The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements |
Notes to Consolidated Financial Statements
(1) Organization
Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol "BDCO."
Assets are organized in two business segments: 'refinery operations' (owned by LE) and 'tolling and terminaling services' (owned by LRM and NPS). 'Corporate and other' includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.
Affiliates
Affiliates controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin assets and funds working capital requirements during periods of working capital deficits. In addition, an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Going Concern
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits, as discussed more fully below. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing a petition for bankruptcy.
Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2022 and December 31, 2021. See “Notes (3) and (10)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.
Third-Party Defaults
· | Veritex Loans – As of the filing date of this report, LE and LRM were in default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for failing to make required monthly principal and interest payments and failing to satisfy financial covenants. In addition, LE was in default under the LE Term Loan Due 2034 for failing to replenish a $1.0 million payment reserve account. In a letter to LE and LRM dated August 2, 2022, Veritex affirmed existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for failing to make payments of principal and interest when due and demanded payment of all past due amounts owed. In addition, Veritex reserved all of its rights and noted that Veritex may, at its discretion, exercise all remedies available to it, which may include accelerating the loan, requesting appointment of a receiver, initiating foreclosure proceedings, or filing a lawsuit against obligors. |
| |
· | GNCU Loan – As of the filing date of this report, NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy financial covenants. |
| |
· | Kissick Debt – Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility's business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, LE has made no payments under the subordinated Kissick Debt. To date, Mr. Kissick has taken no action due to the non-payment. As of the filing date of this report, there were defaults under the Kissick Debt related to payment of past due obligations at maturity. |
Blue Dolphin Energy Company | | September 30, 2022 │Page 16 |
Notes to Consolidated Financial Statements | | |
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on the trading prices of our Common Stock and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders regarding existing defaults and continues to actively discuss potential restructuring and refinancing opportunities. See “Note (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Related-Party Defaults
· | Notes and Loan Agreement – As of the filing date of this report, Blue Dolphin was in default related to past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. Affiliates controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin assets, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. |
Substantial Current Debt
Excluding accrued interest, we had current debt of $57.5 million and $63.0 million, respectively, as of September 30, 2022 and December 31, 2021. Current debt consists of bank debt, investor debt, and related party debt. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2022 and December 31, 2021.
Margin Volatility. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable refining margins may have a material adverse effect on our earnings, cash flows, and liquidity.
In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and thereafter the U.S. economy experienced pronounced adverse effects as the virus spread globally. Considerable progress was made to combat COVID-19 and its multiple variants. While domestic demand and refining margins improved during the nine months ended September 30, 2022, the future impact of COVID-19 remains unknown. Based on recent outbreaks in China, a global resurgence of the virus could negatively impact population health, commodity prices, and oil and product demand and supply worldwide.
In February 2022, Russia invaded neighboring Ukraine. The military conflict caused turmoil in global commodity markets, injecting even more uncertainty into a global economy recovering from the effects of COVID-19. As Russia is a major international producer and exporter of crude oil, sanctions imposed on Russia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the three and nine months ended September 30, 2022 compared to the same periods a year earlier. However, the long term effect of the military conflict remains unclear due to uncertainty surrounding the war’s duration and the level and length of international sanctions on Russia.
Recent data indicates a sharp rise in inflation in the U.S. and globally. Current and future inflationary effects may be driven by, among other things, supply chain disruptions, governmental stimulus, or fiscal policies, and increasing demand for certain goods and services as recovery from the COVID-19 pandemic continues. We have observed higher costs for feedstocks, labor, and materials used in our business. We cannot predict the effect of rising interest rates, concerns of a recession, and higher inflation on demand for our refined petroleum products.
COVID-19, the Russian military conflict with Ukraine, and inflation continue to evolve, and the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence.
Historic Net Losses and Working Capital and Equity Deficits
Net Income (Losses). Although we historically had net losses, we had net income of $6.4 million for the three months ended September 30, 2022 compared to a net loss of $2.9 million for the three months ended September 30, 2021. We had net income of $23.3 million for the nine months ended September 30, 2022 compared to a net loss of $10.2 million for the nine months ended September 30, 2021. The significant improvement for the three and nine-month comparative periods resulted from improved refining margins associated with supply contraction and strong demand. While refining margins improved significantly for both three- and nine-month periods ended September 30, 2022, the general outlook for the remainder of the year remains uncertain, and we can provide no assurances that refining margins and demand will remain at current levels.
Blue Dolphin Energy Company | | September 30, 2022 │Page 17 |
Notes to Consolidated Financial Statements | | |
Working Capital Deficits. Historically, we had working capital and equity deficits. Although we had $54.4 million and $78.5 million in working capital deficits at September 30, 2022 and December 31, 2021, respectively, excluding the current portion of long-term debt, we had $3.1 million in working capital and $15.5 million in working capital deficits at September 30, 2022 and December 31, 2021, respectively. The significant improvement in working capital between the periods was primarily due to favorable refining margins and increased gross profit. During the three and nine months ended September 30, 2022, continued liquidity improvement tied to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations.
