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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/18
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-Q
(Mark One)
| ☒ |
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
June 30,
2018
or
|
☐
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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, 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. (Check
one):
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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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Emerging
growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
☐ No ☒
Number
of shares of common stock, par value $0.01 per share outstanding as
of August 14, 2018: 10,925,513
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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36
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ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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51
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ITEM
4.
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CONTROLS
AND PROCEDURES
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51
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PART
II. OTHER INFORMATION
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51
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ITEM
1.
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LEGAL
PROCEEDINGS
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51
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ITEM
1A.
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RISK
FACTORS
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51
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ITEM
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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51
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ITEM
3.
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DEFAULTS
UPON SENIOR SECURITIES
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52
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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52
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ITEM
5.
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OTHER
INFORMATION
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52
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ITEM
6.
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EXHIBITS
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52
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SIGNATURES
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53
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INTRODUCTION
This
Quarterly Report for the quarterly period ended June 30, 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”), “Part II, Item 1A. Risk Factors” in our
Quarterly Report on Form 10-Q for the period ended March 31, 2018,
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”)
. A unit of volume equal to 42
U.S. gallons.
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
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 crude distillation tower, the rate is calculated by dividing
total refinery throughput or total refinery production on a bpd
basis by the total capacity of the crude distillation tower
(currently 15,000 bpd).
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 tower 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.
Final Arbitration Award
.
Damages and attorney fees and related
expenses awarded to GEL Tex Marketing, LLC (“GEL”) by
an arbitrator on August 11, 2017, in arbitration proceedings
between LE and GEL related to a contractual dispute.
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 as
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 income (expense), and
income tax benefit (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
.
Refinery operating expenses in our
consolidated statements of operations represent: (i) Blue
Dolphin’s direct operating expenses, which primarily include
the crude distillation tower and associated facilities, such as
direct costs of labor, maintenance materials and services,
chemicals and catalysts and utilities and (ii) LEH’s
operating fee of 5% of Blue Dolphin’s direct operating
expenses 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.
|
|
Three
Months Ended June 30,
|
Six Months Ended
June 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
(in thousands,
except share and per-share amounts)
|
|||
|
REVENUE FROM
OPERATIONS
|
|
|
|
|
|
Refinery
operations
|
$
88,265
|
$
56,633
|
$
159,777
|
$
108,535
|
|
Tolling
and terminaling
|
850
|
704
|
1,584
|
1,407
|
|
Total
revenue from operations
|
89,115
|
57,337
|
161,361
|
109,942
|
|
|
|
|
|
|
|
COST OF
OPERATIONS
|
|
|
|
|
|
Cost of
refined products sold
|
83,867
|
54,625
|
152,591
|
106,399
|
|
Refinery operating
expenses
|
1,377
|
1,652
|
3,299
|
4,465
|
|
Other
operating expenses
|
56
|
54
|
100
|
115
|
|
Arbitration award
and associated fees
|
-
|
24,339
|
-
|
24,339
|
|
General
and administrative expenses
|
688
|
708
|
1,348
|
1,614
|
|
Depletion,
depreciation and amortization
|
463
|
449
|
918
|
900
|
|
Accretion of asset
retirement obligations
|
78
|
72
|
144
|
144
|
|
Total
cost of operations
|
86,529
|
81,899
|
158,400
|
137,976
|
|
Income
(loss) from operations
|
2,586
|
(24,562
)
|
2,961
|
(28,034
)
|
|
|
|
|
|
|
|
OTHER INCOME
(EXPENSE)
|
|
|
|
|
|
Easement, interest
and other income
|
1
|
1
|
2
|
383
|
|
Interest and other
expense
|
(751
)
|
(832
)
|
(1,495
)
|
(1,426
)
|
|
Gain on
disposal of property
|
-
|
-
|
-
|
1,834
|
|
Total
other income (expense)
|
(750
)
|
(831
)
|
(1,493
)
|
791
|
|
Income
(loss) before income taxes
|
1,836
|
(25,393
)
|
1,468
|
(27,243
)
|
|
Income
tax benefit
|
-
|
-
|
217
|
-
|
|
Net
income (loss)
|
$
1,836
|
$
(25,393
)
|
$
1,685
|
$
(27,243
)
|
|
|
|
|
|
|
|
Income (loss) per
common share:
|
|
|
|
|
|
Basic
|
$
0.17
|
$
(2.39
)
|
$
0.15
|
$
(2.58
)
|
|
Diluted
|
$
0.17
|
$
(2.39
)
|
$
0.15
|
$
(2.58
)
|
|
|
|
|
|
|
|
Weighted average
number of common shares outstanding:
|
|
|
|
|
|
Basic
|
10,925,513
|
10,637,101
|
10,925,513
|
10,556,356
|
|
Diluted
|
10,925,513
|
10,637,101
|
10,925,513
|
10,556,356
|
See
accompanying notes to consolidated financial
statements.
Consolidated Statements of
Cash Flows
(Unaudited)
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Net income
(loss)
|
$
1,685
|
$
(27,243
)
|
|
Adjustments to
reconcile net income (loss) to net cash
|
||
|
provided by (used
in) operating activities:
|
|
|
|
Depletion,
depreciation and amortization
|
918
|
900
|
|
Deferred income
tax
|
(216
)
|
-
|
|
Amortization of
debt issue costs
|
64
|
64
|
|
Accretion of asset
retirement obligations
|
144
|
144
|
|
Common stock issued
for services
|
-
|
30
|
|
Changes in
operating assets and liabilities
|
|
|
|
Accounts
receivable
|
252
|
1,586
|
|
Accounts
receivable, related party
|
653
|
1,162
|
|
Prepaid expenses
and other current assets
|
(1,110
)
|
(57
)
|
|
Deposits and other
assets
|
(66
)
|
(25
)
|
|
Inventory
|
(1,091
)
|
(1,773
)
|
|
Accrued arbitration
award
|
(3,000
)
|
31,279
|
|
Accounts payable,
accrued expenses and other liabilities
|
2,635
|
(11,336
)
|
|
Accounts payable,
related party
|
252
|
302
|
|
Net cash provided
by (used in) operating activities
|
1,120
|
(4,967
)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Capital
expenditures
|
(1,231
)
|
(1,408
)
|
|
Net cash used in
investing activities
|
(1,231
)
|
(1,408
)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Payments on
debt
|
(475
)
|
(855
)
|
|
Net
activity on related-party debt
|
452
|
3,257
|
|
Net
cash provided by (used in) financing activities
|
(23
)
|
2,402
|
|
Net change in cash,
cash equivalents, and restricted cash
|
(134
)
|
(3,973
)
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
2,146
|
6,083
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
2,012
|
$
2,110
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
Financing of
capital expenditures via accounts payable and capital
leases
|
$
82
|
1,462
|
|
Financing of
guaranty fees via long-term debt, related party
|
$
325
|
$
111
|
|
Conversion of
accounts payable to short-term notes
|
$
-
|
$
-
|
|
Conversion of
related-party notes to common stock
|
$
-
|
$
831
|
|
Interest
paid
|
$
1,290
|
$
1,333
|
|
Income
taxes paid
|
$
-
|
$
-
|
See
accompanying notes to consolidated financial
statements.
