BLUE DOLPHIN ENERGY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis is our analysis of our financial performance, financial condition, and 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 Quarterly 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 endedDecember 31, 2021 .
Overview
Blue Dolphin is an independent downstream energy company operating in theGulf Coast region ofthe United States . Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity inNixon, 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 aDelaware corporation and is traded on the OTCQX under the ticker symbol "BDCO". Affiliates Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin assets and has historically funded working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See "Part I, Item 1. Financial Statements - Note (3)" for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. General Trends and Outlook We anticipate that our business will continue to be affected by the following key factors. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results. COVID-19 Pandemic. InMarch 2020 , the WHO declared the outbreak of COVID-19 a pandemic, and theU.S. economy began to experience pronounced adverse effects as a result of the global outbreak. Significant progress has been made to combat COVID-19 and its multiple variants; however, it remains a global challenge and continues to have an impact on our financial results. The extent of the COVID-19 outbreak on our operational and financial performance will significantly depend on further developments, including the duration and spread of the outbreak and continued impact on our personnel and customers. While domestic demand and refining margins improved heading into 2022 and during the quarter endedMarch 31, 2022 , we expect global market volatility to continue at least until the outbreak of COVID-19, including any new variants, stabilizes, if not longer. The extent to which the pandemic may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence. Russian-Ukrainian Conflict. InFebruary 2022 ,Russia invaded neighboringUkraine . The conflict caused turmoil in global markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Sanctions imposed onRussia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the first quarter of 2022 compared to the prior year. Despite favorable refining margins during the first quarter, the future impact of the Russian-Ukrainian Conflict on our financial position and results of operations remains uncertain. Liquidity and Access to Capital Markets. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. During the three months endedMarch 31, 2022 and 2021, we successfully secured an additional$1.5 million and$0 , respectively, in working capital through CARES Act loans. There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as those related to COVID-19 or the Russian conflict withUkraine , or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operations. Blue Dolphin Energy Company March 31, 2022 |Page 35 Table of Contents
Management's Discussion and Analysis
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy. Business Opportunities. Although we regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations, in the foreseeable future we anticipate that such activities will likely only relate to renewable energy-related projects. Management determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. A 'going concern' opinion likely limits our ability to finance our operations through options such as selling equity or incurring additional debt. Our ability to continue as a going concern depends on sustained positive operating margins and working capital, purchase of crude oil and condensate, and payments on long-term debt. If we are unable to meet these requirements, we may have to cease operating or seek bankruptcy protection. 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 becoming more numerous, more stringent, and more complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other GHG 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:
· Maintain safe operations and enhance health,
Optimize safety, and environmental systems.
Existing
Asset Base · Planning and managing turnarounds and
downtime.
· Reduce or streamline variable costs incurred
in production.
Improve
Operational · Increase throughput capacity and optimize
Efficiencies product slate.
· Increase tolling and terminaling revenue
· Leverage existing infrastructure to engage
Seize Market in renewable energy projects.
Opportunities
· Take advantage of market opportunities as
they arise.
Optimize Existing Asset Base. The refinery experienced less downtime during the three-month period endedMarch 31, 2022 compared to the same period a year earlier. During the three-month periods endedMarch 31, 2022 and 2021, the refinery experienced 6 days and 11 days of downtime, respectively. Given recent favorable refining margins, management delayed theNixon facility's annual maintenance turnaround in order to maximize refinery runs. Improve Operational Efficiencies. Management continued to focus on optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. Continued austerity measures further contributed to improved refinery throughput, production, and sales during the three-months endedMarch 31, 2022 compared to the same period in 2021. Seize Market Opportunities. InMarch 2021 , we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green energy growth. We continue to explore potential commercial partnerships and project-based government loans as vehicles to expand our corporate strategy into renewable energy, and we will continue these efforts throughout 2022. While we believe our renewable energy strategy successfully aligns with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee that we will achieve our objectives. Successful execution of our business strategy depends on several factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at theNixon 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. Blue Dolphin Energy Company March 31, 2022 |Page 36
Table of Contents
Management's Discussion and Analysis
Downstream Operations
Our refinery operations segment consists of the following assets and operations:
Key Products
Property Handled Operating Subsidiary Location
Nixon facility Crude Oil LE Nixon, Texas
· Crude distillation Refined Products
tower (15,000 bpd)
· Petroleum storage
tanks (operations
support)
· Loading and
unloading facilities
· Land (56 acres)
Crude Oil and Condensate Supply. Operation of theNixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms. Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any renewal term. As ofMarch 31, 2022 , we received approximately 10.1 million bbls, or 40.4%, of the contracted total volume under the crude supply agreement. Related to the Crude Supply Agreement, Tartan stores crude oil at theNixon facility under a terminal services agreement dated as ofJune 1, 2019 . Under the terminal services agreement, crude oil is stored at theNixon facility at a specified rate per bbl of the storage tank's shell capacity. The terminal services agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement. Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.
