BLUE DOLPHIN ENERGY COMPANY 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" and "Risk Factors" for a discussion of the factors that could cause actual results to differ materially from those projected in these statements.
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). See "Part II, Item 8. Financial Statements and Supplementary Data - Note (4)" for more information related to our business segments and properties. 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 properties 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 II, Item 8. Financial Statements and Supplementary Data - Note (3)" for additional disclosures related to Affiliate agreements and 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. COVID-19 has disrupted theU.S. economy since the first quarter of 2020 and immediately resulted in a decline in demand for our products. We began to see improvement in demand for our refined products beginning late in the second half of 2020, which continued through 2021. Despite worldwide advances in containment of the virus and incremental economic market recovery throughout 2021, COVID-19 continues to be dynamic, and near-term economic and other challenges remain. The COVID-19 pandemic continues to evolve, and 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. Under earlier state and federal mandates that regulated business closures, our business was deemed an essential business and, as such, remained open. Although uncertainties exist with respect to the future impact of the pandemic, we expect to continue operating with minimal disruptions. 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. Personnel safety continues to be prioritized through cleaning procedures, social distancing guidelines, personal protection equipment, outside visitor limitations, and remote working for all corporate personnel. Commodity Prices. InFebruary 2022 ,Russia invaded neighboringUkraine . The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations. These events have and continue to impact commodity prices, which could have a material effect on our earnings, cash flows, and financial condition. In the short-term, commodity price fluctuations are highly uncertain. Actual price outcomes will be dependent on the degree to which existing sanctions imposed onRussia , any potential future sanctions, and independent corporate actions affectRussia's oil production or the sale ofRussia's oil in the global market. In addition, the degree to which other oil producers respond to current oil prices, as well as the effects macroeconomic developments might have on global oil demand, will be important for oil price formation in the coming months. 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 twelve months endedDecember 31, 2021 and 2020, we successfully secured$10.5 million and$0.3 million , respectively, in working capital through CARES Act loans. In addition, subsequent to the period covered by this report, we secured an additional$1.5 million in working capital through modification of the existing BDEC Term Loan Due 2051. 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 operations. Blue Dolphin Energy Company December 31, 2021 |Page 34 Table of Contents
Management's Discussion and Analysis
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 objective is to improve our financial profile by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:
Optimize · Maintain safe operations and enhance health, safety, and
Existing environmental systems.
Asset Base · Planning and managing turnarounds and downtime.
Improve · Reduce or streamline variable costs incurred in production.
Operational · Increase throughput capacity and optimize product slate.
Efficiencies · Increase tolling and terminaling revenue.
Seize Market · Leverage existing infrastructure to engage in renewable
Opportunities energy projects.
· Take advantage of market opportunities as they arise.
Optimize Existing Asset Base. Management is committed to maintaining the safe
and reliable operation of Nixon facility. We successfully balanced protecting
personnel from exposure to COVID-19 with ensuring adequate staffing levels to
operate the plant. Although the refinery experienced 42 days downtime during the
twelve-month period ended 2020 due to the impact of COVID-19, management
efficiently used more than half of the downtime (22 days) to safely complete a
planned maintenance turnaround and perform repairs and maintenance on boilers,
heaters, and an exchanger. Despite the continued impact of COVID-19, downtime
during the twelve-month period ended 2021 significantly decreased to 23 days. Of
the 23 days of downtime in 2021, 10 days related to a power failure due to
Winter Storm Uri.
Improve Operational Efficiencies. Given the impact of COVID-19, management
focused on optimizing receivables and payables by prioritizing payments,
optimizing inventory levels based on demand, monitoring discretionary spending,
and delaying capital expenditures. These austerity measures, combined with
maintenance and repair activities, gave rise to improved refinery throughput,
production, and sales during the twelve-months ended December 31, 2021 compared
to 2020.
