BLUE DOLPHIN ENERGY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See "Important Information Regarding Forward-Looking Statements" for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2021 .
Overview
Blue Dolphin is an independent downstream energy company operating in theGulf Coast region ofthe United States . Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity inNixon, Texas . Blue Dolphin was formed in 1986 as aDelaware corporation and is traded on the OTCQX under the ticker symbol "BDCO". 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 and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see "Part I, Item 1. Financial Statements - Note (4)".
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 funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See "Part I, Item 1. Financial Statements - Note (3)" for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. Business Operations Update General Business Environment. Throughout 2020, the COVID-19 pandemic and actions taken by governments and others in response thereto negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for petroleum products. The COVID-19 pandemic also resulted in significant business and operational disruptions, including business closures, liquidity strains, destruction of non-essential demand, as well as supply chain challenges, travel restrictions, stay-at-home orders, and limitations on the availability of the workforce. However, actions taken by theU.S. government to provide stimulus to individuals and businesses helped mitigate the impacts of the downturn caused by COVID-19. Vaccination efforts underway domestically and internationally also provide promise for a sustained, near-term economic recovery. As more businesses resume operations and governmental restrictions are lifted, there is cautious optimism that the economy will continue to recover in 2021, but it is unknown if or when the economy will return to pre-COVID-19 levels. As a result of government actions taken to curb the spread of COVID-19 and significant business interruptions, demand for our refined products declined sharply beginning inmid-March 2020 . The U.S. market for gasoline and diesel began showing signs of improvement starting in late 2020 and improved demand has, intermittently, continued through the first half of 2021. While jet fuel demand lagged behind due to depressed international and domestic business and leisure air travel, it has also begun to recover. With regard to inventory, Winter Storm Uri caused unprecedented disruptions to natural gas and electricity supply throughout the Midwest andGulf Coast regions, limiting refining operations, which helped further reduce excess inventories and balance supply and demand. The combination of improving demand, declining inventories, and increasing COVID-19 vaccinations led to an overall increase in refined product prices and improved refining margins during the first half of 2021. The EIA forecasts that an increase in global oil supply will contribute to a mostly balanced market during the second half of 2021. However, these projections depend on the production decisions ofOPEC ,U.S. oil production, and the pace of oil demand growth. While the refining market is showing signs of recovery, refinery utilization rates remain below historical levels and uncertainty remains as to whether a resurgence in the virus may spur future governmental restrictions and lockdowns which could threaten the pace of global economic recovery. Our Business. While demand has improved and the uncertainties surrounding COVID-19 appear to be lessening, downward pressure on commodity prices, refining margins, and demand remain a significant risk and could continue for the foreseeable future. Improvements in our financial position and performance depend on the ongoing severity, location and duration of the effects and spread of COVID-19 and any new variants, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus and treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in the second half of 2021 and beyond. 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.Blue Dolphin Energy Company June 30, 2021 |Page 38 Table of Contents
Management's Discussion and Analysis
Management continues to proactively address the known impacts of COVID-19 to the extent possible. We operate theNixon facility at reduced rates based on market conditions and staffing levels, and we adjust the facility's operating rate in response to market and other conditions. We carefully evaluate projects and, as a result, have limited or postponed projects and other non-essential work. We have also planned capital expenditures at a level we believe will satisfy all required safety, environmental, and regulatory requirements. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to
collaborate virtually. Going Concern Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. As discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, 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, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing. Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets atJune 30, 2021 andDecember 31, 2020 . See "Part I, Item 1. Financial Statements - Notes (1), (3), (10), and (11)" for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results
of operations. Third-Party Defaults
· Veritex Loans - Defaults under the LE Term Loan Due 2034 and LRM Term Loan
Due 2034 permit Veritex to declare the amounts owed under these loan
agreements immediately due and payable, exercise its rights with respect to
collateral securing obligors' obligations under these loan agreements, and/or
exercise any other rights and remedies available. Any exercise by Veritex of
its rights and remedies under our secured loan agreements would have a
material adverse effect on our business operations, including crude oil and
condensate procurement and our customer relationships; financial condition;
and results of operations. Veritex exercising its rights would also adversely
impact the trading price of our common stock and the value of an investment
in our common stock, which could lead to holders of our common stock losing
their investment in its entirety. We can provide no assurance that: (i) our
assets or cash flow will be sufficient to fully repay borrowings under our
secured loan agreements with Veritex, either upon maturity or if accelerated,
(ii) LE and LRM will be able to refinance or restructure the payments of the
debt, and/or (iii) Veritex, as first lien holder, will provide future default
waivers. The borrowers continue in active dialogue with Veritex. For both the
three and six-month periods ended
payments to Veritex totaled
ended
million. As of the filing date of this report, LE and LRM were in default
with respect to required monthly payments under the LE Term Loan Due 2034 and
LRM Term Loan Due 2034.
· Amended Pilot Line of Credit - Upon maturity of the Pilot Line of Credit in
each a guarantor and collectively guarantors, a notice demanding the
immediate payment of the unpaid principal amount and all interest accrued and
unpaid, and all other amounts owing or payable (the "Payment Obligations").
Pursuant to the Amended Pilot Line of Credit, commencing on
Payment Obligations began to accrue interest at a default rate of fourteen
percent (14%) per annum. Failure of the borrower or any guarantor of paying
the past due Payment Obligations constituted an event of default. Pilot
expressly retained and reserved all its rights and remedies available to it
at any time, including without limitation, the right to exercise all rights
and remedies available to Pilot under the Amended Pilot Line of Credit or
applicable law or equity.
