SECURITIES & EXCHANGE COMMISSION EDGAR FILING
BLUE DOLPHIN ENERGY CO
Form: 10-K
Date Filed: 2015-03-31
Corporate Issuer CIK: 793306
Symbol:
SIC Code:
Fiscal Year End:
BDCO
1311
12/31
© Copyright 2015, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
❑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of incorporation or organization
73-1268729
(I.R.S. Employer Identification No.)
801 Travis Street, Suite 2100
Houston, Texas
(Address of principal executive offices)
77002
(Zip Code)
(713) 568-4725
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
OTCQX
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ❑ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ❑ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ☑ No ❑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☑ No ❑
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
Large accelerated filer ❑ Accelerated filer ❑ Non-accelerated filer ❑ Smaller Reporting Company ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ❑ No ☑
The aggregate market value of shares of common stock held by non-affiliates of the registrant was $9,588,038 based on the number of shares of common stock
held by non-affiliates and the last reported sale price of the registrant's common stock on December 31, 2014.
Number of shares of common stock, par value $0.01 per share outstanding as of March 31, 2015: 10,449,444
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K REPORT INDEX
PART I
ITEM 1
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
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SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTER
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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FORWARD LOOKING STATEMENTS
As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, certain statements included throughout this Annual Report on
Form 10-K, and in particular under the sections entitled “Part I, Item 1. Business,” “Part I, Item 3. Legal Proceedings” and “Part II, Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” relating to matters that are not historical fact are forward-looking statements that
represent management’s beliefs and assumptions based on currently available information. Forward-looking statements relate to matters such as our industry,
business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital
resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future” and similar terms and phrases to identify forward-looking statements.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some
of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks
and uncertainties, many of which are beyond our control, which could result in our expectations not being realized, or materially affect our financial condition,
results of operations and cash flows.
Actual events, results, and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these
factors, they include, among others, the following:
Risks Related to Our Business and Industry
• our dependence on Lazarus Energy Holdings, LLC (“LEH”) for financing and management of our property and the property of our subsidiaries;
• capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate;
• our ability to use net operating loss (“NOL”) carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation;
• dangers inherent in oil and gas operations that could cause disruptions and expose us to potentially significant losses, costs or liabilities and reduce our
liquidity;
• geographic concentration of our assets, which creates a significant exposure to the risks of the regional economy;
• competition from companies having greater financial and other resources;
•
laws and regulations regarding personnel and process safety, as well as environmental, health and safety, for which failure to comply may result in substantial
fines, criminal sanctions, permit revocations, injunctions, facility shutdowns and/or significant capital expenditures;
insurance coverage that may be inadequate or expensive;
related party transactions with LEH and its affiliates, which may cause conflicts of interest; and
loss of executive officers or key employees, as well as a shortage of skilled labor or disruptions in our labor force, which may make it difficult to maintain
productivity.
•
•
•
Risks Related to Our Refining Operations
• volatility of crude oil, other feedstocks, refined petroleum products, and fuel and utility services;
• volatility of refining margins;
• potential downtime at the Nixon Facility, which could result in lost margin opportunity, increased maintenance expense, increased inventory, and a reduction
in cash available for payment of our obligations;
loss of market share by a key customer or consolidation among our customer base;
failure to grow or maintain the market share for our refined petroleum products;
•
•
• our reliance on third-parties for the transportation of crude oil and condensate into and refined petroleum products out of the Nixon Facility;
• our dependence on Genesis Energy, LLC (“Genesis”) and its affiliates for financing, crude oil and condensate sourcing, inventory risk management, hedging,
and refined petroleum product marketing;
interruptions in the supply of crude oil and condensate sourced in the Eagle Ford Shale;
•
• changes in the supply/demand balance in the Eagle Ford Shale could result in lower refining margins;
• hedging of our refined petroleum products and crude oil and condensate inventory, which may limit our gains and expose us to other risks;
• availability and cost of Renewable Identification Numbers and Renewable Fuel Standard mandates; and
•
regulation of greenhouse gas emissions, which could increase our operational costs and reduce demand for our products.
Risks Related to Our Pipelines and Oil and Gas Properties
• asset retirement obligations for our pipelines and facilities assets and oil and gas properties.
Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking
statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance
may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so.
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GLOSSARY FOR SELECTED TERMS
The following are abbreviations and definitions of certain terms used in this document, which are commonly used in the oil and gas industry:
Atmospheric gas oil. The heaviest product boiled by a crude distillation unit operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil,
either in pure form or blended with cracked stocks. In-blends atmospheric gas oil, often abbreviated as AGO, usually serves as the premium quality component
used to lift lesser streams to the standards of saleable furnace oil or diesel engine fuel. Certain ethylene plants, called heavy oil crackers, can take AGO as
feedstock.
Bbl. One stock tank barrel, or 42 United States gallons of liquid volume, used in reference to oil or other liquid hydrocarbons.
Blending. The physical mixture of a number of different liquid hydrocarbons to produce a finished product with certain desired characteristics. Products can be
blended in-line through a manifold system, or batch blended in tanks and vessels. In-line blending of gasoline, distillates, jet fuel and kerosene is accomplished
by injecting proportionate amounts of each component into the main stream where turbulence promotes thorough mixing. Additives, including octane enhancers,
metal deactivators, anti-oxidants, anti-knock agents, gum and rust inhibitors, and detergents, are added during and/or after blending to result in specifically
desired properties not inherent in hydrocarbons.
Bpd. Barrels per day; based on operating days.
Capacity utilization rate. A percentage measure that indicates the amount of available capacity that is being used at a facility.
Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude
oil distillation unit. The higher a refinery’s complexity, the greater the refinery’s capital investment and number of operating units used to separate feedstock into
fractions, improve their quality, and increase the production of higher-valued products. Refinery complexities range from the relatively simple crude oil distillation
unit (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.
Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Condensate is chemically more complex than liquefied petroleum
gas. Although condensate is sometimes similar to crude oil, it is usually lighter.
Cooling tower. A structure that cools heated refining process water by circulating the water through a series of louvers and baffles through which cool air is
forced by large fans.
Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and
sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as
fuels or converted to more valuable products.
Crude oil distillation unit . The refinery processing unit where initial crude oil distillation takes place. See also definition of topping unit.
Cut. One or more crude oil compounds that vaporize and are extracted within a certain temperature range during the crude distillation process.
Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.
Desalting. Removal of salt from crude oil. Desalting is preferably performed prior to commercialization of the crude; must be performed prior to refining.
Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle
distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (e.g., natural gasoline, kerosene, and light and heavy naphtha), (ii) light
oils or middle distillates (e.g., kerosene, light and heavy diesel), (iii) medium oils, and (iv) heavy fuel oils.
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Distillation. The first step in the refining process whereby crude oil and condensate is heated at atmospheric pressure in the base of a distillation tower. As the
temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower according
to their densities, from lightest to heaviest. They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at
other points in the refining process to remove impurities. Lighter products produced in this process can be further refined in a catalytic cracking unit or reforming
unit. Heavier products, which cannot be vaporized and separated in this process, can be further distilled in a vacuum distillation unit or coker.
Distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components distilled by means of distillation trays.
Exchanger (heat exchanger). A device used to transfer heat from one process liquid to another.
Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, that are used as basic input materials in a refining
process. Feedstocks are transformed into one or more finished products.
Fractionation. The separation of crude oil and condensate into its more valuable and usable components through distillation.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or
stratigraphic condition.
Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being
held in inventory for delivery, sale, or use.
Heat exchanger. See definition for exchanger.
Intermediate petroleum products. A petroleum product that might require further processing before it is saleable to the ultimate consumer. This further
processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an
input for another company that will process it further.
Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution
between about 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between about 5 and 15 carbon atoms per
molecule. Jet fuel is a white product, so-called because it is transparent.
Kerosene. A middle distillate fraction of crude oil that is produced at higher temperatures than naphtha and lower temperatures than gas oil. It is usually used as
jet turbine fuel and sometimes for domestic cooking, heating, and lighting.
Leasehold interest. The interest of a lessee under an oil and gas lease.
Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high API gravity due
to the presence of a high proportion of light hydrocarbon fractions.
Liquefied petroleum gas. Manufactured during the refining of crude oil and condensate; burns relatively cleanly with no soot and very few sulfur emissions.
Commonly abbreviated as LPG.
Low sulfur diesel. Not to be confused with ultra low sulfur diesel, low sulfur diesel contains a maximum 500 ppm sulfur.
MMcf. One million cubic feet of gas.
Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials it can make high-grade motor gasoline or jet
fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions.
Net revenue interest. The percentage of production to which the owner of a working interest is entitled.
Non-road, locomotive and marine diesel . Used in locomotive, marine and non-road diesel engines and equipment, such as farm or construction
equipment. Commonly referred to as “off-road” diesel and abbreviated as NRLM. In the United States, the EPA fuel standard for “off-road” vehicles was
progressively lowered from low sulfur diesel (500 ppm sulfur) to ultra low sulfur diesel (15 ppm sulfur).
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Overriding royalty interest. An interest in oil and gas produced at the surface, free of the expense of production that is in addition to the usual royalty interest
reserved to the lessor in an oil and gas lease.
Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic
compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.
Ppm. Parts per million.
Product slate. The type of refined petroleum products produced by the refining process.
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquefied petroleum gases. The others include butane,
propylene, butadiene, butylene, isobutylene and mixtures thereof. See definition of liquefied petroleum gas.
Recommissioning. While commissioning of a new plant facility or refinery helps ensure correct operation of its major systems when first installed,
recommissioning helps to restore an existing plant facility or refinery to its originally intended operating performance. Both processes comprise the integrated
application of a set of engineering techniques and procedures to check, inspect and test every operational component of the project, from individual functions
such as instruments and equipment, up to complex amalgamations, such as modules, subsystems and systems.
Refined petroleum products. Refined petroleum products are derived from crude oil and condensate that have been processed through various refining
methods. The resulting products include gasoline, home heating oil, jet fuel, diesel, lubricants and the raw materials for fertilizer, chemicals, and pharmaceuticals.
Following the refining process, the products are transported to terminals or local distribution centers for sale to various end-users and consumers.
Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil and condensate is separated and transformed into
marketable refined petroleum products.
Separation. The separation of the different hydrocarbons present in crude oil and condensate depending on their respective boiling ranges. This process takes
place in a distillation column.
Sour crude. Crude oil containing sulfur content of more than 0.5%.
Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane from a product.
Sweet crude. Crude oil containing sulfur content of less than 0.5%.
Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also produced as a byproduct of
removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized according to
their sulfur content, with lower sulfur fuels usually selling at a higher, premium price and higher sulfur fuels selling at a lower, or discounted, price.
Topping unit. A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric
distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.
Throughput. The volume processed through a unit or a refinery or transported through a pipeline.
Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit is taken offline for a week or more for comprehensive revamp and
renewal.
Ultra low sulfur diesel . A cleaner-burning diesel fuel containing a maximum 15 ppm sulfur. Primarily used for highway vehicles. Commonly referred to as “on-
road” diesel and abbreviated as ULSD.
Undivided interest. A form of ownership interest in which more than one person concurrently owns an interest in the same oil and gas lease or pipeline and in
which the interests of the parties are not specified whether by percentage or portion of the property.
West Texas Intermediate. A grade of crude oil used as a benchmark in oil pricing. Described as intermediate because of its relative mid-range density and mid-
range sulfur content. Commonly abbreviated as WTI.
Working interest. The operating interest that gives the owner the right to drill, produce, and conduct operating activities on the property and receive a share of
production after the corresponding percentage of operational costs and royalties are paid.
Yield. The percentage of refined petroleum products that is produced from crude oil and other feedstocks.
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ITEM 1.
BUSINESS
Overview
PART I
Blue Dolphin Energy Company ( http://www.blue-dolphin-energy.com, referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “BDEC,” “we,”
“us” and “our”) is primarily an independent refiner and marketer of petroleum products. Our primary asset is a 15,000 bpd crude oil and condensate processing
facility that is located in Nixon, Wilson County, Texas (the “Nixon Facility”). As part of our refinery business segment, we also conduct petroleum storage and
terminaling operations under third-party lease agreements at the Nixon Facility. We also own and operate pipeline assets and have leasehold interests in oil and
gas properties, which are considered non-core to our business.
Structure and Management
We were formed as a Delaware corporation in 1986. In connection with our reverse acquisition of Lazarus Energy, LLC (“LE”) in 2012, whereby we acquired the
Nixon Facility, we:
(i) issued 8,426,456 shares of our common stock, par value $0.01 per share (the “Common Stock”) to Lazarus Energy Holdings, LLC (“LEH”) as
consideration. As a result, LEH, our controlling shareholder, owns approximately 81% of our Common Stock. Jonathan P. Carroll, Chairman of the Board of
Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH; and
(ii) entered into a Management Agreement dated and effective February 12, 2012 with LEH. Pursuant to the Management Agreement, LEH manages our
property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business. On May 12, 2014, the Management Agreement
was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating
Agreement” (the “Operating Agreement”).
Our operations are conducted directly and indirectly through our primary operating subsidiaries, as follows:
• LE, a Delaware limited liability company (petroleum processing assets);
• Lazarus Refining & Marketing, LLC, a Delaware limited liability company (petroleum storage and terminaling) (“LRM”);
• Blue Dolphin Pipe Line Company, a Delaware corporation (pipeline operations) (“BDPL”);
• Blue Dolphin Petroleum Company, a Delaware corporation (exploration and production activities);
• Blue Dolphin Services Co., a Texas corporation (administrative services);
• Blue Dolphin Exploration Company, a Delaware corporation (inactive); and
• Petroport, Inc., a Delaware corporation (inactive).
Refinery Operations
The Nixon Facility occupies approximately 56 acres in Nixon, Wilson County, Texas and consists of a distillation unit, naphtha stabilizer unit, depropanizer unit,
approximately 120,000 bbls of crude oil and condensate storage capacity, approximately 178,000 bbls of refined petroleum product storage capacity, and related
loading and unloading facilities and utilities.
The Nixon Facility was built in 1980 and operated until 1983. The Nixon Facility was reopened in 1986 under a new owner and operated intermittently until 1992,
when it was shut down again. The Nixon Facility was acquired by LE in 2006, refurbished, and placed back into service in February 2012.
The Nixon Facility is located very close to crude oil and condensate production in the Eagle Ford Shale. Management closely monitors and adjusts the yields of
the Nixon Facility’s most profitable refined petroleum products, utilizes an inventory risk management policy to reduce commodity price risk, and tightly manages
refinery operating expenses in an effort to maximize refining margins. Under our inventory risk management policy, Genesis may, but is not required to, use
derivative instruments when certain of our refined petroleum product inventories exceed certain thresholds.
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Process Summary
With a capacity of 15,000 bpd, the Nixon Facility is considered a “topping unit” because it is primarily comprised of a crude distillation unit, the first stage of the
crude oil refining process. “Topping units” are typically smaller than full-scale refineries and are usually located near the primary market for their key product. The
Nixon Facility’s level of complexity allows us to refine crude oil and condensate into finished petroleum products, such as jet fuel, and intermediate petroleum
products, such as naphtha, LPG, atmospheric gas oil, and oil-based mud blendstock. Finished products are sold in nearby markets and intermediate products
are sold to wholesalers and nearby refineries for further blending and processing. The Nixon Facility uses light crude oil and condensate sourced in the Eagle
Ford Shale as feedstock.
During 2014, we continued refurbishment of key components of the Nixon Facility, including the naphtha stabilizer and depropanizer units. Once operational, the
naphtha stabilizer and depropanizer units will improve the overall quality of the naphtha that we produce, allow higher recovery of lighter products that can be
sold as LPG mix, and increase the amount of throughput that can be processed by the Nixon Facility. The below diagram represents a high level overview of the
current crude oil and condensate refining process at the Nixon Facility.
Example represents a simplified plant configuration. The specific configuration will vary based on various market and operational factors.
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Refining Industry Overview
Crude oil refining is the process of separating the hydrocarbons present in crude oil into usable or refined petroleum products such as gasoline, diesel, jet fuel
and other products. Crude oil refining is primarily a margins-based business where both crude oil and refined petroleum products are commodities with prices
that can fluctuate independently for short periods due to supply, demand, transportation and other factors. In order to increase profitability, or improve margins, it
is important for a crude oil refinery to maximize the yields of high value finished petroleum products and to minimize the costs of feedstocks and operating
expenses. There are also a number of operational efficiencies that can be deployed to improve margins. These include selecting the appropriate crude oil or
condensate to fulfill anticipated product demand, increasing the amount and value of refined petroleum products processed from the crude oil or condensate,
reducing down-time for maintenance, repair and investment, developing valuable by-products or production inputs out of materials that are typically discarded,
and adjusting utilization rates (operating at a high utilization rate when margins are high and, conversely, reducing production and buying of feedstocks when
margins are low).
Crude oil and condensate supply and demand dynamics vary by region, creating differentiated margin opportunities based on the refinery’s location. The Nixon
Facility is located in the Gulf Coast region of the United States, which is represented by the Energy Information Administration (the “EIA”) as Petroleum
Administration for Defense District 3 (“PADD 3”).
A refinery’s product slate depends on market demand, the type of crude oil and/or condensate being refined, and the refinery’s complexity. Although an increase
or decrease in the price for crude oil generally results in a similar increase or decrease in prices for refined petroleum products, there is normally a time lag in the
realization of the similar increase or decrease in prices for refined petroleum products. The effect of changes in crude oil prices on a refinery’s results of
operations depends, in part, on how quickly and how fully refined petroleum products prices adjust to reflect these changes.
Raw Material Supply
The primary input for the Nixon Facility is crude oil and condensate, which represented approximately 100% of our total refinery throughput volumes for the years
ended December 31, 2014 and 2013. As a result of the declining price of crude oil and condensate during the last quarter of 2014, our average crude oil and
condensate costs were lower. We processed 11,599 bpd and 11,209 bpd of crude oil and condensate for the years ended December 31, 2014 and 2013,
respectively.
Crude Oil and Condensate Supply
We purchase the light crude oil and condensate for the Nixon Facility pursuant to an exclusive Crude Oil Supply and Throughput Services Agreement (the “Crude
Supply Agreement”) with GEL TEX Marketing, LLC (“GEL”), an affiliate of Genesis. We have the ability to purchase crude oil and condensate from other
suppliers with the prior consent of GEL. All crude oil and condensate supplied pursuant to the Crude Supply Agreement is paid for pursuant to the terms of the
Joint Marketing Agreement. In addition, we have granted GEL right of first refusal to use three storage tanks at the Nixon Facility during the term of the Crude
Supply Agreement. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Relationship with Genesis”
of this report for more information related to the Crude Supply Agreement.
Subject to certain termination rights, the Crude Supply Agreement had an initial term of three years. The initial term ended on August 12, 2014. However, on
October 30, 2013, Lazarus Energy, LLC (“LE”) entered into a Letter Agreement Regarding Certain Advances and Related Agreements with GEL and Milam
Services, Inc. (“Milam”)(the “October 2013 Letter Agreement”), effective October 24, 2013. In accordance with the terms of the October 2013 Letter Agreement,
LE agreed not to terminate the Crude Supply Agreement and GEL agreed to automatically renew the Crude Supply Agreement at the end of the initial term for
successive one year periods until August 12, 2019 unless sooner terminated by GEL with 180 days prior written notice.
Crude oil and condensate is currently received at the Nixon Facility by truck and stored in tanks. The Nixon Facility property is crossed by a crude oil and
condensate pipeline owned by Koch Pipeline Company. The pipeline represents a potential future opportunity to receive crude oil and condensate at the Nixon
Facility, thereby reducing trucking costs.
Electrical Power Supply
A regional electric cooperative supplies electrical power to the Nixon Facility.
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Fuel Supply
Light distillates that are produced at the Nixon Facility are used as fuel within the refinery. In addition, small amounts of propane are occasionally acquired for use
in starting-up the Nixon Facility.
Turnaround and Refinery Reliability
We are committed to the safe and efficient operation of the Nixon Facility. Turnarounds are used to repair, restore, refurbish or replace refinery equipment such
as vessels, tanks, reactors, piping, rotating equipment, instrumentation, electrical equipment, heat exchangers and fired heaters. Typically a refinery undergoes a
major facility turnaround every three to five years. Since the Nixon Facility is still in the recommissioning phase, one or more of the units may require additional
unscheduled down time for unanticipated maintenance or repairs that are more frequent than our scheduled turnarounds.
Petroleum Refining Market and Competition
The principal competitive factors affecting refineries are crude oil and other feedstock costs, capacity utilization rates, refinery operating expenses, refined
petroleum products mix, and product distribution/transportation costs. Many of our principal competitors are larger, integrated independent or multi-national oil
companies (such as Valero, Chevron, ExxonMobil, Shell and ConocoPhillips). These competitors are often better able to withstand volatile market conditions,
compete on the basis of price, obtain crude oil in times of shortage and bear the economic risk inherent in all phases of the refining industry because of their
larger capitalization, diversified operations, multiple locations, and larger refinery complexities,.
We compete primarily on the basis of cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined
petroleum products slate as a result of changing commodity prices, market demand, and refinery operating costs. The Nixon Facility, which is located in the
Eagle Ford Shale, supplies intermediate and finished petroleum products primarily to customers in the lower portion of the Texas Triangle (the Houston - San
Antonio - Dallas/Fort Worth area).
Despite the United States’ current surplus refining capacity, 50% of which is located in PADD 3 (Gulf Coast), the rise in production of light sweet crude oil from
unconventional sources such as the Bakken Shale and the Eagle Ford Shale has revitalized some refinery operations that formerly depended on imported light
sweet crude oil. As a result, small refineries like the Nixon Facility are more competitive with large refineries that process more widely available, lower quality
heavy-sour crude oil. In order to remain competitive, large refineries need significant pricing discounts on light sweet crude oil in order to displace lower quality
heavy-sour crude oil.
Refining Operations Customers
Customers for our intermediate and finished petroleum products include distributors, wholesalers and refineries primarily in the lower portion of the Texas
Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers. Many of these arrangements
are subject to periodic renegotiation, which could result in us receiving higher or lower relative prices for our intermediate and finished petroleum products. For
the year ended December 31, 2014, our five largest customers accounted for approximately 89% of our refined petroleum products sales. For the year ended
December 31, 2013, our five largest customers accounted for approximately 92% of our refined petroleum products sales.
Insurance and Risk Management
Our operations are subject to significant hazards and risks inherent in crude oil and condensate refining operations and in the transportation and storage of crude
oil and condensate, as well as intermediate and finished petroleum products. We have property damage and business interruption coverage at the Nixon Facility,
as well as business interruption coverage for 24 months from the date of the loss, subject to a deductible with a 45 day waiting period. Our property damage
insurance has deductibles ranging from $5,000 to $500,000. In addition, we have a full suite of insurance policies covering workers compensation, general
liability, directors’ and officers’ liability, environmental liability, and other business risks. These are supported by safety and other risk management
programs. See also, “Item 1A. Risk Factors – Risks Related to Our Business” in this report.
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Pipeline Transportation
Our pipeline transportation operations involve the gathering and transportation of oil and natural gas for producers/shippers operating offshore in the vicinity of
our pipelines, as well as leasehold interests in oil and natural gas properties, in the Gulf of Mexico. Our pipeline transportation operations represented less than
1% of total revenue for the years ended December 31, 2014 and 2013.