Cash and cash equivalents totaled $6.3 million and $0.01 million at September 30, 2022 and December 31, 2021, respectively. Restricted cash (current portion) totaled $0 and $0.05 million at September 30, 2022 and December 31, 2021, respectively. The increase in cash and cash equivalents at September 30, 2022 was the result of market-driven inventory management. Management anticipates that the cash reserve will be utilized in the near term to repay past-due amounts owed to Veritex.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. COVID-19, the Russian military conflict with Ukraine, and inflation continue to evolve, and the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing inventory levels based on demand, managing cash flow, and delaying capital expenditures. To safeguard personnel, we offer remote work where possible and request that personnel practice social distancing, mask-wearing, and other site-specific precautionary measures when needed. We also encourage personnel to receive vaccines.
We can provide no guarantees that: our business strategy will be successful, favorable refining margins will continue, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if third parties exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
(2) Principles of Consolidation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.
The consolidated balance sheet as of December 31, 2021 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC. Operating results for the three months and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or for any other period.
Significant Accounting Policies
The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.
Blue Dolphin Energy Company | | September 30, 2022 │Page 18 |
Notes to Consolidated Financial Statements | | |
Use of Estimates. The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual results could differ from those estimates. Uncertainty concerning COVID-19, the Russian military conflict with Ukraine, inflation, volatility in commodity prices, and severe weather impacts associated with climate change have impacted and likely will continue to impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us as of September 30, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, AROs, inventory and related reserves, deferred tax asset reserves, and the carrying value of long-lived assets.
Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts. Restricted cash, current portion reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | |
Cash and cash equivalents | | $ | 6,294 | | | $ | 9 | |
Restricted cash | | | - | | | | 48 | |
| | $ | 6,294 | | | $ | 57 | |
The increase in cash and cash equivalents at September 30, 2022 was the result of market-driven inventory management. Management anticipates that the cash reserve will be utilized in the near term to repay past-due amounts owed to Veritex.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management’s judgment, deserve consideration in estimating bad debts. Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio. We had an allowance for doubtful accounts of $0.06 million at September 30, 2022 and $0 at December 31, 2021.
Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.
Property and Equipment.
Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.
Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016. During the twelve months ended December 31, 2021, we recorded an additional impairment of $1.1 million due to a change in the estimated future cost and timing of decommissioning these assets. During the nine months ended September 30, 2022, we recorded an additional impairment of $0.1 million due to an additional change in the timing of decommissioning these assets. Our pipelines and facilities assets are inactive. Decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the impact of COVID-19. BSEE mandated that decommissioning occur prior to June 1, 2023.
Blue Dolphin Energy Company | | September 30, 2022 │Page 19 |
Notes to Consolidated Financial Statements | | |
Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties have been fully impaired since 2011.
CIP. CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related to refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) storage tank agreements, whereby a customer agrees to pay a certain fee per storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer. The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a straight-line basis over the term of the supply contract.
Income Taxes. We determine deferred income taxes based on: (i) temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities and (ii) operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which we expect the differences to reverse. Our provision for income taxes consists of our current tax liability and the change in deferred income tax assets and liabilities.
Blue Dolphin Energy Company | | September 30, 2022 │Page 20 |
Notes to Consolidated Financial Statements | | |
Management uses significant judgment in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to assess the realizability of deferred tax assets. We weigh whether there is a more than 50% probability of realizing a portion or all the deferred tax assets. Realization depends on the generation of future taxable income before the expiration of any NOL carryforwards. We record a valuation allowance against deferred income tax assets if there is a more than 50% probability of not realizing some portion of the asset. We recognize an uncertain tax positions benefit in our financial statements if deferred tax assets meet a minimum recognition threshold. First, we determine whether there is a more than 50% probability that our income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If we meet the criteria, we record a benefit in the financial statements equal to the largest amount greater than 50% likely to be realized upon settlement with taxing authorities.
A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended September 30, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of September 30, 2022 and December 31, 2021. In addition, we have NOL carryforwards that remain available for future use. See “Note (13)” to our consolidated financial statements for more information related to income taxes.
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we re-assess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.
Commodity price market volatility associated with COVID-19, the Russian military conflict with Ukraine, and inflation could affect the value of certain of our long-lived assets. Management evaluated refinery and facilities assets for impairment as of December 31, 2021. We did not record any impairment of our long-lived assets for the periods presented. However, impairment may be required in the future if losses are material, or as new opportunities arise, such as reconfiguration of the Nixon refinery into a renewable fuels facility.
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (11)” to our consolidated financial statements for additional information related to AROs.
Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (14)” to our consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted. During the three months ended September 30, 2022, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our financial position, results of operations, or liquidity.
Blue Dolphin Energy Company | | September 30, 2022 │Page 21 |
Notes to Consolidated Financial Statements | | |
(3) Related-Party Transactions
Affiliate Operational Agreements Summary
Blue Dolphin and certain of its subsidiaries are parties to several operational agreements with Affiliates, including the Amended and Restated Operating Agreement, BDSC-LEH Office Sub-Lease Agreement, and the Jet Fuel Sales Agreement.
Working Capital
We historically relied on Affiliates for funding during periods of working capital deficits. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party. During the three and nine months ended September 30, 2022, continued liquidity improvement tied to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations.
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaling $0.2 million at both September 30, 2022 and December 31, 2021.