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
(1)
|
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 (9) Related Party
Transactions,” “Note (11) Long-Term Debt, Net”
and “Note (18) 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:
●
Nixon Product
Storage, LLC, a Delaware limited liability company
(“NPS”).
●
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”).
Effective
June 12, 2018, Blue Dolphin acquired 100% of the issued and
outstanding membership interests of NPS from Lazarus Midstream
Partners, L.P., an affiliate of LEH, pursuant to an Assignment
Agreement. The assignment was accounted for as a combination of
entities under common control. See “Note (5) NPS
Assignment” of this Quarterly Report for further information
related to the NPS assignment.
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 and Settlement Agreement – 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 $7.6 million to GEL, which
amount has been applied to reduce the balance of the Final
Arbitration Award.
9
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 was subsequently amended nine times to extend the
Continuance Period through July 2018.
On July
20, 2018, LE, NPS, and Blue Dolphin, together with LEH, Carroll
& Company Financial Holdings, L.P. (“C&C”), and
Jonathan Carroll (collectively referred to herein as the
“Lazarus Parties”), entered into a Settlement Agreement
with GEL (the “Settlement Agreement”), whereby GEL and
the Lazarus Parties agreed to mutually release all claims against
each other and to file a stipulation of dismissal with prejudice in
connection with the GEL Arbitration (the “Settlement”),
subject to the terms and conditions set forth in the Settlement
Agreement. The Settlement is conditioned upon payment by the
Lazarus Parties to GEL of $10.0 million in cash (the
“Settlement Payment”) and $0.5 million in cash at the
end of each calendar month until the Settlement Payment is paid
(the “Interim Payments”) or the Settlement Agreement is
terminated. The Interim Payments will not be applied to reduce the
amount of the Settlement Payment, but such payments will reduce the
Final Arbitration Award. At June 30, 2018 and December 31, 2017,
accrued arbitration award payable on our consolidated balance sheet
was $24.1 million and $27.1 million, respectively. At
the time of the Settlement, the difference between the Settlement
Payment and the amount we have accrued on our consolidated balance
sheet for arbitration award payable will be recognized as a gain on
our consolidated statement of operations.
The
Settlement Agreement restricts the Lazarus Parties from taking
certain actions without the prior written consent of GEL,
including: (i) the incurrence of any debt not specifically excepted
in the Settlement Agreement, (ii) the establishment of any liens
not specifically excepted in the Settlement Agreement, (iii) the
disposition of any assets other than certain ordinary course sales
to unaffiliated third parties, payments to unaffiliated third-party
trade creditors and scheduled debt payments, (iv) the entrance into
any transactions with affiliates not specifically excepted in the
Settlement Agreement, (v) the failure to pay debts generally as
they become due, and (vi) the entrance into a bankruptcy,
reorganization or similar proceeding. A violation of any of the
restrictions in the Settlement Agreement, as well as the failure of
the Lazarus Parties to make Interim Payments as they become due,
will constitute an event of default under the Settlement Agreement
which, subject to certain cure periods, would allow GEL to
terminate the Settlement Agreement and enforce its rights under the
Final Arbitration Award.
The
Lazarus Parties are exploring the possibility of obtaining a
commercial loan in an aggregate principal amount equal to the
Settlement Payment (the “Settlement Financing”),
subject to obtaining the consent of Veritex Community Bank
(“Veritex”), as lender under certain loan agreements
with the Lazarus Parties and their affiliates. Under the Settlement
Agreement, the Lazarus Parties are required to work in good faith
and take reasonable actions necessary to obtain the Settlement
Financing in accordance with the terms of the Settlement Agreement.
Prior to the consummation of the Settlement Financing, the Lazarus
Parties are required to: (i) cause NPS to consummate the Settlement
Financing and restrict its ability to commence a bankruptcy case,
(ii) assign to NPS certain tank leases that will constitute
collateral for the Settlement Financing, and (iii) cause NPS to
assume joint and several liability for all or a portion of the
Final Arbitration Award. The failure to achieve certain milestones
in connection with obtaining the Settlement Financing will
constitute an event of default under the Settlement Agreement,
which would allow GEL to terminate the Settlement Agreement and
enforce its rights under the Final Arbitration Award.
Simultaneously with
the execution of the Settlement Agreement, Jonathan Carroll and
C&C entered into a Security Agreement pursuant to which
Jonathan Carroll and C&C agreed to secure up to $10.0 million
of LE’s obligations under the Final Arbitration Award with a
security interest in their equity in LEH.
The
Settlement Agreement will terminate, unless extended in writing by
GEL, on December 31, 2018 if the Settlement Payment is not made on
or before such date, and the Settlement Agreement may be terminated
by GEL following the occurrence of an event of default under the
Settlement Agreement, as described above. Pursuant to the
Settlement Agreement, the parties agreed to terminate the Letter
Agreement, and GEL agreed not to take any action to execute or
collect on the Final Arbitration Award and to take all action
necessary to continue the District Court Action until the earlier
of: (i) the date on which the Settlement Payment is paid or (ii)
the termination of the Settlement Agreement.
10
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Blue
Dolphin can provide no assurance that the conditions necessary for
consummation of the Settlement will be met. If certain conditions
are not met or the Settlement Agreement is terminated, GEL may seek
to enforce the Final Arbitration Award against the Lazarus Parties,
in which case: (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) Blue Dolphin and its affiliates would likely be required
to seek protection under bankruptcy laws.
●
Veritex Secured
Loan Agreement Event of Default – 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 Settlement Agreement. 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. Additionally,
Veritex must ultimately approve the Settlement. 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 June 30, 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,
will approve the Settlement. If Veritex does not approve
the Settlement Agreement, 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 Blue Dolphin would likely be required to seek
protection under bankruptcy laws.
Operating Risks
. Successful execution of our
business plan depends on several key factors, including the
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 June 30, 2018, we reported net income of $1.8
million, or income of $0.17 per share, compared to a net loss of
$25.4 million, or a loss of $2.39 per share, for the quarter ended
June 30, 2017. The prior period in 2017 included the
Final Arbitration Award, which was $24.3 million and represented an
expense of $2.32 per share. Including the Final
Arbitration Award, net income (loss) on a per share basis improved
$2.56 between the periods. Excluding the Final
Arbitration Award, net income (loss) on a per share basis improved
$0.27 between the periods, which was primarily the result of
improved margins for refined petroleum products.
