BLUE DOLPHIN ENERGY COMPANY The following discussion and analysis is management's perspective of our current financial condition and results of operations and should be read in conjunction with "Important Information Regarding Forward-Looking Statements," "Part I, Item 1A. Risk Factors," and "Part II, Item 8. Financial Statements and Supplementary Data" included in this report. This discussion and analysis includes the years endedDecember 31, 2022 and 2021 and comparison between such periods. The discussions of the year endedDecember 31, 2020 and year-to-year comparisons between the years endedDecember 31, 2021 and 2020 that are not included in this report can be found in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , which was filed onApril 1, 2022 , and such discussions are incorporated by reference into this report. Overview and Outlook
Company 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". An Affiliate, combined withJonathan Carroll , controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See "Part II, Item 8. Financial Statements and Supplementary Data - Note (3)" for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. Going Concern. In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations were significantly improved for the twelve months endedDecember 31, 2022 versus the prior twelve month period, management determined that certain factors continue to present substantial doubt about our ability to continue as a going concern. Factors include significant current debt, which impacts our ability to meet debt covenants, and 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. Management is working to alleviate these factors by entering into forbearance agreements with lenders, maximizing operation of theNixon refinery given favorable refining margins, and pursuing opportunities to obtain capital and/or refinance debt. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing a petition for bankruptcy. Business Operations Update. Our results for the year endedDecember 31, 2022 were favorably impacted by the ongoing recovery in the worldwide demand for petroleum-based transportation fuels, particularly jet fuel, while the worldwide supply of those products remained constrained. This supply and demand imbalance contributed to increases in the market prices of petroleum-based transportation fuels (as well as crude oil and other feedstocks that are processed to make these products) and thus in refining margins. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the crude oil and petroleum-based products markets resulting from the Russian-Ukrainian military conflict. Some refineries closed over the past two years and other refineries ceased crude oil processing in favor of transitioning to renewable fuel production. In addition, these negative impacts to the supply of petroleum-based products were exacerbated during the second quarter of 2022 by the Russian-Ukrainian military conflict. Due to the conflict, countries and private market participants responded by refraining from purchasing and transporting Russian crude oil and petroleum-based products; however, some of the uncertainties and related impacts began dissipating during the second half of 2022.
The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting$32.9 million in net income for the twelve months endedDecember 31, 2022 . Our operating results for 2022, including operating results by segment, can be found within this "Management's Discussion and Financial Analysis of Financial Condition and Results of Operations" within 'Results of Operations.'
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Management's Discussion and Analysis
Our operations generated$16.3 million in cash for the twelve months endedDecember 31, 2022 . We used cash from operations to pay$7.0 million to Veritex and GNCU, our largest lenders, during the same period [as described in "Part II, Item 8. Financial Statements and Supplementary Data - Note (10)"] and made$0.1 million in capital improvements to theNixon facility. AtDecember 31, 2022 , we had$0.5 million in liquidity. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within this "Management's Discussion and Financial Analysis of Financial Condition and Results of Operations" within 'Liquidity and Capital Resources.' General Trends and Outlook. The economic effects from the COVID-19 pandemic on our business were and may again be significant. Although our business has recovered since the onset of the pandemic inMarch 2020 , there continues to be uncertainty and unpredictability about the lingering impacts of COVID-19 to the worldwide economy, including in connection with the spread of variants and resulting restrictions, that could negatively affect our business, financial condition, results of operations , and liquidity in future periods. Additionally, many uncertainties remain with respect to the supply and demand imbalance in the petroleum-based products market worldwide due to the Russian-Ukrainian military conflict and a global economic recession. While it is difficult to predict the ultimate economic impacts of COVID-19, the Russian-Ukrainian military conflict, recession, and inflation may have on us, we have noted key factors below that impacted our results of operations in 2022 and will likely impact our results of operations during 2023: · Jet fuel commodity pricing and demand. · Light crude oil commodity pricing and demand. 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, 2022 and 2021, we secured$1.5 million and$10.5 million , respectively, in working capital from CARES Act loans. There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all, or refinance existing debt. 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 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. Changes in Regulations. Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other 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:
Optimize · Maintain safe operations and enhance health, safety, and
Existing environmental systems.