Seize Market Opportunities. We intend to be a proactive participant in the transition to a lower carbon energy future. 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. During 2021, we explored several potential commercial partnerships and 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. We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities outside of renewable energy-related projects in the foreseeable future. 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 deficits. A 'going concern' opinion could impair our ability to finance our operations by selling equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern depends on sustained positive operating margins and working capital to sustain operations, purchase of crude oil and condensate, and payments on long-term debt. If we cannot achieve these goals, we may have to cease operating or seek bankruptcy protection. Blue Dolphin Energy Company December 31, 2021 |Page 35 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 II, Item 8. Financial Statements and Supplementary Data". 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. Since the beginning of 2020, the COVID-19 pandemic disrupted economies around the world, including the oil and gas industry in which we operate. The rapid spread of the virus led to the implementation of various responses, including federal, state, and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health and safety measures. Actions by members ofOPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets, which impacted our operational and financial performance. In particular, we experienced net losses due to unfavorable margins per bbl and significantly lower sales volume due to significant refinery downtime. Global oil prices and refined product demand recovered somewhat in 2021 compared to 2020 as COVID-19 cases stabilized, mortality rates decreased, and availability and inoculation rates of vaccines increased. However, recovery of jet fuel demand lagged that of other refined products as airline travel restrictions and consumer hesitancy to fly during the pandemic continued. Despite the uptick in market conditions during the second half of 2021, overall, we experienced operating and net losses due to unfavorable margins and lower sales volume, which affected our liquidity. Cash constraints adversely impacted the frequency of crude oil acquisition, debt payments, and abandonment of pipeline and facilities assets. The extent to which the continued COVID-19 pandemic will impact our operations depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning variants, actions taken to contain the spread of COVID-19 and treat its impact, and the availability and acceptance of vaccines to mitigate such spread, among others. InFebruary 2022 ,Russia invaded neighboringUkraine . The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations. 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. 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
Segment contribution margin (deficit) is used to evaluate both refinery operations and tolling and terminaling while refining gross profit (deficit) per bbl is a refinery operations benchmark. Both measures supplement our financial information presented in accordance withU.S. GAAP. Management uses these non-GAAP measures to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate future impacts to our financial performance as a result of capital investments. Non-GAAP measures have important limitations as analytical tools. These non-GAAP measures, which are defined in our glossary of terms, 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 ourU.S. GAAP results. See "Part II, Item 7. Management's Discussion and Analysis and Results of Operations - Non-GAAP Reconciliations" and the financial statements within "Part II, Item 8. Financial Statements and Supplementary Data" 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. Blue Dolphin Energy Company December 31, 2021 |Page 36 Table of Contents
Management's Discussion and Analysis
Operation Costs and Expenses We manage operating expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating 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 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 and refined products that we handle through our processing assets and the volume 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. Refinery Downtime
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company December 31, 2021 |Page 37
Table of Contents
Management's Discussion and Analysis
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 operating results of refinery operations and tolling and terminaling business segments.
Twelve Months Ended
2020)
Overview. Net loss for YE 2021 was Impairment of Assets. During YE 2021 we
$12.8 million , or a loss of $1.01 per recorded an impairment of $1.1 million
share, compared to a net loss of $14.5 related to the remaining carrying value
million, or a loss of $1.15 per share, of asset retirement costs associated
for YE 2020. The improvement in net with our pipeline and facilities
loss was the result of improved margins assets. There was no impairment charge
per bbl and slightly higher sales in YE 2020.
volume.
General and Administrative Expenses.
Total Revenue from Operations. Total General and administrative expenses revenue from operations increased increased 31% to$3.0 million in YE significantly to$300.8 million for YE 2021 compared to$2.3 million in YE 2021 from$174.8 million for YE 2020. 2020. The increase related to higher The significant increase related to a corporate insurance in YE 2021 compared rise in refinery operations revenue to YE 2020. driven by higher commodity pricing per bbl on refined products sold and Depletion, Depreciation and slightly higher sales volumes. During Amortization. Depletion, depreciation, the same comparative periods, tolling and amortization expenses for YE 2021 and terminaling revenue decreased by totaled$2.8 million compared to$2.7 $0.5 million , or nearly 12%, to$3.7 million in YE 2020. The nearly 4% million. increase primarily related to
placing a
petroleum storage tank in service.