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
LEH | | | | | | |
June LEH Note (in default) | | $ | 7,343 | | | $ | 12,672 | |
BDPL-LEH Loan Agreement (in default) | | | 7,934 | | | | 7,454 | |
LEH Total | | | 15,277 | | | | 20,126 | |
Ingleside | | | | | | | | |
March Ingleside Note (in default) | | | 1,103 | | | | 1,066 | |
Jonathan Carroll | | | | | | | | |
March Carroll Note (in default) | | | 1,979 | | | | 2,304 | |
| | | 18,359 | | | | 23,496 | |
| | | | | | | | |
Less: Long-term debt, related party, current portion (in default) | | | (14,425 | ) | | | (20,042 | ) |
Less: Accrued interest payable, related party (in default) | | | (3,934 | ) | | | (3,454 | ) |
As indicated in the table below, the $5.3 million reduction associated with the June LEH Note reflects transactions related to the Jet Fuel Sales Agreement and the Amended and Restated Operating Agreement.
| | June LEH Note | |
| | (in default) | |
| | (in thousands) | |
| | | |
Balance at December 31, 2021 | | $ | 12,672 | |
| | | | |
Related-party receivables settled against related-party provided working capital | | | (10,658 | ) |
Blue Dolphin operating costs and related LEH management fee under | | | | |
Amended and Restated Operating Agreement | | | 5,329 | |
| | | | |
Balance at September 30, 2022 | | $ | 7,343 | |
The $0.3 million reduction associated with the March Carroll Note reflects payment in common stock to Jonathan Carroll pursuant to the LE Amended and Restated Guaranty Fee Agreement and the LRM Amended and Restated Guaranty Fee Agreement. See “Note (15)” and “Note (16)” to our consolidated financial statements for additional information regarding the share issuance and guaranty fee payments.
See “Notes (1) and (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Blue Dolphin Energy Company | | September 30, 2022 │Page 22 |
Notes to Consolidated Financial Statements | | |
Consolidated Statements of Operations.
Total revenue from operations.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands, except percent amounts) | | | (in thousands, except percent amounts) | |
Refinery operations | | | | | | | | | | | | | | | | | | | | | | | | |
LEH | | $ | 48,264 | | | | 37.6 | % | | $ | 24,214 | | | | 30.1 | % | | $ | 134,119 | | | | 35.8 | % | | $ | 61,271 | | | | 29.3 | % |
Third-Parties | | | 79,085 | | | | 61.7 | % | | | 55,252 | | | | 68.7 | % | | | 238,195 | | | | 63.5 | % | | | 145,196 | | | | 69.4 | % |
Tolling and terminaling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third-Parties | | | 920 | | | | 0.7 | % | | | 924 | | | | 1.2 | % | | | 2,760 | | | | 0.7 | % | | | 2,777 | | | | 1.3 | % |
| | $ | 128,269 | | | | 100.0 | % | | $ | 80,390 | | | | 100.0 | % | | $ | 375,074 | | | | 100.0 | % | | $ | 209,244 | | | | 100.0 | % |
Interest expense.
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | | | (in thousands) | |
Jonathan Carroll | | | | | | | | | | | | |
Guaranty Fee Agreements | | | | | | | | | | | | |
First Term Loan Due 2034 (in default) | | $ | 108 | | | $ | 108 | | | $ | 324 | | | $ | 323 | |
Second Term Loan Due 2034 (in default) | | | 45 | | | | 45 | | | | 135 | | | | 134 | |
March Carroll Note (in default) | | | 29 | | | | 33 | | | | 90 | | | | 94 | |
LEH | | | | | | | | | | | | | | | | |
BDPL-LEH Loan Agreement (in default) | | | 160 | | | | 160 | | | | 480 | | | | 480 | |
June LEH Note (in default) | | | 94 | | | | 293 | | | | 390 | | | | 690 | |
Ingleside | | | | | | | | | | | | | | | | |
March Ingleside Note (in default) | | | 14 | | | | 14 | | | | 42 | | | | 42 | |
| | $ | 450 | | | $ | 653 | | | $ | 1,461 | | | $ | 1,763 | |
Other. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended September 30, 2022 and 2021. BDSC received sublease income from LEH totaling $0.03 million for both nine-month periods ended September 30, 2022 and 2021.
The LEH operating fee, related party increased to approximately $0.3 million for the three months ended September 30, 2022 compared to $0.1 million for the three months ended September 30, 2021. The LEH operating fee, related party was $0.6 million for the nine-month period ended September 30, 2022 compared to $0.4 million for the nine-month period ended September 30, 2021. The increases for both the three and nine-month comparative periods coincided with increased cost of goods sold during the same periods.
(4) Revenue and Segment Information
We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer at the Nixon refinery. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.
