (20) years, Blue Dolphin has maintained several surety bonds through RLI Insurance Company (“RLI”) as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In June and July 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling $1.0 million or provide bond exonerations and replacement bonds.  Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management is hopeful that Blue Dolphin and RLI will reach an interim agreement to maintain the bonds as currently placed given BDPL’s near term plan to decommission the offshore assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all supplemental pipeline bonds required by BOEM, which would reduce the amount of surety bonds held by RLI from $1.25 million to $0.25 million.

 

TCEQ Proposed Agreed Order.  In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020.  The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believes the penalty matter is resolved, LRM expects to continue working with TCEQ to fully remediate certain open items. At September 30, 2023, we adjusted our recorded liability downward slightly to reflect the final penalty amount, as we had previously recorded the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities.

 

Pilot Dispute Related to Set-Off Payments.  In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit.  However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the amount remained in dispute between the parties. However, this matter is one of the topics to be addressed during the December 2023 mediation with Pilot.

 

Defaults under Secured Loan Agreements.  We are currently in default under certain of our secured loan agreements with third parties and related parties.  See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If lenders exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

Counterparty Contract-Related Dispute.  As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil.  Management is working to resolve the dispute amicably;  however, the potential outcome is unknown.  Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows.  However, there can be no assurance that management’s efforts will result in a manageable outcome.

 

(16) Subsequent Events

 

Veritex First Amended Forbearance Agreement

On October 30, 2023, but effective September 30, 2023 (the “Amendment Effective Date”), LE, LRM, Veritex, and guarantors (as defined therein), entered into the First Amended Forbearance Agreement). Under the First Amended Forbearance Agreement, Veritex agreed to forbear from exercising any of its remedies under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 in connection with existing defaults beginning on the Amendment Effective Date through and including December 29, 2023 (the “Forbearance Termination Date”). Unless sooner terminated as stipulated under the First Amended Forbearance Agreement, Veritex also agreed to forbear from testing the Borrowers’ compliance with financial covenants and taking any action to exercise its rights and/or remedies with respect to LE or LRM’s compliance or non-compliance with financial covenants from the Amendment Effective Date through the Forbearance Termination Date.

 

Termination of Crude Supply Agreement and Terminal Services Agreement

As previously disclosed, LE entered into a Crude Supply Agreement with Pilot dated May 7, 2019, as amended on November 11, 2019.  The Crude Supply Agreement was assigned by Pilot to Tatan pursuant to an Assignment of Contract dated March 20, 2020. Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a Terminal Services Agreement with NPS dated June 1, 2019. Pursuant to a letter dated October 31, 2023, and received by LE and NPS on November 2, 2023, Tartan provided the required 60 days’ notice of its intention to terminate the Crude Supply Agreement and Terminal Services Agreement effective December 31, 2023. There were no penalties associated with the termination. We will recognize a non-cash gain related to the remaining portion of the contract renewal bonus in the fourth quarter of 2023.

 

BSEE Civil Penalty

On October 24, 2023, BSEE proposed an administrative civil penalty of approximately $0.2 million related to BDPL’s failure to timely remediate an INC related to a required platform inspection. The proposed administrative civil penalty will be finalized 30 days following the date of notice.  We recorded a liability for the maximum proposed amount of approximately $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of September 30, 2023.

  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is management’s perspective of our current financial condition and results of operations, as well as significant trends that may affect future performance.  All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain.  See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.  You should read the following discussion together with the financial statements and the related notes included elsewhere in this report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.  

 

Overview and Outlook

 

Company Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States.  Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas.  Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS).  Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

 

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report.  An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products.  Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates.  See “Part I, Item 1. Financial Statements– Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

 

Going Concern

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

 

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

 

Business Operations Update

During the third quarter of 2023, oil and gas commodity prices rebounded compared to the second quarter of 2023. Higher refining margins and a sell off of previously built-up inventory with a lower cost basis contributed to Blue Dolphin reporting net income of $7.1 million, or $0.47 per share, for the three months ended September 30, 2023 (“Q3 2023”) on lower refinery throughput, production, and sales volumes compared to the same period a year earlier. We reported net income of $6.4 million, or $0.43 per share, for the three months ended September 30, 2022 (“Q3 2022”). Our full operating results for the three and nine months ended September 30, 2023, including operating results by segment, can be found within ‘—Results of Operations.’

 

We had cash flow from operations of $11.2 million for the three months ended September 30, 2023 (“Q3 2023”). At September 30, 2023, we had approximately $11.5 million in liquidity. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within ‘—Liquidity and Capital Resources.’

  

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Management’s Discussion and Analysis

 

 

 

General Trends and Outlook

Many uncertainties remain surrounding the capital, credit, and commodity markets, which could impact our ability to obtain additional financing to refinance and restructure debt. In addition, uncertainty related to global supply and demand for petroleum-based products due to potential recession and inflation driven demand destruction and any potential resolution of the Russian-Ukrainian and Israeli-Hamas armed conflicts could adversely impact our refining margins and refined product sales. It is difficult to predict the ultimate economic impacts that these factors may have on our operations and financial results.  For example, significantly weaker refining margins impacted our results of operations during the second quarter of 2023; however, results of operations improved significantly during the third quarter of 2023.

 

Liquidity and Access to Capital Markets

We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. During 2023, we entered into the Veritex First Amended Forbearance Agreement, LEH Forbearance Agreement, and Kissick Forbearance Agreement. During 2022, we secured $1.5 million in working capital through CARES Act loans and entered into our first forbearance with Veritex.

 

There can be no assurance that we will be able to raise additional capital on acceptable terms, if at all, or refinance existing debt. If we are unable to refinance or restructure debt, certain of which is currently in default, or forbear or waive defaults and lenders exercise their rights with respect to the debt, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to manage business disruptions, such as those experienced during the height of the COVID-19 pandemic, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.

 

Changes in Regulations

Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other greenhouse gas emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.

 

Business Strategy and Accomplishments

Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:

 

 

 

 

Optimize Existing Asset Base

 

·          Maintain safe operations and enhance health, safety, and environmental systems. 

·          Plan and manage turnarounds and downtime.

