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). Active 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. Business Strategy 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: Optimizing ? Operating safely and enhancing health, safety, and Existing environmental systems. Asset Base ? Planning and managing turnarounds and downtime. Improving ? Reducing or streamlining variable costs incurred in production. Operational ? Increasing throughput capacity and optimizing product slate. Efficiencies ? Increasing tolling and terminaling revenue. Seizing ? Taking advantage of market opportunities as they arise. Market Opportunities Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at theNixon facility, meeting contractual obligations, and having favorable margins on refined products. Our financial results are primarily affected by the relationship between our crude oil and condensate acquisition costs, the prices at which we ultimately sell our refined products, and the volume of refined products that we sell, all of which depend upon numerous factors beyond our control. The prices at which we sell our refined products are strongly influenced by the commodity price of crude oil. If crude oil prices increase, our 'refinery operations' business segment margins will fall unless we can pass along these price increases to our wholesale customers. Increases in the selling price for refined products typically trail the rising cost of crude oil and may be difficult to implement when crude oil costs increase dramatically over a short period. Sharp decreases in refined product market demand, such as the record low demand that has occurred because of widespread COVID-19 related travel restrictions, can adversely affect our refining margins. There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
Management's Discussion and Analysis
We regularly engage in discussions with third parties regarding the possible purchase of assets and operations that are strategic and complementary to our existing operations. However, we do not anticipate any material acquisition activity in the foreseeable future. Management has 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, margin deterioration and volatility, and historic net losses and working capital deficits. A 'going concern' opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend on sustained positive operating margins and working capital to sustain operations, including the purchase of crude oil and condensate and payments on long-term debt. If we are unable to achieve these goals, our business would be jeopardized, and we may not be able to continue. Business Operations Update We continue to proactively address the known impacts of COVID-19. Facility-dependent personnel, including those needed to maintain theNixon facility, report to the facility under strict protocols that are designed to ensure personnel health and safety. We are also supporting non-facility-dependent personnel through remote work and virtual meeting technology, and we are encouraging all personnel to follow local guidance. All non-essential business travel and attendance at conferences, trainings, and other gatherings have been suspended. The outbreak of the COVID-19 pandemic negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for petroleum products in 2020 and is expected to continue in 2021. The COVID-19 pandemic also created simultaneous shocks in oil supply, demand, and pricing resulting in an economic challenge to our industry which has not occurred since our formation. The COVID-19 pandemic and related governmental responses, as well as developments in the global oil markets, resulted in significant business and operational disruptions, including business closures, supply chain disruptions, travel restrictions, stay-at-home orders, and limitations on the availability of workforces. As a result of commodity price volatility and decreased demand for our products, our business results and cash flows were significantly adversely impacted by the COVID-19 pandemic. Specifically, Blue Dolphin's income and cash flow from operations reflected a loss of$7.9 million and a use of cash of$3.9 million , respectively, for the twelve months endedDecember 31, 2020 compared to income of$5.5 million and a use of cash of$8.2 million , respectively, for the twelve months endedDecember 31, 2019 . The twelve months endedDecember 31, 2019 included a gain on the extinguishment of debt of$9.1 million . We expect the combination of abnormal volatility in commodity prices and significant decreased demand for our refined products to continue for the foreseeable future. The duration of the impact of the COVID-19 pandemic and the related market developments is unknown. The continued negative impact of these events on our business and operations will depend on the ongoing severity, location and duration of the effects and spread of COVID-19, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in 2021 or thereafter. We continue to take measures to lessen the impact of the pandemic on our operations and limit the spread of the virus among personnel. For example, we operated theNixon facility at reduced rates in 2020 based on market conditions and staffing levels, and we expect to continue adjusting the facility's operating rate until market and other conditions substantially improve. We have carefully evaluated projects and, as a result, have limited or postponed projects and other non-essential work. We have planned a level of capital expenditures we believe will allow us to satisfy and comply with all required safety, environmental, and planned regulatory capital commitments and other regulatory requirements, although there are no assurances that we will be able to continue to do so. Non-compliance with applicable environmental and safety requirements, including as a result of reduced staff due to an outbreak of the virus at one of our locations, may impair our operations, subject us to fines or penalties assessed by governmental authorities, and/or result in an environmental or safety incident. We may also be subject to liability as a result of claims against us by impacted workers or third parties. The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, result of operations, financial condition, cash flows, and our ability to service our indebtedness and other obligations. There can also be no assurance that our liquidity, business, financial condition, and results of operations will revert to pre-2020 levels once the impacts of the COVID-19 pandemic cease. 2020 Successes Despite a going concern due to defaults under our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, and the COVID-19 pandemic, management took decisive steps in 2020 to further improve our operations and financial stability. Achieved milestones include: ? We safely completed a 13-day planned maintenance turnaround and concluded the 5-year capital improvement expansion project of theNixon facility. The turnaround focused on resolving crude heater issues while the expansion project involved the 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 deployment. The increase in petroleum storage capacity has helped with de-bottlenecking theNixon refinery . The additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase theNixon refinery's complexity.