Blue Dolphin Energy Company | | September 30, 2022 │Page 23 |
Notes to Consolidated Financial Statements | | |
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | | | (in thousands) | |
| | | | | | | | | | | | |
Refinery operations | | $ | 127,349 | | | $ | 79,466 | | | $ | 372,314 | | | $ | 206,467 | |
Tolling and terminaling | | | 920 | | | | 924 | | | | 2,760 | | | | 2,777 | |
Total revenue from operations | | | 128,269 | | | | 80,390 | | | | 375,074 | | | | 209,244 | |
| | | | | | | | | | | | | | | | |
Intercompany processing fees(1) | | | | | | | | | | | | | | | | |
Refinery operations | | | (663 | ) | | | (650 | ) | | | (1,991 | ) | | | (1,797 | ) |
Tolling and terminaling | | | 663 | | | | 650 | | | | 1,991 | | | | 1,797 | |
Total intercompany processing fees | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Operation costs and expenses(2) | | | | | | | | | | | | | | | | |
Refinery operations | | | (117,655 | ) | | | (79,593 | ) | | | (339,849 | ) | | | (208,936 | ) |
Tolling and terminaling | | | (580 | ) | | | (521 | ) | | | (1,772 | ) | | | (1,267 | ) |
Corporate and other | | | (57 | ) | | | (83 | ) | | | (125 | ) | | | (187 | ) |
Total operation costs and expenses | | | (118,292 | ) | | | (80,197 | ) | | | (341,746 | ) | | | (210,390 | ) |
| | | | | | | | | | | | | | | | |
Segment contribution margin (deficit) | | | | | | | | | | | | | | | | |
Refinery operations | | | 9,031 | | | | (777 | ) | | | 30,474 | | | | (4,266 | ) |
Tolling and terminaling | | | 1,003 | | | | 1,053 | | | | 2,979 | | | | 3,307 | |
Corporate and other | | | (57 | ) | | | (83 | ) | | | (125 | ) | | | (187 | ) |
Total segment contribution margin (deficit) | | | 9,977 | | | | 193 | | | | 33,328 | | | | (1,146 | ) |
| | | | | | | | | | | | | | | | |
General and administrative expenses(3) | | | | | | | | | | | | | | | | |
Refinery operations | | | (426 | ) | | | (282 | ) | | | (1,021 | ) | | | (848 | ) |
Tolling and terminaling | | | (132 | ) | | | (70 | ) | | | (255 | ) | | | (206 | ) |
Corporate and other | | | (473 | ) | | | (423 | ) | | | (1,402 | ) | | | (1,246 | ) |
Total general and administrative expenses | | | (1,031 | ) | | | (775 | ) | | | (2,678 | ) | | | (2,300 | ) |
| | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | |
Refinery operations | | | (305 | ) | | | (302 | ) | | | (918 | ) | | | (906 | ) |
Tolling and terminaling | | | (342 | ) | | | (340 | ) | | | (1,026 | ) | | | (1,020 | ) |
Corporate and other | | | (52 | ) | | | (51 | ) | | | (155 | ) | | | (153 | ) |
Total depreciation and amortization | | | (699 | ) | | | (693 | ) | | | (2,099 | ) | | | (2,079 | ) |
| | | | | | | | | | | | | | | | |
Interest and other non-operating expenses, net(4) | | | | | | | | | | | | | | | | |
Refinery operations | | | (972 | ) | | | (747 | ) | | | (2,392 | ) | | | (2,053 | ) |
Tolling and terminaling | | | (321 | ) | | | (384 | ) | | | (1,148 | ) | | | (1,284 | ) |
Corporate and other | | | (437 | ) | | | (523 | ) | | | (1,450 | ) | | | (1,340 | ) |
Total interest and other non-operating expenses, net | | | (1,730 | ) | | | (1,654 | ) | | | (4,990 | ) | | | (4,677 | ) |
| | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | | | | | | | | | | | | | | |
Refinery operations | | | 7,328 | | | | (2,108 | ) | | | 26,143 | | | | (8,073 | ) |
Tolling and terminaling | | | 208 | | | | 259 | | | | 550 | | | | 797 | |
Corporate and other | | | (1,019 | ) | | | (1,080 | ) | | | (3,132 | ) | | | (2,926 | ) |
Total income (loss) before income taxes | | | 6,517 | | | | (2,929 | ) | | | 23,561 | | | | (10,202 | ) |
| | | | | | | | | | | | | | | | |
Income tax expense | | | (68 | ) | | | - | | | | (224 | ) | | | - | |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 6,449 | | | $ | (2,929 | ) | | $ | 23,337 | | | $ | (10,202 | ) |
(1) | Fees associated with an intercompany tolling agreement tied to naphtha volumes. |
(2) | Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL. |
(3) | General and administrative expenses within refinery operations include the LEH operating fee, impairment expense, and bad debt expense. |
(4) | Corporate and other within interest and other non-operating expenses, net primarily reflects interest expense for the LE Amended and Restated Guaranty Fee Agreement, LRM Amended and Restated Guaranty Fee Agreement, June LEH Note, March Carroll Note, and March Ingleside Note. See “Note (3), ”“Note (15),” and “Note (16)” to our consolidated financial statements for additional information regarding guaranty fee agreements. |
Blue Dolphin Energy Company | | September 30, 2022 │Page 24 |
Notes to Consolidated Financial Statements | | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | | | (in thousands) | |
Capital expenditures | | | | | | | | | | | | |
Refinery operations | | $ | 56 | | | $ | - | | | $ | 102 | | | $ | - | |
Tolling and terminaling | | | - | | | | - | | | | - | | | | - | |
Corporate and other | | | - | | | | - | | | | - | | | | - | |
Total capital expenditures | | $ | 56 | | | $ | - | | | $ | 102 | | | $ | - | |
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Identifiable assets | | | | | | |
Refinery operations | | $ | 71,582 | | | $ | 44,939 | |
Tolling and terminaling | | | 17,151 | | | | 19,878 | |
Corporate and other | | | 1,067 | | | | 1,278 | |
Total identifiable assets | | $ | 89,800 | | | $ | 66,095 | |
(5) Concentration of Risk
Bank Accounts
Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At September 30, 2022 and December 31, 2021, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $5.8 million and $0, respectively.