Blue Dolphin Energy Company June 30, 2021 |Page 39
Table of Contents
Management's Discussion and Analysis
Pursuant to a June 1, 2020 notice, Pilot began applying Pilot's payment
obligations to NPS under each of (a) the Terminal Services Agreement
(covering Tank Nos . 67, 71, 72, 73, 77, and 78), dated as of May 2019 ,between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank
No. 56), dated as of
payment obligations to Pilot under the Amended Pilot Line of Credit. Such
tank lease setoff amounts only partially satisfy NPS' obligations under the
Amended Pilot Line of Credit, and Pilot expressly retained and reserved all
its rights and remedies available to it at any time, including, without
limitation, the right to exercise all rights and remedies available to Pilot
under the Amended Pilot Line of Credit or applicable law or equity. For the
three-month periods ended
amounts totaled
three-month periods ended
incurred under the Amended Pilot Line of Credit totaled
million, respectively. For the six-month periods ended
2020, the tank lease setoff amounts totaled
respectively. For the six-month periods ended
amount of interest NPS incurred under the Amended Pilot Line of Credit
totaled
On
entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach
of the Amended Pilot Line of Credit and Pilot demanded full repayment of the
Payment Obligations, including through use of the proceeds of these SBA
EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan
Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Payment
Obligations. While the SBA acknowledged this point and indicated a
willingness to subordinate the loans, no further action has been taken by
Pilot as of the filing date of this report.
Any exercise by Pilot of its rights and remedies under the Amended Pilot Line
of Credit would have a material adverse effect on our business operations,
including crude oil and condensate procurement and our customer
relationships; financial condition; and results of operations. NPS and
guarantors continue in active dialogue with Pilot to reach a negotiated
settlement, and we believe that Pilot hopes to continue working with NPS to
settle the Payment Obligations. NPS and guarantors are also working on the
possible refinance of amounts owing and payable under the Amended Pilot Line
of Credit. However, progress with potential lenders has been slow due to the
ongoing COVID-19 pandemic. NPS's ability to repay, refinance, replace or
otherwise extend this credit facility is dependent on, among other things,
business conditions, our financial performance, and the general condition of
the financial markets. Given the current financial markets, we could be
forced to undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could be used
to repay such indebtedness. We can provide no assurance that we will be able
to consummate any such transaction on terms that are commercially reasonable,
on terms acceptable to us or at all. If new debt or other liabilities are
added to the Company's current consolidated debt levels, the related risks
that it now faces could intensify. In the event we are unsuccessful in such
endeavors, NPS may be unable to pay the amounts outstanding under the Amended
Pilot Line of Credit, which may require us 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.
· Notre Dame Debt - 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
favor of Veritex as holder of the LE Term Loan Due 2034. To date, no payments
have been made under the subordinated Notre Dame Debt and the holder of the
Notre Dame Debt has taken no action as a result of the non-payment.
Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results 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. During the three-month period endedJune 30, 2021 and 2020, our refinery experienced 4 days and 8 days of downtime, respectively, as a result of crude deficiencies due to COVID-19 related cash constraints. During the six-month periods endedJune 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints. Related-Party Defaults Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Replated party debt represents such working capital borrowings. As of the filing date of this report, Blue Dolphin was in default with respect to past due payment obligations under the March Carroll Note,March Ingleside Note , and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement.Blue Dolphin Energy Company June 30, 2021 |Page 40 Table of Contents
Management's Discussion and Analysis
Margin Deterioration and Volatility. Our refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, 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 addition, actions by members of theOPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. While the refining market is showing signs of recovery, refinery utilization rates remain below historical levels and uncertainty remains as to whether a resurgence in the virus may spur future governmental restrictions and lockdowns which could threaten the pace of global economic recovery. We cannot predict when prices and demand will stabilize, and 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 and results of operations throughout 2021.
Historic Net Losses and Working Capital Deficits.
Net Losses
Net loss for the three months endedJune 30, 2021 was$4.1 million , or a loss of$0.32 per share, compared to a net loss of$4.2 million , or a loss of$0.34 per share, for the three months endedJune 30, 2020 . The improvement between the three-month periods in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. Less refinery downtime also contributed to the improvement between the periods. Net loss for the six months endedJune 30, 2021 was$7.3 million , or a loss of$0.57 per share, compared to a net loss of$7.6 million , or a loss of$0.61 per share, for the six months endedJune 30, 2020 . The improvement between the six-month periods in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. The improvement between the periods was also due to less refinery downtime and decreased interest and other expense. Working Capital Deficits
We had a working capital deficit of
Cash and cash equivalents totaled$0.009 million and$0.5 million atJune 30, 2021 andDecember 31, 2020 , respectively. Restricted cash (current portion) totaled$0.05 million at bothJune 30, 2021 andDecember 31, 2021 . Restricted cash, noncurrent totaled$0 and$0.5 million atJune 30, 2021 andDecember 31, 2020 , respectively. See "Part I, Item 1. Financial Statements - Note (1)" regarding going concern factors and associated risks.
