Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to______
Commission File No. 0-15905
| Blue Dolphin Energy Company
(Exact name of registrant as specified in its charter) | |
| | Delaware | | 73-1268729 | |
| | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
| | | | | |
| | 801 Travis Street, Suite 2100, Houston, Texas | | 77002 | |
| | (Address of principal executive offices) | | (Zip Code) | |
713-568-4725
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock, par value $0.01 per share, outstanding as of August 14, 2024: 14,921,968
TABLE OF CONTENTS
Blue Dolphin Energy Company
Glossary of Terms
Throughout this Quarterly Report on Form 10-Q, we have used the following terms:
Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH owned 83% of the Common Stock as of the filing date of this report. Affiliate Revolving Credit Agreement. A credit agreement between LEH and its affiliates and Blue Dolphin and its subsidiaries effective April 1, 2024; extends credit to Blue Dolphin and its subsidiaries, at LEH's sole discretion, for working capital purposes up to a maximum of $5.0 million in the aggregate; initial term expires on April 30, 2025; automatically renews for one year periods unless sooner terminated by the parties; interest accrues at the WSJ Prime rate plus 2.00%, compounded annually, and paid quarterly. AMT. Alternative Minimum Tax. Amended and Restated Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel by LE to LEH; effective April 1, 2023; one-year automatic renewals; currently renewed through March 31, 2025; LEH purchases all jet fuel produced by LE; LEH sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification. ARO. Asset retirement obligations. ASU. Accounting Standards Update. AGO. Atmospheric gas oil (also known as atmospheric tower bottoms) is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock. bbl. Barrel; a unit of volume equal to 42 U.S. gallons. BDEX. Blue Dolphin Exploration Company, a wholly owned subsidiary of Blue Dolphin. BDPC. Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue Dolphin. BDPL. Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue Dolphin. BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016, between BDPL and LEH in the original principal amount of $4.0 million; original interest accrued at 16.00% annually; decreased to 8.00% annually under the LEH Payment Agreement; guaranteed by certain BDPL property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; matured August 2018; as of the filing date of this report, in forbearance related to defaults prior to May 2023 pursuant to the LEH Payment Agreement. BDSC. Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin. BDSC-LEH Amended Office Space Agreement. Office sublease agreement in Houston, Texas between BDSC and LEH; extended term effective September 1, 2023 and expiring August 31, 2024; rent approximately $0.003 million per month; management is currently exploring leasing options. Blue Dolphin. Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole. bpd. Barrel per day; a measure of the bbls of daily output produced in a refinery or transported through a pipeline. Blue Dolphin Guaranty Fee Agreement. Guaranty Fee Agreement (as modified) effective January 1, 2023, between Blue Dolphin and Jonathan Carroll; related to payoff of Blue Dolphin Term Loan Due 2051; fee paid equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051; fees payable 100% in cash. | | Blue Dolphin Term Loan Due 2051 (as modified). An EIDL dated May 4, 2021 between Blue Dolphin and the SBA in the original principal amount of $0.5 million; the note was modified in February 2022 to increase the principal amount by $1.5 million to $2.0 million; additional principal used for working capital; interest accrues at 3.75%; maturity date May 2051; monthly principal and interest payment $0.01 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due and paid in November 2023; loan not forgivable; security includes all tangible and intangible personal property, including, but not limited to inventory, equipment, instruments, chattel paper, documents, letter of credit rights, accounts, deposit accounts, commercial tort claims, general intangibles, and as-extracted collateral; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type. Board. Board of Directors of Blue Dolphin. BOEM. Bureau of Ocean Energy Management. BSEE. Bureau of Safety and Environmental Enforcement. CAA. Clean Air Act. Capacity utilization rate. A percentage measure that indicates the amount of available capacity used in the Nixon refinery. With respect to the crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd). CDC. Centers for Disease Control and Prevention. CERLA. Comprehensive Environmental Response, Compensation, and Liability Act of 1980. CIP. Construction in progress. COVID-19. An infectious disease caused by a coronavirus called SARS-CoV-2; first identified in 2019 in Wuhan, the capital of China's Hubei province; the disease spread globally, resulting in a pandemic. Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue Dolphin had 20,000,000 shares of Common Stock authorized and 14,921,968 shares of Common Stock issued and outstanding as of the filing date of this report. Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0. Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter. Cost of goods sold. Reflects the cost of crude oil and condensate, fuel use, and chemicals. Crude distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process refines crude oil and other inputs into intermediate and finished petroleum products; commonly referred to as a crude distillation unit or an atmospheric distillation unit. Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before use as fuels or conversion to other products. |
Blue Dolphin Energy Company
| Glossary of Terms (Continued) |
CWA. Clean Water Act. Depropanizer unit. A distillation column that isolates propane from a mixture containing butane and other heavy components. Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM, reduced crude, and AGO). Distillation. The first step in the refining process whereby crude oil and condensate are heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower based on their densities (from lightest to heaviest). They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities. DLA. Defense Logistics Agency. Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including severe weather, power failures, and preventive maintenance. EIA. Energy Information Administration. EIDL. Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19. EPA. Environmental Protection Agency. Eagle Ford Shale. A hydrocarbon-producing geological formation extending across South Texas from the Mexican border into East Texas. Equipment Loan Due 2025. Installment sales contract dated October 13, 2020 between LE and Texas First in the original principal amount of $0.7 million; loan represents conversion of prior equipment rental agreement for a backhoe with an option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type. Exchange Act. Securities Exchange Act of 1934, as amended. FASB. Financial Accounting Standards Board. FDIC. Federal Deposit Insurance Corporation. Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products. Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use. Freeport facility. Consists of processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas; facility is currently inactive. | | GNCU. Greater Nevada Credit Union. Greenhouse gases. Molecules in the Earth’s atmosphere, such as carbon dioxide, methane, and chlorofluorocarbons, that warm the atmosphere because they absorb some of the thermal radiation emitted from the Earth’s surface. Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount. HOBM. Heavy oil-based mud blendstock; see also “distillates.” HUBZone. Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities. IBLA. Interior Board of Land Appeals. INC. Incident of Noncompliance issued by BOEM and/or BSEE. Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan Carroll. Intercompany processing fees. Fees associated with an intercompany tolling agreement related to naphtha volumes. Intermediate petroleum products. A petroleum product that might require further processing before being saleable to the ultimate consumer; further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company to process it further. IRC Section 382. Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following ownership change. IRS. Internal Revenue Service. Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule. Jet Fuel Purchase Agreements. Product agreements for the purchase of jet fuel from LEH by LE; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE sold the products back to LEH under a prior jet fuel sales agreement between the parties. Kissick Debt. Loan agreement originally entered into between LE and Notre Dame Investors, Inc. in the original principal amount of $8.0 million; debt held by John Kissick (the “Kissick Noteholder”) as of the date of this report; pursuant to a 2017 sixth amendment, the Kissick Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce LE’s prior obligation to GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC; subject to the Kissick Subordination Agreement; security includes subordinated deed of trust that encumbers the crude distillation tower and general assets of LE; original interest accrued at 16.00% annually; decreased to 6.25% annually under the Kissick Forbearance Agreement; no covenants; matured January 2019; as of the filing date of this report, in forbearance related to defaults prior to April 2023 pursuant to the Kissick Forbearance Agreement. Kissick Forbearance Agreement. Payment agreement between LE and Kissick Noteholder effective April 30, 2023; under the payment agreement, Kissick Noteholder and LE agreed to modify the payment terms of the Kissick Debt to satisfy in full LE’s $11.2 million obligation to Kissick Noteholder under the Kissick Debt by March 2025. Effective April 30, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the Kissick Debt decreased from 16.00% to 6.25% per year. |
Blue Dolphin Energy Company
| Glossary of Terms (Continued) |
Kissick Subordination Agreement. Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034. Lazarus Capital. Lazarus Capital, LLC, an affiliate of Jonathan Carroll. Lazarus Entities. LEH, NPS, LE, LRM, Lazarus San Antonio Refinery LLC, and Blue Dolphin. LE. Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin. LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; related to payoff of LE Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash. LE Amended and Restated Master Service Agreement. Master Service Agreement between LE and Ingleside executed May 11, 2023 (effective March 1, 2023) for storage of product intended for customer receipt by barge; three-year term; tank rental $0.50 per bbl per month. LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE, Veritex, and guarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; security includes first priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory), assignment of all Nixon facility contracts, permits, and licenses, absolute assignment of Nixon facility rents and leases, including storage tank rental income, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; in forbearance at December 31, 2023 and through March 29, 2024. LE Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type. LEH. Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin as of the date of this report. LEH Payment Agreement. Payment agreement between LEH and BDPL effective May 9, 2023; under the payment agreement, LEH and BDPL agreed to modify the payment terms of the BDPL-LEH Loan Agreement to satisfy in full BDPL’s $8.3 million obligation to LEH under the BDPL-LEH Loan Agreement by April 2027. Effective May 9, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the BDPL-LEH Loan Agreement decreased from 16.00% to 8.00% per year. | | LEH operating fee. A management fee paid to LEH under the Third Amended and Restated Operating Agreement; calculated as 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin and its subsidiaries; previously reflected within refinery operating expenses in our consolidated statements of operations. Leasehold interest. The interest of a lessee under an oil and gas lease. Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions. LMT. Lazarus Marine Terminal I, LLC, an affiliate of LEH. LRM. Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue Dolphin. LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; related to payoff of LRM Term Loan Due 2034; fee paid equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees payable 100% in cash. LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015, between LRM, Veritex, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime rate plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; security includes second priority lien on rights of LE in crude distillation tower and other collateral of LE, first priority lien on real property interests of LRM, first priority lien on all LRM fixtures, furniture, machinery, and equipment, first priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified storage tanks for which Veritex has a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; in forbearance at December 31, 2023 and through March 29, 2024. LTRI. Lazarus Texas Refinery I, an affiliate of LEH. MVP. MV Purchasing, LLC. Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials, it can make high-grade motor gasoline or jet fuel. It is also a generic term for the lightest and most volatile petroleum fractions. Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily of methane but commonly including varying amounts of other higher alkanes and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium. |
Blue Dolphin Energy Company
| Glossary of Terms (Continued) |
Nixon facility. Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas. Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas. NOL. Net operating losses. NPS. Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin. NPS Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1, 2023, between NPS and Jonathan Carroll; related to payoff of NPS Term Loan Due 2031; fee paid equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031; fees payable 100% in cash. NPS-LEH Terminal Services Agreement. Terminal Services Agreement between NPS and LEH effective November 1, 2022; enables LEH to store its jet fuel, which LEH lifts as needed; one-year term with one-year automatic renewals; tank rental approximately $0.2 million per month. NPS Term Loan Due 2031. Loan Agreement dated September 20, 2021, between NPS, GNCU, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at 5.75%; maturity date October 2031; monthly principal and interest payment $0.1 million; interest-only payments first thirty-six (36) months; first principal payment due November 2024; purpose of loan working capital; security includes deed of trust lien on approximately 56 acres of land and improvements owned by LE, leasehold deed of trust lien on certain property leased by NPS from LE, and assignment of leases and rents and certain personal property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default. NPS Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrued during deferral period; first payment made February 2023; loan not forgivable; security includes business assets (e.g., related machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type. Operating days. Represents the number of days in a period in which the crude distillation tower operated. Operating days are calculated by subtracting downtime in a period from calendar days in the same period. OSHA. Occupational Safety and Health Administration. Other conversion costs. Represents the combination of direct labor costs and manufacturing overhead costs. These are the costs that are necessary to convert our raw materials into refined products. Other operating expenses. Represents costs associated with our natural gas processing, treating, and redelivery facility, as well as our pipeline assets and leasehold interests in oil and gas properties. | | PADD. Petroleum Administration for Defense Districts; PADD regions enable regional analysis of petroleum product supply and movements by the EIA. Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil. PHMSA. Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation. Pilot. Pilot Travel Centers LLC, a Delaware limited liability company. Pilot Entities. Pilot, Starlight Relativity Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal, LP. Pilot Forbearance and Accommodation Agreement. Forbearance and Accommodation Agreement dated January 12, 2023 between NPS and Pilot regarding the sale of in-tank jet fuel following Pilot’s termination of a terminal services agreement. Under the Pilot Forbearance and Accommodation Agreement, the parties agreed to explore a potential compromise to their dispute; the forbearance period terminated on February 28, 2023, but was followed by the Pilot Forbearance Agreement. Under the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023. Pilot Forbearance Amendment. An amendment to the Pilot Forbearance and Accommodation Agreement dated March 31, 2023; the amendment extended the forbearance period and all deadlines associated with unresolved legal claims to June 15, 2023. Under the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all stored jet fuel in April 2023. On June 16, 2023, following the expiration of the Pilot Forbearance and Accommodation Agreement, the parties extended the deadline for responses to outstanding discovery requests related to legal claims to August 31, 2023. On August 28, 2023 the parties filed a joint motion to stay the case. The parties attended mediation in December 2023 to settle all outstanding disputes. A confidential Settlement Agreement by and among the Lazarus Entities and Pilot Entities was executed on December 29, 2023. Preferred Stock. Blue Dolphin preferred stock, par value $0.10 per share. Blue Dolphin had 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding as of the filing date of this report. Product slate. Represents type and quality of products produced. Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof. Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, produced by a refinery. Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products. |
Blue Dolphin Energy Company
| Glossary of Terms (Continued) |
Refinery operations gross profit (deficit). Calculated as refinery operations revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount. Refining gross profit (deficit) per bbl. Calculated as refinery operations gross profit (deficit) divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl. ROU. Right-of-use. SBA. Small Business Administration. SEC. Securities and Exchange Commission. Securities Act. The Securities Act of 1933, as amended. Segment contribution margin (deficit). For the refinery operations segment, represents refined product sales minus intercompany processing fees minus refinery operations costs and expenses. For the tolling and terminaling segment, represents storage tank rental and ancillary services fees plus intercompany processing fees minus tolling and terminaling costs and expenses. Intercompany processing fees are associated with an intercompany tolling agreement related to naphtha volumes. Significant customer. A customer who represents more than 10% of our total revenue from operations. Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product. Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized based on their sulfur content, with lower sulfur fuels selling at a higher, premium price and higher sulfur fuels selling at a lower, discounted price. Sweet crude. Crude oil containing sulfur content less than 0.5%. Tartan. Tartan Oil LLC, an affiliate of Pilot. Tartan Crude Supply Agreement. Crude supply agreement between Pilot and LE dated May 7, 2019, as amended on November 11, 2019, which agreement was assigned by Pilot to Tartan pursuant to an Assignment of Contract dated March 20, 2020. Terminated by Tartan effective December 31, 2023. There were no penalties associated with the termination. TCEQ. Texas Commission on Environmental Quality. Texas First. Texas First Rentals, LLC. Third Amended and Restated Operating Agreement. Affiliate agreement between Blue Dolphin and its subsidiaries and LEH governing LEH’s operation and management of those companies’ assets; one-year term effective April 1, 2024 expiring April 1, 2025 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin and its subsidiaries. | | Throughput. The volume processed through a unit or a refinery or transported through a pipeline. Tolling and terminaling gross profit (deficit). Calculated as tolling and terminaling revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount. Topping unit. A type of petroleum refinery that engages in only the first step of the refining process crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0. Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO. Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit, and sometimes the entire plant, is taken offline for a week or more for comprehensive revamp and renewal. USACOE. U.S. Army Corps of Engineers. USDA. U.S. Department of Agriculture. U.S. GAAP. Accounting principles generally accepted in the United States of America. Veritex. Veritex Community Bank, successor in interest to Sovereign Bank by merger. Veritex Forbearance Agreement. Forbearance Agreement dated and effective November 18, 2022 between LE, LRM, Veritex, and guarantors (as defined therein). Veritex First Amended Forbearance Agreement. Amendment to the Veritex Forbearance Agreement dated and effective September 30, 2023 between LE, LRM, Veritex, and guarantors (as defined therein); pursuant to the Veritex First Amended Forbearance Agreement, Veritex agreed to forbear existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through and including December 29, 2023; additionally, Veritex agreed to forbear from testing borrower’s compliance with financial covenants under the loans. Veritex Second Amended Forbearance Agreement. Amendment to the Veritex Forbearance Agreement dated and effective December 29, 2023 between LE, LRM, Veritex, and guarantors (as defined therein); pursuant to the Veritex Second Amended Forbearance Agreement, Veritex agreed to forbear existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through and including March 29, 2024; additionally, Veritex agreed to forbear from testing borrower’s compliance with financial covenants under the loans; expired on March 29, 2024. WHO. World Health Organization. WSJ Prime rate. The base rate on corporate loans posted by at least 70% of the ten largest U.S. banks as published by the Wall Street Journal. Effective July 27, 2023, the WSJ Prime rate increased to 8.50%. XBRL. eXtensible Business Reporting Language. Yield. The percentage of refined products that is produced from crude oil and other feedstocks. |
Blue Dolphin Energy Company
Important Information Regarding Forward Looking Statements
This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals, and expectations concerning our market position, future operations, and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those projected, including but not limited to:
Business and Industry • Significant debt in current liabilities, certain of which is currently in default. • Restrictive covenants in our debt instruments that limit our ability to undertake certain types of transactions. • Inability to meet financial covenants under loan agreements. • Increased costs of capital or a reduction in the availability of credit. • Public health threats, pandemics, and epidemics, such as COVID-19, and the adverse impacts on our business, financial condition, results of operations, and liquidity. • Affiliate Common Stock ownership and transactions that could cause conflicts of interest. • Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products. • Geographical concentration of our assets and customers in West Texas. • Competition from companies with more significant financial and other resources. • Market changes in insurance that impact premium costs and available coverages. • Industry technological developments that outpace our ability to keep up. Downstream and Midstream Operations • Commodity price and refined product demand volatility, which can adversely affect our refining margins. • Crude oil, other feedstocks, and fuel and utility services price volatility. • Effects of geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and any spread or expansion thereof, including with respect to impacts to commodity prices and other markets. • Availability and cost of crude oil and other feedstocks to operate the Nixon facility. • Equipment failure and maintenance, which lead to operational downtime. • Potential impairment in the carrying value of long-lived assets, which could negatively affect our operating results. • Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund. • Critical personnel loss, labor actions, and workplace safety issues. • Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer. • Increases in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting our crude oil and condensate, feedstocks, and refined products. • Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. • Geographical concentration of our refining operations and customers within the Eagle Ford Shale. • Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers. • Failing to effectively execute new business strategies, such as renewable fuels. • Our ability to effect and integrate potential acquisitions. | | Legal, Government, and Regulatory • Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities. • Strict laws and regulations regarding personnel and process safety. • Uncertainty regarding the impact of current and future sanctions imposed by governments, including the U.S., and other authorities in response to military conflicts. • General economic, political, or regulatory developments, including recession, inflation, interest rates, or changes in governmental policies relating to refined petroleum products, crude oil, or taxation. • Assessment of penalties by regulatory agencies, such as BOEM, BSEE, OSHA and the TCEQ for violations. • Our ability to resolve the bond dispute with RLI. • Our estimates of future AROs related to our pipeline and facilities assets, which may increase. • Regulatory changes and other measures related to greenhouse gas emissions, climate change, and an ongoing desire to transition to greater renewable energy solutions. Security • A terrorist attack or armed conflict. • Increased activism against oil and gas companies • Actual or potential cybersecurity threats or loss of data privacy. Common Stock • Fluctuations in our stock price that may result in a substantial investment loss. • Increasing attention to environmental, social, and governance (ESG) matters. • Declines in our stock price due to share sales. • Dilution of the equity of current stockholders and the potential decline of our stock price due to the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue. • The potential sale of shares in accordance with Rule 144, which may adversely affect the market. • The lack of dividend payments. • Failing to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act. |
See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.
Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.
Blue Dolphin Energy Company
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands except share amounts) | |
| | | | | | | | | |
ASSETS | | | | | | | | |
CURRENT ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 98 | | | $ | 18,713 | |
Accounts receivable, net | | | 483 | | | | 116 | |
Accounts receivable, related party | | | 5,931 | | | | 4,184 | |
Prepaid expenses and other current assets | | | 3,039 | | | | 1,591 | |
Deposits | | | 210 | | | | 110 | |
Inventory | | | 39,863 | | | | 24,576 | |
Total current assets | | | 49,624 | | | | 49,290 | |
| | | | | | | | | |
LONG-TERM ASSETS | | | | | | | | |
Total property and equipment, net | | | 53,673 | | | | 54,958 | |
Operating lease right-of-use assets, net | | | 40 | | | | 158 | |
Restricted cash, noncurrent | | | 1,000 | | | | 5 | |
Surety bonds | | | 230 | | | | 230 | |
Deferred tax assets, net | | | 1,382 | | | | 1,436 | |
Total long-term assets | | | 56,325 | | | | 56,787 | |
| | | | | | | | | |
TOTAL ASSETS | | $ | 105,949 | | | $ | 106,077 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Long-term debt less unamortized debt issue costs, current portion (in default) | | $ | 15,260 | | | $ | 39,440 | |
Interest payable | | | 271 | | | | 2,596 | |
Accounts payable | | | 7,416 | | | | 1,814 | |
Accounts payable, related party | | | 204 | | | | 889 | |
Current portion of lease liabilities | | | 38 | | | | 147 | |
Income taxes payable | | | 64 | | | | 951 | |
Asset retirement obligations, current portion | | | 2,999 | | | | 4,504 | |
Accrued expenses and other current liabilities | | | 5,727 | | | | 5,084 | |
Total current liabilities | | | 31,979 | | | | 55,425 | |
| | | | | | | | | |
LONG-TERM LIABILITIES | | | | | | | | |
Long-term debt, net of current portion | | | 26,789 | | | | 3,745 | |
Long-term debt, related party, net of current portion | | | 4,000 | | | | 4,000 | |
Long-term interest payable, related party, net of current portion | | | 1,308 | | | | 1,308 | |
Total long-term liabilities | | | 32,097 | | | | 9,053 | |
| | | | | | | | | |
TOTAL LIABILITIES | | | 64,076 | | | | 64,478 | |
| | | | | | | | | |
Commitments and contingencies (Note 15) | | | | | | | | |
| | | | | | | | | |
STOCKHOLDERS' EQUITY | | | | | | | | |
Common stock ($0.01 par value, 20,000,000 shares authorized; 14,921,968 shares issued at June 30, 2024 and December 31, 2023) (1) | | | 149 | | | | 149 | |
Additional paid-in capital | | | 39,758 | | | | 39,758 | |
Retained earnings | | | 1,966 | | | | 1,692 | |
TOTAL STOCKHOLDERS' EQUITY | | | 41,873 | | | | 41,599 | |
| | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 105,949 | | | $ | 106,077 | |
(1) | Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At June 30, 2024 and December 31, 2023, there were no shares of preferred stock issued and outstanding. |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
| Financial Statements (Continued) |
Consolidated Statements of Operations (Unaudited)
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands, except share and per-share amounts) | |
REVENUE FROM OPERATIONS | | | | | | | | | | | | | | | | |
Refinery operations | | $ | 68,548 | | | $ | 67,267 | | | $ | 158,463 | | | $ | 181,907 | |
Tolling and terminaling | | | 1,111 | | | | 1,611 | | | | 2,218 | | | | 3,632 | |
Total revenue from operations | | | 69,659 | | | | 68,878 | | | | 160,681 | | | | 185,539 | |
| | | | | | | | | | | | | | | | | |
COST OF GOODS SOLD | | | | | | | | | | | | | | | | |
Crude oil, fuel use, and chemicals | | | 65,021 | | | | 63,145 | | | | 141,932 | | | | 157,132 | |
Other conversion costs | | | 8,694 | | | | 3,843 | | | | 10,975 | | | | 6,013 | |
Total cost of goods sold | | | 73,715 | | | | 66,988 | | | | 152,907 | | | | 163,145 | |
| | | | | | | | | | | | | | | | | |
Gross profit (deficit) | | | (4,056 | ) | | | 1,890 | | | | 7,774 | | | | 22,394 | |
| | | | | | | | | | | | | | | | | |
COST OF OPERATIONS | | | | | | | | | | | | | | | | |
LEH operating fee, related party | | | 254 | | | | 103 | | | | 426 | | | | 247 | |
Other operating expenses | | | 140 | | | | 69 | | | | 280 | | | | 160 | |
General and administrative expenses | | | 1,471 | | | | 911 | | | | 2,454 | | | | 2,118 | |
Depreciation and amortization | | | 705 | | | | 697 | | | | 1,409 | | | | 1,395 | |
Accretion of asset retirement obligations | | | - | | | | 24 | | | | - | | | | 59 | |
| | | | | | | | | | | | | | | | | |
Total cost of operations | | | 2,570 | | | | 1,804 | | | | 4,569 | | | | 3,979 | |
| | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (6,626 | ) | | | 86 | | | | 3,205 | | | | 18,415 | |
| | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest and other income | | | 43 | | | | 50 | | | | 191 | | | | 52 | |
Interest and other expense | | | (1,483 | ) | | | (1,669 | ) | | | (2,997 | ) | | | (3,001 | ) |
Total other income (expense) | | | (1,440 | ) | | | (1,619 | ) | | | (2,806 | ) | | | (2,949 | ) |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | (8,066 | ) | | | (1,533 | ) | | | 399 | | | | 15,466 | |
| | | | | | | | | | | | | | | | | |
Income tax benefit (expense) | | | 1,716 | | | | (27 | ) | | | (125 | ) | | | (273 | ) |
| | | | | | | | | | | | | | | | | |
Net Income (loss) | | $ | (6,350 | ) | | $ | (1,560 | ) | | $ | 274 | | | $ | 15,193 | |
| | | | | | | | | | | | | | | | | |
Income (loss) per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.43 | ) | | $ | (0.10 | ) | | $ | 0.02 | | | $ | 1.02 | |
Diluted | | $ | (0.43 | ) | | $ | (0.10 | ) | | $ | 0.02 | | | $ | 1.02 | |
| | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | | | | | | | | | |
Basic | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | |
Diluted | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
| Financial Statements (Continued) |
Consolidated Statements of Stockholders’ Equity (Unaudited)
| | | Common Stock | | | | | | | | | |
| | | Shares Issued | | | | | | Additional | | | | | | Total | |
| | | and | | | | | | Paid-In | | | Retained | | | Stockholders' | |
| | | Outstanding | | | Par Value | | | Capital | | | Earnings | | | Equity | |
| | | | | | | (in thousands except share amounts) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2023 | | | 14,921,968 | | | $ | 149 | | | $ | 39,758 | | | $ | 1,692 | | | $ | 41,599 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 274 | | | | 274 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2024 | | | 14,921,968 | | | $ | 149 | | | $ | 39,758 | | | $ | 1,966 | | | $ | 41,873 | |
| | | Common Stock | | | | | | | Total | |
| | | | | | | | | | | Additional | | | | | | | Stockholders' | |
| | | | | | | | | | | Paid-In | | | Accumulated | | | Equity | |
| | | Shares Issued | | | Par Value | | | Capital | | | Deficit | | | (Deficit) | |
| | | | | | | (in thousands except share amounts) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2022 | | | 14,921,968 | | | $ | 149 | | | $ | 39,758 | | | $ | (29,319 | ) | | $ | 10,588 | |
| | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 15,193 | | | | 15,193 | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at June 30, 2023 | | | 14,921,968 | | | $ | 149 | | | $ | 39,758 | | | $ | (14,126 | ) | | $ | 25,781 | |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
| Financial Statements (Continued) |
Consolidated Statements of Cash Flows (Unaudited)
| | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 274 | | | $ | 15,193 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 1,409 | | | | 1,395 | |
Accretion of asset retirement obligations | | | - | | | | 59 | |
Deferred income tax | | | 54 | | | | - | |
Amortization of debt issue costs | | | 101 | | | | 102 | |
Deferred revenues and expenses | | | - | | | | (205 | ) |
Changes in operating assets and liabilities | | | | | | | | |
Accounts receivable | | | (367 | ) | | | 1,119 | |
Accounts receivable, related party | | | (1,747 | ) | | | (1,529 | ) |
Prepaid expenses and other current assets | | | (1,548 | ) | | | (1,491 | ) |
Inventory | | | (15,287 | ) | | | (11,246 | ) |
Asset retirement obligations | | | (1,505 | ) | | | - | |
Accounts payable, accrued expenses and other liabilities | | | 2,918 | | | | (1,694 | ) |
Accounts payable, related party | | | (685 | ) | | | 395 | |
Net cash provided by (used in) operating activities | | | (16,383 | ) | | | 2,098 | |
| | | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | |
Capital expenditures | | | - | | | | (102 | ) |
Net cash used in investing activities | | | - | | | | (102 | ) |
| | | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | |
Payments on debt principal | | | (1,237 | ) | | | (744 | ) |
Net activity on related-party debt | | | - | | | | (1,211 | ) |
Net cash used in financing activities | | | (1,237 | ) | | | (1,955 | ) |
Net change in cash, cash equivalents, and restricted cash | | | (17,620 | ) | | | 41 | |
| | | | | | | | | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD | | | 18,718 | | | | 1,521 | |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD | | $ | 1,098 | | | $ | 1,562 | |
| | | | | | | | | |
Supplemental Information: | | | | | | | | |
Non-cash investing and financing activities: | | | | | | | | |
Issuance of shares for services and/or to extinguish debt | | $ | - | | | $ | - | |
Right of use assets financed via operating lease | | $ | - | | | $ | 215 | |
Interest paid | | $ | 4,813 | | | $ | 3,362 | |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
Notes to Consolidated Financial Statements |
(1) Organization
Company Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.
Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Working Capital Improvement
Certain conditions and events exist, in the aggregate, that caused management to evaluate Blue Dolphin's ability to continue as a going concern. Those conditions and events include historical working capital deficits and significant current debt in default. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements). To bolster working capital reserves, management continues efforts to restructure debt obligations and reduce cash requirements. Management acknowledges that uncertainty remains related to future operating margins; however, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt. As a result, our consolidated balance sheets as of June 30, 2024 and December 31, 2023, the related consolidated statement of operations, stockholders’ equity, and cash flows for the three and six months ended June 30, 2024 have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
We had positive working capital of $17.6 million at June 30, 2024 compared to a working capital deficit of $6.1 million at December 31, 2023, representing a $23.8 million improvement. Our significant current debt is primarily the result of bank debt to GNCU being in default. The current portion of long-term debt on our consolidated balance sheets totaled $15.3 million and $39.4 million at June 30, 2024 and December 31, 2023, respectively. The $24.2 million decrease in current debt between the periods primarily related to the Veritex loans being reclassified to long-term debt, net of current portion at June 30, 2024 as a result of no longer being in default. We continue to actively explore additional funding to refinance and restructure debt and further improve working capital.
Our current assets totaled $49.6 million at June 30, 2024 compared to $49.3 million at December 31, 2023, representing a $0.3 million increase. Our current liabilities totaled $32.0 million at June 30, 2024 compared to $55.4 million at December 31, 2023, representing a $23.4 million decrease.
Forbearance Agreements, Waivers, and Defaults
Veritex Forbearance Agreements and Waivers. Under the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex Forbearance Agreement expired on September 30, 2023, and was superseded by the Veritex First Amended Forbearance Agreement. The First Amended Forbearance Agreement expired on December 29, 2023, and was superseded by the Veritex Second Amended Forbearance Agreement. The Veritex Second Amended Forbearance Agreement expired on March 29, 2024. During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants.
On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of June 30, 2024, LE and LRM were in compliance with financial covenants related to their respective Veritex loans.
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million during both the three months ended June 30, 2024 and 2023. LE paid the Kissick Noteholder $3.0 million and $1.5 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to defaults prior to April 2023.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
LEH Payment Agreement. Pursuant to the LEH Payment Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million for both three months ended June 30, 2024 and 2023. BDPL paid LEH approximately $0.2 million and $0.1 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to defaults prior to May 2023.
Defaults. As of June 30, 2024 and through the filing date of this report, we were in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
Refining Margins
Our results of operations and liquidity are highly dependent upon the margins we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. The general outlook for the oil and natural gas industry for the remainder of 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East.