Management's Discussion and Analysis
? Although in place pre-pandemic, we further tightened our cash conservation program to manage cash flow and remain competitive in a low oil price environment. This includes optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. Despite this focus, management is keeping in mind the overall safety of our operations and personnel, as well as the impact to our business over the long-term. 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 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. Steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply in 2020. In addition, actions by members ofOPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. Although federal, state, and local governments and health officials have made strides to contain the virus, treat its effects, and implement vaccine programs andOPEC has since agreed to certain production cuts, oil prices have remained depressed and oversupply and lack of demand in the market persists. Oil and refined product prices and demand are expected to remain volatile for the foreseeable future, and we cannot predict when prices and demand will improve and stabilize. We are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position or results of operations. 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. 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 our 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 DowntimeThe Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.
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 Ended
Overview. Net loss for YE 2020 was Gross Profit (Deficit). Gross deficit$14.5 million , or a loss of$1.15 per was$2.1 million for YE 2020 compared share, compared to net income of$7.4 to a gross profit of$11.4 million for million, or income of$0.66 per share, YE 2019. The significant decrease in in YE 2019. The increase in net loss gross profit between the periods was the result of unfavorable margins primarily related to lower margins per per bbl and significantly lower sales bbl due to market fluctuations volume. YE 2019 included a gain on the associated with the COVID-19 pandemic extinguishment of debt of$9.1 million . in 2020. Total Revenue from Operations. Total General and Administrative revenue from operations decreased Expenses. General and administrative nearly 44% to$174.8 million for YE expenses decreased nearly 14% to$2.3 2020 from$309.3 million for YE 2019. million from$2.7 million in YE 2019. The significant decrease related to a The decrease related to significantly decline in refinery operations revenue lower legal expenses in YE 2020 as a result of lower commodity pricing compared to YE 2019. per bbl on refined products sold and significantly lower sales volumes in Depletion, Depreciation and 2020 due to market fluctuations Amortization. Depletion,
depreciation,
associated with the COVID-19 pandemic. and amortization expenses for YE 2020 Tolling and terminaling revenue
totaled approximately $2.7 million
decreased by
in YE 2019. The nearly 8% increase
primarily related to placing a
Total Cost of Goods Sold. Total cost of petroleum storage tank in service.
goods sold decreased approximately 41%
to $176.9 million for YE 2020 from Total Other Income (Expense). Total
$297.8 million for YE 2019. The other expense in YE 2020 was $6.6
significant decrease related to lower million compared to total other income
commodity prices per bbl for crude oil of
representing a decrease of $8.5
fluctuations associated with the million. Total other expense in YE 2020
COVID-19 pandemic and significant primarily related to interest expense
refinery downtime in 2020, which associated with our secured loan
resulted in lower sales volumes. agreements with Veritex, related-party
debt, and the line of credit with
Pilot. Total other income in YE 2019
included a $9.1 million gain on the
extinguishment of debt related to the
GEL Settlement, which was offset by
interest and other expense of $7.2
million.