Products and Markets. Our market is the
The Nixon refinery's product slate is moderately adjusted based on market demand. We currently produce a single finished product - jet fuel - and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur ofMarch 31, 2023 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing. Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (theHouston -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. Many of our competitors are substantially 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. Most of our storage tanks are equipped with emissions monitoring devices. We also have response and control plans in place for spill prevention and emergencies. Blue Dolphin Energy Company March 31, 2022 |Page 37 Table of Contents
Management's Discussion and Analysis
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. 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.The Nixon refinery did not incur significant damage due to Winter Storm Uri in the three months endedMarch 31, 2021 . However, the facility lost external power for 10 days due to the storm. 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:
Key
Products Operating Location
Property Handled Subsidiary
Nixon facility Crude Oil LRM, NPS Nixon, Texas
· Petroleum storage Refined
tanks (third-party Products
leasing)
· 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. Storage customers are
typically refiners in the lower portion of the Texas Triangle (the Houston - San
Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from
within the Nixon facility via pipeline or from third parties via truck. 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 regulations under OSHA and comparable state and local regulations.
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 respondto emergencies. 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 months endedMarch 31, 2022 and 2021. See "Part I, Item 1. Financial Statements - Note (15)" related to pipelines and platform decommissioning requirements and related risks. Operating Property Subsidiary Location Freeport facility BDPL Freeport, · Crude oil and natural Texas gas separation and dehydration · Natural gas processing, treating, and redelivery · Vapor recovery unit · Two onshore pipelines · Land (162 acres) Offshore Pipelines (Trunk BDPL Gulf of Line and Lateral Lines) Mexico Oil and Gas Leasehold BDPC Gulf of Interests Mexico
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations underOSHA , PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets. Blue Dolphin Energy Company March 31, 2022 |Page 38 Table of Contents
Management's Discussion and Analysis
Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be in 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 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.
While refining margins improved significantly in the first quarter of 2022, the general outlook for the oil and natural gas industry for the remainder of the year remains unclear given the impact of COVID-19 and the Russian conflict withUkraine , and we can provide no assurances that refining margins and demand
will remain at current levels. How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl
We use segment contribution margin (deficit) to evaluate the performance of our downstream and midstream operations. We use refining gross profit (deficit) per bbl as a downstream benchmark. Both measures supplement GAAP financial information presented. Management uses segment contribution margin (deficit) and refining gross profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial performance considering potential capital investments. These non-GAAP measures have important limitations as analytical tools. They should not be considered a substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with our GAAP financial results. See "Non-GAAP Reconciliations" for a reconciliation of Non-GAAP measures toU.S. GAAP.
Tank Rental Revenue
Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.
Operation Costs and Expenses
We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs and expenses for tolling and terminaling operations are relatively fixed.
Refinery Throughput and Production Data
The amount of revenue we generate from the refinery operations business segment primarily depends on the volumes of crude oil that we process into refined products and the volume of refined products sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime. Blue Dolphin Energy Company March 31, 2022 |Page 39 Table of Contents
Management's Discussion and Analysis
Refinery Downtime
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.
Three Months Ended
Overview. Net income for Q1 2022 was$3.5 million , or income of$0.27 per share, compared to a net loss of$3.2 million , or a loss of$0.25 per share, in Q1 2021. The$6.7 million , or$0.52 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand as the impact from COVID-19 lessened. The net loss in Q1 2021 was also due to 11 days of refinery downtime, 10 days of which was associated with Winter Storm Uri.
Total Revenue from Operations. Total revenue from operations increased 86% to$110.7 million for Q1 2022 from$59.4 million for Q1 2021. Increased commodity prices primarily drove refinery operations revenue higher in Q1 2022; increased sales volume contributed approximately 10% to the rise in refinery operations revenue. Tolling and terminaling revenue was flat between the periods at$0.9 million .
Total Cost of Goods Sold. Total cost of goods sold increased approximately 75% to$104.1 million for Q1 2022 from$59.6 million for Q1 2021. The significant increase related to higher crude acquisition costs and slightly higher throughput.