For the
six months ended June 30, 2018, we reported net income of $1.7
million, or income of $0.15 per share, compared to a net loss of
$27.2 million, or a loss of $2.58 per share, for the six months
ended June 30, 2017. Including the Final Arbitration
Award, net income (loss) on a per share basis improved $2.73
between the periods. Excluding the Final Arbitration
Award, net income (loss) on a per share basis improved $0.43
between the periods, which was primarily the result of improved
margins for refined petroleum products.
Execution
of our business plan was hindered during the quarter ended June 30,
2018 by several factors, including:
●
Working Capital
Deficits – We had a working capital deficit of $69.9 million
at June 30, 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 $28.7 million
at June 30, 2018 compared to a working capital deficit of $30.0
million at December 31, 2017.
11
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
●·
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 Settlement Agreement is terminated 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 June 30, 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 June 30, 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 the Settlement Agreement 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
Veritex does not approve the Settlement or if the Settlement
Agreement with GEL is terminated 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 Blue Dolphin and its affiliates would likely be
required to seek protection under bankruptcy laws.
For
additional disclosures related to the Final Arbitration Award, the
GEL Letter Agreement, the Settlement 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 (9) Related
Party Transactions
-
Note (11) Long-Term
Debt, Net
-
Note (18)
Commitments and Contingencies – Legal
Matters
-
Final Arbitration
Award
-
Results of
Operations
-
Liquidity and
Capital Resources
12
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 and six months ended June 30, 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 $0.1 million and $0 at June 30, 2018
and December 31, 2017, respectively.
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 (7) Inventory” for
additional disclosures related to our inventory.)
13
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 (8) 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 (11) Long-Term Debt,
Net” for additional disclosures related to debt issue
costs.)
14
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 June 30, 2018 and December 31,
2017. We expect to recover deferred tax
assets related to the Alternative Minimum Tax
(“AMT”).
15
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 June 30, 2018 and December 31, 2017,
there were no uncertain tax positions for which a reserve or
liability was necessary. (See “Note (16) 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 periods
presented.
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
(12) 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.
16
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 (17) 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 (13) 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:
ASUs 2018-10 and 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. In July 2018,
FASB issued ASU 2018-10. The amendments in ASU 2018-10 affect
narrow aspects of the guidance issued in the amendments in ASU
2016-02. For a public business entity, the amendments in ASU
2018-10 affect the amendments in ASU 2016-02, which are not yet
effective, but for which early adoption upon issuance is permitted.
For entities that early adopted Topic 842, the amendments are
effective upon issuance of ASU 2018-10, and the transition
requirements are the same as those in Topic 842. For entities that
have not adopted Topic 842, the effective date and transition
requirements will be the same as the effective date and transition
requirements in Topic 842. We do not expect adoption of this
guidance to have a significant impact on our consolidated balance
sheets.
ASU 2018-09, Codification Improvements
. In July
2018, FASB issued ASU 2018-09. This guidance affects a
wide variety of topics in the codification and represents changes
to clarify, correct errors in, or make minor improvements to the
codification. The amendments make the codification easier to
understand and easier to apply by eliminating inconsistencies and
providing clarifications. The amendments apply to all reporting
entities within the scope of the affected accounting
guidance. Some of the amendments in ASU 2018-09 do not
require transition guidance and will be effective upon issuance.
However, many of the amendments do have transition guidance with
effective dates for annual periods beginning after December 15,
2018, for public business entities. We are currently
evaluating the impact ASU 2018-09 may have on our consolidated
financial statements.
ASU 2018-07, Compensation – Stock Compensation (Topic
718)
. In June 2018, FASB issued ASU
2018-07. This guidance expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and
services from non-employees. The amendments in ASU 2018-07 are
effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that
fiscal year. Early adoption is permitted, but no earlier than
an entity’s adoption date of Topic 606. We do not
expect adoption of this guidance to have a significant impact on
our consolidated financial statements.
17
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
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.
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.
|
(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 and the arbitration award and associated
fees. 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)
|
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.
|
18
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(1)
|
Operation
costs within Refinery Operations includes related general and
administrative expenses and the arbitration award and associated
fees. 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 (18) 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.
|
|
(5)
|
NPS Assignment
|
Effective
June 12, 2018, Blue Dolphin obtained 100% of the issued and
outstanding membership interest of NPS, a Delaware limited
liability company, from Lazarus Midstream Partners, L.P.
(“Lazarus Midstream”), an affiliate of LEH, pursuant to
an Assignment Agreement. The assignment of interest
facilitates the Lazarus Parties exploring the possibility of
obtaining the Settlement Financing under the Settlement
Agreement.
The
assignment was accounted for as a combination of entities under
common control. Accordingly, the recognized assets and liabilities
of NPS were transferred at their carrying amounts at the date of
transfer and the results of operations are included for the three
and six months ended June 30, 2018. NPS did not have significant
assets, liabilities or results of operations for the three and six
months ended June 30, 2017. Assets and liabilities included in the
consolidated balance sheets were $0.3 million and $0, respectively,
as of June 30, 2018. NPS provides petroleum storage
services at the Nixon Facility. NPS’ operations
are included in our Tolling and Terminaling business
segment.
19
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(6)
|
Prepaid Expenses and Other Current Assets
|
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Prepaid crude oil
and condensate
|
$
1,839
|
$
913
|
|
Prepaid
insurance
|
478
|
294
|
|
|
$
2,317
|
$
1,207
|
|
(7)
|
Inventory
|
Inventory
as of the dates indicated consisted of the following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
AGO
|
$
1,945
|
$
213
|
|
Crude oil and
condensate
|
1,573
|
961
|
|
Naphtha
|
417
|
170
|
|
Chemicals
|
224
|
162
|
|
Propane
|
16
|
17
|
|
LPG
mix
|
5
|
8
|
|
HOBM
|
-
|
1,558
|
|
|
$
4,180
|
$
3,089
|
|
(8)
|
Property, Plant and Equipment, Net
|
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Refinery and
facilities
|
$
54,114
|
$
51,432
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
747
|
653
|
|
|
55,427
|
52,651
|
|
|
|
|
|
Less: Accumulated
depletion, depreciation, and amortization
|
(9,414
)
|
(8,495
)
|
|
|
46,013
|
44,156
|
|
|
|
|
|
Construction in
progress
|
18,979
|
20,441
|
|
|
$
64,992
|
$
64,597
|
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest,
which is recorded as part of the asset to which it relates, is
depreciated over the asset’s useful life. Interest
cost capitalized, which is currently included in construction in
progress, was $3.7 million and $3.9 million at June 30, 2018 and
December 31, 2017, respectively. We expect construction
of petroleum storage tanks at the Nixon Facility to continue until
year end.