Management's Discussion and Analysis
Refinery 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.
Twelve Months Ended
December 31,
2020 2019
(in thousands)
Refined product sales $170,601 $304,924 Less: Total cost of goods sold (176,862) (297,827) Gross profit (deficit) (6,261) 7,097
Sales (Bbls) 3,916 4,547
Gross Profit (Deficit) per Bbl
Twelve Months Ended
December 31,
2020 2019
(in thousands)
Net revenue (1) $170,601 $304,924
Intercompany fees and sales (2,384) (2,615)
Operation costs and expenses (175,201) (296,502)
Segment Contribution Margin (Deficit)
(1) Net revenue excludes intercompany crude sales.
YE 2020 Versus YE 2019
? Refining gross deficit per bbl was$1.60 for YE 2020 compared to a gross profit per bbl of$1.56 in YE 2019, representing a decrease of$3.16 per bbl. The significant decrease related to lower margins and significant refinery downtime in 2020 due to market fluctuations associated with the COVID-19 pandemic. ? Segment contribution margin decreased approximately$12.8 million to a deficit of$7.0 million in YE 2020 compared to profit of$5.8 million in YE 2019. The decrease related to lower margins per bbl and lower sales volume in 2020 due to market fluctuations associated with the COVID-19 pandemic. ? Refinery downtime increased significantly to 42 days in YE 2020 compared to 21 days in YE 2019. Refinery downtime in 2020 primarily related to lack of crude due to cash restraints, a maintenance turnaround, and equipment repairs while refinery downtime in YE 2019 primarily related to a maintenance turnaround and equipment repairs. Significant refinery downtime in YE 2020 negatively impacted refinery throughput, refinery production, and capacity utilization rate.
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.
Twelve Months Ended
December 31,
2020 2019
(in thousands)
Net revenue (1) $4,209 $4,338
Intercompany fees and sales 2,384 2,615
Operation costs and expenses (1,661) (1,325)
Segment Contribution Margin $4,932 $5,628 (1) Net revenue excludes intercompany crude sales.
YE 2020 Versus YE 2019 ?
Tolling and terminaling net revenue decreased 3% in YE 2020 compared to YE 2019 primarily as a result of lower tank rental revenue and decreased fees collected for ancillary services, such as truck loading/unloading, lab testing, and in-tank and tank-to-tank blending. ? Intercompany fees and sales, which reflect fees associated with an intercompany tolling agreement tied to naphtha volumes, decreased in YE 2020 compared to YE 2019. Naphtha sales volumes decreased between the periods. ? Segment contribution margin in YE 2020 decreased 12% to$4.9 million compared to$5.6 million YE 2019. The decrease related to lower revenue and intercompany fees tied to naphtha volumes.
Management's Discussion and Analysis
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Twelve Months Ended December 31,
2020 2019 2020 2019 2020 2019 2020 2019
Refinery Operations Tolling and Terminaling Corporateand Other Total
(in thousands)
Segment
contribution
margin $(6,984) $5,807 $4,932 $5,628 $(169) $(222) $(2,221) $11,213
General and
administrative
expenses(1) (1,257) (1,252) (307) (262) (1,381) (1,756) $(2,945) $(3,270)
Depreciation and
amortization (1,186) (1,913) (1,296) (396) (204) (181) $(2,686) $(2,490)
Interest and
other
non-operating
income
(expenses), net (2,929) 5,668 (2,546) (2,398) (1,116) (1,362) $(6,591) $1,908
Income (loss)
before income
taxes (12,356) 8,310 783 2,572 (2,870) (3,521) (14,443) 7,361
Income tax
expense - - - - (15) - (15) -
Income (loss)
before income
taxes $(12,356) $8,310 $783 $2,572 $(2,885) $(3,521) $(14,458) $7,361
(1)General and administrative expenses within refinery operations include the LEH operating fee.