 

 

 

 

 

 

 

Improve Operational Efficiencies

 

·          Reduce or streamline variable costs incurred in production. 

·          Increase throughput capacity and optimize product slate. 

·          Increase tolling and terminaling revenue.

 

 

 

 

 

 

 

Seize Market Opportunities

 

·          Leverage existing infrastructure to engage in renewable energy projects. 

·          Take advantage of market opportunities as they arise. 

 

 

 

 

Optimize Existing Asset Base

Although downtime at the Nixon facility increased by 1 day for Q3 2023 compared to the three months ended September 30, 2022 (“Q3 2022”), the facility underwent a planned three-day turnaround for maintenance of several large components. On a year-to-date basis, the Nixon facility improved uptime by 4 days, experiencing 11 days of downtime for the nine months ended September 2023 (“YTD 2023”) compared to 15 days of downtime for the nine months ended September 30, 2022 (“YTD 2022”). Downtime in YTD 2023 related to maintenance and repairs (8 days) and a planned turnaround (3 days); downtime in YTD 2022 related to maintenance and repairs (11 days) and crude deficiencies associated with cash constraints (4 days). Throughout 2023 we have continued to focus on improvements in day-to-day plant operations and identifying safety and mechanical process improvements to optimize plant operations, particularly considering elevated Texas temperatures.

 

Improve Operational Efficiencies

Tolling and terminaling revenue increased nearly 4% in Q3 2023 compared to Q3 2022 because of higher ancillary services fees and increased tank rental revenue.  Tolling and terminaling revenue increased $1.8 million in YTD 2023 compared to YTD 2022 primarily as a result of April and June payments under the Pilot Forbearance Amendment.

 

  

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Seize Market Opportunities

In 2021, we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on renewable energy growth. Rising demand for renewable energy is attributable to a variety of factors, including growing public support, U.S. governmental actions to increase energy independence, and environmental concerns related to climate change. During Q3 2023, management continued to have discussions with potential commercial partners. Management expects to continue with these efforts throughout 2023. As discussed throughout this report, our ‘going concern’ opinion may impact our renewable energy endeavors. Furthermore, reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects.

 

Successful execution of our business strategy depends on multiple factors.  These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects.  Our business strategy involves risks.  Accordingly, we cannot assure investors that our plans will be successful.  If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, filing bankruptcy, or ceasing operating. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

 

Downstream Operations

Our refinery operations segment consists of the following assets and operations:

 

Property

 

Key Products

Handled

 

Operating

Subsidiary

 

 

Location

 

 

 

 

 

Nixon facility

·         Crude distillation tower (15,000 bpd) 

·          Petroleum storage tanks (operations support) 

·          Loading and unloading facilities 

·          Land (56 acres) 

 

Crude Oil

Refined Products

 

LE

 

Nixon, Texas

 

Crude Oil and Condensate Supply

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We currently operate under a crude supply agreement with Tartan. Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the Crude Supply Agreement and terminal services agreement. The effective date of the termination is December 31, 2023.  Management has continued to develop crude supplier relationships over the past year.  As a result, management believes that available alternative suppliers will be able to provide us with adequate amounts of crude oil and condensate following agreement termination and for the foreseeable future.

 

Under the volume-based Crude Supply Agreement, Tartan was to deliver 24.8 million net bbls of crude oil. For the nine months ended September 30, 2023 and 2022, volume delivered under the Crude Supply Agreement, as a percentage of the total net bbls of crude oil deliverable, was 66.8% and 50.3%, respectively. During the three and nine months ended September 30, 2023, substantially all our crude was sourced from Tartan.  During the three and nine months ended September 30, 2022, all our crude oil was sourced from Tartan. At September 30, 2023, accounts payable for crude oil and condensate was $0.

 

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility.  If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced.  Similarly, 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, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations.

 

Products and Markets

Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for PADD 3.  We sell our products primarily in the U.S. within PADD 3.  Occasionally, we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico.

   

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The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO.  An Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.  The product sales agreement with the Affiliate has a one-year term expiring the earliest to occur of March 31, 2024 plus 30-day carryover or delivery of the maximum quantity of jet fuel.  Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.

 

Customers

Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.

 

Competition

Most of our competitors are larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.

 

Safety and Downtime

We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals.  Our storage tanks are equipped with leak detection devices. We also have response and control plans in place for spill prevention and emergencies.

 

The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.

 

We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.

 

Midstream Operations

Our tolling and terminaling segment consists of the following assets and operations:

 

Property

 

Key Products

Handled

 

Operating Subsidiary

 

 

Location

 

 

 

 

 

Nixon facility

·          Petroleum storage tanks and terminal services 

·          Loading and unloading facilities 

 

Crude Oil

Refined Products

 

LRM, NPS

 

Nixon, Texas

 

Products and Customers

The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil.  Our storage customers are typically from the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area).  Shipments are received and redelivered from the Nixon facility via third party trucks.  Contract terms range from month-to-month to three years.

 

Operations Safety

Our midstream operations are operated in a manner materially consistent with industry safe practices and standards.  These operations are subject to OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.

   

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Inactive Operations

We own other pipeline and facilities assets and have leasehold interests in oil and gas properties.  These assets are inactive.  We account for these inactive operations in ‘corporate and other.’  Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and nine months ended September 30, 2023 and 2022.  See “Part I, Item 1. Financial Statements – Note (15)” related to pipelines and platform decommissioning requirements and related risks.

Property

 

Operating Subsidiary

 

 

Location

 

 

 

 

Freeport facility

·          Crude oil and natural gas separation and dehydration 

·          Natural gas processing, treating, and redelivery 

·          Vapor recovery unit 

·          Two onshore pipelines 

·          Land (162 acres)

 

 

BDPL

 

 

Freeport, Texas

Offshore Pipelines (Trunk Line and Lateral Lines)

 

BDPL

 

 

Gulf of Mexico

Oil and Gas Leasehold Interests

 

BDPC

 

 

Gulf of Mexico

 

Pipeline and Facilities Safety 

Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.

 

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Management’s Discussion and Analysis

 

 

 

Results of Operations

A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be read in conjunction with our financial statements in “Part I, Item 1. Financial Statements.” The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.