Key Supplier
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any renewal term. As of September 30, 2022, we received approximately 12.4 million bbls, or 50.3%, of the contracted total volume under the Crude Supply Agreement.
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.
Significant Customers
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Three Months Ended | | Number Significant Customers | | | % Total Revenue from Operations | | | Portion of Accounts Receivable at September 30, | |
| | | | | | | | | |
September 30, 2022 | | | 2 | | | | 64 | % | | $ | 0 | |
September 30, 2021 | | | 3 | | | | 69 | % | | $ | 0 | |
Nine Months Ended | | Number Significant Customers | | | % Total Revenue from Operations | | | Portion of Accounts Receivable at September 30, | |
| | | | | | | | | |
September 30, 2022 | | | 2 | | | | 61 | % | | $ | 0 | |
September 30, 2021 | | | 3 | | | | 72 | % | | $ | 0 | |
Blue Dolphin Energy Company | | September 30, 2022 │Page 25 |
Notes to Consolidated Financial Statements | | |
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. For the three months ended September 30, 2022 and 2021, the Affiliate accounted for approximately 38% and 30% of total revenue from operations, respectively. For the nine months ended September 30, 2022 and 2021, the Affiliate accounted for approximately 36% and 29% of total revenue from operations, respectively. The Affiliate represented $0 in accounts receivable at both September 30, 2022 and 2021, respectively.
Concentration of Customers. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or negatively, which impacts our overall exposure to credit risk. Economic changes include the uncertainties related to COVID-19, the Russian military conflict with Ukraine, inflation, and the associated volatility in the global commodities markets. Historically, we have had no significant problems collecting our accounts receivable.
Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to other countries, such as low sulfur diesel to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands, except percent amounts) | | | (in thousands, except percent amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
LPG mix | | $ | - | | | | 0.0 | % | | $ | 9 | | | | 0.0 | % | | $ | - | | | | 0.0 | % | | $ | 21 | | | | 0.0 | % |
Naphtha | | | 25,571 | | | | 20.1 | % | | | 20,440 | | | | 25.7 | % | | | 80,707 | | | | 21.7 | % | | | 49,928 | | | | 24.1 | % |
Jet fuel | | | 48,264 | | | | 37.9 | % | | | 24,212 | | | | 30.5 | % | | | 134,119 | | | | 36.0 | % | | | 61,271 | | | | 29.7 | % |
HOBM | | | 19,143 | | | | 15.0 | % | | | 17,607 | | | | 22.2 | % | | | 63,045 | | | | 16.9 | % | | | 49,282 | | | | 23.9 | % |
AGO | | | 34,371 | | | | 27.0 | % | | | 17,198 | | | | 21.6 | % | | | 94,443 | | | | 25.4 | % | | | 45,965 | | | | 22.3 | % |
| | $ | 127,349 | | | | 100.0 | % | | $ | 79,466 | | | | 100.0 | % | | $ | 372,314 | | | | 100.0 | % | | $ | 206,467 | | | | 100.0 | % |
An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (15)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements, as well as “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and our subsequent filings as filed with the SEC for additional disclosures related to Affiliate risk.
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Prepaid crude oil and condensate | | $ | 3,836 | | | $ | 1,368 | |
Prepaid insurance | | | 1,235 | | | | 953 | |
Other prepaids | | | 71 | | | | 36 | |
Prepaid easement renewal fees | | | 60 | | | | 76 | |
| | $ | 5,202 | | | $ | 2,433 | |
(7) Inventory
Inventory as of the dates indicated consisted of the following:
| | Septembeer 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
HOBM | | $ | 18,051 | | | $ | 1,749 | |
Crude oil and condensate | | | 828 | | | | 660 | |
Naphtha | | | 396 | | | | 189 | |
AGO | | | 171 | | | | 338 | |
Chemicals | | | 90 | | | | 121 | |
Propane | | | 41 | | | | 27 | |
LPG mix | | | 19 | | | | 14 | |
| | $ | 19,596 | | | $ | 3,098 | |
Blue Dolphin Energy Company | | September 30, 2022 │Page 26 |
Notes to Consolidated Financial Statements | | |
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Refinery and facilities | | $ | 72,629 | | | $ | 72,583 | |
Land | | | 566 | | | | 566 | |
Other property and equipment | | | 913 | | | | 903 | |
| | | 74,108 | | | | 74,052 | |
| | | | | | | | |
Less: Accumulated depreciation and amortiation | | | (19,739 | ) | | | (17,795 | ) |
| | | 54,369 | | | | 56,257 | |
| | | | | | | | |
CIP | | | 3,715 | | | | 3,666 | |
| | $ | 58,084 | | | $ | 59,923 | |
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Unearned revenue from contracts with customers | | $ | 6,583 | | | $ | 4,388 | |
Insurance | | | 572 | | | | 273 | |
Unearned contract renewal income | | | 480 | | | | 400 | |
Accrued fines and penalties | | | 407 | | | | 407 | |
Taxes payable | | | 297 | | | | 136 | |
Board of director fees payable | | | 208 | | | | 230 | |
Other payable | | | 223 | | | | 218 | |
Customer deposits | | | 173 | | | | 173 | |
| | $ | 8,943 | | | $ | 6,225 | |
(10) Third-Party Long-Term Debt
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Veritex Loans | | | | | | |
LE Term Loan Due 2034 (in default) | | $ | 24,088 | | | $ | 23,789 | |
LRM Term Loan Due 2034 (in default) | | | 9,791 | | | | 9,861 | |