20
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(9)
|
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. Additionally, effective June 12,
2018, Blue Dolphin obtained 100% of the issued and outstanding
membership interest of NPS from Lazarus Midstream pursuant to an
Assignment Agreement. (See “Note (5) NPS
Assignment” for further discussion related to the NPS
transaction.)
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.
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. LEH receives an operating
fee of 5% of Blue Dolphin’s direct operating expenses.
LEH’s operating fee and Blue Dolphin’s direct operating
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 resells
the jet fuel purchased from LE to a government
agency. LEH bids for jet fuel contracts are evaluated
under preferential pricing terms due to its HUBZone
certification. 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.
21
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 on August 15, 2018. Interest accrues
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 reflected 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 accrues
interest at a rate of 8.00% and has a maturity date of January
2019. Interest under the June LEH Note, which is compounded
annually and accrued at a rate of 8.00%, was paid in kind and added
to the outstanding balance.
●
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.
22
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
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 (11) 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.
Financial Statements Impact
.
Consolidated Balance Sheets
. Accounts receivable,
related party from LEH associated with the Jet Fuel Sales Agreement
were $0 and $0.7 million at June 30, 2018 and December 31, 2017,
respectively. Accounts payable, related party to LMT
associated with the Dock Tolling Agreement were $1.2 million and
$1.0 million at June 30, 2018 and December 31, 2017,
respectively.
Long-term
debt, related party associated with the BDPL Loan Agreement, March
Ingleside Note, and the March Carroll Note as of the dates
indicated was as follows:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
LEH
|
$
4,036
|
$
4,000
|
|
Ingleside
|
1,238
|
1,169
|
|
Jonathan
Carroll
|
786
|
439
|
|
|
6,060
|
5,608
|
|
|
|
|
|
Less: Long-term
debt, related party,
|
|
|
|
current
portion
|
(6,060
)
|
(4,000
)
|
|
|
$
-
|
$
1,608
|
Accrued
interest associated with the BDPL Loan Agreement was $1.2 million
and $0.9 million at June 30, 2018 and December 31, 2017,
respectively.
23
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Consolidated Statements of Operations
. Related
party revenue from operations as a portion of refinery operations
and tolling and terminaling 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 June
30, 2018 and 2017. Related party cost of goods sold
associated with the Dock Tolling Agreement with LMT totaled $0.4
million for both the six months ended June 30, 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:
For the
three months ended June 30, 2018, refinery operating expenses
decreased approximately $0.3 million, or $0.37 per bbl, compared to
the same period a year earlier. For the six months ended
June 30, 2018, refinery operating expenses decreased approximately
$1.2 million, or $0.63 per bbl, compared to the same six-month
period a year earlier. The decrease in refinery operating expenses
was due to the revised cost-plus expense reimbursement structure
under the Amended and Restated Operating Agreement, as well as
management’s efforts to reduce spending.
24
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Related
party interest expense associated with the BDPL Loan Agreement, the
Restated Guaranty Fee Agreements, and the related-party promissory
notes (the June LEH Note, the March Ingleside Note, and March
Carroll Note) for the periods indicated was as
follows:
|
|
Three Months
Ended June 30,
|
Six Months Ended
June 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
(in
thousands)
|
|||
|
Jonathan
Carroll
|
$
177
|
$
166
|
$
340
|
$
334
|
|
LEH
|
163
|
211
|
323
|
396
|
|
Ingleside
|
24
|
23
|
71
|
46
|
|
|
$
364
|
$
400
|
$
734
|
$
776
|
|
(10)
|
Accrued Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Unearned
revenue
|
$
2,721
|
$
450
|
|
Board of director
fees payable
|
241
|
207
|
|
Other
payable
|
213
|
116
|
|
Customer
deposits
|
109
|
109
|
|
Property
taxes
|
81
|
131
|
|
Excise and income
taxes payable
|
78
|
79
|
|
Insurance
|
44
|
68
|
|
|
$
3,487
|
$
1,160
|
|
(11)
|
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:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
First Term Loan Due
2034 (in default)
|
$
22,841
|
$
23,199
|
|
Second Term Loan
Due 2034 (in default)
|
9,404
|
9,502
|
|
Notre Dame Debt (in
default)
|
4,978
|
4,978
|
|
Capital
leases
|
62
|
-
|
|
|
$
37,285
|
$
37,679
|
|
|
|
|
|
Less: Current
portion of long-term debt, net
|
(35,194
)
|
(35,544
)
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(2,070
)
|
(2,135
)
|
|
|
$
21
|
$
-
|
25
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
Unamortized
debt issue costs, which relate to secured loan agreements with
Veritex, as of the dates indicated consisted of the
following:
|
|
June
30,
|
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
|
(372
)
|
(307
)
|
|
|
$
2,070
|
$
2,135
|
Amortization
expense was $0.03 million for both the three months ended June 30,
2018 and 2017. Amortization expense was $0.6 million for
both the six months ended June 30, 2018 and 2017.
Accrued
interest associated with long-term debt, net is reflected as
interest payable, in default and interest payable, related party,
in default in our consolidated balance sheets. Accrued
interest as of the dates indicated consisted of the
following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt (in
default)
|
$
2,444
|
$
2,046
|
|
BDPL Loan Agreement
(related party)
|
1,214
|
892
|
|
Second Term Loan
Due 2034 (in default)
|
49
|
49
|
|
First Term Loan Due
2034 (in default)
|
36
|
40
|
|
|
3,743
|
3,027
|
|
Less: Interest
payable, current portion
|
(3,743
)
|
(3,027
)
|
|
Long-term interest
payable, net of current portion
|
$
-
|
$
-
|
Related Party
. See “Note (9) 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.
26
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
As
described elsewhere in this Quarterly 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 June 30, 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 Settlement Agreement. 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. Additionally, Veritex must ultimately
approve the Settlement. 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 Blue Dolphin 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.)
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 June 30, 2018 and 2017. Guaranty fees
earned by Jonathan Carroll related to the First Term Loan Due 2034
totaled $0.2 million for both the six months ended June 30, 2018
and 2017. Guaranty fees are recognized monthly as incurred and are
included in interest and other expense in our consolidated
statements of operations. LEH, LRM and Blue Dolphin also guaranteed
the First Term Loan Due 2034. (See “Note (9) 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 Quarterly 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 June 30, 2018, 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 Settlement
Agreement. 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. Additionally, Veritex must ultimately approve
the Settlement. 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 Blue Dolphin 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.)
27
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 June 30, 2018 and 2017. Guaranty fees
earned by Jonathan Carroll related to the Second Term Loan Due 2034
totaled $0.2 million for both the six months ended June 30, 2018
and 2017. Guaranty fees are recognized monthly as incurred and are
included in interest and other expense in our consolidated
statements of operations. LEH, LE and Blue Dolphin also guaranteed
the Second Term Loan Due 2034. (See “Note (9)
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.