 

Major Influences on Results of Operations

Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations.  When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally result in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes.  Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.

 

The general outlook for the oil and natural gas industry for the remainder of 2023 remains unclear given general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, uncertainty in the Middle East related to, among other things, Israeli-Hamas armed conflicts, and the continued conflict between Russia and Ukraine. We can provide no assurances that refining margins and demand will remain at current levels.

 

How We Evaluate Our Operations

Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, storage tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.

 

Refinery Operations Gross Profit (Deficit), Refining Gross Profit (Deficit) per Bbl, and Tolling and Terminaling Gross Profit (Deficit)

We use refinery operations gross profit (deficit) and tolling and terminaling gross profit (deficit) to evaluate the performance of our downstream and midstream operations.  We use refining gross profit (deficit) per bbl as a downstream benchmark. All three measures supplement GAAP financial information presented. Management uses refinery operations gross profit (deficit), tolling and terminaling gross profit (deficit), and refining gross profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial performance considering potential capital investments.  We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity.

 

Storage Tank Rental Revenue and Ancillary Services Fees

Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees under terminal services agreements. As a result, tank rental revenue and ancillary services fees combined are one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.

 

Operation Costs and Expenses

We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets.  Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses.  Operation costs and expenses for tolling and terminaling operations are relatively fixed.

 

Refinery Throughput and Production Data

The amount of revenue we generate from the refinery operations business segment primarily depends on the volumes of crude oil that  we process into refined products, the volume of refined products sold to customers, and associated refining margins.  These measures are affected by numerous factors, including, but not limited to crude oil and refined product supply and demand, economic and political conditions, and refinery downtime.

 

Refinery Downtime

The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime may result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.

   

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Consolidated Results

 

Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.

 

Q3 2023 Versus Q3 2022

Overview.  Net income for Q3 2023 totaled $7.1 million, or $0.47 per share, compared to net income of $6.4 million, or $0.43 per share, in Q3 2022. The $0.7 million, or $0.04 per share, increase in net income between the periods was the result of higher refining margins and a sell off of previously built-up inventory with a lower cost basis.

 

Total Revenue from Operations.  Total revenue from operations decreased 20% to $101.6 million for Q3 2023 from $127.3 million for Q3 2022. A nearly 6% decrease in sales volume contributed to the decrease in refinery operations revenue in Q3 2023. Tolling and terminaling operations revenue increased nearly 4% between the periods from increased tank rental revenue.

 

Total Cost of Goods Sold.  Total cost of goods sold decreased $26.8 million, or 23%, to $91.4 million for Q3 2023 from $118.2 million for Q3 2022.  The decrease was related to a combination of lower inventory values from a prior period and lower refinery throughput.

 

Total Gross Profit.  Gross profit totaled $11.2 million for Q3 2023 compared to gross profit of $10.0 million for Q3 2022. The 11% increase in gross profit between the periods was the result of higher refining margins in Q3 2023.

 

Total General and Administrative Expenses. General and administrative expenses increased $0.5 million, or 97%, from $0.6 million in Q3 2022 to $1.1 million in Q3 2023. The increase was primarily related to an increase in professional service fees, including legal expenses related to the Pilot dispute and environmental service fees.

 

Total Depreciation and Amortization. Depreciation and amortization expenses remained flat at $0.7 million for both Q3 2023 and Q3 2022.

 

Total Other Income (Expense).  Total other expense in Q3 2023 totaled $1.5 million compared to total other expense of $1.7 million in Q3 2022, representing a decrease of $0.2 million, or approximately 11%. The decrease was due to lower related party interest expenses in Q3 2023 compared to Q3 2022.  Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

 

YTD 2023 Versus YTD 2022

Overview.  Net income for YTD 2023 totaled $22.3 million, or $1.49 per share, compared to net income of $23.3 million, or $1.69 per share, in YTD 2022. The 1.0 million, or $0.20 per share, decrease in net income between the periods was the result of weaker refining margins and lower refinery throughput, production, and sales volumes for YTD 2023.

 

Total Revenue from Operations.  Total revenue from operations decreased 24% to $283.5 million for YTD 2023 from $372.3 million for YTD 2022. Lower commodity prices and a buildup of inventory in the second quarter and lower sales volumes for YTD 2023 contributed to the decrease in refinery operations revenue in YTD 2023. Tolling and terminaling operations revenue increased 66% between the periods, increasing from $2.8 million in YTD 2022 to $4.6 million in YTD 2023. Tolling and terminaling revenue increased as a result of Pilot payments in January under the Pilot Forbearance and Accommodation Agreement and in April and June under the Pilot Forbearance Amendment.

 

Total Cost of Goods Sold.  Total cost of goods sold decreased 25% to $254.5 million for YTD 2023 from $341.6 million for YTD 2022.  The decrease related to lower crude acquisition costs associated with lower refinery throughput and inventory impairment expense.

 

Total Gross Profit.  Gross profit totaled $33.6 million for YTD 2023 compared to gross profit of $33.5 million for YTD 2022. Increased tolling and terminaling revenue helped offset the decrease in refining profit in YTD 2023 compared to the same period a year earlier.

 

Total General and Administrative Expenses. General and administrative expenses increased $1.4 million, or 76%, from $1.8 million in YTD 2022 to $3.2 million in YTD 2023. The increase was primarily related to higher insurance renewal premiums and legal fees associated with the Pilot dispute.

 

Total Depreciation and Amortization. Depreciation and amortization expenses were flat at $2.1 million for both YTD 2023 and YTD 2022.