Ongoing Acquisition and Disposition Activities
Consistent with our growth strategy, we are continuously engaged in discussions with potential sellers of assets, including LEH, our majority stockholder,
regarding the possible purchase of assets and operations that are strategic and complementary to our existing operations. These acquisition efforts may involve
participation by us in processes that have been made public and involve a number of potential buyers, commonly referred to as “auction” processes, as well as
situations in which we believe we are the only potential buyer or one of a limited number of potential buyers in negotiations with the potential seller. These
acquisition efforts often involve assets and operations which, if acquired, could have a material effect on our financial condition and results of operations and
require special financing.
The closing of any transaction for which we have entered into a definitive acquisition agreement will be subject to customary and other closing conditions, which
may not ultimately be satisfied or waived. Accordingly, we can give no assurance that our current or future acquisition efforts will be successful. Although we
expect the acquisitions we make to be accretive in the long-term, we can provide no assurance that our expectations will ultimately be realized.
Governmental Regulation
Our operations and properties are subject to extensive and complex federal, state, and local environmental, health, and safety statutes, regulations, and
ordinances governing, among other things, the generation, storage, handling, use and transportation of petroleum, solid wastes, hazardous wastes, and
hazardous substances; the emission and discharge of materials into the environment and environmental protection; waste management; characteristics and
composition of diesel and other fuels; and the monitoring, reporting and control of greenhouse gas emissions. These laws impose certain obligations on our
operations, including requiring the acquisition of permits and authorizations to conduct regulated activities, restricting the manner in which regulated activities are
conducted, limiting the quantities and types of materials that may be released into the environment, and requiring the monitoring of releases of materials into the
environment.
Failure to comply with environmental, health or safety laws and our permits or other authorizations issued under such laws could result in fines, civil or criminal
penalties or other sanctions, injunctive relief compelling the installation of additional controls, or a revocation of our permits and the shutdown of our facilities.
We cannot predict the extent to which additional environmental, health, and safety laws will be enacted in the future, or how existing or future laws will be
interpreted with respect to our operations. Many environmental, health, and safety laws and regulations are becoming increasingly stringent. The cost of
compliance with and governmental enforcement of environmental, health, and safety laws may increase in the future. We may be required to make significant
capital expenditures or incur increased operating costs to achieve compliance with applicable environmental, health, and safety laws. This Governmental
Regulation section should be read in conjunction with the "Forward-Looking Statements" and “Part I, Item 1A. Risk Factors” sections of this report, which discuss
our expectations regarding future events, results or outcomes based on currently available information.
Air Emissions
The federal Clean Air Act (the “CAA”), its amendments and implementing regulations, as well as the corresponding state laws and regulations that regulate
emissions of pollutants into the air, affect our crude oil and condensate processing operations and impact certain emissions sources located offshore. Under the
CAA, facilities that emit volatile organic compounds or nitrogen oxides face increasingly stringent regulations. The Environmental Protection Agency (the “EPA”)
has, in the past, targeted petroleum refineries as part of a nationwide enforcement initiative, and refineries remain high-visibility targets for enforcement under the
CAA. In 1992, the EPA published a list of source categories (industry groups) that emit one or more of a list of 188 hazardous air pollutants (“HAPs”), also known
as air toxics. The list of industry groups includes petroleum refineries because they are considered to be a major source of HAP emissions. The EPA developed
standards that require the application of maximum achievable control technology (“MACT”) to help control HAP emissions. The Petroleum Refinery MACT
standard applies to petroleum refining process units and related emission points. We are required to obtain permits, as well as to test, monitor, report, and
implement control requirements. In addition, our operations are subject to a number of New Source Performance Standards (“NSPS”) regulations. For example, in
September 2012, the EPA issued final revisions to the NSPS for process heaters and flares at petroleum refineries. The final NSPS regulate emissions of
nitrogen oxide from process heaters and emissions of sulfur dioxide from flares. The final rule also establishes work practice and monitoring standards for flares.
In addition, air permits incorporating stringent control technology requirements are required for our refining operations that result in the emission of regulated air
contaminants.
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The CAA authorized the EPA to require modifications in the formulation of refined fuel products. In 2007, the EPA issued a second Mobile Source Air Toxics
standard (the “MSAT II”) that required significant reductions in the sulfur content in gasoline and diesel transportation fuels. These standards required most
refineries to produce transportation fuels for highway use at 15 ppm sulfur for “on-road” diesel and 30 ppm sulfur for gasoline. “Off-road” diesel requirements were
reduced to 15 ppm sulfur in June 2014. The Nixon Facility does not currently produce gasoline or transportation-related diesel fuel products.
Fuel Quality Requirements
Pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007 (the “Energy Acts of 2005 and 2007”), the EPA issued
Renewable Fuels Standards (“RFS”) that require the blending of biofuels into transportation fuel. Since the compliance mechanism for RFS - Renewable
Identification Numbers (“RINs”) – would create a burden on the Nixon Facility related to its NRLM production through May 2014, we applied for an extension of
the temporary exemption afforded small refineries through December 31, 2010 under the CAA Section 211(o)(9)(B). In September 2014, the EPA granted the
Nixon Facility a small refinery exemption from RFS requirements for 2013 and 2014.
On May 31, 2014, the Nixon Facility ceased production of NRLM, a transportation-related diesel fuel product. On June 1, 2014, the Nixon Facility began
producing oil-based mud blendstock, a non-transportation lubricant blend product. The shift in product slate from NRLM to oil-based mud blendstock was the
result of the EPA’s phased-in requirements for small refineries to reduce the sulfur content in transportation-related diesel fuel, such as NRLM, to a maximum of
15 ppm sulfur by June 1, 2014. “Topping units,” like the Nixon Facility, typically lack a desulfurization process unit to lower sulfur content levels within the range
required by the fuel quality standards implemented by the EPA in June 2014, and integration of such a desulfurization unit generally requires additional permitting
and significant capital upgrades. The Nixon Facility can still produce diesel with higher sulfur content as a feedstock to other refineries and blenders in the
United States and as a finished petroleum product to other countries.
Hazardous Substances and Wastes
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) imposes liability, without regard to fault or the legality of the original
conduct, on parties the statute defines as responsible for the release or threatened release of a hazardous substance into the environment. Responsible parties,
which include the present owner or operator of a site where the release occurred, the owner or operator of the site at the time of disposal of the hazardous
substance, and persons that disposed of or arranged for the disposal of a hazardous substance, are liable for response and remediation costs and for damages to
natural resources. Petroleum and natural gas are excluded from the definition of hazardous substances; however, this exclusion does not apply to all materials
used in our operations. State statutes impose similar liability. At this time, neither we nor any of our predecessors have been designated as a potentially
responsible party under CERCLA or similar state statute.
We also may incur liability under the Resource Conservation and Recovery Act (“RCRA”), and comparable state and local laws, which impose requirements
related to the handling, storage, treatment and disposal of solid and hazardous wastes. In our refining operations, we generate petroleum product wastes and
ordinary industrial wastes, such as paint wastes, waste solvents and waste oils that may be regulated as hazardous wastes. In addition, our operations also
generate solid wastes, which are regulated under RCRA and state law. The Nixon Facility has been used for refining activities for many years. Although prior
owners and operators may have used operating and waste disposal practices that were standard in the industry at the time, petroleum hydrocarbons and various
wastes may have been released on or under the Nixon Facility site. A 2008 third-party environmental study determined that petroleum hydrocarbon and volatile
organic compound concentrations were below Tier 1 protective concentration levels (“PCLs”). However, RCRA-8 metals were found to be above Tier 1
PCLs. An additional third-party study determined that metal concentrations from the soil would not leach beyond groundwater concentrations exceeding their
respective PCLs. As a result, groundwater resources would not be threatened and no further reporting was required. Certain wastes generated by our oil and
gas operations are currently exempt from regulation as hazardous wastes, but are subject to non-hazardous waste regulations. In the future these wastes could
be designated as hazardous wastes under RCRA or other applicable statutes and therefore may become subject to more rigorous and costly requirements.
Water Discharges
The Federal Water Pollution Control Act of 1972, as amended, also known as the Clean Water Act (the “CWA”), and analogous state laws impose restrictions and
stringent controls on the discharge of pollutants, including oil, into federal and state waters. The CWA and analogous state laws affect our crude oil and
condensate processing operations, petroleum storage and terminaling operations, pipeline operations, and exploration and production activities. The CWA
prohibits the discharge of pollutants to waters of the United States except as authorized by the terms of a permit issued by the EPA or a state agency with
delegated authority. Spill prevention, control, and countermeasure requirements mandate the use of structures, such as berms and other secondary containment,
to prevent hydrocarbons or other pollutants from reaching a jurisdictional body of water in the event of a spill or leak. Federal and state regulatory agencies can
impose administrative, civil, and criminal penalties for non-compliance with discharge permits or other requirements of the CWA or analogous state laws and
regulations.
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Stormwater from the Nixon Facility is tested and discharged pursuant to applicable stormwater permit(s). Process wastewater from the Nixon Facility is tested
and discharged to a nearby municipal treatment facility pursuant to applicable process wastewater permit(s). Wastewater from our offshore facilities, including
our oil and natural gas pipelines and anchor platform, are tested and discharged pursuant to applicable produced water permit(s).
Pipelines and Onshore Facilities
The Oil Pollution Act of 1990 (the “OPA”) and regulations promulgated thereunder include a variety of requirements related to the prevention of oil spills and
impose liability for damages resulting from such spills. OPA imposes liability on owners and operators of onshore and offshore facilities and pipelines for removal
costs and certain public and private damages arising from a spill. OPA establishes a liability limit for onshore facilities of $350 million and offshore facilities of $75
million plus all clean-up costs. OPA establishes lesser liability limits for vessels depending upon their size. A party cannot take advantage of the liability limits if
the spill is caused by gross negligence or willful misconduct or resulted from a violation of federal safety, construction or operating regulations. If a party fails to
report a spill or cooperate in the clean-up, liability limits do not apply. OPA imposes ongoing requirements on responsible parties, including proof of financial
responsibility for potential spills. In October 1996, the United States Congress enacted the Coast Guard Authorization Act of 1996 (P.L. 104-324), which
amended OPA to establish requirements for evidence of financial responsibility for certain offshore facilities. The evidence of financial responsibility amount
required is $35 million for certain types of offshore facilities located seaward of the seaward boundary of a state, including properties used for oil transportation.
We currently maintain the statutory $35 million coverage. While our financial responsibility requirements under OPA may be amended to impose additional costs,
we do not expect the impact of such a change to be any more burdensome on us than on others similarly situated.
Our pipeline operations and exploration and production activities within federal waters are also subject to the requirements of the Outer Continental Shelf Lands
Act (the “OCSLA”). OCSLA is administered by the Bureau of Ocean Energy Management (the “BOEM”) and the Bureau of Safety and Environmental
Enforcement (the “BSEE”). BOEM oversees offshore leasing, resource evaluation, review and administration of oil and gas exploration and development plans,
renewable energy development, National Environmental Policy Act analysis and environmental studies. BSEE is responsible for safety and environmental
oversight of offshore oil and gas operations, including the development and enforcement of safety and environmental regulations, permitting of offshore
exploration, development and production, inspections, offshore regulatory programs and oil spill response compliance.
Financial Assurance
We are required to satisfy BOEM supplemental pipeline bonding requirements with regard to certain pipelines that we operate in federal waters of the Gulf of
Mexico. These supplemental pipeline bonding requirements are intended to secure our performance of plugging and abandonment obligations with respect to
these pipelines. Once plugging and abandonment work has been completed, the collateral backing the supplemental pipeline bonds will be released to us.
In August 2006, BDPL secured a $700,000 supplemental pipeline bond for Right-of-Way Number OCS-G 01381. On February 5, 2014, WBI Energy Midstream,
LLC, a Colorado limited liability company (“WBI”), and BDPL entered into an Asset Sale Agreement (the “Purchase Agreement”) whereby BDPL reacquired
WBI’s 1/6th interest in the Blue Dolphin Pipeline System, the Galveston Area Block 350 Pipeline and the Omega Pipeline (the “Pipeline Assets”) effective
October 31, 2013. Pursuant to the Purchase Agreement, WBI paid BDPL $100,000 in cash, and a surety company $850,000 in cash as collateral for additional
supplemental pipeline bonds for the benefit of BDPL in exchange for the payment and discharge of any and all payables, claims, and obligations related to the
Pipeline Assets. The $850,000 in cash was used to: (i) increase the supplemental pipeline bond for Right-of-Way Number OCS-G 01381 by $205,000,
increasing the total cash-backed collateral for this right-of-way to $905,000, and (ii) secure a $645,000 cash-backed supplemental pipeline bond for Right-of-Way
Number OCS-G 08606.
In December 2014, BDPL completed plugging and abandonment work for Right-of-Way Number OCS-G 08606. As a result, BDPL anticipates release by BOEM
of the collateral backing this supplemental pipeline bond in the first half of 2015. There can be no assurance that BOEM will not require additional supplemental
pipeline bonds related to other BDPL pipeline right-of-ways.
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Health, Safety and Maintenance
We are subject to a number of federal and state laws and regulations related to safety, including the Occupational Safety and Health Act ("OSHA") and
comparable state statutes, the purpose of which are to protect the health and safety of workers. We also are subject to OSHA Process Safety Management
regulations, which are designed to prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or explosive chemicals.
We operate a comprehensive safety, health and security program, with participation by personnel at all levels of the organization. We have developed
comprehensive safety programs aimed at preventing OSHA recordable incidents. Despite our efforts to achieve excellence in our safety and health performance,
there can be no assurances that there will not be accidents resulting in injuries or even fatalities. We routinely monitor our programs and consider improvements
in our management systems.
In 2007, OSHA launched the National Emphasis Program for Petroleum Refineries (“RNEP”). The RNEP requires inspections of all refineries for compliance with
process safety management regulations. Under the directive, the Nixon Facility is subject to inspections that may last from two to six months, including one to
three months onsite. Inspectors primarily focus on process safety management implementation and recordkeeping. The Nixon Facility was the subject of an
OSHA inspection in 2013. As a result of the inspection, the Nixon Facility entered into an OSHA settlement agreement in 2014, pursuant to which we agreed to
comply with abatement certification provisions primarily related to documentation and posting requirements and paid a penalty totaling $38,500.
Climate Change
In 2007 the United States Supreme Court held in Massachusetts v. EPA that emission of greenhouse gases (“GHGs”) may be regulated as an air pollutant under
the CAA. In December 2009, the EPA published its findings that GHGs, including carbon dioxide and methane, are contributing to the warming of the Earth’s
atmosphere and other climatic conditions present a potential danger to public health and the environment. As a result of these findings, the EPA has adopted and
implemented regulations that have or will restrict emissions of GHGs under existing provisions of the CAA.
• Transportation/Mobile Sources – The EPA and the National Highway Traffic Safety Administration (“NHTSA”) have taken steps to enable the production of
clean vehicles through reduced GHG emissions and improved fuel use from on-road vehicles and engines. On August 28, 2012, the EPA and NHTSA
finalized standards to extend the light-duty vehicle GHG National Program for model years 2017-2025. The agencies also adopted first-ever GHG
regulations for heavy-duty engines and vehicles. The EPA is also responsible for developing and implementing regulations to ensure that transportation fuel
sold in the United States contains a minimum volume of renewable fuel. [See “Part I. Item 1. Business – Governmental Regulation – Fuel Quality
Requirements” of this report for additional information related to RFS.] On May 31, 2014, the Nixon Facility ceased production of NRLM, a transportation-
related diesel fuel product.
• Stationary Sources – On May 13, 2010, the EPA set GHG emissions thresholds to define when permits under the New Source Review Prevention of
Significant Deterioration (“PSD”) and Title V Operating Permit programs are required for new and existing industrial facilities. This final rule "tailors" permitting
programs to apply to certain stationary sources of GHG emissions and establishes a schedule that initially focuses the CAA’s permitting programs on the
largest sources with the most CAA permitting experience. The rule then expands to cover the largest sources of GHG that may not have been previously
covered by the CAA for other pollutants. Also in its final rule, the EPA committed to undertake another rulemaking, to begin in 2011 and conclude no later
than July 1, 2012 related to possibly phasing in GHG permitting and whether certain smaller sources can be permanently excluded from permitting. To
date, the EPA has issued no further rulings on this matter. The adoption of any regulations that require reporting of GHGs or otherwise limit emissions of
GHGs from the Nixon Facility could require us to incur significant costs and expenses or changes in operations, which could adversely affect our operations
and financial condition.
Environmental
See “Part II, Item 8. Financial Statements and Supplementary Data – Note (22) Commitments and Contingencies – Health, Safety and Environmental Matters” of
this report for a description of our environmental activities.
Intellectual Property
We rely on intellectual property laws to protect our brand, as well as those of our subsidiaries. “Blue Dolphin” is a registered trademark in the United States in
name and logo form. “Petroport” is a registered trademark in the United States in name form. In addition, “blue-dolphin-energy.com” is a registered domain
name.
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Personnel
We rely on the services of LEH pursuant to an Operating Agreement to manage our property and the property of our subsidiaries, including the Nixon Facility, in
the ordinary course of business. LEH provides us with the following services under the Operating Agreement, among others:
• Personnel serving in capacities equivalent to the capacities of corporate executive officers, including Chief Executive Officer and interim Chief Financial
Officer, as well as general manager and environmental, health and safety; and
• Personnel providing administrative and professional services, including accounting, human resources, insurance, and regulatory compliance.
See “Part II, Item 8. Financial Statements and Supplementary Data - Note (9), Accounts Payable, Related Party” of this report for additional disclosures related to
the Operating Agreement.
Available Information
The Securities and Exchange Commission (the “SEC”) maintains and makes available public records, which includes reports filed by regulated companies and
individuals, through conventional and electronic reading rooms. The SEC’s conventional reading room is located at 100 F Street, Northeast, Washington, D.C.
20549 and can be reached at (202) 551-8300. The SEC’s electronic reading room, which maintains records created by the SEC on or after November 1, 1996, is
available online at http://www.sec.gov/foia/efoiapg.htm. Reports
individuals are available at
http://www.sec.gov/edgar/searchedgar/webusers.htm. We also make our public filings available on our website ( http://www.blue-dolphin-energy.com) as soon as
reasonably practicable after such material is filed, or furnished, to the SEC. A copy of our filings will also be furnished free of charge upon request.
regulated entities and
the SEC by
filed with
ITEM 1A. RISK FACTORS
There are numerous factors that affect our business and operating results, many of which are beyond our control. The following is a description of significant
factors that may cause our future operating results to differ materially from those currently expected. The risks described below are not the only risks we face.
Additional risks and uncertainties not specified herein, not currently known to us, or currently deemed to be immaterial may also materially adversely affect our
business, financial condition, operating results and/or cash flows.
Risks Related to Our Business and Industry
Our operations are highly dependent on our relationships with Genesis and LEH, and, if we are unable to successfully maintain these relationships, our
operations, liquidity and financial condition may be harmed.
We are party to a variety of contracts and agreements with Genesis and its affiliates that enable the purchase of crude oil and condensate, transportation of crude
oil and condensate, and other services. Certain of these agreements with Genesis and its affiliates have an initial term of three years and successive one-year
renewals until August 12, 2019 unless sooner terminated by Genesis or its affiliates with 180 days prior written notice. Further, we have an understanding with
Genesis related to inventory risk management, which is intended to reduce the commodity price risk of our refined petroleum product inventories and generate a
more consistent gross profit margin for each barrel of refined petroleum products.
LEH manages our property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business pursuant to the Operating
Agreement. The Operating Agreement expires on the earliest to occur of: (a) the termination date of a certain agreement with a Genesis affiliate, which has an
initial term of three years and successive one-year renewals until August 12, 2019 unless sooner terminated by the Genesis affiliate with 180 days prior written
notice, (b) August 12, 2015, or (c) upon written notice of either party to the Operating Agreement of a material breach of the Operating Agreement by the other
party.
These agreements and understandings require us to have a close working relationship with Genesis and LEH in order for us to be successful in fully executing
our business strategy. If we are unable to maintain these relationships or our relationships are not on good terms, it could have a material adverse effect on our
operations, liquidity and financial condition.
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We may have capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate.
If we are unable to generate sufficient cash flows or otherwise secure sufficient liquidity to support our short-term and long-term capital requirements, we may not
be able to meet our payment obligations or pursue our business strategies, any of which could have a material adverse effect on our results of operations or
liquidity. Our short-term working capital needs are related to repayment of debt obligations and capital expenditures for maintenance, upgrades, and
refurbishment of equipment at the Nixon Facility. Our long-term working capital needs primarily relate to repayment of long-term debt obligations. In addition, we
continue to utilize capital to reduce operational, safety and environmental risks. We may incur substantial compliance costs in connection with any new
environmental, health and safety regulations. Our liquidity will affect our ability to satisfy any of these needs.
Our ability to use NOL carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation.
Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to
limitations on its ability to utilize its pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership
change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more
than 50 percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years).
As of December 31, 2014, we reported a net deferred tax asset of approximately $5.7 million. Blue Dolphin experienced ownership changes in 2005 in
connection with a series of private placements, and in 2012 as a result of the reverse acquisition of LE. The 2012 ownership change limits our ability to utilize
NOLs following the 2005 ownership change that were not previously subject to limitation. Limitations imposed on our ability to use NOLs to offset future taxable
income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect, and could cause such NOLs
to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for state income tax purposes. NOLs
generated after the 2012 ownership change are not subject to limitation.
Genesis and LEH may, but are not required to, fund our working capital requirements in the event our internally generated cash flows and other sources of
liquidity are inadequate.
Historically, we have relied on Genesis and/or LEH to fund our working capital requirements when cash reserves and revenue from operations, including sales of
refined petroleum products and rental of storage tanks, were insufficient to fund our working capital requirements. As of December 31, 2014 and 2013, working
capital requirements financed by LEH were $1,174,168 and $3,659,340, respectively, and are reflected in accounts payable, related party in our consolidated
balance sheets. We expect that these resources will be sufficient to satisfy our anticipated working capital requirements over the next 12 to 18 months. In the
event our working capital requirements are not funded by Genesis and/or LEH, or we are otherwise unable to secure sufficient liquidity to support our short term
and/or long-term capital requirements, we may not be able to meet our payment obligations, comply with certain deadlines related to environmental regulations
and standards or pursue our business strategies, any of which may have a material adverse effect on our results of operations or liquidity. Our long-term needs
for cash include ongoing capital expenditures for equipment to improve the Nixon Facility and reduce operational, safety and environmental risks. Our liquidity will
affect our ability to satisfy any of these needs.
The dangers inherent in oil and gas operations could expose us to potentially significant losses, costs or liabilities and reduce our liquidity.
Oil and gas operations are inherently subject to significant hazards and risks. These hazards and risks include, but are not limited to, fires, explosions, ruptures,
blowouts, spills, third-party interference and equipment failure, any of which could result in interruption or termination of operations, pollution, personal injury and
death, or damage to our assets and the property of others. These risks could harm our reputation and business, result in claims against us, and have a material
adverse effect on our results of operations and financial condition.
The geographic concentration of our assets creates a significant exposure to the risks of the regional economy and other regional adverse conditions.