Capital Resources and Liquidity Considering this period of extreme economic disruption, combined with the weaker commodity price environment, we remain focused on the safe and reliable operation of theNixon facility and cash conservation. Our primary cash requirements relate to: (i) purchasing crude oil and condensate for the operation of theNixon refinery , (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement and (iii) servicing debt. In instances where we experience a working capital deficit, we have historically relied on Affiliates to meet our liquidity needs. We are actively exploring additional financing; however, we currently have no arrangements for additional capital and no assurances can be given that we will be able to raise sufficient capital when needed, on acceptable terms, or at all. If we are unable to raise sufficient additional capital in the very near term, we may further default on our payment obligations under certain of our existing debt obligations. Without additional financing, it remains unclear whether we will have or can obtain sufficient liquidity to withstand COVID-19 disruptions to our business. We had a working capital deficit of$72.3 million and$59.4 million atDecember 31, 2020 and 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of$22.9 million and$19.6 million atDecember 31, 2020 and 2019, respectively. Although in place pre-pandemic, we have further tightened our cash conservation program to manage cash flow and remain competitive in a low oil price environment. This includes optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. Despite this focus, management is keeping in mind the overall safety of our operations and personnel, as well as the impact to our business over the long-term. The duration of the impact of the COVID-19 pandemic and the related market developments is unknown. The continued negative impact of these events on our business and operations will depend on the ongoing severity, location and duration of the effects and spread of COVID-19, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in 2021 or thereafter. A sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. As a result, we may have to seek 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. During the twelve-month period endedDecember 31, 2020 , we received two small loans totaling$0.3 million in the aggregate under federal or other governmental programs to support our operations as a result of the COVID-19 pandemic. These loans provided or guaranteed by theU.S. government, including pursuant to the Coronavirus Aid, Relief and Economic Security Act, signed into law onMarch 27, 2020 , subject us to additional restrictions on our operations, including limitations on personnel headcount and compensation reductions and other cost reduction activities that could adversely affect us.
Management's Discussion and Analysis
Debt Overview.
Total Debt and Accrued Interest
December 31,
2020 2019
(in thousands)
Veritex Loans
LE Term Loan Due 2034 (in default) $22,840 $21,776
LRM Term Loan Due 2034 (in default) 9,473 9,031
Amended Pilot Line of Credit (in default) 8,145 11,786 Notre Dame Debt (in default)
9,413 8,617
Related-Party Debt
BDPL Loan Agreement (in default) 6,814 6,174
March Ingleside Note (in default) 1,013 1,004
March Carroll Note (in default) 1,551 997
June LEH Note (in default) 9,446 -
LE Term Loan Due 2050 152 -
NPS Term Loan Due 2050 152 -
Equipment Loan Due 2025 71 -
Total Debt 69,070 59,385
Less: Current portion of long-term debt, net (57,744) (51,301) Less: Unamortized debt issue costs
(1,749) (2,096)
Less: Accrued interest payable (in default) (9,222) (5,988)
$355 $- Net cash provided by financing activities was$5.4 million in YE 2020 compared to$8.8 million in YE 2019. Net proceeds from the issuance of debt totaled$0.4 million in YE 2020 compared to$12.4 million in YE 2019. Principal payments on long-term debt totaled$3.6 million in YE 2020 compared to$2.6 million in YE 2019. As of the filing date of this report, LE and LRM were current on required monthly payments under secured loan agreements with Veritex, but other defaults remain outstanding as noted below. NPS is making partial monthly payments to Pilot under the Amended Pilot Line of Credit as a tank lease setoff using amounts Pilot owed to NPS under two tank lease agreements. No payments have been made under the subordinated Notre Dame Debt. Debt Defaults. The majority of our debt is in default. Defaults under our secured loan agreements with third parties include Veritex financial covenant violations, a Pilot event of default and debt acceleration, and a Notre Dame Debt event of default. We also have defaults under secured and unsecured related-party debt. See "Part II, Item 8. Financial Statements and Supplementary Data, Notes (1), (3), (10), and (11)" for additional disclosures related to Affiliate and third-party debt agreements, including debt guarantees, and defaults in our debt obligations. 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. Number Portion of Significant % Total Accounts Customers Revenue from Receivable Operations December 31, 2020 3 70.8%$0 2019 4 96.5%$1.7 million One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. The Affiliate accounted for 28.7% and 31.3% of total revenue from operations in 2020 and 2019, respectively. The Affiliate represented approximately$0 and$1.4 million in accounts receivable atDecember 31, 2020 and 2019, respectively. The amounts will be paid under normal business terms. Amounts outstanding relating to the Jet Fuel Sales Agreement can significantly vary period to period based on the timing of the related sales and payments received. Amounts we owed to LEH under various long-term debt, related-party agreements totaled$9.1 million and$6.2 million atDecember 31, 2020 and 2019, 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.
