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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-Q
3/31/18
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-Q
(Mark
One)
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☒
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the quarterly period ended
March
31,
2018
or
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition
period from
to
Commission File No.
0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of
registrant as specified in its charter)
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Delaware
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73-1268729
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(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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801
Travis Street, Suite 2100, Houston, Texas
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77002
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(Address of
principal executive offices)
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(Zip
Code)
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713-568-4725
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(Registrant’s
telephone number, including area code)
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Indicate by check
mark whether the registrant (1) 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 and posted
on its corporate website, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes ☒ No
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated
filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐ (Do not
check if a smaller reporting company)
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Smaller reporting
company
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☒
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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 May 15,
2018: 10,925,513
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TABLE OF CONTENTS
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GLOSSARY OF
SELECTED ENERGY AND FINANCIAL TERMS
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4
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PART I. FINANCIAL
INFORMATION
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6
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ITEM
1.
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FINANCIAL
STATEMENTS
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6
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Consolidated
Balance Sheets (Unaudited)
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6
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Consolidated
Statements of Operations (Unaudited)
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7
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Consolidated
Statements of Cash Flows (Unaudited)
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8
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Notes to
Consolidated Financial Statements
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9
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ITEM
2.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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34
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ITEM
3.
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QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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48
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ITEM
4.
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CONTROLS AND
PROCEDURES
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48
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PART
II. OTHER INFORMATION
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48
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ITEM
1.
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LEGAL
PROCEEDINGS
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48
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ITEM
1A.
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RISK
FACTORS
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48
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ITEM
2.
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UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
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48
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ITEM
3.
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DEFAULTS UPON
SENIOR SECURITIES
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49
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ITEM
4.
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MINE SAFETY
DISCLOSURES
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49
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ITEM
5.
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OTHER
INFORMATION
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49
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ITEM
6.
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EXHIBITS
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49
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SIGNATURES
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50
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INTRODUCTION
This Quarterly
Report for the quarterly period ended March 31, 2018 (this
“Quarterly Report”) is a document that U.S. public
companies file with the Securities and Exchange Commission
(“SEC”) each quarter. Part I, Item 1. of the
Quarterly Report contains financial information, including
consolidated financial statements and related
notes. Part I, Item 2. of this Quarterly Report provides
management’s discussion and analysis of our financial
condition and results of operations. We hope investors will find it
useful to have this information in a single document.
In this Quarterly
Report, “Blue Dolphin,” “we,”
“our,” and “us” are used interchangeably to
refer to Blue Dolphin Energy Company individually or to Blue
Dolphin Energy Company and its subsidiaries collectively, as
appropriate to the context. Information in this Quarterly Report is
current as of the filing date, unless otherwise
specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this Quarterly
Report, and from time to time throughout the year, we share our
expectations for our future performance. These forward-looking
statements include statements about our business plans; our
expected financial performance, including the anticipated effect of
strategic actions; previously reported material weakness in our
internal control over financial reporting; economic, political and
market conditions; and other factors that could affect our future
results of operations or financial condition, including, without
limitation, statements under the section entitled “Part I,
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Part II, Item 1.
Legal Proceedings,” and “Part II, Item 1A. Risk
Factors.” Any statements we make that are not matters of
current reportage or historical fact should be considered
forward-looking. Such statements often include words such as
“believe,” “expect,”
“anticipate,” “intend,” “plan,”
“estimate,” “will,” and similar
expressions. By their nature, these types of statements are
uncertain and are not guarantees of our future performance. Our
forward-looking statements represent our estimates and expectations
at the time of disclosure. However, circumstances change
constantly, often unpredictably, and investors should not place
undue reliance on these statements. Many events beyond our control
will determine whether our expectations will be realized. We
disclaim any current intention or obligation to revise or update
any forward-looking statements, or the factors that may affect
their realization, whether considering new information, future
events or otherwise, and investors should not rely on us to do
so.
In accordance with
the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995, “Part I, Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017 (the “Annual Report”), and
“Part II, Item 1A. Risk Factors” in this Quarterly
Report explain some of the important factors that may cause actual
results to be materially different from those that we
anticipate.
Remainder of Page
Intentionally Left Blank
GLOSSARY OF SELECTED ENERGY AND FINANCIAL TERMS
Below are
abbreviations and definitions of certain commonly used oil and gas
industry terms, as well as key financial performance measures used
by management, that are used in this Quarterly Report.
Regarding financial
terms, management uses U.S. generally accepted accounting
principles (“GAAP”) and certain non-GAAP performance
measures to assess our results of operations. Certain performance
measures used by management to assess our operating results and the
effectiveness of our business segment are considered non-GAAP
performance measures. These performance measures may differ from
similar calculations used by other companies within the petroleum
industry, thereby limiting their usefulness as a comparative
measure. We refer to certain refinery throughput and
production data in the explanation of our period over period
changes in results of operations. For our consolidated
results, we refer to our consolidated statements of operations in
the explanation of our period over period changes in results of
operations.
Energy
Terms
Atmospheric gas oil
(“AGO”)
. 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.
Barrel
(“bbl”)
. One stock tank bbl, or 42 U.S. gallons
of liquid volume, used about oil or other liquid
hydrocarbons.
Barrels per Day
(“bpd”)
. A measure of the bbls of
daily output produced in a refinery or transported through a
pipeline.
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.
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 turns 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
these chemicals and compounds can be used as fuels or converted to
more valuable products.
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 heavy oil-based mud
blendstock (“HOBM”), reduced crude, and
AGO).
Distillation
.
The first step in the refining process whereby crude oil and
condensate is 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 per 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.
Feedstocks
.
Crude oil and other hydrocarbons, such as condensate and/or
intermediate products, that are used as basic input materials in a
refining process. Feedstocks are transformed into one or
more finished products.
Finished petroleum
products
. Materials or products which have
received the final increments of value through processing
operations, and which are being held in inventory for delivery,
sale, or use.
Intermediate
petroleum products
. A petroleum product that
might require further processing before it is saleable to the
ultimate consumer. This further processing might be done
by the producer or by another processor. Thus, an
intermediate petroleum product might be a final product for one
company and an input for another company that will process it
further.
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 about 8 and 16
carbon atoms per molecule; wide-cut or naphtha-type jet fuel
(including Jet B) has between about 5 and 15 carbon atoms per
molecule.
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.
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.
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.
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 petroleum
products
. Refined petroleum products are derived from crude
oil and condensate that have been processed through various
refining methods. The resulting products include gasoline, home
heating oil, jet fuel, diesel, lubricants and the raw materials for
fertilizer, chemicals, and pharmaceuticals.
Refinery
.
Within the oil and gas industry, a refinery is an industrial
processing plant where crude oil and condensate is separated and
transformed into petroleum products.
Sour crude
.
Crude oil containing sulfur content of more than 0.5%.
Stabilizer
unit
. A distillation column intended to remove the lighter
boiling compounds, such as butane or propane, from a
product.
Sweet crude
.
Crude oil containing sulfur content of less than 0.5%.
Sulfur
.
Present at various levels of concentration in many hydrocarbon
deposits, such as petroleum, coal, or natural gas. Also, produced
as a by-product of removing sulfur-containing contaminants from
natural gas and petroleum. Some of the most commonly used
hydrocarbon deposits are categorized per their sulfur content, with
lower sulfur fuels usually selling at a higher, premium price and
higher sulfur fuels selling at a lower, or discounted,
price.
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.
Throughput
. The
volume processed through a unit or a refinery or transported
through a pipeline.
Turnaround
.
Scheduled large-scale maintenance activity wherein an entire
process unit is taken offline for a week or more for comprehensive
revamp and renewal.
Yield
. The
percentage of refined petroleum products that is produced from
crude oil and other feedstocks.
Financial and Performance Measures
Arbitration award
and associated fees
.
Damages and GEL’s attorneys’ fees and related expenses
awarded to GEL Tex Marketing, LLC in arbitration
proceedings.
Capacity
Utilization Rate
. A percentage measure that indicates the
amount of available capacity that is being used in a refinery or
transported through a pipeline. With respect to the
c
rude 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).
Cost of Refined
Products Sold
.
Primarily includes purchased crude oil and condensate costs, as
well as transportation, freight and storage costs.
Depletion,
Depreciation and Amortization
. Represents property and
equipment, as well as intangible assets that are depreciated or
amortized based on the straight-line method over the estimated
useful life of the related asset.
Downtime
.
Scheduled and/or unscheduled periods in which the crude
distillation uower is not operating. Downtime may occur
for a variety of reasons, including bad weather, power failures,
and preventive maintenance.
Easement, Interest
and Other Income
.
Reflects land easement fees received from FLNG Land II, Inc., a
Delaware corporation (“FLNG”), pursuant to a Master
Easement Agreement.
EBITDA
.
Reflects earnings before: (i) interest income (expense), (ii)
income taxes, and (iii) depreciation and amortization.
General and
Administrative Expenses
.
Primarily include corporate costs,
such as accounting and legal fees, office lease expenses, and
administrative expenses.
Gross
Profit
.
Calculated as total revenue less
cost of refined products sold; reflected as a dollar ($)
amount.
Gross
Margin
. Calculated as gross profit divided by
total revenue; reflected as a percentage (%).
Refining Gross
Profit per Bbl
. Calculated refined petroleum
product sales less cost of refined products sold divided by the
volume, in bbls, of refined petroleum products sold during the
period; reflected as a dollar ($) amount per bbl.
Income Tax
Expense
.
Includes
federal and state taxes, as well as deferred taxes, arising from
temporary differences between income for financial reporting and
income tax purposes.
Net Income
(Loss)
. Represents total revenue from operations less total
cost of operations, total other expense, and income tax
expense.
Operating
Days
. Represents the number of days in a period in which the
crude distillation tower operated. Operating days is calculated by
subtracting downtime in a period from calendar days in the same
period.
Other Income
(Expense)
. Reflects working capital loan
interest, guaranty fees earned by Jonathan Carroll, expensed
interest related to long-term debt, and non-recurring income
items.
Other Operating
Expenses
. Represents costs associated with our pipeline
assets and leasehold interests in oil and gas
properties.
Refinery Operating
Expenses
.
Direct
operating expenses of the
crude distillation
tower
and associated facilities, including direct costs of
labor, maintenance materials and services, chemicals and catalysts
and utilities. Represents fees paid to LEH to manage and
operate the Nixon Facility pursuant to the Amended and Restated
Operating Agreement.
Revenue from
Operations
. Primarily consists of refined petroleum product
sales, but also includes tank rental revenue. Excise and other
taxes that are collected from customers and remitted to
governmental authorities are not included in
revenue. Other operations revenue relates to fees
received from pipeline transportation services, which ceased in
2016.
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.
Total Refinery
Throughput
.
Refers
to the volume processed as input through the
crude distillation
tower
. Refinery throughput includes crude oil and condensate
and other feedstocks.
ITEM
1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
(Unaudited)
See accompanying
notes to consolidated financial statements.
See accompanying
notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months
Ended March 31,
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2018
|
2017
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(in
thousands)
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OPERATING
ACTIVITIES
|
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Net
loss
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$
(151
)
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$
(1,850
)
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Adjustments
to reconcile net loss to net cash
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provided by (used
in) operating activities:
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Depletion,
depreciation and amortization
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455
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451
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Deferred income
tax
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(109
)
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-
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Amortization of
debt issue costs
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32
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32
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Accretion of asset
retirement obligations
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66
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72
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Changes in
operating assets and liabilities
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|
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Accounts
receivable
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818
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1,816
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Accounts
receivable, related party
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307
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1,162
|
|
Prepaid expenses
and other current assets
|
(331
)
|
(554
)
|
|
Deposits and other
assets
|
(16
)
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(25
)
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Inventory
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766
|
(2,334
)
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Accrued arbitration
award
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(1,500
)
|
-
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Accounts payable,
accrued expenses and other liabilities
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312
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(1,294
)
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Accounts payable,
related party
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152
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151
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|
Net cash provided
by (used in) operating activities
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801
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(2,373
)
|
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INVESTING
ACTIVITIES
|
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Capital
expenditures
|
(540
)
|
(811
)
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Net cash used in
investing activities
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(540
)
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(811
)
|
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FINANCING
ACTIVITIES
|
|
|
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Payments on
debt
|
(240
)
|
(474
)
|
|
Net activity on
related-party debt
|
217
|
1,097
|
|
Net cash (used in)
provided by financing activities
|
(23
)
|
623
|
|
Net change in cash,
cash equivalents, and restricted cash
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238
|
(2,561
)
|
|
|
|
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CASH, CASH
EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
2,146
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6,083
|
|
CASH, CASH
EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
2,384
|
$
3,522
|
|
|
|
|
|
Supplemental
Information:
|
|
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Non-cash investing
and financing activities:
|
|
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|
Financing of
capital expenditures via accounts payable and capital
leases
|
$
82
|
$
1,220
|
|
Financing of
guaranty fees via long-term debt, related party
|
$
163
|
$
183
|
|
Conversion of
accounts payable to short-term notes
|
$
-
|
$
90
|
|
Interest
paid
|
$
558
|
$
559
|
|
Income taxes
paid
|
$
-
|
$
-
|
See accompanying
notes to consolidated financial statements.
|
Notes
to Consolidated Financial Statements
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|
|
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(1)
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Organization
|
Nature of
Operations
. Blue Dolphin Energy Company
(“Blue Dolphin”) is a publicly-traded Delaware
corporation primarily engaged in the refining and marketing of
petroleum products. We also provide tolling and storage
terminaling services. Our assets, which are located in
Nixon, Texas, primarily include a 15,000-bpd crude distillation
tower and approximately 1.1 million bbls of petroleum storage tanks
(collectively the “Nixon Facility”).
Pipeline
transportation and oil and gas operations are no longer
active.
Structure and
Management
.
Blue
Dolphin is controlled by Lazarus Energy Holdings, LLC
(“LEH”). LEH operates and manages all Blue Dolphin
properties pursuant to an Amended and Restated Operating Agreement
(the “Amended and Restated Operating
Agreement”). Jonathan Carroll is Chairman of the
Board of Directors (the “Board”), Chief Executive
Officer, and President of Blue Dolphin, as well as a majority owner
of LEH. Together LEH and Jonathan Carroll own 80.2% of our common
stock, par value $0.01 per share (the “Common Stock”).
(See “Note (8) Related Party Transactions,” “Note
(10) Long-Term Debt, Net” and “Note (17) Commitments
and Contingencies – Financing Agreements” for
additional disclosures related to LEH, the Amended and Restated
Operating Agreement, and Jonathan Carroll.)
We have the
following active subsidiaries:
●
Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”).
●
Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”).
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”).