Operating Risks
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. As discussed under "Part I, Item 1. Financial Statements - Note (1)" under "Going Concern" and throughout this report, we are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. 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 the spread of COVID-19 with vaccine programs and monitor variant clusters, we expect to continue operating. Any governmental mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability. Management believes that it has taken all prudent steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a low oil price environment. We are managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. At theNixon facility, we adjust throughput and production based on prevailing market conditions. With regard to personnel safety, we adopted remote working where possible and social distancing, mask wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.Blue Dolphin Energy Company June 30, 2021 |Page 41 Table of Contents
Management's Discussion and Analysis
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. 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 environmental
Existing systems.
Asset Base ·
Planning and managing turnarounds and downtime.
· Reducing or streamlining variable costs incurred in production.
Improving
Operational · Increasing throughput capacity and optimizing product slate. Efficiencies
· Increasing tolling and terminaling revenue.
Seizing · · Leveraging existing infrastructure to engage in renewable
Market energy projects.Opportunities ·
· Taking advantage of market opportunities as they arise.
Optimizing Existing Asset Base. We are subject to extensive federal, state, and local environmental and safety laws and regulations enforced by various agencies, including the DOT,EPA ,OSHA , as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention measures and the composition of the fuels we produce, as well as the safe operation of our plants and pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our refinery and related operations, and may be subject to revocation, modification, and renewal. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. With regard to the pandemic and personnel safety, we adopted remote working where possible and social distancing, mask wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.
We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. 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. In an effort to better manage downtime, we conduct maintenance activities to the extent possible when the refinery experiences downtime. Improving Operational Efficiencies. During the three and six-month periods endedJune 30, 2021 , refinery throughput, production and sales improved as a result of steps taken by management to maximize operational efficiency in the COVID-19 pandemic environment. Steps included managing inventory to avoid buildup and adjusting throughput and production levels based on prevailing market conditions. We are also managing cash flow by optimizing receivables and payables by prioritizing payments, as well as closely monitoring costs company-wide. Seizing Market Opportunities. With our sights set on recovery from the pandemic and the future, we continue to explore and investigate growth opportunities. InMarch 2021 , we announced a pivot to explore renewable energy opportunities through an affiliate,Lazarus Energy Alternative Fuels LLC ("LEAF"). LEAF will explore potential opportunities to position Blue Dolphin in the global transition to cleaner, lower-carbon alternatives from traditional fossil fuels. These opportunities may include technology, development, or commercial partnerships, as well as the repurposing of assets and facilities, for the production, storage, transportation and sale of alternative fuels and other low-carbon products. Under theBiden Administration , the focus on cleaner energy sources and technology to decarbonize resource-intensive industries continues to accelerate. This focus is steering government policy to incentivize clean energy sources and carbon capture technologies, as well as supporting new industry-wide investment in areas like renewables, green hydrogen, and carbon capture, utilization, and storage. 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, having favorable margins on refined products, and collaborating with new partners to develop and finance clean energy projects. There can be no assurance that our business strategy will be successful, including a pivot to renewables through LEAF, 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. We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities 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 impairs 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 depends 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 will be jeopardized, we may not be able to continue operating, and we may have to seek bankruptcy protection.Blue Dolphin Energy Company June 30, 2021 |Page 42 Table of Contents
Management's Discussion and Analysis
Refinery Operations
Our refinery operations segment consists of the following assets and operations:
Key
Products Operating Location
Property Handled Subsidiary
Nixon facility Crude Oil LE Nixon, Texas
· Crude distillation tower (15,000 bpd) Refined
Products
· Petroleum storage tanks
· 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 Pilot. The crude supply agreement, the initial term of which is volume based, expires when Pilot sells us 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement automatically renews for successive one-year terms (each such term, a "Renewal Term") unless either party provides the other with notice of nonrenewal at least 60 days prior to expiration of any Renewal Term. Total volume sold to us under the crude supply agreement totaled approximately 6.8 million bbls as ofJune 30, 2021 . EffectiveMarch 1, 2020 , Pilot assigned its rights, title, interest, and obligations in the crude supply agreement toTartan Oil LLC , a Pilot affiliate. Sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results 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. During the three-month periods endedJune 30, 2021 and 2020, our refinery experienced 4 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints. During the six-month periods endedJune 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints. Pilot also stores crude oil at theNixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at theNixon facility at a specified rate per bbl of the storage tank's shell capacity. Although the initial term of the terminal services agreement expiredApril 30, 2020 , the agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement. Products and Markets. Our market is theGulf Coast region of theU.S. , which is represented by the EIA asPetroleum Administration forDefense District 3 (PADD 3). We sell our products primarily in theU.S. within PADD 3. Occasionally, we sell refined products to customers that export toMexico .The Nixon refinery's product slate is moderately adjusted based on market demand. We currently produce a single finished product - jet fuel - and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur ofMarch 31, 2022 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing. Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (theHouston -San Antonio -Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products. Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple "topping unit" refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.Blue Dolphin Energy Company June 30, 2021 |Page 43 Table of Contents
Management's Discussion and Analysis
Safety and Downtime. Our refinery operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations underEPA ,OSHA , and comparable state and local requirements. Together, these regulations are designed for personnel safety, process safety management, and risk management, as well as to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable, or explosive chemicals. Storage tanks used for refinery 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 refinery operations have response and control plans, spill prevention and other programs to respond to emergencies.The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Planned turnarounds are used to repair, restore, refurbish, or replace refinery equipment. Unplanned shutdowns can occur for a variety of reasons, including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities, disabled equipment, or crude deficiencies due to cash constraints. However, inTexas the most typical reason is excessive heat or power outages from high winds and thunderstorms.The Nixon refinery did not incur significant damage as a result of Winter Storm Uri inFebruary 2021 . However, the facility was down for approximately 10 days as a result of lost external power.