28
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
A
summary of equipment held under long-term capital leases as of the
dates indicated follows:
|
|
June 30,
|
December 31,
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
Crane
|
$
94
|
$
-
|
|
Less:
accumulated depreciation
|
(7
)
|
-
|
|
|
$
87
|
$
-
|
|
(12)
|
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:
|
|
June 30,
|
December 31,
|
|
|
2018
|
2017
|
|
|
(in thousands)
|
|
|
Asset
retirement obligations, at the beginning of the period
|
$
2,315
|
$
2,028
|
|
Accretion
expense
|
143
|
287
|
|
|
2,458
|
2,315
|
|
Less:
asset retirement obligations, current portion
|
(2,458
)
|
(2,315
)
|
|
Long-term
asset retirement obligations, at the end of the period
|
$
-
|
$
-
|
|
(13)
|
Treasury Stock
|
At June
30, 2018 and December 31, 2017, we had 0 shares of treasury
stock. 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.
29
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(14)
|
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 June 30, 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 $1.4 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
Settlement Agreement is terminated 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 June 30, 2018, we had 5 customers that accounted
for approximately 96.7% of refinery operations
revenue. LEH, a related party, was 1 of these 5
significant customers and accounted for approximately 28.9% of
refinery operations revenue. At June 30, 2018, these 5
customers represented approximately $0.7 million in accounts
receivable. LEH represented approximately $0 in accounts
receivable. LEH purchases our jet fuel and resells the
jet fuel to a government agency. LEH bids for jet fuel
contracts are evaluated under preferential pricing terms due to its
HUBZone certification. (See “Note (9) Related
Party Transactions,” “Note (11) Long-Term Debt,
Net,” and “Note (18) Commitments and Contingencies
– Financing Agreements” for additional disclosures
related to LEH.)
For the
three months ended June 30, 2017, we had 4 customers that accounted
for approximately 80.5% of our refined petroleum product sales. LEH
was 1 of these 4 significant customers and accounted for
approximately 35.6% of our refined petroleum product
sales. At June 30, 2017, these 4 customers represented
approximately $0.3 million in accounts receivable. LEH
represented approximately $0 in accounts receivable.
For the
six months ended June 30, 2018, we had 4 customers that accounted
for approximately 86.8% of our refined petroleum product sales. LEH
was 1 of these 4 significant customers and accounted for
approximately 28.9% of our refined petroleum product
sales. At June 30, 2018, these 4 customers represented
approximately $0.7 million in accounts receivable. LEH
represented approximately $0 in accounts receivable.
For the
six months ended June 30, 2017, we had 3 customers that accounted
for approximately 75.6% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and
accounted for approximately 35.9% of our refined petroleum product
sales. At June 30, 2017, these 3 customers represented
approximately $0.1 million in accounts receivable. LEH
represented approximately $0 in accounts receivable.
30
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
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:
|
(15)
|
Leases
|
BDSC
leases our principal office space in Houston, Texas under a 2006
lease agreement. Effective January 1, 2018, BDSC entered an amended
lease agreement (the “Lease Amendment”) that extended
the lease period by sixty-eight (68) months expiring on August 31,
2023. Under the Lease Amendment, our base rent for 6,489 square
feet is $0.01 million per month. The Lease Amendment
includes an allowance for lessee improvements, rent abatements, and
a five-year renewal option. For the three months ended
June 30, 2018 and 2017, rent expense totaled $0.06 million and
$0.05 million, respectively. For the six months ended June 30, 2018
and 2017, rent expense totaled $0.11 million and $0.13 million,
respectively. Rent expense is recognized on a straight-line
basis.
|
(16)
|
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 and
six months ended June 30, 2018.
For the
three months ended June 30, 2018 and 2017, we recognized an income
tax benefit of $0. For the six months ended June 30,
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:
|
|
June
30,
|
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
|
$
-
|
31
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
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. For the three months ended
June 30, 2018 and 2017, we recognized a provision for state income
tax of $0. For the six months ended June 30, 2018 and
2017, we recognized a provision for state income tax of $0.02
million and $0, respectively.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
and capital loss carryforwards
|
$
10,641
|
$
9,767
|
|
Accrued arbitration
award payable
|
3,180
|
4,122
|
|
Start-up costs
(crude oil and condensate processing facility)
|
721
|
763
|
|
Asset retirement
obligations liability/deferred revenue
|
520
|
495
|
|
AMT credit and
other
|
100
|
217
|
|
Total deferred tax
assets
|
15,162
|
15,365
|
|
Deferred tax
liabilities:
|
|
|
|
Basis differences
in property and equipment
|
(4,764
)
|
(4,415
)
|
|
Total deferred tax
liabilities
|
(4,764
)
|
(4,415
)
|
|
|
10,398
|
10,950
|
|
Valuation
allowance
|
(10,290
)
|
(10,950
)
|
|
Deferred tax
assets, net
|
$
108
|
$
-
|
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.
32
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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
|
-
|
4,160
|
4,160
|
|
|
|
|
|
|
Balance
at June 30, 2018
|
$
9,614
|
$
34,378
|
$
43,992
|
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 June 30, 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 June 30, 2018 and December 31, 2017.
|
(17)
|
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 and six
months ended June 30, 2018 and 2017 was the same as basic EPS as
there were no stock options or other dilutive instruments
outstanding.
33
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
|
(18)
|
Commitments and Contingencies
|
Legal Matters
.
Final Arbitration Award and Settlement
Agreement
. See “Note (1) Organization
– Going Concern – Final Arbitration Award and
Settlement Agreement” and "Part II, Item 1. Legal
Proceedings” for additional disclosures related to the Final
Arbitration Award and the Settlement Agreement.
Veritex Secured Loan Agreement Event of
Default
. See “Note (1) Organization –
Going Concern – Veritex Secured Loan Agreement Event of
Default” and “Note (11) 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
(9) 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 (11) 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 (11) 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 $4.8
million (the “Separate Orders”) within sixty (60)
calendar days of receipt of the letter. The Separate
Orders relate to five (5) existing pipeline rights-of-way. BDPL
sought to appeal the Separate Orders on May 30, 2018, and filed the
required Statement of Reasons for the appeal with the Interior
Board of Land Appeals on July 16, 2018. The filing does
not relieve BDPL of its obligations to provide additional financial
assurance in accordance with the Separate Orders, and BOEM issued
an Incident of Noncompliance (“INC”) for each Separate
Order dated June 08, 2018 and received by BDPL on June 11,
2018. BOEM asserts that the INCs authorize BOEM to
impose financial penalties on BDPL if it does not comply with the
Separate Orders within 20 days. BOEM asserts that potential
penalties accrue for each day BDPL failed to comply after June 28,
2018. BDPL appealed the INCs on August 8, 2018 and has
thirty (30) days from the date of appeal to file a Statement of
Reasons with BOEM.