●
Blue Dolphin
Petroleum Company, a Delaware corporation.
●
Blue Dolphin
Services Co., a Texas corporation
(“BDSC”).
See "Part I, Item
1. Business” and “Item 2. Properties” in the
Annual Report for additional information regarding our operating
subsidiaries, principal facilities, and assets.
References in this
Quarterly Report to “we,” “us,” and
“our” are to Blue Dolphin and its subsidiaries unless
otherwise indicated or the context otherwise requires.
Going
Concern
. Management has determined that certain
factors raise substantial doubt about our ability to continue as a
going concern. These factors include the
following:
●
Final Arbitration
Award – As previously disclosed, LE was involved in
arbitration proceedings (the “GEL Arbitration”) with
GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis
Energy, LP (“Genesis”), related to a contractual
dispute involving a Crude Oil Supply and Throughput Services
Agreement (the “Crude Supply Agreement”) and a Joint
Marketing Agreement (the “Joint Marketing Agreement”),
each between LE and GEL and dated August 12, 2011. On
August 11, 2017, the arbitrator delivered its final award in the
GEL Arbitration (the “Final Arbitration
Award”). The Final Arbitration Award denied all of
LE’s claims against GEL and granted substantially all the
relief requested by GEL in its counterclaims. Among
other matters, the Final Arbitration Award awarded damages and
GEL’s attorneys’ fees and related expenses to GEL in
the aggregate amount of approximately $31.3 million. As
of the date of this report, LE has paid $6.2 million to GEL, which
amount has been applied to reduce the balance of the Final
Arbitration Award.
9
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
As previously
disclosed, a hearing on confirmation of the Final Arbitration Award
was scheduled to occur on September 18, 2017 in state district
court in Harris County, Texas. Prior to the scheduled hearing, LE
and GEL jointly notified the court that the hearing would be
continued for a period of no more than 90 days after September 18,
2017 (the “Continuance Period”), to facilitate
settlement discussions between the parties. On September 26, 2017,
LE and Blue Dolphin, together with LEH and Jonathan Carroll,
entered into a Letter Agreement with GEL, effective September 18,
2017 (the “GEL Letter Agreement”), confirming the
parties’ agreement to the continuation of the confirmation
hearing during the Continuance Period, subject to the terms of the
GEL Letter Agreement. The GEL Letter Agreement has been
amended to extend the Continuance Period through May 31,
2018.
The GEL Letter
Agreement, as amended to date, prohibits Blue Dolphin and its
affiliates from making any pre-payments on indebtedness, other than
in the ordinary course of business as described in the GEL Letter
Agreement, and from making any payments to Jonathan Carroll under
the Amended and Restated Guaranty Fee Agreements between November
1, 2017 and the end of the Continuance Period. (Jonathan
Carroll has received no cash payments since August 2016 and no
common stock payments since May 2017 under the Amended and Restated
Guaranty Fee Agreements.)
We can provide no
assurance as to whether negotiations with GEL will result in a
settlement or the potential terms of any such settlement. If the
parties are unable to reach an acceptable settlement with GEL, and
GEL seeks to confirm and enforce the Final Arbitration Award: (i)
our business operations, including crude oil and condensate
procurement and our customer relationships; financial condition;
and results of operations will be materially affected, and (ii) LE
would likely be required to seek protection under bankruptcy
laws.
●
Veritex Secured
Loan Agreement Event of Default – Veritex Community Bank
(“Veritex”), as successor in interest to Sovereign Bank
by merger, delivered to obligors notices of default under secured
loan agreements with Veritex, stating that the Final Arbitration
Award constitutes an event of default under the secured loan
agreements. The occurrence of an event of default
permits Veritex to declare the amounts owed under these loan
agreements immediately due and payable, exercise its rights with
respect to collateral securing obligors’ obligations under
these loan agreements, and/or exercise any other rights and
remedies available. Veritex informed obligors that it is
not currently exercising its rights and remedies under the secured
loan agreements considering the ongoing settlement discussions with
GEL and the continuance of the hearing on confirmation of the Final
Arbitration Award and to allow Veritex to evaluate any proposed
settlement agreement related to the Final Arbitration Award, which
would require Veritex’s approval. However, Veritex expressly
reserved all of its rights, privileges and remedies related to
events of default under the secured loan agreements and informed
obligors that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements. The debt associated with loans under secured
loan agreements was classified within the current portion of
long-term debt on our consolidated balance sheet at March 31, 2018
due to existing events of default related to the Final Arbitration
Award as well as the uncertainty of LE and LRM’s ability to
meet financial covenants in the secured loan agreements in the
future.
We can provide no
assurance as to whether Veritex, as first lienholder, would approve
a settlement between GEL and the parties related to the Final
Arbitration Award. If the parties are unable to reach an
acceptable settlement with GEL or Veritex does not approve any such
settlement and GEL seeks to confirm and enforce the Final
Arbitration Award, our business, financial condition, and results
of operations will be materially adversely affected, and LE would
likely be required to seek protection under bankruptcy
laws. Further, any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material
adverse effect on our business, financial condition, and results of
operations, and LE would likely be required to seek protection
under bankruptcy laws.
Operating
Risks
. Successful execution of our business plan
depends on several key factors, including reaching an acceptable
settlement with GEL, having adequate crude oil and condensate
supplies, maintaining safe and reliable operations at the Nixon
Facility, improving margins on refined petroleum products, and
meeting contractual obligations. (See “Part I, Item 1.
Business – Business Strategies” in the
Annual Report for information related to our business
plan.) For the quarter ended March 31, 2018, execution
of our business plan was negatively impacted by several factors,
including:
●
Net Losses –
For the quarter ended March 31, 2018, we reported a net loss of
$0.2 million, or a loss of $0.01 per share, compared to a net loss
of $1.9 million, or a loss of $0.18 per share, for the year ended
March 31, 2017. The $0.17 per share decrease in net loss
between the periods was the result of improved margins for refined
petroleum products and increased sales volume.
10
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
●
Working Capital
Deficits – We had a working capital deficit of $71.5 million
at March 31, 2018 compared to a working capital deficit of $69.5
million at December 31, 2017. Excluding the current portion of
long-term debt, we had a working capital deficit of $30.3 million
at March 31, 2018 compared to a working capital deficit of $30.0
million at December 31, 2017.
●
Crude Supply
– We currently have in place a month-to-month evergreen crude
supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil
and condensate, and we expect the supplier to continue to do so for
the foreseeable future. However, our ability to purchase
adequate amounts of crude oil and condensate is dependent on our
liquidity and access to capital, which could be adversely affected
if the parties are unable to reach an acceptable settlement with
GEL, and GEL seeks to confirm and enforce the Final Arbitration
Award, and other factors, as noted above.
●
Financial Covenant
Defaults – In addition to existing events of default related
to the Final Arbitration Award, at March 31, 2018, LE and LRM were
in violation of certain financial covenants in secured loan
agreements with Veritex. Covenant defaults under the secured loan
agreements would permit Veritex to declare the amounts owed under
these loan agreements immediately due and payable, exercise its
rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available. The debt associated with these loans
was classified within the current portion of long-term debt on our
consolidated balance sheet at March 31, 2018 due to existing events
of default related to the Final Arbitration Award as well as the
uncertainty of LE and LRM’s ability to meet the financial
covenants in the future. There can be no assurance that Veritex
will provide a waiver of events of default related to the Final
Arbitration Award, consent to any proposed settlement with GEL, or
provide future waivers of any financial covenant defaults, which
would have an adverse impact on our financial position and results
of operations.
We are continuing
aggressive actions in 2018 to improve operations and
liquidity. Management believes that it is continuing to
take the appropriate steps to improve operations at the Nixon
Facility and our overall financial stability. However,
there can be no assurance that our business plan will be
successful, that LEH and its affiliates will continue to fund our
working capital needs, or that we will be able to obtain additional
financing on commercially reasonable terms or at all. If
the parties are unable to reach an acceptable settlement with GEL
or Veritex does not approve any such settlement and GEL seeks to
confirm and enforce the Final Arbitration Award, our business,
financial condition, and results of operations will be materially
adversely affected, and LE would likely be required to seek
protection under bankruptcy laws.
For additional
disclosures related to the Final Arbitration Award, the GEL Letter
Agreement, defaults under secured loan agreements, and risk factors
that could materially affect our future business, financial
condition and results of operations, refer to the following
sections in this Quarterly Report:
●
Part I, Item 1.
Financial Statements, Notes to Consolidated Financial
Statements:
-
Note (8) Related
Party Transactions
-
Note (10) Long-Term
Debt, Net
-
Note (17)
Commitments and Contingencies – Legal
Matters
●
Part I, Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations:
-
Final Arbitration
Award
-
Results of
Operations
-
Liquidity and
Capital Resources
11
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(2)
|
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, 2017 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. Operating results for the
three months ended March 31, 2018 are not necessarily indicative of
the results that may be expected for the fiscal year ending
December 31, 2018, or for any other period.
|
(3)
|
Significant
Accounting Policies
|
The summary of
significant accounting policies of Blue Dolphin is presented to
assist in understanding our consolidated financial statements. Our
consolidated financial statements and accompanying notes are
representations of management who is responsible for their
integrity and objectivity. These accounting policies conform to
GAAP and have been consistently applied in the preparation of our
consolidated financial statements.
Use of Estimates
.
We have made several estimates and
assumptions related to the reporting of our consolidated assets and
liabilities and to the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with GAAP. We believe our current estimates are
reasonable and appropriate, however, actual results could differ
from those estimated.
Cash and Cash
Equivalents
.
Cash and cash equivalents
represent liquid investments with an original maturity of three
months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at
times, may exceed insured deposit limits. We monitor the financial
condition of the financial institutions and have experienced no
losses associated with these accounts.
Restricted Cash
.
Restricted cash (current portion)
primarily represents: (i) amounts held in our disbursement account
with Veritex attributable to construction invoices awaiting payment
from that account, (ii) a payment reserve account held by Veritex
as security for payments under a loan agreement, and (iii) a
construction contingency account under which Veritex will fund
contingencies. Restricted cash, noncurrent represents
funds held in the Veritex disbursement account for payment of
future construction related expenses to build new petroleum storage
tanks.
Accounts Receivable and Allowance for
Doubtful Accounts
.
Our accounts receivable consists
of customer obligations due in the ordinary course of
business. Since we have a small number of customers with
individually large amounts due on any given date, we evaluate
potential and existing customers’ financial condition, credit
worthiness, and payment history to minimize credit risk. Allowance
for doubtful accounts is based on a combination of current sales
and specific identification methods. If necessary, we establish an
allowance for doubtful accounts to estimate the amount of probable
credit losses. Allowance for doubtful accounts totaled
$0 both at March 31, 2018 and December 31, 2017.
Inventory
.
Our inventory primarily consists
of refined petroleum products, crude oil and condensate, and
chemicals. Inventory is valued at lower of cost or net
realizable value with cost being determined by the average cost
method, and net realizable value being determined based on
estimated selling prices less any associated delivery
costs. If the net realizable value of our refined
petroleum 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 refined products sold. (See
“Note (6) Inventory” for additional disclosures related
to our inventory.)
12
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Property and
Equipment
.
Refinery and Facilities
. Management
expects to continue making improvements to the
crude distillation
tower
based on operational needs and technological
advances. Additions to refinery and facilities assets
are capitalized. Expenditures for repairs and maintenance are
expensed as incurred and included as operating expenses under the
Amended and Restated Operating Agreement.
We record refinery
and facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of
operations. For financial reporting purposes,
depreciation of refinery and facilities assets is computed using
the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities assets are placed in
service. As a result of the Final Arbitration Award,
which represents a significant adverse change that could affect the
value of a long-lived asset, management performed potential
impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the periods presented.
Pipelines and Facilities
. Our pipelines
and facilities are recorded at cost less any adjustments for
depreciation or impairment. Depreciation is computed
using the straight-line method over estimated useful lives ranging
from 10 to 22 years. In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) guidance on accounting for the
impairment or disposal of long-lived assets, management performed
periodic impairment testing of our pipeline and facilities assets
in the fourth quarter of 2016. Upon completion of that testing, our
pipeline assets were fully impaired. All pipeline
transportation services to third-parties have ceased, existing
third-party wells along our pipeline corridor have been permanently
abandoned, and no new third-party wells are being drilled near our
pipelines. However, management believes our pipeline
assets have future value based on large-scale, third-party
production facility expansion projects near the
pipelines.
Oil and Gas Properties
. Our oil and gas
properties are accounted for using the full-cost method of
accounting, whereby all costs associated with acquisition,
exploration and development of oil and gas properties, including
directly related internal costs, are capitalized on a cost center
basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production
method. All leases associated with our oil and gas properties have
expired, and our oil and gas properties were fully impaired in
2011.
Construction in Progress
. Construction
in progress expenditures, which relate to construction and
refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in
service.
(See “Note
(7) Property, Plant and Equipment, Net” for additional
disclosures related to our refinery and facilities assets, oil and
gas properties, pipelines and facilities assets, and construction
in progress.)
Intangibles – Other
.
Trade name, an intangible asset, represents the “Blue Dolphin
Energy Company” brand name. We account for
intangible assets under FASB ASC guidance related to intangibles,
goodwill, and other. Under the guidance, we determined trade name
to have an indefinite useful life, and we test intangible assets
with indefinite lives annually for
impairment. Management performed its regular annual
impairment testing of trade name in the fourth quarter of 2017.
Upon completion of that testing, our trade name asset was fully
impaired at December 31, 2017.
Debt Issue Costs
. We have debt
issue costs related to certain refinery and facilities assets debt.
Debt issue costs are capitalized and amortized over the term of the
related debt using the straight-line method, which approximates the
effective interest method. Debt issue costs are presented net with
the related debt liability. (See “Note (10)
Long-Term Debt, Net” for additional disclosures related to
debt issue costs.)
13
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Revenue
Recognition
.
We adopted the
provisions of FASB ASU 2014-09,
Revenue from Contracts with Customers (ASC
606)
, on January 1, 2018, as described below in
“New Pronouncements Adopted.” Accordingly, our revenue
recognition accounting policy has been revised to reflect the
adoption of this standard.
Refinery Operations Revenue
. Revenue
from the sale of refined petroleum products is recognized when the
product is sold to a customer in fulfillment of performance
obligations. Each barrel of refined petroleum product,
or other unit of measure, is separately identifiable and represents
a distinct performance obligation to which the transaction price is
allocated. Performance obligations are met when control
is transferred to the customer in accordance with the terms of the
respective sales agreement. We consider a variety of
facts and circumstances in assessing the point of control transfer,
including but not limited to: whether the purchaser can direct the
use of the refined petroleum product, the transfer of significant
risks and rewards, our rights to payment, and transfer of legal
title. In each case, the term between delivery and when payments
are due is not significant. Transportation, shipping,
and handling costs incurred are included in cost of refined
products sold. Excise and other taxes that are collected from
customers and remitted to governmental authorities are not included
in revenue.