Kissick Debt (in default) | | | 10,807 | | | | 10,210 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 9,976 | | | | 10,094 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 2,063 | | | | 512 | |
LE Term Loan Due 2050 | | | 159 | | | | 156 | |
NPS Term Loan Due 2050 | | | 159 | | | | 156 | |
Equipment Loan Due 2025 | | | 44 | | | | 53 | |
| | | 57,087 | | | | 54,831 | |
| | | | | | | | |
Less: Current portion of long-term debt, net | | | (43,105 | ) | | | (42,953 | ) |
Less: Unamortized debt issue costs | | | (2,199 | ) | | | (2,351 | ) |
Less: Accrued interest payable | | | (9,457 | ) | | | (8,689 | ) |
| | $ | 2,326 | | | $ | 838 | |
Blue Dolphin Energy Company | | September 30, 2022 │Page 27 |
Notes to Consolidated Financial Statements | | |
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Veritex Loans | | | | | | |
LE Term Loan Due 2034 (in default) | | $ | 1,674 | | | $ | 1,674 | |
LRM Term Loan Due 2034 (in default) | | | 768 | | | | 768 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 730 | | | | 730 | |
| | | | | | | | |
Less: Accumulated amortization | | | (922 | ) | | | (821 | ) |
| | $ | 2,199 | | | $ | 2,351 | |
Amortization expense was $0.05 million and $0.03 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense was $0.1 million and $0.09 million for the nine months ended September 30, 2022 and 2021, respectively.
Accrued interest related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Kissick Debt (in default) | | $ | 5,829 | | | $ | 5,232 | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 (in default) | | | 2,637 | | | | 2,338 | |
LRM Term Loan Due 2034 (in default) | | | 889 | | | | 959 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 18 | | | | 136 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 63 | | | | 12 | |
LE Term Loan Due 2050 | | | 9 | | | | 6 | |
NPS Term Loan Due 2053 | | | 9 | | | | 6 | |
Equipment Loan Due 2025 | | | 3 | | | | - | |
| | | 9,457 | | | | 8,689 | |
Less: Accrued interest payable (in default) | | | (9,457 | ) | | | (8,689 | ) |
Long-term Interest Payable, Net of Current Portion | | $ | - | | | $ | - | |
As reflected in the table above and elsewhere in this report, we are in default under the LE Term Loan Due 2034, LRM Term Loan Due 2034, NPS Term Loan Due 2031, and the Kissick Debt. Defaults under these secured loan agreements permit the lender to declare the amounts owed under these loan agreements immediately due and payable, exercise their 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 loan agreements was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2022 and December 31, 2021.
Any exercise by third parties of their rights and remedies under our secured loan agreements will have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading prices of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. See “Notes (1) and (3)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Blue Dolphin Energy Company | | September 30, 2022 │Page 28 |
Notes to Consolidated Financial Statements | | |
(11) AROs
Refinery and Facilities
Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.
Pipelines and Facilities and Oil and Gas Properties
We have AROs associated with decommissioning our pipelines and facilities assets, as well as plugging and abandoning our oil and gas properties. We recorded a discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipment. During the twelve months ended December 31, 2021, we determined that the estimated future cost and timing of decommissioning these assets changed. As a result, we recorded an increase in liability at December 31, 2021. We recorded an additional increase in liability during the nine months ended September 30, 2022 due to a further change in timing; BSEE mandated that decommissioning must occur prior to June 1, 2023. We will recognize accretion expense through the anticipated decommissioning date.
ARO liability as of the dates indicated was as follows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | |
AROs, at the beginning of the period | | $ | 3,461 | | | $ | 2,370 | |
Changes in estimates of existing obligations | | | 114 | | | | 1,091 | |
Accretion expense | | | 100 | | | | - | |
| | | 3,675 | | | | 3,461 | |
Less: AROs, current portion | | | (3,675 | ) | | | - | |
Long-term AROs, at the end of the period | | $ | - | | | $ | 3,461 | |
See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.
(12) Lease Obligations
Lease Obligations
Office Lease. We maintain our corporate headquarters in Houston, Texas. The 68-month operating lease, with BDSC as lessee, expires in August 2023. BDSC had an option to extend the lease term for an additional five (5) year period. However, BDSC is considering the economic advantages of alternative locations.
In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement to cure BDSC’s office lease default. Under a Fourth Amendment to Lease dated May 27, 2021 (the “Fourth Amendment”), Building Lessor agreed to defer BDSC’s past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning in June 2021, and continuing through lease expiration The Past Due Obligations were subject to an annual percentage rate of 4.50%. As revised under the Fourth Amendment, BDSC’s base rent including the prorated portion of the Past Due Obligations was $0.02 million per month.