Our primary operating asset, the Nixon Facility, is located in Nixon, Wilson County, Texas in Texas’ Eagle Ford Shale and we market our refined petroleum
products in a single, relatively limited geographic area. In addition, our onshore facilities assets are located in Freeport, Brazoria County, Texas, and all of our
pipelines and oil and gas properties are located within the Gulf of Mexico. As a result, our operations are more susceptible to regional economic conditions than
our more geographically diversified competitors. Any changes in market conditions, unforeseen circumstances or other events affecting the area in which our
assets are located could have a material adverse effect on our business, financial condition, and results of operations. These factors include, among other things,
changes in the economy, weather conditions, demographics, and population.
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Competition from companies having greater financial and other resources than we do could materially and adversely affect our business and results of
operations.
The refining industry is highly competitive. Our refining operations compete with domestic refiners and marketers in PADD 3 (Gulf Coast), domestic refiners in
other PADD regions, and foreign refiners that import products into the United States. Certain of our competitors have larger, more complex refineries and may be
able to realize higher margins per barrel of production. Several of our principal competitors are integrated national or international oil companies that are larger
and have substantially greater resources than we do and have access to proprietary sources of controlled crude oil production. Unlike these competitors, we
obtain all of our feedstocks from a single supplier. Because of their integrated operations and larger capitalization, larger, more complex refineries may be more
flexible in responding to volatile industry or market conditions, such as crude oil and other feedstocks supply shortages or commodity price fluctuations. If we are
unable to compete effectively, we may lose existing customers or fail to acquire new customers.
We are subject to strict laws and regulations regarding personnel and process safety, and failure to comply with these laws and regulations could have a material
adverse effect on our results of operations, financial condition and profitability.
We are subject to the requirements of OSHA and comparable state statutes that regulate the protection of the health and safety of workers, and the proper
design, operation and maintenance of our equipment. In addition, OSHA and certain environmental regulations require that we maintain information about
hazardous materials used or produced in our operations and that we provide this information to personnel and state and local governmental authorities. Failure to
comply with these requirements, including general industry standards, record keeping requirements and monitoring and control of occupational exposure to
regulated substances, may result in significant fines or compliance costs, which could have a material adverse effect on our results of operations, financial
condition and cash flows.
We may incur significant liability under, or costs and capital expenditures to comply with, environmental, health and safety regulations, which are complex and
change frequently.
Our refinery, pipelines and other operations are subject to federal, state and local laws regulating, among other things, the generation, storage, handling, use and
transportation of petroleum and hazardous substances, the emission and discharge of materials into the environment, waste management, characteristics and
composition of diesel and other matters otherwise relating to the protection of the environment. Our operations are also subject to various laws and regulations
relating to occupational health and safety. Compliance with the complex array of federal, state and local laws relating to the protection of the environment, health
and safety is difficult and likely will require us to make significant expenditures. Moreover, our business is inherently subject to accidental spills, discharges or
other releases of petroleum or hazardous substances into the environment including at neighboring areas or third-party storage, treatment or disposal facilities.
Certain environmental laws impose joint and several liability without regard to fault or the legality of the original conduct in connection with the investigation and
cleanup of such spills, discharges or releases. As such, we may be required to pay more than our fair share of such investigation or cleanup. We may not be
able to operate in compliance with all applicable environmental, health and safety laws, regulations and permits at all times. Violations of applicable legal or
regulatory requirements could result in substantial fines, criminal sanctions, permit revocations, injunctions and/or facility shutdowns.
We may also be required to make significant capital expenditures, incur increased operating costs, or change operations to achieve compliance with applicable
standards and regulations. For example:
• We review, on an ongoing basis, our compliance with relevant federal, state and local environmental laws. During the course of our review, we may discover
that we are not in compliance with existing environmental regulations. To the extent that we are out of compliance, we may incur significant liabilities, costs
and capital expenditures to comply with such environmental regulations, which are complex and change frequently. Costs of compliance are often
unpredictable, and there can be no assurance that the future costs will not be material. It is possible that we may identify additional costs in the future, which
could result in additional obligations and expenses, including fines and penalties;
• On September 12, 2012, the EPA published final amendments to NSPS for petroleum refineries to be effective November 13, 2012. These amendments
include standards for emissions of nitrogen oxides from process heaters and work practice standards and monitoring requirements for flares. We continue to
evaluate the regulation and amended standards, as may be applicable to the operations at our refinery. We cannot currently predict costs we may incur, if
any, to comply with the amended NSPS, but the costs could be material; and
• New environmental regulations became effective in June 2014 that require most refineries to produce transportation-related fuels for highway and non-
highway use at 15 ppm sulfur. In order to meet the lower sulfur content requirement for NRLM in the United States, the Nixon Facility will require capital
upgrades in excess of approximately $50 million. In order to complete the required capital upgrades, we will have to finance such capital expenditures
primarily through the issuance of debt and/or equity, which would result in dilution to existing stockholders and/or subject us to higher debt levels. The Nixon
Facility can continue to sell diesel with high sulfur content in the United States to other refineries and blenders as a feedstock and to other countries as a
finished petroleum product. There can be no assurance that we can: (i) obtain financing for capital expenditures at rates or at terms acceptable to us, if at all,
(ii) sell diesel with a higher sulfur content in the United States to other refineries and blenders as feedstock or overseas as a finished petroleum product, or
(iii) sell higher sulfur diesel content at prices that we deem reasonable or at all.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Capital expenditures or costs for compliance with existing environmental, health and safety regulations could have a material adverse effect on our results of
operations, financial condition and profitability. We cannot predict the extent to which additional environmental, health and safety legislation or regulations will be
enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to our operations. Many of
these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time.
Our insurance policies may be inadequate or expensive.
Our insurance coverage does not cover all potential losses, costs or liabilities. We could suffer losses for uninsurable or uninsured risks or in amounts in excess
of our existing insurance coverage. Our ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which we
have no control. In addition, if we experience insurable events, our annual premiums could increase further or insurance may not be available at all or if it is
available, on limited coverage items. The occurrence of an event that is not fully covered by insurance or the loss of insurance coverage could have a material
adverse effect on our business, financial condition, and results of operations and, as a result, our ability to make distributions.
LEH holds a significant interest in us, and our related party transactions with LEH and its affiliates may cause conflicts of interest that may adversely affect us.
Jonathan P. Carroll, our Chief Executive Officer, President, Assistant Treasurer and Secretary, and Tommy L. Byrd, our interim Chief Financial Officer, Treasurer
and Assistant Secretary, are also a member and employee, respectively, of LEH and as a result may, under certain circumstances, have interests that differ from
or conflict with our interests. Further, pursuant to the Operating Agreement, LEH manages and operates the Nixon Facility and Blue Dolphin’s other operations.
As a result of their relationship with LEH, Messrs. Carroll and Byrd may experience conflicts of interest in the execution of their duties on behalf of Blue Dolphin
including with respect to the Operating Agreement.
LEH owns approximately 81% of our Common Stock. Mr. Carroll is the majority owner of LEH. Through its ownership of such a large amount of Common Stock,
LEH has significant influence over matters such as the election of our Board of Directors (the “Board”), control over our business, policies and affairs and other
matters submitted to our stockholders. LEH is entitled to vote the Common Stock it owns in accordance with its interests, which may be contrary to our interests
and those of other stockholders. LEH has interests that differ from the interests of our stockholders and, as a result, there is a risk that important business
decisions will not be made in the best interest of some of our stockholders. LEH and its other affiliates are not limited in their ability to compete with us and are
not obligated to offer us business opportunities. We believe that the transactions and agreements that we have entered into with LEH and its affiliates are on
terms that are at least as favorable as could reasonably have been obtained at such time from third-parties. However, these relationships could create, or appear
to create, potential conflicts of interest when our Board is faced with decisions that could have different implications for us and LEH or its affiliates. The
appearance of conflicts, even if such conflicts do not materialize, might adversely affect the public’s perception of us, as well as our relationship with other
companies and our ability to enter into new relationships in the future, which may have a material adverse effect on our ability to do business.
Our business may suffer if any of the executive officers or other key employees discontinues employment with us. Furthermore, a shortage of skilled labor or
disruptions in our labor force may make it difficult for us to maintain productivity.
Our future success depends to a large extent on the services of the executive officers and other key employees and on our continuing ability to recruit, train and
retain highly qualified employees in all areas of our operations. Furthermore, our operations require skilled and experienced employees with proficiency in
multiple tasks. The competition for these employees is intense, and the loss of these executives or employees could harm our business. If any of these
executives or other key personnel resign or become unable to continue in their present roles and are not adequately replaced, our business could be materially
adversely affected.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Risks Primarily Related to Our Refining Operations
The price volatility of crude oil, other feedstocks, refined petroleum products, and fuel and utility services may have a material adverse effect on our earnings,
cash flows and liquidity.
Our refining earnings, cash flows and liquidity from operations depend primarily on the margin above operating expenses (including the cost of refinery
feedstocks, such as crude oil and condensate that are processed and blended into refined petroleum products) at which we are able to sell as refined petroleum
products. Crude oil refining is primarily a margin-based business. In order to improve margins, it is important for a crude oil refinery to maximize the yields of high
value finished petroleum produces and to minimize the costs of feedstocks and operating expenses. When the margin between refined petroleum product prices
and crude oil and other feedstock costs decreases, our margins are negatively affected. Crude oil refining margins have historically been volatile, and are likely to
continue to be volatile, as a result of a variety of factors, including fluctuations in the prices of crude oil, other feedstocks, refined petroleum products, and fuel and
utility services. While an increase or decrease in the price of crude oil may result in a similar increase or decrease in prices for refined petroleum products, there
may be a time lag in the realization of the similar increase or decrease in prices for refined petroleum products. The effect of changes in crude oil and
condensate prices on our refining margins therefore depends, in part, on how quickly and how fully refined petroleum product prices adjust to reflect these
changes.
Prices of crude oil, other feedstocks and refined petroleum products depend on numerous factors beyond our control, including the supply of and demand for
crude oil, other feedstocks, and refined petroleum products. Such supply and demand are affected by, among other things:
•
changes in global and local economic conditions;
• domestic and foreign demand for fuel products, especially in the United States, China and India;
• worldwide political conditions, particularly in significant oil producing regions such as the Middle East, West Africa and Latin America;
•
the level of foreign and domestic production of crude oil, other feedstocks, and refined petroleum products and the volume of crude oil, feedstocks, and
refined petroleum products imported into the United States;
• availability of and access to transportation infrastructure;
•
•
capacity utilization rates of refineries in the United States;
the ability of the members of the Organization of Petroleum Exporting Countries to affect oil prices and maintain production controls;
• development and marketing of alternative and competing fuels;
•
commodities speculation;
• natural disasters (such as hurricanes and tornadoes), accidents, interruptions in transportation, inclement weather or other events that can cause
unscheduled shutdowns or otherwise adversely affect our refineries;
federal and state government regulations and taxes; and
local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets.
•
•
Refining margins are volatile, and a reduction in anticipated refining margins will adversely affect the amount of cash we will have available for working capital.
Historically, refining margins have been volatile, and they are likely to continue to be volatile in the future. Our financial results are primarily affected by the
relationship, or margin, between our refined petroleum product sales prices and our crude oil and condensate costs. Our crude oil and condensate acquisition
costs and the prices at which we can ultimately sell our refined petroleum products depend upon numerous factors beyond our control.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
The prices at which we sell refined petroleum products are strongly influenced by the commodity price of crude oil. If crude oil prices increase, our “refinery
operations” business segment margins will fall unless we are able to pass along these price increases to our wholesale customers. Increases in the selling prices
for refined petroleum products typically lag behind the rising cost of crude oil and may be difficult to implement when crude oil costs increase dramatically over a
short period of time.
Potential downtime at the Nixon Facility could result in lost margin opportunity, increased maintenance expense, increased inventory, and a reduction in cash
available for payment of our obligations.
The safe and reliable operation of the Nixon Facility is key to our financial performance and results of operations, and we are particularly vulnerable to disruptions
in our operations because all of our refining operations are conducted at a single facility. Although currently operating at anticipated levels, the Nixon Facility is
still in a recommissioning phase and may require unscheduled downtime for unanticipated reasons, including maintenance and repairs, voluntary regulatory
compliance measures, or cessation or suspension by regulatory authorities. Occasionally, the Nixon Facility experiences a temporary shutdown due to power
outages as a result of high winds and thunderstorms. In the case of such a shutdown, the refinery must initiate a standard start-up process, and such process
can last several days although we are typically able to resume normal operations the next day. Any scheduled or unscheduled downtime may result in lost
margin opportunity, increased maintenance expense and a build-up of refined petroleum products inventory, which could reduce our ability to meet our payment
obligations.
Loss of market share by a key customer or consolidation among our customer base, could harm our operating results.
For the year ended December 31, 2014, 89% of our refined petroleum products sales came from five customers. These customers have a variety of suppliers to
choose from and therefore can make substantial demands on us, including demands on product pricing and on contractual terms, which often results in the
allocation of risk to us as the supplier. Our ability to maintain strong relationships with our principal customers is essential to our future performance. If we lose a
key customer, if any of our key customers reduce their orders of our refined petroleum products or require us to reduce our prices before we are able to reduce
costs, if a customer is acquired by one of our competitors or if a key customer suffers financial hardship, our operating results could be harmed.
Additionally, if there is consolidation among our customer base, our customers may be able to command increased leverage in negotiating prices and other
terms of sale, which could adversely affect our profitability. In addition, if, as a result of increased leverage, customer pressures require us to reduce our pricing
such that our gross margins are diminished, we could decide not to sell our refined petroleum products to a particular customer, which could result in a decrease
in our revenue. Consolidation among our customer base may also lead to reduced demand for our products, replacement of our products by the combined entity
with those of our competitors and cancellations of orders, each of which could harm our operating results.
The sale of refined petroleum products to the wholesale market is our primary business, and if we fail to maintain and grow the market share of our refined
petroleum products, our operating results could suffer.
Our success in the wholesale market depends in large part on our ability to maintain and grow our image and reputation as a reliable operator and to expand into
and gain market acceptance of our refined petroleum products. Adverse perceptions of product quality, whether or not justified, or allegations of product quality
issues, even if false or unfounded, could tarnish our reputation and cause our wholesale customers to choose refined petroleum products offered by our
competitors.
We are dependent on third-parties for the transportation of crude oil and condensate into and refined petroleum products out of our Nixon Facility, and if these
third-parties become unavailable to us, our ability to process crude oil and condensate and sell refined petroleum products to wholesale markets could be
materially and adversely affected.
We rely on trucks for the receipt of crude oil and condensate into and the sale of refined petroleum products out of our Nixon Facility. Since we do not own or
operate any of these trucks, their continuing operation is not within our control. If any of the third-party trucking companies that we use, or the trucking industry in
general, become unavailable to transport crude oil, condensate, and/or our refined petroleum products because of acts of God, accidents, government regulation,
terrorism or other events, our revenue and net income would be materially and adversely affected.
We depend exclusively on GEL for our supply of crude oil and other feedstocks, and the loss of GEL or a material decrease in the supply of crude oil and other
feedstocks generally available to the Nixon Facility could have a material adverse effect on our operations and financial condition.
We purchase 100% of our crude oil and other feedstocks exclusively from GEL under the Crude Supply Agreement. We have the ability to purchase crude oil and
condensate from other suppliers with the prior consent of GEL. We are dependent on GEL for the provision of our crude oil and condensate. The loss of GEL
as our crude oil and condensate supplier, to the extent we were unable to find another crude oil and condensate supplier, would adversely affect our financial
results.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
To the extent that GEL reduces the volume of crude oil and other feedstocks that they supply to us as a result of declining production, competition, or otherwise,
our sales, net income and cash available for payments of our debt obligations would decline unless we were able to acquire comparable supplies of crude oil and
other feedstocks on comparable terms from other suppliers. Fluctuations in crude oil prices can greatly affect production rates and investments by third-parties in
the development of new oil reserves. Drilling activity generally decreases as crude oil prices decrease. We have no control over the level of drilling activity in the
fields that supply the Nixon Facility, the amount of reserves underlying the wells in these fields, the rate at which production from a well will decline or the
production decisions of producers. A material decrease in either crude oil and condensate production or drilling activity in the fields that supply the Nixon Facility,
as a result of depressed commodity prices, natural production declines, governmental moratoriums on drilling or production activities, the availability and the cost
of capital or otherwise, could result in a decline in the volume of crude oil and condensate that we refine.
Our supplier sources a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale and may experience interruptions of supply from
that region.
Our supplier sources a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. As a result, we may be disproportionately
exposed to the impact of delays or interruptions of supply from that region caused by transportation capacity constraints, curtailment of production, unavailability
of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions, plant closures for scheduled
maintenance or interruption of transportation of oil or natural gas produced from the wells in that area.
Our refining operations and customers are primarily located within the Eagle Ford Shale and changes in the supply/demand balance in this region could result in
lower refining margins.
Our primary operating asset, the Nixon Facility, is located in Texas’ Eagle Ford Shale and we market our refined petroleum products in a single, relatively limited
geographic area. As a result, we are more susceptible to regional economic conditions than our more geographically diversified competitors. Should the
supply/demand balance shift in our region as a result of changes in the local economy, an increase in refining capacity or other reasons, resulting in supply in
the PADD 3 (Gulf Coast) region to exceed demand, we would have to deliver refined petroleum products to customers outside of our current operating region and
thus incur considerably higher transportation costs, resulting in lower refining margins.
Hedging of our refined petroleum products and crude oil and condensate may limit our gains and expose us to other risks.
We are exposed to commodity price risk related to our refined petroleum products and crude oil and condensate inventories. The spread between the cost of
crude oil and condensate and refined petroleum product sales prices is the primary factor affecting our operations, liquidity and financial condition. Our feedstock
acquisition costs and refined petroleum products sales prices depend on numerous factors beyond our control. These factors include the supply of and demand
for crude oil, gasoline, and refined petroleum products. Supply and demand for these products depend on various factors, including changes in domestic and
foreign economies, weather conditions, domestic and foreign political affairs, production levels, availability of imports and exports, marketing of competitive fuels,
and government regulation.
Under our inventory risk management policy, Genesis may, but is not required to, use derivative instruments as certain of our refined petroleum product
inventories exceed certain thresholds in an effort to reduce our commodity price risk. However, Genesis’ execution of the inventory risk management plan is
outside of our control. Accordingly, there could be situations in which Genesis fails to execute on the plan or executes on the plan in a manner that causes
significant losses to us, all of which are beyond our control. In the event that our inventory risk management system fails and/or is implemented poorly or not at
all, we could experience a material and negative adverse effect on our operations, liquidity and financial condition.
If sufficient RINs are unavailable for purchase or if we have to pay a significantly higher price for RINs, or if we are otherwise unable to meet the EPA's RFS
mandates, our business, financial condition and results of operations could be materially adversely affected.
Pursuant to the Energy Independence and Security Act of 2007, the EPA has promulgated the Renewable Fuel Standard, or RFS, which requires refiners to
blend "renewable fuels," such as ethanol, with their petroleum fuels or purchase renewable energy credits, known as RINs, in lieu of blending. Under the RFS,
the volume of renewable fuels refineries like us are obligated to blend into their finished petroleum products increases annually over time until 2022. Beginning in
February 2012, the Nixon Facility was required to blend renewable fuels into its diesel fuel or purchase RINs in lieu of blending. We submitted an application with
the EPA requesting a small refinery exemption under the RFS mandate (“Hardship Exemption”) due to disproportionate economic hardship and disparate impact
that compliance with the RFS mandate would have on the Nixon Facility. In September 2014, the EPA granted the Nixon Facility a small refinery exemption
from RFS requirements for 2013 and 2014. Recently the price of RINs has been extremely volatile.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Regulation of greenhouse gas emissions could increase our operational costs and reduce demand for our products.
Continued political attention to issues concerning climate change, the role of human activity in it, and potential mitigation through regulation could have a material
impact on our operations and financial results.
International agreements and national or regional legislation and regulatory measures to limit greenhouse emissions are currently in various stages of discussion
or implementation. These and other greenhouse gas emissions-related laws, policies and regulations may result in substantial capital, compliance, operating and
maintenance costs. The level of expenditure required to comply with these laws and regulations is uncertain and is expected to vary depending on the laws
enacted in each jurisdiction, our activities in the particular jurisdiction and market conditions. Greenhouse gas emissions that could be regulated include those
arising from the conversion of crude oil and other hydrocarbons into refined petroleum products, the transportation of crude oil and natural gas, and the
exploration and production of crude oil and natural gas. Some matters related to these activities, such as actions taken by our competitors in response to such
laws and regulations, are beyond our control.
The effect of regulation on our financial performance will depend on a number of factors including, among others, the sectors covered, the greenhouse gas
emissions reductions required by law, the extent to which we would be entitled to receive emission allowance allocations or would need to purchase compliance
instruments on the open market or through auctions, the price and availability of emission allowances and credits and the impact of legislation or other regulation
on our ability to recover the costs incurred through the pricing of our products. Material price increases or incentives to conserve or use alternative energy
sources could also reduce demand for products we currently sell and adversely affect our sales volumes, revenues and margins.
Risks Related to Our Pipelines and Oil and Gas Properties
Asset retirement obligations for our pipelines and facilities assets and oil and gas properties are estimates, and actual costs could vary significantly.
We are required to record a liability for the discounted present value of our asset retirement obligations to plug and abandon inactive pipelines and related assets
and non-producing oil and gas properties in which we have a working interest. Such asset retirement obligations may include complete structural removal and/or
restoration of the land or seabed. Although management has used its best efforts to determine future asset retirement obligations, assumptions and estimates
can be influenced by many factors beyond management’s control, including, but not limited to, changes in regulatory requirements, which may be more
restrictive in the future, changes in costs for abandonment related services and technologies, which could increase or decrease based on supply and demand,
and/or extreme weather conditions, such as hurricanes, which may cause structural or other damage to pipeline and related assets and oil and gas properties.
Accordingly, our estimate of future asset retirement obligations could differ materially from actual costs that may be incurred. As of December 31, 2014, our
estimated future asset retirement obligations were $3.3 million. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (12) Asset Retirement
Obligations” of this report for additional information regarding asset retirement obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Owned and Leased Assets
We own, lease, and have leasehold interests in the properties listed below:
Property
Nixon Facility
Freeport Facility
Pipelines and Oil and Gas
Properties
Corporate Headquarters
Business Segment(s)
Refinery Operations
Pipeline Transportation
Pipeline Transportation
Corporate and Other
Acres
56
193
--
--
22
Owned / Leased
Location
Owned
Owned
Owned/Leasehold Interests
Nixon, Wilson County, Texas
Freeport, Brazoria County, Texas
Gulf of Mexico
Lease
Houston, Harris County, Texas
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
LEH manages and operates all of our properties and is reimbursed for their management and operation under the Operating Agreement. We believe that our
properties are generally adequate for our operations and are maintained in a good state of repair in the ordinary course of business.
•
•
Nixon Facility – Located in Nixon, Wilson County, Texas, the 15,000 bpd Nixon Facility is a 56 acre crude oil and condensate processing facility that consists
of a distillation unit, naphtha stabilizer unit, depropanizer unit, approximately 120,000 bbls of crude oil and condensate storage capacity, approximately
178,000 bbls of refined petroleum products storage capacity and related loading and unloading facilities and utilities. The Nixon Facility is currently
undergoing upgrades and refurbishment of certain components, including the naphtha stabilizer and depropanizer units. The Nixon Facility is pledged as
collateral under a Security Agreement as discussed in Part II, Item 8 “Financial Statements and Supplementary Data – Note (13) Long-Term Debt” of this
report.