Tolling and Terminaling Revenue
.
Revenues for tolling and terminaling include fees pursuant to: (i)
tolling agreements, whereby a customer agrees to pay a certain fee
per gallon or barrel for throughput volumes moving through the
naphtha stabilizer unit and a fixed monthly reservation fee for use
of the naphtha stabilizer unit and (ii) tank storage agreements,
whereby a customer agrees to pay a certain fee per tank based on
tank size over a period of time for the storage of products. We
typically satisfy performance obligations for tolling and
terminaling operations with the passage of time. We determine the
transaction price at agreement inception based on the guaranteed
minimum amount of revenue over the term of the agreement. We
allocate the transaction price to the single performance obligation
that exists under the agreement, and we recognize revenue in the
amount for which we have a right to invoice. Generally,
payment terms do not exceed 30 days.
Revenue from tank
storage customers may, from time to time, include fees for
ancillary services, such as in-tank and tank-to-tank
blending. These services are considered optional to the
customer, and the price we charge for such services is not included
in the fixed cost under the customer’s tank storage
agreement. Ancillary services do not provide a material
right to the customer, and such services are considered a separate
performance obligation by us under the tank storage agreement. The
performance obligation is satisfied when the requested service has
been performed in the applicable period.
Income Taxes
. We account for
income taxes under FASB ASC guidance related to income taxes, which
requires recognition of income taxes based on amounts payable with
respect to the current reporting period and the effects of deferred
taxes for the expected future tax consequences of events that have
been included in our financial statements or tax
returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that a portion or all of the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any net operating loss
(“NOL”) carryforwards. When management
determines that it is more likely than not that a tax benefit will
not be realized, a valuation allowance is recorded to reduce
deferred tax assets. A significant piece of objective
negative evidence evaluated was the cumulative loss incurred over
the three-year period ended December 31, 2017. Such objective
evidence limits the ability to consider other subjective evidence,
such as our projections for future growth. Based on this
evaluation, we recorded a valuation allowance against the deferred
tax assets for which realization was not deemed more likely than
not as of March 31, 2018 and December 31,
2017. We expect to recover deferred tax
assets related to the Alternative Minimum Tax
(“AMT”).
14
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
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 March 31, 2018 and December 31, 2017,
there were no uncertain tax positions for which a reserve or
liability was necessary. (See “Note (15) Income
Taxes” for further information related to income
taxes.)
Impairment or Disposal of Long-Lived
Assets
. In accordance with FASB ASC guidance on accounting
for the impairment or disposal of long-lived assets, we
periodically evaluate our long-lived assets for impairment.
Additionally, we evaluate our long-lived assets when events or
circumstances indicate that the carrying value of these assets may
not be recoverable. The carrying value is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset or group of
assets. If the carrying value exceeds the sum of the undiscounted
cash flows, an impairment loss equal to the amount by which the
carrying value exceeds the fair value of the asset or group of
assets is recognized. Significant management judgment is required
in the forecasting of future operating results that are used in the
preparation of projected cash flows and, should different
conditions prevail or judgments be made, material impairment
charges could be necessary. As a result of the Final Arbitration
Award, which represents a significant adverse change that could
affect the value of a long-lived asset, management performed
potential impairment testing of our refinery and facilities assets
in the fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the quarter ended March 31,
2018.
Asset Retirement Obligations
.
FASB ASC guidance related to asset retirement obligations
(“AROs”) requires that a liability for the discounted
fair value of an ARO be recorded in the period in which incurred
and the corresponding cost capitalized by increasing the carrying
amount of the related long-lived asset. The liability is accreted
towards its future value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the
liability is settled for an amount other than the recorded amount,
a gain or loss is recognized.
Management has
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facilities assets arises
and a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We recorded an ARO
liability related to future asset retirement costs associated with
dismantling, relocating, or disposing of our offshore platform,
pipeline systems, and related onshore facilities, as well as for
plugging and abandoning wells and restoring land and sea beds. We
developed these cost estimates for each of our assets based upon
regulatory requirements, structural makeup, water depth, reservoir
characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering
consultations. Because these costs typically extend many
years into the future, estimating future costs are difficult and
require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis. (See “Note (11) Asset Retirement
Obligations” for additional information related to our
AROs.)
Computation of Earnings Per
Share
. We apply the provisions of FASB ASC guidance for
computing earnings per share (“EPS”). The guidance
requires the presentation of basic EPS, which 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. The guidance requires dual presentation
of basic EPS and diluted EPS on the face of our consolidated
statements of operations and requires a reconciliation of the
denominator of basic EPS and diluted EPS. Diluted EPS is computed
by dividing net income available to common stockholders by the
diluted weighted average number of common shares outstanding, which
includes the potential dilution that could occur if securities or
other contracts to issue shares of common stock were converted to
common stock that then shared in the earnings of the
entity.
15
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
The number of
shares related to options, warrants, restricted stock, and similar
instruments included in diluted EPS is based on the “Treasury
Stock Method” prescribed in FASB ASC guidance for computation
of EPS. This method assumes theoretical repurchase of shares using
proceeds of the respective stock option or warrant exercised, and,
for restricted stock, the amount of compensation cost attributed to
future services that has not yet been recognized and the amount of
any current and deferred tax benefit that would be credited to
additional paid-in-capital upon the vesting of the restricted
stock, at a price equal to the issuer’s average stock price
during the related earnings period. Accordingly, the number of
shares includable in the calculation of EPS in respect of the stock
options, warrants, restricted stock, and similar instruments is
dependent on this average stock price and will increase as the
average stock price increases. (See “Note (16)
Earnings Per Share” for additional information related to
EPS.)
Treasury Stock
. We accounted
for treasury stock under the cost method. In May 2017,
our treasury stock was re-issued. The net change in
share price after acquisition of the treasury stock was recognized
as a component of additional paid-in-capital in our consolidated
balance sheets. (See “Note (12) Treasury
Stock” for additional disclosures related to treasury
stock.)
New Pronouncements
Adopted
. The FASB issues an Accounting Standards
Update (“ASU”) to communicate changes to the FASB ASC,
including changes to non-authoritative SEC
content. Recently adopted ASUs include:
ASU 2014-09, Revenue from Contracts with
Customers (ASC 606)
. We adopted this accounting
pronouncement effective January 1, 2018, using a modified
retrospective approach, which required us to apply the new revenue
standard to: (i) all new revenue contracts entered into after
January 1, 2018 and (ii) all existing revenue contracts as of
January 1, 2018. In accordance with this approach, our
consolidated revenues for the periods prior to January 1, 2018 will
not be revised. Our implementation activities related to
ASC 606 are complete, and we will not have any material differences
in the amount or timing of revenues as a result of the adoption of
ASC 606. Our largest revenue streams consist of orders
received from our customers for crude-oil derived specialty
products based on market prices. These revenues are
recognized at a point in time upon transfer of control of the
product in accordance with contractual terms.
New Pronouncements Issued, Not Yet
Effective
. The following are recently issued, but not yet
effective, ASU’s that may influence our consolidated
financial position, results of operations, or cash
flows:
ASU 2018-05, Income Taxes (Topic
740)
. In March 2018, FASB issued ASU 2018-05.
This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not
able to complete their accounting for the income tax effects of the
Tax Cuts and Jobs Act in the period of enactment. This
guidance also includes amendments to the XBRL
Taxonomy. For public business entities, the amendments
in ASU 2018-05 are effective for fiscal years ending after December
15, 2020. Early adoption is permitted. We do not expect
adoption of this guidance to have a significant impact on our
consolidated financial statements.
ASU 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency
and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. For a public
business entity, the amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is
permitted. We do not expect adoption of this guidance to have a
significant impact on our consolidated balance sheets.
Other new
pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
16
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(4)
|
Business
Segment Information
|
We have two
reportable business segments: (i) Refinery Operations and (ii)
Tolling and Terminaling. Refinery operations relate to the refining
and marketing of petroleum products at our 15,000-bpd
crude distillation
tower
. Tolling and terminaling operations relate to tolling
and storage terminaling services under related-party and
third-party lease agreements. Both operations are
conducted at the Nixon Facility.
Business segment
information for the periods indicated (and as of the dates
indicated), was as follows:
|
(1)
|
Operation costs
within Refinery Operations includes related general and
administrative expenses. Operation cost within Tolling and
Terminaling includes an allocation of refinery operating expenses
and other costs (e.g. insurance and maintenance), as well as
associated refinery fuel costs. Operation cost within Corporate and
Other includes general and administrative expenses associated with
corporate maintenance costs (such as accounting fees, director
fees, and legal expense), as well as expenses associated with our
pipeline assets and oil and gas leasehold interests (such as
accretion).
|
|
(2)
|
Other non-interest
income reflects FLNG Land II, Inc. easement revenue. See
“Note (17) Commitments and Contingencies – FLNG
Easements” for further discussion related to
FLNG.
|
|
(3)
|
EBITDA is a
non-GAAP financial measure. See “Part I, Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Results of Operations –
Non-GAAP Financial Measures” for additional information
related to EBITDA.
|
17
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(5)
|
Prepaid
Expenses and Other Current Assets
|
Prepaid expenses
and other current assets as of the dates indicated consisted of the
following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Prepaid crude oil
and condensate
|
$
1,300
|
$
913
|
|
Prepaid
insurance
|
130
|
294
|
|
|
$
1,430
|
$
1,207
|
|
(6)
|
Inventory
|
Inventory as of the
dates indicated consisted of the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Crude oil and
condensate
|
$
1,080
|
$
961
|
|
HOBM
|
594
|
1,558
|
|
AGO
|
309
|
213
|
|
Chemicals
|
165
|
162
|
|
Naphtha
|
145
|
170
|
|
Propane
|
22
|
17
|
|
LPG
mix
|
8
|
8
|
|
|
$
2,323
|
$
3,089
|
|
(7)
|
Property,
Plant and Equipment, Net
|
Property, plant and
equipment, net, as of the dates indicated consisted of the
following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Refinery and
facilities
|
$
51,662
|
$
51,432
|
|
Land
|
566
|
566
|
|
Other property and
equipment
|
747
|
653
|
|
|
52,975
|
52,651
|
|
|
|
|
|
Less: Accumulated
depletion, depreciation, and amortization
|
(8,951
)
|
(8,495
)
|
|
|
44,024
|
44,156
|
|
|
|
|
|
Construction in
progress
|
20,740
|
20,441
|
|
|
$
64,764
|
$
64,597
|
We capitalize
interest cost incurred on funds used to construct property, plant,
and equipment. The capitalized interest is recorded as
part of the asset to which it relates and is depreciated over the
asset’s useful life. Interest cost capitalized,
which is currently included in construction in progress, was $4.2
million and $3.9 million at March 31, 2018 and December 31, 2017,
respectively. We expect construction of petroleum storage tanks at
the Nixon Facility to continue until year end.
18
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(8)
|
Related
Party Transactions
|
Blue Dolphin and
certain of its subsidiaries are party to several agreements with
LEH and its affiliates. Management believes that these
related party transactions were consummated on terms equivalent to
those that prevail in arm's-length transactions.
Related Parties
.
LEH
. LEH is our controlling
shareholder. Jonathan Carroll, Chairman of the Board,
Chief Executive Officer, and President of Blue Dolphin, is the
majority owner of LEH. Together LEH and Jonathan Carroll
own 80.2% of our Common Stock. Related party agreements
with LEH include: (i) an Amended and Restated Operating Agreement
with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE,
(iii) a Loan Agreement with BDPL, (iv) an Amended and Restated
Promissory Note with Blue Dolphin, and (v) a Debt Assumption
Agreement with LE.
Ingleside Crude, LLC
(“Ingleside”)
. Ingleside is a related
party of LEH and Jonathan Carroll. Blue Dolphin is party
to an Amended and Restated Promissory Note with
Ingleside.
Lazarus Marine Terminal I, LLC
(“LMT”)
. LMT is a related party
of LEH and Jonathan Carroll. LE is party to a Dock
Tolling Agreement with LMT.
Jonathan Carroll
. Jonathan
Carroll is Chairman of the Board, Chief Executive Officer, and
President of Blue Dolphin. Related party agreements with
Jonathan Carroll include: (i) Amended and Restated Guaranty Fee
Agreements with LE and LRM and (ii) an Amended and Restated
Promissory Note with Blue Dolphin.
Currently, we
depend on LEH and its affiliates (including Jonathan Carroll and
Ingleside) for financing when revenue from operations and
borrowings under bank facilities are insufficient to meet our
liquidity needs. Such borrowings are reflected in our
consolidated balance sheets in accounts payable, related party,
and/or long-term debt, related party. Each quarter
amounts owed by the parties are settled with amounts to be paid by
the parties as discussed within this Note (8) Related Party
Transactions. As a result, related-party transactions do
not always reflect cash payments between the parties.
Operations Related
Agreements
.
Amended and Restated Operating
Agreement
. LEH operates and manages all Blue
Dolphin properties pursuant to the Amended and Restated Operating
Agreement. The Amended and Restated Operating Agreement, which was
restructured following cessation of crude supply and marketing
activities under the Crude Supply Agreement and Joint Marketing
Agreement with GEL, expires: (i) April 1, 2020, (ii) upon written
notice by either party to the Amended and Restated Operating
Agreement of a material breach by the other party, or (iii) upon 90
days’ notice by the Board if the Board determines that the
Amended and Restated Operating Agreement is not in our best
interest. Blue Dolphin reimburses LEH at cost plus five percent
(5%) for all reasonable Blue Dolphin expenses incurred while LEH
performs the services. These expenses are reflected
within refinery operating expenses in our consolidated statements
of operations.
Jet Fuel Sales Agreement
. LE
sells jet fuel to LEH pursuant to a Jet Fuel Sales
Agreement. LEH, which is HUBZone certified, resells
these products to a government agency. The Jet Fuel
Sales Agreement terminates on the earliest to occur of: (a) a
one-year term expiring March 31, 2019 plus a 30-day carryover or
(b) delivery of a maximum quantity of jet fuel as defined
therein. Sales to LEH under the Jet Fuel Sales Agreement
are reflected within refinery operations revenue in our
consolidated statements of operations. (LRM previously leased
petroleum storage tanks to LEH for the storage of the jet fuel
under a Terminal Services Agreement. The Terminal
Services Agreement has been terminated as described
below).
