BLUE DOLPHIN ENERGY COMPANY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See "Important Information Regarding Forward-Looking Statements" for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
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 In 2020, 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. 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 in 2020 and throughout the first quarter of 2021. As vaccine rollouts ramp up around the world, travel restrictions are pared back, andOPEC and other producer countries re-balance inventories, we are cautiously optimistic that the global economy, oil demand, and commodity prices will recover from the impact of the pandemic. In the wake of the COVID-19 pandemic, we continue to take measures to lessen the impact on our operations and limit the spread of the virus among personnel. 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 careful 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. The duration of the impact of the COVID-19 pandemic and 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. 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 March 31, 2021 |Page 39
Management's Discussion and Analysis and Internal Controls
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 atMarch 31, 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. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remained outstanding. ? Amended Pilot Line of Credit - Upon maturity of the Pilot Line of Credit inMay 2020 , Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, 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 onMay 4, 2020 , the 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. Pursuant to aJune 1, 2020 notice, Pilot began applying Pilot's payment obligations to NPS under each of (a) the Terminal Services Agreement (coveringTank Nos . 67, 71, 72, 73, 77, and 78), dated as ofMay 2019 , between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as ofJune 1, 2019 , between NPS and Pilot, against NPS' 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 endedMarch 31, 2021 and 2020, the tank lease setoff amounts totaled$0.6 million and$0 , respectively. For the three-month periods endedMarch 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled$0.3 million and$0.4 million , respectively. OnNovember 23, 2020 , NPS and guarantors received notice from Pilot that the entry into the SBA EIDLs 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 the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Payment Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, 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.
Management's Discussion and Analysis and Internal Controls
? 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 theNixon facility's business assets, in 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 has resulted in significant financial constraints on producers, which in turn has resulted 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 endedMarch 31, 2021 , our refinery experienced 1 day of downtime as a result of lack of crude due to 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. 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. 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 will improve in the short-term. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future, despite signs of recovery during the first quarter of 2021. 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 endedMarch 31, 2021 was$3.4 million , or a loss of$0.27 per share, compared to a net loss of$3.3 million , or a loss of$0.27 per share, for the three months endedMarch 31, 2020 . Net losses in both periods were the result of unfavorable refining margins per bbl. The net loss during the three months endedMarch 31, 2021 was also due to 10 days of refinery downtime associated with Winter Storm Uri. Working Capital Deficits We had a working capital deficit of$74.3 million and$72.3 million atMarch 31, 2021 andDecember 31, 2020 , respectively. Excluding the current portion of long-term debt, we had a working capital deficit of$24.2 million and$22.6 million atMarch 31, 2021 andDecember 31, 2020 , respectively. Cash and cash equivalents, restricted cash (current portion), and restricted cash, noncurrent were as follow: March 31, December 31, 2021 2020 (in thousands) Cash and cash equivalents$521 $549 Restricted cash (current portion) 48 48 Restricted cash, noncurrent - 514 Total$569 $1,111
See "Part I, Item 1. Financial Statements - Note (1)" regarding going concern factors and associated risks.
Management's Discussion and Analysis and Internal Controls
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 roll out COVID-19 vaccines, 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, 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. 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 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 ? Leveraging existing infrastructure to engage in renewable Market energy projects. Opportunities ? Taking advantage of market opportunities as they arise. 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. During the first quarter of 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. 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.Blue Dolphin Energy Company March 31, 2021 |Page 42
Management's Discussion and Analysis and Internal Controls
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 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, we may not be able to continue operating, and we may have to seek
bankruptcy protection.
Refinery Operations
Our refinery operations segment consists of the following assets and operations:
Key Products Operating
Property Handled Subsidiary Location
Nixon facility Crude Oil LE Nixon, Texas
? Crude distillation tower Refined Products
(15,000 bpd)
? Petroleum storage tanks
? Loading and unloading
facilities
? Land (56 acres)
Crude Oil and Condensate Supply. Operation of the Nixon 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 billed under the
crude supply agreement totaled approximately 5.8 million bbls as of March 31,
2021 . Effective March 1, 2020 , Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC , a Pilot affiliate.