We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. 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.
Tolling and Terminaling Operations
Our tolling and terminaling segment consists of the following assets and
operations:
Key
Products Operating Location
Property Handled Subsidiary
Nixon facility Crude Oil LRM, NPS Nixon, Texas
· Petroleum storage tanks Refined
Products· Loading and unloading facilities
Products and Customers. TheNixon 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 (theHouston -San Antonio -Dallas/Fort Worth area). Shipments are received and redelivered from within theNixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to three years. Operations Safety. Our tolling and terminal operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations underOSHA and comparable state and local regulations. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies. Inactive Operations We own certain other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets, which are shown below and included in corporate and other, are not operational and are fully impaired. We fully impaired our pipeline assets in 2016 and our oil and gas leasehold interests in 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and six months endedJune 30, 2021 and 2020. See "Part I, Item 1. Financial Statements - Note (16)" 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 BDPL Gulf of Mexico Lateral Lines) Oil and Gas Leasehold Interests BDPC Gulf of Mexico Blue Dolphin Energy Company June 30, 2021 |Page 44 Table of Contents
Management's Discussion and Analysis
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets. Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be in read in conjunction with our financial statements in "Part I, Item 1. Financial Statements". The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl 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. In 2020, 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 addition, actions by members of theOPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. As COVID-19 vaccinations increase, global economic activity rises, and theOPEC and partner countries limit crude oil production, there is cautious optimism that the economy is improving based on signs of recovery during the first half of 2021. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future as new mutations of the virus spread. We cannot predict when prices and demand will stabilize, and 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 and results of operations throughout 2021. 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), 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 "Non-GAAP Reconciliations" within this Results of Operations and the financial statements within "Part I, Item 1. Financial Statements" 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 Downtime
Blue Dolphin Energy Company June 30, 2021 |Page 45 Table of Contents
Management's Discussion and Analysis
Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments. Three Months EndedJune 30, 2021 Versus Six Months EndedJune 30, 2021 VersusJune 30, 2020 June 30, 2020 (Q2 2021 Versus Q2 2020) (6 Months 2021 Versus 6 Months 2020)
Overview. Net loss for Q2 2021 was$4.1 Overview. Net loss for 6 Months 2021 million, or a loss of$0.32 per share, was$7.3 million , or a loss of$0.57 compared to a net loss of$4.2 million , per share, compared to a net loss of or a loss of$0.34 per share, in Q2$7.6 million , or a loss of$0.61 per 2020. The improvement between the share, in 6 Months 2020. The periods was the result of slightly improvement between the periods was the improved market conditions as more result of improved market conditions as businesses resumed operations and more businesses resumed operations and governmental pandemic-related governmental pandemic-related restrictions were lifted, including restrictions were lifted, including more favorable commodity prices and more favorable commodity prices and improved throughput and sales volumes. improved throughput and sales volumes. Less refinery downtime also contributed The improvement between the periods was to the improvement between the periods. also due to less refinery downtime and decreased interest and other
expense.
Total Revenue from Operations. Total revenue from operations increased Total Revenue from Operations. Total significantly in Q2 2021 to$69.4 revenue from operations increased million compared to$18.5 million in Q2 significantly in 6 Months 2021 to 2020. The increase between the periods$127.0 million compared to$78.3 related to higher refined product million in 6 Months 2020. The increase prices and higher sales volume, which between the periods related to higher was slightly offset by lower ancillary refined product prices and higher sales service fees (tank blending, lab volume, which was slightly offset by testing, etc.). lower tank rental revenue. Total Cost of Goods Sold. Total cost of Total Cost of Goods Sold. Total cost of goods sold increased significantly in goods sold increased significantly in 6 Q2 2021 to$70.5 million compared to Months 2021 to$130.1 million compared$19.7 million for Q2 2020. The increase to$81.8 million for 6 Months 2020. The in Q2 2021 related to higher crude oil increase in 6 Months 2021 related to costs and increased throughput volume higher crude oil costs and increased associated with improved refined throughput volume as the economy
product demand as the economy recovers recovers from the COVID-19 pandemic. from the COVID-19 pandemic.
Gross Deficit. Gross deficit was Gross Deficit. Gross deficit was$1.0 million for 6 Months 2021 compared to million for Q2 2021 compared to gross gross deficit of$1.3 million for 6 deficit of$1.2 million for Q2 2020. Months 2020. The slight improvement was The slight improvement was the result the result of more stable commodity of more stable commodity prices and prices and improved sales volumes as improved sales volumes as the economy the economy recovers from the COVID-19 recovers from the COVID-19 pandemic. pandemic. General and Administrative Expenses. General and Administrative Expenses. General and administrative expenses General and administrative expenses increased approximately 15% to$0.6 increased approximately 8% to$1.3 million in Q2 2021 from$0.5 million in million in 6 Months 2021 from$1.2 Q2 2020. The increase primarily related million in 6 Months 2020. The increase to increased insurance premiums primarily related to increased following renewals. insurance premiums following
renewals.