Asset Base · Plan and manage 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 energy
Opportunities projects.
· Take advantage of market opportunities as they arise.
Optimize Existing Asset Base. Given continued favorable refining margins, we
delayed performing the Nixon facility's maintenance turnaround until the second
quarter of 2023 in order to maximize refinery runs. Although the refinery
experienced a similar amount of downtime during the twelve months ended December
31, 2022 (22 days) compared to the twelve months ended December 31, 2021 (23
days), we experienced fewer days of crude deficiencies associated with cash
constraints during the 2022 period. During 2022, we focused on improvements in
day-to-day plant operations, identifying safety and mechanical process
improvements to optimize plant operations.
Improve Operational Efficiencies. We carefully managed product mix, product
inventory levels, and crude acquisition to maintain improvements to refinery
throughput, production, and sales during the twelve months ended December 31,
2022 compared to the same period in 2021. Refinery charge and production
capacity utilization rates improved more than 5% each to 87.7% and 85.5%,
respectively, during the twelve months ended December 31, 2022 from 81.8% and
79.8%, respectively, during the twelve months ended December 30, 2021 .
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Seize Market Opportunities. As a result of higher commodity prices and increased capacity utilization rates, we experienced a significant improvement in gross profits. Gross profit totaled$46.1 million for the twelve months endedDecember 31, 2022 compared to$0.9 million for the twelve months endedDecember 31, 2021 . In 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. Rising demand for green energy is attributable to a variety of factors, including growing public support,U.S. governmental actions to increase energy independence, and environmental concerns related to climate change. Our initial focus includes commercialization opportunities in hydrogen, carbon capture and storage, carbon offsets and emerging technologies. During the twelve months endedDecember 31, 2022 , management had discussions with several potential commercial partners and explored project-based opportunities through government loans as vehicles to enter the renewable energy space. Management expects these efforts to continue in 2023. As discussed throughout this report, our 'going concern' opinion may impact our renewable energy endeavors. Furthermore, reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects. Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at 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. If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, or seeking protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. 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 tower Refined Products (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 (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. For the twelve months endedDecember 31, 2022 and 2021, we received approximately 4.5 million bbls, or 18.4%, and 4.2 million bbls, or 17.0%, respectively, of the contracted volume under the Crude Supply Agreement. As ofDecember 31, 2022 , we received approximately 13.6 million bbls, or 54.8%, of the total allowable contracted volume under the Crude Supply Agreement. AtDecember 31, 2022 , accounts payable for crude oil and condensate was$0 . As ofDecember 31, 2022 , 100% of our crude oil was sourced from Tartan 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. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. 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, significant 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. Blue Dolphin Energy Company December 31, 2022 |Page 35 35 Table of Contents
Management's discussion and Analysis
Products and Markets. Our market is theGulf Coast region of theU.S. , which is represented by the EIA asPetroleum Administration for PADD 3. We sell our products primarily in theU.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as low sulfur diesel toMexico .The Nixon refinery's product slate is adjusted based on market demand. We currently produce a single finished product - jet fuel - and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a one-year term expiring the earliest to occur ofMarch 31, 2024 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 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 leak detection devices. We also have response and control plans in place for spill prevention and emergencies.The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages. In 2021, theNixon refinery did not incur significant damage due to Winter Storm Uri; however, the facility lost external power for 10 days due to the storm. InDecember 2022 , theNixon refinery was idled for 5 days due to an unnamed winter ice 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
Property Handled Subsidiary Location
Nixon facility Crude Oil LRM, NPS Nixon, Texas
· Petroleum storage tanks Refined Products
(third-party 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 OSHA regulations and comparable state and local regulators. Storage
tanks used for terminal operations are designed for crude oil and condensate and
refined products, and most are equipped with appropriate controls that minimize
emissions and promote safety. Our terminal operations have response and control
plans, spill prevention and other programs to respond to emergencies.