Sustained periods of low crude oil prices due to market volatility associated
with the COVID-19 pandemic has resulted in significant financial constraints on
producers, which in turn has resulted 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 ended March 31, 2021 and 2020, our
refinery experienced 1 day and no days, respectively, of downtime as a result of
lack of crude due to cash constraints.
Pilot also stores crude oil at the Nixon facility under two terminal services
agreements. Under the terminal services agreements, Pilot stores crude oil at
the Nixon facility at a specified rate per bbl of the storage tank's shell
capacity. Although the initial term of the terminal services agreement expired
April 30, 2020 , the agreement renewed 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 the
The Nixon refinery's product slate is moderately adjusted based on market demand. We currently produce a single finished product - jet fuel - and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur ofMarch 31, 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 March 31, 2021 |Page 43
Management's Discussion and Analysis and Internal Controls
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 underOSHA , theEPA , 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 lack of crude 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 Property Handled Subsidiary Location 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 months endedMarch 31, 2021 and 2020. See "Part I, Item 1. Financial Statements - Note (16)" related to pipelines and platform decommissioning requirements and related risks. Operating Property Subsidiary Location Freeport facility BDPL Freeport, Texas ? Crude oil and natural gas separation and dehydration ? Natural gas processing, treating, and redelivery ? Vapor recovery unit ? Two onshore pipelines ? Land (162 acres) Offshore Pipelines (Trunk Line and Lateral BDPL Gulf of Mexico Lines) Oil and Gas Leasehold Interests BDPC Gulf of Mexico Blue Dolphin Energy Company March 31, 2021 |Page 44
Management's Discussion and Analysis and Internal Controls
Pipeline and Facilities Safety. Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations underOSHA , PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets. 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 will improve in the short-term. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future, despite signs of recovery during the first quarter of 2021. 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 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.Blue Dolphin Energy Company March 31, 2021 |Page 45
Management's Discussion and Analysis and Internal Controls
Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Three Months Ended
2020)
Overview. Net loss for Q1 2021 was $3.2 General and Administrative
million, or a loss of $0.25 per share, Expenses. General and administrative
compared to a net loss of $3.3 million , expenses increased approximately 2% to
or a loss of $0.27 per share, in Q1 $0.7 million in Q1 2021 from $0.6
2020. Net losses in both periods were million in Q1 2020. The increase
the result of unfavorable refining primarily related to rising insurance
margins per bbl. The net loss in Q1 premiums.
2021 was also due to 10 days of
refinery downtime associated with Depletion, Depreciation and
Winter Storm Uri. Amortization. Depletion, depreciation,
and amortization expenses for Q1 2021
Total Revenue from Operations. Total totaled approximately$0.7 million revenue from operations decreased compared to approximately$0.6 million approximately 4% to$59.4 million for in Q1 2020. The nearly 10% increase Q1 2021 from$62.0 million for Q1 2020. primarily related to placing a Although refined product prices petroleum storage tank in
service.
improved in Q1 2021, refinery operations revenue decreased due to Total Other Income (Expense). Total lower sales volumes. Tolling and other expense in Q1 2021 was$1.4 terminaling revenue decreased as a million compared to total other expense result of lower tank rental fees. of$1.8 million in Q1 2020, representing a decrease of Total Cost of Goods Sold. Total cost of approximately$0.4 million . Total other goods sold decreased approximately 4% expense in Q1 2021 primarily related to to$59.6 million for Q1 2021 from$62.1 interest expense associated with million for Q1 2020. The decrease secured loan agreements with Veritex, related to lower throughput due to related-party debt, and the line of refinery downtime. credit with Pilot. Gross Deficit. Gross deficit was$0.2 million for Q1 2021 compared to gross deficit of$0.1 million for Q1 2020. Refinery margins were adversely affected by lower margins and refinery downtime primarily associated with Winter Storm Uri.