Depletion, Depreciation and Depletion, Depreciation and Amortization. Depletion, depreciation, Amortization. Depletion, depreciation, and amortization expenses were flat at and amortization expenses totaled$1.4 $0.7 million for Q2 2021 and Q2 2020. million for 6 Months 2021 compared to Depletion, depreciation and$1.3 million for 6 Months 2020,
amortization expense primarily related representing an increase of to refinery assets.
approximately $0.1 million . The
increase related to placing refinery
Total Other Expense. Total other assets in service. expense was also flat in Q2 2021 compared to Q2 2020 at$1.6 million . Total Other Expense. Total other Total other expense in both periods expense was$3.0 million in 6 Months primarily related to interest expense 2021 compared to$3.4 million in 6 associated with secured loan agreements Months 2020, representing a decrease of with Veritex, related-party debt, and approximately$0.4 million . Total other the line of credit with Pilot. expense in both periods primarily related to interest expense associated with secured loan agreements with Veritex, related-party debt, and the line of credit with Pilot. Interest expense between the periods was the result of the decreased outstanding balance under the Amended Pilot Line of Credit.Blue Dolphin Energy Company June 30, 2021 |Page 46 Table of Contents
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.
Three Months Ended
June 30,
2021 2020
(in thousands)
Refined product sales $ 68,518 $ 17,359
Less: Total cost of goods sold (70,466 ) (19,676 )
Gross deficit (1,948 ) (2,317 )
Sales (Bbls) 988 669
Gross Deficit per Bbl $ (1.97 ) $ (3.46 )
Three Months Ended
June 30,
2021 2020
(in thousands)
Net revenue (1) $ 68,518 $ 17,359
Intercompany fees and sales (581 ) (406 )
Operation costs and expenses (70,054 ) (19,418 )
Segment Contribution Deficit $ (2,117 ) $ (2,465 ) (1) Net revenue excludes intercompany crude sales.
Q2 2021 Versus Q2 2020
· Refining gross deficit per bbl was
deficit per bbl of
bbl. The improvement between the periods related to higher refining margins
and higher sales volume. Commodity prices and refined product demand
experienced a recovery in Q2 2021 compared to Q2 2020 as more businesses
resumed operations and governmental pandemic-related restrictions were
lifted. Despite the Q2 2021 improvement, economic recovery remained well
below pre-pandemic levels.
· Segment contribution deficit improved slightly in Q2 2021 compared to Q2 2020
due to the aforementioned economic recovery and less refinery downtime.
· Refinery downtime decreased to 4 days in Q2 2021 compared to 23 days in Q2
2020. Refinery downtime in Q2 2021 related to crude deficiencies associated
with cash constraints. Refinery downtime in Q2 2020 was spurred by the
COVID-19 pandemic. Management utilized Q2 2020 downtime to perform a
maintenance turnaround and address other maintenance issues.
Six Months Ended
June 30,
2021 2020
(in thousands)
Refined product sales $ 127,001 $ 78,256
Less: Total cost of goods sold (130,089 ) (81,764 )
Gross deficit (3,088 ) (3,508 )
Sales (Bbls) 1,935 1,810
Gross Deficit per Bbl $ (1.60 ) $ (1.94 )
Six Months Ended
June 30,
2021 2020
(in thousands)
Net revenue (1) $ 127,001 $ 78,256
Intercompany fees and sales (1,147 ) (1,023 )
Operation costs and expenses (129,343 ) (81,251 )
Segment Contribution Deficit $ (3,489 ) $ (4,018 ) (2) Net revenue excludes intercompany crude sales.
6 Months 2021 Versus 6 Months 2020
· Refining gross deficit per bbl was
deficit per bbl of
margins and higher sales volume. Commodity prices and refined product demand
experienced a recovery in 6 Months 2021 compared to 6 Months 2020 as more
businesses resumed operations and governmental pandemic-related restrictions
were lifted. For 6 Months 2021, the economic recovery was offset by the
impact of Winter Storm Uri.
· Segment contribution deficit improved slightly in 6 Months 2021 compared to 6
Months 2020 due to the aforementioned economic recovery. However, the
economic recovery was offset by the impact of Winter Storm Uri.
· Refinery downtime decreased to 15 days in 6 Months 2021 compared to 26 days
in 6 Months 2020. Refinery downtime in 6 Months 2021 related to power outages
due to Winter Storm Uri and crude deficiencies associated with cash
constraints. Refinery downtime in 6 Months 2020 was spurred by the COVID-19
pandemic, which included cash constraints that affected our ability to
acquire crude. Management utilized 6 Months 2020 downtime to perform a
maintenance turnaround and address other maintenance issues.
Blue Dolphin Energy Company June 30, 2021 |Page 47
Table of Contents
Management's Discussion and Analysis
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.
Three Months Ended
June 30,
2021 2020
(in thousands)
Net revenue (1) $ 923 $ 1,110
Intercompany fees and sales 581 406
Operation costs and expenses (412 ) (258 )
Segment Contribution Margin $ 1,092 $ 1,258 (1) Net revenue excludes intercompany crude sales.
Q2 2021 Versus Q2 2020
· Tolling and terminaling net revenue decreased nearly 17% in Q2 2021 compared
to Q2 2020 primarily as a result of lower ancillary service fees (tank
blending, lab testing, etc.).
· Intercompany fees and sales, which reflect fees associated with anintercompany tolling agreement tied to naphtha volumes, increased in Q2 2021
compared to Q2 2020. Naphtha sales volumes increased between the periods as a
result of demand recovery.