Management's Discussion and Analysis
Contractual Obligations. Related-Party Debt Agreement/Transaction Parties Type Effective Date Interest Rate Key Terms Amended and Restated Jonathan Carroll Debt 04/01/2017 2.00%
Tied to payoff of LE Guaranty Fee Agreement - LE$25 million Veritex loan; payments 50% cash, 50% Common Stock
Amended and Restated Jonathan Carroll Debt
Tied to payoff of
Guaranty Fee Agreement - LRM LRM$10 million Veritex loan; payments 50% cash, 50% Common Stock
March Carroll Note (in Jonathan Carroll Debt 03/31/2017 8.00% Blue Dolphin working default) - Blue Dolphin
capital; matured
01/01/2019; interest
still accruing
March Ingleside Note (in Ingleside - Blue Debt 03/31/2017 8.00% Blue Dolphin working
default) Dolphin capital; reflects
amounts owed to
Ingleside under
previous Amended and
Restated Tank Lease
Agreement; matured
01/01/2019; interest
still accruingJune LEH Note (in LEH - Blue Debt 03/31/2017 8.00% Blue Dolphin working default) Dolphin
capital; reflects
amounts owed to LEH
under the Amended
and Restated
Operating Agreement;
reflects amounts
owed to Jonathan
Carroll under
guaranty fee
agreements; matured
01/01/2019; interest
still accruingBDPL-LEH Loan Agreement LEH - BDPL Debt 08/15/2016 16.00%
2-year term;$4.0 (in default) million principal amount;$0.5 million annual payment; proceeds used for working capital; no financial maintenance covenants; secured by certain BDPL property Related-Party Defaults
Loan Description Event(s) of Default Covenant Violations
March Carroll Note Failure of borrower to pay past due --
(in default) obligations; loan matured January
2019
March Ingleside Note Failure of borrower to pay past due ---
(in default) obligations; loan matured January
2019
June LEH Note (in Failure of borrower to pay past due ---
default) obligations; loan matured January
2019
BDPL-LEH Loan Failure of borrower to pay past due ---
Agreement (in obligations; loan matured August
default) 2018
Third-Party Debt
Original
Principal Monthly
Amount Principal
(in and Interest Interest
Loan Description Parties millions) Maturity Date Payment Rate Loan Purpose
Veritex Loans(1)
LE Term Loan Due LE-Veritex $25.0 Jun 2034 $0.2 million WSJ Prime + Refinance loan;
2034 (in default) 2.75% capital
improvements
LRM Term Loan Due LRM-Veritex $10.0 Dec 2034 $0.1 million WSJ Prime + Refinance bridge
2034 (in default) 2.75% loan; capital
improvements
Notre Dame Debt (in LE-Kissick $11.7 Jan 2018 No payments 16.00% Working capital;
default)(2)(3) to date; reduced balance
payment of GEL Final
rights Arbitration
subordinated Award
Amended Pilot Line NPS-Pilot $13.0 May 2020 --- 14.00% GEL Settlement
of Credit (in Payment, NPS
default) purchase of
crude oil from
Pilot, and
working capital
SBA EIDLs
LE Term Loan Due LE-SBA $0.15 Aug 2050 $0.0007 3.75% Working capital
2050(4) million
NPS Term Loan Due NPS-SBA
million
Equipment Loan Due LE-Texas First $0.07 Oct 2025 $0.0013 4.50% Equipment Lease
2025 million Conversion
(1)
Proceeds were placed in a disbursement account whereby Veritex makes payments
for construction related expenses. Amounts held in the disbursement account are
reflected on our consolidated balance sheets as restricted cash (current
portion) and restricted cash, noncurrent. At December 31, 2020 , restricted cash
(current portion) was $0.05 million and restricted cash, noncurrent was $0.5
million . At December 31, 2019 , restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.6 million .