Management's Discussion and Analysis and Internal Controls
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
March 31,
2021 2020
(in thousands)
Refined product sales $58,483 $60,897
Less: Total cost of goods sold (59,623) (62,088)
Gross deficit (1,140) (1,191)
Sales (Bbls) 948 1,141
Gross Deficit per Bbl $(1.20) $(1.04)
Three Months Ended
March 31,
2021 2020
(in thousands)
Net revenue (1) $58,483 $60,897
Intercompany fees and sales (566) (617)
Operation costs and expenses (59,289) (61,833)
Segment Contribution Deficit $(1,372) $(1,553)
Q1 2021 Versus Q1 2020
?
deficit per bbl was $1.20 for Q1 2021 compared to gross deficit per bbl of $1.04
in Q1 2020, representing a decline of $0.16 per bbl. The deficit in both periods
related to lower margins and market fluctuations associated with the COVID-19
pandemic. Refinery downtime associated with Winter Storm Uri also caused an
increase in gross deficit per bbl in Q1 2021.
?
deficit improved slightly in Q1 2021 compared to Q1 2020.
?
downtime increased significantly to 11 days in Q1 2021 compared to 3 days in Q1
2020. Refinery downtime in Q1 2021 primarily related to power outages during
Winter Storm Uri.
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
March 31,
2021 2020
(in thousands)
Net revenue (1) $930 $1,103
Intercompany fees and sales 566 617
Operation costs and expenses (334) (255)
Segment Contribution Margin $1,162 $1,465
Q1 2021 Versus Q1 2020
?
Tolling and terminaling net revenue decreased nearly 16% in Q1 2021 compared to
Q1 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, decreased in Q1 2021 compared to Q1
2020. Naphtha sales volumes decreased between the periods.
?
Segment contribution margin in Q1 2021 decreased 20% to $1.2 million compared to
$1.5 million Q1 2020. The decrease related to lower revenue and intercompany
fees tied to naphtha volumes.
Management's Discussion and Analysis and Internal Controls
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Three Months Ended March 31,
2021 2020 2021 2020 2021 2020 2021 2020
Refinery Operations Tolling and Terminaling Corporate and Other
Total
(in thousands)
Segment
contribution
margin (deficit)
$(59) $(264) $(147) General and administrative expenses(1) (301) (304) (68) (68) (413) (419) (782) (791) Depreciation and amortization (302) (288) (340) (294) (51) (51) (693) (633) Interest and other non-operating income (expenses), net (598) (741) (452) (770) (385) (243) (1,435) (1,754) Income (loss) before income taxes (2,573) (2,886) 302 333 (903) (772) (3,174) (3,325) Income tax expense - - - - - (15) - (15) Income (loss) before income taxes$(2,573) $(2,886) $302 $333 $(903) $(787) $(3,174) $(3,340) (1)
General and administrative expenses within refinery operations include the LEH operating fee.
Capital Resources and Liquidity We had a working capital deficit of$74.3 million and$72.3 million atMarch 31, 2021 andDecember 31, 2020 , respectively. Excluding the current portion of long-term debt, we had a working capital deficit of$24.2 million and$22.6 million atMarch 31, 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. Considering this recent 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 further disruptions to our business. How long and to what extent COVID-19 and related market developments will affect our business and operations is unknown. The overall impact of these events will depend on the actions of federal, state, and local government and health officials to contain and treat the virus, including deployment of vaccines, and how quickly economic conditions improve 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.Blue Dolphin Energy Company March 31, 2021 |Page 48
Management's Discussion and Analysis and Internal Controls
Debt Overview.