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Management's Discussion and Analysis
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 twelve months endedDecember 31, 2022 and 2021. See "Part II, Item 8. Financial Statements and Supplementary Data - Note (15)" related to pipelines and platform decommissioning requirements and related risks. Property Operating Subsidiary Location Freeport facility BDPL Freeport, Texas
· Crude oil and natural gas separation and
dehydration
· Natural gas processing, treating, and redelivery
· Vapor recovery unit
· Two onshore pipelines
· Land (162 acres)Offshore Pipelines (Trunk Line and Lateral Lines) BDPL Gulf of Mexico Oil and Gas Leasehold Interests BDPC Gulf
ofMexico
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 regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets. Remainder of Page Intentionally Left Blank Blue Dolphin Energy Company December 31, 2022 |Page 37 37 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 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 during 2022 primarily due to increased commodity prices and demand, the general outlook for the oil and natural gas industry for 2023 remains unclear given uncertainty surrounding the Russian military conflict withUkraine , recession, inflation, and COVID-19. 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, storage 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.
Storage Tank Rental Revenue and Ancillary Services Fees
Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees associated with customer tank rental agreements. As a result, tank rental revenue and ancillary services fees combined are 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. Refinery Downtime
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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 the operating results of our refinery operations and tolling and terminaling business segments. Twelve Months EndedDecember 31, 2022 ("2022") VersusDecember 31, 2021 ("2021") Overview. Net income for 2022 was$32.9 million , or income of$2.34 per share, compared to a net loss of$12.8 million , or a loss of$1.01 per share, in 2021. The$45.7 million , or$3.35 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand. The net loss in 2021 was also due to lower refinery margins, 23 days of refinery downtime; of the 23 days, 13 days related to crude deficiencies associated with cash constraints and 10 days were associated with Winter Storm Uri. Although 2022 refinery downtime totaled 22 days (5 of which related to an unnamed winter ice storm), margins were higher. Total Revenue from Operations. Total revenue from operations increased 62% to$487.5 million for 2022 from$300.8 million for 2021. Increased commodity prices primarily drove refinery operations revenue higher in 2022; however, higher volume sales also contributed to the increase. Tolling and terminaling revenue increased nearly 20% between the periods to$4.4 million .
Total Cost of Goods Sold. Total cost of goods sold increased approximately 47%
to
Gross Profit. Gross profit totaled$46.1 million for 2022 compared to gross profit of$0.9 million for 2021. Higher commodity prices and improved refinery uptime positively impacted refinery margins in 2022 compared to 2021.
General and Administrative Expenses. General and administrative expenses
decreased
Depreciation and Amortization. Depreciation and amortization expenses remained
flat at
Total Other Income (Expense). Total other expense in 2022 totaled$5.9 million compared to total other expense of$6.2 million in 2021, representing a decrease of approximately$0.3 million . The decrease was due to lower related party interest expense in 2022 compared to 2021. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements. Blue Dolphin Energy Company December 31, 2022 |Page 39 39 Table of Contents 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. 2022 Versus 2021 Refinery Downtime. Refinery downtime decreased from 23 days in 2021 to 22 days in 2022. Refinery downtime in 2021 related to crude deficiencies associated with cash constraints (13 days) and downtime associated with Winter Storm Uri (10 days). Refinery downtime in 2022 related to maintenance (13 days), weather associated with an unnamed ice storm (5 days), and crude deficiencies associated with cash constraints (4 days). Refining Gross Profit (Deficit). Refining gross profit was$41.6 million for 2022 compared to gross deficit of$2.8 million in 2021, representing a significant increase of$44.4 million . The significant increase in 2022 related to higher refining margins, improved product demand, and improved throughput. Refining gross deficit in 2021 was the result of lower margins and COVID-19 market fluctuations.