Subsequent to the Fourth Amendment, Building Lessor notified BDSC of a new default under the office lease due to non-payment of rent. As a result of the subsequent default, Building Lessor deemed the Fourth Amendment null and void. On June 9, 2022, BDSC paid all past due amounts totaling approximately $0.2 million to Building Lessor and Building Lessor considered the office lease default cured.
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended September 30, 2022 and 2021. BDSC received sublease income from LEH totaling $0.03 million for both nine-month periods ended September 30, 2022 and 2021. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.
Blue Dolphin Energy Company | | September 30, 2022 │Page 29 |
Notes to Consolidated Financial Statements | | |
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
| | September 30, | | | December 31, | |
Balance Sheet Location | | 2022 | | | 2021 | |
| | (in thousands) | |
Assets | | | | | | |
Operating lease ROU assets Operating lease ROU assets | | $ | 787 | | | $ | 787 | |
Less: Accumulated amortization on operating lease assets Operating lease ROU assets | | | (590 | ) | | | (455 | ) |
| | | | | | | | |
Total lease labilities | | | 197 | | | | 332 | |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating lease | | | | | | | | |
Current portion of lease liabilities | | | 211 | | | | 215 | |
| | | | | | | | |
Noncurrent | | | | | | | | |
Operating lease | | | | | | | | |
Long-term lease liabilities, net of current | | | - | | | | 156 | |
Total lease labilities | | $ | 211 | | | $ | 371 | |
| Weighted average remaining lease term in years | |
Operating lease | | | 0.92 | |
Weighted average discount rate | | | | |
Operating lease | | | 8.25 | % |
Finance leases | | | 8.25 | % |
The following table presents information related to lease costs incurred for operating and finance leases:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | | | | | | | |
Operating lease costs | | $ | 51 | | | $ | 51 | | | $ | 154 | | | $ | 154 | |
Total lease cost | | $ | 51 | | | $ | 51 | | | $ | 154 | | | $ | 154 | |
The table below presents supplemental cash flow information related to leases as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
|
Cash paid for amounts included in the measurement of lease liabilities: | | $ | 50 | | | $ | 49 | | | $ | 151 | | | $ | 148 | |
Operating cash flows for operating lease | | | | | | | | | | | | | | | | |
As of September 30, 2022, maturities of lease liabilities for the periods indicated were as follows:
| | Operating | |
September 30, | | Lease | |
| | (in thousands) | |
2023 | | $ | 220 | |
| | $ | 220 | |
Future minimum annual lease commitments that are non-cancelable:
| | Operating | |
September 30, | | Lease | |
| | (in thousands) | |
2023 | | $ | 220 | |
| | $ | 220 | |
Blue Dolphin Energy Company | | September 30, 2022 │Page 30 |
Notes to Consolidated Financial Statements | | |
(13) Income Taxes
The Inflation Reduction Act ("IRA") was enacted into law on August 16, 2022. The IRA imposes a 15% alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable corporations” and are therefore exempt from payment of an alternative minimum tax.
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands) | |
Current | | | | | | | | | | | | |
Federal | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
State | | | (68 | ) | | | - | | | | (224 | ) | | | - | |
Deferred | | | | | | | | | | | | | | | | |
Federal | | | (1,257 | ) | | | 615 | | | | (5,152 | ) | | | 1,782 | |
State | | | - | | | | - | | | | - | | | | - | |
Change in valuation allowance | | | 1,257 | | | | (615 | ) | | | 5,152 | | | | (1,782 | ) |
| | | | | | | | | | | | | | | | |
Total provision for income taxes | | $ | (68 | ) | | $ | - | | | $ | (224 | ) | | $ | - | |
TMT is treated like an income tax for financial reporting purposes.
Deferred income taxes as of the dates indicated consisted of the following:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Deferred tax assets: | | | | | | |
NOL and capital loss carryforwards | | $ | 12,472 | | | $ | 16,818 | |
Business interest expense | | | 3,973 | | | | 4,680 | |
Start-up costs (crude oil and condensate processing facility) | | | 361 | | | | 424 | |
ARO liability/deferred revenue | | | 772 | | | | 727 | |
Other | | | 38 | | | | 12 | |
Total deferred tax assets | | | 17,616 | | | | 22,661 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Basis differences in property and equipment | | | (8,149 | ) | | | (7,945 | ) |
Total deferred tax liabilities | | | (8,149 | ) | | | (7,945 | ) |
| | | 9,467 | | | | 14,716 | |
| | | | | | | | |
Valuation allowance | | | (9,467 | ) | | | (14,716 | ) |
| | | | | | | | |
Deferred tax assets, net | | $ | - | | | $ | - | |
Deferred Income Taxes
Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.
NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition. These ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of roughly $0.6 million per year. We may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards that were generated beginning in 2018 may only be used to offset 80% of taxable income and are carried forward indefinitely.