· Segment contribution margin in Q2 2021 decreased 13% to
to $1.3 million Q2 2020. The decrease related to lower revenue.
Six Months Ended
June 30,
2021 2020
(in thousands)
Net revenue (1) $ 1,853 $ 2,213
Intercompany fees and sales 1,147 1,023
Operation costs and expenses (746 ) (513 )
Segment Contribution Margin $ 2,254 $ 2,723 (2) Net revenue excludes intercompany crude sales.
6 Months 2021 Versus 6 Months 2020
· Tolling and terminaling net revenue decreased 16% in 6 Months 2021 compared
to 6 Months 2020 primarily as a result of lower tank rental revenue.
· Intercompany fees and sales, which reflect fees associated with an
intercompany tolling agreement tied to naphtha volumes, increased in 6 Months
2021 compared to 6 Months 2020. Naphtha sales volumes increased between the
periods as a result of demand recovery.
· Segment contribution margin in 6 Months 2021 decreased 17% to
compared to $2.7 million 6 Months 2020. The decrease related to lower
revenue.
Blue Dolphin Energy Company June 30, 2021 |Page 48
Table of Contents
Management's Discussion and Analysis
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Three Months Ended June 30,
2021 2020 2021 2020 2021 2020 2021 2020
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ (2,117 ) $ (2,465 ) $ 1,092 $ 1,258 $ (50 ) $ (47 ) $ (1,075 ) $ (1,254 )
General and
administrative
expenses(1) (265 ) (327 ) (68 ) (68 ) (410 ) (326 ) (743 ) (721 )
Depreciation
and
amortization (302 ) (294 ) (340 ) (324 ) (51 ) (51 ) (693 ) (669 )
Interest and
other
non-operating
expenses, net (708 ) (751 ) (448 ) (616 ) (432 ) (231 ) (1,588 ) (1,598 )
Income (loss)
before incometaxes (3,392 ) (3,837 ) 236 250 (943 ) (655 ) (4,099 ) (4,242 ) Income tax expense - - - - - (15 ) - -
Income (loss)
(1) General and administrative expenses within refinery operations include the
LEH operating fee.
Six Months Ended June 30,
2021 2020 2021 2020 2021 2020 2021 2020
Refinery Operations Tolling and Terminaling Corporate and Other Total
(in thousands)
Segment
contribution
margin
(deficit) $ (3,489 ) $ (4,018 ) $ 2,254 $ 2,723 $ (104 ) $ (106 ) $ (1,339 ) $ (1,401 )
General and
administrative
expenses(1) (566 ) (631 ) (136 ) (136 ) (823 ) (745 ) (1,525 ) (1,512 )
Depreciation
and
amortization (604 ) (582 ) (680 ) (618 ) (102 ) (102 ) (1,386 ) (1,302 )
Interest and
other
non-operating
expenses, net (1,306 ) (1,492 ) (900 ) (1,386 ) (817 ) (474 ) (3,023 ) (3,352 )
Income (loss)
before income
taxes (5,965 ) (6,723 ) 538 583 (1,846 ) (1,427 ) (7,273 ) (7,567 )
Income tax
expense - - - - - (15 ) - (15 )
Income (loss)
(1) General and administrative expenses within refinery operations include the
LEH operating fee.
Liquidity and Capital Resources
We had a working capital deficit of$77.4 million and$72.3 million atJune 30, 2021 andDecember 31, 2020 , respectively. Excluding the current portion of long-term debt, we had a working capital deficit of$24.5 million and$22.6 million atJune 30, 2021 andDecember 31, 2020 , 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.
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 further disruptions to our business. How long and to what extent COVID-19 and related market developments will continue to affect our business and operations is unknown. As COVID-19 vaccinations increase, global economic activity rises, and theOPEC and partner countries limit crude oil production, there is cautious optimism that the economy is improving based on signs of recovery during the first half of 2021. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future as new mutations of the virus spread. We cannot predict when prices and demand will stabilize, and 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 and results of operations throughout 2021. 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.Blue Dolphin Energy Company June 30, 2021 |Page 49 Table of Contents
Management's Discussion and Analysis
Debt Overview.
Total Debt and Accrued Interest
June 30 ,December 31, 2021 2020 (in thousands) Veritex Loans
LE Term Loan Due 2034 (in default)$ 23,468 $ 22,840 LRM Term Loan Due 2034 (in default) 9,738 9,473 Amended Pilot Line of Credit (in default) 6,044 8,145 Notre Dame Debt (in default) 9,812 9,413 Related-Party Debt BDPL Loan Agreement (in default) 7,134 6,814 March Ingleside Note (in default) 1,045 1,013 March Carroll Note (in default) 1,916 1,551
June LEH Note (in default) 12,119 9,446 BDEC Term Loan Due 2051 503 - LE Term Loan Due 2050 155 152 NPS Term Loan Due 2050 155 152 Equipment Loan Due 2025 62 71
Total debt and accrued interest 72,151 69,070
Less: Current portion of long-term debt, net (58,777 ) (57,744 ) Less: Unamortized debt issue costs
(1,685 ) (1,749 )
Less: Accrued interest payable (in default) (10,842 ) (9,222 )
Long-term debt, net of current portion $ 847 $ 355
Net cash provided by financing activities totaled $2.6 million in Q2 2021
compared to $4.0 million provided by financing activities in Q2 2020. Principal
payments on debt totaled $0.003 million in Q2 2021 compared to $0.8 million in
Q2 2020. Net cash provided by financing activities totaled $1.7 million in 6
Months 2021 compared to $4.7 million provided by financing activities in 6
Months 2020. Principal payments on debt totaled $0.009 million in 6 Months 2021
compared to $1.5 million in 6 Months 2020. As of the filing date of this report,
LE and LRM were in default with respect to required monthly payments under
secured loan agreements with Veritex. 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: (1) Veritex financial
covenant violations, failure to make monthly payments, and failure to replenish
a payment reserve account; (2) Pilot event of default and debt acceleration; and
(3) Notre Dame Debt event of default. We also have defaults under secured and
unsecured related-party debt. As of the filing date of this report, Blue Dolphin
was in default with respect to past due payment obligations under the March
Carroll Note, March Ingleside Note , and June LEH Note. As of the same date, BDPL
was also in default related to past due payment obligations under the BDPL-LEH
Loan Agreement. See "Part I, Item 1. Financial Statements - 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.