Terminal Services
Agreement
. Pursuant to a Terminal Services
Agreement, LEH leased petroleum storage tanks from LRM for the
storage of LEH purchased jet fuel under the Jet Fuel Sales
Agreement (as described above). The Terminal Services
Agreement was terminated in June 2017. Rental fees
received from LEH under the Terminal Services Agreement are
reflected within tolling and terminaling revenue in our
consolidated statements of operations.
19
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Amended and Restated Tank Lease
Agreement
. Pursuant to an Amended and Restated
Tank Lease Agreement with Ingleside, LE leased petroleum storage
tanks to meet periodic, additional storage needs. The
Amended and Restated Tank Lease Agreement was terminated in July
2017. Rental fees owed to Ingleside under the tank lease
agreement are reflected within long-term debt, related party, net
of current portion in our consolidated balance sheets. Amounts
expensed as rental fees to Ingleside under the Amended and Restated
Tank Lease Agreement are reflected within refinery operating
expenses in our consolidated statements of operations.
Dock Tolling Agreement
. In
May 2016, LE entered a Dock Tolling Agreement with LMT to
facilitate loading and unloading of petroleum products by barge at
LMT’s dock facility in Ingleside, Texas. The Dock
Tolling Agreement has a five-year term and may be terminated at any
time by the agreement of both parties. LE pays LMT a
flat reservation fee monthly. The reservation fee
includes tolling volumes up to 84,000 gallons per
day. Excess tolling volumes are subject to an increased
per gallon rate. Amounts expensed as tolling fees under
the Dock Tolling Agreement are reflected in the cost of refined
products sold in our consolidated statements of
operations.
Financial
Agreements
.
BDPL
Loan Agreement
. In August
2016, BDPL entered a loan and security agreement with LEH as
evidenced by a promissory note in the original principal amount of
$4.0 million (the “
BDPL
Loan
Agreement”). The
BDPL
Loan
Agreement matures in August 2018 and accrues interest at rate of
16.00%. A final balloon payment is due at
maturity.
The proceeds of
the
BDPL
Loan
Agreement were used for working capital. There are no
financial maintenance covenants associated with the
BDPL
Loan
Agreement. The
BDPL
Loan
Agreement is secured by certain property owned by BDPL. Outstanding
principal owed to LEH under the
BDPL
Loan
Agreement is reflected in long-term debt, related party, current
portion in our consolidated balance sheets. Accrued
interest under the
BDPL
Loan
Agreement is reflected in interest payable, related party, current
portion in our consolidated balance sheets.
Promissory Notes
. We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. During
2017, LEH and its affiliates (Ingleside and Jonathan Carroll)
provided working capital to Blue Dolphin in the form of non-cash
advances, such as conversions of accounts payable to debt. These
non-cash advances are relefcted in the below promissory notes.
There can be no assurance that LEH and its affiliates will continue
to fund our working capital requirements. Outstanding principal and
accrued interest owed under these promissory notes are reflected in
long-term debt, related party, current portion in our consolidated
balance sheets.
●
June LEH Note
– In March 2017,
Blue Dolphin entered a promissory note with LEH (the “March
LEH Note”). In June 2017, the March LEH Note was
amended and restated to increase the principal amount (the
“June LEH Note”). The June LEH Note accrued
interest at a rate of 8.00% and had a maturity date of January
2019. During the second quarter of 2017, all amounts
owed to LEH by Blue Dolphin under the June LEH Note were settled to
$0 with amounts owed to Blue Dolphin by LEH under the Jet Fuel
Sales Agreement.
●
March Ingleside Note
– In March
2017, a promissory note between Blue Dolphin and Ingleside was
amended and restated (the “March Ingleside Note”) to
increase the principal and extend the maturity date to January
2019. Interest under the March Ingleside Note, which is compounded
annually and accrued at a rate of 8.00%, was paid in kind and added
to the outstanding balance.
●
March Carroll Note
– In March
2017, a promissory note between Blue Dolphin and Jonathan Carroll
was amended and restated (the “March Carroll Note”) to
increase the principal amount, revise the payment terms to reflect
payment in cash and shares of Blue Dolphin Common Stock, and extend
the maturity date to January 2019. Interest under the
March Carroll Note, which is compounded annually and accrued at a
rate of 8.00%, was paid in kind and added to the outstanding
balance.
20
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Pursuant to the GEL
Letter Agreement, as amended to date, Blue Dolphin and its
affiliates shall: (i) pay only debts in the ordinary course of
business as described in the GEL Letter Agreement, (ii) refrain
from making pre-payments on indebtedness, and (iii) suspend
payments to Jonathan Carroll under Guaranty Fee
Agreements. As a result, no payments were made under the
BDPL Loan Agreement, the March Ingleside Note, and the March
Carroll Note during the three months ended March 31,
2018.
Debt Assumption Agreement
. On September 18, 2017, LEH
paid, on LE’s behalf, certain obligations totaling $3.6
million to GEL relating to the GEL Arbitration and the GEL Letter
Agreement. In exchange for such payments, LE agreed to assume $3.7
million of LEH’s existing indebtedness pursuant to the Debt
Assumption Agreement, entered on November 14, 2017 and made
effective September 18, 2017, by and among LE, LEH and John
Kissick. Debt held by John Kissick, including the
debt
associated with the Debt Assumption Agreement, is
reported in this Quarterly Report as the Notre Dame Debt and is
reflected in long-term debt less unamortized debt issue costs,
current portion in our consolidated balance sheets, as it is
currently in default. (See “Note (10) Long-Term
Debt, Net” for further discussion related to the Notre Dame
Debt.)
Amended and
Restated Guaranty Fee Agreements
. Pursuant to
Amended and Restated Guaranty Fee Agreements, Jonathan Carroll
earns fees for providing his personal guarantee on certain LE and
LRM long-term debt. Jonathan Carroll was required to
guarantee repayment of funds borrowed and interest accrued under
certain LE and LRM loan agreements. Amounts owed to
Jonathan Carroll under Amended and Restated Guaranty Fee Agreements
are reflected within long-term debt, related party, net of current
portion in our consolidated balance sheets. Amounts
expensed related to Amended and Restated Guarantee Fee Agreements
are reflected within interest and other expense in our consolidated
statements of operations.
Pursuant to the GEL
Letter Agreement, as amended to date, Blue Dolphin and its
affiliates shall: (i) pay only debts in the ordinary course of
business as described in the GEL Letter Agreement, (ii) refrain
from making pre-payments on indebtedness, and (iii) suspend
payments to Jonathan Carroll under Guaranty Fee
Agreements. As a result, Jonathan Carroll received no
cash payments and no common stock payments during the three months
ended March 31, 2018. (See “Note (10) Long-Term
Debt, Net” for further discussion related to these guaranty
fee agreements.)
Financial Statements
Impact
.
Consolidated Balance
Sheets
. Accounts receivable, related party from
LEH associated with the Jet Fuel Sales Agreement were $0.3 million
and $0.7 million at March 31, 2018 and December 31, 2017,
respectively. Accounts payable, related party to LMT
associated with the Dock Tolling Agreement were $1.1 million and
$1.0 million at March 31, 2018 and December 31, 2017,
respectively.
Long-term debt,
related party associated with the
BDPL
Loan
Agreement, March Ingleside Note, and March Carroll Note as of the
dates indicated was as follows:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
LEH
|
$
4,000
|
$
4,000
|
|
Ingleside
|
1,215
|
1,169
|
|
Jonathan
Carroll
|
610
|
439
|
|
|
5,825
|
5,608
|
|
|
|
|
|
Less: Long-term
debt, related party,
|
|
|
|
current
portion
|
(5,825
)
|
(4,000
)
|
|
|
$
-
|
$
1,608
|
Accrued interest
associated with the
BDPL
Loan
Agreement was $1.1 million and $0.9 million at March 31, 2018 and
December 31, 2017, respectively.
21
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Consolidated Statements of
Operations
. Related party revenue from operations
as a portion of total product sales was as follows:
Related party cost
of goods sold associated with the Dock Tolling Agreement with LMT
totaled $0.2 million for both the three months ended March 31, 2018
and 2017.
Related party
refinery operating expenses associated with the Amended and
Restated Operating Agreement with LEH for the periods indicated
were as follows:
|
|
Three Months
Ended March 31,
|
|||
|
|
2018
|
2017
|
||
|
|
|
Throughput
|
|
Throughput
|
|
|
Amount
|
per
bbl
|
Amount
|
per
bbl
|
|
|
(in thousands,
except per bbl amounts)
|
|||
|
LEH
|
$
1,922
|
$
1.91
|
$
2,813
|
$
2.80
|
|
|
$
1,922
|
$
1.91
|
$
2,813
|
$
2.80
|
For the three
months ended March 31, 2018, refinery operating expenses per bbl
decreased $0.89 per bbl compared to the same period a year earlier.
The decrease was due to the revised cost-plus expense reimbursement
structure under the Amended and Restated Operating Agreement, as
well as management's effors to reduce overall operating
costs.
Related party
interest expense associated with the
BDPL
Loan
Agreement and Amended and Restated Guaranty Fee Agreements for the
periods indicated was as follows:
|
|
Three Months
Ended March 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Jonathan
Carroll
|
$
163
|
$
168
|
|
LEH
|
160
|
207
|
|
Ingleside
|
47
|
-
|
|
|
$
370
|
$
375
|
22
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(9)
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses
and other current liabilities as of the dates indicated consisted
of the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Unearned
revenue
|
$
942
|
$
450
|
|
Board of director
fees payable
|
239
|
207
|
|
Other
payable
|
145
|
116
|
|
Customer
deposits
|
109
|
109
|
|
Insurance
|
89
|
68
|
|
Excise and income
taxes payable
|
83
|
79
|
|
Property
taxes
|
72
|
131
|
|
|
$
1,679
|
$
1,160
|
|
(10)
|
Long-Term
Debt, Net
|
Long-term debt, net
represents the outstanding principal of long-term debt less
associated debt issue costs. Long-term debt, net as of
the dates indicated consisted of the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
First Term Loan Due
2034 (in default)
|
$
23,020
|
$
23,199
|
|
Second Term Loan
Due 2034 (in default)
|
9,450
|
9,502
|
|
Notre Dame Debt (in
default)
|
4,978
|
4,978
|
|
Capital
leases
|
72
|
-
|
|
|
$
37,520
|
$
37,679
|
|
|
|
|
|
Less: Current
portion of long-term debt, net
|
(35,387
)
|
(35,544
)
|
|
|
|
|
|
Less: Unamortized
debt issue costs
|
(2,102
)
|
(2,135
)
|
|
|
$
31
|
$
-
|
Unamortized debt
issue costs, which relate to secured loan agreements with Veritex,
as of the dates indicated consisted of the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
First Term Loan Due
2034 (in default)
|
$
1,674
|
$
1,674
|
|
Second Term Loan
Due 2034 (in default)
|
768
|
768
|
|
|
|
|
|
Less: Accumulated
amortization
|
(340
)
|
(307
)
|
|
|
$
2,102
|
$
2,135
|
Amortization
expense was $0.03 million for both the three months ended March 31,
2018 and 2017.
23
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Accrued interest
associated with long-term debt, net is reflected as interest
payable, current portion and long-term interest payable, net of
current portion in our consolidated balance sheets and includes
related party interest. Accrued interest as of the dates
indicated consisted of the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt (in
default)
|
$
2,245
|
$
2,046
|
|
LEH Loan Agreement
(related party)
|
1,052
|
892
|
|
Second Term Loan
Due 2034 (in default)
|
51
|
49
|
|
First Term Loan Due
2034 (in default)
|
41
|
40
|
|
|
|
|
|
|
3,389
|
3,027
|
|
|
|
|
|
Less: Interest
payable, current portion
|
(3,389
)
|
(3,027
)
|
|
Long-term interest
payable, net of current portion
|
$
-
|
$
-
|
Related Party
. See
“Note (8) Related Party Transactions” for additional
disclosures with respect to related party long-term
debt.
First Term Loan Due 2034 (In
Default)
. LE has a 2015 loan agreement and related security
agreement
with Veritex
as administrative agent and lender. The loan agreement
is for
a term loan in the
principal amount of $25.0 million
(the “First Term
Loan Due 2034”). The First Term Loan Due 2034
matures in June 2034, has a current monthly payment of principal
and interest of $0.2 million, and accrues interest at a rate based
on the Wall Street Journal Prime Rate plus
2.75%. Pursuant to a construction rider in the First
Term Loan Due 2034, proceeds available for use were placed in a
disbursement account whereby Veritex makes payments for
construction related expenses. Amounts held in the disbursement
account are reflected as restricted cash (current portion) and
restricted cash, noncurrent in our consolidated balance
sheets.
As described
elsewhere in this Annual Report, Veritex notified LE that the Final
Arbitration Award constitutes an event of default under the First
Term Loan Due 2034. In addition to existing events of
default related to the Final Arbitration Award, at March 31, 2018,
LE was in violation of the debt service coverage ratio, the current
ratio, and debt to net worth ratio financial covenants related to
the first Term Loan Due 2034. LE also failed to
replenish a payment reserve account as required. The
occurrence of events of default under the First Term Loan Due 2034
permits Veritex to declare the amounts owed under the First Term
Loan Due 2034 immediately due and payable, exercise its rights with
respect to collateral securing LE’s obligations under the
loan agreement, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not
currently exercising its rights, privileges and remedies under the
First Term Loan Due 2034 considering the ongoing settlement
discussions with GEL and the continuance of the hearing on
confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final
Arbitration Award, which would require Veritex’s
approval. However, Veritex expressly reserved all its
rights, privileges and remedies related to events of default under
the First Term Loan Due 2034 and informed LE that it would consider
a final confirmation of the Final Arbitration Award to be a
material event of default under the loan agreement. Any
exercise by Veritex of its rights and remedies under the First Term
Loan Due 2034 would have a material adverse effect on our business,
financial condition, and results of operations and would likely
require LE to seek protection under bankruptcy
laws. (See “Note (1) Organization – Going
Concern and Operating Risks” for additional disclosures
related to the First Term Loan Due 2034, the Final Arbitration
Award and financial covenant violations.)