Freeport Facility – Located in Freeport, Brazoria County, Texas, the Freeport Facility encompasses approximately 193 acres of land and includes pipeline
easements and right-of-ways, crude oil and natural gas separation and dehydration facilities, a vapor recovery unit and two onshore pipelines. The two
onshore pipelines consist of approximately 4 miles of the 20-inch Blue Dolphin Pipeline and a 16-inch natural gas pipeline that connects the Freeport Facility
to the Dow Chemical Plan Complex in Freeport, Texas.
•
Pipelines and Oil and Gas Properties –The following provides a summary of our offshore pipelines, all of which are located in the Gulf of Mexico:
Pipeline
Location
Ownership
Miles
Blue Dolphin Pipeline (1)
GA 350 Pipeline
Omega Pipeline (2)
(1) Currently inactive.
(2) Currently abandoned in place.
Gulf of Mexico
Gulf of Mexico
Gulf of Mexico
100%
100%
100%
38
13
18
Natural Gas
Capacity
(MMcf/d)
180
65
110
o Blue Dolphin Pipeline System (“Blue Dolphin Pipeline”) – The Blue Dolphin Pipeline consists of 16-inch and 20-inch pipeline segments, including a trunk
line and lateral lines, that span approximately 38 miles and run from an offshore anchor platform in Galveston Area Block 288 to our Freeport
Facility. The Blue Dolphin Pipeline has an aggregate capacity of approximately 180 MMcf of natural gas and 7,000 bbls of crude oil and condensate per
day. The Blue Dolphin Pipeline is currently inactive;
o Galveston Area Block 350 Pipeline (the “GA 350 Pipeline”) – The GA 350 Pipeline is an 8-inch, 13 mile offshore pipeline extending from Galveston Area
Block 350 to a subsea interconnect and tie-in with a transmission pipeline in Galveston Area Block 391. The GA-350 Pipeline has a capacity of
approximately 65 MMcf of gas per day; and
o Omega Pipeline (the “Omega Pipeline”) – The Omega Pipeline is a 12-inch, 18 mile offshore pipeline that originates in the High Island Area, East
Addition Block A-173 and extends to West Cameron Block 342, where it was previously connected to the High Island Offshore System. The Omega
Pipeline was abandoned in place in 1997. Reactivation of the Omega Pipeline is dependent upon future drilling activity in its vicinity and the successful
attraction of producer/shippers to the system. When it was active, the Omega Pipeline had a capacity of approximately 110 MMcf of gas per day.
Oil and gas properties include a 2.5% working interest and a 2.008% net revenue interest in High Island Block 115, a 0.5% overriding royalty interest in
Galveston Area Block 321, and a 2.88% working interest and 2.246% net revenue interest in High Island Block 37. All of the leases associated with these oil
and gas properties have expired.
• Corporate Headquarters – Our company headquarters is located downtown in Houston, Harris County, Texas. We lease 13,878 square feet of office space,
7,389 square feet of which is used and paid for by LEH. Our office lease is discussed more fully in Part II, Item 8 “Financial Statements and Supplementary
Data – Note (17) Leases” of this report.
ITEM 3. LEGAL PROCEEDINGS
From time to time we are subject to various lawsuits, claims, liens and administrative proceedings that arise out of the normal course of business. Vendors have
placed mechanic’s liens on the Nixon Facility as protection during construction activities. Management does not believe that such liens have a material adverse
effect on our results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX U.S. Premier tier of the OTC Markets under the ticker
symbol “BDCO." The following table sets forth, for the periods indicated, the high and low prices for our Common Stock as reported by the NASDAQ and the
OTC Markets. The quotations reflect inter-dealer prices, without adjustment for retail mark-ups, markdowns or commissions and may not represent actual
transactions.
Quarter Ended
2014
December 31
September 30
June 30
March 31
2013
December 31
September 30
June 30
March 31
Holders
High
Low
$
$
$
$
$
$
$
$
6.20
9.99
10.75
6.05
6.90
7.00
6.49
9.97
$
$
$
$
$
$
$
$
3.51
5.99
3.50
4.75
4.15
5.01
5.12
5.00
As of March 31, 2015, we had 273 record holders of our Common Stock. We have approximately 3,000 beneficial holders of our Common Stock.
Dividends
We have not declared or paid any dividends on our Common Stock since our incorporation. We currently intend to retain earnings for our capital needs and
expansion of our business and do not anticipate paying cash dividends on the Common Stock in the foreseeable future. We expect that any loan agreements we
enter into in the future will likely contain restrictions on the payment of dividends on our Common Stock. Future policy with respect to dividends will be
determined by the Board based upon our earnings and financial condition, capital requirements and other considerations.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a review of certain aspects of our financial condition and results of operations and should be read in conjunction with “Part I, Item 1. Business”
and “Part II, Item 8. Financial Statements and Supplementary Data” including the associated “Notes to Consolidated Financial Statements” of this report.
Overview
Our refinery operations consist primarily of the 15,000 bpd crude oil and condensate processing facility that is located in Nixon, Wilson County, Texas (the “Nixon
Facility”). The Nixon Facility’s complexity allows us to refine crude oil and condensate into finished petroleum products, such as jet fuel, and intermediate
petroleum products, such as naphtha, LPG and atmospheric gas oil. The Nixon Facility consists of a distillation unit, naphtha stabilizer unit, depropanizer unit,
approximately 120,000 bbls of crude oil and condensate storage capacity, approximately 178,000 bbls of refined petroleum product storage capacity, and related
loading and unloading facilities and utilities. The Nixon Facility is currently undergoing upgrades and refurbishment of certain components, including the naphtha
stabilizer and depropanizer units. As part of our refinery business segment we also conduct petroleum storage and terminaling operations under third-party lease
agreements at the Nixon Facility. We also own and operate pipeline assets and have leasehold interests in oil and gas properties, which are considered non-core
to our business. Certain of our pipelines are inactive, and all of the leases associated with our oil and gas properties have expired.
Refinery Operations Business Strategy
We are committed to maintaining safe, efficient and reliable refinery operations, improving margins, and focusing on safety and environmental
stewardship. Throughout 2014, we advanced our refinery operations business strategy by: (i) continuing to implement programs and procedures at the Nixon
Facility to improve safety, (ii) improving product mix through the introduction of oil-based mud blendstock in June 2014 and the increased production of jet fuel,
and (iii) upgrading and refurbishing certain components of the Nixon Facility, including the naphtha stabilizer unit, depropanizer unit, and two boilers. We
anticipate that completion of these capital improvement projects will:
• Naphtha Stabilizer and Depropanizer Units – improve the overall quality of the naphtha that we produce, allow higher recovery of lighter products that can be
sold as LPG mix, and increase the amount of throughput that can be processed by the Nixon Facility; and
• Boilers – reduce fuel gas usage since the new boilers will be more energy efficient and have the ability to operate using natural gas. This will, in turn, reduce
emissions of combustion-related pollutants and potential operational downtime.
Major Influences on Results of Operations
Our earnings and cash flows from our refining operations business segment are primarily affected by the relationship between refined petroleum product prices
and the prices for crude oil and other feedstocks. Crude oil refining is primarily a margin-based business, and in order to increase profitability, it is important for
the refinery to maximize the yields of high value finished products and to minimize the costs of feedstock and operating expenses. Our cost to acquire crude oil
and condensate and the price for which our refined petroleum products are ultimately sold depend on several factors, many of which are beyond our control,
including the supply of, and demand for, crude oil, gasoline and other refined products, which depend on changes in domestic and foreign economies, weather
conditions, domestic and foreign political affairs, production levels, availability of and access to transportation infrastructure, the availability of imports, the
marketing of competitive fuel, and the extent of government regulation, among other factors.
Crude oil and refined petroleum product prices are also affected by other factors, such as product pipeline capacity, local market conditions and the operating
levels of competing refineries. Crude oil costs and the prices of refined petroleum products have historically been subject to wide fluctuations. An expansion or
upgrade of our competitors’ facilities, price volatility, international political and economic developments and other factors beyond our control are likely to continue
to play an important role in crude oil refining industry economics. Moreover, the refining industry typically experiences seasonal fluctuations in demand for
refined petroleum products, such as increases in the demand for gasoline during the summer driving season and for home heating oil during the winter. These
factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a negative impact on product margins. In addition to
current market conditions, there are long-term factors that may impact the demand for refined petroleum products. These factors include mandated renewable
fuels standards, proposed climate change laws and regulations, and increased mileage standards for vehicles.
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Relationship with Lazarus Energy Holdings, LLC (“LEH”)
In connection with our reverse acquisition of Lazarus Energy, LLC (“LE”) in 2012 whereby we acquired the Nixon Facility, we:
(i) issued 8,426,456 shares of our Common Stock to Lazarus Energy Holdings, LLC (“LEH”) as consideration. As a result, LEH, our controlling shareholder,
owns approximately 81% of our Common Stock. Jonathan P. Carroll, Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and
President of Blue Dolphin, is the majority owner of LEH; and
(ii) entered into a Management Agreement dated and effective February 12, 2012 with LEH. Pursuant to the Management Agreement, LEH manages our
property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business. On May 12, 2014, the Management Agreement
was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating
Agreement” (the “Operating Agreement”).
We currently rely on our profit share, GEL TEX Marketing, LLC (“GEL”), an affiliate of Genesis Energy, LLC (“Genesis”), and LEH to fund our working capital
requirements. During months in which we receive no profit share distribution, GEL and/or LEH may, but are not required to, fund our operating losses.
Relationship with Genesis
We continue to be dependent on our relationship with Genesis and its affiliates. Our relationship with Genesis is governed by three agreements:
•
•
Crude Supply Agreement – Pursuant to the Crude Supply Agreement, GEL, an affiliate of Genesis, is the exclusive supplier of crude oil and condensate to
the Nixon Facility. We have the ability to purchase crude oil and condensate from other suppliers with the prior consent of GEL. GEL supplies crude oil and
condensate to LE at cost plus freight expense and any costs associated with GEL’s hedging. All crude oil and condensate supplied to LE pursuant to the
Crude Supply Agreement is paid for pursuant to the terms of the Joint Marketing Agreement as described below. In addition, GEL has a first right of refusal
to use three storage tanks at the Nixon Facility during the term of the Crude Supply Agreement. Subject to certain termination rights, the Crude Supply
Agreement had an initial term of three years expiring on August 12, 2014. In accordance with the terms of the October 2013 Letter Agreement, LE agreed
not to terminate the Crude Supply Agreement and GEL agreed to automatically renew the Crude Supply Agreement at the end of the initial term for
successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written notice.
Construction and Funding Agreement – Pursuant to the Construction and Funding Agreement, LE engaged Milam to provide construction services on a
turnkey basis in connection with the construction, installation and refurbishment of certain equipment at the Nixon Facility (the “Project”). Milam made
advances in excess of their obligation for certain construction and operating costs at the Nixon Facility. All amounts advanced to LE pursuant to the terms of
the Construction and Funding Agreement bear interest at a rate of 6% per annum. In March 2012 (the month after initial operation of the Nixon Facility
occurred), LE began paying Milam, in accordance with the provisions of the Joint Marketing Agreement, a minimum monthly payment of $150,000 (the
“Base Construction Payment”) as repayment of interest and amounts advanced to LE under the Construction and Funding Agreement. If, however, the
Gross Profits (as defined below) of LE in any given month (calculated as the revenue from the sale of products from the Nixon Facility minus the cost of
crude oil and condensate) are insufficient to make this payment, then there is a deficit amount, which shall accrue interest (the “Deficit Amount”). If there is a
Deficit Amount, then 100% of the gross profits in subsequent calendar months will be paid to Milam until the Deficit Amount has been satisfied in full and all
previous $150,000 monthly payments have been made.
So long as the Construction and Funding Agreement remains in effect, LE is prohibited from: (i) incurring any debt (except debt that is subordinated to
amounts owed to Milam or GEL); (ii) selling, discounting or factoring its accounts receivable or its negotiable instruments outside the ordinary course of
business while no default exists; (iii) suffering any change of control or merging with or into another entity; and (iv) certain other conditions listed therein. As
of the date hereof, Milam can terminate the Construction and Funding Agreement by written notice at any time. If Milam terminates the Construction and
Funding Agreement, then Milam and LE are required to execute a forbearance agreement, the form of which has previously been agreed to as Exhibit J of
the Construction and Funding Agreement.
In accordance with the terms of the October 2013 Letter Agreement, GEL agreed to advance to LE monies not to exceed approximately $186,934 to pay for
certain equipment and services at the Nixon Facility. All amounts advanced or paid by GEL or its affiliates pursuant to the October 2013 Letter Agreement
constitute Obligations, as defined in the Construction and Funding Agreement, by LE to Milam under the Construction and Funding Agreement.
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•
Joint Marketing Agreement – The Joint Marketing Agreement sets forth the terms of an agreement between LE and GEL pursuant to which the parties will
jointly market and sell the output produced at the Nixon Facility and share the Gross Profits (as defined below) from such sales. Pursuant to the Joint
Marketing Agreement, GEL is responsible for all product transportation scheduling. LE is responsible for entering into contracts with customers for the
purchase and sale of output produced at the Nixon Facility and handling all billing and invoicing relating to the same. However, all payments for the sale of
output produced at the Nixon Facility will be made directly to GEL as collection agent and all customers must satisfy GEL’s customer credit approval
process. Subject to certain amendments and clarifications (as described below), the Joint Marketing Agreement also provides for the sharing of “Gross
Profits” (defined as the total revenue from the sale of output from the Nixon Facility minus the cost of crude oil and condensate pursuant to the Crude
Supply Agreement) as follows:
(a) First, prior to the date on which Milam has recouped all amounts advanced to LE under the Construction and Funding Agreement (the “Investment
Threshold Date”), the Base Construction Payment of $150,000 shall be paid to GEL (for remittance to Milam) each calendar month to satisfy amounts owed
under the Construction and Funding Agreement, with a catch-up in subsequent months if there is a Deficit Amount until such Deficit Amount has been
satisfied in full.
(b) Second, prior to and as of the Investment Threshold Date, LE is entitled to receive weekly payments to cover direct expenses in operating the Nixon Facility
(the “Operations Payments”) in an amount not to exceed $750,000 per month plus the amount of any accounting fees. If Gross Profits are less than
$900,000, then LE’s Operations Payments shall be reduced to equal to the difference between the Gross Profits for such monthly period and the proceeds
discussed in (a) above; if Gross Profits are negative, then LE does not get an Operations Payment and the negative balance becomes a Deficit Amount
which is added to the total due and owing under the Construction Funding Agreement and such Deficit Amount must be satisfied before any allocation of
Gross Profit in the future may be made to LE.
(c) Third, prior to the Investment Threshold Date and subject to the payment of the Base Construction Payment by LE and the Operations Payments by GEL,
pursuant to (a) and (b) above, an amount shall be paid to GEL from Gross Profits equal to transportation costs, tank storage fees (if applicable), financial
statement preparation fees (collectively, the “GEL Expense Items”), after which GEL shall be paid 80% of the remaining Gross Profits (any percentage of
Gross Profits distributed to GEL, the “GEL Profit Share”) and LE shall be paid 20% of the remaining Gross Profits (any percentage of Gross Profits
distributed to LE, the “LE Profit Share”); provided, however, that in the event that there is a forbearance payment of Gross Profits required by LE under a
forbearance agreement with a bank, then 50% of the LE Profit Share shall be directly remitted by GEL to the bank on LE’s behalf until such forbearance
amount is paid in full; and provided further that, if there is a Deficit Amount due under the Construction and Funding Agreement and a forbearance payment
of Gross Profits that would otherwise be due and payable to the bank for such period, then GEL shall receive 80% of the Gross Profit and 10% shall be
payable to the bank and LE shall not receive any of the LE Profit Share until such time as the Deficit Amount is reduced to zero.
(d) Fourth, after the Investment Threshold Date and after the payment to GEL of the GEL Expense Items, 30% of the remaining Gross Profit up to $600,000
(the “Threshold Amount”) shall be paid to GEL as the GEL Profit Share and LE shall be paid 70% of the remaining Gross Profit as the LE Profit Share. Any
amount of remaining Gross Profit that exceeds the Threshold Amount for such calendar month shall be paid to GEL and LE in the following manner: (i) GEL
shall be paid 20% of the remaining Gross Profits over the Threshold Amount as the GEL Profit Share and (ii) LE shall be paid 80% of the remaining Gross
Profits over the Threshold Amount as the LE Profit Share.
(e) After the Investment Threshold Date, if GEL sustains losses, it can recoup those losses by a special allocation of 80% of Gross Profits until such losses are
covered in full, after which the prevailing Gross Profits allocation shall be reinstated.
The Joint Marketing Agreement contains negative covenants that restrict LE’s actions under certain circumstances. For example, LE is prohibited from making
any modifications to the Nixon Facility or entering into any contracts with third-parties that would materially affect or impair GEL’s or its affiliates’ rights under the
agreements set forth above. The Joint Marketing Agreement had an initial term of three years expiring on August 12, 2014. In accordance with the terms of the
October 2013 Letter Agreement, LE agreed not to terminate the Joint Marketing Agreement and GEL agreed to automatically renew the Joint Marketing
Agreement at the end of the initial term for successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written
notice.
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•
Amendments and Clarifications to the Joint Marketing Agreement – The Joint Marketing Agreement was amended and clarified to allow GEL to provide LE
with Operations Payments during months in which LE incurred Deficit Amounts.
(a) In July and August 2012, we entered into amendments to the Joint Marketing Agreement whereby GEL and Milam agreed that Deficit Amounts would be
added to our obligations amount under the Construction and Funding Agreement. In addition, the parties agreed to amend the priority of payments to reflect
that, to the extent that there are available funds in a particular month, AFNB shall be paid one-tenth of such funds, provided that we will not participate in
available funds until Deficit Amounts added to the Construction and Funding Agreement are paid in full.
(b) In December 2012, GEL made Operations Payments and other payments to or on behalf of LE in which the aggregate amount exceeded the amount
payable to LE in the month of December 2012 under the Joint Marketing Agreement (the “Overpayment Amount”). In December 2012, we entered into an
amendment to the Joint Marketing Agreement whereby GEL and Milam agreed that Gross Profits payable to LE would be redirected to GEL as payment for
the Overpayment Amount until such Overpayment Amount has been satisfied in full. Such redistributions shall not reduce the distributions of Gross Profit
that GEL or Milam are otherwise entitled to under the Joint Marketing Agreement.
(c) In February 2013, Milam paid a vendor $64,358 (the “Settlement Payment”), which represented amounts outstanding by LE for services rendered at the
Nixon Facility plus the vendor’s legal fees. In addition, Milam and GEL incurred legal fees and expenses related to settling the matter. In a letter agreement
between LE, GEL and Milam dated February 21, 2013, the parties agreed to modify the Joint Marketing Agreement such that, from and after January 1,
2013, the Gross Profit shall be distributed first to GEL, prior to any other distributions or payments to the parties to the Joint Marketing Agreement until GEL
has received aggregate distributions as provided in the December 2012 Letter Agreement plus the Settlement Payment and Milam and GEL incurred legal
fees and expenses.
(d) In February 2013, GEL agreed to advance to LE the funds necessary to pay for the actual costs incurred for the scheduled maintenance turnaround at the
Nixon Facility and capital expenditures relating to an electronic product meter, lab equipment and certain piping in an amount equal to the actual costs of the
refinery turnaround and capital expenditures, not to exceed $840,000 in the aggregate. In a letter agreement between LE, GEL and Milam dated February
21, 2013, the parties agreed that all amounts advanced by GEL or its affiliates to LE pursuant to the letter agreement shall constitute obligations under the
Construction and Funding Agreement.
The principal balance outstanding on the Construction and Funding Agreement was $0 and $5,747,330 at December 31, 2014 and December 31, 2013,
respectively. As a result of LE’s repayment of all amounts due and owing to Milam pursuant to the Construction and Funding Agreement, LE receives up to 80%
of the Gross Profits as LE’s Profit Share under the Joint Marketing Agreement and Milam is obligated to release all liens on the Nixon Facility.
Results of Operations
We have two reportable business segments: (i) “Refinery Operations” and (ii) “Pipeline Transportation.” Business activities related to our “Refinery Operations”
business segment are conducted at the Nixon Facility and represent approximately 99% of our operations. Business activities related to our “Pipeline
Transportation” business segment are primarily conducted in the Gulf of Mexico through our pipeline assets and leasehold interests in oil and gas
properties. Our “Pipeline Transportation” operations are non-core to our business and represent less than 1% of our operations. In this “Results of Operations”
section, we first review our business on a consolidated basis, and then separately review our “Refinery Operations” business segment.
Consolidated Results
For our consolidated results, we refer to our financial statement line items in the explanation of our period over period changes in results of operations. We have
reclassified certain prior year amounts to conform to our 2014 presentation. Below are general definitions of what those line items include and represent.
•
Revenue from Operations – Revenue from operations primarily consists of refined petroleum product sales. Revenue from refined petroleum product sales is
recognized when title passes. Title passage occurs when refined petroleum products are sold or delivered in accordance with the terms of the respective
sales agreements. Revenue is recognized when sales prices are fixed or determinable and collectability is reasonably assured. Customers assume the risk
of loss when title is transferred. Transportation, shipping and handling costs incurred are included in cost of refined petroleum products sold. Excise and other
taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
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•
•
Cost of Refined Products Sold – Cost of refined products sold primarily includes purchased crude oil and condensate costs, as well as transportation, freight
and storage costs.
Refinery Operating Expenses – Refinery operating expenses are the direct operating expenses of the refinery, including direct costs of labor, maintenance
materials and services, chemicals and catalysts, utilities and other direct operating expenses of the Nixon Facility. Refinery operating expenses are
considered Services under the Operating Agreement.
• General and Administrative Expense – General and administrative expenses primarily include corporate costs, such accounting and legal fees, office lease
expenses and administrative expenses.
•
Depletion, Depreciation and Amortization – Depletion, depreciation and amortization represent an allocation to expense within the statement of operations of
the carrying value of capital and intangible assets. The value is allocated based on the straight-line method over the estimated useful life of the related asset.
• Other (Income) Expense – Other (income) expense primarily represents income from storage tank rental fees and revenue from FLNG Land, II, Inc., a
Delaware corporation (“FLNG”), pursuant to a Master Easement Agreement whereby BDPL is providing FLNG with uninterrupted pedestrian and vehicular
ingress and egress to and from State Highway 332, across the certain property of BDPL to certain property of FLNG.
•
Income Tax Benefit (Expense) – Income tax benefit (expense) represents income tax expense for the period comprised of the increase (decrease) during the
period for domestic deferred tax assets and liabilities attributable to continuing operations, as well as an income tax provision for federal and state income tax
expense related to the current year period.
•
Net Income (Loss) – Represents total revenue from operations less total cost of operations, total other income (expense) and income tax expense, current.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Total Revenue from Operations. For the year ended December 31, 2014 (the “Current Year”), we had total revenue from operations of $387,524,974 compared
to total revenue from operations of $409,543,069 for the year ended December 31, 2013 (the “Prior Year”). The 5% decrease in total revenue from operations
was primarily the result of lower refined petroleum product prices in the Current Year compared to the Prior Year. Substantially all of our revenue in the Current
Year came from refined petroleum product sales, which generated revenue of $387,304,774, or more than 99% of total revenue from operations, compared to
$409,239,747, or more than 99% of total revenue from operations, in the Prior Year.