Blue Dolphin Energy Company | | September 30, 2022 │Page 31 |
Notes to Consolidated Financial Statements | | |
NOL Carryforwards. 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, 2020 | | | 9,614 | | | | 56,363 | | | | 65,977 | |
| | | | | | | | | | | | |
Net operating losses used and expired | | | (1,717 | ) | | | 9,148 | | | | 7,431 | |
| | | | | | | | | | | | |
Balance at December 31, 2021 | | $ | 7,897 | | | $ | 65,511 | | | $ | 73,408 | |
| | | | | | | | | | | | |
Net operating losses used and expired | | | (6,127 | ) | | | (15,330 | ) | | | (21,457 | ) |
| | | | | | | | | | | | |
Balance at September 30, 2022 | | $ | 1,770 | | | $ | 50,181 | | | $ | 51,951 | |
Valuation Allowance
. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At September 30, 2022 and December 31, 2021, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of September 30, 2022 and December 31, 2021.
We have NOL carryforwards that remain available for future use. At September 30, 2022 and December 31, 2021, there were no uncertain tax positions for which a reserve or liability was necessary.
(14) Earnings and Dividends Per Share
A reconciliation between basic and diluted income per share for the periods indicated was as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands, | |
| | except share and per share amounts) | |
| | | | | | | | | | | | |
Net income (loss) | | $ | 6,449 | | | $ | (2,929 | ) | | $ | 23,337 | | | $ | (10,202 | ) |
| | | | | | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | | |
Basic and diluted income (loss) per share | | $ | 0.43 | | | $ | (0.23 | ) | | $ | 1.69 | | | $ | (0.80 | ) |
Basic and diluted shares used in computing earnings per share | | | 14,825,763 | | | | 12,693,514 | | | | 13,797,701 | | | | 12,693,514 | |
Diluted EPS for the three months and six months ended September 30, 2022 and 2021 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding.
Under certain of our secured loan agreements, we are restricted from declaring or paying any dividend on our Common Stock without the prior written consent of the lender. Historically, we have not declared any dividends on our Common Stock.
Blue Dolphin Energy Company | | September 30, 2022 │Page 32 |
Notes to Consolidated Financial Statements | | |
(15) Commitments and Contingencies
Amended and Restated Operating Agreement
See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the Amended and Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020.
In August 2022, BSEE issued an INC to BDPL for failure to perform associated with decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets and/or remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, BDPL maintained $3.7 million and $3.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Defaults Under Secured Loan Agreements with Third Parties and Related Parties
See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.
Financing Agreements and Guarantees
Indebtedness. See “Notes (1), (3), and (10)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.
Guarantees. Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.
Health, Safety and Environmental Matters
The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failure to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.
Share Issuances
We are obligated to issue shares of our Common Stock to: (i) Jonathan Carroll pursuant to the Guaranty Fee Agreements and (ii) non-employee directors for services rendered to the Board. Set forth below is information regarding the issuance of Common Stock related to these obligations during the three and nine months ended September 30, 2022:
On September 6, 2022, we issued an aggregate of 98,336 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from April 2022 to June 2022. The average cost basis was $0.86, the low was $0.58, and the high was $1.26.
Blue Dolphin Energy Company | | September 30, 2022 │Page 33 |
Notes to Consolidated Financial Statements | | |
On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from April 2020 through March 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64.
On May 12, 2022, we also issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The average cost basis was $0.55, the low was $0.33, and the high was $0.91.
The securities issuances were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. We recognized a loss on the issuance of shares of approximately $0.1 million and $0 for the three months ended September 30, 2022 and 2021, respectively. We recognized a loss on the issuance of shares of approximately $0.4 million and $0 for the nine months ended September 30, 2022 and 2021, respectively. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement.
Legal Matters
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved Matters.
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.
BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of September 30, 2022 and December 31, 2021. At both September 30, 2022 and December 31, 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the Nixon refinery. Under the agreement, we agreed to pay penalties totaling $0.05 million by November 30, 2022. Furthermore, we agreed to remediate identified violations on a progressive schedule from October 2022 to March 2023. Failure to abide by the terms of the agreed could result in additional fines. We recorded a liability for the penalty in the amount of $0.05 million on our consolidated balance sheets within accrued expenses and other current liabilities as of September 30, 2022.
Blue Dolphin Energy Company | | September 30, 2022 │Page 34 |
Notes to Consolidated Financial Statements | | |
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. In May 2022, management met with the TCEQ to review the alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in a June 2022 letter. As of the filing date of this report, we have not received further communications from the TCEQ. We recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of September 30, 2022 and December 31, 2021.
Pilot Dispute Related to Set-Off Payments. In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If third parties exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that management’s efforts will result in a manageable outcome.
Resolved Matters.
None.
(16) Subsequent Events
Director Fees
On October 27, 2022, we issued an aggregate of 24,591 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three-month periods ended September 30, 2022. The cost basis for the shares was $1.22. The share payments were accrued at September 30, 2022.
Guaranty Fee Agreements Payment
On October 7, 2022, we made a cash payment to Jonathan Carroll in the amount of $0.2 million, which represents a fraction of the cash component owed under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement. Historically, management did not pay Jonathan Carroll the cash portion due to Blue Dolphin’s working capital deficits. We accrue the cash portion monthly, and we add the amount to the balance owed to Jonathan Carroll under the March Carroll Note. The cash payment was accrued at September 30, 2022.
See “Note (15)” for additional disclosures related to director share issuances. See “Note (3)” to our consolidated financial statements for additional information regarding guaranty fee payments.
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Blue Dolphin Energy Company | | September 30, 2022 │Page 35 |