 

Total Other Income (Expense)Total other expense in YTD 2023 totaled $4.5 million compared to total other expense of $5.0 million in YTD 2022, representing a decrease of $0.5 million, or 10%. The decrease was due to lower related party interest expense in YTD 2023 compared to YTD 2022.  Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 46

 

 

Table of Contents

   

Management’s Discussion and Analysis

 

 

  

Downstream Operations

 

Our refinery operations business segment is owned by LE.  Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land.  Refinery operations revenue is derived from refined product sales.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Refinery operations revenue

 

$101,598

 

 

$127,349

 

 

$283,505

 

 

$372,314

 

Less: intercompany processing fees(1)

 

 

(930)

 

 

(663)

 

 

(2,101)

 

 

(1,991)

Less: cost of goods sold

 

 

(90,985)

 

 

(117,655)

 

 

(253,317)

 

 

(339,849)

Refinery operations gross profit

 

$9,683

 

 

$9,031

 

 

$28,087

 

 

$30,474

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales (bbls)

 

 

1,081

 

 

 

1,149

 

 

 

3,005

 

 

 

3,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refining gross profit per bbl

 

$8.96

 

 

$7.86

 

 

$9.35

 

 

$9.58

 

 

(1)

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

 

Q3 2023 Versus Q3 2022

Refinery Downtime. Refinery downtime increased from 3 days in Q3 2022 to 4 days in Q3 2023. Although downtime increased by 1 day for Q3 2023 compared to Q3 2022, the facility underwent a planned three-day turnaround for maintenance of several large components. Refinery downtime in Q3 2022 related to crude deficiencies associated with cash constraints.

 

Refinery Operations Gross Profit.  Refining gross profit totaled $9.7 million for Q3 2023 compared to gross profit of $9.0 million in Q3 2022, representing an increase of $0.7 million. The increase in Q3 2023 was related to higher refining margins and a sell off of previously built-up inventory with a lower cost basis compared to the same period a year earlier.

 

Refining Gross Profit per Bbl. On a per bbl basis, refining gross profit was $8.96 for Q3 2023 compared to gross profit of $7.86 for Q3 2022, representing an increase of $1.10 per bbl. The increase related to higher refining margins compared to the same period a year earlier.

 

YTD 2023 Versus YTD 2022

Refinery Downtime. Refinery downtime decreased 4 days, from 15 days in YTD 2022 to 11 days in YTD 2023.  Downtime in YTD 2023 related to maintenance and repairs (8 days) and a planned turnaround (3 days); downtime in YTD 2022 related to maintenance and repairs (11 days) and crude deficiencies associated with cash constraints (4 days).

 

Refinery Operations Gross Profit.  Refining gross profit was $28.1 million for YTD 2023 compared to gross profit of $30.5 million in YTD 2022, representing a decrease of $2.4 million. Lower commodity prices and lower sales volumes for YTD 2023 contributed to the decrease in refinery operations revenue in YTD 2023.

 

Refining Gross Profit per Bbl. On a per bbl basis, refining gross profit was $9.35 for YTD 2023 compared to refining gross profit of $9.58 for YTD 2022, representing a decrease of $0.23 per bbl. The decrease related to less favorable refining margins in YTD 2023 compared to the same period a year earlier.

 

Remainer of Page Intentionally Left Blank

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 47

 

 

Table of Contents

   

Management’s Discussion and Analysis

 

 

  

Midstream Operations

 

Our tolling and terminaling business segment is owned by LRM and NPS.  Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Tolling and terminaling revenue

 

$956

 

 

$920

 

 

$4,588

 

 

$2,760

 

Intercompany processing fees(1)

 

 

930

 

 

 

663

 

 

 

2,101

 

 

 

1,991

 

Less: cost of goods sold

 

 

(403)

 

 

(580)

 

 

(1,216)

 

 

(1,772)

Tolling and terminaling gross profit

 

$1,483

 

 

$1,003

 

 

$5,473

 

 

$2,979

 

 

(1)

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

           

Q3 2023 Versus Q3 2022

Tolling and Terminaling Revenue. Tolling and terminaling revenue, which consists of storage tank rental and ancillary services fees, increased nearly 4% in Q3 2023 compared to Q3 2022, resulting from increased ancillary service fees and tank rental revenue.

 

Tolling and Terminaling Gross Profit. Tolling and terminaling gross profit increased approximately $0.5 million from approximately $1.0 million in Q3 2022 to $1.5 million in Q3 2023. The increase was primarily related to higher intercompany processing fees.

 

YTD 2023 Versus YTD 2022

Tolling and Terminaling Revenue. Tolling and terminaling revenue increased 66% from $2.8 million in YTD 2022 to $4.6 million in YTD 2023. The $1.8 million increase was as a result of Pilot payments in January under the Pilot Forbearance and Accommodation Agreement and in April and June under the Pilot Forbearance Amendment.

 

Tolling and Terminaling Gross Profit. Tolling and terminaling gross profit increased approximately $2.5 million from approximately $3.0 million in YTD 2022 to $5.5 million in YTD 2023. The increase primarily related to the aforementioned Pilot payments.

 

Reconciliation

Gross Profit (Deficit) by Segment

 

 

 

Three Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

Refinery Operations

 

 

Tolling and Terminaling

 

 

Corporate and Other

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$101,598

 

 

$127,349

 

 

$956

 

 

$920

 

 

$-

 

 

$-

 

 

$102,554

 

 

$128,269

 

Intercompany processing fees

 

 

(930)

 

 

(663)

 

 

930

 

 

 

663

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Cost of goods sold

 

 

(90,985)

 

 

(117,655)

 

 

(403)

 

 

(580)

 

 

-

 

 

 

-

 

 

 

(91,388)

 

 

(118,235)

Gross profit

 

 

9,683

 

 

 

9,031

 

 

 

1,483

 

 

 

1,003

 

 

 

-

 

 

 

-

 

 

 

11,166

 

 

 

10,034

 

Other operating and general and administrative expenses(1)

 

 

(374)

 

 

(426)

 

 

(306)

 

 

(132)

 

 

(840)

 

 

(530)

 

 

(1,520)

 

 

(1,088)

Depreciation and amortization

 

 

(303)

 

 

(305)

 

 

(342)

 

 

(342)

 

 

(54)

 

 

(52)

 

 

(699)

 

 

(699)

Interest and other non-operating expenses, net

 

 

(847)

 

 

(972)

 

 

(502)

 

 

(321)

 

 

(194)

 

 

(437)

 

 

(1,543)

 

 

(1,730)

Income (loss) before income taxes

 

 

8,159

 

 

 

7,328

 

 

 

333

 

 

 

208

 

 

 

(1,088)

 

 

(1,019)

 

 

7,404

 

 

 

6,517

 

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(339)

 

 

(68)

 

 

(339)

 

 

(68)