Net loss for the three months ended June 30, 2024 totaled $6.4 million, or a loss of $0.43 per share, compared to a net loss of $1.6 million, or a loss of $0.10 per share, for the three months ended June 30, 2023. The $4.8 million, or $0.33 per share, decrease in net income between the periods resulted from less favorable refining margins on lower refinery throughput, production, and sales volumes. Net income for the six months ended June 30, 2024 totaled $0.3 million, or income of $0.02 per share, compared to net income of $15.2 million, or $1.02 per share, for the six months ended June 30, 2023. The $14.9 million, or $1.00 per share, decrease in net income between the periods resulted from less favorable refining margins on lower refinery throughput, production, and sales volumes. We cannot assure investors that refining margins will remain positive and demand will increase.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and maintaining operation of the Nixon refinery.
● | Working Capital. As noted above, we have historically had working capital deficits primarily due to having significant current debt. Sufficient working capital is necessary to meet contractual, operational, regulatory, and safety needs. Our short-term working capital needs are primarily related to (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Third Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to the repayment of long-term debt obligations. To avoid business disruptions and manage cash flow, we optimize receivables and payables by prioritizing payments, monitor discretionary spending, and carefully manage capital expenditures. |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
● | Refining Margins. Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. To remain competitive in a volatile commodity price environment, we adjust throughput and production based on market conditions and adjust our product slate based on commodities pricing. |
● | Nixon Refinery Operation. We maintain relationships with suppliers that source and repair key components of the Nixon refinery. We expect our suppliers to maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases, increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to mitigate supply-based risks that could cause a business disruption. |
General macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East continue to evolve, and the extent to which these factors impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs 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 secured loan agreements that are in default, our business, financial condition, and results of operations will be materially adversely affected. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
(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, 2023 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, 2023 as filed with the SEC. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, or for any other period.
Significant Accounting Policies
A summary of significant Blue Dolphin accounting policies is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.
Use of Estimates. The nature of our business requires that we make estimates and assumptions in accordance with U.S.GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Although commodity price volatility, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of June 30, 2024 and through the filing date of this report. The accounting matters assessed included, but are not limited to, our allowance for credit losses, inventory and related reserves, and the carrying value of long-lived assets, assessing Blue Dolphin's ability to continue as a going concern and evaluating the need for a valuation allowance on deferred tax assets.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. Although management historically deemed this a normal business risk, options to limit risk are being evaluated given current capital, credit, and commodity markets and financial institution health. Restricted cash, non-current portion at June 30, 2024 and December 31, 2023 reflected amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
| | | | | | | | | |
Cash and cash equivalents | | $ | 98 | | | $ | 18,713 | |
Restricted cash, noncurrent | | | 1,000 | | | | 5 | |
| | | $ | 1,098 | | | $ | 18,718 | |
Accounts Receivable and Allowance for Credit Losses. Accounts receivable are presented net of any necessary allowance(s) for credit losses. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for credit losses 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 credit losses of $0 and $0.06 million at June 30, 2024 and December 31, 2023, respectively.
Financial Instruments. Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt approximates fair value as it carries interest rates that fluctuate with the prime rate.
Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.
Property and Equipment.
Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.
Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Construction in Progress (CIP). CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service. See “Notes (8) and (11)” to our consolidated financial statements for additional disclosures related to refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases, we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) terminal services agreements whereby a customer agrees to pay a certain fee per storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer. The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments, when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer pre-payments and deposits (contract liabilities) on our consolidated balance sheet. Amounts are billed as products are lifted and sold or upon signing of bulk sales contracts. Generally, billing occurs subsequent to revenue recognition, resulting in a short-term liability. We sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These deposits are liquidated when revenue is recognized.
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.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Income Taxes. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. Our effective tax rate may be different than expected if the federal and state statutory rates were applied to income from continuing operations due to certain items that are deductible or included in income for tax purposes that are not deductible or included for financial statement purposes.
The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At June 30, 2024 and December 31, 2023, there were no uncertain tax positions for which a reserve or liability was necessary.
Deferred Taxes. Deferred income tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when we are unable to conclude that realization of the deferred income tax assets is more likely than not.
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we reassess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.
Commodity price market volatility associated with general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East could affect the value of certain of our long-lived assets. As of June 30, 2024 and December 31, 2023, we did not record any impairment of our long-lived assets. However, impairment may be required in the future if external events or circumstances change or if internal conditions shift materially.
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing of certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory permitting requirements, asset structural integrity, water depth, third-party equipment availability, and mobilization/demobilization costs. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (11)” to our consolidated financial statements for additional information related to AROs.
Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (14)” to our consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted
During the three and six months ended June 30, 2024, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective
● | ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in our income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. We will adopt ASU 2023-09 in the fourth quarter of 2025. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. |
● | ASU 2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024. Early adoption is permitted. We will adopt ASU 2023-07 in the fourth quarter of 2024 using a retrospective transition method. |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
(3) Related-Party Transactions
Affiliate Agreements
Financial and Operational Agreements. Blue Dolphin and certain of its subsidiaries are currently parties to several financial and operational agreements with Affiliates.
Agreement/Transaction | Parties | Effective Date | Key Terms |
Blue Dolphin Guaranty Fee Agreement | Blue Dolphin Jonathan Carroll | 01/01/2023 | Related to payoff of Blue Dolphin $2.0 million SBA loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051 as consideration for providing his personal guarantee. |
Jet Fuel Purchase Agreements | LE LEH | 04/21/2023 | Product agreements for the purchase of jet fuel by LE from LEH; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE sold the products back to LEH under a prior jet fuel sales agreement between the parties. |
Amended and Restated Jet Fuel Sales Agreement | LE LEH | 04/01/2023 | Jet fuel sales by LE to LEH; 1-year automatic renewals; LEH lifts the jet fuel from LE as needed and sells it to the DLA under preferential pricing terms due to LEH's HUBZone certification. |
| Affiliate Revolving Credit Agreement | Blue Dolphin and subsidiaries LEH and affiliates | 04/01/2024 | Credit agreement for working capital purposes up to a maximum of $5.0 million in the aggregate; advances are at LEH's sole discretion; initial term expires on April 30, 2025; automatically renews for one year periods unless sooner terminated by the parties; interest accrues at the WSJ Prime rate plus 2.00%, compounded annually, and paid quarterly. |
LE Amended and Restated Guaranty Fee Agreement | LE Jonathan Carroll | 01/01/2023 | Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034 as consideration for providing his personal guarantee. |
LE Amended and Restated Master Services Agreement | LE Ingleside | 03/01/2023 | For storage of products intended for customer receipt by barge; tank rental fee $0.1 million per month. |
LRM Amended and Restated Guaranty Fee Agreement | LRM Jonathan Carroll | 01/01/2023 | Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034 as consideration for providing his personal guarantee. |
NPS Guaranty Fee Agreement | NPS Jonathan Carroll | 01/01/2023 | Related to payoff of NPS $10.0 million GNCU loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031 as consideration for providing his personal guarantee. |
NPS Terminal Services Agreement | NPS LEH | 11/01/2022 | For LEH storage of jet fuel at the Nixon facility; tank rental fee $0.2 million per month; 1-year term on an evergreen basis; either party may cancel upon 60 days’ prior written notice. |
Office Sub-Lease Agreement | BDSC LEH | 05/31/23 | 12-month extension of prior office sublease; term expires 08/31/2024; office lease Houston, Texas; rent approximately $0.003 million per month; management is currently exploring leasing options. |
Third Amended and Restated Operating Agreement | Blue Dolphin LE LRM NPS BDPL BDPC BDSC LEH | 04/01/2024 | 1-year term; expires 04/01/2025 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC. |
Debt Agreements. BDPL was a party to the BDPL-LEH Loan Agreement with LEH at June 30, 2024 and December 31, 2023. Summaries of the debt agreements follow:
Loan Description | | Parties | | Maturity Date | | Interest Rate | | Loan Purpose |
| | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | BDPL | | Aug 2018 | | 8.00% | | Original principal amount of $4.0 million; Blue Dolphin working capital |
| | | LEH | | | | | | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Forbearance and Defaults.
LEH Payment Agreement. Pursuant to the LEH Payment Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million for both three months ended June 30, 2024 and 2023. BDPL paid LEH approximately $0.2 million and $0.1 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to defaults prior to May 2023.
Covenants, Guarantees and Security.
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.
See “Notes (1) and (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts receivable, related party. Accounts receivable—related party for the sale of jet fuel to LEH totaled $5.9 million and $4.2 at June 30, 2024 and December 31, 2023, respectively. Amounts Blue Dolphin owed to LEH under the Third Amended and Restated Operating Agreement were net settled against amounts LEH owed to LE under the Amended and Restated Jet Fuel Sales Agreement. Excess amounts owed by LEH to LE were reflected in accounts receivable—related party on our consolidated balance sheet.
Accounts payable, related party. Accounts payable, related party totaled approximately $0.2 million and $0.9 million at June 30, 2024 and December 31, 2023. Accounts payable, related party at December 31, 2023 reflected tank rental fees owed by LE to Ingleside under the LE Amended and Restated Master Services Agreement plus amounts owed to LTRI for previously purchased refinery equipment.
Long-term debt, related party, net of current portion and accrued interest payable, related party, net of current portion.
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
LEH | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | $ | 5,308 | | | $ | 5,308 | |
LEH Total | | | 5,308 | | | | 5,308 | |
| | | | | | | | | |
Less: Long-term debt, related party, current portion | | | - | | | | - | |
Less: Accrued interest payable, related party, current portion | | | - | | | | - | |
| | | $ | 5,308 | | | $ | 5,308 | |
Consolidated Statements of Operations.
Total revenue from operations.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands, except percent amounts) | | | (in thousands, except percent amounts) | |
Refinery operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LEH | | $ | 26,026 | | | | 37.4 | % | | $ | 25,419 | | | | 36.9 | % | | $ | 53,420 | | | | 33.2 | % | | $ | 60,764 | | | | 32.7 | % |
Third-Parties | | | 42,522 | | | | 61.0 | % | | | 41,848 | | | | 60.7 | % | | | 105,043 | | | | 65.4 | % | | | 121,143 | | | | 65.3 | % |
Tolling and terminaling | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LEH | | | 540 | | | | 0.8 | % | | | 540 | | | | 0.8 | % | | | 1,080 | | | | 0.7 | % | | | 1,080 | | | | 0.6 | % |
Third-Parties | | | 571 | | | | 0.8 | % | | | 1,071 | | | | 1.6 | % | | | 1,138 | | | | 0.7 | % | | | 2,552 | | | | 1.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 69,659 | | | | 100.0 | % | | $ | 68,878 | | | | 100.0 | % | | $ | 160,681 | | | | 100.0 | % | | $ | 185,539 | | | | 100.0 | % |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Interest expense.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | | | (in thousands) | |
Jonathan Carroll | | | | | | | | | | | | | | | | |
Guaranty Fee Agreements | | | | | | | | | | | | | | | | |
Tied to First Term Loan Due 2034 | | $ | 97 | | | $ | 101 | | | $ | 195 | | | $ | 203 | |
Tied to NPS Term Loan Due 2031 | | | 50 | | | | 50 | | | | 100 | | | | 100 | |
Tied to Second Term Loan Due 2034 | | | 40 | | | | 42 | | | | 81 | | | | 84 | |
Tied to Blue Dolphin Term Loan Due 2051 | | | 10 | | | | 10 | | | | 20 | | | | 20 | |
LEH | | | | | | | | | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | | 106 | | | | 164 | | | | 212 | | | | 324 | |
| | | $ | 303 | | | $ | 367 | | | $ | 608 | | | $ | 731 | |
Other. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended June 30, 2024 and 2023. BDSC received sublease income from LEH totaling $0.02 million for both six-month periods ended June 30, 2024 and 2023.
The LEH operating fee, related party totaled $0.3 million for the three-month period ended June 30, 2024 compared to approximately $0.1 million for the three-month period ended June 30, 2023. The increase between the periods related to higher manufacturing overhead costs including insurance. The LEH operating fee, related party totaled $0.4 million for the six-month period ended June 30, 2024 compared to approximately $0.2 million for the six-month period ended June 30, 2023. The increase between the periods related to higher manufacturing overhead costs including insurance.
Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both three-month periods ended June 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.6 million and $0.4 million for the six-month periods ended June 30, 2024 and 2023, respectively.
(4) Revenue and Segment Information
We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending) and tolling and reservation fees for use of the naphtha stabilizer at the Nixon refinery. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Contract Balances
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
Accounts receivable (including related-party), beginning of period | | $ | 4,300 | | | $ | 1,148 | |
Accounts receivable (including related-party), end of period | | | 6,414 | | | | 4,300 | |
| | | | | | | | | |
Unearned revenue, beginning of period | | $ | 3,243 | | | $ | 3,888 | |
Unearned revenue, end of period | | | 2,896 | | | | 3,243 | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Segment Information
Business segment information for the periods indicated (and as of the dates indicated) was as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | | | (in thousands) | |
| | | | | | | | | | | | | | | | | |
Refinery operations | | $ | 68,548 | | | $ | 67,267 | | | $ | 158,463 | | | $ | 181,907 | |
Tolling and terminaling | | | 1,111 | | | | 1,611 | | | | 2,218 | | | | 3,632 | |
Total revenue from operations | | | 69,659 | | | | 68,878 | | | | 160,681 | | | | 185,539 | |
| | | | | | | | | | | | | | | | | |
Intercompany processing fees(1) | | | | | | | | | | | | | | | | |
Refinery operations | | | (573 | ) | | | (595 | ) | | | (1,076 | ) | | | (1,171 | ) |
Tolling and terminaling | | | 573 | | | | 595 | | | | 1,076 | | | | 1,171 | |
Total intercompany processing fees | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
Costs of good sold(2) | | | | | | | | | | | | | | | | |
Refinery operations | | | (73,305 | ) | | | (66,532 | ) | | | (152,087 | ) | | | (162,332 | ) |
Tolling and terminaling | | | (410 | ) | | | (456 | ) | | | (820 | ) | | | (813 | ) |
Total costs of goods sold | | | (73,715 | ) | | | (66,988 | ) | | | (152,907 | ) | | | (163,145 | ) |
| | | | | | | | | | | | | | | | | |
Gross profit (deficit) | | | | | | | | | | | | | | | | |
Refinery operations | | | (5,330 | ) | | | 140 | | | | 5,300 | | | | 18,404 | |
Tolling and terminaling | | | 1,274 | | | | 1,750 | | | | 2,474 | | | | 3,990 | |
Total gross profit (deficit) | | | (4,056 | ) | | | 1,890 | | | | 7,774 | | | | 22,394 | |
| | | | | | | | | | | | | | | | | |
Other operating and general and administrative expenses(3) | | | | | | | | | | | | | | | | |
Refinery operations | | | (645 | ) | | | (410 | ) | | | (1,054 | ) | | | (979 | ) |
Tolling and terminaling | | | (69 | ) | | | (156 | ) | | | (92 | ) | | | (626 | ) |
Corporate and other | | | (1,151 | ) | | | (541 | ) | | | (2,014 | ) | | | (979 | ) |
Total other operating and general and administrative expenses | | | (1,865 | ) | | | (1,107 | ) | | | (3,160 | ) | | | (2,584 | ) |
| | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | |
Refinery operations | | | (301 | ) | | | (304 | ) | | | (602 | ) | | | (608 | ) |
Tolling and terminaling | | | (342 | ) | | | (342 | ) | | | (684 | ) | | | (684 | ) |
Corporate and other | | | (62 | ) | | | (51 | ) | | | (123 | ) | | | (103 | ) |
Total depreciation and amortization | | | (705 | ) | | | (697 | ) | | | (1,409 | ) | | | (1,395 | ) |
| | | | | | | | | | | | | | | | | |
Interest and other non-operating expenses, net | | | | | | | | | | | | | | | | |
Refinery operations | | | (806 | ) | | | (932 | ) | | | (1,540 | ) | | | (1,609 | ) |
Tolling and terminaling | | | (497 | ) | | | (490 | ) | | | (993 | ) | | | (960 | ) |
Corporate and other | | | (137 | ) | | | (197 | ) | | | (273 | ) | | | (380 | ) |
Total interest and other non-operating expenses, net | | | (1,440 | ) | | | (1,619 | ) | | | (2,806 | ) | | | (2,949 | ) |
| | | | | | | | | | | | | | | | | |
Income (loss) before income taxes | | | | | | | | | | | | | | | | |
Refinery operations | | | (7,082 | ) | | | (1,506 | ) | | | 2,104 | | | | 15,208 | |
Tolling and terminaling | | | 366 | | | | 762 | | | | 705 | | | | 1,720 | |
Corporate and other | | | (1,350 | ) | | | (789 | ) | | | (2,410 | ) | | | (1,462 | ) |
Total income (loss) before income taxes | | | (8,066 | ) | | | (1,533 | ) | | | 399 | | | | 15,466 | |
| | | | | | | | | | | | | | | | | |
Income tax benefit (expense) | | | 1,716 | | | | (27 | ) | | | (125 | ) | | | (273 | ) |
| | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (6,350 | ) | | $ | (1,560 | ) | | $ | 274 | | | $ | 15,193 | |
(1) | Fees associated with an intercompany tolling agreement related to naphtha volumes. |
(2) | Cost of goods sold within tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance). |
(3) | General and administrative expenses within refinery operations includes the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations. |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | | | (in thousands) | |
Capital expenditures | | | | | | | | | | | | | | | | |
Refinery operations | | $ | - | | | $ | 102 | | | $ | - | | | $ | 102 | |
| | | | | | | | | | | | | | | | |
Total capital expenditures | | $ | - | | | $ | 102 | | | $ | - | | | $ | 102 | |
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Identifiable assets | | | | | | | | |
Refinery operations | | $ | 86,294 | | | $ | 86,565 | |
Tolling and terminaling | | | 16,970 | | | | 16,464 | |
Corporate and other | | | 2,685 | | | | 3,048 | |
Total identifiable assets | | $ | 105,949 | | | $ | 106,077 | |
(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 June 30, 2024 and December 31, 2023, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $0.8 million and $18.2 million, respectively. Instability and volatility in the capital, credit, and commodity markets, as well as with financial institutions, could adversely affect our cash balances (including restricted cash) in excess of FDIC insurance limits per depositor. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.