(2)
LE originally entered into a loan agreement with Notre Dame Investors, Inc. in
the principal amount of $8.0 million . The debt is currently held by John
Kissick . Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to
increase the principal amount by $3.7 million ; the additional principal was used
to reduce the GEL Final Arbitration Award by $3.6 million .
(3)
Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt
agreed to subordinate their right to payments, as well as any security interest
and liens on the Nixon facility's business assets, in favor of Veritex as holder
of the LE Term Loan Due 2034.
(4)
Payments are deferred for the first twelve (12) months of the loan; the first
payment is due August 2021 ; interest accrues during the deferral period. SBA
EIDLs are not forgivable.
Management's Discussion and Analysis
Third-Party Defaults
Loan Description Event(s) of Default Covenant Violations
Veritex Loans
LE Term Loan Due 2034 GEL Final Arbitration Financial covenants:
(in default) Award and associated ? debt service coverage ratio,
material adverse effect current ratio, and debt to net
conditions; failure to worth ratio
replenish $1.0 million
payment reserve account;
events of default under
other secured loan
agreements with Veritex
LRM Term Loan Due GEL Final Arbitration Financial covenants:
2034 (in default) Award and associated ? debt service coverage ratio,
material adverse effect current ratio, and debt to net
conditions; events of worth ratio
default under other
secured loan agreements
with Veritex
Notre Dame Debt (in Failure of borrower to ---
default) pay past due obligations;
loan matured January 2019
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
To cover the various obligations of lessees and rights-of-way holders operating
in federal waters of the Gulf of Mexico , BOEM evaluates an operator's financial
ability to carry out present and future obligations to determine whether the
operator must provide additional security beyond the statutory bonding
requirements. Such obligations include the cost of plugging and abandoning wells
and decommissioning pipelines and platforms at the end of production or service
activities. Once plugging and abandonment work has been completed, the
collateral backing the financial assurance is released by BOEM.
BDPL has historically maintained $0.9 million in financial assurance to BOEM for
the decommissioning of its trunk pipeline offshore in federal waters. Following
an agency restructuring of the financial assurance program, in March 2018 BOEM
ordered BDPL to provide additional financial assurance totaling approximately
$4.8 million for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018 , BOEM issued BDPL INCs for each right-of-way that
failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted
multiple extension requests that extended BDPL's deadline for filing a statement
of reasons for the appeal with the IBLA. On August 9, 2019 , BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering BDPL's August
2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until
August 2020 . The Office of the Solicitor of the U.S. Department of the Interior
was agreeable to a 10-day extension while it conferred with BOEM on BDPL's stay
request. In late October 2019 , BDPL filed a motion to request the 10-day
extension, which motion was subsequently granted by the IBLA. The solicitor's
office consented to an additional 14-day extension for BDPL to file its reply,
and BDPL filed a motion to request the 14-day extension in November 2019 . The
solicitor's office indicated that BOEM would not consent to further extensions.
However, the solicitor's office signaled that BDPL's adherence to the milestones
identified in an August 15, 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.
Although we planned to decommission the offshore pipelines and platform assets
in the third quarter of 2020, decommissioning of these assets has been delayed
due to cash constraints associated with the ongoing impact of COVID-19 and
winter being the offseason for dive operations in the U.S. Gulf of Mexico . We
cannot currently estimate when decommissioning may occur. In the interim, BDPL
provides BOEM and BSEE with updates regarding the project's status.