Cost of Refined Products Sold. Cost of refined petroleum products sold was $363,762,292 for the Current Year compared to $399,101,182 for the Prior
Year. The nearly 9% decrease in cost of refined products sold was primarily the result of a decrease in the average price of crude oil and condensate and
operating for 8 fewer days in the Current Year compared to the Prior Year.
Refinery Operating Expenses. Refinery operating expenses in the Current Year remained relatively flat compared to the Prior Year. We recorded refinery
operating expenses of $10,698,023 ($2.77 per barrel of throughput) in the Current Year compared to $10,673,722 ($2.79 per barrel of throughput) in the Prior
Year. Despite operating for fewer days and increasing refinery throughput slightly, refinery operating expenses per barrel of throughput decreased $0.02 for the
Current Year compared to the Prior year. Refinery operating expense represent services provided to us by LEH to manage and operate Blue Dolphin’s assets
pursuant to the Operating Agreement with LEH. See “Part II, Item 8. Financial Statements and Supplementary Data - Note (9), Accounts Payable, Related Party”
of this report for additional disclosures related to the Operating Agreement.
General and Administrative Expenses . We incurred general and administrative expenses of $1,427,707 in the Current Year compared to $1,794,053 in the Prior
Year. The more than 20% decrease in general and administrative expenses in the Current Year compared to the Prior Year was primarily related to lower
consulting, legal and audit expenses.
Depletion, Depreciation and Amortization. We recorded depletion, depreciation and amortization expenses of $1,570,962 in the Current Year compared to
$1,342,563 in the Prior Year. The approximate 17% increase in depletion, depreciation and amortization expenses for the Current Year compared to the Prior
Year primarily related to depreciable refinery assets placed in service.
Other Income. We recognized $1,400,898 in tank rental and easement revenue in the Current Year compared to $1,155,064 in the Prior Year. The approximate
21% increase in tank rental and easement revenue in the Current Year compared to the Prior Year was primarily a result of fees received from FLNG Land, II,
Inc., a Delaware corporation (“FLNG”), pursuant to a Master Easement Agreement.
Net Income (Loss) . For the Current Year, we reported net income of $15,758,756, or an income of $1.51 per share, compared to a net loss of $3,807,129 or a
loss of $0.36 per share, for the Prior Year. The significant increase in net income in the Current Year, which represented an increase of $1.87 per share, was
primarily attributable to favorable refining margins, improved product mix, and recognition of a net deferred tax asset. For the Current Year we recognized a net
deferred tax asset of $5,760,106. The net deferred tax asset was primarily the result of net operating losses (“NOLs”) generated before and after our acquisition
of LE in 2012. See “Part II. Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note (18) Income Taxes” for
additional disclosures related to income taxes and our net deferred tax asset.
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Refining Segment Results
For our refining segment results, we refer to key operational data in the explanation of our period over period changes in results of operations. Below are general
definitions of what those items include and represent.
• Operating Days – The number of days in a calendar period in which the Nixon Facility operated. Downtime is excluded from operating days.
•
•
•
•
•
•
•
•
Downtime – Scheduled or unscheduled periods in which the Nixon Facility is not operable. Downtime may be required for a variety of reasons, including
maintenance, inspection and equipment repair, voluntary regulatory compliance measures, and cessation or suspension by regulatory authorities.
Total Refinery Throughput – Refers to the volume processed as input through the Nixon Facility. Refinery throughput includes crude oil and condensate and
other feedstocks.
Total Refinery Production – Refers to the volume processed as output through the Nixon Facility. Refinery production includes finished petroleum products,
such as jet fuel, and intermediate petroleum products, such as naphtha, LPG and atmospheric gas oil.
Fuel and Energy Losses – Represents crude oil and condensate volumes used to power the Nixon Facility and energy losses that occur as part of normal
refinery operations, such as evaporation from oil-water separators and small steam or condensate leaks.
Capacity Utilization Rate –A percentage measure that indicates the amount of available capacity that is being used at the Nixon Facility. The rate is
calculated by dividing total refinery throughput on a bpd basis or total refinery production on a bpd basis by the total capacity of the Nixon Facility, which is
currently 15,000 bpd.
Refinery Operating Income – Refinery operating income is a function of refined petroleum product sales less cost of refined petroleum products sold and
refinery operating expenses.
Refinery Operating Income Per Barrel Sold – Refinery operating income per barrel sold is a general indication of the amount, on a per barrel basis, for which
the Nixon Facility was able to sell its refined petroleum products above its cost of refined petroleum products sold and refinery operating expenses. Refinery
operating income per barrel sold is calculated by subtracting cost of refined products sold and refinery operating expenses from refined petroleum product
sales and dividing the difference by total refined petroleum product sales (bbl) for the respective periods presented.
Earnings Before Interest, Income Taxes and Depreciation (“EBITDA”) – Earnings is adjusted for: (i) income taxes and (ii) interest income (expense),
depreciation and amortization. We exclude interest expense (or income) and other expenses or income not pertaining to the operations of our segments from
EBITDA.
Remainder of Page Intentionally Left Blank
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Key Operational Metrics
The Nixon Facility, which was refurbished and began operations in February 2012, has been operating for approximately three years. Following are key
operational metrics for the Nixon Facility:
Operating Days
Downtime
Total refinery throughput
bbls
bpd
Total refinery production
bbls
bpd
Total refined petroleum product sales
bbls
Fuel and energy losses
bbls
bpd
Capacity utilization rate
refinery throughput
refinery production
Refinery operating income(1)
per bbl sold(1)
EBITDA(1)
______________________
Year Ended December 31,
2014
2013
333
32
341
24
3,862,351
11,599
3,822,128
11,209
3,788,710
11,378
3,743,482
10,978
3,779,677
3,709,294
73,641
221
78,646
231
77.3%
75.9%
74.7%
73.2%
$
$
$
12,844,459
3.40
$
$
(535,157)
(0.14)
13,821,685
$
552,859
(1) See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Non-GAAP Performance Measures” of this
report for a reconciliation of this non-GAAP financial measure to the applicable GAAP financial measure within our consolidated balance sheets and/or
statements of operations.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Operating Days. The Nixon Facility operated for a total of 333 days during the year ended December 31, 2014 (the “Current Year”) compared to a total of 341
days during the year ended December 31, 2013 (the “Prior Year”). This represented 8 fewer operating days in the Current Year compared to the Prior Year,
which related to downtime.
Downtime. The safe and reliable operation of the Nixon Facility is key to our financial performance and results of operations. Downtime may result in lost margin
opportunity, increased maintenance expense, and a reduction in cash available for payment of our obligations. The Nixon Facility experienced 32 days of
downtime in the Current Year compared to 24 days of downtime in the Prior Year. This represented 8 more days of downtime in the Current Year compared to
the Prior Year. Downtime during the Current Year primarily related to a planned maintenance turnaround and repair of an overhead accumulator. Downtime
during the Prior Year primarily related to a planned maintenance turnaround.
Total Refinery Throughput. For the Current Year, the Nixon Facility processed 3,862,351 bbls, or 11,599 bpd, of crude oil and condensate compared to
3,822,128 bbls, or 11,209 bpd, of crude oil and condensate for the Prior Year. Despite operating for fewer days, refinery throughput increased slightly for the
Current Year compared to the Prior year, rising by 40,223 bbls, or 390 bpd, as the Nixon Facility capitalized on lower crude oil and condensate acquisition costs.
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Total Refinery Production. For the Current Year, the Nixon Facility processed 3,788,710 bbls, or 11,378 bpd, of refined petroleum products compared to
3,743,482 bbls, or 10,978 bpd, of refined petroleum products for the Prior Year. Despite operating for fewer days, refinery production increased slightly for the
Current Year compared to the Prior Year, rising 45,228 bbls, or 400 bpd, as the Nixon Facility increased throughput volumes to capitalize on lower crude oil and
condensate acquisition costs and increased jet fuel production.
Fuel and Energy Losses . For the Current Year, fuel and losses at the Nixon Facility were 73,641 bbls, or 221 bpd, compared to 78,646 bbls, or 231 bpd, for the
Prior Year. The nominal decrease in fuel and losses of 5,005 bbls, or 9 bpd, was the result of operational efficiency improvements.
Capacity Utilization Rate. The capacity utilization rate for refinery throughput for the Current Year was 77.3% compared to 74.7% for the Prior Year, reflecting a
nominal increase of 2.6%. The capacity utilization rate for refinery production for the Current Year was 74.7% compared to 75.9% for the Prior Year, reflecting a
nominal increase of 2.7%. The increase in capacity utilization rates for refinery throughput and refinery production related to increases in throughput and
production volumes as the Nixon Facility capitalized on lower crude oil and condensate acquisition costs, as well as an increase in the production of jet fuel.
Refinery Operating Income. For the Current Year, the Nixon Facility had a refinery operating income of $12,884,459 compared to a negative refinery margin of
$535,157 for the Prior Year. Refinery operating income increased by $13,379,616 for the Current Year compared to the Prior Year. The significant increase in
refinery operating income between the periods was the result of lower crude oil and condensate acquisition costs and improved product mix as a result of
increased jet fuel production.
Refinery Operating Income Per Barrel Sold . For the Current Year, the Nixon Facility had a refinery operating income per barrel sold of $3.40 compared to a
negative refinery operating income per barrel sold of $0.14 for the Prior Year. This represented an increase in refinery operating income per barrel sold of $3.54
for the Current Year compared to the Prior Year. The significant increase in refinery operating income per barrel sold between the periods was the result of
lower crude oil and condensate acquisition costs and improved product mix as a result of increased jet fuel production.
EBITDA. For the Current Year, our “Refinery Operations” business segment had EBITDA of $13,821,685 compared to EBITDA of $552,859 for the Prior
Year. This represented an increase in EBITDA of $13,268,826 for the Current Year compared to the Prior Year. The significant increase in EBITDA between the
periods was the result of lower crude oil and condensate acquisition costs and improved product mix as a result of increased jet fuel production.
Refined Petroleum Product Sales Summary
All of our refined petroleum products are currently sold in the United States. The following tables summarize total refined petroleum product sales:
Atmospheric gas oil
Naphtha
Jet fuel
NRLM
Oil-based mud blendstock
LPG mix
Reduced crude
Years Ended December 31,
2014
2013
$
96,027,339
89,700,423
88,479,458
62,729,476
49,662,414
705,664
-
24.8% $ 101,955,402
103,980,651
23.2%
20,048,594
22.8%
182,513,228
16.2%
12.8%
-
499,277
0.2%
242,595
0.0%
24.9%
25.4%
4.9%
44.6%
0.0%
0.1%
0.1%
Total refined petroleum product sales
$ 387,304,774
100.0% $ 409,239,747
100.0%
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On May 31, 2014, the Nixon Facility ceased production of NRLM, a transportation-related diesel fuel product. On June 1, 2014, the Nixon Facility began
producing oil-based mud blendstock, a non-transportation lubricant blend product. The shift in product slate from NRLM to oil-based mud blendstock was the
result of the Environmental Protection Agency’s (the “EPA’s”) phased-in requirements for small refineries to reduce the sulfur content in transportation-related
diesel fuel, such as NRLM, to a maximum of 15 ppm sulfur by June 1, 2014. “Topping units,” like the Nixon Facility, typically lack a desulfurization process unit to
lower sulfur content levels within the range required by the EPA’s recently implemented fuel quality standards, and integration of such a unit generally requires
additional permitting and significant capital expenditures. The Nixon Facility could produce and sell higher ppm sulfur diesel as a feedstock to other refineries
and blenders in the United States and as a finished petroleum product to other countries.
The Nixon Facility began producing jet fuel in late 2013. Jet fuel is produced by separating the distillate stream into kerosene and diesel and blending the
kerosene with a portion of the heavy naphtha stream. Production of jet fuel, which is considered a higher value product, significantly upgrades the value of the
naphtha component.
Refined Petroleum Product Economic Hedges
Operation cost within our refining segment includes the effect of economic hedges on our refined petroleum product inventories. For the Current Year, our
refining segment recognized a realized gain of $3,327,921 and an unrealized gain of $488,950. For the Prior Year, our refining segment recognized a realized
loss of $246,210 and an unrealized gain of $143,050.
Non-GAAP Performance Measures
Refinery operating income, refinery operating income per barrel sold, and EBITDA are non-GAAP performance measures used by management to assess our
operating results and the effectiveness of our business segments. Calculations of refinery operating income, refinery operating income per barrel sold, and
EBITDA may differ from similar calculations of other companies in our industry, thereby limiting its usefulness to investors as a comparative measure.
Refinery Operating Income and Refinery Operating Income Per Barrel Sold . The following table provides a reconciliation of refinery operating income and
refinery operating income per barrel sold to refined petroleum product sales, cost of refined petroleum products sold, and refinery operating expenses for the
periods indicated. For a reconciliation of refined petroleum product sales to total revenue from operations for our consolidated operations, see “Part II, Item 8.
Financial Statements and Supplementary Data – Consolidated Statements of Operations” of this report.
Total refined petroleum product sales
Less:
Cost of refined petroleum products sold
Refinery operating expenses
Refinery operating income
Total refined petroleum product sales (bbls)
Refinery operating income per bbl sold
33
December 31,
2014
2013
$ 387,304,774
$ 409,239,747
(363,762,292)
(10,698,023)
(374,460,315)
(399,101,182)
(10,673,722)
(409,774,904)
$
12,844,459
$
(535,157)
3,779,677
3,709,294
$
3.40
$
(0.14)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EBITDA. EBITDA should be considered in conjunction with net income (loss) and other performance measures such as operating cash flows. Following is a
reconciliation of EBITDA, capital expenditures, and identifiable assets by business segment for the year ended December 31, 2014 (and at December 31, 2014)
and the year ended December 31, 2013 (and at December 31, 2013):
Revenue
Less: Operation cost(1)
Other non-interest income
EBITDA
Depletion, depreciation and amortization
Interest expense, net
Income before income taxes
Capital expenditures
Identifiable assets(2)
Year Ended December 31, 2014
Segment
Refinery
Pipeline
Corporate &
Operations
$ 387,304,774
(374,613,154)
1,130,065
13,821,685
$
Transportation
220,200
(483,262)
270,833
7,771
$
$
$
$
Other
-
(1,242,466)
-
(1,242,466)
Total
$ 387,524,974
(376,338,882)
1,400,898
12,586,990
$
(1,570,962)
(844,850)
$
10,171,178
$
1,720,156
$
-
$
-
$
1,720,156
$
50,950,050
$
3,028,719
$
6,428,388
$
60,407,157
(1) Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion
expenses. Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as
accounting fees, director fees and legal expense.
Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.
(2)
Revenue
Less: Operation cost(1)
Other non-interest income
EBITDA
Depletion, depreciation and amortization
Interest expense, net
Loss before income taxes
Capital expenditures
Identifiable assets(2)
Year Ended December 31, 2013
Segment
Refinery
Pipeline
Corporate &
Operations
$ 409,239,747
(409,800,285)
1,113,397
552,859
$
Transportation
303,322
(524,051)
41,667
(179,062)
$
$
$
$
Other
-
(1,652,160)
-
(1,652,160)
Total
$ 409,543,069
(411,976,496)
1,155,064
(1,278,363)
$
(1,342,563)
(1,096,948)
$
(3,717,874)
$
1,477,729
$
-
$
-
$
1,477,729
$
54,470,723
$
2,399,467
$
809,311
$
57,679,501
(1) Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion
expenses. Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as
accounting fees, director fees and legal expense.
Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.
(2)
34
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Liquidity and Capital Resources
Sources and Uses of Cash
At December 31, 2014 and 2013, we had cash and cash equivalents of $1,293,233 and $434,717, respectively. Since our reverse acquisition of LE in 2012, in
which we acquired the Nixon Facility, we have relied on our profit share distribution under the Joint Marketing Agreement, LEH and GEL to fund our working
capital requirements. During months in which we receive no profit share distribution under the Joint Marketing Agreement, LEH and/or GEL may, but are not
required to, fund our operating losses. As of December 31, 2014, the working capital amount funded by LEH and GEL was $1,174,168 and $0,
respectively. Amounts funded by LEH are reflected in accounts payable, related party in our consolidated balance sheets. Amounts previously funded by GEL
were reflected as Deficit Amount under the Construction and Funding Agreement.
We believe that our aforementioned refinery operations business strategy will be sufficient to support our operations for the next 12 months. (See “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Refinery Operations Business Strategy” of this report for disclosures
related to our business strategy.) However, our efforts depend on several factors, including our future performance, levels of accounts receivable, inventories,
accounts payable, capital expenditures, adequate access to credit and financial flexibility to attract long-term capital on satisfactory terms. These factors may be
impacted by general economic, political, financial, competitive and other factors beyond our control. There can be no assurance that our business strategy will
achieve the anticipated outcomes, or that LEH and/or GEL will continue to fund our working capital requirements during months in which we have operational
losses. In the event our business strategy is unsuccessful, or our working capital requirements are not funded by our profit share distribution, LEH or GEL, we
may experience a significant and material adverse effect on our operations, liquidity, and financial condition. See “Part I, Item 1A. Risk Factors” of this report for
risk factors related to working capital, liquidity and Nixon Facility downtime.
Cash Flow
Our cash flow from operations for the periods indicated was as follows:
Cash flow from operations
Adjusted income (loss) from continuing operations
Change in assets and current liabilities
Total cash flow from operations
Cash inflows (outflows)
Proceeds from issuance of long-term debt
Payments on long term debt
Capital expenditures
Proceeds from sale of assets
Proceeds from notes payable
Payments on notes payble
Total cash outflows
Total change in cash flows
35
Years Ended December 31,
2014
2013
$
11,425,857
(4,247,678)
$
(2,287,900)
3,311,718
7,178,179
1,023,818
-
(6,226,521)
(1,720,156)
-
2,000,000
(372,986)
5,750,611
(5,274,106)
(1,477,729)
201,000
15,032
(224,805)
(6,319,663)
(1,009,997)
$
858,516
$
13,821
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
For the Current Year, we experienced positive cash flow from operations of $7,178,179 compared to positive cash flow from operations of $1,023,818 for the
Prior Year, which represented an increase in cash flow from operations of $6,154,361 for the Current Year compared to the Prior Year. The improvement in
cash flow from operations was primarily the result of improved profitability in the Current Year as income from operations increased to $9,619,530 compared to a
loss from operations of $3,775,990 for the Prior Year, an improvement of $13,395,520. The improvement in cash flow from operations was robust enough to
offset a moderate increase in Current Year capital spending as well as a very significant reduction in Current Year cash flow from financing activities. Cash flow
from financing activities declined as the aforementioned improvement in profitability enabled us to repay the Prior Year's outstanding balance under the
Construction and Funding Agreement in full.
Working Capital
We had negative working capital of $3,200,991, consisting of $14,682,657 in total current assets and $17,883,648 in total current liabilities, at December 31,
2014. Comparatively, we had negative working capital of $7,929,834, consisting of $20,488,953 in total current assets and $28,418,787 in total current liabilities,
at December 31, 2013. The $4,728,843 improvement in working capital from the prior year primarily stemmed from improved profitability in 2014, which enabled
reductions in accounts payable of $8,413,362 and accounts payable, related party of $2,485,172.
Capital Spending
Capital expenditures in the Current Year totaled $1,720,156 compared to $1,477,729 in the Prior Year. Capital spending primarily related to investments in the
Nixon Facility. We expect to fund additional capital expenditures at the Nixon Facility primarily through cash from operations or other borrowings. On May 2,
2014, Lazarus Refining & Marketing, LLC (“LRM”) entered into a loan and security agreement with Sovereign Bank, a Texas state bank (“Sovereign”), for a term
loan facility in the aggregate amount of $2.0 million (the “Sovereign Loan”). The proceeds of the Sovereign Loan are being used primarily to finance costs
associated with refurbishment of the Nixon Facility’s naphtha stabilizer and depropanizer units. On August 7, 2014, LRM also entered into a 36 month “build-to-
suit” capital lease with for the purchase of new boiler equipment for the Nixon Facility. The boiler equipment was delivered in December 2014 and placed in
service during the first quarter of 2015.
Indebtedness
The principal balance outstanding on the Refinery Note was $8,648,980 and $9,057,937 at December 31, 2014 and 2013, respectively. The principal balance
outstanding on the Sovereign Loan was $1,638,898 and $0 at December 31, 2014 and 2013, respectively. The principal balance outstanding on the Notre
Dame Debt was $1,300,000 at December 31, 2014 and 2013. The principal balance outstanding on a capital lease was $466,401 and $0 at December 31,
2014 and 2013, respectively. See “Part II, Item 8. Financial Statements and Supplementary Data - Note (13) Long-Term Debt” of this report for additional
disclosures related to our long-term debt obligations.
Critical Accounting Policies
Long Lived Assets
Refinery and Facilities. Additions to refinery and facilities are capitalized. Expenditures for repairs and maintenance, including maintenance turnarounds, are
included as operating expenses under the Operating Agreement and covered by LEH (see “Part II, Item 8. Financial Statements and Supplementary Data – Note
(9) Accounts Payable, Related Party” in this report for additional disclosures related to the Operating Agreement). Management expects to continue making
improvements to the Nixon Facility based on technological advances.
Refinery and facilities are carried at cost. Adjustment of the asset and the related accumulated depreciation accounts are made for refinery and facilities’
retirements and disposals, with the resulting gain or loss included in the statements of operations.
For financial reporting purposes, depreciation of refinery and facilities is computed using the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities are placed in service.
36
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Management has evaluated the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) guidance related to asset retirement
obligations (“AROs”) for our refinery and facilities. Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery
and facilities. Further, management believes that these assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for
the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present
value techniques. We did not record any impairment of our refinery and facilities for the years ended December 31, 2014 and 2013.
Pipelines and Facilities Assets . We record pipelines and facilities at the lower of cost or net realizable value. Depreciation is computed using the straight-line
method over estimated useful lives ranging from 10 to 22 years. In accordance with FASB ASC guidance on accounting for the impairment or disposal of long-
lived assets, assets are grouped and evaluated for impairment based on the ability to identify separate cash flows generated therefrom.
Construction in Progress. Construction in progress expenditures related to refurbishment activities at the Nixon Facility are capitalized as incurred. Depreciation
begins once the asset is placed in service.
Revenue Recognition
We sell various refined petroleum products including jet fuel, naphtha, distillates, and atmospheric gas oil. Revenue from refined petroleum product sales is
recognized when title passes. Title passage occurs when refined petroleum products are sold or delivered in accordance with the terms of the respective sales
agreements. Revenue is recognized when sales prices are fixed or determinable and collectability is reasonably assured.
Customers assume the risk of loss when title is transferred. Transportation, shipping and handling costs incurred are included in cost of refined petroleum
products sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
Tank rental fees are invoiced monthly in accordance with the terms of the related lease agreement and recognized in other income. Land easement revenue is
recorded monthly and included in other income.
Asset Retirement Obligations
FASB ASC guidance related to AROs requires that a liability for the discounted fair value of an ARO be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and
the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is
recognized.
Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities. Further, management believes that
these assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these
assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of these assets, we will
estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.
We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating or disposing of our offshore platform, pipeline
systems and related onshore facilities, as well as plugging and abandonment of wells and land and sea bed restoration costs. We develop these cost estimates
for each of our assets based upon regulatory requirements, platform structure, water depth, reservoir characteristics, reservoir depth, equipment market demand,
current procedures, and construction and engineering consultations. Because these costs typically extend many years into the future, estimating these future
costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology,
political and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis.