Net income (loss)

 

$8,159

 

 

$7,328

 

 

$333

 

 

$208

 

 

$(1,427)

 

$(1,087)

 

$7,065

 

 

$6,449

 

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

Refinery Operations

 

 

Tolling and Terminaling

 

 

Corporate and Other

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$283,505

 

 

$372,314

 

 

$4,588

 

 

$2,760

 

 

$-

 

 

$-

 

 

$288,093

 

 

$375,074

 

Intercompany processing fees

 

 

(2,101)

 

 

(1,991)

 

 

2,101

 

 

 

1,991

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Cost of goods sold

 

 

(253,317)

 

 

(339,849)

 

 

(1,216)

 

 

(1,772)

 

 

-

 

 

 

-

 

 

 

(254,533)

 

 

(341,621)

Gross profit

 

 

28,087

 

 

 

30,474

 

 

 

5,473

 

 

 

2,979

 

 

 

-

 

 

 

-

 

 

 

33,560

 

 

 

33,453

 

Other operating and general and administrative expenses(1)

 

 

(1,193)

 

 

(1,021)

 

 

(932)

 

 

(255)

 

 

(1,979)

 

 

(1,527)

 

 

(4,104)

 

 

(2,803)

Depreciation and amortization

 

 

(911)

 

 

(918)

 

 

(1,026)

 

 

(1,026)

 

 

(157)

 

 

(155)

 

 

(2,094)

 

 

(2,099)

Interest and other non-operating expenses, net

 

 

(2,456)

 

 

(2,392)

 

 

(1,462)

 

 

(1,148)

 

 

(574)

 

 

(1,450)

 

 

(4,492)

 

 

(4,990)

Income (loss) before income taxes

 

 

23,527

 

 

 

26,143

 

 

 

2,053

 

 

 

550

 

 

 

(2,710)

 

 

(3,132)

 

 

22,870

 

 

 

23,561

 

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(612)

 

 

(224)

 

 

(612)

 

 

(224)

Net income (loss)

 

$23,527

 

 

$26,143

 

 

$2,053

 

 

$550

 

 

$(3,322)

 

$(3,356)

 

$22,258

 

 

$23,337

 

 

 

(1)

General and administrative expenses within refinery operations include the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 48

 

 

Table of Contents

    

Management’s Discussion and Analysis

 

 

  

Capital Resources and Liquidity

 

We had $10.3 million and $45.2 million in working capital deficits at September 30, 2023 and December 31, 2022, respectively, representing a $34.9 million improvement.  Excluding the current portion of long-term debt, we had $28.0 million and $2.1 million in working capital at September 30, 2023 and December 31, 2022, respectively, representing an improvement of $25.9 million. The significant improvement in working capital over the previous nine months was due to decreases in the current portion of long-term debt, accounts payable, and accrued interest payable.  The improvement was also due to a significant increase in cash from operations and inventory.

 

Cash and cash equivalents totaled $11.5 million and $0.5 million at September 30, 2023 and December 31, 2022, respectively, representing an increase of $11.0 million.  Restricted cash, noncurrent totaled $1.0 million at both September 30, 2023 and December 31, 2022 and related to a Veritex payment reserve account. Accounts receivable, related party, which was associated with the sale of jet fuel to LEH, totaled $2.0 million and $0 at September 30, 2023 and December 31, 2022, respectively.

 

We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Second Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.

 

We continue to actively explore additional financing to refinance and restructure debt and further improve working capital. During 2023, we entered into the Veritex First Amended Forbearance Agreement, LEH Forbearance Agreement, and Kissick Forbearance Agreement. During 2022, we secured $1.5 million in working capital through CARES Act loans and entered into our first forbearance with Veritex. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.

 

Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence.  In the long term, we may not be able to manage business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.

 

Sources and Use of Cash

Components of Cash Flows

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Cash Flows Provided By (Used In):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$11,214

 

 

$5,774

 

 

$13,312

 

 

$10,647

 

Investing activities

 

 

-

 

 

 

(56)

 

 

(102)

 

 

(102)

Financing activities

 

 

(305)

 

 

572

 

 

 

(2,260)

 

 

(4,308)

Increase in Cash and Cash Equivalents

 

$10,909

 

 

$6,290

 

 

$10,950

 

 

$6,237

 

 

Cash Flow from Operations.  We had cash flow from operations of $11.2 million for Q3 2023 compared to cash flow from operations of $5.8 million for Q3 2022. The $5.4 million increase in cash flow from operations between the periods was due to higher refining margins and a sell off of previously built-up inventory with a lower cost basis in Q3 2023.  We had cash flow from operations of $13.3 million for YTD 2023 compared to cash flow from operations of $10.6 million for YTD 2022. The $2.7 million increase in cash flow from operations between the periods was primarily the result of stronger refining margins.

 

Capital Expenditures. Capital expenditures totaled $0 and $0.06 million for Q3 2023 and Q3 2022, respectively. Due to continued uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, uncertainty in the Middle East, and the Russian-Ukrainian and Israeli-Hamas armed, we anticipate continuing to limit capital expenditures over the next twelve months. However, to the extent we can capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 49

 

 

Table of Contents

    

Management’s Discussion and Analysis

 

 

  

We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion.  We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.

 

Debt and Lease Obligations

 

Debt Agreements.