Refining Gross Profit (Deficit) per Bbl. On a per bbl basis, refining gross
profit was
Segment Contribution Margin (Deficit). Refinery operations segment contribution margin improved$44.6 million from a deficit of$3.4 million in 2021 to$41.2 million in 2022 due to higher refining margins. Twelve Months Ended December 31, 2022 2021 (in thousands) Refined product sales$ 483,061 $ 297,103 Less: total cost of goods sold(1) (441,433 ) (299,906 ) Refining gross profit (deficit) 41,628 (2,803 ) Sales (Bbls) 4,256 4,071
Refining gross profit (deficit) per bbl
Twelve Months Ended
December 31,
2022 2021
(in thousands)
Refined product sales $ 483,061 $ 297,103
Less: intercompany processing fees(1) (2,583 ) (2,457 )
Less: operation costs and expenses (439,292 ) (298,082 )
Segment contribution margin (deficit)
(1) Fees associated with an intercompany tolling agreement related to naphtha
volumes.
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Midstream Operations. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer. 2022 Versus 2021
Tolling and Terminaling Revenue. Storage tank rental and ancillary services fees increased$0.7 million from$3.7 million in 2021 to$4.4 million in 2022. Intercompany processing fees increased 5% from$2.5 million in 2021 to$2.6 million in 2022. Processed naphtha volumes increased nearly 34% between the
two periods. Segment Contribution Margin. Tolling and terminaling segment contribution margin increased 12% from$4.3 million in 2021 to$4.9 million in 2022. The increase related to higher tank rental and ancillary service fees and slightly higher operation costs and expenses. Twelve Months EndedDecember 31, 2022 2021 (in thousands)
Tank storage rental and ancillary services fees
2,583 2,457
Less: operation costs and expenses (2,142 ) (1,825) Segment contribution margin$ 4,884 $ 4,349
(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Twelve Months Ended December 31,
2022 2021 2022 2021 2022 2021 2022 2021
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit)
$ (221 ) $ (197 ) $ 45,849 $ 716 General and administrative expenses(1) (1,682 ) (1,549 ) (427 ) (343 ) (1,860 ) (2,742 ) (3,969 ) (4,634 ) Depreciation and amortization (1,224 ) (1,214 ) (1,368 ) (1,362 ) (206 ) (204 ) (2,798 ) (2,780 ) Interest and other non-operating expenses, net (2,753 ) (2,779 ) (1,433 ) (1,649 ) (1,697 ) (1,715 ) (5,883 ) (6,143 ) Income (loss) before income taxes 35,527 (8,978 ) 1,656 995 (3,984 ) (4,858 ) 33,199 (12,841 ) Income tax expense - - - - (224 ) - (307 ) - Net income (loss)$ 35,527 $ (8,978 ) $ 1,656 $ 995 $ (4,208 ) $ (4,858 ) $ 32,892 $ (12,841 )
(1) General and administrative expenses within refinery operations include the LEH operating fee, related party and accretion of asset retirement obligations.