37
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Income Taxes
We account for income taxes under FASB ASC guidance related to income taxes, which requires recognition of income taxes based on amounts payable with
respect to the current year and the effects of deferred taxes for the expected future tax consequences of events that have been included in our financial
statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and
tax basis of assets and liabilities, as well as for operating losses and tax credit carryforwards using enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized, which is dependent upon the generation of future
taxable income prior to the expiration of any net operating loss carryforwards. When management determines that it is more likely than not that a tax benefit will
not be realized, a valuation allowance is recorded to reduce deferred tax assets.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income prior to the expiration of any net
operating loss carryforwards.
The guidance also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and
transition.
See “Part II, Item 8. Financial Statements and Supplementary Data - Note (18) Income Taxes” of this report for further information related to income taxes.
Recently Adopted Accounting Guidance
The guidance issued by the FASB during the year ended December 31, 2014 is not expected to have a material effect on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
Crude oil refining is primarily a margins-based business where both crude oil and refined petroleum products are commodities with prices that can fluctuate
independently for short periods due to supply, demand, transportation and other factors. The spread between the cost of our feedstocks and the sales price of
refined petroleum products is the primary factor affecting our operations, liquidity and financial condition. Our crude oil and condensate acquisition costs and
refined petroleum products sales prices depend on numerous factors beyond our control. These factors include the supply of and demand for crude oil, gasoline,
and other refined petroleum products. Supply and demand for these products depend, among other things, on changes in domestic and foreign economies;
weather conditions; domestic and foreign political affairs; production levels; availability of imports and exports; marketing of competitive fuels; and government
regulation.
Under our inventory risk management policy, Genesis may, but is not required to, use derivative instruments as certain of our refined petroleum product
inventories exceed certain thresholds in an effort to reduce our commodity price risk. However, Genesis’ execution of the inventory risk management plan is
outside of our control. Accordingly, there could be situations in which Genesis fails to execute on the plan or executes on the plan in a manner that causes
significant losses to us, all of which are beyond our control. In the event that our inventory risk management system fails and/or is implemented poorly or not at
all, we could experience a material and negative adverse effect on our operations, liquidity and financial condition.
At December 31, 2014, we performed a sensitivity analysis to determine the impact of an increase in the market price of commodity contracts for our economic
hedges. Based on this sensitivity analysis, we determined that an increase of $1.00 per barrel in commodity contracts held at December 31, 2014 would
increase unrealized loss by approximately $115,000.
38
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Interest Rate Risk
We are exposed to interest rate volatility with regard to existing variable rate debt that is tied to movements in the U.S. Prime Rate. At December 31, 2014, we
had $10,287,878 of variable interest debt with a weighted average interest rate at year end of approximately 5.75%. At December 31, 2014, we performed a
sensitivity analysis to determine the impact of an increase in interest rates. Based on this sensitivity analysis, we determined that an increase of 1% in our
average floating interest rates at December 31, 2014 would increase interest expense by approximately $102,879 per year.
Remainder of Page Intentionally Left Blank
39
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
Remainder of Page Intentionally Left Blank
40
41
42
43
44
45
46
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Stockholders of Blue Dolphin Energy Company
We have audited the accompanying consolidated balance sheets of Blue Dolphin Energy Company and its subsidiaries (the “Company”) as of December 31,
2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Blue Dolphin Energy
Company and its subsidiaries as of December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
/s/ UHY LLP
____________________
UHY LLP
Sterling Heights, Michigan
March 31, 2015
41
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable
Prepaid expenses and other current assets
Deposits
Inventory
Total current assets
Total property and equipment, net
Surety bonds
Debt issue costs, net
Trade name
Deferred tax assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Accounts payable, related party
Notes payable
Asset retirement obligations, current portion
Accrued expenses and other current liabilities
Interest payable, current portion
Long-term debt, current portion
Deferred tax liabilities
Total current liabilities
Long-term liabilities:
Asset retirement obligations, net of current portion
Deferred revenues and expenses
Long-term debt, net of current portion
Long-term interest payable, net of current portion
Total long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies (Note 22)
December 31,
2014
2013
$
$
1,293,233
1,008,514
8,340,303
771,458
68,498
3,200,651
14,682,657
37,371,075
1,642,000
479,737
303,346
5,928,342
434,717
327,388
13,487,106
333,683
1,219,660
4,686,399
20,488,953
36,388,666
-
498,536
303,346
-
$
60,407,157
$
57,679,501
$
$
12,370,179
1,174,168
-
85,846
2,783,704
56,039
1,245,476
168,236
17,883,648
1,780,924
691,525
10,808,803
1,274,789
14,556,041
20,783,541
3,659,340
11,884
107,388
1,600,444
40,272
2,215,918
-
28,418,787
1,490,273
-
13,889,349
1,767,381
17,147,003
32,439,689
45,565,790
STOCKHOLDERS' EQUITY
Common stock ($0.01 par value, 20,000,000 shares authorized;10,599,444 and 10,580,973 shares issued at December
31, 2014 and 2013, respectively)
Additional paid-in capital
Accumulated deficit
Treasury stock, 150,000 shares at cost
Total stockholders' equity
105,995
36,718,781
(8,057,308)
(800,000)
27,967,468
105,810
36,623,965
(23,816,064)
(800,000)
12,113,711
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
60,407,157
$
57,679,501
See accompanying notes to consolidated financial statements.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Consolidated Statements of Operations
REVENUE FROM OPERATIONS
Refined product sales
Pipeline operations
Oil and gas sales
Total revenue from operations
COST OF OPERATIONS
Cost of refined products sold
Refinery operating expenses
Pipeline operating expenses
Lease operating expenses
General and administrative expenses
Depletion, depreciation and amortization
Abandonment expense
Accretion expense
Total cost of operations
Income (loss) from operations
OTHER INCOME (EXPENSE)
Tank rental and easement revenue
Interest and other income
Interest expense
Loss on disposal of property and equipment
Total other income
Income (loss) before income taxes
Income tax benefit (expense)
Net income (loss)
Income (loss) per common share
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
43
Years Ended December 31,
2014
2013
$
387,304,774
220,200
-
387,524,974
$
409,239,747
303,122
200
409,543,069
363,762,292
10,698,023
208,037
26,428
1,427,707
1,570,962
-
211,995
399,101,182
10,673,722
163,163
67,923
1,794,053
1,342,563
63,767
112,686
377,905,444
413,319,059
9,619,530
(3,775,990)
1,400,898
47,522
(892,372)
(4,400)
551,648
1,155,064
3,105
(1,100,053)
-
58,116
10,171,178
(3,717,874)
5,587,578
(89,255)
$
15,758,756
$
(3,807,129)
$
$
1.51
1.51
$
$
(0.36)
(0.36)
10,441,464
10,441,464
10,445,883
10,445,883
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Consolidated Statements of Stockholders’ Equity
Common Stock
Shares Issued
Par Value
Additional
Paid-In
Capital
Accumulated
Deficit
Treasury Stock
Shares
Cost
Total
Stockholders’
Equity
Balance at December 31,
2012
Common stock issued for
services
Treasury stock acquired
Net loss
Balance at December 31,
2013
Common stock issued for
services
Treasury stock acquired
Net income
Balance at December 31,
2014
10,563,297
105,633
36,524,142
(20,008,935)
-
-
16,620,840
17,676
-
-
177
-
-
99,823
-
-
-
-
(3,807,129)
-
(150,000)
-
-
(800,000)
-
100,000
(800,000)
(3,807,129)
10,580,973
$
105,810
$
36,623,965
$
(23,816,064)
(150,000)
$
(800,000)
$
12,113,711
18,471
-
-
185
-
-
94,816
-
-
-
-
15,758,756
-
-
-
-
-
-
95,001
-
15,758,756
10,599,444
$
105,995
$
36,718,781
$
(8,057,308)
(150,000)
$
(800,000)
$
27,967,468
See accompanying notes to consolidated financial statements.
Remainder of Page Intentionally Left Blank
44
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Blue Dolphin Energy Company & Subsidiaries
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depletion, depreciation and amortization
Unrealized gain on derivatives
Deferred taxes
Amortization of debt issue costs
Amortization of intangible assets
Accretion expense
Abandonment costs incurred
Common stock issued for services
Loss on disposal of assets
Changes in operating assets and liabilities
Restricted cash
Accounts receivable
Prepaid expenses and other current assets
Deposits and other assets
Inventory
Accounts payable, accrued expenses and other liabilities
Accounts payable, related party
Net cash provided by operating activities
INVESTING ACTIVITIES
Capital expenditures
Proceeds from sale of assets
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from issuance of debt
Payments on long-term debt
Proceeds from notes payable
Payments on notes payable
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
Supplemental Information:
Non-cash operating activities
Reduction in accounts receivable in exchange for treasury stock received
Surety bond funded by seller of pipeline interest
Non-cash investing and financing activities:
New asset retirement obligations
Changes in estimates of existing ARO obligations
Financing of capital expenditures via capital lease
Accrued services payable converted to common stock
Interest paid
See accompanying notes to consolidated financial statements.
45
Years Ended December 31,
2014
2013
$
15,758,756
$
(3,807,129)
1,570,962
(488,950)
(5,760,106)
33,799
-
211,995
-
95,001
4,400
(681,126)
5,146,803
(437,775)
(505,838)
1,485,748
(6,770,318)
(2,485,172)
7,178,179
1,342,563
(143,050)
-
33,800
9,463
112,686
63,767
100,000
-
(237,795)
1,111,649
(105,369)
16,787
(2,385,707)
2,846,834
2,065,319
1,023,818
(1,720,156)
-
(1,720,156)
(1,477,729)
201,000
(1,276,729)
-
(6,226,521)
2,000,000
(372,986)
(4,599,507)
858,516
5,750,611
(5,274,106)
15,032
(224,805)
266,732
13,821
434,717
1,293,233
$
420,896
434,717
-
850,000
300,980
-
536,635
-
1,369,197
$
$
$
$
$
$
$
800,000
-
-
592,415
-
50,000
791,536
$
$
$
$
$
$
$
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Notes to Consolidated Financial Statements
(1)
Organization
Nature of Operations
Blue Dolphin Energy Company ( http://www.blue-dolphin-energy.com, referred to herein, with its predecessors and subsidiaries, as “Blue Dolphin,” “BDEC,” “we,”
“us” and “our”) is primarily an independent refiner and marketer of petroleum products. Our primary asset is a 15,000 bpd crude oil and condensate processing
facility that is located in Nixon, Wilson County, Texas (the “Nixon Facility”). As part of our refinery business segment, we also conduct petroleum storage and
terminaling operations under third-party lease agreements at the Nixon Facility. We also own and operate pipeline assets and have leasehold interests in oil and
gas properties, which are considered non-core to our business. See “Note (4) Business Segment Information” of this report for further discussion of our business
segments.
Structure and Management
We were formed as a Delaware corporation in 1986. In connection with our reverse acquisition of Lazarus Energy, LLC (“LE”) in 2012, whereby we acquired the
Nixon Facility, we:
(i) issued 8,426,456 shares of our common stock, par value $0.01 per share (the “Common Stock”) to Lazarus Energy Holdings, LLC (“LEH”) as
consideration. As a result, LEH, our controlling shareholder, owns approximately 81% of our Common Stock. Jonathan P. Carroll, Chairman of the Board of
Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH; and
(ii) entered into a Management Agreement dated and effective February 12, 2012 with LEH. Pursuant to the Management Agreement, LEH manages our
property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business. On May 12, 2014, the Management Agreement
was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating
Agreement” (the “Operating Agreement”).
Our operations are conducted directly and indirectly through our primary operating subsidiaries, as follows:
·
·
·
·
·
·
·
LE, a Delaware limited liability company (petroleum processing assets);
Lazarus Refining & Marketing, LLC, a Delaware limited liability company (petroleum storage and terminaling) (“LRM”);
Blue Dolphin Pipe Line Company, a Delaware corporation (pipeline operations) (“BDPL”);
Blue Dolphin Petroleum Company, a Delaware corporation (exploration and production activities);
Blue Dolphin Services Co., a Texas corporation (administrative services);
Blue Dolphin Exploration Company, a Delaware corporation (exploration and production investments) (“BDEX”); and
Petroport, Inc., a Delaware corporation (inactive).
(2)
Basis of Presentation
We have prepared our audited consolidated financial statements in accordance with United States generally accepted accounting principles (“GAAP”), as codified
by the Financial Accounting Standards Board (the “FASB”) in its Accounting Standards Codification (“ASC”), and pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Our consolidated financial statements include Blue Dolphin and its subsidiaries. Significant intercompany
transactions have been eliminated in the consolidation. In the opinion of management, such consolidated financial statements reflect all adjustments necessary
to present fair consolidated statements of operations, financial position and cash flows. We believe that the disclosures are adequate and the presented
information is not misleading.
(3)
Significant Accounting Policies
The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated
financial statements and notes are representations of management who is responsible for its integrity and objectivity. These accounting policies conform to
GAAP and have been consistently applied in the preparation of our consolidated financial statements.
46
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
We have made a number of estimates and assumptions related to the reporting of our consolidated assets and liabilities and to the disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. While we believe our current estimates are reasonable and
appropriate, actual results could differ from those estimated.
Cash and Cash Equivalents
Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial
institutions and have experienced no losses associated with these accounts. Cash and cash equivalents amounted to $1,293,233 and $434,717 at December 31,
2014 and 2013, respectively.
Restricted Cash
On September 29, 2008, LE entered into a certain Loan Agreement (the “Loan Agreement”) with First International Bank (“FIB”) as evidenced by that certain
promissory note, of even date with the Loan Agreement, in the original principal amount of $10.0 million (the “Refinery Note”). In October 2011, the Loan
Agreement was acquired by American First National Bank (“AFNB”). Restricted cash represents a payment reserve account to be drawn upon by AFNB in the
event that we fail to make any payment in a timely manner as required under the Loan Agreement. Restricted cash was $1,008,514 and $327,388 at December
31, 2014 and 2013, respectively.
Accounts Receivable, Allowance for Doubtful Accounts and Concentration of Credit Risk
Accounts receivable are customer obligations due under normal trade terms. The allowance for doubtful accounts represents our estimate of the amount of
probable credit losses existing in our accounts receivable. We have a limited number of customers with individually large amounts due at any given date. Any
unanticipated change in any one of these customers’ credit worthiness or other matters affecting the collectability of amounts due from such customers could
have a material adverse effect on our results of operations in the period in which such changes or events occur. We regularly review all of our aged accounts
receivable for collectability and establish an allowance as necessary for individual customer balances.
Concentration of Risk
Bank Accounts
Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain our cash
balances at financial institutions located in Houston, Texas. In the United States, the Federal Deposit Insurance Corporation (the “FDIC”) insures certain financial
products up to a maximum of $250,000 per depositor. We had cash balances in excess of the FDIC insurance limit per depositor in the amount of $1,113,977
and $77,388 at December 31, 2014 and 2013, respectively.
Significant Customers
Customers of our refined petroleum products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston -
San Antonio - Dallas/Fort Worth area). We have bulk term contracts, including month-to-month, six months, and up to five year terms in place with most of our
customers. Certain of our contracts require us to sell fixed quantities and/or minimum quantities of intermediate and finished petroleum products and many of
these arrangements are subject to periodic renegotiation, which could result in us receiving higher or lower relative prices for our refined petroleum products. See
“Note (16) Concentration of Risk” of this report for additional disclosures related to significant customers.
47
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Inventory
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The nature of our business requires us to maintain inventory, which primarily consists of refined petroleum products. Inventory reflected for crude oil and
condensate is nominal and represents line fill. Because refined petroleum products are commodities, we have no control over the changing market value of these
inventories. Our overall inventory is valued at lower of cost or market with costs being determined by the average cost method. If the market value of our refined
petroleum product inventories declines to an amount less than our average cost, we record a write-down of inventory and an associated impairment
expense. See “Note (7) Inventory” of this report for additional disclosures related to our inventory.
Price-Risk Management Activities
Under our inventory risk management policy, Genesis Energy, LLC (“Genesis”) may, but is not required to, use derivative instruments as economic hedges to
reduce our commodity price risk. We follow FASB ASC guidance for derivatives and hedging related to stand-alone derivative instruments. These contracts are
not subject to hedge accounting treatment under FASB ASC guidance. Although such hedge positions are direct contractual obligations of Genesis and not us,
we record the fair value of these Genesis hedges in our consolidated balance sheet each financial reporting period because of contractual arrangements with
Genesis under which we are effectively exposed to the potential gains or losses. Changes in the fair value from financial reporting period to financial reporting
period are recognized in our consolidated statement of operations. See “Note (21) Refined Petroleum Products Inventory Risk Management” of this report for
additional disclosures related to our inventory risk management policy.
Property and Equipment
Refinery and Facilities
Additions to refinery and facilities are capitalized. Expenditures for repairs and maintenance, including maintenance turnarounds, are expensed as incurred and
are included as operating expenses under the Operating Agreement with LEH (see “Note (9) Accounts Payable Related Party” of this report for additional
disclosures related to the Operating Agreement). Management expects to continue making improvements to the Nixon Facility based on technological advances.
Refinery and facilities are carried at cost. Adjustment of the asset and the related accumulated depreciation accounts are made for refinery and facilities’
retirements and disposals, with the resulting gain or loss included in the statements of operations.
For financial reporting purposes, depreciation of refinery and facilities is computed using the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities are placed in service.
Management has evaluated the FASB ASC guidance related to asset retirement obligations (“AROs”) for our refinery and facilities. Management has concluded
that there is no legal or contractual obligation to dismantle or remove the refinery and facilities. Further, management believes that these assets have
indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot
reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of
performing the retirement activities and record a liability for the fair value of that cost using present value techniques. We did not record any impairment of our
refinery and facilities for the years ended December 31, 2014 and 2013.
Oil and Gas Properties
We account for our oil and gas properties using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of
oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production method. Our Gulf of Mexico oil and gas properties had no production during the years ended
December 31, 2014 and 2013. All leases associated with our Gulf of Mexico oil and gas properties have expired.
Pipelines and Facilities
We record pipelines and facilities at the lower of cost or net realizable value. Depreciation is computed using the straight-line method over estimated useful lives
ranging from 10 to 22 years. In accordance with FASB ASC guidance on accounting for the impairment or disposal of long-lived assets, assets are grouped and
evaluated for impairment based on the ability to identify separate cash flows generated therefrom.
48
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Construction in Progress
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Construction in progress expenditures related to refurbishment activities at the Nixon Facility are capitalized as incurred. Depreciation begins once the asset is
placed in service.
See “Note (8) Property, Plant and Equipment, Net” of this report for additional disclosures related to our refinery and facilities, oil and gas properties, pipelines and
facilities, and construction in progress.
Intangibles – Other
We recognized trade name in connection with our reverse acquisition of LE in 2012. We have determined our trade name to have an indefinite useful life. We
account for other intangible assets under FASB ASC guidance related to intangibles, goodwill and other. Under the guidance, we test intangible assets with
indefinite lives annually for impairment. Management performed its regular annual impairment testing of trade name in the fourth quarter of 2014. Upon
completion of that testing, we determined that no impairment was necessary as of December 31, 2014.
Debt Issue Costs
We have debt issue costs related to certain facilities debt. Debt issue costs are capitalized and amortized over the term of the related debt using the straight-line
method, which approximates the effective interest method. When a loan is paid in full, any unamortized financing costs are removed from the related accounts
and charged to operations. Debt issue costs, net of accumulated amortization, totaled $479,737 and $498,536 at December 31, 2014 and 2013,
respectively. Accumulated amortization was $211,244 and $177,445 at December 31, 2014 and 2013, respectively. Amortization expense, which is included in
interest expense, was $33,799 and $33,800 for both years ended December 31, 2014 and 2013. See “Note (13) Long-Term Debt” of this report for additional
disclosures related to the Refinery Note.
Revenue Recognition
Refined Petroleum Products Revenue
We sell various refined petroleum products including jet fuel, naphtha, distillates and atmospheric gas oil. Revenue from refined petroleum products sales is
recognized when title passes. Title passage occurs when refined petroleum products are sold or delivered in accordance with the terms of the respective sales
agreements. Revenue is recognized when sales prices are fixed or determinable and collectability is reasonably assured.
Customers assume the risk of loss when title is transferred. Transportation, shipping and handling costs incurred are included in cost of refined petroleum
products sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
Deferred Revenue
On February 5, 2014, WBI Energy Midstream, LLC , a Colorado limited liability company (“WBI”), and BDPL entered into an Asset Sale Agreement (the
“Purchase Agreement”) whereby BDPL reacquired WBI’s 1/6th interest in the Blue Dolphin Pipeline System, the Galveston Area Block 350 Pipeline and the
Omega Pipeline (the “Pipeline Assets”) effective October 31, 2013. Pursuant to the Purchase Agreement, WBI paid BDPL $100,000 in cash, and a surety
company $850,000 in cash as collateral for supplemental pipeline bonds for the benefit of BDPL in exchange for the payment and discharge of any and all
payables, claims, and obligations related to the Pipeline Assets. We recorded the amount received for BDPL’s benefit for the supplemental pipeline bonds as
deferred revenue. The deferred revenue is being recognized on a straight-line basis through December 31, 2018, the expected retirement date of the assets for
which the supplemental pipeline bonds secure.
Tank Rental and Easement Revenue
Tank rental fees are invoiced monthly in accordance with the terms of the related lease agreement and recognized in other income. Land easement revenue is
recorded monthly and included in other income.
49
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Pipeline Transportation Revenue
Revenue from our pipeline operations is derived from fee-based contracts and is typically based on transportation fees per unit of volume transported multiplied
by the volume delivered. Revenue is recognized when volumes have been physically delivered for the customer through the pipeline.
Income Taxes
We account for income taxes under FASB ASC guidance related to income taxes, which requires recognition of income taxes based on amounts payable with
respect to the current year and the effects of deferred taxes for the expected future tax consequences of events that have been included in our financial
statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and
tax basis of assets and liabilities, as well as for operating losses and tax credit carryforwards using enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized, which is dependent upon the generation of future
taxable income prior to the expiration of any net operating loss (“NOL”) carryforwards. When management determines that it is more likely than not that a tax
benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets.
The guidance also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return, as well as guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and
transition.
See “Note (18) Income Taxes” of this report for further information related to income taxes.
Impairment or Disposal of Long-Lived Assets
In accordance with FASB ASC guidance on accounting for the impairment or disposal of long-lived assets, we initiate a review of our long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an
asset is measured by comparing its carrying amount to the expected future undiscounted cash flows expected to result from the use and eventual disposition of
that asset, excluding future interest costs that would be recognized as an expense when incurred. Any impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating
results that are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could
be necessary.
Asset Retirement Obligations
FASB ASC guidance related to AROs requires that a liability for the discounted fair value of an ARO be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and
the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is
recognized.
Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities. Further, management believes that
these assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these
assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of these assets, we will
estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.
50
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating or disposing of our offshore platform, pipeline
systems and related onshore facilities, as well as plugging and abandonment of wells and land and sea bed restoration costs. We develop these cost estimates
for each of our assets based upon regulatory requirements, platform structure, water depth, reservoir characteristics, reservoir depth, equipment market demand,
current procedures and construction and engineering consultations. Because these costs typically extend many years into the future, estimating these future
costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology,
political and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis.
See “Note (12) Asset Retirement Obligations” of this report for additional information related to our AROs.