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

 

Loan Description

Parties

Maturity Date

Interest Rate

Loan Purpose

June LEH Note

Blue Dolphin

LEH

Jan 2019

8.00%

Blue Dolphin working capital; reflected amounts owed to LEH under the Second Amended and Restated Operating Agreement

BDPL-LEH Loan Agreement (in forbearance)

BDPL

LEH

Aug 2018

16.00%

Original principal amount of $4.0 million; Blue Dolphin working capital

 

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

 

Third-Party Agreements Summary.  Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with third parties:

 

Loan Description

 

Parties

Principal

 (in millions)

Origination / 

Maturity

Monthly Principal

and Interest Payment

 

Interest Rate

 

Loan Purpose

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance) (1)

LE

Veritex

$25.0

Jun 2015 /

Jun 2034

$0.2 million

WSJ Prime + 2.75%

Refinance loan; capital improvements

LRM Term Loan Due 2034 (in forbearance) (1)

LRM

Veritex

$10.0

Dec 2015 / Dec 2034

$0.1 million

WSJ Prime + 2.75%

Refinance bridge loan; capital improvements

Kissick Debt (in forbearance)(2)

LE

Kissick

$11.7

Jun 2006 /

Jan 2018

$0.5 million

6.25%

Working capital

GNCU Loan (in default)

 

 

 

 

 

 

NPS Term Loan Due 2031(3)

NPS

GNCU

$10.0

Oct 2021 /

Oct 2031

$0.1 million

5.75%

Working capital

SBA EIDLs

 

 

 

 

 

 

Blue Dolphin Term Loan Due 2051 (as modified)(4)

Blue Dolphin

SBA

$2.0

May 2021 /

Jun 2051

$0.01 million

3.75%

Working capital

LE Term Loan Due 2050(5)

LE

SBA

$0.15

Aug 2020 /

Aug 2050

$0.0007 million

3.75%

Working capital

NPS Term Loan Due 2050(5)

NPS

SBA

$0.15

Aug 2020 /

Aug 2050

$0.0007 million

3.75%

Working capital

Equipment Loan Due 2025(6)

LE

Texas First

$0.07

Oct 2020 /

Oct 2025

$0.0013 million

4.50%

Equipment Lease Conversion

 

 

(1)

At both September 30, 2023 and December 31, 2022, restricted cash, noncurrent, represented amounts held by Veritex in a $1.0 million payment reserve account.

 

(2)

Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million.

 

(3)

Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First payment due in November 2024.

 

(4)

Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable.

 

(5)

Payments deferred for thirty (30) months; first payment made February 2023; interest accrued during deferral period; loan not forgivable.

 

(6)

In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 50

 

 

Table of Contents

   

Management’s Discussion and Analysis

 

 

  

Guarantees and Security.

 

Loan Description

Guarantees

Security

Veritex Loans

 

 

LE Term Loan Due 2034 (in forbearance)

·       USDA 

·       Jonathan Carroll(1) 

·       Affiliate cross-guarantees

 

·       First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory) 

·       Assignment of all Nixon facility contracts, permits, and licenses 

·       Absolute assignment of Nixon facility rents and leases, including tank rental income 

·       $5.0 million life insurance policy on Jonathan Carroll

 

LRM Term Loan Due 2034 (in forbearance)

·       USDA 

·       Jonathan Carroll(1) 

·       Affiliate cross-guarantees

 

·       Second priority lien on rights of LE in crude distillation tower and other collateral of LE 

·       First priority lien on real property interests of LRM 

·       First priority lien on all LRM fixtures, furniture, machinery, and equipment 

·       First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to

         LRM rights in its leases of certain specified tanks for which Veritex has second priority lien 

·       Substantially all assets 

Kissick Debt (in forbearance)(2)

---

·       Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE

 

GNCU Loan

 

 

NPS Term Loan Due 2031 (in default)

·       USDA 

·       Jonathan Carroll(1) 

·      Affiliate cross-guarantees 

·       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 

·       Assignment of leases and rents and certain personal property 

BDPL-LEH Loan Agreement (in forbearance)

·       --

·        Certain BDPL property

SBA EIDLs

 

 

Blue Dolphin Term Loan Due 2051

---

·      Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) 

LE Term Loan Due 2050

---

·       Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) 

NPS Term Loan Due 2050

---

·       Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) 

Equipment Loan Due 2025

---

·       First priority security interest in the equipment (backhoe). 

 

 

(1)

Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest.

 

(2)

Subject to the Kissick Subordination Agreement.

 

Lease Agreements.

Office Lease.  We maintain our corporate headquarters in Houston, Texas.  In May 2023, BDSC signed a 12-month extension to its existing operating lease.  The extended term commences on September 1, 2023 and expires on August 31, 2024.  Under the amended agreement, the annual rent was reduced from $31.00 per square foot to $30.00 per square foot, resulting in a monthly base rental amount of $0.02 million.

 

An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended September 30, 2023 and 2022.  Sublease income from LEH totaled $0.03 million for both nine-month periods ended September 30, 2023 and 2022.

 

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

Outstanding Principal, Debt Issue Costs, and Accrued Interest.  Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

 

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Management’s Discussion and Analysis

 

 

  

Outstanding Principal, Debt Issue Costs, and Accrued Interest.  Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

 

Outstanding Principal and Accrued Interest.

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

$20,074

 

 

$20,801

 

LRM Term Loan Due 2034 (in forbearance)

 

 

8,351

 

 

 

8,671

 

Kissick Debt (in forbearance)

 

 

8,521

 

 

 

11,006

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

9,975

 

 

 

9,975

 

LEH

 

 

 

 

 

 

 

 

June LEH Note (debt satisfied)

 

 

-

 

 

 

1,211

 

BDPL-LEH Loan Agreement (in forbearance)

 

 

8,309

 

 

 

8,094

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

2,137

 

 

 

2,082

 

LE Term Loan Due 2050

 

 

161

 

 

 

162

 

NPS Term Loan Due 2050

 

 

161

 

 

 

162

 

Equipment Loan Due 2025

 

 

33

 

 

 

38

 

 

 

 

57,722

 

 

 

62,202

 

 

 

 

 

 

 

 

 

 

Less: Current portion of long-term debt, net

 

 

(38,369)

 

 

(47,366)

Less: Unamortized debt issue costs

 

 

(1,997)

 

 

(2,149)

Less: Accrued interest payable

 

 

(3,836)

 

 

(10,365)

 

 

$13,520

 

 

$2,322

 

 

The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, NPS Term Loan Due 2031, and Kissick Debt was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2023 and December 31, 2022.  Although the debt associated with the BDPL-LEH Loan Agreement was classified within the current portion of long-term debt on our consolidated balance sheet at December 31, 2022, the debt was reclassified to long-term debt, net of current portion at September 30, 2023 as a result of the LEH Forbearance Agreement.