Total Cost of Goods Sold. Total cost of goods sold increased nearly 70% to Total Other Income (Expense). Total$300.0 million for YE 2021 from$176.9 other expense in YE 2021 was$6.1 million for YE 2020. The significant million compared to$6.6 million in YE increase related to higher commodity 2020, representing a decrease of$0.5 prices per bbl for crude oil and million. Total other expense primarily chemicals, slightly higher throughput relates to interest expense associated volume, and reduced refinery downtime with our secured loan agreements
with
in 2021. Veritex, related-party debt, and the
line of credit with Pilot. The decrease
Gross Profit (Deficit). Gross profit between the comparative periods
was $0.9 million for YE 2021 compared primarily related to paying off the
to a gross deficit of $2.1 million for Amended Pilot Line of Credit.
YE 2020. The improvement between the
periods primarily related to higher
margins per bbl due to a positive shift
in the commodity price market.
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Management's Discussion and Analysis
Refinery Operations. The 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.
YE 2021 Versus YE 2020
· Refining gross deficit per bbl was
$0.69 for YE 2021 compared to $1.60 for
YE 2020, representing an improvement of
[[Image Removed: bdco_10kimg3.jpg]] $0.91 per bbl. The significant increase
related to improved margins, higher
sales volume, and reduced refinery
downtime in 2021.
· Segment contribution margin in YE
2021 improved $3.5 million to a deficit
of $3.4 million from a deficit of $7.0
million in YE 2020. The improvement
related to higher margins per bbl and[[Image Removed: bdco_10kimg9.jpg]] slightly higher sales volume in 2021.
(1) · Refinery downtime improved
Net revenue excludes intercompany crude significantly in YE 2021 to 23 days
sales. compared to 42 days in YE 2020.
Refinery downtime in 2021 primarily
related to lack of crude due to cash
constraints and a power loss during
Winter Storm Uri. Comparatively,
refinery downtime in 2020 primarily
related to lack of crude due to cash
restraints, a maintenance turnaround,
and equipment repairs. Improved
operating days in YE 2021 favorably
impacted refinery throughput and
production.
Tolling and Terminaling. 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.
YE 2021 Versus YE 2020
[[Image Removed: bdco_10kimg21.jpg]]
(1) · Tolling and terminaling net revenue
Net revenue excludes intercompany crude decreased 12% in YE 2021 compared to YE
sales. 2020 primarily as a result of lower
tank rental revenue.
· Intercompany fees and sales, which
reflect fees associated with an
intercompany tolling agreement tied to
naphtha volumes, increased in YE 2021
compared to YE 2020. Naphtha sales
volumes increased between the periods.
· Segment contribution margin in YE
2021 decreased nearly 12% to $4.3
million compared to $4.9 million in YE
2020. The decrease related to lower
revenue.
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Management's Discussion and Analysis
Non-GAAP Reconciliations
Reconciliation of Segment Contribution Margin (Deficit)
Twelve Months Ended December 31,
2021 2020 2021 2020 2021 2020 2021 2020
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ (3,436 ) $ (6,984 ) $ 4,349 $ 4,932 $ (197 ) $ (169 ) $ 716 $ (2,221 )
General and
administrative
expenses(1) (1,549 ) (1,257 ) (343 ) (307 ) (2,742 ) (1,381 ) $ (4,634 ) $ (2,945 )
Depreciation
and
amortization (1,214 ) (1,186 ) (1,362 ) (1,296 ) (204 ) (204 ) $ (2,780 ) $ (2,686 )
Interest and
other
non-operating
income
(expenses),
net (2,779 ) (2,929 ) (1,649 ) (2,546 ) (1,715 ) (1,116 ) $ (6,143 ) $ (6,591 )
Income (loss)
before income
taxes (8,978 ) (12,356 ) 995 783 (4,858 ) (2,870 ) (12,841 ) (14,443 )
Income tax
expense - - - - - (15 ) - (15 )
Income (loss)
before income
taxes $ (8,978 ) $ (12,356 ) $ 995 $ 783 $ (4,858 ) $ (2,885 ) $ (12,841 ) $ (14,458 ) (1) General and administrative expenses within refinery operations include the
LEH operating fee.