Derivatives
We are exposed to commodity prices and other market risks including gains and losses on certain financial assets as a result of our inventory risk management
policy. Under our inventory risk management policy, Genesis may, but is not required to, use commodity futures contracts to mitigate the change in value for
certain of our refined petroleum product inventories subject to market price fluctuations. The physical inventory volumes are not exchanged and these contracts
are net settled with cash. We recognize all commodity hedge positions as either current assets or current liabilities in our consolidated balance sheets and those
instruments are measured at fair value. Therefore, changes in the fair value of these commodity hedging instruments are included as income or expense in the
period of change in our consolidated statements of operations. Net gains or losses associated with these transactions are recognized within cost of refined
petroleum products sold in our consolidated statements of operations using mark-to-market accounting. See “Note (20) Fair Value Measurement” of this report
for additional disclosures related to derivatives.
Computation of Earnings Per Share
We apply the provisions of FASB ASC guidance for computing earnings per share (“EPS”). The guidance requires the presentation of basic EPS, which excludes
dilution and is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock
outstanding for the period. The guidance requires dual presentation of basic EPS and diluted EPS on the face of our audited consolidated statements of
operations and requires a reconciliation of the numerators and denominators of basic EPS and diluted EPS. Diluted EPS is computed by dividing net income
(loss) available to common stockholders by the diluted weighted average number of common shares outstanding, which includes the potential dilution that could
occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the earnings of the entity.
The number of shares related to options, warrants, restricted stock and similar instruments included in diluted EPS is based on the “Treasury Stock Method”
prescribed in FASB ASC guidance for computation of EPS. This method assumes theoretical repurchase of shares using proceeds of the respective stock option
or warrant exercised, and for restricted stock the amount of compensation cost attributed to future services which has not yet been recognized and the amount of
current and deferred tax benefit, if any, that would be credited to additional paid-in-capital upon the vesting of the restricted stock, at a price equal to the issuer’s
average stock price during the related earnings period. Accordingly, the number of shares includable in the calculation of EPS in respect of the stock options,
warrants, restricted stock and similar instruments is dependent on this average stock price and will increase as the average stock price increases. See “Note
(19) Earnings Per Share” for additional information related to EPS.
Stock-Based Compensation
In accordance with FASB ASC guidance for stock-based compensation, share-based payments to personnel, including grants of restricted stock units, are
measured at fair value as of the date of grant and are expensed in our consolidated statements of operations over the service period (generally the vesting
period). See “Note (14) Stock Options” for more information related to stock-based compensation.
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued, the net change in share price subsequent to acquisition of the treasury
stock is recognized as a component of additional paid-in-capital in our consolidated balance sheets. See “Note (15) Treasury Stock” for additional disclosures
related to treasury stock.
51
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Business Combinations
We account for acquisitions in accordance with FASB ASC guidance for business combinations. The guidance requires consideration given, including contingent
consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (i) in-
process research and development costs be recorded at fair value as an indefinite-lived intangible asset, (ii) acquisition costs generally be expensed as incurred,
(iii) restructuring costs associated with a business combination generally be expensed subsequent to the acquisition date; and (iv) changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense.
The guidance requires that any excess of purchase price over fair value of net assets acquired, including identifiable intangible and liabilities assumed be
recognized as goodwill. Any excess of fair value of acquired net assets, including identifiable intangibles assets, over the acquisition consideration results in a
bargain purchase gain. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and
recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued.
Reclassification
We have reclassified certain insignificant prior year amounts related to our oil and gas exploration and production operations to conform to our 2014 presentation.
New Pronouncements Issued but Not Yet Effective
In May 2014, FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a
new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue
recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how
revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for reporting periods beginning after
December 15, 2016, and early adoption is not permitted. We are evaluating the impact that adoption of this guidance will have on the determination or reporting
of our financial results.
Remainder of Page Intentionally Left Blank
52
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(4)
Business Segment Information
We have two reportable business segments: (i) “Refinery Operations” and (ii) “Pipeline Transportation.” Business activities related to our “Refinery Operations”
business segment are conducted at the Nixon Facility. Business activities related to our “Pipeline Transportation” business segment are primarily conducted in
the Gulf of Mexico through our Pipeline Assets and leasehold interests in oil and gas properties. Our “Pipeline Transportation” business segment is considered
non-core to our business.
Segment information for the years ended December 31, 2014 (and at December 31, 2014) was as follows:
Revenue
Less: Operation cost(1)
Other non-interest income
EBITDA
Depletion, depreciation and amortization
Interest expense, net
Income before income taxes
Capital expenditures
Identifiable assets(2)
Year Ended December 31, 2014
Segment
Refinery
Pipeline
Corporate &
Operations
$ 387,304,774
(374,613,154)
1,130,065
13,821,685
$
Transportation
220,200
(483,262)
270,833
7,771
$
$
$
Other
-
(1,242,466)
-
Total
$ 387,524,974
(376,338,882)
1,400,898
$
(1,242,466)
(1,570,962)
(844,850)
$
10,171,178
$
1,720,156
$
-
$
-
$
1,720,156
$
50,950,050
$
3,028,719
$
6,428,388
$
60,407,157
(1) Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion
expenses. Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as
accounting fees, director fees and legal expense.
Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.
(2)
Remainder of Page Intentionally Left Blank
53
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Year Ended December 31, 2013
Segment
Refinery
Pipeline
Corporate &
Operations
$ 409,239,747
(409,800,285)
1,113,397
552,859
$
Transportation
303,322
(524,051)
41,667
(179,062)
$
$
$
Other
-
(1,652,160)
-
Total
$ 409,543,069
(411,976,496)
1,155,064
$
(1,652,160)
(1,342,563)
(1,096,948)
$
(3,717,874)
$
1,477,729
$
-
$
-
$
1,477,729
$
54,470,723
$
2,399,467
$
809,311
$
57,679,501
Revenue
Less: Operation cost(1)
Other non-interest income
EBITDA
Depletion, depreciation and amortization
Interest expense, net
Loss before income taxes
Capital expenditures
Identifiable assets(2)
(1) Operation cost within the “Refinery Operations” and “Pipeline Transportation” segments includes related general, administrative, and accretion
expenses. Operation cost within “Corporate and Other” includes general and administrative expenses associated with corporate maintenance costs, such as
accounting fees, director fees and legal expense.
Identifiable assets contain related legal obligations of each business segment including cash, accounts receivable and recorded net assets.
(2)
(5)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
Unrealized hedging gains
Prepaid insurance
Prepaid professional fees
Prepaid listing fees
Prepaid loan closing fees
Prepaid taxes
54
December 31,
2014
2013
$
$
495,900
156,558
104,000
15,000
-
-
6,950
165,004
104,000
15,000
33,513
9,216
$
771,458
$
333,683
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(6)
Deposits
Deposits consisted of the following:
Tax bonds
Equipment deposits
Utility deposits
Rent deposits
Purchase option deposits
(7)
Inventory
Inventory consisted of the following:
Jet fuel
Atmospheric gas oil
Naphtha
Oil-based mud blendstock
Crude
LPG mix
NRLM
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
December 31,
2014
2013
$
$
-
48,785
10,250
9,463
-
792,000
124,526
10,250
9,463
283,421
$
68,498
$
1,219,660
December 31,
2014
2013
$
$
2,631,546
224,007
194,688
124,176
19,041
7,193
-
1,444,399
575,919
804,490
-
19,041
28,888
1,813,662
$
3,200,651
$
4,686,399
Remainder of Page Intentionally Left Blank
55
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(8)
Property, Plant and Equipment, Net
Property, plant and equipment, net, consisted of the following:
Refinery and facilities
Pipelines and facilities
Onshore separation and handling facilities
Land
Other property and equipment
Less: Accumulated depletion, depreciation and amortization
Construction in Progress
Property, Plant and Equipment, Net
(9)
Accounts Payable, Related Party
December 31,
2014
2013
$
$
36,462,451
2,127,207
325,435
602,938
597,064
40,115,095
35,852,928
1,826,226
325,435
577,965
567,813
39,150,367
4,586,575
35,528,520
3,016,713
36,133,654
1,842,555
255,012
$
37,371,075
$
36,388,666
LEH, our controlling shareholder, owns approximately 81% of Common Stock. Jonathan Carroll, Chairman of the Board, Chief Executive Officer, and President
of Blue Dolphin, is the majority owner of LEH. LEH manages all of our subsidiaries and operates all of our assets, including the Nixon Facility, (the “Services”)
pursuant to the Operating Agreement.
With respect to the Nixon Facility, the Operating Agreement covers all refinery operating expenses with the exception of capital expenditures. Pursuant to the
Operating Agreement, for management and operation of the Nixon Facility LEH receives as compensation: (i) weekly payments from GEL TEX Marketing, LLC
(“GEL”) not to exceed $750,000 per month, (ii) reimbursement for certain accounting costs related to the preparation of financial statements of LE not to exceed
$50,000 per month, (iii) $0.25 for each barrel processed at the Nixon Facility during the term of the Operating Agreement, up to a maximum quantity of 10,000
barrels per day determined on a monthly basis, and (iv) $2.50 for each barrel in excess of 10,000 barrels per day processed at the Nixon Facility during the term
of the Operating Agreement, determined on a monthly basis. For all other assets, LEH is reimbursed at cost for all reasonable expenses incurred while
performing the Services. All compensation owed to LEH under the Operating Agreement is to be paid to LEH within 30 days of the end of each calendar month.
The Operating Agreement expires upon the earliest to occur of: (a) the date of the termination of the Joint Marketing Agreement pursuant to its terms, (b) August
12, 2015, or (c) upon written notice of either party to the Operating Agreement of a material breach of the Operating Agreement by the other party.
Aggregate amounts expensed for Services at the Nixon Facility for the years ended December 31, 2014 and 2013 were $10,698,023 (approximately $2.77 per
barrel of throughput) and $10,673,722 (approximately $2.79 per barrel of throughput), respectively.
At December 31, 2014 and 2013, the amounts outstanding to LEH to fund our working capital requirements were $1,174,168 and $3,659,340, respectively, and
are reflected in accounts payable, related party in our consolidated balance sheets.
56
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(10) Notes Payable
Notes payable consisted of the following:
Short-term note
Short-term capital leases
December 31,
2014
2013
$
$
$
-
-
-
$
9,379
2,505
11,884
Short-Term Note
The balance on a short-term note issued in January 2010 in the amount of $100,000 as payment for financing services was $0 and $9,379 at December 31, 2014
and 2013, respectively. The unsecured note was paid off during the first quarter of 2014.
Short-Term Capital Leases
The balance on short-term notes under capital lease agreements was $0 and $2,505 at December 31, 2014 and 2013, respectively. These capital leases were
paid off during the first quarter of 2014.
(11) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
Excise and income taxes payable
Genesis crude accrued payable
Board of director fees payable
Unearned revenue
Transportation and inspection
Other payable
Insurance
57
December 31,
2014
2013
$
$
1,228,411
521,739
345,000
252,500
190,000
149,962
96,092
688,754
-
240,000
302,505
100,000
269,185
-
$
2,783,704
$
1,600,444
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(12) Asset Retirement Obligations
Refinery and Facilities
Management has concluded that there is no legal or contractual obligation to dismantle or remove the Nixon Refinery and related facilities. Management believes
that the Nixon Refinery and related facilities have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon
which we would retire these assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of
these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.
Pipelines and Facilities and Oil and Gas Properties
We have AROs associated with the dismantlement and abandonment in place of our pipelines and facilities, as well as the plugging and abandonment of our oil
and gas properties. We recorded a discounted liability for the fair value an ARO with a corresponding increase to the carrying value of the related long-lived
asset at the time the asset was installed or placed in service. We amortize the amount added to property and equipment and recognize accretion expense in
connection with the discounted liability over the remaining life of the asset.
For the years ended December 31, 2014 and 2013, we recognized $0 and $63,767, respectively, in abandonment expense related to our oil and gas properties.
Abandonment expense for 2013 related to our High Island A7 and High Island 37 oil and gas properties. Abandonment expense represents amounts incurred in
excess of the ARO liability for the related asset. Plugging and abandonment costs for oil and gas properties and pipelines are recorded as information becomes
available from operators to substantiate actual and/or probable costs.
AROs on a roll-forward basis were as follows:
Asset retirement obligations, at the beginning of the year
Changes in estimates of existing obligations
New asset retirement obligations
Liabilities settled
Accretion expense
Less: current portion of asset retirement obligations
December 31,
2014
2013
$
$
1,597,661
-
300,980
(243,866)
211,995
1,866,770
(85,846)
921,260
592,415
-
(28,700)
112,686
1,597,661
(107,388)
Long-term asset retirement obligations, at the end of the year
$
1,780,924
$
1,490,273
For the years ended December 31, 2014 and 2013, we recognized $243,866 and $28,700, respectively, in liabilities settled. For 2014, liabilities settled primarily
related to abandonment of pipeline Segment No. 8606. For 2013, liabilities settled related to our High Island 37 oil and gas property. The WBI transaction
resulted in a $300,980 increase in our AROs related to the Pipeline Assets, which represents the fair value of the liability, and increased accretion expense
throughout the remaining useful life of certain of the Pipeline Assets. For additional information related to the WBI Transaction, see “Note (3) Significant
Accounting Policies – Revenue Recognition – Deferred Revenue” and “Note (22) Commitments and Contingencies – Supplemental Pipeline Bonds” of this report.
58
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(13) Long-Term Debt
Long-term debt consisted of the following:
Refinery Note
Sovereign Loan
Notre Dame Debt
Capital Leases
Construction and Funding Agreement
Less: current portion of long-term debt
The following is a schedule of future long-term debt payments:
Years Ending December 31,
2015
2016
2017
2018
2019
Subsequent to 2019
Refinery Note
December 31,
2014
2013
$
$
8,648,980
1,638,898
1,300,000
466,401
-
12,054,279
(1,245,476)
10,808,803
$
$
9,057,937
-
1,300,000
-
5,747,330
16,105,267
(2,215,918)
13,889,349
Future
Long-Term
Debt Payments
$
1,245,476
2,616,167
958,202
517,543
546,736
6,170,155
$
12,054,279
The Refinery Note accrues interest at a rate of U.S. Prime Rate plus 2.25% (effective rate of 5.50% at December 31, 2014) and has a maturity date of October 1,
2028 (the “Maturity Date”). LE’s obligations under the Refinery Note are secured by a Deed of Trust (the “Deed of Trust”) of even date with the Loan
Agreement. The Refinery Note is further secured by a Security Agreement (the “Security Agreement” and, together with the Loan Agreement, the Refinery Note
and Deed of Trust, the “Refinery Loan Documents”) also of even date with the Refinery Note, which Security Agreement covers various items of collateral
including a first lien on the Nixon Facility and general assets of LE. The principal balance outstanding on the Refinery Note was $8,648,980 and $9,057,937 at
December 31, 2014 and 2013, respectively. Interest was accrued on the Refinery Note in the amount of $47,569 and $40,132 at December 31, 2014 and 2013,
respectively.
The Loan Agreement has debt-to-worth and current ratio financial maintenance covenants (the “Financial Maintenance Covenants”). As of December 31, 2014
and the date of filing this report, we were in compliance with the Financial Maintenance Covenants in the Loan Agreement. As of December 31, 2013, we were
in violation of the current ratio covenant in the Loan Agreement. However, AFNB agreed to waive certain financial maintenance covenants relating the Financial
Maintenance Covenants under the Loan Agreement in a letter agreement effective December 31, 2013.
On September 1, 2013, AFNB and LE amended the Refinery Note (the “Note Modification Agreement”). Pursuant to the Note Modification Agreement, the
monthly principal and interest payment due under the Refinery Note is $75,310. Other than modification of the payment terms under the Refinery Note, the terms
under the Loan Agreement and the Refinery Note remain the same through the Maturity Date and the Refinery Loan Documents remain in full force and effect.
Sovereign Loan
On May 2, 2014, LRM entered into a loan and security agreement with Sovereign Bank, a Texas state bank (“Sovereign”), for a term loan facility in the aggregate
amount of $2.0 million (the “Sovereign Loan”) at an interest rate of 6.00%. The proceeds of the Sovereign Loan are being used primarily to finance costs
associated with refurbishment of the Nixon Facility’s naphtha stabilizer and depropanizer units. The Sovereign Loan is: (i) subject to a financial maintenance
covenant pertaining to debt service coverage ratio, (ii) secured by the assignment of certain leases of LRM, certain assets of LEH, our controlling shareholder
and an affiliated entity, and (iii) guaranteed by Jonathan Carroll, Chairman of the Board, Chief Executive Officer, and President of Blue Dolphin and majority
owner of LEH and an affiliated entity. The principal balance outstanding on the Sovereign Loan was $1,638,898 and $0 at December 31, 2014 and 2013,
respectively. Interest was accrued on the Sovereign Loan in the amount of $8,470 and $0 at December 31, 2014 and 2013, respectively.
On March 25, 2015, Sovereign and LRM amended the Sovereign Loan pursuant to a Loan Modification Agreement (the “Loan Modification Agreement”). Under
the Loan Modification Agreement, the interest rate on the Sovereign Loan was modified to be the greater of the U.S. Prime Rate plus 2.75% or 6.00%. In
addition, the maturity date of the Sovereign Loan was extended to March 25, 2017. Pursuant to the Loan Modification Agreement, the monthly payment due
under the Sovereign Loan is $61,665 plus interest.
59
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Notre Dame Debt
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LE entered into a loan with Notre Dame Investors, Inc. as evidenced by that certain promissory note in the original principal amount of $8,000,000, which is
currently held by John Kissick (the “Notre Dame Debt”). The Notre Dame Debt accrues interest at a rate of 16% and is secured by a Deed of Trust, Security
Agreement and Financing Statements (the “Subordinated Deed of Trust”), which encumbers the Nixon Facility and general assets of LE. The principal balance
outstanding on the Notre Dame Debt was $1,300,000 at December 31, 2014 and 2013. Interest was accrued on the Notre Dame Debt in the amount of
$1,274,789 and $1,066,784 at December 31, 2014 and 2013, respectively. There are no financial maintenance covenants associated with the Notre Dame
Debt. The due date of the Notre Dame Debt was extended to July 1, 2016.
Pursuant to Intercreditor and Subordination Agreements dated September 29, 2008 and August 12, 2011, the holder of the Notre Dame Debt and Subordinated
Deed of Trust agreed to subordinate its interest and liens on the Nixon Facility and general assets of LE in favor of the holder of the Refinery Note, the Deed of
Trust and Security Agreement and Milam Services, Inc. (“Milam”), an affiliate of Genesis, under the Construction and Funding Agreement, respectively.
Pursuant to a First Amendment to Promissory Note made effective July 1, 2013, the Notre Dame Debt was amended as follows: (i) the annual interest rate on
the unpaid balance was set to 16% and (ii) the final maturity became July 1, 2015.
Pursuant to a Second Amendment to Promissory Note made effective October 1, 2014, the Notre Dame Debt was amended to extend the maturity date to July 1,
2016.
Capital Leases
Long-term capital lease obligations totaled $466,401 and $0 at December 31, 2014 and 2013. The following is a summary of equipment held under long-term
capital leases:
Cost
Less: accumulated depreciation
December 31,
2014
2013
$
$
538,598
-
$
538,598
$
-
-
-
On August 7, 2014, we entered into a 36 month “build-to-suit” capital lease for the purchase of new boiler equipment for the Nixon Facility. The cost of the
equipment has been added to construction in progress until it has been completed, delivered, and placed into service. Depreciation will begin once the
equipment has been placed into service. The equipment was delivered in December 2014 and placed in service during the first quarter of 2015. The long-term
capital lease obligation requires a quarterly payment in the amount of $42,996.
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At December 31, 2014, future minimum lease commitments under non-cancelable capital leases were as follows:
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Years Ending December 31,
2015
2016
2017
2018
2019
Subsequent to 2019
Total future minimum lease payments
Amount representing interest
Present value of minimum lease payments
Construction and Funding Agreement
Future
Minimum
Lease Payments
$
$
171,821
171,821
148,058
-
-
-
491,700
(25,299)
466,401
In August 2011, Milam committed funding for the completion of the Nixon Facility’s refurbishment and start-up operations. Payments under the Construction and
Funding Agreement began in the first quarter of 2012, when the Nixon Facility was placed in service. All amounts advanced under the Construction and Funding
Agreement bore interest at a rate of 6% annually. There were no financial maintenance covenants associated with this obligation.
The principal balance outstanding on the Construction and Funding Agreement was $0 and $5,747,330 at December 31, 2014 and 2013, respectively. Interest
was accrued on the Construction and Funding Agreement in the amount of $0 and $700,597 at December 31, 2014 and 2013, respectively. As a result of LE’s
repayment of all amounts due and owing to Milam pursuant to the Construction and Funding Agreement, LE is now entitled to receive up to 80% of the Gross
Profits as LE’s Profit Share under the Joint Marketing Agreement. In addition, Milam is obligated to release all liens on the Nixon Facility. See “Part I, Item 1.
Financial Statements - Note (22) Commitments and Contingencies – Genesis Agreements” of this report for additional disclosures related to the Construction and
Funding Agreement and our relationship with Genesis.
(14)
Stock Options
Blue Dolphin’s Board established a 2000 Stock Incentive Plan that was subsequently approved by Blue Dolphin’s stockholders on May 18, 2000. As a result of
Blue Dolphin’s reverse acquisition of LE, all employees of Blue Dolphin became employees of LEH effective February 15, 2012. Therefore, all options
outstanding for Blue Dolphin employees (with the exception of options outstanding for Ivar Siem that expired in October 2013) were cancelled 90 days following
the effective date of the reverse merger. At December 31, 2014 and 2013, there were no options outstanding, no options exercisable and no shares of Common
Stock reserved for issuance under the 2000 Stock Incentive Plan.
(15)
Treasury Stock
In March of 2013, BDEX completed a non-cash transaction to dispose of its 7% undivided working interest in an oil property located in Indonesia (“Indonesia”)
pursuant to a Sale and Purchase Agreement with Blue Sky Langsa, Ltd. (“Blue Sky”) dated November 6, 2012. Blue Sky’s consideration to BDEX for Indonesia
was 150,000 shares of Common Stock, which represented a recovery of a significant portion of the 342,857 shares of Common Stock BDEX paid Blue Sky to
acquire Indonesia in 2010. The 150,000 shares of Common Stock acquired from Blue Sky are being held as treasury stock. At December 31, 2014 and 2013,
we had 150,000 shares of treasury stock.
61
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(16)
Concentration of Risk
Key Supplier
Under the Crude Oil and Supply Throughput Services Agreement by and between LE and GEL dated August 12, 2011 (the “Crude Supply Agreement”), GEL is
the exclusive supplier of crude oil and condensate to the Nixon Facility. We have the ability to purchase crude oil and condensate from other suppliers with the
prior consent of GEL. The initial term was to expire on August 12, 2014. However, on October 30, 2013, LE entered into a Letter Agreement Regarding Certain
Advances and Related Agreements with GEL and Milam (the “October 2013 Letter Agreement”), effective October 24, 2013. In accordance with the terms of the
October 2013 Letter Agreement, LE agreed not to terminate the Crude Supply Agreement and GEL agreed to automatically renew the Crude Supply Agreement
at the end of the initial term for successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written notice.