24
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
As a condition of
the First Term Loan Due 2034, Jonathan Carroll was required to
guarantee r
epayment
of funds borrowed and interest accrued under the
loan. For his personal guarantee, LE entered a Guaranty
Fee Agreement with Jonathan Carroll whereby he earns a fee equal to
2.00% per annum of the outstanding principal balance owed under the
First Term Loan Due 2034. Effective in April 2017, the
Guaranty Fee Agreement associated with the First Term Loan Due 2034
was amended and restated to reflect payment in cash and shares of
Blue Dolphin Common Stock. Guaranty fees earned by
Jonathan Carroll related to the First Term Loan Due 2034 totaled
$0.1 million for both the three months ended March 31, 2018 and
2017. Guaranty fees are recognized monthly as incurred and are
included in interest and other expense in our consolidated
statements of operations. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements. As a result, Jonathan Carroll received no
cash payments and no common stock payments during the three months
ended March 31, 2018. LEH, LRM and Blue Dolphin also
guaranteed the First Term Loan Due 2034. (See “Note (8)
Related Party Transactions” for additional disclosures
related to LEH and Jonathan Carroll)
A portion of the
proceeds of the First Term Loan Due 2034 were used to refinance
approximately $8.5 million of debt owed under a previous debt
facility with American First National Bank. Remaining
proceeds are being used primarily to construct new petroleum
storage tanks at the Nixon Facility. The First Term Loan Due 2034
is secured by: (i) a first lien on all Nixon Facility business
assets (excluding accounts receivable and inventory), (ii)
assignment of all Nixon Facility contracts, permits, and licenses,
(iii) absolute assignment of Nixon Facility rents and leases,
including tank rental income, (iv) a payment reserve account held
by Veritex, and (v) a pledge of $5.0 million of a life insurance
policy on Jonathan Carroll. The First Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Second Term Loan Due 2034 (In
Default)
. LRM has a 2015 loan agreement and related security
agreement with Veritex as administrative agent and
lender. The loan agreement is for a term loan in the
principal amount of $10.0 million (the “Second Term Loan Due
2034”). The Second Term Loan Due 2034 matures in
December 2034, has a current monthly payment of principal and
interest of $0.1 million, and accrues interest at a rate based on
the Wall Street Journal Prime Rate plus 2.75%. Pursuant
to a construction rider in the Second Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
As described
elsewhere in this Annual Report, Veritex notified LRM that the
Final Arbitration Award constitutes an event of default under the
Second Term Loan Due 2034. In addition to existing
events of default related to the Final Arbitration Award, at
December 31, 2017, LRM was in violation of the debt service
coverage ratio, the current ratio, and debt to net worth ratio
financial covenants related to the Second Term Loan Due
2034. The occurrence of events of default under the
Second Term Loan Due 2034 permits Veritex to declare the amounts
owed under the Second Term Loan Due 2034 immediately due and
payable, exercise its rights with respect to collateral securing
LRM’s obligations under the loan agreement, and/or exercise
any other rights and remedies available. Veritex
informed obligors that it is not currently exercising its rights,
privileges and remedies under the Second Term Loan Due 2034
considering the ongoing settlement discussions with GEL and the
continuance of the hearing on confirmation of the Final Arbitration
Award and to allow Veritex to evaluate any proposed settlement
agreement related to the Final Arbitration Award, which would
require Veritex’s approval. However, Veritex
expressly reserved all its rights, privileges and remedies related
to events of default under the Second Term Loan Due 2034 and
informed LRM that it would consider a final confirmation of the
Final Arbitration Award to be a material event of default under the
loan agreement. Any exercise by Veritex of its rights
and remedies under the Second Term Loan Due 2034 would have a
material adverse effect on our business, financial condition, and
results of operations and would likely require LE to seek
protection under bankruptcy laws. (See “Note (1) Organization
– Going Concern and Operating Risks” for additional
disclosures related to the First Term Loan Due 2034, the Final
Arbitration Award and financial covenant violations.)
25
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
As a condition of
the Second Term Loan Due 2034, Jonathan Carroll was required to
guarantee repayment of funds borrowed and interest accrued under
the loan. For his personal guarantee, LRM entered a
Guaranty Fee Agreement with Jonathan Carroll whereby he earns a fee
equal to 2.00% per annum of the outstanding principal balance owed
under the Second Term Loan Due 2034. Effective in April
2017, the Guaranty Fee Agreement associated with the Second Term
Loan Due 2034 was amended and restated to reflect payment in cash
and shares of Blue Dolphin Common Stock. Guaranty fees
earned by Jonathan Carroll related to the Second Term Loan Due 2034
totaled $0.1 million for both the three months ended March 31, 2018
and 2017. Guaranty fees are recognized monthly as incurred and are
included in interest and other expense in our consolidated
statements of operations. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements. As a result, Jonathan Carroll received no
cash payments and no common stock payments during the three months
ended March 31, 2018. LEH, LE and Blue Dolphin also
guaranteed the Second Term Loan Due 2034. (See
“Note (8) Related Party Transactions” for additional
disclosures related to LEH and Jonathan Carroll.)
A portion of the
proceeds of the Second Term Loan Due 2034 were used to refinance a
previous bridge loan from Veritex in the amount of $3.0
million. Remaining proceeds are being used primarily to
construct additional new petroleum storage tanks at the Nixon
Facility. The Second Term Loan Due 2034 is secured by: (i) a second
priority lien on the rights of LE in the crude distillation tower
and the other collateral of LE pursuant to a security agreement;
(ii) a first priority lien on the real property interests of LRM;
(iii) a first priority lien on all of LRM’s fixtures,
furniture, machinery and equipment; (iv) a first priority lien on
all of LRM’s contractual rights, general intangibles and
instruments, except with respect to LRM’s rights in its
leases of certain specified tanks, with respect to which Veritex
has a second priority lien in such leases subordinate to a prior
lien granted by LRM to Veritex to secure obligations of LRM under
the Term Loan Due 2017; and (v) all other collateral as described
in the security documents. The Second Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Notre Dame Debt (In Default)
.
LE entered a loan with Notre Dame Investors, Inc. as evidenced by a
promissory note in the original principal amount of $8.0 million,
which is currently held by John Kissick (the “Notre Dame
Debt”). Pursuant to a Sixth Amendment to the Notre Dame Debt,
entered on November 14, 2017 and made effective September 18, 2017,
the Notre Dame Debt was amended to increase the principal amount by
$3.7 million (the “Additional Principal”). The
Additional Principal was used to make payments to GEL to reduce the
balance of the Final Arbitration Award in the amount of $3.6
million in accordance with the GEL Letter
Agreement. Interest on the principal accrues at a rate
of 16.00%. The Notre Dame Debt matured in January 2018,
however, pursuant to a Subordination Agreement dated June 2015, the
holder of the Notre Dame Debt agreed to subordinate its right to
payments, as well as any security interest and liens on the Nixon
Facility, in favor of Veritex as holder of the First Term Loan Due
2034.
The Notre Dame Debt
is secured by a Deed of Trust, Security Agreement and Financing
Statements (the “Subordinated Deed of Trust”), which
encumbers the
crude distillation
tower
and general assets of LE. There are no
financial maintenance covenants associated with the Notre Dame
Debt.
Capital Leases
.
Boiler Equipment Lease
. In
2014, LRM entered a 36-month build-to-suit capital lease for the
purchase two new boilers for the Nixon Facility. One of the boilers
was placed in service during the second quarter of 2017, being
reclassified on our consolidated balance sheets from construction
in progress to refinery and facilities. The other boiler remains in
construction in progress. The lease was paid off during
the three months ended March 31, 2018.
Crane Lease
. In January
2018, LE entered a 24-month capital lease for the purchase of a
20-ton crane for use at the Nixon Facility. The lease
requires a negligible monthly payment and matures in January
2020.
26
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
A summary of
equipment held under long-term capital leases as of the dates
indicated follows:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Crane
|
$
94
|
$
-
|
|
Less: accumulated
depreciation
|
(3
)
|
-
|
|
|
$
91
|
$
-
|
|
(11)
|
Asset
Retirement Obligations
|
Refinery and Facilities
.
Management has concluded that there is no legal or contractual
obligation to dismantle or remove the refinery and facilities
assets. Management believes that the refinery and facilities assets
have indeterminate lives under FASB ASC guidance for estimating
AROs because dates or ranges of dates upon which we would retire
these assets cannot reasonably be estimated at this time. When a
legal or contractual obligation to dismantle or remove the refinery
and facilities assets arises and a date or range of dates can
reasonably be estimated for the retirement of these assets, we will
estimate the cost of performing the retirement activities and
record a liability for the fair value of that cost using present
value techniques.
Pipelines and Facilities and Oil and
Gas Properties
. We have AROs associated with the
dismantlement and abandonment in place of our pipelines and
facilities assets, as well as the plugging and abandonment of our
oil and gas properties. We recorded a discounted
liability for the fair value of an ARO with a corresponding
increase to the carrying value of the related long-lived asset at
the time the asset was installed or placed in service. We
depreciate the amount added to property and equipment and recognize
accretion expense relating to the discounted liability over the
remaining life of the asset. Plugging and abandonment costs are
recorded during the period incurred or as information becomes
available to substantiate actual and/or probable
costs.
Changes to our ARO
liability for the periods indicated were as follows:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Asset retirement
obligations, at the beginning of the period
|
$
2,315
|
$
2,028
|
|
Accretion
expense
|
66
|
287
|
|
|
2,381
|
2,315
|
|
Less: asset
retirement obligations, current portion
|
(2,381
)
|
(2,315
)
|
|
Long-term asset
retirement obligations, at the end of the period
|
$
-
|
$
-
|
|
(12)
|
Treasury
Stock
|
At March 31, 2018
and 2017, we had 0 and 150,000 shares of treasury stock,
respectively. In May 2017, we issued 150,000 shares of
treasury stock to Jonathan Carroll as payment for amounts due under
the March Carroll Note. The issuance price of the treasury stock
issued to Mr. Carroll was $2.48 per share, which represents the
preceding 30-day average closing price of the Common Stock, in
accordance with the Amended and Restated Guaranty Fee
Agreements. The shares of treasury stock issued to Mr.
Carroll are restricted per applicable securities holding periods
for affiliates.
27
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(13)
|
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 our cash balances at financial institutions located in
Houston, Texas. In the U.S., the Federal Deposit Insurance
Corporation (the “FDIC”) insures certain financial
products up to a maximum of $250,000 per depositor. At
March 31, 2018 and December 31, 2017, we had cash balances
(including restricted cash) of more than the FDIC insurance limit
per depositor in the amount of $1.9 million and $1.6 million,
respectively.
Key Supplier
.
We currently have
in place a month-to-month evergreen crude supply contract with a
major integrated oil and gas company. This supplier
currently provides us with adequate amounts of crude oil and
condensate, and we expect the supplier to continue to do so for the
foreseeable future. However, our ability to purchase
adequate amounts of crude oil and condensate is dependent on our
liquidity and access to capital, which could be adversely affected
if the parties are unable to reach an acceptable settlement with
GEL, and GEL seeks to confirm and enforce the Final Arbitration
Award, as well as other factors, including as net losses, working
capital deficits, and financial covenant defaults in secured loan
agreements.
Significant Customers
. We
routinely assess the financial strength of our customers and have
not experienced significant write-downs in our accounts receivable
balances. Therefore, we believe that our accounts
receivable credit risk exposure is limited.
For the three
months ended March 31, 2018, we had 3 customers that accounted for
approximately 77.0% of refinery operations revenue. LEH
was 1 of these 3 significant customers and accounted for
approximately 28.8% of refinery operations revenue. At
March 31, 2018, these 3 customers represented approximately $0.3
million in accounts receivable. LEH represented
approximately $0.3 million in accounts receivable. LEH,
which is HUBZone certified, purchases our jet fuel and resells the
jet fuel to a government agency. (See “Note (8)
Related Party Transactions,” “Note (10) Long-Term Debt,
Net,” and “Note (17) Commitments and Contingencies
– Financing Agreements” for additional disclosures
related to LEH.)
For the three
months ended March 31, 2017, we had 3 customers that accounted for
approximately 82.1% of refinery operations revenue. LEH
was 1 of these 3 significant customers and accounted for
approximately 36.2% of refinery operations revenue. At
March 31, 2017, these 3 customers represented approximately $0 in
accounts receivable.
Refined Petroleum Product
Sales
. Our refined petroleum products are primarily sold in
the U.S. However, with the opening of the Mexican diesel market to
private companies, we occasionally sell low-sulfur diesel to
customers that export to Mexico. Total refined
petroleum product sales by distillation (from light to heavy) for
the periods indicated consisted of the following:
28
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(14)
|
Leases
|
|
(15)
|
Income
Taxes
|
On
December 22, 2017, the Tax Cuts and Jobs Act was signed into
law. The principal element of the Tax Cuts and Jobs Act relevant to
our financial statements is a reduction in the U.S. federal
corporate tax rate from 34% to 21%, effective January 1, 2018.
Other provisions of the Tax Cuts and Jobs Act did not have a
significant impact on our financial statements for the three months
ended March 31, 2018.
For the three
months ended March 31, 2018 and 2017, we recognized an income tax
benefit of $0.2 million and $0, respectively.
The provision for
income tax benefit (expense) as of the dates indicated consisted of
the following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Current
|
$
108
|
$
-
|
|
Deferred
|
|
|
|
Impact of change in
enacted tax rates
|
-
|
(6,654
)
|
|
Change in valuation
allowance
|
109
|
6,654
|
|
Total provision for
income taxes
|
$
217
|
$
-
|
In 2018, our
effective tax rate differed from the U.S. federal statutory rate
primarily due to Alternative Minimum Tax credits made refundable by
the Tax Cuts and Jobs Act. In 2017, our effective tax
rate differed from the U.S. federal statutory rate primarily due to
re-measuring deferred income taxes at the new statutory tax rate
and the related change of the valuation allowance over our deferred
tax assets. At the date of enactment of the Tax Cuts and
Jobs Act, we re-measured our deferred tax assets and liabilities
using a rate of 21%, which is the rate expected to be in place when
such deferred assets and liabilities are expected to reverse in the
future. The re-measurement, which was offset by a change
in our valuation allowance, reduced our net deferred tax assets by
approximately $6.7 million.
The state of Texas
has a Texas margins tax (“TMT”), which is a form of
business tax imposed on gross margin. Although TMT is imposed on an
entity’s gross profit rather than on its net income, certain
aspects of TMT make it like an income tax. Accordingly,
TMT is treated as an income tax for financial reporting
purposes.
29
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
Deferred income
taxes as of the dates indicated consisted of the
following:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
and capital loss carryforwards
|
$
10,720
|
$
9,767
|
|
Accrued arbitration
award payable
|
3,377
|
4,122
|
|
Start-up costs
(crude oil and condensate processing facility)
|
742
|
763
|
|
Asset retirement
obligations liability/deferred revenue
|
507
|
495
|
|
AMT credit and
other
|
109
|
217
|
|
Total deferred tax
assets
|
15,455
|
15,365
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Basis differences
in property and equipment
|
(4,577
)
|
(4,415
)
|
|
Total deferred tax
liabilities
|
(4,577
)
|
(4,415
)
|
|
|
|
|
|
|
10,878
|
10,950
|
|
|
|
|
|
Valuation
allowance
|
(10,769
)
|
(10,950
)
|
|
Deferred tax
assets, net
|
$
109
|
$
-
|
Deferred Income
Taxes
. Deferred income tax balances reflect the
effects of temporary differences between the carrying amounts of
assets and liabilities and their tax basis, as well as from NOL
carryforwards. We state those balances at the enacted
tax rates we expect will be in effect when taxes are
paid. NOL carryforwards and deferred tax assets
represent amounts available to reduce future taxable
income.