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 remain focused on maintaining the safe and reliable operation ofNixon facility 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, aggressively evaluating all discretionary spending, non-essential costs for near-term cost reductions; and where possible, modifying vendor and contractor payment terms. During the twelve months endedDecember 31, 2021 and 2020, we successfully secured$10.5 million and$0.3 million , respectively, in working capital through CARES Act loans. In addition, subsequent to the period covered by this report, we secured an additional$1.5 million in working capital through modification of the existing BDEC Term Loan Due 2051. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. 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, seek bankruptcy protection, or cease operating. Working Capital We had$78.5 million and$72.3 million in working capital deficits atDecember 31, 2021 and 2020, respectively. Excluding the current portion of long-term debt, we had$15.5 million and$22.6 million in working capital deficits atDecember 31, 2021 and 2020, respectively. Cash and cash equivalents totaled$0.01 and$0.5 million atDecember 31, 2021 and 2020, respectively. Restricted cash (current portion) totaled$0.05 million at bothDecember 31, 2021 and 2020. Restricted cash, noncurrent totaled$0 and$0.5 million atDecember 31, 2021 and 2020, respectively. Blue Dolphin Energy Company December 31, 2021 |Page 40 Table of Contents
Management's Discussion and Analysis
Sources and Use of Cash
Components of Cash Flows
December 31,
2021 2020
(in thousands)
Cash Flows Provided By (Used In):
Operating activities $ (6,056 ) $ (3,901 )
Investing activities - (1,085 )
Financing activities 5,002 5,429
Increase (Decrease) in Cash and Cash Equivalents
Cash Flow 2021 Compared to 2020
We had a cash flow deficit from operations of$6.1 million for YE 2021 compared to a cash flow deficit of$3.9 million for YE 2020. The significant reduction in cash flow from operations in FY 2021 was due to payoff of the Pilot Amended Line of Credit inOctober 2021 and loss from operations. The cash flow deficit for YE 2020 primarily related to loss from operations.
Capital Expenditures
During YE 2021, capital expenditures totaled$0 . In FY 2020, we invested$1.1 million in capital expenditures. Capital expenditures in YE 2020 primarily related to: (i) a 13-day maintenance turnaround and equipment repairs and (ii) completion of theNixon Facility Expansion Project , which involved construction of nearly 1.0 million bbls of new petroleum storage tanks, smaller efficiency improvements to the refinery, and acquisition of refurbished refinery equipment for future development. Maintenance and repair costs were expensed as incurred. 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.
Future Expected Capital Expenditures
Management is committed to maintaining the safe and reliable operation of theNixon facility. Due to continued uncertainties related to the COVID-19 pandemic, 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. Remainder of Page Intentionally Left Blank Blue Dolphin Energy Company December 31, 2021 |Page 41 Table of Contents
Management's Discussion and Analysis
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(1)
Third-Party $ 42,953 $ 32 $ 30 $ 776 $ 43,791
Related-Party 20,042 - - - 20,042
Total Long-Term Debt 62,995 32 30 776 63,833
Lease Obligations 215 156 - - 371
$ 63,210 $ 188 $ 30 $ 776 $ 64,204 (1) See "Part II, Item 8. Financial Statements and Supplementary Data - Notes
(3), (10), and (11) for additional disclosures related to third-party and
related-party debt. Long-term debt excludes interest, which is estimated
to be 12.1 million payable in less than 1 year,
and three years, $0.1 million between three and five years, and $0.5
million in five years and later."
Net cash provided by financing activities was $5.0 million in YE 2021 compared
to $5.4 million in YE 2020. Net proceeds from the issuance of debt totaled $10.5
million in YE 2021 compared to $0.4 million in YE 2020. In YE 2021, issuance of
debt was associated with the NPS Term Loan Due 2031.
Principal payments on long-term debt totaled $4.7 million in YE 2021 compared to
$3.9 million in YE 2020. For YE 2021 and YE 2020, principal and interest
payments to Veritex were $0.6 million and $0.9 million , respectively. For both
YE 2021 and YE 2020, principal and interest payments to John Kissick and related
parties were $0 . From June 2020 to October 2021 , Pilot applied payments owed to
NPS under two terminal services agreements against NPS' payment obligations to
Pilot under the Amended Pilot Line of Credit. For YE 2021 and YE 2020, the tank
lease payment setoff totaled $1.9 million and $1.3 million , respectively.