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Blue Dolphin Energy Company June 30, 2021 |Page 50
Table of Contents
Management's Discussion and Analysis
Concentration of Customers Risk. We routinely assess the financial strength of
our customers and have not experienced significant write-downs in accounts
receivable balances. We believe that our accounts receivable credit risk
exposure is limited.
Portion of
% Total Accounts
Number Significant Revenue from Receivable
Three Months Ended Customers Operations at June 30,
June 30, 2021 3 75 % $ 0
June 30, 2020 3 69 % $ 0
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 30% and 25% of total revenue from operations for the three months
ended June 30, 2021 and 2020, respectively. The Affiliate represented $0 in
accounts receivable at both June 30, 2021 and 2020, respectively.
Portion of
% Total Accounts
Number Significant Revenue from Receivable
Six Months Ended Customers Operations at June 30,
June 30, 2021 4 86 % $ 0
June 30, 2020 4 90 % $ 0
The Affiliate accounted for 29% and 28% of total revenue from operations for the
six months ended June 30, 2021 and 2020, respectively. The Affiliate represented
$0 in accounts receivable at both June 30, 2021 and 2020, respectively.
Outstanding amounts under certain related party agreements can significantly
vary period to period based on the timing of sales and payments. With regard to
the Amended and Restated Operating Agreement, any amount that remains
outstanding at the end of the quarter is added to the June LEH Note, which is
reflected on the consolidated balance sheets within long-term debt, related
party, current portion (in default). At June 30, 2021 and December 31, 2020 , the
total amount we owed to LEH under long-term debt, related-party agreements
totaled $19.3 million and $16.3 million , respectively. See "Part I, Item 1.
Financial Statements - Notes (3) and (16)" for additional disclosures related to
Affiliate agreements, arrangements, and risk.
Contractual Obligations.
Related-Party Debt
Agreement/Transaction Parties Type Effective Date Interest Rate Key Terms
Amended and Restated Jonathan Debt 04/01/2017 2.00% Tied to
Guaranty Fee Carroll - LE payoff of LE
Agreement $25 million
Veritex
loan;
payments 50%
cash, 50%
Common Stock
Amended and Restated Jonathan Debt 04/01/2017 2.00% Tied to
Guaranty Fee Carroll - payoff of
Agreement LRM LRM $10
million
Veritex
loan;
payments 50%
cash, 50%
Common Stock
March Carroll Note Jonathan Debt 03/31/2017 8.00% Blue Dolphin
(in default) Carroll - working
Blue Dolphin capital;
matured
01/01/2019;
reflects
amounts owed
to Jonathan
Carroll
under
guaranty fee
agreements;
interest
still
accruing
March Ingleside Note Ingleside - Debt 03/31/2017 8.00% Blue Dolphin
(in default) Blue Dolphin working
capital;
matured
01/01/2019;
interest
still
accruing
June LEH Note (in LEH - Blue Debt 03/31/2017 8.00% Blue Dolphin
default) Dolphin working
capital;
reflects
amounts owed
to LEH under
the Amended
and Restated
Operating
Agreement;
matured
01/01/2019;
interest
still
accruing
BDPL-LEH Loan LEH - BDPL Debt 08/15/2016 16.00% 2-year term;
Agreement (in $4.0 million
default) 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) payment obligations; loan matured
January 2019
March Ingleside Note Failure of borrower to pay past due ---
(in default) payment obligations; loan matured
January 2019
June LEH Note (in Failure of borrower to pay past due ---
default) payment obligations; loan matured
January 2019
BDPL-LEH Loan Failure of borrower to pay past due ---
Agreement (in payment obligations; loan matured
default) August 2018
Blue Dolphin Energy Company June 30, 2021 |Page 51
Table of Contents
Management's Discussion and Analysis
Third-Party Debt
Original
Principal Monthly
Amount Principal
(in and Interest
Loan Description Parties millions) Maturity Date Payment Interest Rate Loan Purpose
Veritex Loans(1)
LE Term Loan Due LE-Veritex $25.0 Jun 2034 $0.2 million WSJ Prime + 2.75% Refinance
2034 (in loan;
default) capital
improvements
LRM Term Loan LRM-Veritex $10.0 Dec 2034 $0.1 million WSJ Prime + 2.75% Refinance
Due 2034 (in bridge loan;
default) capital
improvements
Notre Dame Debt LE-Kissick $11.7 Jan 2018 No payments 16.00% Working
(in to date; capital;
default)(2)(3) payment reduced
rights balance of
subordinated GEL
arbitration
award
Amended Pilot NPS-Pilot $13.0 May 2020 --- 14.00% GEL
Line of Credit settlement
(in default) payment, NPS
purchase of
crude oil
from Pilot,
and working
capital
SBA EIDLs
BDEC Term Loan Blue Dolphin-SBA $0.5 Jun 2051 $0.003 3.75% Working
Due 2051(4) million capital
LE Term Loan Due LE-SBA $0.15 Aug 2050 $0.0007 3.75% Working
2050(5) million capital
NPS Term Loan NPS-SBA $0.15 Aug 2050 $0.0007 3.75% Working
Due 2050(5) million capital
Equipment Loan LE-Texas First
Equipment
Due 2025(6) million Lease
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
(current portion) was
At
restricted cash, noncurrent was
(2) LE originally entered into a loan agreement with
in the principal amount of
Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended
to increase the principal amount by
was used to reduce the arbitration award with GEL by
(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
Veritex as holder of the LE Term Loan Due 2034.