Key Supplier
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. On December 29, 2023, we entered a new crude supply agreement with MVP, effective January 1, 2024. This agreement provides a firm source of light-sweet Eagle Ford crude oil to the Nixon facility under improved credit terms, and management believes that MVP can provide us with adequate amounts of crude oil and condensate for the foreseeable future. Related to the crude supply agreement, MVP stores crude oil at the Nixon facility under a terminal services agreement. At June 30, 2024, accounts payable for crude oil and condensate was $5.1 million.
During 2023, we operated under a crude supply agreement with Tartan. Tartan also stored crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the crude supply agreement and terminal services agreement. The effective date of the termination was December 31, 2023. During the second quarter of 2023, the vast majority of our crude was sourced from Tartan under the crude supply agreement. At June 30, 2023, accounts payable for crude oil and condensate was $0.
Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, if producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Customers
Significant Customers. We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
| | | | | | | | | | | Portion of | |
| | | | | | | | | | | Accounts | |
| | | Number | | | % Total | | | Receivable at | |
| | | Significant | | | Revenue from | | | June 30, | |
Three Months Ended | | Customers | | | Operations | | | (in millions) | |
| | | | | | | | | | | | | |
June 30, 2024 | | | 2 | | | | 68.9 | % | | $ | 5.9 | |
June 30, 2023 | | | 3 | | | | 83.7 | % | | $ | 1.5 | |
| | | | | | | | | | | Portion of | |
| | | | | | | | | | | Accounts | |
| | | Number | | | % Total | | | Receivable at | |
| | | Significant | | | Revenue from | | | June 30, | |
Six Months Ended | | Customers | | | Operations | | | (in millions) | |
| | | | | | | | | | | | | |
June 30, 2024 | | | 3 | | | | 80.5 | % | | $ | 5.9 | |
June 30, 2023 | | | 3 | | | | 72.7 | % | | $ | 1.5 | |
One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification. The jet fuel, which is stored at the Nixon Facility, is lifted by the Affiliate as needed. For the three months ended June 30, 2024 and 2023, the Affiliate accounted for 38.1% and 37.7% of total revenue from operations, respectively. For the six months ended June 30, 2024 and 2023, the Affiliate accounted for 33.9% and 33.3% of total revenue from operations, respectively. Accounts receivable of the Affiliate totaled $5.9 million at June 30, 2024.
Customer Concentration. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or negatively, which impacts our overall exposure to credit risk. Economic changes include uncertainties related to commodity price volatility, recession and inflation, and armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products. Historically, we have had no significant problems collecting our accounts receivable.
Refined Product Sales
We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands, except percent amounts) | | | (in thousands, except percent amounts) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LPG mix | | $ | 55 | | | | 0.1 | % | | $ | 57 | | | | 0.1 | % | | $ | 116 | | | | 0.1 | % | | $ | 112 | | | | 0.1 | % |
Naphtha | | | 14,669 | | | | 21.4 | % | | | 9,174 | | | | 13.6 | % | | | 32,782 | | | | 20.7 | % | | | 29,903 | | | | 16.4 | % |
Jet fuel | | | 26,026 | | | | 38.0 | % | | | 25,419 | | | | 37.8 | % | | | 53,420 | | | | 33.7 | % | | | 60,764 | | | | 33.4 | % |
HOBM | | | 6,366 | | | | 9.3 | % | | | 10,197 | | | | 15.2 | % | | | 26,901 | | | | 17.0 | % | | | 43,685 | | | | 24.0 | % |
AGO | | | 21,432 | | | | 31.3 | % | | | 22,420 | | | | 33.3 | % | | | 45,244 | | | | 28.6 | % | | | 47,443 | | | | 26.1 | % |
| | | $ | 68,548 | | | | 100.0 | % | | $ | 67,267 | | | | 100.0 | % | | $ | 158,463 | | | | 100.0 | % | | $ | 181,907 | | | | 100.0 | % |
An Affiliate, LEH, purchases all our jet fuel. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements.
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Prepaid insurance | | $ | 2,542 | | | $ | 1,168 | |
Other prepaids | | | 477 | | | | 230 | |
Prepaid easement renewal fees | | | 20 | | | | 32 | |
Prepaid crude oil and condensate | | | - | | | | 161 | |
| | | $ | 3,039 | | | $ | 1,591 | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
(7) Inventory
Inventory as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Naphtha | | $ | 13,661 | | | $ | 8,782 | |
HOBM | | | 13,639 | | | | 5,144 | |
Jet fuel | | | 10,290 | | | | 8,570 | |
Crude oil and condensate | | | 1,705 | | | | 1,494 | |
AGO | | | 275 | | | | 392 | |
Chemicals | | | 252 | | | | 160 | |
Propane | | | 31 | | | | 24 | |
LPG mix | | | 10 | | | | 10 | |
| | | $ | 39,863 | | | $ | 24,576 | |
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Refinery and facilities | | $ | 72,776 | | | $ | 72,675 | |
Land | | | 566 | | | | 566 | |
Other property and equipment | | | 913 | | | | 913 | |
| | | | 74,255 | | | | 74,154 | |
| | | | | | | | | |
Less: Accumulated depreciation and amortization | | | (24,251 | ) | | | (22,966 | ) |
| | | | 50,004 | | | | 51,188 | |
| | | | | | | | | |
Construction in progress | | | 3,669 | | | | 3,770 | |
| | | $ | 53,673 | | | $ | 54,958 | |
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Unearned revenue from contracts with customers | | $ | 2,896 | | | $ | 3,243 | |
Insurance | | | 1,687 | | | | 467 | |
Accrued fines and penalties | | | 407 | | | | 522 | |
Other payable | | | 272 | | | | 297 | |
Taxes payable | | | 239 | | | | 142 | |
Customer deposits | | | 163 | | | | 163 | |
Board of director fees payable | | | 63 | | | | 250 | |
| | | $ | 5,727 | | | $ | 5,084 | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
(10) Third-Party Long-Term Debt
Loan Agreements
| | | | | | | | | | | Monthly Principal | | | | | | | |
| | | | | Principal | | | | | and Interest Payment | | | | | | | |
Loan Description | | Parties | | (in millions) | | | Maturity | | (in millions) | | | Interest Rate | | | Loan Purpose |
Veritex Loans | | | | | | | | | | | | | | | | | |
LE Term Loan Due 2034 (1) | | LE | | $ | 25.0 | | | June 2034 | | $0.3 | | | WSJ Prime + 2.75% | | | Refinance loan; capital improvements |
| | | Veritex | | | | | | | | | | | | | | | |
LRM Term Loan Due 2034 (1) | | LRM | | $ | 10.0 | | | December 2034 | | $0.1 | | | WSJ Prime + 2.75% | | | Refinance bridge loan; capital improvements |
| | | Veritex | | | | | | | | | | | | | | | |
Kissick Debt (in forbearance)(2) | | LE | | $ | 11.7 | | | January 2018 | | $0.5 | | | | 6.25 | % | | Working capital |
| | | Kissick Noteholder | | | | | | | | | | | | | | | |
GNCU Loan | | | | | | | | | | | | | | | | | |
NPS Term Loan Due 2031(in default) (3) | | NPS | | $ | 10.0 | | | October 2031 | | $0.1 | | | | 5.75 | % | | Working capital |
| | | GNCU | | | | | | | | | | | | | | | |
SBA EIDLs | | | | | | | | | | | | | | | | | |
Blue Dolphin Term Loan Due 2051 (as modified) (4) | | Blue Dolphin | | $ | 2.0 | | | June 2051 | | $0.01 | | | | 3.75 | % | | Working capital |
| | | SBA | | | | | | | | | | | | | | | |
LE Term Loan Due 2050 (5) | | LE | | $ | 0.15 | | | August 2050 | | $0.0007 | | | | 3.75 | % | | Working capital |
| | | SBA | | | | | | | | | | | | | | | |
NPS Term Loan Due 2050 (5) | | NPS | | $ | 0.15 | | | August 2050 | | $0.0007 | | | | 3.75 | % | | Working capital |
| | | SBA | | | | | | | | | | | | | | | |
Equipment Loan Due 2025 (6) | | LE | | $ | 0.07 | | | October 2025 | | $0.0013 | | | | 4.50 | % | | Equipment Lease Conversion |
| | | Texas First | | | | | | | | | | | | | | | |
(1) | Restricted cash, noncurrent totaled $1.0 million and $0.0 at June 30, 2024 and December 31, 2023, respectively. Restricted cash, noncurrent reflects amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million. Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024. |
(2) | Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million. |
(3) | Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments are due monthly through loan maturity. First payment due in November 2024. |
(4) | Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable. |
(5) | Payments deferred for thirty (30) months; first payment made in February 2023; interest accrued during deferral period; loan not forgivable. |
(6) | In May 2019, LE entered into 12-month equipment rental agreement with an option to purchase the backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility. |
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | $ | 19,333 | | | $ | 19,858 | |
LRM Term Loan Due 2034 | | | 8,067 | | | | 8,260 | |
Kissick Debt (in forbearance) | | | 4,306 | | | | 7,147 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 9,975 | | | | 9,975 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 2,114 | | | | 2,135 | |
LE Term Loan Due 2050 | | | 160 | | | | 162 | |
NPS Term Loan Due 2050 | | | 160 | | | | 162 | |
Equipment Loan Due 2025 | | | 21 | | | | 29 | |
| | | | 44,136 | | | | 47,728 | |
| | | | | | | | | |
Less: Current portion of long-term debt, net | | | (15,260 | ) | | | (39,440 | ) |
Less: Unamortized debt issue costs | | | (1,816 | ) | | | (1,947 | ) |
Less: Accrued interest payable | | | (271 | ) | | | (2,596 | ) |
| | | $ | 26,789 | | | $ | 3,745 | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | $ | 1,674 | | | $ | 1,674 | |
LRM Term Loan Due 2034 | | | 768 | | | | 768 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 730 | | | | 730 | |
| | | | | | | | | |
Less: Accumulated amortization | | | (1,356 | ) | | | (1,225 | ) |
| | | $ | 1,816 | | | $ | 1,947 | |
Amortization expense was $0.05 million for both three-month periods ended June 30, 2024 and 2023. Amortization expense was $0.1 million for both six-month periods ended June 30, 2024 and 2023.
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:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Kissick Debt (in forbearance) | | $ | - | | | $ | 2,169 | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | | 51 | | | | 181 | |
LRM Term Loan Due 2034 | | | 69 | | | | 70 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 17 | | | | 17 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 114 | | | | 135 | |
LE Term Loan Due 2050 | | | 10 | | | | 12 | |
NPS Term Loan Due 2053 | | | 10 | | | | 12 | |
| | | | 271 | | | | 2,596 | |
Less: Accrued interest payable | | | (271 | ) | | | (2,596 | ) |
Long-term Interest Payable, Net of Current Portion | | $ | - | | | $ | - | |
The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 was classified within long-term debt, current portion on our consolidated balance sheets at December 31, 2023 due to being in default; however, the Veritex loans were reclassified to long-term debt, net of current portion at June 30, 2024 as a result of no longer being in default. The NPS Term Loan Due 2031 was classified within long-term debt, current portion on our consolidated balance sheets at June 30, 2024 and December 31, 2023 due to being in default. The Kissick Debt fell within long-term debt, current portion on our consolidated balance sheet at June 30, 2024 compared to long-term debt, net of current portion at December 31, 2023 due to principal payments being due within the next twelve months.
Forbearance Agreements, Waivers, and Defaults
Veritex Forbearance Agreements and Waivers. Under the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex Forbearance Agreement expired on September 30, 2023, and was superseded by the Veritex First Amended Forbearance Agreement. The First Amended Forbearance Agreement expired on December 29, 2023, and was superseded by the Veritex Second Amended Forbearance Agreement. The Veritex Second Amended Forbearance Agreement expired on March 29, 2024. During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants.
On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of June 30, 2024, LE and LRM were in compliance with financial covenants related to their respective Veritex loans.
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million during both the three months ended June 30, 2024 and 2023. LE paid the Kissick Noteholder $3.0 million and $1.5 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to defaults prior to April 2023.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Defaults. As of June 30, 2024 and through the filing date of this report, we were in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure the debt, and/or (iii) third parties will provide future forbearances or default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading price of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. If the debt associated with secured loan agreements is accelerated and we are unable to refinance or restructure the debt or obtain default waivers, we may have to consider other options, including selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, filing bankruptcy, or ceasing operating. See “Notes (1) and (3)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Guarantees and Security
Loan Description | Guarantees | Security |
Veritex Loans | | |
LE Term Loan Due 2034 | • USDA | • First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory) |
| | • Jonathan Carroll(1) | • Assignment of all Nixon facility contracts, permits, and licenses |
| | • Affiliate cross-guarantees | • Absolute assignment of Nixon facility rents and leases, including tank rental income |
| | | • $5.0 million life insurance policy on Jonathan Carroll |
LRM Term Loan Due 2034 | • USDA | • Second priority lien on rights of LE in crude distillation tower and other collateral of LE |
| | • Jonathan Carroll(1) | • First priority lien on real property interests of LRM |
| | • Affiliate cross-guarantees | • First priority lien on all LRM fixtures, furniture, machinery, and equipment |
| | | • First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien |
| | | • Substantially all assets |
Kissick Debt (in forbearance)(2) | - | • Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE |
GNCU Loan | | |
NPS Term Loan Due 2031 (in default) | • USDA | • Deed of trust lien on approximately 56 acres of land and improvements owned by LE |
| | • Jonathan Carroll(1) | • Leasehold deed of trust lien on certain property leased by NPS from LE |
| | • Affiliate cross-guarantees | • Assignment of leases and rents and certain personal property |
SBA EIDLs | | |
Blue Dolphin Term Loan Due 2051 | - | • Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
LE Term Loan Due 2050 | - | • Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
NPS Term Loan Due 2050 | - | • Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
Equipment Loan Due 2025 | - | • First priority security interest in the equipment (backhoe). |
| | (1) | Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. |
| | (2) | Subject to the Kissick Subordination Agreement. |
Representations, Warranties, and Covenants
The First Term Loan Due 2034, Second Term Loan Due 2034, NPS Term Loan Due 2031, BDEC Term Loan Due 2051, LE Term Loan Due 2050, and NPS Term Loan Due 2050 contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for bank facilities of these types. Specifically, the First Term Loan Due 2034 contains quarterly debt service coverage and total combined current assets ratios and annual current and debt to net worth ratios; in addition, LE must maintain quarterly total combined debt and total combined tangible net worth ratios. The First Term Loan Due 2034 also requires that a $1.0 million payment reserve account be maintained. The Second Term Loan Due 2034 contains quarterly total combined current assets, total combined current liabilities, and total combined debt ratios and annual current and debt to net worth ratios. The NPS Term Loan Due 2031 requires annual maintenance of debt service coverage and current ratios. There are no covenants associated with the Kissick Debt, BDEC Term Loan Due 2051, LE Term Loan Due 2050, NPS Term Loan Due 2050, and the Equipment Loan Due 2025.