NOL Carryforwards
. Under IRC
Section 382, a corporation that undergoes an “ownership
change” is subject to limitations on its use of pre-change
NOL carryforwards to offset future taxable income. Within the
meaning of IRC Section 382, an “ownership change”
occurs when the aggregate stock ownership of certain stockholders
(generally 5% shareholders, applying certain look-through rules)
increases by more than 50 percentage points over such stockholders'
lowest percentage ownership during the testing period (generally
three years). For income tax purposes, we experienced ownership
changes in 2005, relating to a series of private placements, and in
2012, because of a reverse acquisition, that limit the use of
pre-change NOL carryforwards to offset future taxable
income. In general, the annual use limitation equals the
aggregate value of common stock at the time of the ownership change
multiplied by a specified tax-exempt interest rate. The 2012
ownership change will subject approximately $16.3 million in NOL
carryforwards that were generated prior to the ownership change to
an annual use limitation of approximately $0.6 million per
year. Unused portions of the annual use limitation
amount may be used in subsequent years. Because of the
annual use limitation, approximately $6.7 million in NOL
carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were
generated after the 2012 ownership change are not subject to an
annual use limitation under IRC Section 382 and may be used for a
period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change.
30
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
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, 2016
|
$
9,614
|
$
23,562
|
$
33,176
|
|
|
|
|
|
|
Net operating
losses
|
-
|
6,656
|
6,656
|
|
|
|
|
|
|
Balance at December
31, 2017
|
$
9,614
|
$
30,218
|
$
39,832
|
|
|
|
|
|
|
Net operating
losses
|
-
|
4,295
|
4,295
|
|
|
|
|
|
|
Balance at March
31, 2018
|
$
9,614
|
$
34,513
|
$
44,127
|
Valuation Allowance
. As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that some portion or all the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any NOL carryforwards. At March
31, 2018 and December 31, 2017, management determined that
cumulative losses incurred over the prior three-year period
provided significant objective evidence that limited the ability to
consider other subjective evidence, such as projections for future
growth. Based on this evaluation, we recorded a valuation allowance
against the deferred tax assets for which realization was not
deemed more likely than not as of March 31, 2018 and December 31,
2017.
|
(16)
|
Earnings
Per Share
|
A reconciliation
between basic and diluted income per share for the periods
indicated was as follows:
Diluted EPS is
computed by dividing net income available to common stockholders by
the weighted average number of shares of common stock
outstanding. Diluted EPS for the three months ended
March 31, 2018 and 2017 was the same as basic EPS as there were no
stock options or other dilutive instruments
outstanding.
31
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(17)
|
Commitments
and Contingencies
|
Legal Matters
.
Final Arbitration Award
. See
“Note (1) Organization – Going Concern – Final
Arbitration Award” and "Part II, Item 1. Legal
Proceedings” for additional disclosures related to the Final
Arbitration Award.
Veritex Secured Loan Agreement Event of
Default
. See “Note (1) Organization –
Going Concern – Veritex Secured Loan Agreement Event of
Default” and “Note (10) Long-Term Debt, Net” for
disclosures related to defaults under secured loan
agreements.
Other Legal Matters
. From
time to time we are involved in routine lawsuits, claims, and
proceedings incidental to the conduct of our business, including
mechanic’s liens and administrative
proceedings. Management does not believe that such
matters will have a material adverse effect on our financial
position, earnings, or cash flows.
Amended and Restated Operating
Agreement
. See “Note (8) Related Party
Transactions” for additional disclosures related to the
Amended and Restated Operating Agreement.
FLNG Easements
. BDPL and FLNG
were parties to a Pipeline Easement dated November 5, 2005 (the
“FLNG Pipeline Easement”) and the FLNG Master Easement
Agreement (together with the FLNG Pipeline Easement, the
“FLNG Easements”). The FLNG Easements provided FLNG and
its affiliates: (i) a pipeline easement and right of way across
BDPL-owned property to certain property owned by FLNG and (ii)
rights of ingress and egress across BDPL-owned property to the
property owned by FLNG. Under the FLNG Easements, FLNG made
payments to us in the amount of $0.5 million each year. The FLNG
Easements were terminated in February 2017.
Financing Agreements
. See
“Note (10) Long-Term Debt, Net” for additional
disclosures related to financing agreements.
Guarantees
. LEH and Jonathan
Carroll have provided guarantees on certain Blue Dolphin-related
long-term debt. The maximum amount of any guarantee is
reduced as payments are made. See “Note (10)
Long-Term Debt, Net” for additional disclosures related to
guarantees.
Health, Safety and Environmental
Matters
. All our operations and properties 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 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 greenhouse gas emissions. Our operations also require
numerous permits and authorizations under various environmental,
health, and safety laws and regulations. Failure to obtain and
comply with these permits or environmental, health, or safety laws
generally could result in fines, penalties or other sanctions, or a
revocation of our permits.
Nixon Facility Expansion
.
We
have made and
continue to make capital and efficiency improvements at the Nixon
Facility. Therefore, we incurred and will continue to incur capital
expenditures related to these improvements, which include, among
other things, facility and land improvements and completion of
petroleum storage tanks.
Supplemental Pipeline Bonds
. In
a letter dated March 30, 2018, the Bureau of Ocean Energy
Management (the “BOEM”) ordered BDPL to provide
additional supplemental bonds or acceptable financial assurance of
approximately $4.6 million within sixty (60) calendar days of
receipt of the letter. The order relates to five (5)
existing pipeline rights-of-way. At March 31, 2018 and December 31,
2017, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to the
BOEM. BDPL plans to appeal the order within the
allowable timeframe. There can be no assurance that the
BOEM will accept a reduced amount of supplemental financial
assurance or not require additional supplemental pipeline bonds
related to our existing pipeline rights-of-way. If BDPL
is required by the BOEM to provide significant additional
supplemental bonds or acceptable financial assurance, we may
experience a significant and material adverse effect on our
operations, liquidity, and financial condition.
32
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(18)
|
Subsequent
Events
|
Seventh Amendment to GEL Letter
Agreement
. On April 27, 2018, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a
seventh amendment to the GEL Letter Agreement, which extended the
Continuance Period through May 31, 2018, in order to facilitate
ongoing discussions. An additional $0.5 million was paid
to GEL on April 26, 2018, which amount has been applied to reduce
the balance of the final award. (See “Note (1)
Organization – Going Concern – Final Arbitration
Award” for disclosures related to the Final Arbitration
Award.)
Remainder of Page
Intentionally Left Blank
In this Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2018 (the Quarterly Report”), references to
“Blue Dolphin,” “we,” “us” and
“our” are to Blue Dolphin Energy Company and its
subsidiaries, unless otherwise indicated or the context otherwise
requires. You should read the following discussion together with
the financial statements and the related notes included elsewhere
in this Quarterly Report, as well as with the risk factors,
financial statements, and related notes included thereto in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2017 (the “Annual Report”).
Forward Looking Statements
Certain statements
included in this Quarterly Report, including in this
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” are forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1935. Forward-looking statements represent
management’s beliefs and assumptions based on currently
available information. Forward-looking statements relate to
matters such as our industry, business strategy, goals and
expectations concerning our market position, future operations,
margins, profitability, capital expenditures, liquidity and capital
resources, access to supplies of crude oil and condensate,
commitments and contingencies, and other financial and operating
information. We have used the words “anticipate,”
“assume,” “believe,” “budget,”
“continue,” “could,”
“estimate,” “expect,” “intend,”
“may,” “plan,” “potential,”
“predict,” “project,” “will,”
“future” and similar terms and phrases to identify
forward-looking statements.
Forward-looking
statements reflect our current expectations regarding future
events, results, or outcomes. These expectations may or may not be
realized. Some of these expectations may be based upon assumptions
or judgments that prove to be incorrect. In addition, our business
and operations involve numerous risks and uncertainties, many of
which are beyond our control, which could result in our
expectations not being realized, or materially affect our financial
condition, results of operations and cash flows. Actual
events, results and outcomes may differ materially from our
expectations due to a variety of factors. Although it is not
possible to identify all these factors, they include, among others,
the following and other factors described under the heading
“Risk Factors” in the Annual Report and this Quarterly
Report:
Risks
Related to Our Business and Industry
●
Failure to reach a
settlement agreement with GEL (See “Final Arbitration
Award” below).
●
Inadequate
liquidity to sustain operations due to the unfavorable outcome in
the arbitration of the contract-related dispute with GEL, net
losses, working capital deficits, and other factors, including
crude supply issues tied to access to capital and financial
covenant defaults in secured loan agreements, any of which could
have a material adverse effect on us.
●
Dangers inherent in
oil and gas operations that could cause disruptions and expose us
to potentially significant losses, costs or liabilities and reduce
our liquidity.
●
Geographic
concentration of our assets, which creates a significant exposure
to the risks of the regional economy.
●
Competition from
companies having greater financial and other
resources.
●
Laws and
regulations regarding personnel and process safety, as well as
environmental, health, and safety, for which failure to comply may
result in substantial fines, criminal sanctions, permit
revocations, injunctions, facility shutdowns, and/or significant
capital expenditures.
●
Insurance coverage
that may be inadequate or expensive.
●
Related party
transactions with LEH and its affiliates (including Jonathan
Carroll and Ingleside), which may cause conflicts of
interest.
●
Failure to comply
with certain financial covenants related to certain secured loan
agreements.
●
Our ability to use
net operating loss (“NOL”) carryforwards to offset
future taxable income for U.S. federal income tax purposes, which
are subject to limitation.
●
Terrorist attacks,
cyber-attacks, threats of war, or actual war may negatively affect
our operations, financial condition, results of operations, and
cash flows.
34
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Risks
Related to Our Refinery Operations Business Segment
●
A determination by
management that there is, and the report of our independent
registered public accounting firm that expresses, substantial doubt
about our ability to continue as a going
concern.
●
Volatility of
refining margins.
●
Volatility of crude
oil, other feedstocks, refined petroleum products, and fuel and
utility services.
●
Our ability to
acquire sufficient levels of crude oil on favorable terms to
operate the crude distillation tower.
●
Refinery downtime,
which could result in lost margin opportunity, increased
maintenance costs, increased inventory, and a reduction in cash
available for payment of our obligations and to which we are
particularly vulnerable because all our refining operations are
conducted at a single facility.
●
Capital needs for
which our internally generated cash flows and other sources of
liquidity may not be adequate.
●
Our dependence on
LEH and its affiliates for financing and management of our
properties.
●
Loss of executive
officers or key employees, as well as a shortage of skilled labor
or disruptions in our labor force, which may make it difficult to
maintain productivity.
●
Loss of market
share by a key customer or consolidation among our customer
base.
●
Failure to grow or
maintain the market share for our refined petroleum
products.
●
Our reliance on
third-parties for the transportation of crude oil and condensate
into and refined petroleum products out of the Nixon
Facility.
●
Interruptions in
the supply of crude oil and condensate sourced in the Eagle Ford
Shale.
●
Changes in the
supply/demand balance in the Eagle Ford Shale that could result in
lower margins on refined petroleum products.
●
Regulation of
greenhouse gas emissions, which could increase our operational
costs and reduce demand for our products.
Risks
Related to Our Pipelines and Oil and Gas Properties
●
Required increases
in bonds or other sureties to maintain compliance with regulatory
requirements, which could significantly impact our liquidity and
financial condition.
●
More stringent
regulatory requirements related to asset retirement obligations
(“AROs”), which could significantly increase our
estimated future AROs.
Any one of these
factors or a combination of these factors could materially affect
our future results of operations and could influence whether any
forward-looking statements ultimately prove to be accurate. Our
forward-looking statements are not guarantees of future
performance, and actual results and future performance may differ
materially from those suggested in any forward-looking statements.
We do not intend to update these statements unless we are required
to do so.
Going Concern
See “Part I,
Item 1. Financial Statements – Note (1) Organization –
Going Concern” regarding factors management has determined
raise substantial doubt about our ability to continue as a going
concern.
Operating Risks
See “Part I,
Item 1. Financial Statements – Note (1) Organization –
Operating Risks” regarding factors that have negatively
impacted execution of our business plan.
Company Overview
Blue Dolphin is a
publicly-traded Delaware corporation primarily engaged in the
refining and marketing of petroleum products. We also provide
tolling and storage terminaling services. Our assets,
which are located in Nixon, Texas, primarily include a
15,000-bpd
crude distillation
tower
and approximately 1.1 million bbls of petroleum
storage tanks (collectively the "Nixon Facility"). Pipeline
transportation and oil and gas operations are no longer
active. Blue Dolphin maintains a website at
http://www.blue-dolphin-energy.com
. Information
on or accessible through Blue Dolphin’s website is not
incorporated by reference in or otherwise made a part of this
Quarterly Report.
35
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Major Influences on Results of Operations
Refinery
Operations
As a margin-based
business, our refinery operations are primarily affected by gross
profit per bbl, product slate, and refinery downtime.
Price Differentials per
Bbl
Gross profit per
bbl, which reflects the per bbl price difference between crude oil
and condensate (input) and refined petroleum products (output), is
the most significant driver of refining margins, and they have
historically been subject to wide fluctuations. Our per bbl cost to
acquire crude oil and condensate and the per bbl price for which
our refined petroleum products are ultimately sold depend on the
economics of supply and demand. Supply and demand are affected by
numerous factors, most, if not all, of which are beyond our
control, including:
●
Domestic and
foreign market conditions, political affairs, and economic
developments;
●
Import supply
levels and export opportunities;
●
Existing domestic
inventory levels;
●
Operating and
production levels of competing refineries;
●
Expansion and/or
upgrades of competitors’ facilities;
●
Governmental
regulations (e.g., mandated renewable fuels standards, proposed
climate change laws and regulations, and increased mileage
standards for vehicles);
●
Weather
conditions;
●
Availability of and
access to transportation infrastructure;
●
Availability of
competing fuels (e.g., renewables); and
●
Seasonal
fluctuations.
Product Slate
Management
periodically determines whether to change the
crude distillation
tower
’s product mix, as well as maintain,
increase, or decrease inventory levels based on various
factors. These factors include the crude oil pricing
market in the U.S. Gulf Coast region, the refined petroleum
products market in the same region, the relationship between these
two markets, fulfilling contract demands, and other factors that
may impact our operations, financial condition, and cash
flows.