Gross Margin (Deficit). Gross margin was
General and Administrative Expenses. General and administrative expenses decreased approximately 5% to$0.6 million in Q1 2022 from approximately$0.7 million in Q1 2021. The decrease primarily related to lower insurance premiums and professional fees.
Depreciation and Amortization. Depreciation and amortization expenses totaled
approximately
Total Other Income (Expense). Total other expense in Q1 2022 was$1.6 million compared to total other expense of$1.4 million in Q1 2021, representing an increase of approximately$0.2 million . Total other expense primarily relates to interest expense associated with third-party and related party secured loan
agreements.
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. Q1 2022 Versus Q1 2021
Refining Gross Margin (Deficit) per Bbl. Refining gross margin per bbl was$5.51 for Q1 2022 compared to gross deficit per bbl of$1.20 in Q1 2021, representing a significant increase of$6.71 per bbl. The significant increase in Q1 2022 related to higher refining margins, improved product demand as the impact from COVID-19 lessened, and increased refinery uptime. Refining gross deficit per bbl in Q1 2021 was the result of lower margins and market fluctuations associated with the COVID-19 pandemic and refinery downtime associated with Winter Storm Uri.
Segment Contribution Margin (Deficit). Segment contribution margin improved dramatically in Q1 2022 compared to Q1 2021. The increase was driven by higher refining margins.
Refinery Downtime. Refinery downtime decreased to 6 days in Q1 2022 compared to 11 days in Q1 2021. Refinery downtime in Q1 2022 primarily related to maintenance while refinery downtime in Q1 2021 primarily related to power outages during Winter Storm Uri.
Three Months Ended
March 31,
2022 2021
(in thousands)
Refined product sales $ 109,757 $ 58,483 Less: Total cost of goods sold (104,077 ) (59,623 ) Gross margin (deficit)
5,680 (1,140 )
Sales (Bbls) 1,031 948
Gross margin (deficit) per bbl
Three Months Ended
March 31,
2022 2021
(in thousands)
Net revenue (1) $ 109,757 $ 58,483
Intercompany fees and sales (653 ) (566 )
Operation costs and expenses (103,458 ) (59,289 )
Segment contribution margin (deficit)
(1) Net revenue excludes intercompany crude sales.
Blue Dolphin Energy Company March 31, 2022 |Page 40 Table of Contents
Management's Discussion and Analysis
Midstream Operations. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from tank storage rental fees, tolling and reservation fees for use of the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending. Q1 2022 Versus Q1 2021
Net Revenue. Tolling and terminaling net revenue was relatively flat in Q1 2022 compared to Q1 2021.
Intercompany Fees and Sales. Intercompany fees and sales, which reflect processing fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Q1 2022 compared to Q1 2021. Naphtha volumes processed nearly doubled between the two periods primarily due to improved naphtha refined product demand as the impact from COVID-19 lessened.
Segment Contribution Margin. Segment contribution margin in Q1 2022 decreased 17% to$1.0 million from$1.2 million in Q1 2021. The$0.2 million decrease related to higher intercompany fees and operation costs tied to naphtha volumes. Three Months Ended March 31, 2022 2021 (in thousands) Net revenue (1)$ 926 $ 930 Intercompany fees and sales 653 566 Operation costs and expenses (619 ) (334 ) Segment contribution margin$ 960 $ 1,162 (1) Net revenue excludes intercompany crude sales. Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Three Months Ended March 31,
2022 2021 2022 2021 2022 2021 2022 2021
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ 5,646 $ (1,372 ) $ 960 $ 1,162 $ (11 ) $ (54 ) $ 6,595 $ (264 )
General and
administrative
expenses(1) (282 ) (301 ) (70 ) (68 ) (431 ) (413 ) (783 ) (782 )
Depreciation
and
amortization (307 ) (302 ) (342 ) (340 ) (52 ) (51 ) (701 ) (693 )
Interest and
other
non-operating
income
(expenses),
net (717 ) (598 ) (418 ) (452 ) (457 ) (385 ) (1,592 ) (1,435 )
Income (loss)
before income
taxes 4,340 (2,573 ) 130 302 (951 ) (903 ) 3,519 (3,174 )
Income tax
expense - - - - - - (41) -
Net income(loss)$ 4,340 $ (2,573 ) $ 130 $ 302 $ (951 ) $ (903 ) $ 3,478 $ (3,174 )
(1) General and administrative expenses within refinery operations include the
LEH operating fee and accretion of asset retirement obligations.