(4) Payment is deferred for the first eighteen (18) months of the loan; the first
payment is due
The BDEC Term Loan Due 2051 is not forgivable.
(5) Payments are deferred for the first twelve (12) months of the loan; the first
payment is due
The LE Term Loan Due 2050 and NPS Term Loan Due 2050 are not forgivable.
(6) In
option to purchase the backhoe at maturity. The equipment rental agreement
matured in
2025 to finance the purchase of the backhoe. The backhoe continues to be used
at the Nixon facility.
Third-Party Defaults
Loan Description Event(s) of Default Covenant Violations
Veritex Loans
LE Term Loan Due Failure to make required Financial covenants:
2034 (in default) monthly payments; failure to ? debt service coverage ratio,
replenish $1.0 million current ratio, and debt to net
payment reserve account; worth ratio
events of default under
other secured loan
agreements with VeritexLRM Term Loan Due Events of default under Financial covenants: 2034 (in default) other secured loan
? debt service coverage ratio,
agreements with Veritex current ratio, and debt to net
worth ratio
Amended Pilot Line Failure of borrower or any --- of Credit (in guarantor to pay past due default)
obligations; loan matured
May 2020
Notre Dame Debt (in Failure of borrower to pay ---
default) past due obligations; loan
matured January 2019
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Blue Dolphin Energy Company June 30, 2021 |Page 52
Table of Contents
Management's Discussion and Analysis
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
To cover the various obligations of lessees and rights-of-way holders operating in federal waters of theGulf of Mexico , BOEM evaluates an operator's financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. BDPL 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, inMarch 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. InJune 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. OnAugust 9, 2019 , BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL'sAugust 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter untilAugust 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 lateOctober 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 inNovember 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 anAugust 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. BDPL reasonably expected to complete its decommissioning obligations prior to BSEE'sAugust 2020 deadline. However, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. Decommissioning of the assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. Financial constraints and BDPL's pending appeal of the BOEM INCs do 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 ofJune 30, 2021 . At bothJune 30, 2021 andDecember 31, 2020 , 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. InDecember 2018 , BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE onAugust 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 thanFebruary 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 thanAugust 15, 2020 ). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE onFebruary 11, 2020 and the USACOE onMarch 25, 2020 . InApril 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 inJune 2020 .
BDPL reasonably expected to complete its decommissioning obligations prior to BSEE'sAugust 2020 deadline. However, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. Financial constraints do 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 ofJune 30, 2021 . At bothJune 30, 2021 andDecember 31, 2020 , BDPL maintained$2.4 million in AROs related to abandonment of these assets.Blue Dolphin Energy Company June 30, 2021 |Page 53 Table of Contents
Management's Discussion and Analysis
Sources and Use of Cash.
Components of Cash Flows
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Cash Flows Provided By (Used In):
Operating activities $ (3,139 ) $ (3,595 ) $ (2,766 ) $ (3,854 )
Investing activities - (710 ) - (908 )
Financing activities 2,627 4,040
1,712 4,694
Decrease in Cash and Cash Equivalents
Cash Flow We had a cash flow deficit of approximately$0.5 million for Q2 2021 compared to a cash flow deficit of approximately$0.3 million for Q2 2020. We had a cash flow deficit of approximately$1.1 million for 6 Months 2021 compared to a cash flow deficit of approximately$0.1 million for 6 Months 2020. The cash flow deficit between both periods primarily related to loss from operations.
Capital Expenditures
During Q2 2021, capital expenditures totaled$0 compared to$0.7 million during Q2 2020. During 6 Months 2021, capital expenditures totaled$0 compared to$0.9 million during 6 Months 2020. Capital expenditures during 2020 primarily related to completion of a petroleum storage tank and a maintenance turnaround. The 5-yearNixon capital improvement expansion project was completed during Q2 2020 with completion of the last petroleum storage tank. 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 for the remainder of 2021. 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.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
Our significant accounting policies and recent accounting developments are described in "Part I, Item 1. Financial Statements - 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 the spread of COVID-19 with vaccine programs and monitor variant clusters, 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 ofJune 30, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
New accounting standards and disclosures are discussed in "Part I, Item 1. Financial Statements - Note (2)".
Blue Dolphin Energy Company June 30, 2021 |Page 54 Table of Contents Internal Controls
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