Refinery Downtime
The safe and
reliable operation of the
crude distillation
tower
is key to our financial performance and results
of operations, and we are particularly vulnerable to disruptions in
our operations because all our refining operations are conducted at
a single location. Although operating at anticipated levels,
the
crude distillation
tower
is still in a recommissioning phase and may
require unscheduled downtime for unanticipated reasons, including
maintenance and repairs, voluntary regulatory compliance measures,
or cessation or suspension by regulatory authorities.
Occasionally,
the
crude distillation
tower
experiences a temporary shutdown due to power
outages from high winds and thunderstorms. In such cases, we must
initiate a standard refinery start-up process, which can last
several days. We are typically able to resume normal operations the
next day. Any scheduled or unscheduled downtime may
result in lost margin opportunity, increased maintenance expense
and a build-up of refined petroleum products inventory, which could
reduce our ability to meet our payment obligations.
36
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Tolling
and Terminaling Operations
The Nixon
Facility’s petroleum storage tanks and infrastructure are
primarily suited for light to intermediate crude oil and condensate
and refined petroleum products, such as naphtha, jet fuel, diesel
and fuel oil. Our storage terminaling operations are
primarily affected by:
●
price (in terms of
storage fees) and available capacity;
●
industry factors
including changes in the prices of petroleum products that affect
demand for storage services; and
●
utilization rates
of our competitors.
Key
Relationships
Relationship with
LEH
Blue Dolphin and
certain of its subsidiaries are currently party to a variety of
agreements with LEH. Related party agreements with LEH
include: (i) an Amended and Restated Operating Agreement with Blue
Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a
Loan Agreement with BDPL, (iv) an Amended and Restated Promissory
Note with Blue Dolphin, and (v) a Debt Assumption Agreement with
LE. In addition, we currently rely on advances from LEH and its
affiliates (including Jonathan Carroll) to fund our working capital
requirements. There can be no assurances that LEH and its
affiliates will continue to fund our working capital
requirements. (See “Part I, Item 1. Financial
Statements – Note (8) Related Party Transactions” for
additional disclosures related to agreements that we have in place
with LEH and its affiliates.)
Relationship with Crude
Supplier
Operation of
the
crude distillation
tower
depends on our ability to purchase adequate
amounts of crude oil and condensate on favorable
terms. We currently have in place a month-to-month
evergreen crude supply contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate, and we expect the
supplier to continue to do so for the foreseeable
future. However, our ability to purchase adequate
amounts of crude oil and condensate is dependent on our liquidity
and access to capital, which could be adversely affected if the
parties are unable to reach an acceptable settlement with GEL, and
GEL seeks to confirm and enforce the Final Arbitration Award, as
well as other factors, including as net losses, working capital
deficits, and financial covenant defaults in secured loan
agreements.
Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial
stability. If our business plan is unsuccessful, it
could affect our ability to acquire adequate supplies of crude oil
and condensate under the existing contract or
otherwise. Further, because our existing crude supply
contract is a month-to-month arrangement, there can be no assurance
that crude oil and condensate supplies will continue to be
available under this contract in the future.
Results of Operations
Consolidated
Results
March 31, 2018 (the “Current
Period”) Compared to March 31, 2017 (the “Prior
Period”)
.
Total Revenue from Operations
. For the
Current Period, we had total revenue from operations of $72.2
million compared to total revenue from operations of $52.6 million
for the Prior Period, an increase of nearly
38%. Approximately 85% of the increase between the
periods was the result of improved margins for refined petroleum
products while approximately 15% of the increase was due to
increased sales volume.
Cost of Refined Products Sold
. Cost of
refined products sold was $68.7 million for the Current Period
compared to $51.8 million for the Prior Period. The
approximate 33% increase in cost of refined products sold was the
result of higher crude oil prices and increased sales volume in the
Current Period compared to the Prior Period.
Gross Profit / Gross Margin
. For the
Current Period, gross profit totaled $3.5 million, or 4.9%,
compared to gross profit of $0.8 million, or 1.6%, for the Prior
Period. The $2.7 million, or 3.3%, increase between the
periods primarily related to improved margins for refined petroleum
products in the Current Period compared to the Prior
Period.
37
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Refinery Operating
Expenses
. We recorded refinery operating expenses
of $1.9 million in the Current Period compared to $2.8 million in
the Prior Period, a decrease of nearly 32%. Refinery
operating expenses per bbl of throughput were $1.91 in the Current
Period compared to $2.80 in the Prior Period. The $0.89
decrease in refinery operating expenses per bbl of throughput
between the periods was the result of significantly lower refinery
operating expenses under the Amended and Restated Operating
Agreement, as well as management's efforts to reduce overall
operating costs. (See “Part I, Item 1. Financial Statements
– Note (8) Related Party Transactions” for additional
disclosures related to components of refinery operating expenses,
the Amended and Restated Operating Agreement)
General and Administrative Expenses
. We
incurred general and administrative expenses of $0.7 million in the
Current Period compared to $0.9 million in the Prior
Period. The 31% decrease in general and administrative
expenses in the Current Period compared to the Prior Period
primarily related to a significant decrease in legal
fees.
Depletion, Depreciation and
Amortization
. We recorded depletion, depreciation
and amortization expenses of $0.5 million in the Current Period
compared to $0.5 million in the Prior Period, which was
flat.
Other Income
(Expense).
Total other income (expense) was
expense of $0.7 million in the Current Period compared to income of
$1.6 million in the Prior Period. The Prior Period
includes a one-time gain on the sale of property.
Income Tax Expense
. We
recognized an income tax benefit of $0.2 million in the Current
Period compared to an income tax expense of $0 in the Prior
Period. Income tax expense in the Current Period
primarily relates to a refundable AMT paid in prior periods. (See
“Part I, Item 1. Financial Statements – Note (15)
Income Taxes” for additional disclosures related to income
taxes.)
Net Loss
. For the Current
Period, we reported a net loss of $0.2 million, or loss of $0.01
per share, compared to a net loss of $1.9 million, or loss of $0.18
per share, for the Prior Period. The $0.17 per share improvement in
net loss between the periods was primarily the result of improved
margins for refined petroleum products.
Remainder of Page
Intentionally Left Blank
38
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Non-GAAP
Financial Measures
To supplement our
consolidated results, management uses refining gross profit per bbl
and EBITDA, non-GAAP financial measures, to help investors evaluate
our ongoing operating results and allow for greater transparency in
reviewing our overall financial, operational and economic
performance. Refining gross profit per bbl and EBITDA are
reconciled to GAAP-based results below. Refining gross profit per
bbl and EBITDA should not be considered an alternative for GAAP
results. Refining gross profit per bbl and EBITDA are provided to
enhance an overall understanding of our financial performance for
the applicable periods and are indicators that management believes
are relevant and useful. Refining gross profit per bbl and EBITDA
may differ from similar calculations used by other companies within
the petroleum industry, thereby limiting its usefulness as a
comparative measure. (See “Part I, Item 1. Financial
Statements” for comparative GAAP results.)
Current Period Compared to Prior
Period
.
Refining Gross Profit per Bbl –
For the three months ended March 31, 2018, refining gross profit
per bbl was $2.81 compared to $0.14 per bbl for the three months
ended March 31, 2017, reflecting an increase of
$2.67. The significant increase between the periods
primarily related to improved margins for refined petroleum
products in the Current Period compared to the Prior
Period. (See “Glossary of Selected Energy and
Financial Terms” in this Quarterly Report for the definition
of gross margin per bbl.)
EBITDA
– EBITDA for the periods
indicated was as follows:
●
Refinery Operations
. For the
Current Period EBITDA for refinery operations was positive at $0.2
million compared to a loss of $2.6 million for the Prior Period,
reflecting an improvement of $2.4 million. The
significant improvement in refinery operations EBITDA between the
periods was the result of improved margins for refined petroleum
product in the Current Period compared to the Prior
Period.
●
Tolling and
Terminaling
. EBITDA for tolling and terminaling
operations was positive at $0.7 million for the Current Period. We
did not report tolling and terminaling operations as a separate
business segment in 2017.
|
(1)
|
Operation costs
within Refinery Operations includes related general and
administrative expenses. Operation cost within Tolling and
Terminaling includes an allocation of refinery operating expenses
and other costs (e.g. insurance and maintenance), as well as
associated refinery fuel costs.
Operation cost
within Corporate and Other includes general and administrative
expenses associated with corporate maintenance costs (such as
accounting fees, director fees, and legal expense), as well as
expenses associated with our pipeline assets and oil and gas
leasehold interests (such as accretion).
|
|
(2)
|
Other non-interest
income reflects FLNG easement revenue. See “Part
I, Item 1. – Notes to Consolidated Financial Statements
– Note (17) Commitments and Contingencies – FLNG
Easements” for further discussion related to
FLNG.
|
39
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Refinery
Operations Throughput and Production Data
Operational
metrics for the crude distillation tower for the periods indicated
were as follow:
|
Note:
|
The small
difference between total refinery throughput (volume processed as
input) and total refinery production (volume processed as output)
represents a combination of multiple factors including refinery
fuel use, elimination of some impurities originally present in the
crude oil, loss, and other factors.
|
In the Current
Period, the
crude distillation
tower
experienced 16 days of downtime related to a
maintenance turnaround. In the Prior Period, the
crude distillation
tower
experienced 10 days of downtime primarily due
to a contract-related dispute with GEL. Total refinery throughput
bbls and total refinery production bbls increased nominally in the
Current Period compared to the Prior Period despite the
crude distillation
tower
being down for a maintenance turnaround in the
Current Period.
Refined Petroleum Product Sales
Summary
.
See “Part I,
Item 1. Financial Statements - Note (13) Concentration of
Risk” for a discussion of refined petroleum product
sales.
40
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Liquidity
and Capital Resources
Overview
.
Currently, we rely
on revenue from operations, LEH and its affiliates (including
Jonathan Carroll), and borrowings under bank facilities to meet our
liquidity needs. Primary uses of cash include: (i)
reimbursement of LEH for refinery operating expenses under the
Amended and Restated Operating Agreement, (ii) payments on
long-term debt and the Final Arbitration Award, (iii) purchase of
crude oil and condensate, and (iv) construction in
progress.
As discussed
elsewhere within this “Liquidity and Capital Resources”
section, management has determined that there is substantial doubt
about our ability to continue as a going concern due to consecutive
quarterly net losses, inadequate working capital, the Final
Arbitration Award, crude supply issues tied to access to capital,
and defaults under secured loan agreements. See “Part I, Item
1. Financial Statements – Note (1) Organization – Going
Concern” for additional disclosures related to the Final
Arbitration Award, the GEL Letter Agreement (as amended), defaults
under secured loan agreements, and going concern.
We are continuing
aggressive actions in 2018 to improve operations and
liquidity. Management believes that it is continuing to
take the appropriate steps to improve operations at the Nixon
Facility and our overall financial stability. However,
there can be no assurance that our business plan will be
successful, that LEH and its affiliates will continue to fund our
working capital needs, or that we will be able to obtain additional
financing on commercially reasonable terms or at all. If
the parties are unable to reach an acceptable settlement with GEL
or Veritex does not approve any such settlement and GEL seeks to
confirm and enforce the Final Arbitration Award, our business,
financial condition, and results of operations will be materially
adversely affected, and LE would likely be required to seek
protection under bankruptcy laws.
Crude Oil and Condensate
Supply
.
Operation of
the
crude distillation
tower
depends on our ability to purchase adequate
amounts of crude oil and condensate on favorable
terms. We currently have in place a month-to-month
evergreen crude supply contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate, and we expect the
supplier to continue to do so for the foreseeable
future. However, our ability to purchase adequate
amounts of crude oil and condensate is dependent on our liquidity
and access to capital, which could be adversely affected if the
parties are unable to reach an acceptable settlement with GEL, and
GEL seeks to confirm and enforce the Final Arbitration Award, as
well as other factors, including net losses, working capital
deficits, and financial covenant defaults in secured loan
agreements.
Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial
stability. If our business plan is unsuccessful, it
could affect our ability to acquire adequate supplies of crude oil
and condensate under the existing contract or
otherwise. Further, because our existing crude supply
contract is a month-to-month arrangement, there can be no assurance
that crude oil and condensate supplies will continue to be
available under this contract in the future.
Remainder of Page
Intentionally Left Blank
41
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Cash Flow
.
Our cash flow from
operations for the periods indicated was as
follows:
|
|
Three Months
Ended March 31,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Beginning cash,
cash equivalents, and restricted cash
|
$
2,146
|
$
6,083
|
|
|
|
|
|
Cash flow from
operations
|
|
|
|
Adjusted profit
(loss) from operations
|
185
|
(1,295
)
|
|
Change in assets
and current liabilities
|
616
|
(1,078
)
|
|
|
|
|
|
Total cash flow
from operations
|
801
|
(2,373
)
|
|
|
|
|
|
Cash inflows
(outflows)
|
|
|
|
Payments on
debt
|
(240
)
|
(474
)
|
|
Net activity on
related-party debt
|
217
|
1,097
|
|
Capital
expenditures
|
(540
)
|
(811
)
|
|
|
|
|
|
Total cash inflows
(outflows)
|
(563
)
|
(188
)
|
|
|
|
|
|
Total change in
cash flows
|
238
|
(2,561
)
|
|
|
|
|
|
Ending cash, cash
equivalents, and restricted cash
|
$
2,384
|
$
3,522
|
For the Current
Period, we experienced cash flow from operations of $0.8 million
compared to negative cash flow from operations of $2.4 million for
the Prior Period. The $1.6 million improvement in cash flow from
operations between the periods was primarily the result improved
operating income.
Working Capital
.
We had a working
capital deficit of $71.5 million at March 31, 2018 compared to a
working capital deficit of $69.5 million at December 31, 2017.
Excluding the current portion of long-term debt, we had a working
capital deficit of $30.3 million at March 31, 2018 compared to a
working capital deficit of $30.0 million at December 31,
2017.
As discussed
elsewhere within this “Liquidity and Capital Resources”
section, the Final Arbitration Award has affected our ability to
obtain working capital through financing. We can provide
no assurance as to whether negotiations with GEL will result in a
settlement or the potential terms of any such settlement. If the
parties are unable to reach an acceptable settlement with GEL, and
GEL seeks to confirm and enforce the Final Arbitration Award: (i)
our business operations, including crude oil and condensate
procurement and our customer relationships; financial condition;
and results of operations will be materially affected, and (ii) LE
would likely be required to seek protection under bankruptcy
laws.