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
have not recorded a liability on our consolidated balance sheet as of December
31, 2020 . At both December 31, 2020 and 2019, BDPL maintained approximately $0.9
million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE's idle iron
regulations. Idle iron regulations mandate lessees and rights-of-way holders to
permanently abandon and/or remove platforms and other structures when they are
no longer useful for operations. Until such structures are abandoned or removed,
lessees and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In December 2018 , BSEE issued an INC to BDPL for failure to flush and fill
Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to
address BDPL's plans with respect to decommissioning its offshore pipelines and
platform assets. BSEE proposed that BDPL re-submit permit applications for
pipeline and platform decommissioning, along with a safe boarding plan for the
platform, within six (6) months (no later than February 15, 2020 ), and develop
and implement a safe boarding plan for submission with such permit applications.
Further, BSEE proposed that BDPL complete approved, permitted work within twelve
(12) months (no later than August 15, 2020 ). BDPL timely submitted permit
applications for decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020 . In April
2020 , BSEE issued another INC to BDPL for failure to perform the required
structural surveys for the GA-288C Platform. BDPL requested an extension to the
INC related to the structural platform surveys, and BSEE approved BDPL's
extension request. The required platform surveys were completed, and the INC was
resolved in June 2020 .
Although we planned to decommission the offshore pipelines and platform assets
in the third quarter of 2020, decommissioning of these assets has been delayed
due to cash constraints associated with the ongoing impact of COVID-19 and
winter being the offseason for dive operations in the U.S. Gulf of Mexico . We
cannot currently estimate when decommissioning may occur. In the interim, BDPL
provides BSEE with updates regarding the project's status.
Management's Discussion and Analysis
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, 2020 . AtDecember 31, 2020 and 2019, BDPL maintained$2.4 million and$2.6 million , respectively, in AROs related to abandonment of these assets. Sources and Use of Cash. Components of Cash Flows Twelve Months Ended December 31, 2020 2019 (in thousands) Cash Flows Provided By (Used In): Operating activities$(3,901) $(8,190) Investing activities (1,085) (1,574) Financing activities 5,429 8,767
Increase (Decrease) in Cash and Cash Equivalents
Cash Flow 2020 Compared to 2019 We had a cash flow deficit from operations of$3.9 million for YE 2020 compared to$8.2 million for YE 2019. The approximate$4.3 million improvement in cash flow from operations in FY 2020 compared to FY 2019 was due to no longer having to make payments to GEL. The cash flow deficit for YE 2020 primarily related to loss from operations. The cash flow deficit from operations for YE 2019 was primarily the result of payments toward the accrued arbitration award with GEL.
2020 Capital Expenditures
During YE 2020, capital expenditures totaled
? Completion ofNixon Facility Expansion Project - We completed a 5-year expansion project involving the 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 deployment. The increase in petroleum storage capacity has helped with de-bottlenecking theNixon refinery . The additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase theNixon refinery's complexity. The total cost of the project, which was funded through the Veritex loans, was approximately$32.5 million . ?
Maintenance Turnaround and Repairs - We completed a 13-day, planned maintenance turnaround that primarily involved replacing a key component of the crude heater. We also made equipment repairs. These 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.
Management's Discussion and Analysis
Future Expected Capital Expenditures We remain focused on the safe and reliable operation of theNixon facility. In view of the uncertainty surrounding the COVID-19 pandemic, combined with the weaker commodity price environment, we anticipate new capital expenditures to be minimal in 2021in . However, capital spending using remaining funds under a loan from Veritex will continue until the funds are depleted. Unused amounts under the Veritex loans are reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See "Part II, Item 8. Financial Statements and Supplementary Data, Note (10)" for additional disclosures related to borrowings for capital spending.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates Our significant accounting policies and recent accounting developments are described in "Part II, Item 8. Financial Statements and Supplementary Data, Note (2)". 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. 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 uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through 2021 and beyond. 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. 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 COVID-19 as ofDecember 31, 2020 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures New accounting standards and disclosures are discussed in "Part II, Item 8. Financial Statements and Supplementary Data, Note (2)".
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Quantitative and Qualitative Disclosure
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