34
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Notes
to Consolidated Financial Statements
(Continued)
|
||
There
can be no assurance that BOEM will: (i) accept a proposal for a
reduced amount of supplemental financial assurance, (ii) not
require additional supplemental pipeline bonds related to
BDPL’s existing pipeline rights-of-way, and/or (iii) not
impose penalties under the INCs. If BDPL is required by BOEM to
provide significant additional supplemental bonds or acceptable
financial assurance or is assessed significant penalties under the
INCs, we may experience a significant and material adverse effect
on our operations, liquidity, and financial
condition. As of June 30, 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.
|
(19)
|
Subsequent Events
|
Settlement Agreement
. On July 20, 2018, the
Lazarus Parties entered into a Settlement Agreement with GEL
whereby the parties agreed to the Settlement, subject to the terms
and conditions set forth in the Settlement
Agreement. (See “Note (1) Organization –
Going Concern – Final Arbitration Award and Settlement
Agreement” for disclosures related to the Settlement
Agreement.)
Remainder of Page
Intentionally Left Blank
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 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”) and in our Quarterly Report
on Form 10-Q for the period ended March 31,
2018.
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, our Quarterly
Report on Form 10-Q for the period ended March 31, 2018, and this
Quarterly Report:
Risks Related to Our Business and Industry
●
Failure to meet the
terms and conditions set forth in the Settlement Agreement with
GEL, including but not limited to securing the Settlement Financing
(See “Part I. Financial Information, Item 1. Financial
Statements, Notes to Consolidated Financial Statements – Note
(1) Organization – Going Concern – Final Arbitration
Award and Settlement Agreement” for disclosures related to
the Settlement Agreement).
●
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.
36
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
●
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.
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
●
Failure to meet the
requirements of BOEM’s Separate Orders to provide additional
supplemental bonds or acceptable financial assurance, 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.
37
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
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.
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.
38
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 (9) 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
Settlement Agreement is terminated 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
Three Months Ended June 30, 2018 (the “Current Three-Month
Period”) Compared to June 30, 2017 (the “Prior
Three-Month Period”)
.
Total Revenue from Operations
. For the Current Three-Month
Period, we had total revenue from operations of $89.1 million
compared to total revenue from operations of $57.3 million for the
Prior Three-Month Period, an increase of approximately
56%. Approximately 99% of our revenue from operations is
derived from refinery operations. For the Current
Three-Month Period compared to the Prior Three-Month Period, 87% of
the increase in refinery operations revenue was due to higher
product pricing while 13% was due to increased sales
volume. For the same period, tolling and terminaling
revenue increased nearly 21% as a result of increased storage
fees.
39
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
Cost of Refined Products Sold
. Cost of refined products sold
was $83.9 million for the Current Three-Month Period compared to
$54.6 million for the Prior Three-Month Period. The
approximate 54% increase in cost of refined products sold in the
Current Three-Month Period compared to the Prior Three-Month Period
was the result of higher crude oil prices and increased sales
volume.
Gross Profit / Gross Margin
. For the Current Three-Month
Period, gross profit totaled $5.2 million, or 6%, compared to gross
profit of $2.7 million, or 5%, for the Prior Three-Month
Period. The significant improvement between the periods
primarily related to improved margins for refined petroleum
products.
Refinery Operating Expenses
. We recorded refinery
operating expenses of $1.4 million, or $1.16 per bbl, in the
Current Three-Month Period compared to $1.7 million, or $1.53 per
bbl, in the Prior Three-Month Period, a decrease of nearly 17%. The
$0.3 million, or $0.37 per bbl, decrease in refinery operating
expenses between the periods was the result of lower refinery
operating expenses and management’s efforts to reduce
spending. (See “Part I, Item 1. Financial Statements –
Note (9) Related Party Transactions” for additional
disclosures related to components of refinery operating expenses
and the Amended and Restated Operating Agreement)
General and Administrative Expenses
. We incurred general and
administrative expenses of $0.7 million in the Current Three-Month
Period compared to $0.7 million in the Prior Three-Month Period,
which was relatively flat.
Depletion, Depreciation and Amortization
. We
recorded depletion, depreciation and amortization expenses of $0.5
million in the Current Three-Month Period compared to $0.4 million
in the Prior Three-Month Period, which was relatively
flat.
Other Income (Expense).
Total other income
(expense) was an expense of $0.8 million in the Current Three-Month
Period compared to expense of $0.8 million in the Prior Three-Month
Period, which was flat.
Net Income (Loss)
. For the Current Three-Month
Period, we reported income of $1.8 million, or income of $0.17 per
share, compared to a net loss of $25.4 million, or loss of $2.39
per share, for the Prior Three-Month Period. The Prior
Three-Month Period included the Final Arbitration Award, which was
$24.3 million and represented an expense of $2.32 per
share. Including the Final Arbitration Award, net income
(loss) on a per share basis improved $2.56 between the
periods. Excluding the Final Arbitration Award, net
income (loss) on a per share basis improved $0.24 between the
periods, which was primarily the result of improved margins for
refined petroleum products.
Six Months Ended June 30, 2018 (the “Current Six-Month
Period”) Compared to June 30, 2017 (the “Prior
Six-Month Period”)
.
Total Revenue from Operations
. For the Current Six-Month
Period, we had total revenue from operations of $161.4 million
compared to total revenue from operations of $109.9 million for the
Prior Six-Month Period, an increase of approximately
47%. Approximately 99% of our revenue from operations is
derived from refinery operations. For the Current Six-Month Period
compared to the Prior Six-Month Period, 86% of the increase in
refinery operations revenue was due to higher product pricing while
13% was due to increased sales volume. For the same
period, tolling and terminaling revenue increased approximately 13%
as a result of increased storage fees.
Cost of Refined Products Sold
. Cost of refined products sold
was $152.6 million for the Current Six-Month Period compared to
$106.4 million for the Prior Six-Month Period. The
nearly 43% increase in cost of refined products sold in the Current
Six-Month Period compared to the Prior Six-Month Period was the
result of higher crude oil prices and increased sales
volume.
Gross Profit / Gross Margin
. For the Current Six-Month
Period, gross profit totaled $8.8 million, or 5%, compared to gross
profit of $3.5 million, or 3%, for the Prior Three-Month
Period. The significant improvement between the periods
primarily related to improved margins for refined petroleum
products.
Refinery Operating Expenses
. We recorded refinery
operating expenses of $3.3 million, or $1.51 per bbl, in the
Current Six-Month Period compared to $4.5 million, or $2.14 per
bbl, in the Prior Six-Month Period, a decrease of
26%. The $1.2 million, or $0.63 per bbl, decrease in
refinery operating expenses between the periods was the result of
lower refinery operating expenses in the Current Six-Month Period,
a general cost restructure under the Amended and Restated Operating
Agreement in the Prior Six-Month Period, and management’s
efforts to reduce overall spending. (See “Part I, Item 1.