 

Debt Issue Costs. Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

$1,674

 

 

$1,674

 

LRM Term Loan Due 2034 (in forbearance)

 

 

768

 

 

 

768

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031  (in default)

 

 

730

 

 

 

730

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

(1,175)

 

 

(1,023)

 

 

$1,997

 

 

$2,149

 

 

Amortization expense was $0.05 million for both three-month periods ended September 30, 2023 and 2022.  Amortization expense was $0.1 million for both nine-month periods ended September 30, 2023 and 2022.

  

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Management’s Discussion and Analysis

 

 

  

Accrued Interest. Related-party and third-party accrued interest payable associated with long-term debt in our consolidated balance sheets, as of the dates indicated consisted of the following:

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(in thousands)

 

Kissick Debt (in forbearance)

 

$3,544

 

 

$6,028

 

LEH

 

 

 

 

 

 

 

 

BDPL-LEH Loan Agreement (in forbearance)

 

 

4,309

 

 

 

4,094

 

Veritex Loans

 

 

 

 

 

 

 

 

LE Term Loan Due 2034 (in forbearance)

 

 

49

 

 

 

53

 

LRM Term Loan Due 2034 (in forbearance)

 

 

67

 

 

 

66

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

137

 

 

 

82

 

LE Term Loan Due 2050

 

 

11

 

 

 

12

 

NPS Term Loan Due 2053

 

 

11

 

 

 

12

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

17

 

 

 

17

 

Equipment Loan Due 2025

 

 

-

 

 

 

1

 

 

 

 

8,145

 

 

 

10,365

 

Less: Accrued interest payable

 

 

(3,836)

 

 

(10,365)

Long-term Interest Payable, Net of Current Portion

 

$4,309

 

 

$-

 

 

Forbearance and Defaults.

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

 

Under the Veritex Forbearance Agreement, which expired on September 30, 2023, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex Forbearance Agreement was superseded by the Veritex First Amended Forbearance Agreement. 

 

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

 

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

 

Other Defaults. As of September 30, 2023 and the filing date of this report, we were also in default under the NPS Term Loan Due 2031 due to covenant violations.  Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.  In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.

   

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Management’s Discussion and Analysis

 

 

  

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure the debt, and/or (iii) third parties will provide future forbearances or default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. 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 our business, the trading price 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. If the debt associated with secured loan agreements is accelerated and we are unable to refinance or restructure the debt or obtain default waivers, we may have to consider other options, including selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, filing bankruptcy, or ceasing operating.

 

Proceeds from Debt. Net proceeds from the issuance of debt totaled $0 in both Q3 2023 and Q3 2022.  Net proceeds from the issuance of debt totaled $0 and $1.5 million in YTD 2023 and YTD 2022, respectively. Proceeds in YTD 2022 represented additional principal under the Blue Dolphin Term Loan Due 2051.

 

Concentration of Customers Risk

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, 2023

 

 

3

 

 

 

73.5%

 

$0.1 million

 

September 30, 2022

 

 

2

 

 

 

64.4%

 

$0

 

 

Nine Months Ended

 

Number

Significant

Customers

 

 

% Total

Revenue from

Operations

 

 

Portion of Accounts Receivable

at September 30,

 

 

 

 

 

 

 

 

 

 

 

September 30, 2023

 

 

3

 

 

 

72.6%

 

$0.1 million

 

September 30, 2022

 

 

2

 

 

 

60.9%

 

$0

 

 

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.  The jet fuel, which is stored at the Nixon Facility, is lifted by the Affiliate as needed.  For the three months ended September 30, 2023 and 2022, the Affiliate accounted for 32.2% and 37.6% of total revenue from operations, respectively. For the nine months ended September 30, 2023 and 2022, the Affiliate accounted for 32.6% and 35.8% of total revenue from operations, respectively.  Accounts receivable by the Affiliate represented $2.0 million at September 30, 2023.

 

Regulatory Activities

BOEM Supplemental Pipeline Bonds.  To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL historically maintained $0.9 million in pipeline bonds with BOEM for the decommissioning of its trunk pipeline offshore in federal waters.  Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way.  In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.  Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to the abandonment of BDPL’s offshore pipelines and platform may help in future discussions with BOEM related to the INCs. Abandonment of these assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.

 

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. 

   

Blue Dolphin Energy Company

 

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Management’s Discussion and Analysis

 

 

   

We are currently unable to predict the outcome of the supplemental pipeline bond INCs.  Accordingly, we did not record a liability on our consolidated balance sheets as of September 30, 2023 and December 31, 2022.  At both September 30, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. However, as noted below, we may need to secure a new bonding relationship. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

 

BSEE Offshore Pipelines and Platform RequirementsBDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations.  Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations.  Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

 

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

 

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

 

Due to BDPL’s failure to comply with BSEE requirements, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.

 

Inspections.  In March 2023, BSEE issued BDPL an INC for failing to perform required 2021 and 2022 structural surveys for the GA-288C platform, and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023.  Although BDPL requested a second extension, BSEE denied BDPL’s request.  BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023.   Because BDPL failed to comply with the INC within the allotted timeframe, on October 24, 2023 BSEE proposed an administrative civil penalty of approximately $0.2 million.  The proposed administrative civil penalty will be finalized 30 days following the date of notice.  We recorded a liability for the maximum proposed amount of approximately $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of September 30, 2023.

 

RLI Surety Bonds. For more than twenty (20) years, Blue Dolphin has maintained several surety bonds through RLI Insurance Company (“RLI”) as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In June and July 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling $1.0 million or provide bond exonerations and replacement bonds.  Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management is hopeful that Blue Dolphin and RLI will reach an interim agreement to maintain the bonds as currently placed given BDPL’s near term plan to decommission the offshore assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all supplemental pipeline bonds required by BOEM, which would reduce the amount of surety bonds held by RLI from $1.25 million to $0.25 million.

 

TCEQ Proposed Agreed Order.  In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020.  The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believes the penalty matter is resolved, LRM expects to continue working with TCEQ to fully remediate certain open items. At September 30, 2023, we adjusted our recorded liability downward slightly to reflect the final penalty amount, as we had previously recorded the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities.

 

Off-Balance Sheet Arrangements

None.

   

Blue Dolphin Energy Company

 

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Management’s Discussion and Analysis

 

 

  

Accounting Standards

Critical Accounting Policies and Estimates.