(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.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
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. From time to time we record an increase in liability or an impairment due to changes in estimates or the timing of decommissioning the assets. During the six months ended June 30, 2024, we settled liabilities totaling $1.5 million related to our pipeline and facilities assets. During the six months ended June 30, 2023, we recorded an increase in liability totaling $1.6 million and settled liabilities totaling $0.8 million related to our pipeline and facilities assets.
Because our pipelines and facilities assets have been inactive for an extended period, BOEM mandated that they be decommissioned. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements. Management worked with a consultant to develop a decommissioning plan, and BDPL was following the plan. However, in July 2024, BDPL requested a BSEE extension to decommission the subject assets until the second quarter of 2025. Separately, management is exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE). BDPL’s request for an extension does not relieve BDPL of its obligations to comply with BSEE’s mandate or of BSEE’s authority to impose civil penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Due to BDPL’s failure to complete decommissioning of the offshore pipeline and platform assets and remedy associated INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity. On January 26, 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner. We recorded a liability for the maximum proposed amount of $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of June 30, 2024. Although BDPL filed an appeal to the civil penalty on March 25, 2024, BDPL filed a motion to withdraw the appeal on April 17, 2024. BDPL paid the civil penalty related to platform inspections on April 19, 2024.
ARO liability as of the dates indicated was as follows:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
| | | | | | | | | |
AROs, at the beginning of the period | | $ | 4,504 | | | $ | 3,710 | |
Changes in estimates of existing obligations | | | - | | | | 1,558 | |
Liabilities settled | | | (1,505 | ) | | | (823 | ) |
Accretion expense | | | - | | | | 59 | |
| | | | | | | | | |
Less: AROs, current portion | | | (2,999 | ) | | | (4,504 | ) |
Long-term AROs, at the end of the period | | $ | - | | | $ | - | |
See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.
(12) Lease Obligations
Lease Obligations
Office Lease. We maintain our corporate headquarters in Houston, Texas. In May 2023, BDSC signed a 12-month extension to its existing operating lease. The extended term commenced on September 1, 2023 and expires on August 31, 2024. Under the amended agreement, the annual rent was reduced from $31.00 per square foot to $30.00 per square foot, resulting in a monthly base rental amount of $0.02 million. Management is currently exploring leasing options.
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 June 30, 2024 and 2023. BDSC received sublease income from LEH totaling $0.02 million for both six-month periods ended June 30, 2024 and 2023. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.
Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both three-month periods ended June 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.6 million and $0.4 million for the six-month periods ended June 30, 2024 and 2023, respectively. Due to its one-year term, the lease is being treated as short term. As a result, the lease was not recorded on our balance sheet. See “Note (3)” to our consolidated financial statements for additional disclosures related to the LE Amended and Restated Master Services Agreement.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
| | | | June 30, | | | December 31, | |
| | Balance Sheet Location | | 2024 | | | 2023 | |
| | | | (in thousands) | |
Assets | | | | | | | | | |
Operating lease ROU assets | Operating lease ROU assets | | $ | 995 | | | $ | 787 | |
Less: Accumulated amortization on operating lease assets | Operating lease ROU assets | | | (955 | ) | | | (629 | ) |
| | | | | | | | | | |
Total lease assets | | | 40 | | | | 158 | |
| | | | | | | | | | |
Liabilities | | | | | | | | | |
Current | | | | | | | | | |
Operating lease | Current portion of lease liabilities | | | 38 | | | | 147 | |
| | | | | | | | | | |
Noncurrent | | | | | | | | | |
Operating lease | Long-term lease liabilities, net of current | | | - | | | | - | |
Total lease liabilities | | $ | 38 | | | $ | 147 | |
Weighted average remaining lease term in years | | | | |
Operating lease | | | 0.17 | |
Weighted average discount rate | | | | |
Operating lease | | | 8.25 | % |
The following table presents information related to lease costs incurred for operating and finance leases:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | |
| | | | | | | | | | | | | | | | | |
Operating lease costs | | $ | 62 | | | $ | 51 | | | $ | 124 | | | $ | 103 | |
Short-term lease expense, related party | | | 300 | | | | 300 | | | | 600 | | | | 400 | |
Total lease cost | | $ | 362 | | | $ | 351 | | | $ | 724 | | | $ | 503 | |
The table below presents supplemental cash flow information related to leases as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Operating cash flows for operating lease | | $ | 55 | | | $ | 59 | | | $ | 109 | | | $ | 116 | |
As of June 30, 2024, maturities of lease liabilities for the periods indicated were as follows:
| | | Operating | |
June 30, | | Lease | |
| | | (in thousands) | |
| | | | | |
2025 | | $ | 38 | |
| | | $ | 38 | |
Future minimum annual lease commitments that are non-cancelable:
| | | Operating | |
June 30, | | Lease | |
| | | (in thousands) | |
2025 | | $ | 38 | |
| | | $ | 38 | |
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
(13) Income Taxes
The Inflation Reduction Act ("IRA") was enacted into law in August 2022. The IRA imposes a 15% alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable corporations” and are therefore exempt from payment of an alternative minimum tax.
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | | | (in thousands) | |
Current | | | | | | | | | | | | | | | | |
Federal | | $ | 188 | | | $ | (5 | ) | | $ | (27 | ) | | $ | (120 | ) |
State | | | 37 | | | | (22 | ) | | | (44 | ) | | | (153 | ) |
Deferred | | | | | | | | | | | | | | | | |
Federal | | | 1,491 | | | | 331 | | | | (54 | ) | | | (3,096 | ) |
Change in valuation allowance | | | - | | | | (331 | ) | | | - | | | | 3,096 | |
| | | | | | | | | | | | | | | | | |
Total provision for income taxes | | $ | 1,716 | | | $ | (27 | ) | | $ | (125 | ) | | $ | (273 | ) |
GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.
Deferred income taxes as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Deferred tax assets: | | | | | | | | |
NOL and capital loss carryforwards | | $ | 5,798 | | | $ | 6,014 | |
Business interest expense | | | 3,063 | | | | 2,534 | |
Start-up costs (crude oil and condensate processing facility) | | | 212 | | | | 254 | |
ARO liability/deferred revenue | | | 629 | | | | 946 | |
Other | | | 81 | | | | 54 | |
Total deferred tax assets | | | 9,783 | | | | 9,802 | |
| | | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Basis differences in property and equipment | | | (8,401 | ) | | | (8,366 | ) |
Total deferred tax liabilities | | | (8,401 | ) | | | (8,366 | ) |
| | | | 1,382 | | | | 1,436 | |
| | | | | | | | | |
Deferred tax assets (liabilities), net | | $ | 1,382 | | | $ | 1,436 | |
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.
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. During the year ended December 31, 2023, the valuation allowance was reduced to zero based upon the expected utilization of the net deferred tax asset as a result of positive evidence that was evaluated, including recent earnings history and expectations for future taxable income.
At June 30, 2024, there were no uncertain tax positions for which a reserve or liability was necessary.
NOL Carryforwards
Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on using 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) increases by more than fifty percent [50% over such stockholders’ lowest percentage ownership during the testing period (generally three years)]. Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of approximately $0.6 million per year. We may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused and are excluded in the NOL carryforward presented below. 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 generated beginning in 2018 may only be used to offset 80% of taxable income and are carried forward indefinitely.
NOL Carryforwards Available for Use. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):
| | | Net Operating Loss Carryforward | | | | | |
| | | Pre- | | | Post- | | | | | |
| | | Ownership | | | Ownership | | | | | |
| | | Change | | | Change | | | Total | |
| | | (in thousands) | |
| | | | | | | | | | | | | |
Balance at December 31, 2022 | | $ | 5,147 | | | $ | 45,624 | | | $ | 50,771 | |
| | | | | | | | | | | | | |
Net operating losses used and expired | | | (638 | ) | | | (21,493 | ) | | | (22,131 | ) |
| | | | | | | | | | | | | |
Balance at December 31, 2023 | | $ | 4,509 | | | $ | 24,131 | | | $ | 28,640 | |
| | | | | | | | | | | | | |
Net operating losses used and expired | | | (638 | ) | | | (390 | ) | | | (1,028 | ) |
| | | | | | | | | | | | | |
Balance at June 30, 2024 | | $ | 3,871 | | | $ | 23,741 | | | $ | 27,612 | |
(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 | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands, | | | (in thousands, | |
| | | except share and per share amounts) | | | except share and per share amounts) | |
| | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (6,350 | ) | | $ | (1,560 | ) | | $ | 274 | | | $ | 15,193 | |
| | | | | | | | | | | | | | | | | |
Earnings (loss) per share | | | | | | | | | | | | | | | | |
Basic and diluted income (loss) per share | | $ | (0.43 | ) | | $ | (0.10 | ) | | $ | 0.02 | | | $ | 1.02 | |
Basic and diluted shares used in computing earnings per share | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | | | | 14,921,968 | |
Diluted EPS for the three and six months ended June 30, 2024 and 2023 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 (loss) available to common stockholders by the weighted average number of shares of common stock outstanding.
Shareholders are entitled to receive such dividends as may be declared by our Board out of funds legally available for such purpose. However, no dividend may be declared or paid unless after-tax profit was made in the preceding fiscal year, we comply with covenants in our secured loan agreements, we are current on all required debt payments, and we have received prior written concurrence from certain lenders.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
(15) Commitments and Contingencies
Third 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 Third Amended and Restated Operating Agreement.
Offshore Pipelines and Platform Requirements
BDPL has pipelines and platform assets subject to BSEE’s idle iron regulations. Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
Platform Inspections. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In March 2023, BSEE issued BDPL an INC for failing to perform the required 2021 and 2022 annual structural surveys for the GA-288C platform and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023. Although BDPL requested a second extension, BSEE denied BDPL’s request. BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023. Because BDPL failed to comply with the INC within the allotted timeframe, BSEE proposed an administrative civil penalty of approximately $0.2 million on October 24, 2023. The proposed administrative civil penalty was finalized on January 26, 2024, for $0.2 million. We recorded a liability for the maximum proposed amount of $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of March 31, 2024. Although BDPL filed an appeal to the civil penalty on March 25, 2024, BDPL filed a motion to withdraw the appeal on April 17, 2024. BDPL paid the civil penalty related to platform inspections on April 19, 2024.
Decommissioning Obligations. Because our pipelines and facilities assets have been inactive for an extended period, BOEM mandated that they be decommissioned. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements. Management worked with a consultant to develop a decommissioning plan, and BDPL submitted its decommissioning plan to the agency in November 2023. Although the decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the impact of COVID-19, a significant portion of the decommissioning project was completed from late December 2023 to mid- February 2024. In July 2024, BDPL requested a BSEE extension to decommission the subject assets until the second quarter of 2025. BDPL’s request for an extension does not relieve BDPL of its obligations to comply with BSEE’s mandate or BSEE’s authority to impose civil penalties. Further, there can be no assurance that BDPL can complete anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of June 30, 2024 and December 31, 2023. Due to BDPL’s failure to comply with BSEE requirements, BDPL could still be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity. At June 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 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. Failing to obtain and comply with these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
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, sometimes unspecified, damages or penalties may be sought from us in some matters, which 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.
Resolved Matters.
Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the 60-day notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day. On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code ("TBCC") of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential dispute compromise pursuant to the Pilot Forbearance and Accommodation Agreement, with a forbearance period terminating on February 28, 2023. As part of the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023.
On March 31, 2023, NPS and Pilot executed the Pilot Forbearance Amendment, extending the forbearance period and all deadlines in the unresolved Texas Action to June 15, 2023. As part of the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all 185,000 bbls of stored jet fuel in April 2023. On June 16, 2023, following the expiration of the Pilot Forbearance and Accommodation Agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to August 31, 2023. On August 28, 2023, the parties filed a joint motion to stay the case in anticipation of planned mediation in December 2023 to settle all outstanding disputes.
A confidential Settlement Agreement by and among LEH, NPS, LE, LRM, Lazarus San Antonio Refinery, LLC, and Blue Dolphin (together the "Lazarus Entities"), on the one hand, and Pilot, Starlight Relatively Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal LP (together, the "Pilot Entities"), on the other hand, was executed on December 29, 2023. Among other matters addressed, NPS's contract-related dispute related to set-off payments and LRM’s contracted-related dispute involving a revenue-sharing arrangement for storing and selling crude oil with Pilot and Tartan, respectively, were fully resolved, and the parties agreed to mutually release all claims against each other. Further, Pilot and NPS agreed to take such actions as necessary to dismiss the Texas Action. For the avoidance of doubt, all contractual agreements between the Lazarus Entities and Pilot Entities were terminated.
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 paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations before December 31, 2022. We remediated the remaining violations on a progressive schedule by April 2023.
Unresolved Matters.
BOEM Supplemental Pipeline Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.
Blue Dolphin Energy Company
| Notes to Consolidated Financial Statements (Continued) |
Historically, BDPL maintained $0.9 million in pipeline bonds with BOEM to decommission its trunk pipeline offshore in federal waters. In March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way, an increase of approximately $3.9 million. 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 decommissioning its offshore pipelines and platform would likely help in future discussions with BOEM related to the INCs. Fulfilling abandonment obligations related to the subject assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose civil penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We cannot predict the outcome of the supplemental pipeline bond INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of June 30, 2024 and December 31, 2023. At both June 30, 2024 and December 31, 2023, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI. However, as noted below, RLI desires to reduce its risk profile related to BDPL's bonds. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
RLI Surety Bonds. Blue Dolphin currently has several surety bonds through RLI as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In June, July, and December 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling approximately $1.0 million or provide bond exonerations and replacement bonds. Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management was hopeful Blue Dolphin and RLI could reach an understanding whereby the existing bonds could be maintained until BDPL completed decommissioning of the subject assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all BOEM supplemental pipeline bonds, reducing the amount of surety bonds held by RLI from $1.25 million to $0.3 million. On February 19, 2024, RLI filed suit against Blue Dolphin, BDPL, and BDEX seeking an injunction for the payment of approximately $1.0 million of additional collateral for the bonds. BDPL filed its answer to RLI's lawsuit on April 23, 2024 denying RLI's claims. On July 22, 2024, BDPL presented a settlement proposal to RLI to fully resolve the matter. On July 26, 2024, RLI informed the court that the parties reached a settlement in principle. The parties are currently working to finalize the settlement documents and proposed consent judgment.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believed the penalty matter was resolved in principle, TCEQ referred the matter to the State Office of Administrative Hearings. A preliminary hearing will be held on August 8, 2024. Management plans to participate in the hearing. At June 30, 2024, we accrued $0.4 million on our balance sheet within accrued expenses and other current liabilities related to this matter.
BSEE Civil Penalties. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In March 2023, BSEE issued BDPL an INC for failing to perform the required 2021 and 2022 annual structural surveys for the GA- 288C platform and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023. Although BDPL requested a second extension, BSEE denied BDPL’s request. BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023. Because BDPL failed to comply with the INC within the allotted timeframe, BSEE proposed an administrative civil penalty of approximately $0.2 million on October 24, 2023. The proposed administrative civil penalty was finalized on January 26, 2024, for $0.2 million. We recorded a liability for the maximum proposed amount of $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of June 30, 2024. Although BDPL filed an appeal to the civil penalty on March 25, 2024, BDPL filed a motion to withdraw the appeal on April 17, 2024. BDPL paid the civil penalty related to platform inspections on April 19, 2024.