Financial Statements – Note (9) Related Party
Transactions” for additional disclosures related to
components of refinery operating expenses and the Amended and
Restated Operating Agreement)
40
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
General and Administrative Expenses
. We incurred general and
administrative expenses of $1.3 million in the Current Six-Month
Period compared to $1.6 million in the Prior Six-Month
Period. For the Current Six-Month Period compared to the
Prior Six-Month Period, the approximate 16% decrease in general and
administrative expenses primarily related to lower legal
fees.
Depletion, Depreciation and Amortization
. We
recorded depletion, depreciation and amortization expenses of $0.9
million in the Current Six-Month Period compared to $0.9 million in
the Prior Three-Month Period, which was flat.
Other Income (Expense).
Total other income
(expense) was an expense of $1.5 million in the Current Six-Month
Period compared to income of $0.8 million in the Prior Six-Month
Period. The Prior Six-Month Period included 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 Six-Month Period compared to
an income tax expense of $0 in the Prior Six-Month
Period. Income tax benefit in the Current Six-Month
Period primarily relates to a refundable AMT paid in prior periods.
(See “Part I, Item 1. Financial Statements – Note (16)
Income Taxes” for additional disclosures related to income
taxes.)
Net Income (Loss)
. For the Current Six-Month
Period, we reported income of $1.7 million, or income of $0.15 per
share, compared to a net loss of $27.2 million, or loss of $2.58
per share, for the Prior Six-Month Period. The Prior Six-Month
Period included the Final Arbitration Award, which was $24.3
million and represented an expense of $2.32 per
share. Including the Final Arbitration Award, net income
(loss) on a per share basis improved $2.73 between the
periods. Excluding the Final Arbitration Award, net
income (loss) on a per share basis improved $0.41 between the
periods, which was primarily the result of improved margins for
refined petroleum products.
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.)
Refining Gross Profit per Bbl –
For the three months
ended June 30, 2018, refining gross profit per bbl was $3.86
compared to $1.89 per bbl for the three months ended June 30, 2017,
reflecting an increase of $1.97. The significant
increase between the periods primarily related to improved margins
for refined petroleum products in the Current Three-Month Period
compared to the Prior Three-Month 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 Three-Month Period, EBITDA for refinery operations was
positive at $2.5 million compared to a loss of $23.7 million for
the Prior Three-Month Period. The Prior Three-Month
Period included the Final Arbitration Award, which was $24.3
million. Including the Final Arbitration Award, EBITDA
for refinery operations improved $26.2 million between the
periods. Excluding the Final Arbitration Award, EBITDA
for refinery operations improved $1.9 million between the periods,
which was primarily the result of improved margins for refined
petroleum products.
For the
Current Six-Month Period, EBITDA for refinery operations was
positive at $3.1 million compared to a loss of $26.3 million for
the Prior Six-Month Period. Including the Final
Arbitration Award, EBITDA for refinery operations improved $29.4
million between the periods. Excluding the Final
Arbitration Award, EBITDA for refinery operations improved $5.1
million between the periods, which was primarily the result of
improved margins for refined petroleum products.
41
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
●
Tolling and
Terminaling
. EBITDA for tolling and terminaling
operations was positive at $0.9 million for the Current Three-Month
Period. EBITDA for tolling and terminaling operations was also
positive at $1.6 million for the Current Six-Month 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 and the arbitration award and associated
fees. 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).
|
|
(1)
|
Operation
costs within Refinery Operations includes related general and
administrative expenses and the arbitration award and associated
fees. 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 (18) Commitments and Contingencies –
FLNG Easements” for further discussion related to
FLNG.
|
42
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 Three-Month Period, the crude distillation tower
experienced 5 days of downtime primarily related to repair and
maintenance of the naphtha stabilizer unit. In the Prior
Three-Month Period, the crude distillation tower experienced 4 days
of downtime primarily due to a contract-related dispute with
GEL. For the Current Three-Month Period compared to the
Prior Three-Month Period, total refinery throughput bbls and total
refinery production bbls increased nominally despite the crude
distillation tower being down more days in the Current Three-Month
Period.
In the
Current Six-Month Period, the crude distillation tower experienced
21 days of downtime primarily related to repair and maintenance of
the naphtha stabilizer unit and short maintenance turnarounds
scheduled in January and March of 2018. In the Prior
Six-Month Period, the crude distillation tower experienced 14 days
of downtime primarily due to a contract-related dispute with
GEL. For the Current Six-Month Period compared to the
Prior Six-Month Period, total refinery throughput bbls and total
refinery production bbls increased nominally despite the crude
distillation tower being down more days in the Current Six-Month
Period.
Refined Petroleum Product Sales Summary
.
See
“Part I, Item 1. Financial Statements - Note (14)
Concentration of Risk” for a discussion of refined petroleum
product sales.
43
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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) payment to LEH for Blue Dolphin’s direct
operating costs plus the 5% operating expense fee 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. These actions, as well as favorable market
pricing, resulted in net income of $1.8 million for the Current
Three-Month Period, an improvement of $2.0 million compared to the
first quarter of 2018. 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 Veritex does not approve the Settlement or
the Settlement Agreement with GEL is terminated 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 Blue Dolphin 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
Settlement Agreement is terminated 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
44
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 June 30,
|
Six Months Ended
June 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
|
(in
thousands)
|
|||
|
Beginning cash,
cash equivalents, and restricted cash
|
$
2,384
|
$
3,522
|
$
2,146
|
$
6,083
|
|
|
|
|
|
|
|
Cash flow from
operations
|
|
|
|
|
|
Adjusted profit
(loss) from operations
|
2,410
|
(24,810
)
|
2,595
|
(26,105
)
|
|
Change
in assets and current liabilities
|
(2,091
)
|
22,218
|
(1,475
)
|
21,138
|
|
Total cash flow
from operations
|
319
|
(2,592
)
|
1,120
|
(4,967
)
|
|
|
|
|
|
|
|
Cash inflows
(outflows)
|
|
|
|
|
|
Payments on
debt
|
(235
)
|
(382
)
|
(475
)
|
(855
)
|
|
Net activity on
related-party debt
|
235
|
2,159
|
452
|
3,257
|
|
Capital
expenditures
|
(691
)
|
(597
)
|
(1,231
)
|
(1,408
)
|
|
Total
cash inflows (outflows)
|
(691
)
|
1,180
|
(1,254
)
|
994
|
|
|
|
|
|
|
|
Total change in
cash flows
|
(372
)
|
(1,412
)
|
(134
)
|
(3,973
)
|
|
|
|
|
|
|
|
Ending
cash, cash equivalents, and restricted cash
|
$
2,012
|
$
2,110
|
$
2,012
|
$
2,110
|
For the
Current Three-Month Period, we experienced cash flow from
operations of $0.3 million compared to negative cash flow from
operations of $2.6 million for the Prior Three-Month Period. The
$2.9 million improvement in cash flow from operations between the
periods was primarily the result improved operating income. For the
Current Six-Month Period, we experienced cash flow from operations
of $1.1 million compared to negative cash flow from operations of
$5.0 million for the Prior Six-Month Period. The $6.1 million
improvement in cash flow from operations between the periods was
primarily the result of improved operating income.