Significant Accounting Policies.  Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.

 

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

 

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

 

New Accounting Standards and Disclosures.

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

 

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

 

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Blue Dolphin Energy Company

 

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Controls and Procedures

 

 

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on our evaluation, our Chief Executive Officer (principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and nine months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Legal Proceedings & Risk Factors

 

 

  

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes.  We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

 

Unresolved Matters

Pilot Dispute Related to Terminal Services Agreement

Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.

 

On October 28, 2022, Pilot commenced an action and application for a temporary restraining order against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the temporary restraining order was denied the same day.

 

On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS agreed to forbear from exercising its remedies under the Texas Business and Commerce Code while the parties explored a potential compromise of the dispute pursuant to the Pilot Forbearance and Accommodation Agreement, with a forbearance period terminating on February 28, 2023. As part of the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023. 

 

On March 31, 2023, NPS and Pilot executed the Pilot Forbearance Amendment, extending the forbearance period and all deadlines in the unresolved Texas Action to June 15, 2023.  As part of the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all 185,000 bbls of stored jet fuel in April 2023. On June 16, 2023, following expiration of the Pilot Forbearance and Accommodation Agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to August 31, 2023. On August 28, 2023 the parties filed a joint motion to stay this case. The parties anticipate attending mediation in December 2023 to settle all outstanding disputes. If, upon conclusion of the mediation there is no resolution, then either party may individually or jointly move for the court to lift the stay and enter a new scheduling order and trial setting.

 

BOEM Supplemental Pipeline Bonds

To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL historically maintained $0.9 million in pipeline bonds with BOEM for the decommissioning of its trunk pipeline offshore in federal waters.  Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way.  In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.  Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to the abandonment of BDPL’s offshore pipelines and platform may help in future discussions with BOEM related to the INCs. Abandonment of these assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.

 

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. 

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 58

 

 

Table of Contents

 

Legal Proceedings & Risk Factors

 

 

  

We are currently unable to predict the outcome of the supplemental pipeline bond INCs.  Accordingly, we did not record a liability on our consolidated balance sheets as of September 30, 2023 and December 31, 2022.  At both September 30, 2023 and December 31, 2022, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. However, as noted elsewhere in this report, we may need to secure a new bonding relationship. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

 

Pilot Dispute Related to Set-Off Payments

In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit.  However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the amount remained in dispute between the parties. However, this matter is one of the topics to be addressed during the December 2023 mediation with Pilot.

 

Defaults under Secured Loan Agreements

We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If lenders exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

Counterparty Contract-Related Dispute

As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil.  Management is working to resolve the dispute amicably; however, the potential outcome is unknown.  Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows.  However, there can be no assurance that management’s efforts will result in a manageable outcome.

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC. These risks and uncertainties could materially and adversely affect our business, financial condition, and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.  Except as noted below, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our Quarterly Report on Form 10-Q for the three months ended March 31, 2023, and our Quarterly Report on Form 10-Q for the three months ended June 30, 2023.

 

Our future success depends on our ability to acquire sufficient levels of crude oil to operate the Nixon refinery on favorable terms when needed.

 

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We currently operate under a crude supply agreement with Tartan. Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the Crude Supply Agreement and terminal services agreement. The effective date of the termination is December 31, 2023.  Management has continued to develop crude supplier relationships over the past year.  As a result, management believes that available alternative suppliers will be able to provide us with adequate amounts of crude oil and condensate following agreement termination and for the foreseeable future.

 

Under the volume-based Crude Supply Agreement, Tartan was to deliver 24.8 million net bbls of crude oil. For the nine months ended September 30, 2023 and 2022, volume delivered under the Crude Supply Agreement, as a percentage of the total net bbls of crude oil deliverable, was 66.8% and 50.3%, respectively. During the three and nine months ended September 30, 2023, substantially all our crude was sourced from Tartan.  During the three and nine months ended September 30, 2022, all our crude oil was sourced from Tartan. At September 30, 2023, accounts payable for crude oil and condensate was $0.

 

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, 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, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations.

 

Given the large dollar amount required to make crude oil purchases, liquidity constraints could cause us to delay purchases of crude oil or otherwise acquire less than the desired amounts. This, in turn, could cause us to operate the Nixon facility at a lower rate on a bpd basis to meet customer demand. During the nine months ended September 30, 2023 and 2022, the refinery experienced 0 and 4 days of downtime due to lack of crude associated with cash constraints.  Failing to operate the Nixon facility at the desired run rate, or at all, could adversely affect our profitability and cash flows.

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 59

 

 

Table of Contents

  

Legal Proceedings & Risk Factors

 

 

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

See “Part I, Item. 1. Financial Statements – Notes (3) and (10)” for disclosures related to defaults on our debt.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

Page Intentionally Left Blank

   

Blue Dolphin Energy Company

 

September 30, 2023   │Page 60

 

 

Table of Contents

 

Exhibits

 

 

  

ITEM 6.  EXHIBITS

 

Exhibits Index

 

 

No. 

 

Description 

 

 

 

31.1*

 

First Amended Forbearance Agreement effective September 30, 2023 among Lazarus Energy LLC, Lazarus Refining & Marketing LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings LLC, Jonathan Carroll, and Veritex Community Bank.

 

 

 

10.1

 

Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document.

 

 

 

101.SCH*

 

XBRL Taxonomy Schema Document.

 

 

 

101.CAL*

 

XBRL Calculation Linkbase Document.

 

 

 

101.LAB*

 

XBRL Label Linkbase Document.

 

 

 

101.PRE*

 

XBRL Presentation Linkbase Document.

 

 

 

101.DEF*

 

XBRL Definition Linkbase Document.

 

* Filed herewith

  

Blue Dolphin Energy Company

 

September 30, 2023   │Page 61

 

 

Table of Contents

 

Signature Page

 

 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

BLUE DOLPHIN ENERGY COMPANY

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

November 14, 2023

By:

/s/ JONATHAN P. CARROLL

 

 

 

Jonathan P. Carroll

Chief Executive Officer, President,

Assistant Treasurer and Secretary

(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)

 

 

    

Blue Dolphin Energy Company

 

September 30, 2023   │Page 62