Capital Resources and Liquidity
We currently rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Due to defaults under our secured loan agreements, substantial current debt, margin volatility, historic net losses and working capital deficits, we have inadequate liquidity to sustain operations. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate theNixon refinery , (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and expanding theNixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. We continue to maintain our focus on safe and reliable operations and conserving cash. The Russian conflict withUkraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence. Management believes it has made significant progress on bolstering liquidity through efforts including securing additional financing, monitoring discretionary spending, and non-essential costs; and where possible, modifying vendor and contractor payment terms. During the three months endedMarch 31, 2022 and 2021, we successfully secured an additional$1.5 million and$0 , respectively, in working capital through CARES Act loans. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. Blue Dolphin Energy Company March 31, 2022 |Page 41 Table of Contents
Management's Discussion and Analysis
There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operating.
Working Capital
We had$72.9 million and$78.5 million in working capital deficits atMarch 31, 2022 andDecember 31, 2021 , respectively. Excluding the current portion of long-term debt, we had$11.8 million and$15.5 million in working capital deficits atMarch 31, 2022 andDecember 31, 2021 , respectively. Cash and cash equivalents totaled$0.1 million and$0.01 million atMarch 31, 2022 andDecember 31, 2021 , respectively. Restricted cash (current portion) totaled$0 and$0.05 million atMarch 31, 2022 andDecember 31, 2021 , respectively. Sources and Use of Cash Components of Cash Flows March 31, 2022 2021 (in thousands) Cash Flows Provided By (Used In): Operating activities$ 937 $ (500 ) Financing activities (888 ) (42 )
Increase (Decrease) in Cash and Cash Equivalents
Cash Flow Q1 2022 Compared to Q1 2021
We had a cash flow from operations of$0.9 million for Q1 2022 compared to a cash flow deficit of$0.5 million for Q1 2021. The significant increase in cash flow from operations in Q1 2022 was due to profit from operations. The cash flow deficit for Q1 2021 primarily related to loss from operations.
Capital Expenditures
During both Q1 2022 and Q1 2021, capital expenditures totaled$0 . Due to continued uncertainties related to the COVID-19 pandemic and the Russian conflict withUkraine , we anticipate little, if any, new capital expenditures in 2022.However, to the extent we are able to capitalize on green energy growth opportunities, capital expenditures may be financed through project-based government loans. We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as 'maintenance' if the expenditure maintains capacity or throughput or as 'expansion' if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses. Debt Overview.
The table below summarizes our principal contractual obligations at
Total Debt and Lease Obligations
Between Between
Less than 1 and 3 3 and 5 5 Years
1 Year Years Years and Later Total
(in thousands)
Long-term debt less unamortized debt
issue costs(1)(2)
Third-party $ 43,004 $ 197 $ 142 $ 1,995 $ 45,338
Related-party 18,087 - - - 18,087
Total long-term debt
less debt issue costs 61,091 197 142 1,995 63,425
Lease obligations 220 99 - - 319
$ 61,311 $ 296 $ 142 $ 1,995 $ 63,744 (1) See "Item 1. Financial Statements - Notes (3) and (10)" for additional
disclosures related to third-party and related-party debt.
(2) Long-term debt excludes interest payable; at
payable and interest payable, related party was estimated to be 12.1
million (less than 1 year), $0.1 million (between 1 and 3 years), $0.1
million (between 3 and 5 years), and $0.5 million (5 years and later).
Blue Dolphin Energy Company March 31, 2022 |Page 42
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Management's Discussion and Analysis
Net proceeds from the issuance of debt totaled$1.5 million in Q1 2022 compared to$0 in Q1 2021. Proceeds in Q1 2022 were from the BDEC Term Loan Due 2051. Principal payments on long-term debt totaled$0.004 million in Q1 2022 compared to$0.006 million in Q1 2021.Net activity on debt to related parties (non-cash payments) totaled$2.4 million and$0.04 million in Q1 2022 and Q1 2021, respectively.
Debt Defaults. The majority of our debt is in default.
Third-Party Defaults
· Veritex Loans - For Q1 2022 and Q1 2021, principal and interest payments to
Veritex totaled
this report, LE and LRM were in default under the LE Term Loan Due 2034 and
LRM Term Loan Due 2034 for failing to make required monthly principal and
interest payments and failing to satisfy financial covenants. In addition, LE
was in default under the LE Term Loan Due 2034 for failing to replenish a
2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed
under these loan agreements immediately due and payable, exercise its rights
concerning collateral securing obligors' obligations under these loan
agreements, and exercise any other rights and remedies available.