Total Debt and Accrued Interest
March 31, December 31,
2021 2020
(in thousands)
Veritex Loans
LE Term Loan Due 2034 (in default) $23,104 $22,840
LRM Term Loan Due 2034 (in default) 9,601 9,473
Amended Pilot Line of Credit (in default) 7,272 8,145 Notre Dame Debt (in default)
9,613 9,413
Related-Party Debt
BDPL Loan Agreement (in default) 6,974 6,814
March Ingleside Note (in default) 1,031 1,013
March Carroll Note (in default) 1,732 1,551
June LEH Note (in default) 9,588 9,446
LE Term Loan Due 2050 153 152
NPS Term Loan Due 2050 153 152
Equipment Loan Due 2025 65 71
Total Debt 69,286 69,070
Less: Current portion of long-term debt, net (57,244) (57,744) Less: Unamortized debt issue costs
(1,718) (1,749)
Less: Accrued interest payable (in default) (9,975) (9,222)
$349 $355 Net cash used in financing activities totaled$0.9 million in Q1 2021 compared to$0.7 million provided by financing activities in Q1 2020. Principal payments on long-term debt totaled$0.9 million in Q1 2021 compared to$0.7 million in Q1 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. 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. 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 Revenue Receivable Significant from at March Customers Operations 31, March 31, 2021 4 90%$0 $0.6 million March 31, 2020 4 94% 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 27% and 29% of total revenue from operations in 2021 and 2020, respectively. The Affiliate represented$0 in accounts receivable at bothMarch 31, 2021 and 2020, respectively. 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$16.6 million and$16.3 million atMarch 31, 2021 andDecember 31, 2020 , respectively. See "Part I, Item 1. Financial Statements - Notes (3) and (16)" for additional disclosures related to Affiliate agreements, arrangements, and risk. Blue Dolphin Energy Company March 31, 2021 |Page 49
Management's Discussion and Analysis and Internal Controls
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
Blue Dolphin Energy Company March 31, 2021 |Page 50
Management's Discussion and Analysis and Internal Controls
Third-Party Debt
Original
Principal Monthly
Amount Maturity Date Principal
Loan Description Parties (in and Interest Interest Loan Purpose
millions) Payment Rate
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
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 March 31, 2021 , restricted cash
(current portion) was $0.05 million and restricted cash, noncurrent was $0 .
December 31, 2020 , restricted cash (current portion) was $0.05 million and
restricted cash, noncurrent was $0.5 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 arbitration award with GEL 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.
Blue Dolphin Energy Company March 31, 2021 |Page 51
Management's Discussion and Analysis and Internal Controls
Third-Party Defaults
Loan Description Event(s) of Default Covenant Violations
Veritex Loans
LE Term Loan Due 2034 Failure to make required Financial covenants:
(in default) monthly payments; failure ?
to replenish $1.0 million debt service coverage ratio,
payment reserve account; current ratio, and debt to net
events of default under worth ratio
other secured loan
agreements with Veritex
LRM Term Loan Due Events of default under Financial covenants:
2034 (in default) other secured loan ?
agreements with Veritex debt service coverage ratio,
current ratio, and debt to net
worth ratio
Amended Pilot Line of Failure of borrower or ---
Credit (in default) any guarantor to pay past
due obligations; loan
matured May 2020
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 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. 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 during 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 theU.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 ofMarch 31, 2021 . At bothMarch 31, 2021 andDecember 31, 2020 , BDPL maintained approximately$0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
Management's Discussion and Analysis and Internal Controls
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 . Although we planned to decommission the offshore pipelines and platform assets during 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 theU.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. 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 ofMarch 31, 2021 . At bothMarch 31, 2021 andDecember 31, 2020 , BDPL maintained$2.4 million in AROs related to abandonment of these assets. Sources and Use of Cash. Components of Cash Flows Three Months Ended March 31, 2021 2020 (in thousands) Cash Flows Provided By (Used In): Operating activities$373 $(259) Investing activities - (198) Financing activities (915) 654
Increase (Decrease) in Cash and Cash Equivalents
Cash Flow Q1 2021 Compared to Q1 2020 We had cash flow from operations of approximately$0.3 million for Q1 2021 compared to a cash flow deficit of approximately$0.3 million for Q1 2020. Cash frow from operations for Q1 2021 was due to the timing of crude oil purchases. The cash flow deficit for Q1 2020 primarily related to loss from operations. Capital Expenditures During Q1 2021, capital expenditures totaled$0 compared to$0.2 million during Q1 2020. Capital expenditures in Q1 2020 primarily related to completion of a 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 in 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.Blue Dolphin Energy Company March 31, 2021 |Page 53
Management's Discussion and Analysis and Internal Controls
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 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 ofMarch 31, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures New accounting standards and disclosures are discussed in "Part I, Item 1. Financial Statements - Note (2)".
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