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Management's Discussion and Analysis
Capital Resources and Liquidity
We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Profitability from favorable refining margins and increased product demand in 2022 improved cash flow from operations. Continued liquidity improvement related to favorable market conditions will enable us to increasingly meet our needs through cash flow from 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 improving theNixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. During 2022 and 2021, we successfully secured an additional$1.5 million and$10.5 million , respectively, in working capital through CARES Act loans. InOctober 2021 , NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. We also continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, the Russian military conflict withUkraine , COVID-19, recession, and inflation continue to evolve, and the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. If refining margins become unfavorable for an extended period, reducing available working capital, and we are unable to raise 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 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$45.2 million and$78.5 million in working capital deficits atDecember 31, 2022 and 2021, respectively. Excluding the current portion of long-term debt, we had$2.1 million in working capital and$15.5 million in working capital deficits atDecember 31, 2022 and 2021, respectively. The significant improvement in working capital between the twelve-month periods was primarily due to favorable refining margins and increased gross profit. During the twelve months endedDecember 31, 2022 , continued liquidity improvement related to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations. Cash and cash equivalents totaled$0.5 million and$0.01 million atDecember 31, 2022 and 2021, respectively. Restricted cash (current portion) totaled$0 and$0.05 million atDecember 31, 2022 and 2021, respectively. Restricted cash, noncurrent totaled$1.0 million and$0 atDecember 31, 2022 and 2021, respectively. Sources and Use of Cash Components of Cash Flows Twelve Months Ended December 31, 2022 2021 Cash Flows Provided By (Used In): Operating activities$ 16,272 $ (6,056 ) Investing activities (102 ) - Financing activities (14,706 ) 5,002
Increase in Cash and Cash Equivalents
Cash Flow from Operations We had cash flow from operations of$16.3 million for 2022 compared to a cash flow deficit from operations of$6.1 million for 2021. The$22.3 million improvement in cash flow from operations between the periods was due to profit from operations, which was offset by a buildup in inventory.
Capital Expenditures
Capital expenditures totaled$0.1 million and$0 in 2022 and 2021, respectively. Capital expenditures in 2022 related to the addition of a portable cooling tower to combat increased summer temperatures and new fire equipment. Due to continued uncertainties surrounding commodity pricing and refined product demand, the Russian military conflict withUkraine , recession, inflation, and COVID-19, we anticipate limited capital expenditures over the next twelve months. However, to the extent we are able to capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans. Blue Dolphin Energy Company December 31, 2022 |Page 42 42 Table of Contents
Management's Discussion and Analysis
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 Activities Net proceeds from the issuance of debt totaled$1.5 million and$10.5 million in 2022 and 2021, respectively. Proceeds in 2022 represented additional principal under the BDEC Term Loan Due 2051; proceeds in 2021 reflected the original principal under the NPS Term Loan Due 2031.
A summary of payment activities to third parties and related parties follow:
Third-Party
· Veritex Loans (in default) - Principal, interest, late fees, and other
payments (described below) to Veritex totaled
and late fee payments to Veritex totaled
the
from exercising any of its rights and remedies related to existing defaults
and non-compliance with the financial covenants, as well as testing
borrowers' future compliance with financial covenants under the LE Term Loan
Due 2034 and LRM Term Loan Due 2034 through
the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i)
in past due principal and interest at the non-default rate (excluding late
fees), (ii)
million in Veritex attorney fees. In the event that LE and LRM pay off all
amounts due under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 on or
before
approximately
filing date of this report, LE and LRM were in compliance with the Veritex
Forbearance Agreement.
· GNCU Loan (in default) - Required interest only payments to GNCU totaled
million and
date of this report, NPS was in default under the NPS Term Loan Due 2031 for
failing to satisfy financial covenants.
· Kissick Debt (in default) - Under a 2015 subordination agreement, JohnKissick agreed to subordinate his right to payments, as well as any security
interest and liens on the
Veritex as holder of the LE Term Loan Due 2034. As of the filing date of this
report, LE was in default under the Kissick Debt related to past due payment
obligations.
· SBA Loans - No payments were required under the BDEC Term Loan Due 2051, LE
Term Loan Due 2050, or the NPS Term Loan Due 2050 for the twelve months ended
totaled
Pilot Line of Credit. From
owed to NPS under two terminal services agreements against NPS' payment
obligations to Pilot under the Amended Pilot Line of Credit. The tank lease
payment setoff totaled
Pilot in
setoff payments. As of the filing date of this report, the amount remained in
dispute between the parties.