· GNCU Loan - For Q1 2022, interest only payments to GNCU totaled
As of the filing date of this report, NPS was in default under the NPS Term
Loan Due 2031 for failing to satisfy financial covenants.
· Kissick Debt - Under a 2015 subordination agreement,
subordinate his right to payments, as well as any security interest and liens
on the
LE Term Loan Due 2034. To date, LE has made no payments under the
subordinated Kissick Debt. To date,
the non-payment. As of the filing date of this report, there were defaults
under the Kissick Debt related to payment of past due obligations at
maturity.
We can provide no assurance that: (i) our assets or cash flow will be sufficient
to fully repay borrowings under our secured loan agreements, either upon
maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or
restructure the debt, and/or (iii) third parties will provide future default
waivers. Defaults under our secured loan agreements and any exercise by third
parties of their rights and remedies related to such defaults may have a
material adverse effect on our business, the trading prices of our Common Stock,
and on the value of an investment in our Common Stock, and holders of our Common
Stock could lose their investment in our Common Stock in its entirety.
Management maintains ongoing dialogue with lenders regarding defaults and
potential restructuring and refinance opportunities.
Related-Party Defaults
· Notes and Loan Agreement - As of the filing date of this report, Blue Dolphin
was in default concerning past due payment obligations under the March
BDPL was also in default related to past due payment obligations under the
BDPL-LEH Loan Agreement. Affiliates controlled approximately 82% of the
voting power of our Common Stock as of the filing date of this report, an
Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a
significant customer of our refined products, and we borrow from Affiliates
during periods of working capital deficits.
Concentration of Customers Risk. We routinely assess the financial strength of
our customers and 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 Significant % Total Revenue Receivable
Three Months Ended Customers from Operations at March 31,
March 31, 2022 3 64.9 % $ 0
March 31, 2021 4 90.4 % $ 0
One of our significant customers is LEH, an Affiliate. Due to a HUBZone
certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales
Agreement and bids on jet fuel contracts under preferential pricing terms. The
Affiliate accounted for 31.2% and 27.1% of total revenue from operations for the
three months ended March 31, 2022 and 2021, respectively. The Affiliate
represented $0 in accounts receivable at both March 31, 2022 and 2021,
respectively. See "Item 1. Financial Statements - Notes (3) and (15)" for
additional disclosures related to Affiliate agreements and arrangements, as well
as "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2021 as filed with the SEC for additional
disclosures related to Affiliate risk.
Blue Dolphin Energy Company March 31, 2022 |Page 43
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Management's Discussion and Analysis
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
To cover the various obligations of lessees and rights-of-way holders operating in federal waters of theGulf of Mexico , BOEM evaluates an operator's financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. BDPL historically maintained$0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, inMarch 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately$4.8 million for five (5) existing pipeline rights-of-way. InJune 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, theOffice of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor's office signaled that BDPL's adherence to milestones identified in anAugust 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. BDPL's pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM's authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as ofMarch 31, 2022 andDecember 31, 2021 . At bothMarch 31, 2022 andDecember 31, 2021 , BDPL maintained approximately$0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds,$0.7 million was credit-backed and$0.2 million was cash-backed.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE's idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements. InDecember 2018 , BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE inAugust 2019 to address BDPL's plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, byFebruary 2020 . BDPL submitted permit applications to BSEE inFebruary 2020 and the USACOE inMarch 2020 . InApril 2020 , BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys inJune 2020 . Abandonment operations were delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. Lack of permit approvals does not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE's authority to impose financial penalties. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL's operator designation, which could have a material adverse effect on our earnings, cash flows and liquidity. We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as ofMarch 31, 2022 andDecember 31, 2021 . At bothMarch 31, 2022 andDecember 31, 2021 , BDPL maintained$3.5 million in AROs related to abandonment of these assets, which amount does not include potential penalties. Blue Dolphin Energy Company March 31, 2022 |Page 44 Table of Contents
Management's Discussion and Analysis
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share. Estimates. The nature of our business requires that we make estimates and assumptions in accordance withU.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. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and
will continue to do so. The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. AsU.S. federal, state, and local officials address surging coronavirus cases and roll out COVID-19 vaccines, we expect to continue operating.
In
We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The Russian conflict withUkraine and the COVID-19 pandemic continue to evolve. Therefore, uncertainty surrounding refining margins, demand for our refined products, and the general business environment are expected to continue through 2022 and beyond. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of the Russian conflict withUkraine and COVID-19 as ofMarch 31, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritativeSEC content. During the three months endedMarch 31, 2022 , we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective.
No new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
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