On April 26, 2024, BDPL received a civil penalty advisory letter from BSEE of the same date related to INCs issued by the agency in September 2023. The letter indicates that the agency is reviewing the INCS, which relate to BDPL's offshore assets in federal waters. BSEE will provide BDPL information related to its review within 90 days from the date of its letter. As of the filing date of this report, BDPL had not received any further communication related to this matter.
Defaults under Secured Loan Agreements. We are currently in default under certain secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” for additional disclosures related to third-party and related-party debt, default 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.
Blue Dolphin Energy Company
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is management’s perspective of our current financial condition and results of operations, as well as significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Overview and Outlook
Company Overview
Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.
Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements– Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.
Business Operations Update
During the second quarter of 2024, refining margins were less favorable compared to the second quarter of 2023. Less favorable refining margins on lower refinery throughput, production, and sales volumes contributed to Blue Dolphin reporting a net loss of $6.4 million, or a loss of $0.43 per share, for the three months ended June 30, 2024 (“Q2 2024”) compared to the same period a year earlier. We reported a net loss of $1.6 million, or a loss of $0.10 per share, for the three months ended June 30, 2023 (“Q22023”). During the first half of 2024, refining margins were also less favorable compared to the first half of 2023. Less favorable refining margins on lower refinery throughput, production, and sales volumes contributed to Blue Dolphin reporting net income of $0.3 million, or $0.02 per share, for the six months ended June 30, 2024 (“Half 2024”) compared to the same period a year earlier. We reported net income of $15.2 million, or $1.02 per share, for the six months ended June 30, 2023 (“Half 2023”).
Our full operating results for the three and six months ended June 30, 2024 and June 30, 2023 including operating results by segment, can be found within ‘—Results of Operations.’
We used cash flow from operations of $10.1 million for Q2 2024. The use of cash flow from operations was primarily due to a build in inventory in preparation for a May 2024 turnaround. At June 30, 2024, we had approximately $0.1 million in cash and cash equivalents. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within ‘—Liquidity and Capital Resources.’
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
General Trends and Outlook
Uncertainties remain surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and the extent to which these factors may impact working capital, commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs 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 secured loan agreements that are in default, our business, financial condition, and results of operations will be materially adversely affected.
Liquidity and Access to Capital Markets
We continue to actively explore additional funding to refinance and restructure debt and further improve working capital. During 2023, we entered into the Veritex First Amended Forbearance Agreement and Veritex Second Amended Forbearance Agreement, both of which have expired, the Kissick Forbearance Agreement, and the LEH Payment Agreement. There can be no assurance that we will be able to raise additional capital on acceptable terms, if at all, or refinance existing debt. If we are unable to refinance or restructure debt, certain of which is currently in default, or forbear or waive defaults and lenders exercise their rights with respect to the debt, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to manage business disruptions, such as those experienced during the height of the COVID-19 pandemic, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
Changes in Regulations
Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other greenhouse gas emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.
Business Strategy and Accomplishments
Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:
| | | |
Optimize Existing Asset Base | | ● Maintain safe operations and enhance health, safety, and environmental systems. |
| | | ● Plan and manage turnarounds and downtime. |
| | | |
| | | |
Improve Operational Efficiencies | | ● Reduce or streamline variable costs incurred in production. |
| | | ● Increase throughput capacity and optimize product slate. |
| | | ● Increase tolling and terminaling revenue. |
| | | |
| | | |
Seize Market Opportunities | | ● Leverage existing infrastructure to engage in renewable energy projects. |
| | | ● Take advantage of market opportunities as they arise. |
| | | |
Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful. If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, filing bankruptcy, or ceasing operating. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
Optimize Existing Asset Base
In May 2024, management successfully completed a 13-day planned maintenance turnaround at the Nixon facility. During the second quarter of 2024, work also continued to protect Nixon facility equipment and personnel from severe cold weather and extreme heat, including implementation of freeze protection measures and chiller system upgrades.
Improve Operational Efficiencies
During Q2 2024, management continued work to upgrade the Nixon facility's terminal management software. Once complete, key elements of the plant's terminal loading functions will be automated, improving order management, bills of lading delivery, and reporting. An additional Lease Automatic Custody Transfer (LACT) unit was also installed at the plant, which will increase plant reliability and crude charge capacity.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Seize Market Opportunities
In 2021, we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on renewable energy growth. Rising demand for renewable energy is attributable to various factors, including growing public support, U.S. governmental actions to increase energy independence, and environmental concerns related to climate change. Throughout 2023, management had meaningful discussions with potential commercial partners and these efforts continue in 2024. Reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects.
Downstream Operations
Our refinery operations segment consists of the following assets and operations:
Property | Key Products Handled | Operating Subsidiary | Location |
| | | | | |
Nixon facility | Crude Oil | LE | Nixon, Texas |
| ● | Crude distillation tower (15,000 bpd) | Refined Products | | |
| ● | Petroleum storage tanks (operations support) | | | |
| ● | Loading and unloading facilities | | | |
| ● | Land (56 acres) | | | |
Crude Oil and Condensate Supply
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. On December 29, 2023, we entered a new crude supply agreement with MVP, effective January 1, 2024. This agreement provides a firm source of light-sweet Eagle Ford crude oil to the Nixon facility under improved credit terms, and management believes that MVP can provide us with adequate amounts of crude oil and condensate for the foreseeable future. Related to the crude supply agreement, MVP stores crude oil at the Nixon facility under a terminal services agreement. At June 30, 2024, accounts payable for crude oil and condensate was $5.1 million.
During 2023, we operated under a crude supply agreement with Tartan. Tartan also stored crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the crude supply agreement and terminal services agreement. The effective date of the termination was December 31, 2023. During Q2 2023, the vast majority of our crude was sourced from Tartan under the crude supply agreement. At June 30, 2023, accounts payable for crude oil and condensate was $0.
Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, if producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
Products and Markets
Our market is the Gulf Coast region of the U.S., which is represented by the EIA as PADD 3. We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. An Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to the Affiliate's HUBZone certification. The product sales agreement with the Affiliate has a one-year term with automatic renewals. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.
Customers. Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.
Competition. Most of our competitors are larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Our storage tanks are equipped with leak detection devices. We also have response and control plans in place for spill prevention and emergencies.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.
Midstream Operations
Our tolling and terminaling segment consists of the following assets and operations:
Property | Key Products Handled | Operating Subsidiary | Location |
| | | | | |
Nixon facility | Crude Oil | LRM, NPS | Nixon, Texas |
| ● | Petroleum storage tanks and terminal services | Refined Products | | |
| ● | Loading and unloading facilities | | | |
Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Our storage customers are typically from the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). Shipments are received and redelivered from the Nixon facility via third party trucks. Contract terms range from month-to-month to three years.
Operations Safety. Our midstream operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in ‘corporate and other.’ Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and six months ended June 30, 2024 and 2023. See “Part I, Item 1. Financial Statements – Note (15)” related to pipelines and platform decommissioning requirements and related risks.
Property | | Operating Subsidiary | | Location |
| | | | | | |
Freeport facility | | BDPL | | Freeport, Texas |
| ● | Crude oil and natural gas separation and dehydration | | | | |
| ● | Natural gas processing, treating, and redelivery | | | | |
| ● | Vapor recovery unit | | | | |
| ● | Two onshore pipelines | | | | |
| ● | Land (162 acres) | | | | |
| | | | | | |
Offshore Pipelines (Trunk Line and Lateral Lines) | | BDPL | | Gulf of Mexico |
Oil and Gas Leasehold Interests | | BDPC | | Gulf of Mexico |
Pipeline and Facilities Safety. Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.
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Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be read in conjunction with our financial statements in “Part I, Item 1. Financial Statements.” The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher-value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally result in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
The general outlook for the oil and natural gas industry for the remainder of 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East. We can provide no assurances that refining margins and demand will remain at current levels.
How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: refinery operations gross profit (deficit), refining gross profit (deficit) per bbl, tolling and terminaling gross profit (deficit), intercompany processing fees, refinery throughput, production and sales data, and refinery downtime.
Refining Gross Profit (Deficit) per Bbl. We use refining gross profit (deficit) per bbl as a downstream benchmark. This non-GAAP measure supplements presented GAAP financial information. Management uses refining gross profit (deficit) per bbl to analyze our core refining results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts on our financial performance considering potential capital investments. As this non-GAAP measure has important limitations as an analytical tool, it should not be considered a substitute for GAAP financial measures. We believe this measure may help investors, analysts, lenders, and rating agencies analyze our results of operations and liquidity in conjunction with presented GAAP financial results.
Storage Tank Rental Revenue and Ancillary Services Fees. Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees (such as for in-tank blending) associated with customer tank rental agreements. As a result, combined tank rental revenue and ancillary services fees are one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.
Operating Costs and Expenses. We manage operating costs and expenses in tandem with meeting environmental, safety, and regulatory requirements while maintaining the mechanical integrity of our assets. Operating costs and expenses are comprised primarily of labor, repair, other maintenance, and utility costs. Refinery operating expenses generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed and the timing of those expenses within the reporting period. Tolling and terminaling operating costs and expenses are relatively fixed.
Intercompany processing fees. We have an intercompany tolling agreement in place between LE and LRM related to naphtha throughput volumes moving through the naphtha stabilizer unit at the Nixon facility. Although intercompany transactions are eliminated during consolidation, evaluation of intercompany processing fees provides investors with helpful information related to our tolling and terminaling business segment.
Refinery Throughput, Production, and Sales Data. The revenue generated from the refinery operations business segment primarily depends on the crude oil volumes processed into refined products and the refined products volumes sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the direct and indirect markets served by our assets, as well as refinery downtime.
Refinery Downtime. The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime results in lost margin opportunity, potential increased maintenance expense, and reduced refined products inventory, which could adversely impact our ability to meet our payment obligations.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Consolidated Results
Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Q2 2024 Versus Q2 2023
Overview. Net loss for Q2 2024 totaled $6.4 million, or a loss of $0.43 per share, compared to a net loss of $1.6 million, or a loss of $0.10 per share, in Q2 2023. The $4.8 million, or $0.33 per share, decrease in net income between the periods resulted from less favorable refining margins on lower refinery throughput, production, and sales volumes. The Nixon refinery was down for 13 days in Q2 2024 as a result of a pre-planned maintenance turnaround completed in May 2024.
Total Revenue from Operations. Total revenue from operations was $69.7 million for Q2 2024 compared to $68.9 million for Q2 2023, representing an increase of 1.1%. The slight increase in total revenue from operations related to a slight increase in refinery operations revenue. Compared to Q2 2023, refinery operations revenue increased 1.9% in Q2 2024 on 0.7% lower sales volume. Tolling and terminaling revenue declined 31.0% as tank rental fees associated with temporary terminal service fees from Pilot in Q2 2023 did not recur in Q2 2024.
Total Cost of Goods Sold. Total cost of goods sold was $73.7 million for Q2 2024 compared to $67.0 million for Q2 2023, representing an increase of 10.0%. Although refinery operations revenue increased, crude acquisition costs in Q2 2024 were higher than in Q2 2023.
Total Gross Profit (Deficit). Total gross deficit totaled $4.1 million for Q2 2024 compared to a gross profit of $1.9 million for Q2 2023. The significant decrease in gross profit between the periods was the result of less favorable refining margins and lower refinery production and sales volume in Q2 2024.
Total General and Administrative Expenses. General and administrative expenses totaled $1.5 million in Q2 2024 compared to $0.9 million in Q2 2023, representing an increase of 61.5%. The increase was primarily related to liabilities settled associated with decommissioning our pipeline assets.
Total Depreciation and Amortization. Depreciation and amortization expenses was flat at $0.7 million for both Q2 2024 and Q2 2023.
Total Other Income (Expense). Total other expense in Q2 2024 totaled $1.4 million compared to total other expense of $1.6 million in Q2 2023, representing a decrease of 11.1%. The decrease was due to lower related party interest expenses in Q2 2024 compared to Q2 2023. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.
| | | Three Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | Refinery Operations | | | Tolling and Terminaling | | | Corporate and Other | | | Total | |
| | | (in thousands) | |
Revenue | | $ | 68,548 | | | $ | 67,267 | | | $ | 1,111 | | | $ | 1,611 | | | $ | - | | | $ | - | | | $ | 69,659 | | | $ | 68,878 | |
Intercompany processing fees | | | (573 | ) | | | (595 | ) | | | 573 | | | | 595 | | | | - | | | | - | | | | - | | | | - | |
Cost of goods sold | | | (73,305 | ) | | | (66,532 | ) | | | (410 | ) | | | (456 | ) | | | - | | | | - | | | | (73,715 | ) | | | (66,988 | ) |
Gross profit (deficit) | | | (5,330 | ) | | | 140 | | | | 1,274 | | | | 1,750 | | | | - | | | | - | | | | (4,056 | ) | | | 1,890 | |
Other operating and general and administrative expenses (1) | | | (645 | ) | | | (410 | ) | | | (69 | ) | | | (156 | ) | | | (1,151 | ) | | | (541 | ) | | | (1,865 | ) | | | (1,107 | ) |
Depreciation and amortization | | | (301 | ) | | | (304 | ) | | | (342 | ) | | | (342 | ) | | | (62 | ) | | | (51 | ) | | | (705 | ) | | | (697 | ) |
Interest and other non-operating expenses, net | | | (806 | ) | | | (932 | ) | | | (497 | ) | | | (490 | ) | | | (137 | ) | | | (197 | ) | | | (1,440 | ) | | | (1,619 | ) |
Income (loss) before income taxes | | | (7,082 | ) | | | (1,506 | ) | | | 366 | | | | 762 | | | | (1,350 | ) | | | (789 | ) | | | (8,066 | ) | | | (1,533 | ) |
Income tax benefit (expense) | | | - | | | | - | | | | - | | | | - | | | | 1,716 | | | | (27 | ) | | | 1,716 | | | | (27 | ) |
Net income (loss) | | $ | (7,082 | ) | | $ | (1,506 | ) | | $ | 366 | | | $ | 762 | | | $ | 366 | | | $ | (816 | ) | | $ | (6,350 | ) | | $ | (1,560 | ) |
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Half 2024 Versus Half 2023
Overview. Net income for Half 2024 totaled $0.3 million, or $0.02 per share, compared to net income of $15.2 million, or $1.02 per share, for Half 2023. The $14.9 million, or $1.00 per share, decrease in net income between the periods resulted from less favorable refining margins on lower refinery throughput, production, and sales volumes. We cannot assure investors that refining margins will remain positive and demand will increase. The Nixon refinery was down for 18 days in Half 2024 related to a pre-planned maintenance turnaround completed in May 2024 (13 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024).
Total Revenue from Operations. Total revenue from operations was $160.7 million for Half 2024 compared to $185.5 million for Half 2023, representing a decrease of 13.4%. The decrease related to declines in both refinery operations and tolling and terminaling revenue.
Total Cost of Goods Sold. Total cost of goods sold was $152.9 million for Half 2024 compared to $163.1 million for Half 2023, representing a decrease of 6.3%. The decrease was related to lower sales volume.
Total Gross Profit. Gross profit totaled $7.8 million for Half 2024 compared to gross profit of $22.4 million for Half 2023. The 65.3% decrease in gross profit between the periods was the result of less favorable refining margins and lower refinery production and sales volume in Half 2024.
Total General and Administrative Expenses. General and administrative expenses totaled $2.5 million in Half 2024 compared to $2.1 million in Half 2023, representing an increase of 15.9%. The increase was primarily related to an increase in professional service fees, including legal expenses, and insurance premiums, and liabilities settled associated with decommissioning our pipeline assets.
Total Depreciation and Amortization. Depreciation and amortization expenses was flat at $1.4 million for both Half 2024 and Half 2023.