Related-Party
· June LEH Note and BDPL-LEH Loan Agreement (in default) - Net activity on
related-party debt totaled
through related-party accounts receivable totaled
Comparatively, net activity on related-party debt totaled
2021; related party debt settled through related-party accounts receivable
totaled
An Affiliate, combined with
the voting power of our Common Stock as of the filing date of this report.
An Affiliate also operates and manages all Blue Dolphin properties, funds
working capital requirements during periods of working capital deficits,
guarantees certain of our third-party secured debt, and is a significant
customer of our refined products.
We can provide no assurance that: (i) our assets or cash flow from operations
and financing activities will be sufficient to fully repay borrowings under
secured loan agreements that are in default, either upon maturity or if
accelerated, (ii) LE, LRM, or NPS will be able to refinance or restructure
their respective debt, and/or (iii) lenders 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 price of our Common
Stock, and on the value of an investment in our Common Stock, and holders of
our Common Stock could lose their investment in our Common Stock in its
entirety. Management maintains ongoing dialogue with lenders regarding
defaults and potential restructuring and refinance opportunities.
See "Part II, Item 8. Financial Statements and Supplementary Data - Notes (3)
and (10)" for additional disclosures related to related-party and third-party
debt.
Blue Dolphin Energy Company December 31, 2022 |Page 43
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Management's Discussion and Analysis
Total Debt and Lease Obligations
The table below summarizes our principal contractual debt and lease obligations
at
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 $ 42,155$ 190 $ 140 $ 1,992 $ 44,477 Related-party 5,211 - - - 5,211 Total long-term debt less debt issue costs 47,366 190 140 1,992 49,688 Lease obligations 156 - - - 156 $ 47,522$ 190 $ 140 $ 1,992 $ 49,844
(1) See "Part II, Item 8. Financial Statements and Supplementary Data - Notes (3)
and (10)" for additional disclosures related to third-party and related-party
debt.
(2) Excludes interest payable; at
interest payable, related party was estimated to be 9.7 million (less than 1
year),
years), and $0.5 million (5 years and later).
Concentration of Customers Risk. We routinely assess the financial strength of
our customers. To date, we have not experienced significant write-downs in
accounts receivable balances. We believe that our accounts receivable credit
risk exposure is limited.
Portion of
Accounts
% Total Receivable
Number Significant Revenue from at December
Twelve Months Ended Customers Operations 31,
December 31, 2022 2 60.4 % $ 0
December 31, 2021 3 71.9 % $ 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. For
the twelve months ended December 31, 2022 and 2021, the Affiliate accounted for
approximately 35.6% and 29.9% of total revenue from operations, respectively.
See "Part II, Item 8. Financial Statements and Supplementary Data - Notes (3) and (15)" for additional disclosures related to Affiliate agreements and arrangements for additional disclosures related to Affiliate 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 conduct 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. 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. Blue Dolphin Energy Company December 31, 2022 |Page 44 44 Table of Contents
Management's Discussion and Analysis
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, 2022 and 2021. At bothDecember 31, 2022 and 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 failing 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 failing to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys inJune 2020 . InAugust 2022 , BSEE issued an INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to aSeptember 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform byJune 1, 2023 . BDPL is examining the feasibility of completing decommissioning operations by BSEE's deadline. InMarch 2023 , BSEE issued an INC to BDPL for failing to perform the required structural surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. BDPL is obtaining vendor quotes for the performance of the required surveys and intends to submit a corrective action plan to BSEE. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL's operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity. We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as ofDecember 31, 2022 and 2021. AtDecember 31, 2022 and 2021, BDPL maintained$3.7 million and$3.5 million , respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
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. Although commodity price volatility, the Russian-Ukrainian military conflict, COVID-19, recession, inflation, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of certainty. We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as ofDecember 31, 2022 and through the filing date of this report. The accounting matters assessed included, but 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. During the twelve months ended
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have
been issued, but are not yet effective, are expected to have a material impact
on our financial position, results of operations, or liquidity.
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Quantitative and Qualitative Disclosure
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