On October 4, 2021 , NPS repaid all obligations owed to Pilot under the Amended
Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28,
2021 , NPS disputed approximately $0.3 million in payments NPS believes Pilot
misapplied as part of the Amended Pilot Line of Credit setoff. As of the filing
date of this report, the amount remained in dispute between the parties.
Debt Defaults. The majority of our debt is in default.
Third-Party Defaults
· Veritex Loans - For YE 2021 and 2020, principal and interest payments to
Veritex were
date of this report, LE and LRM were in default under the LE Term Loan Due
2034 and LRM Term Loan Due 2034 for failing to make required monthly
principal and interest payments and failing to satisfy financial covenants.
In addition, LE was in default under the LE Term Loan Due 2034 for failing to
replenish a
Loan Due 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 the twelve-months ended
payments to GNCU were
NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy
financial covenants.
· Amended Pilot Line of Credit - On
owed to Pilot under the Amended Pilot Line of Credit. However, in a letter
from NPS to Pilot dated
million in payments NPS believes Pilot misapplied as part of the Amended
Pilot Line of Credit setoff. As of the filing date of this report, the amount
remained in dispute between the parties.
From
terminal services agreements against NPS' payment obligations to Pilot under
the Amended Pilot Line of Credit. For YE 2021 and 2020, the tank lease
payment setoff totaled
amount of interest NPS incurred under the Amended Pilot Line of Credit
totaled $0.7 million and $1.4 million , respectively, for YE 2021 and 2020.
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Management's Discussion and Analysis
· 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.
non-payment. As of the filing date of this report, 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 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
Receivable
Number Significant % Total Revenue at December
Twelve Months Ended Customers from Operations 31,
December 31, 2021 3 71.9 % $ 0
December 31, 2020 3 70.8 % $ 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 29.9% and 28.7% of total revenue from operations for the
twelve months ended December 31, 2021 , and 2020, respectively. The Affiliate
represented $0 in accounts receivable at both December 31, 2021 , and 2020,
respectively. See "Part I, Item 1A. Risk Factors" and "Part II, Item 8.
Financial Statements and Supplementary Data - Notes (3) and (16)" for additional
disclosures related to Affiliate agreements, arrangements, and risk.
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 ofDecember 31, 2021 and 2020. At bothDecember 31, 2021 and 2020, BDPL maintained approximately$0.9 million in credit and cash-backed pipeline rights-of-way bonds issued
to BOEM. Blue Dolphin Energy Company December 31, 2021 |Page 43 Table of Contents
Management's Discussion and Analysis
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 have not recorded a liability on our consolidated balance sheet as ofDecember 31, 2021 . AtDecember 31, 2021 and 2020, BDPL maintained$3.5 million and$2.4 million , respectively, in AROs related to abandonment of these assets.
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. InFebruary 2022 ,Russia invaded neighboringUkraine . The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations. 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 around the availability and commodity prices of crude oil, the commodity prices and demand for our refined products, and the general business environment is 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-Ukrainian conflict and COVID-19 as ofDecember 31, 2021 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. Blue Dolphin Energy Company December 31, 2021 |Page 44 Table of Contents
Management's Discussion and Analysis
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 twelve months endedDecember 31, 2021 , we did not adopt any ASUs. Codification Improvements. InOctober 2020 , FASB issued ASU 2020-10, Codification Improvements. The amendments in this guidance affected a wide variety of topics in the ASC by either clarifying the codification or correcting unintended application of guidance. The changes did not have a significant effect on current accounting practice or create a significant administrative cost to most entities. For all reporting entities, the amendments in ASU 2020-10 were effective for fiscal years ending afterDecember 15, 2020 . Early adoption was permitted. Adoption of this guidance did not have a significant impact on our consolidated financial statements.
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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Blue Dolphin Energy Company December 31, 2021 |Page 45
Table of Contents
Quantitative and Qualitative Disclosure
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