We currently rely
on LEH and its affiliates (including Jonathan Carroll) to fund our
working capital requirements. There can be no assurance
that LEH and its affiliates (including Jonathan Carroll) will
continue to fund our working capital requirements.
Capital Spending
.
Capital
improvements primarily relate to construction of new petroleum
storage tanks to add to existing petroleum storage capacity. Since
2015, the Nixon Facility has been undergoing a capital improvement
expansion project to significantly increase petroleum storage
capacity. Increased petroleum storage capacity: (i) assists
with de-bottlenecking the facility, (ii) supports increased
refinery throughput up to approximately 30,000 bpd, and (iii)
provides an opportunity to generate additional tolling and
terminaling revenue. When the expansion project is
complete, petroleum storage capacity at the Nixon Facility will
exceed 1.2 million bbls, an increase of more than 0.9 million
bbls. Due to the Final Arbitration Award, capital
expenditures in the Current Period were minimal and primarily
consisted of capitalized interest on the secured loan agreements
with Veritex.
42
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Capital
expenditures at the Nixon Facility are being funded by Veritex
through long-term debt that was secured in
2015. Available funds under these loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets.
See “Part I,
Item 1. Financial Statements – Note (10) Long-Term Debt,
Net” for additional disclosures related to borrowings for
capital spending.
Contractual
Obligations
.
Related Party
. See
“Part I, Item 1. Financial Statements – Note (8)
Related Party Transactions” for a summary of the agreements
we have in place with related parties.
GEL
. See “Part I, Item
1. Financial Statements – Note (1) Organization – Going
Concern – Final Arbitration Award” for disclosures
related to the Final Arbitration Award to GEL.
Supplemental Pipeline
Bonds
. See “Part I, Item 1. Financial
Statements – Note (1) Organization – Going Concern
– Final Arbitration Award” and “Note (17)
Commitments and Contingencies – Supplemental Pipeline
Bonds” for a discussion of supplemental pipeline bonding
requirements.
Indebtedness
.
The principal
balances outstanding on our long-term debt, net (including related
party) for the periods indicated were as follow:
|
|
March
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
|
|
|
|
First Term Loan Due
2034 (in default)
|
$
23,020
|
$
23,199
|
|
Second Term Loan
Due 2034 (in default)
|
9,450
|
9,502
|
|
Notre Dame Debt (in
default)
|
4,978
|
4,978
|
|
LEH Loan
Agreement
|
4,000
|
4,000
|
|
March Ingleside
Note
|
1,215
|
1,169
|
|
March Carroll
Note
|
610
|
439
|
|
Capital
Leases
|
72
|
-
|
|
|
43,345
|
43,287
|
|
|
|
|
|
Less: Current
portion of long-term debt, net
|
(41,243
)
|
(39,544
)
|
|
|
|
|
|
Less: Unamoritized
debt issue costs
|
(2,102
)
|
(2,135
)
|
|
|
$
-
|
$
1,608
|
Payments on
long-term debt totaled $0.2 million in the Current Period compared
to $0.5 million in the Prior Period.
43
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
As described
elsewhere in this Quarterly Report, Veritex notified obligors that
the Final Arbitration Award constitutes an event of default under
the First Term Loan Due 2034 and Second Term Loan Due
2034. In addition to existing events of default related
to the Final Arbitration Award, at March 31, 2018, LE and LRM were
in violation of the debt service coverage ratio, the current ratio,
and debt to net worth ratio financial covenants related to the
secured loan agreements. LE also failed to replenish a
payment reserve account as required. The occurrence of
events of default under the secured loan agreements permits Veritex
to declare the amounts owed under the secured loan agreements
immediately due and payable, exercise its rights with respect to
collateral securing obligors’ obligations under the loan
agreements, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not
currently exercising its rights, privileges and remedies under the
secured loan agreements considering the ongoing settlement
discussions with GEL and the continuance of the hearing on
confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final
Arbitration Award, which would require Veritex’s
approval. However, Veritex expressly reserved all its
rights, privileges and remedies related to events of default under
the secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan
agreements. Any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material
adverse effect on our business, financial condition, and results of
operations and would likely require LE to seek protection under
bankruptcy laws.
See “Part I,
Item 1. Financial Statements – Note (1) Organization –
Going Concern and Operating Risks, as well as Note (10) Long-Term
Debt, Net” for additional disclosures related to long-term
debt financial covenant violations and events of
default.
See
“Contractual Obligations – Related Party” within
the Liquidity and Capital Resources section for additional
disclosures with respect to related party
indebtedness.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
Long-Lived Assets
.
Refinery and Facilities
. Management
expects to continue making improvements to the
crude distillation
tower
based on operation needs and technological
advances. Additions to refinery and facilities assets
are capitalized. Expenditures for repairs and maintenance are
expensed as incurred and included as operating expenses under the
Amended and Restated Operating Agreement.
We record refinery
and facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of
operations. For financial reporting purposes,
depreciation of refinery and facilities assets is computed using
the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities assets are placed in
service. As a result of the Final Arbitration Award,
which represents a significant adverse change that could affect the
value of a long-lived asset, management performed potential
impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the periods presented.
Pipelines and Facilities Assets
. Our
pipelines and facilities are recorded at cost less any adjustments
for depreciation or impairment. Depreciation is computed
using the straight-line method over estimated useful lives ranging
from 10 to 22 years. In accordance with FASB ASC guidance on
accounting for the impairment or disposal of long-lived assets,
management performed periodic impairment testing of our pipeline
and facilities assets in the fourth quarter of 2016. Upon
completion of that testing, our pipeline assets were fully
impaired. All pipeline transportation services to
third-parties have ceased, existing third-party wells along our
pipeline corridor were permanently abandoned, and no new
third-party wells are being drilled near our pipelines. However,
management believes our pipeline assets have future value based on
large-scale, third-party production facility expansion projects
near the pipelines.
Oil and Gas Properties
. Our oil and gas
properties are accounted for using the full-cost method of
accounting, whereby all costs associated with acquisition,
exploration and development of oil and gas properties, including
directly related internal costs, are capitalized on a cost center
basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production
method. All leases associated with our oil and gas
properties have expired, and our oil and gas properties were fully
impaired in 2011.
Construction in Progress
. Construction
in progress expenditures, which relate to construction and
refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in
service.
44
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Revenue
Recognition
.
We adopted the
provisions of FASB ASU 2014-09,
Revenue from Contracts with Customers (ASC
606)
, on January 1, 2018, as described below in
“Recently Adopted Accounting Guidance.” Accordingly,
our revenue recognition accounting policy has been revised to
reflect the adoption of this standard.
Refinery Operations
Revenue
. Revenue from the sale of refined
petroleum products is recognized when the product is sold to a
customer in fulfillment of performance obligations. Each
barrel of refined petroleum product, or other unit of measure, is
separately identifiable and represents a distinct performance
obligation to which the transaction price is
allocated. Performance obligations are met when control
is transferred to the customer in accordance with the terms of the
respective sales agreement. We consider a variety of
facts and circumstances in assessing the point of control transfer,
including but not limited to: whether the purchaser can direct the
use of the refined petroleum product, the transfer of significant
risks and rewards, our rights to payment, and transfer of legal
title. In each case, the term between delivery and when payments
are due is not significant. Transportation, shipping and
handling costs incurred are included in cost of refined products
sold. Excise and other taxes that are collected from customers and
remitted to governmental authorities are not included in
revenue.
Tolling and Terminaling
Revenue
. Revenues for tolling and terminaling
include fees pursuant to: (i) tolling agreements, whereby a
customer agrees to pay a certain fee per gallon or barrel for
throughput volumes moving through the naphtha stabilizer unit and a
fixed monthly reservation fee for use of the naphtha stabilizer
unit and (ii) tank storage agreements, whereby a customer agrees to
pay a certain fee per tank based on tank size over a period of time
for the storage of products. We typically satisfy performance
obligations for tolling and terminaling operations with the passage
of time. We determine the transaction price at agreement inception
based on the guaranteed minimum amount of revenue over the term of
the agreement. We allocate the transaction price to the single
performance obligation that exists under the agreement, and we
recognize revenue in the amount for which we have a right to
invoice. Generally, payment terms do not exceed 30
days.
Revenue from tank
storage customers may, from time to time, include fees for
ancillary services, such as in-tank and tank-to-tank
blending. These services are considered optional to the
customer, and the price we charge for such services is not included
in the fixed cost under the customer’s tank storage
agreement. Ancillary services do not provide a material
right to the customer, and such services are considered a separate
performance obligation by us under the tank storage agreement. The
performance obligation is satisfied when the requested service has
been performed in the applicable period.
Inventory
.
Our inventory
primarily consists of refined petroleum products, crude oil and
condensate, and chemicals. Inventory is valued at lower
of cost or net realizable value with cost being determined by the
average cost method, and net realizable value being determined
based on estimated selling prices less any associated delivery
costs. If the net realizable value of our refined
petroleum 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 refined products sold.
Asset Retirement
Obligations
.
FASB ASC guidance
related to AROs requires that a liability for the discounted fair
value of an ARO be recorded in the period in which incurred and the
corresponding cost capitalized by increasing the carrying amount of
the related long-lived asset. The liability is accreted towards its
future value each period, and the capitalized cost is depreciated
over the useful life of the related asset. If the liability is
settled for an amount other than the recorded amount, a gain or
loss is recognized.
Management has
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facility 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.
45
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
We recorded an ARO
liability related to future asset retirement costs associated with
dismantling, relocating or disposing of our offshore platform,
pipeline systems and related onshore facilities, as well as
plugging and abandoning wells and restoring land and sea beds. We
developed these cost estimates for each of our assets based upon
regulatory requirements, structural makeup, water depth, reservoir
characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering
consultations. Because these costs typically extend many
years into the future, estimating future costs are difficult and
require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis.
Income Taxes
.
We account for
income taxes under FASB ASC guidance related to income taxes, which
requires recognition of income taxes based on amounts payable with
respect to the current reporting period and the effects of deferred
taxes for the expected future tax consequences of events that have
been included in our financial statements or tax
returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that some portion or all the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any NOL carryforwards. At
December 31, 2017 and 2016, management determined that cumulative
losses incurred over the prior three-year period provided
significant objective evidence that limited the ability to consider
other subjective evidence, such as projections for future growth.
Based on this evaluation, we recorded a valuation allowance against
the deferred tax assets for which realization was not deemed more
likely than not as of March 31, 2018 and December 31,
2017.
FASB ASC guidance
related to income taxes also prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return, as well as guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures,
and transition.
See “Part I,
Item 1. Financial Statements - Note (15) Income Taxes” for
further information related to income taxes.
Recently
Adopted Accounting Guidance
FASB issues an ASU
to communicate changes to the FASB ASC, including changes to
non-authoritative SEC content. Recently adopted ASUs
include:
ASU 2014-09, Revenue from Contracts with
Customers (ASC 606)
. We adopted this accounting
pronouncement effective January 1, 2018, using a modified
retrospective approach, which required us to apply the new revenue
standard to: (i) all new revenue contracts entered into after
January 1, 2018 and (ii) all existing revenue contracts as of
January 1, 2018. In accordance with this approach, our
consolidated revenues for the periods prior to January 1, 2018 will
not be revised. Our implementation activities related to
ASC 606 are complete, and we will not have any material differences
in the amount or timing of revenues as a result of the adoption of
ASC 606. Our largest revenue streams consist of orders
received from our customers for crude-oil derived specialty
products based on market prices. These revenues are
recognized at a point in time upon transfer of control of the
product in accordance with contractual terms.
46
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-Q
3/31/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
New
Pronouncements Issued, Not Yet Effective
The following are
recently issued, but not yet effective, ASU’s that may
influence our consolidated financial position, results of
operations, or cash flows:
ASU 2018-05, Income Taxes (Topic
740)
. In March 2018, FASB issued ASU 2018-05.
This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not
able to complete their accounting for the income tax effects of the
Tax Cuts and Jobs Act in the period of enactment. This
guidance also includes amendments to the XBRL
Taxonomy. For public business entities, the amendments
in ASU 2018-05 are effective for fiscal years ending after December
15, 2020. Early adoption is permitted. We do not expect
adoption of this guidance to have a significant impact on our
consolidated financial statements.
ASU 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency
and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. For a public
business entity, the amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is
permitted. We do not expect adoption of this guidance to have a
significant impact on our consolidated balance sheets.
Other new
pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
Remainder of Page
Intentionally Left Blank
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 Chief Financial Officer (principal financial officer), we
conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period
covered by this Quarterly Report. Based on our evaluation, our
Chief Executive Officer (principal executive officer) and Chief
Financial Officer (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
Management
concluded that our internal control over financial reporting was
effective as of December 31, 2017. 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 months ended March 31, 2018 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting. (See “Part I, Item
4. Controls and Procedures – Evaluation of Disclosure
Controls and Procedures” of this Quarterly Report for a
discussion related to controls and procedures.)
PART II. OTHER INFORMATION
See “Part I,
Item 1. Financial Statements – Note (1) Organization –
Going Concern – Final Arbitration Award” of this
Quarterly Report for disclosures related to the Final Arbitration
Award to GEL.
Other Legal Matters
From time to time
we are involved in routine lawsuits, claims, and proceedings
incidental to the conduct of our business, including
mechanic’s liens and administrative
proceedings. Management does not believe that such
matters will have a material adverse effect on our financial
position, earnings, or cash flows.
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. 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. There
have been no material changes in our assessment of our risk factors
from those set forth in our Annual Report.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See “Part I,
Item. 1. Financial Statements – Note (10) Long-Term Debt,
Net” for disclosures related to defaults on our
debt.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits Index
|
No.
|
|
Description
|
|
|
Fourth Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated February 1, 2018.
|
|
|
|
Fifth Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated February 28, 2018.
|
|
|
|
Sixth Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated March 26, 2018.
|
|
|
|
Seventh Amendment
to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated April 27, 2018.
|
|
|
|
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.
|
|
|
|
Tommy L. Byrd
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
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.
|
|
|
|
Tommy L. Byrd
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.
|
* All
exhibits listed are filed herewith.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
May 15,
2018
|
|
By:
|
/s/ JONATHAN P.
CARROLL
|
|
|
|
|
Jonathan P.
Carroll
Chief Executive
Officer, President,
Assistant Treasurer
and Secretary
(Principal
Executive Officer)
|
|
|
|
|
|
|
May 15,
2018
|
|
By:
|
/s/ TOMMY L.
BYRD
|
|
|
|
|
Tommy L.
Byrd
Chief Financial
Officer,
Treasurer and
Assistant Secretary
(Principal
Financial Officer)
|