Working Capital
.
We had
a working capital deficit of $69.9 million at June 30, 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 $28.7 million at June 30, 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. If the Settlement Agreement with GEL is
terminated 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) Blue Dolphin and its affiliates 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 Three-Month Period were minimal and
primarily consisted of capitalized interest on the secured loan
agreements with Veritex.
45
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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 (11)
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 (9) 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 and Settlement Agreement” for
disclosures related to the Final Arbitration Award and Settlement
Agreement with GEL.
Supplemental Pipeline Bonds
. See “Part I,
Item 1. Financial Statements – Note (18) 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:
|
|
June
30,
|
December
31,
|
|
|
2018
|
2017
|
|
|
(in
thousands)
|
|
|
First Term Loan Due
2034 (in default)
|
$
22,841
|
$
23,199
|
|
Second Term Loan
Due 2034 (in default)
|
9,404
|
9,502
|
|
Notre Dame Debt (in
default)
|
4,978
|
4,978
|
|
BDPL Loan
Agreement
|
4,000
|
4,000
|
|
March Ingleside
Note
|
1,238
|
1,169
|
|
March Carroll
Note
|
786
|
439
|
|
Capital
Leases
|
62
|
-
|
|
June
LEH Note
|
36
|
-
|
|
|
43,345
|
43,287
|
|
Less: Current
portion of long-term debt, net
|
(41,254
)
|
(39,544
)
|
|
Less: Unamoritized
debt issue costs
|
(2,070
)
|
(2,135
)
|
|
|
$
21
|
$
1,608
|
Payments
on long-term debt totaled $0.2 million in the Current Three-Month
Period compared to $0.4 million in the Prior Three-Month Period.
Payments on long-term debt totaled $0.5 million in the Current
Six-Month Period compared to $0.9 million in the Prior Six-Month
Period.
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 June 30, 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 Settlement
Agreement. 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. Additionally, Veritex must ultimately
approve the Settlement. 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 Blue Dolphin to seek
protection under bankruptcy laws.
46
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
See
“Part I, Item 1. Financial Statements – Note (1)
Organization – Going Concern and Operating Risks, as well as
Note (11) 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.
47
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BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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.
48
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
FORM
10-Q 6/30/18
|
|
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
June 30, 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 June 30, 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 (16) 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.
49
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BLUE
DOLPHIN ENERGY COMPANY
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FORM
10-Q 6/30/18
|
|
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:
ASUs 2018-10 and 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. In July 2018,
FASB issued ASU 2018-10. The amendments in ASU 2018-10 affect
narrow aspects of the guidance issued in the amendments in ASU
2016-02. For a public business entity, the amendments in ASU
2018-10 affect the amendments in ASU 2016-02, which are not yet
effective, but for which early adoption upon issuance is permitted.
For entities that early adopted Topic 842, the amendments are
effective upon issuance of ASU 2018-10, and the transition
requirements are the same as those in Topic 842. For entities that
have not adopted Topic 842, the effective date and transition
requirements will be the same as the effective date and transition
requirements in Topic 842. We do not expect adoption of this
guidance to have a significant impact on our consolidated balance
sheets.
ASU 2018-09, Codification Improvements
. In July
2018, FASB issued ASU 2018-09. This guidance affects a
wide variety of topics in the codification and represents changes
to clarify, correct errors in, or make minor improvements to the
codification. The amendments make the codification easier to
understand and easier to apply by eliminating inconsistencies and
providing clarifications. The amendments apply to all reporting
entities within the scope of the affected accounting
guidance. Some of the amendments in ASU 2018-09 do not
require transition guidance and will be effective upon issuance.
However, many of the amendments do have transition guidance with
effective dates for annual periods beginning after December 15,
2018, for public business entities. We are currently
evaluating the impact ASU 2018-09 may have on our consolidated
financial statements.
ASU 2018-07, Compensation – Stock Compensation (Topic
718)
. In June 2018, FASB issued ASU
2018-07. This guidance expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and
services from non-employees. The amendments in ASU 2018-07 are
effective for public business entities for fiscal years beginning
after December 15, 2018, including interim periods within that
fiscal year. Early adoption is permitted, but no earlier than an
entity’s adoption date of Topic 606. We do not
expect adoption of this guidance to have a significant impact on
our consolidated financial statements.
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.
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 and six months ended June 30, 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
and Settlement Agreement” of this Quarterly Report for
disclosures related to the Final Arbitration Award to GEL and the
Settlement Agreement between the Lazarus Parties and
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 (11)
Long-Term Debt, Net” for disclosures related to defaults on
our debt.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
Index
|
No.
|
|
Description
|
|
10.1
*
|
|
Eighth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated May 23,
2018.
|
|
10.2
*
|
|
Ninth
Amendment to Letter Agreement between GEL Tex Marketing, LLC,
Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated June 29,
2018.
|
|
10.3
|
|
Settlement
Agreement, dated as of July 20, 2018, by and among Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC,
Nixon Product Storage, LLC, Carroll & Carroll Financial
Holdings, L.P., and Jonathan Carroll.
|
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||
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||
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||
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||
|
101.INS*
|
|
XBRL
Instance Document.
|
|
101.SCH*
|
|
XBRL
Taxonomy Schema Document.
|
|
101.CAL*
|
|
XBRL
Calculation Linkbase Document.
|
|
101.LAB*
|
|
XBRL
Label Linkbase Document.
|
|
101.PRE*
|
|
XBRL
Presentation Linkbase Document.
|
|
101.DEF*
|
|
XBRL
Definition Linkbase Document.
|
* Filed
herewith.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
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BLUE DOLPHIN ENERGY COMPANY
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(Registrant)
|
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August
14, 2018
|
|
By:
|
/s/
JONATHAN P. CARROLL
|
|
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|
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Jonathan
P. Carroll
Chief
Executive Officer, President,
Assistant
Treasurer and Secretary
(Principal
Executive Officer)
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August
14, 2018
|
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By:
|
/s/
TOMMY L. BYRD
|
|
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Tommy
L. Byrd
Chief
Financial Officer,
Treasurer
and Assistant Secretary
(Principal
Financial Officer)
|
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