Total Other Income (Expense). Total other expense in Half 2024 totaled $2.8 million compared to $2.9 million in Half 2023, representing a decrease of 4.8%. The decrease was due to lower related party interest expenses in Half 2024 compared to Half 2023. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.
| | | Six Months Ended June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | Refinery Operations | | | Tolling and Terminaling | | | Corporate and Other | | | Total | |
| | | (in thousands) | |
Revenue | | $ | 158,463 | | | $ | 181,907 | | | $ | 2,218 | | | $ | 3,632 | | | $ | - | | | $ | - | | | $ | 160,681 | | | $ | 185,539 | |
Intercompany processing fees | | | (1,076 | ) | | | (1,171 | ) | | | 1,076 | | | | 1,171 | | | | - | | | | - | | | | - | | | | - | |
Cost of goods sold | | | (152,087 | ) | | | (162,332 | ) | | | (820 | ) | | | (813 | ) | | | - | | | | - | | | | (152,907 | ) | | | (163,145 | ) |
Gross profit | | | 5,300 | | | | 18,404 | | | | 2,474 | | | | 3,990 | | | | - | | | | - | | | | 7,774 | | | | 22,394 | |
Other operating and general and administrative expenses (1) | | | (1,054 | ) | | | (979 | ) | | | (92 | ) | | | (626 | ) | | | (2,014 | ) | | | (979 | ) | | | (3,160 | ) | | | (2,584 | ) |
Depreciation and amortization | | | (602 | ) | | | (608 | ) | | | (684 | ) | | | (684 | ) | | | (123 | ) | | | (103 | ) | | | (1,409 | ) | | | (1,395 | ) |
Interest and other non-operating expenses, net | | | (1,540 | ) | | | | (1,609) | | | (993 | ) | | | (960 | ) | | | (273 | ) | | | (380 | ) | | | (2,806 | ) | | | (2,949 | ) |
Income (loss) before income taxes | | | 2,104 | | | | 15,208 | | | | 705 | | | | 1,720 | | | | (2,410 | ) | | | (1,462 | ) | | | 399 | | | | 15,466 | |
Income tax expense | | | - | | | | - | | | | - | | | | - | | | | (125 | ) | | | (273 | ) | | | (125 | ) | | | (273 | ) |
Net income (loss) | | $ | 2,104 | | | $ | 15,208 | | | $ | 705 | | | $ | 1,720 | | | $ | (2,535 | ) | | $ | (1,735 | ) | | $ | 274 | | | $ | 15,193 | |
| | (1) | General and administrative expenses within refinery operations include the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations. |
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Downstream Operations
Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | |
Refinery operations revenue | | $ | 68,548 | | | $ | 67,267 | | | $ | 158,463 | | | $ | 181,907 | |
Less: intercompany processing fees (1) | | | (573 | ) | | | (595 | ) | | | (1,076 | ) | | | (1,171 | ) |
Less: cost of goods sold | | | (73,305 | ) | | | (66,532 | ) | | | (152,087 | ) | | | (162,332 | ) |
Refinery operations gross profit (deficit) | | $ | (5,330 | ) | | $ | 140 | | | $ | 5,300 | | | $ | 18,404 | |
| | | | | | | | | | | | | | | | | |
Sales (bbls) | | | 770 | | | | 775 | | | | 1,719 | | | | 1,923 | |
| | | | | | | | | | | | | | | | | |
Refining gross profit (deficit) per bbl | | $ | (6.92 | ) | | $ | 0.18 | | | $ | 3.08 | | | $ | 9.57 | |
(1) | Fees associated with an intercompany tolling agreement related to naphtha volumes. |
Q2 2024 Versus Q2 2023
Refinery Downtime. Refinery downtime increased from 4 days in Q2 2023 to 13 days in Q2 2024. Refinery downtime in Q2 2024 related to a pre-planned maintenance turnaround completed in May 2024. Refinery downtime in Q2 2023 related to maintenance and repairs.
Refinery Operations Gross Profit (Deficit). We had a refining gross deficit of $5.3 million in Q2 2024 compared to refining gross profit of $0.1 million in Q2 2023, representing a decrease of $5.5 million. The decrease in Q2 2024 was related to less favorable refining margins and lower refinery production and sales volume. We incurred an inventory impairment expense of $5.5 million in Q2 2024 based on high volumes of naphtha inventory.
Refining Gross Profit (Deficit) per Bbl. On a per bbl basis, refining gross deficit was $6.92 for Q2 2024 compared to gross profit of $0.18 for Q2 2023, representing a decrease of $7.10 per bbl. The decrease related to less favorable refining margins and and lower refinery production and sales volume in Q2 2024 compared to the same period a year earlier.
Half 2024 Versus Half 2023
Refinery Downtime. Refinery downtime increased from 7 days in Half 2023 to 18 days in Half 2024. Refinery downtime in Half 2024 related to a pre-planned maintenance turnaround completed in May 2024 (13 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024). All refinery downtime in Half 2023 related to maintenance and repairs.
Refinery Operations Gross Profit. Refining gross profit totaled $5.3 million in Half 2024 compared to refining gross profit of $18.4 million in Half 2023, representing a decrease of $13.1 million. The significant decrease in Half 2024 was related to less favorable refining margins and lower refinery production and sales volume in Half 2024.
Refining Gross Profit per Bbl. On a per bbl basis, refining gross profit was $3.08 for Half 2024 compared to gross profit of $9.57 for Half 2023, representing a decrease of $6.49 per bbl. The decrease related to less favorable refining margins and lower refinery production and sales volume in Half 2024 compared to the same period a year earlier.
Remainer of Page Intentionally Left Blank
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Midstream Operations
Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer.
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | |
Tolling and terminaling revenue | | $ | 1,111 | | | $ | 1,611 | | | $ | 2,218 | | | $ | 3,632 | |
Intercompany processing fees (1) | | | 573 | | | | 595 | | | | 1,076 | | | | 1,171 | |
Less: cost of goods sold | | | (410 | ) | | | (456 | ) | | | (820 | ) | | | (813 | ) |
Tolling and terminaling gross profit | | $ | 1,274 | | | $ | 1,750 | | | $ | 2,474 | | | $ | 3,990 | |
(1) | Fees associated with an intercompany tolling agreement related to naphtha volumes. |
Q2 2024 Versus Q2 2023
Tolling and Terminaling Revenue. Tolling and terminaling revenue, which consists of storage tank rental and ancillary services fees, totaled $1.1 million in Q2 2024 compared to $1.6 million in Q2 2023, representing a decrease of $0.5 million. The decrease in Q2 2024 related to lower tank rental fees. Tank rental fees in Q2 2023 included temporary terminal service fees associated with Pilot.
Tolling and Terminaling Gross Profit. Tolling and terminaling gross profit was $1.3 million in Q2 2024 compared to $1.8 million in Q2 2023. The $0.5 million decrease was related to lower tank rental fees.
Half 2024 Versus Half 2023
Tolling and Terminaling Revenue. Tolling and terminaling revenue, which consists of storage tank rental and ancillary services fees, totaled $2.2 million in Half 2024 compared to $3.6 million in Half 2023, representing a decrease of $1.4 million. The decrease in Half 2024 related to lower tank rental fees. Tank rental fees in Half 2023 included temporary terminal service fees associated with Pilot.
Tolling and Terminaling Gross Profit. Tolling and terminaling gross profit was $2.5 million in Half 2024 compared to $4.0 million in Half 2023. The $1.5 million decrease was related to lower tank rental fees.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Capital Resources and Liquidity
Working Capital Improvements. Certain conditions and events exist, in the aggregate, that caused management to evaluate Blue Dolphin's ability to continue as a going concern. Those conditions and events include historical working capital deficits and significant current debt in default. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements). To bolster working capital reserves, management continues efforts to restructure debt obligations and reduce cash requirements. Management acknowledges that uncertainty remains related to future operating margins; however, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt. As a result, our consolidated balance sheets as of June 30, 2024 and December 31, 2023, the related consolidated statement of operations, stockholders’ equity, and cash flows for the three and six months ended June 30, 2024 have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
We had positive working capital of $17.6 million at June 30, 2024 compared to a working capital deficit of $6.1 million at December 31, 2023, representing a $23.8 million improvement. Our significant current debt is primarily the result of bank debt to GNCU being in default. The current portion of long-term debt on our consolidated balance sheets totaled $15.3 million and $39.4 million at June 30, 2024 and December 31, 2023, respectively. The $24.2 million decrease in current debt between the periods primarily related to the Veritex loans being reclassified to long-term debt, net of current portion at June 30, 2024 as a result of no longer being in default. We continue to actively explore additional funding to refinance and restructure debt and further improve working capital.
Our current assets totaled $49.6 million at June 30, 2024 compared to $49.3 million at December 31, 2023 , representing a $0.3 million increase. Our current liabilities totaled $32.0 million at June 30, 2024 compared to $55.4 million at December 31, 2023 , representing a $23.4 million decrease.
Liquidity. Cash and cash equivalents totaled $0.1 million and $18.7 million at June 30, 2024 and December 31, 2023, respectively, representing a decrease of $18.6 million. Restricted cash, noncurrent totaled $1.0 million and $0.0 at June 30, 2024 and December 31, 2023, respectively, and related to a Veritex payment reserve account. Accounts receivable—related party, which was associated with the sale of jet fuel to LEH, totaled $5.9 million and $4.2 million at June 30, 2024 and December 31, 2023, respectively.
We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Third Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.
During 2023, we entered into the Veritex First Amended Forbearance Agreement and Veritex Second Amended Forbearance Agreement, both of which have expired, the Kissick Forbearance Agreement, and the LEH Payment Agreement. We continue to actively explore additional funding to refinance and restructure debt and further improve working capital. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.
Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence. In the long term, we may not be able to manage business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
Sources and Use of Cash
Components of Cash Flow.
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2024 | | | 2023 | | | 2024 | | | 2023 | |
| | | (in thousands) | |
Cash Flows Provided By (Used In): | | | | | | | | | | | | | | | | |
Operating activities | | $ | (10,133 | ) | | $ | (11,685 | ) | | $ | (16,383 | ) | | $ | 2,098 | |
Investing activities | | | - | | | | (102 | ) | | | - | | | | (102 | ) |
Financing activities | | | (892 | ) | | | (184 | ) | | | (1,237 | ) | | | (1,955 | ) |
Increase in Cash and Cash Equivalents | | $ | (11,025 | ) | | $ | (11,971 | ) | | $ | (17,620 | ) | | $ | 41 | |
Cash Flow from Operations. We used $10.1 million in cash flow from operations during Q2 2024 compared to $11.7 million in cash flow from operations during Q22023. The $1.6 million increase in cash flow used from operations between the periods was primarily due to a lower build-up in inventory in Q2 2024.
We used $16.4 million in cash flow from operations during Half 2024 compared to generating $2.1 million in cash flow from operations during Half 2023. The $18.5 million increase in cash flow used from operations was primarily due to earning $15.0 million less in net income between the periods.
Capital Expenditures. Capital expenditures totaled $0 for Q2 2024 and Half 2024. Capital expenditures totaled $0.1 million for both Q22023 and Half 2023. Due to continued uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, we anticipate continuing to limit capital expenditures throughout 2024. However, to the extent we can capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.
Financing Activities. During Half 2024, Blue Dolphin made payments debt principal totaling $1.2 million. During Half 2023, Blue Dolphin made payments on debt principal totaling $0.7 million and paid off amounts owed to LEH totaling $1.2 million related to a June 2017 promissory note, as amended, for Blue Dolphin working capital.
Debt and Lease Obligations
Debt Agreements.
Related-Party Agreements Summary. BDPL was a party to the BDPL-LEH Loan Agreement with LEH at June 30, 2024 and December 31, 2023. Summaries of the debt agreements follow:
Loan Description | | Parties | | Maturity Date | | Interest Rate | | Loan Purpose |
| | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | BDPL | | Aug 2018 | | 8.00% | | Original principal amount of $4.0 million; Blue Dolphin working capital |
| | | LEH | | | | | | |
Third-Party Agreements Summary. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with third parties:
| | | | | | | | Monthly Principal | | | | | |
| | | | Principal | | Origination / | and Interest Payment | | | | | |
Loan Description | Parties | | (in millions) | | Maturity | (in millions) | | Interest Rate | | Loan Purpose |
Veritex Loans | | | | | | | | | | | | |
LE Term Loan Due 2034 (1) | LE | | $ | 25.0 | | June 2034 | $0.3 | | WSJ Prime + 2.75% | | Refinance loan; capital improvements |
| | Veritex | | | | | | | | | | | |
LRM Term Loan Due 2034 (1) | LRM | | $ | 10.0 | | December 2034 | $0.1 | | WSJ Prime + 2.75% | | Refinance bridge loan; capital improvements |
| | Veritex | | | | | | | | | | | |
Kissick Debt (in forbearance) (2) | LE | | $ | 11.7 | | January 2018 | $0.5 | | | 6.25 | % | Working capital |
| | Kissick | | | | | | | | | | | |
GNCU Loan | | | | | | | | | | | | |
NPS Term Loan Due 2031 (in default) (3) | NPS | | $ | 10.0 | | October 2031 | $0.1 | | | 5.75 | % | Working capital |
| | GNCU | | | | | | | | | | | |
SBA EIDLs | | | | | | | | | | | | |
Blue Dolphin Term Loan Due 2051 (as modified) (4) | Blue Dolphin | | $ | 2.0 | | June 2051 | $0.07 | | | 3.75 | % | Working capital |
| | SBA | | | | | | | | | | | |
LE Term Loan Due 2050 (5) | LE | | $ | 0.15 | | August 2050 | $0.0007 | | | 3.75 | % | Working capital |
| | SBA | | | | | | $0.0007 | | | | |
NPS Term Loan Due 2050 (5) | NPS | | $ | 0.15 | | August 2050 | $0.0007 | | | 3.75 | % | Working capital |
| | SBA | | | | | | | | | | | |
Equipment Loan Due 2025 (6) | LE | | $ | 0.07 | | October 2025 | $0.0013 | | | 4.50 | % | Equipment Lease Conversion |
| | Texas First | | | | | | | | | | | |
| | (1) | At both June 30, 2024 and December 31, 2023, restricted cash, noncurrent, represented amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million. Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024. |
| | (2) | Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million. |
| | (3) | Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First payment due in November 2024. |
| | (4) | Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable. |
| | (5) | Payments deferred for thirty (30) months; first payment made February 2023; interest accrued during deferral period; loan not forgivable. |
| | (6) | In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility. |
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Guarantees and Security.
Loan Description | Guarantees | Security |
Veritex Loans | | | | |
LE Term Loan Due 2034 | ● | USDA | ● | First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory) |
| | ● | Jonathan Carroll(1) | ● | Assignment of all Nixon facility contracts, permits, and licenses |
| | ● | Affiliate cross-guarantees | ● | Absolute assignment of Nixon facility rents and leases, including tank rental income |
| | | | ● | $5.0 million life insurance policy on Jonathan Carroll |
| | | | | |
LRM Term Loan Due 2034 | ● | USDA | ● | Second priority lien on rights of LE in crude distillation tower and other collateral of LE |
| | ● | Jonathan Carroll(1) | ● | First priority lien on real property interests of LRM |
| | ● | Affiliate cross-guarantees | ● | First priority lien on all LRM fixtures, furniture, machinery, and equipment |
| | | | ● | First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien |
| | | | ● | Substantially all assets |
Kissick Debt (in forbearance)(2) | - | | ● | Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE |
| | | | | |
GNCU Loan | | | | |
NPS Term Loan Due 2031 (in default) | ● | USDA | ● | Deed of trust lien on approximately 56 acres of land and improvements owned by LE |
| | ● | Jonathan Carroll(1) | ● | Leasehold deed of trust lien on certain property leased by NPS from LE |
| | ● | Affiliate cross-guarantees | ● | Assignment of leases and rents and certain personal property |
BDPL-LEH Loan Agreement (in forbearance) | ● | - | ● | Certain BDPL property |
SBA EIDLs | | | | |
Blue Dolphin Term Loan Due 2051 | - | | ● | Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
LE Term Loan Due 2050 | - | | ● | Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
NPS Term Loan Due 2050 | - | | ● | Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) |
Equipment Loan Due 2025 | - | | ● | First priority security interest in the equipment (backhoe). |
| | (1) | Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. |
| | (2) | Subject to the Kissick Subordination Agreement. |
Lease Agreements.
Office Lease. We maintain our corporate headquarters in Houston, Texas. In May 2023, BDSC signed a 12-month extension to its existing operating lease. The extended term commences on September 1, 2023 and expires on August 31, 2024. Under the amended agreement, the annual rent was reduced from $31.00 per square foot to $30.00 per square foot, resulting in a monthly base rental amount of $0.02 million. Management is currently exploring leasing options.
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 June 30, 2024 and 2023. BDSC received sublease income from LEH totaling $0.02 million for both six-month periods ended June 30, 2024 and 2023.
Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both three-month periods ended June 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.6 million and $0.4 million for the six-month periods ended June 30, 2024 and 2023, respectively.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Outstanding Principal, Debt Issue Costs, and Accrued Interest. Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
Outstanding Principal and Accrued Interest.
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | $ | 19,333 | | | $ | 19,858 | |
LRM Term Loan Due 2034 | | | 8,067 | | | | 8,260 | |
Kissick Debt (in forbearance) | | | 4,306 | | | | 7,147 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 9,975 | | | | 9,975 | |
LEH | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | | 5,308 | | | | 5,308 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 2,114 | | | | 2,135 | |
LE Term Loan Due 2050 | | | 160 | | | | 162 | |
NPS Term Loan Due 2050 | | | 160 | | | | 162 | |
Equipment Loan Due 2025 | | | 21 | | | | 29 | |
| | | | 49,444 | | | | 53,036 | |
| | | | | | | | | |
Less: Current portion of long-term debt, net | | | (15,260 | ) | | | (39,440 | ) |
Less: Unamortized debt issue costs | | | (1,816 | ) | | | (1,947 | ) |
Less: Accrued interest payable | | | (271 | ) | | | (2,596 | ) |
| | | $ | 32,097 | | | $ | 9,053 | |
The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 was classified within long-term debt, current portion on our consolidated balance sheet at December 31, 2023 due to being in default; however, the Veritex loans were reclassified to long-term debt, net of current portion at June 30, 2024 as a result of no longer being in default. The NPS Term Loan Due 2031 was classified within long-term debt, current portion on our consolidated balance sheets at June 30, 2024 and December 31, 2023 due to being in default. The Kissick Debt fell within long-term debt, current portion on our consolidated balance sheet at June 30, 2024 compared to long-term debt, net of current portion at December 31, 2023 due to principal payments being due within the next twelve months.
Debt Issue Costs. Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | $ | 1,674 | | | $ | 1,674 | |
LRM Term Loan Due 2034 | | | 768 | | | | 768 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 730 | | | | 730 | |
| | | | | | | | | |
Less: Accumulated amortization | | | (1,356 | ) | | | (1,225 | ) |
| | | $ | 1,816 | | | $ | 1,947 | |
Amortization expense was $0.05 million for both three-month periods ended June 30, 2024 and 2023. Amortization expense was $0.1 million for both six-month periods ended June 30, 2024 and 2023.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Accrued Interest. Related-party and third-party accrued interest payable associated with long-term debt in our consolidated balance sheets, as of the dates indicated consisted of the following:
| | | June 30, | | | December 31, | |
| | | 2024 | | | 2023 | |
| | | (in thousands) | |
Kissick Debt (in forbearance) | | $ | - | | | $ | 2,169 | |
LEH | | | | | | | | |
BDPL-LEH Loan Agreement (in forbearance) | | | 1,308 | | | | 1,308 | |
Veritex Loans | | | | | | | | |
LE Term Loan Due 2034 | | | 51 | | | | 181 | |
LRM Term Loan Due 2034 | | | 69 | | | | 70 | |
SBA EIDLs | | | | | | | | |
BDEC Term Loan Due 2051 | | | 114 | | | | 135 | |
LE Term Loan Due 2050 | | | 10 | | | | 12 | |
NPS Term Loan Due 2053 | | | 10 | | | | 12 | |
GNCU Loan | | | | | | | | |
NPS Term Loan Due 2031 (in default) | | | 17 | | | | 17 | |
| | | | 1,579 | | | | 3,904 | |
Less: Accrued interest payable | | | (271 | ) | | | (2,596 | ) |
Long-term Interest Payable, Net of Current Portion | | $ | 1,308 | | | $ | 1,308 | |
Forbearance Agreements, Waivers, and Defaults.
Veritex Forbearance Agreements and Waivers. Under the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex Forbearance Agreement expired on September 30, 2023, and was superseded by the Veritex First Amended Forbearance Agreement. The First Amended Forbearance Agreement expired on December 29, 2023, and was superseded by the Veritex Second Amended Forbearance Agreement. The Veritex Second Amended Forbearance Agreement expired on March 29, 2024. During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants.
On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of June 30, 2024, LE and LRM were in compliance with financial covenants related to their respective Veritex loans.
Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt. Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million during both the three months ended June 30, 2024 and 2023. LE paid the Kissick Noteholder $3.0 million and $1.5 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to defaults prior to April 2023.
LEH Payment Agreement. Pursuant to the LEH Payment Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million for both three months ended June 30, 2024 and 2023. BDPL paid LEH approximately $0.2 million and $0.1 million for the six months ended June 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to defaults prior to May 2023.
Defaults. As of June 30, 2024 and through the filing date of this report, we were in default under the NPS Term Loan Due 2031 due to covenant violations. Defaults may permit lenders to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, NPS, or BDPL will be able to refinance or restructure debt, and/or (iii) third parties will provide future forbearances or default waivers, particularly if the banks with whom we have relationships fail. If one or more banks fail, we could be exposed to additional events of default (if not cured or waived) under existing secured loan agreements. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, the trading price of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. If the debt associated with secured loan agreements is accelerated and we are unable to refinance or restructure the debt or obtain default waivers, we may have to consider other options, including selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, filing bankruptcy, or ceasing operating.
Concentration of Customers Risk
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
| | | | | | | | | | | Portion of | |
| | | | | | | | | | | Accounts | |
| | | Number | | | % Total | | | Receivable at | |
| | | Significant | | | Revenue from | | | June 30, | |
Three Months Ended | | Customers | | | Operations | | | (in millions) | |
| | | | | | | | | | | | | |
June 30, 2024 | | | 2 | | | | 68.9 | % | | $ | 5.9 | |
June 30, 2023 | | | 3 | | | | 83.7 | % | | $ | 1.5 | |
| | | | | | | | | | | Portion of | |
| | | | | | | | | | | Accounts | |
| | | Number | | | % Total | | | Receivable at | |
| | | Significant | | | Revenue from | | | June 30, | |
Six Months Ended | | Customers | | | Operations | | | (in millions) | |
| | | | | | | | | | | | | |
June 30, 2024 | | | 3 | | | | 80.5 | % | | $ | 5.9 | |
June 30, 2023 | | | 3 | | | | 72.7 | % | | $ | 1.5 | |
One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification. The jet fuel, which is stored at the Nixon Facility, is lifted by the Affiliate as needed. For the three months ended June 30, 2024 and 2023, the Affiliate accounted for 38.1% and 37.7% of total revenue from operations, respectively. For the six months ended June 30, 2024 and 2023, the Affiliate accounted for 33.9% and 33.3% of total revenue from operations, respectively. Accounts receivable of the Affiliate totaled $5.9 million at June 30, 2024.
Regulatory Activities
BOEM. See "Part II, Item 1. Legal Proceedings —Unresolved Matters—BOEM Supplemental Pipeline Bonds."
BSEE. Offshore Pipelines and Platform Requirements .
BDPL has pipelines and platform assets subject to BSEE’s idle iron regulations. Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
Platform Inspections. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In March 2023, BSEE issued BDPL an INC for failing to perform the required 2021 and 2022 annual structural surveys for the GA-288C platform and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023. Although BDPL requested a second extension, BSEE denied BDPL’s request. BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023. Because BDPL failed to comply with the INC within the allotted timeframe, BSEE proposed an administrative civil penalty of approximately $0.2 million on October 24, 2023. The proposed administrative civil penalty was finalized on January 26, 2024, for $0.2 million. We recorded a liability for the maximum proposed amount of $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of June 30, 2024. Although BDPL filed an appeal to the civil penalty on March 25, 2024, BDPL filed a motion to withdraw the appeal on April 17, 2024. BDPL paid the civil penalty related to platform inspections on April 19, 2024.
Decommissioning Obligations. Because our pipelines and facilities assets have been inactive for an extended period, BOEM mandated that they be decommissioned. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements. Management worked with a consultant to develop a decommissioning plan, and BDPL submitted its decommissioning plan to the agency in November 2023. Although the decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the impact of COVID-19, a significant portion of the decommissioning project was completed from late December 2023 to mid-February 2024. In July 2024, BDPL requested a BSEE extension to decommission the subject assets until the second quarter of 2025. BDPL’s request for an extension does not relieve BDPL of its obligations to comply with BSEE’s mandate or BSEE’s authority to impose civil penalties. Further, there can be no assurance that BDPL can complete anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of June 30, 2024 and December 31, 2023. Due to BDPL’s failure to comply with BSEE requirements, BDPL could still be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity. At June 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
RLI. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—RLI Surety Bonds."
Civil Penalties. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—BSEE Civil Penalties."
OSHA. See "Part II, Item 1. Legal Proceedings—Resolved Matters—OSHA Settlement Agreement."
TCEQ. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—TCEQ Proposed Order."
Off-Balance Sheet Arrangements
None.
Blue Dolphin Energy Company
| Management’s Discussion and Analysis (Continued) |
Accounting Standards
Critical Accounting Policies and Estimates.
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for credit losses, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.
Estimates. The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Although commodity price volatility, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of June 30, 2024 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for credit losses, inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
New Pronouncements Adopted. During the three and six months ended June 30, 2024, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective.
● | ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in our income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. We will adopt ASU 2023-09 in the fourth quarter of 2025. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. |
● | ASU 2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024. Early adoption is permitted. We will adopt ASU 2023-07 in the fourth quarter of 2024 using a retrospective transition method. |
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Blue Dolphin Energy Company
Controls and Procedures
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on our evaluation, our Chief Executive Officer (principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and six months ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company
Legal Proceedings
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Resolved Matters
Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the 60-day notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day. On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and Commerce Code ("TBCC") of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After negotiations, NPS agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential dispute compromise pursuant to the Pilot Forbearance and Accommodation Agreement, with a forbearance period terminating on February 28, 2023. As part of the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023.
On March 31, 2023, NPS and Pilot executed the Pilot Forbearance Amendment, extending the forbearance period and all deadlines in the unresolved Texas Action to June 15, 2023. As part of the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all 185,000 bbls of stored jet fuel in April 2023. On June 16, 2023, following the expiration of the Pilot Forbearance and Accommodation Agreement, the parties agreed to extend the deadline for responses to outstanding discovery requests in the Texas Action to August 31, 2023. On August 28, 2023, the parties filed a joint motion to stay the case in anticipation of planned mediation in December 2023 to settle all outstanding disputes.
A confidential Settlement Agreement by and among LEH, NPS, LE, LRM, Lazarus San Antonio Refinery, LLC, and Blue Dolphin (together the "Lazarus Entities"), on the one hand, and Pilot, Starlight Relatively Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal LP (together, the "Pilot Entities"), on the other hand, was executed on December 29, 2023. Among other matters addressed, NPS's contract-related dispute related to set-off payments and LRM’s contracted-related dispute involving a revenue-sharing arrangement for storing and selling crude oil with Pilot and Tartan, respectively, were fully resolved, and the parties agreed to mutually release all claims against each other. Further, Pilot and NPS agreed to take such actions as necessary to dismiss the Texas Action. For the avoidance of doubt, all contractual agreements between the Lazarus Entities and Pilot Entities were terminated.
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 paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations before December 31, 2022. We remediated the remaining violations on a progressive schedule by April 2023.
Blue Dolphin Energy Company
Legal Proceedings & Risk Factors
Unresolved Matters
BOEM Supplemental Pipeline Bonds. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.
Historically, BDPL maintained $0.9 million in pipeline bonds with BOEM to decommission its trunk pipeline offshore in federal waters. In March 2018, BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way, an increase of approximately $3.9 million. 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 decommissioning its offshore pipelines and platform would likely help in future discussions with BOEM related to the INCs. Fulfilling abandonment obligations related to the subject assets will significantly reduce or eliminate the amount of supplemental pipeline bonds required by BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose civil penalties. There can be no assurance that we will be able to meet additional supplemental pipeline bond requirements. If BDPL is required by BOEM to provide significant additional supplemental pipeline bonds or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We cannot predict the outcome of the supplemental pipeline bond INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of June 30, 2024 and December 31, 2023. At both June 30, 2024 and December 31, 2023, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI. However, as noted below, RLI desires to reduce its risk profile related to BDPL's bonds. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
RLI Surety Bonds. Blue Dolphin currently has several surety bonds through RLI as required by different regulatory agencies, including BOEM and the Railroad Commission of Texas. The bonds total approximately $1.25 million in the aggregate, of which $0.2 million is collateralized in cash. In June, July, and December 2023, RLI demanded Blue Dolphin provide additional cash collateral or a letter of credit totaling approximately $1.0 million or provide bond exonerations and replacement bonds. Although Blue Dolphin received a proposal from another surety to replace the RLI bonds at a 50% collateral requirement, management was hopeful Blue Dolphin and RLI could reach an understanding whereby the existing bonds could be maintained until BDPL completed decommissioning of the subject assets. Abandonment of BDPL’s offshore pipeline and platform assets will eliminate the need for all BOEM supplemental pipeline bonds, reducing the amount of surety bonds held by RLI from $1.25 million to $0.3 million. On February 19, 2024, RLI filed suit against Blue Dolphin, BDPL, and BDEX seeking an injunction for the payment of approximately $1.0 million of additional collateral for the bonds. BDPL filed its answer to RLI's lawsuit on April 23, 2024 denying RLI's claims. On July 22, 2024, BDPL presented a settlement proposal to RLI to fully resolve the matter. On July 26, 2024, RLI informed the court that the parties reached a settlement in principle. The parties are currently working to finalize the settlement documents and proposed consent judgment.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of $0.4 million and identified actions needed to correct the alleged violations. In September 2023, TCEQ presented its final penalty offer of $0.35 million, which LRM accepted. Although LRM believed the penalty matter was resolved in principle, TCEQ referred the matter to the State Office of Administrative Hearings. A preliminary hearing will be held on August 8, 2024. Management plans to participate in the hearing. At June 30, 2024, we accrued $0.4 million on our balance sheet within accrued expenses and other current liabilities related to this matter.
BSEE Civil Penalties. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In March 2023, BSEE issued BDPL an INC for failing to perform the required 2021 and 2022 annual structural surveys for the GA- 288C platform and for failing to provide BSEE with such survey results. In April 2023, BSEE granted BDPL an extension for completing the required platform inspection until May 30, 2023. Although BDPL requested a second extension, BSEE denied BDPL’s request. BDPL completed the platform inspection on August 26, 2023 and submitted the survey report to BSEE on September 6, 2023. Because BDPL failed to comply with the INC within the allotted timeframe, BSEE proposed an administrative civil penalty of approximately $0.2 million on October 24, 2023. The proposed administrative civil penalty was finalized on January 26, 2024, for $0.2 million. We recorded a liability for the maximum proposed amount of $0.2 million on our consolidated balance sheets within accrued expenses and other current liabilities as of March 31, 2024. Although BDPL filed an appeal to the civil penalty on March 25, 2024, BDPL filed a motion to withdraw the appeal on April 17, 2024. BDPL paid the civil penalty related to platform inspections on April 19, 2024.
On April 26, 2024, BDPL received a civil penalty advisory letter from BSEE of the same date related to INCs issued by the agency in September 2023. The letter indicates that the agency is reviewing the INCS, which relate to BDPL's offshore assets in federal waters. BSEE will provide BDPL information related to its review within 90 days from the date of its letter. As of the filing date of this report, BDPL had not received any further communication related to this matter.
Defaults under Secured Loan Agreements. We are currently in default under certain secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” for additional disclosures related to third-party and related-party debt, default 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.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC. These risks and uncertainties could materially and adversely affect our business, financial condition, and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Blue Dolphin Energy Company
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
See “Part I, Item. 1. Financial Statements – Notes (3) and (10)” for disclosures related to defaults on our debt.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
Blue Dolphin Energy Company
Exhibits
ITEM 6. EXHIBITS
Exhibits Index
* Filed herewith
Blue Dolphin Energy Company
Signature Page
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | BLUE DOLPHIN ENERGY COMPANY | |
| | (Registrant) | |
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August 14, 2024 | By: | /s/ JONATHAN P. CARROLL | |
| | | Jonathan P. Carroll Chief Executive Officer, President, Treasurer, and Secretary (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) | |
Blue Dolphin Energy Company