Significant Customers
For the year ended December 31, 2014, we had five customers that accounted for approximately 89% of our refined petroleum products sales. These five
customers represented approximately $6.4 million in accounts receivable at December 31, 2014. For the year ended December 31, 2013, we had five
customers that accounted for approximately 92% of our refined petroleum products sales. These five customers represented approximately $13.4 million in
accounts receivable at December 31, 2013.
Refined Petroleum Product Sales
All of our refined petroleum products are currently sold in the United States. The following table summarizes total refined petroleum product sales:
Atmospheric gas oil
Naphtha
Jet fuel
NRLM
Oil-based mud blendstock
LPG mix
Reduced crude
Years Ended December 31,
2014
2013
$
96,027,339
89,700,423
88,479,458
62,729,476
49,662,414
705,664
-
24.8% $ 101,955,402
103,980,651
23.2%
20,048,594
22.8%
182,513,228
16.2%
12.8%
-
499,277
0.2%
242,595
0.0%
24.9%
25.4%
4.9%
44.6%
0.0%
0.1%
0.1%
Total refined petroleum product sales
$ 387,304,774
100.0% $ 409,239,747
100.0%
On May 31, 2014, the Nixon Facility ceased production of NRLM, a transportation-related diesel fuel product. On June 1, 2014, the Nixon Facility began
producing oil-based mud blendstock, a non-transportation lubricant blend product. The shift in product slate from NRLM to oil-based mud blendstock was the
result of the Environmental Protection Agency’s (the “EPA’s”) phased-in requirements for small refineries to reduce the sulfur content in transportation-related
diesel fuel, such as NRLM, to a maximum of 15 ppm sulfur by June 1, 2014. “Topping units,” like the Nixon Facility, typically lack a desulfurization process unit to
lower sulfur content levels within the range required by the EPA’s recently implemented fuel quality standards, and integration of such a unit generally requires
additional permitting and significant capital upgrades. The Nixon Facility could produce and sell higher ppm sulfur diesel as a feedstock to other refineries and
blenders in the United States and as a finished petroleum product to other countries.
The Nixon Facility began producing jet fuel in late 2013. Jet fuel is produced by separating the distillate stream into kerosene and diesel and blending the
kerosene with a portion of the heavy naphtha stream. Production of jet fuel, which is considered a higher value product, significantly upgrades the value of the
naphtha component.
62
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(17) Leases
Our company headquarters is located in downtown Houston, Harris County, Texas. We lease 13,878 square feet of office space, 7,389 square feet of which is
used and paid for by LEH. The office lease has a 10 year term expiring in 2017, includes free rent periods and escalating rent payment provisions, and requires
payment of a portion of related actual operating expenses. Rent expense is recognized on a straight-line basis. For the years ended December 31, 2014 and
2013, rent expense totaled $98,876 and $113,381, respectively.
At December 31, 2014, future minimum lease commitments that were non-cancelable under our office lease were as follows:
Years Ending December 31,
2015
2016
2017
(18)
Income Taxes
Income Tax Benefit (Expense)
Our income tax benefit (expense) consisted of the following:
Current:
Federal
State
Deferred:
Federal
State
Future
Minimum
Lease Payments
$
116,231
116,231
48,429
$
280,891
Years Ended December 31,
2014
2013
$
(64,258)
(108,270)
$
-
(89,255)
5,760,106
-
-
-
$
5,587,578
$
(89,255)
The state of Texas has a Texas margins tax (“TMT”), which is a form of business tax imposed on gross margin to replace the state’s prior franchise tax structure.
Although TMT is imposed on an entity’s gross margin rather than on its net income, certain aspects of TMT make it similar to an income tax.
63
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Our effective tax rate applicable to continuing operations in 2014 and 2013 was as follows:
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Expected tax rate
Permanent differences
State tax
Federal tax
Change in valuation allowance
Deferred Income Taxes
2014
2013
34.00%
0.00%
1.06%
0.63%
(90.63%)
(54.94%)
34.00%
0.00%
(2.49%)
0.00%
(34.00%)
(2.49%)
Blue Dolphin acquired 100% of the issued and outstanding membership interests of LE in a reverse acquisition in 2012. As a limited liability company, LE’s
taxable income or loss flowed through to its sole member for federal and state income tax purposes prior to the reverse acquisition. However, because Blue
Dolphin is a “C” corporation, LE’s taxable income or loss now flows through to Blue Dolphin for federal and state income tax purposes.
Under Section 382 of the Internal Revenue Code of 1986, as amended (“IRC Section 382”), a corporation that undergoes an “ownership change” is subject to
limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs
when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than 50
percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years). In general, the annual use limitation
equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. Blue Dolphin experienced
ownership changes in 2005 in connection with a series of private placements, and in 2012 as a result of the reverse acquisition of LE. The 2012 ownership
change will subject NOL carryforwards to an annual use limitation, which will significantly reduce Blue Dolphin’s ability to use them to offset taxable income in
periods following the 2012 ownership change. The amount of NOLs subject to such limitations is approximately $18.7 million. As a result of the limitation under
IRC Section 382, the annual use limitation is $638,196 per year, the effect of which will result in approximately $6.7 million in NOL carryforwards expiring unused.
At December 31, 2014, we recognized a net deferred tax asset of approximately $5.7 million, reflecting the future benefit of NOLs generated before and after the
2012 ownership change. NOLs generated subsequent to the 2012 ownership change of approximately $12.1 million are not subject to an annual use limitation
under IRC Section 382. We project usage of approximately $1.3 million of NOLs in 2014.
Remainder of Page Intentionally Left Blank
64
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income
tax purposes. The following table shows significant components of our deferred tax assets and liabilities:
Deferred tax assets:
Inventories
Net operating loss and capital loss carryforwards
Start-up costs (Nixon Facility)
Asset retirement obligations liability/deferrred revenue
AMT credit
Total deferred tax assets
Deferred tax liabilities:
Unrealized hedges
Basis differences in property and equipment
Total deferred tax liabilities
Deferred tax assets, net
Valuation allowance
The following table shows our current and noncurrent deferred tax assets (liabilities):
Current deferred tax liabilities, net
Noncurrent deferred tax assets, net
Deferred tax assets, net
Valuation allowance
Valuation Allowance
December 31,
2014
2013
$
$
369
10,067,144
1,648,036
869,821
85,098
12,670,468
-
9,831,410
1,785,372
645,538
20,840
12,283,160
(168,606)
(4,471,434)
(4,640,040)
(2,363)
(3,163,568)
(3,165,931)
8,030,428
9,117,229
(2,270,322)
$
5,760,106
(9,117,229)
-
$
December 31,
2014
2013
$
$
$
(168,237)
8,198,665
8,030,428
(2,363)
9,119,592
9,117,229
(2,270,322)
$
5,760,106
(9,117,229)
-
As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to future
realization of deferred tax assets. As of December 31, 2014, management determined that sufficient positive evidence exists to conclude that it is more likely
than not that net deferred tax assets of approximately $5.7 million are realizable, and as a result, reduced the valuation allowance accordingly.
Uncertain Tax Positions
We have adopted the provisions of the ASC guidance on accounting for uncertainty in income taxes. The guidance clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements. The guidance also prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The standard also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
65
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The provisions of the guidance on accounting for uncertainty in income taxes have been applied to all of our material tax positions taken for all open tax years on
the date of adoption through the year ended December 31, 2014. We have determined that all of our material tax positions taken in our income tax returns and
the positions we expect to take in our future income tax filings meet the more likely-than-not recognition threshold. In addition, we have determined that, based
on our judgment, none of these tax positions meet the definition of “uncertain tax positions” that are subject to the non-recognition criteria set forth in the
guidance.
As part of this guidance, we record income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However,
there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2014 and
2013. Furthermore, none of our federal and state income tax returns are currently under examination by the Internal Revenue Service (“IRS”) or state authorities.
As of December 31, 2014, fiscal years 2009 and later remain subject to examination by the IRS and fiscal years 2008 and later remain subject to examination by
the state of Texas. We believe there are no uncertain tax positions for both federal and state income taxes.
(19) Earnings Per Share
The following table provides reconciliation between basic and diluted income (loss) per share:
Net income (loss)
Basic and diluted income (loss) per share
Basic and Diluted
Weighted average number of shares of common stock
outstanding and potential dilutive shares of common stock
Years Ended December 31,
2014
2013
$
15,758,756 $
(3,807,129)
$
1.51
$
(0.36)
10,441,464
10,445,883
Diluted EPS is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock
outstanding. Diluted EPS for the year ended December 31, 2014 and 2013 was the same as basic EPS as there were no stock options or other dilutive
instruments outstanding.
(20) Fair Value Measurement
We are subject to gains or losses on certain financial assets based on our various agreements and understandings with Genesis. Pursuant to these agreements
and understandings, Genesis may execute the purchase and sale of certain financial instruments for the purpose of economically hedging certain commodity
price risks associated with our refined petroleum products and, over time, this program may also include mitigating certain risks associated with the purchase of
crude oil and condensate. These financial instruments are direct contractual obligations of Genesis and not us. However, under our agreement with Genesis, we
financially benefit from any gains and financially bear any losses associated with the purchase and/or sale of such financial instruments by Genesis. Because
such instruments represent embedded derivatives for the purpose of financial reporting, we account for such embedded derivatives in our financial records by
utilizing the market approach when measuring fair value of our financial instruments (typically in current assets and/or liabilities, as discussed below). The market
approach uses prices and other relevant information generated by such market transactions executed on our behalf involving identical or comparable assets or
liabilities.
The fair value hierarchy consists of the following three levels:
Level 1
Level 2
Level 3
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by
observable market data.
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable and cannot be corroborated
by market data or other entity-specific inputs.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximated their fair values at December 31, 2014 and 2013 due to their
short-term maturities. The fair value of our long-term debt and short-term notes payable at December 31, 2014 and 2013 was $12,054,279 and $16,117,151,
respectively. The fair value of our debt was determined using a Level 3 hierarchy.
The following table represents our assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and the basis for that measurement:
Financial assets (liabilities):
Commodity contracts
Financial assets (liabilities):
Commodity contracts
Fair Value Measurement at December 31, 2014 Using
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
Carrying Value
at December 31,
2014
Significant
Unobservable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
495,900
$
495,900
$
-
$
-
Fair Value Measurement at December 31, 2013 Using
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
Carrying Value
at December 31,
2014
Significant
Unobservable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
6,950
$
6,950
$
-
$
-
Carrying amounts of commodity contracts executed by Genesis are reflected as other current assets or other current liabilities in our consolidated balance
sheets.
(21) Refined Petroleum Products Inventory Risk Management
Under our inventory risk management policy, Genesis may, but is not required to, use commodity futures contracts to mitigate the change in value for certain of
our refined petroleum product inventories subject to market price fluctuations in our inventory. The physical inventory volumes are not exchanged, and these
contracts are net settled by Genesis with cash.
The fair value of these contracts is reflected in our consolidated balance sheets and the related net gain or loss is recorded within cost of refined petroleum
products sold in our consolidated statements of operations. Quoted prices for identical assets or liabilities in active markets (Level 1) are considered to determine
the fair values for the purpose of marking to market the financial instruments at each period end.
Commodity transactions are executed by Genesis to minimize transaction costs, monitor consolidated net exposures and allow for increased responsiveness to
changes in market factors. Genesis may, but is not required to, initiate an economic hedge on our refined petroleum products when our inventory levels exceed
targeted levels (currently 1.5 days production). Although the decision to enter into a futures contract is made solely by Genesis, Genesis typically confers with
management as part of Genesis’ decision making process.
Due to mark-to-market accounting during the term of the commodity contracts, significant unrealized non-cash net gains and losses could be recorded in our
results of operations. Additionally, Genesis may be required to collateralize any mark-to-market losses on outstanding commodity contracts.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2014, we had the following obligations based on futures contracts of refined petroleum products and crude oil that were entered into as
economic hedges through Genesis. The information presents the notional volume of open commodity instruments by type and year of maturity (volumes in
barrels):
Inventory positions (futures):
Notional Contract Volumes by Year of Maturity
2015
2016
2017
Refined petroleum products and crude oil - net short positions
115,000
-
-
The following table provides the location and fair value amounts of derivative instruments that are reported in our consolidated balance sheets at December 31,
2014 and 2013:
Asset Derivatives
Balance Sheets Location
Commodity contracts
Prepaid expenses and other current
assets (accrued expenses and other
current liabilities)
Fair Value
December 31,
2014
2013
$
495,900
$
6,950
The following table provides the effect of derivative instruments in our consolidated statements of operations for the years ended December 31, 2014 and 2013:
Derivatives
Statements of Operations Location
Gain (Loss) Recognized
Years Ended December 31,
2013
2014
Commodity contracts
Cost of refined products sold
$
3,816,871
$
(103,160)
(22) Commitments and Contingencies
Operating Agreement
See “Note (9) Accounts Payable, Related Party” of this report for additional disclosures related to the Operating Agreement.
Genesis Agreements
We continue to be dependent on our relationship with Genesis and its affiliates. Our relationship with Genesis is governed by three agreements:
•
Crude Supply Agreement – Pursuant to the Crude Supply Agreement, GEL, an affiliate of Genesis, is the exclusive supplier of crude oil and condensate to
the Nixon Facility. We have the ability to purchase crude oil and condensate from other suppliers with the prior consent of GEL. GEL supplies crude oil and
condensate to LE at cost plus freight expense and any costs associated with GEL’s hedging. All crude oil and condensate supplied to LE pursuant to the
Crude Supply Agreement is paid for pursuant to the terms of the Joint Marketing Agreement as described below. In addition, GEL has a first right of refusal
to use three storage tanks at the Nixon Facility during the term of the Crude Supply Agreement. Subject to certain termination rights, the Crude Supply
Agreement had an initial term of three years expiring on August 12, 2014. In accordance with the terms of the October 2013 Letter Agreement, LE agreed
not to terminate the Crude Supply Agreement and GEL agreed to automatically renew the Crude Supply Agreement at the end of the initial term for
successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written notice.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
•
•
Construction and Funding Agreement – Pursuant to the Construction and Funding Agreement, LE engaged Milam to provide construction services on a
turnkey basis in connection with the construction, installation and refurbishment of certain equipment at the Nixon Facility (the “Project”). Milam made
advances in excess of their obligation for certain construction and operating costs at the Nixon Facility. All amounts advanced to LE pursuant to the terms of
the Construction and Funding Agreement bear interest at a rate of 6% per annum. In March 2012 (the month after initial operation of the Nixon Facility
occurred), LE began paying Milam, in accordance with the provisions of the Joint Marketing Agreement, a minimum monthly payment of $150,000 (the
“Base Construction Payment”) as repayment of interest and amounts advanced to LE under the Construction and Funding Agreement. If, however, the
Gross Profits (as defined below) of LE in any given month (calculated as the revenue from the sale of products from the Nixon Facility minus the cost of
crude oil and condensate) are insufficient to make this payment, then there is a deficit amount, which shall accrue interest (the “Deficit Amount”). If there is a
Deficit Amount, then 100% of the gross profits in subsequent calendar months will be paid to Milam until the Deficit Amount has been satisfied in full and all
previous $150,000 monthly payments have been made.
So long as the Construction and Funding Agreement remains in effect, LE is prohibited from: (i) incurring any debt (except debt that is subordinated to
amounts owed to Milam or GEL); (ii) selling, discounting or factoring its accounts receivable or its negotiable instruments outside the ordinary course of
business while no default exists; (iii) suffering any change of control or merging with or into another entity; and (iv) certain other conditions listed therein. As
of the date hereof, Milam can terminate the Construction and Funding Agreement by written notice at any time. If Milam terminates the Construction and
Funding Agreement, then Milam and LE are required to execute a forbearance agreement, the form of which has previously been agreed to as Exhibit J of
the Construction and Funding Agreement.
In accordance with the terms of the October 2013 Letter Agreement, GEL agreed to advance to LE monies not to exceed approximately $186,934 to pay for
certain equipment and services at the Nixon Facility. All amounts advanced or paid by GEL or its affiliates pursuant to the October 2013 Letter Agreement
constitute Obligations, as defined in the Construction and Funding Agreement, by LE to Milam under the Construction and Funding Agreement.
Joint Marketing Agreement – The Joint Marketing Agreement sets forth the terms of an agreement between LE and GEL pursuant to which the parties will
jointly market and sell the output produced at the Nixon Facility and share the Gross Profits (as defined below) from such sales. Pursuant to the Joint
Marketing Agreement, GEL is responsible for all product transportation scheduling. LE is responsible for entering into contracts with customers for the
purchase and sale of output produced at the Nixon Facility and handling all billing and invoicing relating to the same. However, all payments for the sale of
output produced at the Nixon Facility will be made directly to GEL as collection agent and all customers must satisfy GEL’s customer credit approval
process. Subject to certain amendments and clarifications (as described below), the Joint Marketing Agreement also provides for the sharing of “Gross
Profits” (defined as the total revenue from the sale of output from the Nixon Facility minus the cost of crude oil and condensate pursuant to the Crude
Supply Agreement) as follows:
(a)
(b)
(c)
First, prior to the date on which Milam has recouped all amounts advanced to LE under the Construction and Funding Agreement (the “Investment
Threshold Date”), the Base Construction Payment of $150,000 shall be paid to GEL (for remittance to Milam) each calendar month to satisfy amounts
owed under the Construction and Funding Agreement, with a catch-up in subsequent months if there is a Deficit Amount until such Deficit Amount
has been satisfied in full.
Second, prior to and as of the Investment Threshold Date, LE is entitled to receive weekly payments to cover direct expenses in operating the Nixon
Facility (the “Operations Payments”) in an amount not to exceed $750,000 per month plus the amount of any accounting fees. If Gross Profits are less
than $900,000, then LE’s Operations Payments shall be reduced to equal to the difference between the Gross Profits for such monthly period and the
proceeds discussed in (a) above; if Gross Profits are negative, then LE does not get an Operations Payment and the negative balance becomes a
Deficit Amount which is added to the total due and owing under the Construction Funding Agreement and such Deficit Amount must be satisfied
before any allocation of Gross Profit in the future may be made to LE.
Third, prior to the Investment Threshold Date and subject to the payment of the Base Construction Payment by LE and the Operations Payments by
GEL, pursuant to (a) and (b) above, an amount shall be paid to GEL from Gross Profits equal to transportation costs, tank storage fees (if applicable),
financial statement preparation fees (collectively, the “GEL Expense Items”), after which GEL shall be paid 80% of the remaining Gross Profits (any
percentage of Gross Profits distributed to GEL, the “GEL Profit Share”) and LE shall be paid 20% of the remaining Gross Profits (any percentage of
Gross Profits distributed to LE, the “LE Profit Share”); provided, however, that in the event that there is a forbearance payment of Gross Profits
required by LE under a forbearance agreement with a bank, then 50% of the LE Profit Share shall be directly remitted by GEL to the bank on LE’s
behalf until such forbearance amount is paid in full; and provided further that, if there is a Deficit Amount due under the Construction and Funding
Agreement and a forbearance payment of Gross Profits that would otherwise be due and payable to the bank for such period, then GEL shall receive
80% of the Gross Profit and 10% shall be payable to the bank and LE shall not receive any of the LE Profit Share until such time as the Deficit
Amount is reduced to zero.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(d)
Fourth, after the Investment Threshold Date and after the payment to GEL of the GEL Expense Items, 30% of the remaining Gross Profit up to
$600,000 (the “Threshold Amount”) shall be paid to GEL as the GEL Profit Share and LE shall be paid 70% of the remaining Gross Profit as the LE
Profit Share. Any amount of remaining Gross Profit that exceeds the Threshold Amount for such calendar month shall be paid to GEL and LE in the
following manner: (i) GEL shall be paid 20% of the remaining Gross Profits over the Threshold Amount as the GEL Profit Share and (ii) LE shall be
paid 80% of the remaining Gross Profits over the Threshold Amount as the LE Profit Share.
(e)
After the Investment Threshold Date, if GEL sustains losses, it can recoup those losses by a special allocation of 80% of Gross Profits until such
losses are covered in full, after which the prevailing Gross Profits allocation shall be reinstated.
The Joint Marketing Agreement contains negative covenants that restrict LE’s actions under certain circumstances. For example, LE is prohibited from making
any modifications to the Nixon Facility or entering into any contracts with third-parties that would materially affect or impair GEL’s or its affiliates’ rights under the
agreements set forth above. The Joint Marketing Agreement had an initial term of three years expiring on August 12, 2014. In accordance with the terms of the
October 2013 Letter Agreement, LE agreed not to terminate the Joint Marketing Agreement and GEL agreed to automatically renew the Joint Marketing
Agreement at the end of the initial term for successive one year periods until August 12, 2019, unless sooner terminated by GEL with 180 days prior written
notice.
•
Amendments and Clarifications to the Joint Marketing Agreement – The Joint Marketing Agreement was amended and clarified to allow GEL to provide LE
with Operations Payments during months in which LE incurred Deficit Amounts.
(a)
(b)
(c)
(d)
In July and August 2012, we entered into amendments to the Joint Marketing Agreement whereby GEL and Milam agreed that Deficit Amounts would
be added to our obligations amount under the Construction and Funding Agreement. In addition, the parties agreed to amend the priority of payments
to reflect that, to the extent that there are available funds in a particular month, AFNB shall be paid one-tenth of such funds, provided that we will not
participate in available funds until Deficit Amounts added to the Construction and Funding Agreement are paid in full.
In December 2012, GEL made Operations Payments and other payments to or on behalf of LE in which the aggregate amount exceeded the amount
payable to LE in the month of December 2012 under the Joint Marketing Agreement (the “Overpayment Amount”). In December 2012, we entered
into an amendment to the Joint Marketing Agreement whereby GEL and Milam agreed that Gross Profits payable to LE would be redirected to GEL as
payment for the Overpayment Amount until such Overpayment Amount has been satisfied in full. Such redistributions shall not reduce the
distributions of Gross Profit that GEL or Milam are otherwise entitled to under the Joint Marketing Agreement.
In February 2013, Milam paid a vendor $64,358 (the “Settlement Payment”), which represented amounts outstanding by LE for services rendered at
the Nixon Facility plus the vendor’s legal fees. In addition, Milam and GEL incurred legal fees and expenses related to settling the matter. In a letter
agreement between LE, GEL and Milam dated February 21, 2013, the parties agreed to modify the Joint Marketing Agreement such that, from and
after January 1, 2013, the Gross Profit shall be distributed first to GEL, prior to any other distributions or payments to the parties to the Joint
Marketing Agreement until GEL has received aggregate distributions as provided in the December 2012 Letter Agreement plus the Settlement
Payment and Milam and GEL incurred legal fees and expenses.
In February 2013, GEL agreed to advance to LE the funds necessary to pay for the actual costs incurred for the scheduled maintenance turnaround at
the Nixon Facility and capital expenditures relating to an electronic product meter, lab equipment and certain piping in an amount equal to the actual
costs of the refinery turnaround and capital expenditures, not to exceed $840,000 in the aggregate. In a letter agreement between LE, GEL and
Milam dated February 21, 2013, the parties agreed that all amounts advanced by GEL or its affiliates to LE pursuant to the letter agreement shall
constitute obligations under the Construction and Funding Agreement.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The principal balance outstanding on the Construction and Funding Agreement was $0 and $5,747,330 at December 31, 2014 and December 31, 2013,
respectively. As a result of LE’s repayment of all amounts due and owing to Milam pursuant to the Construction and Funding Agreement, LE receives up to 80%
of the Gross Profits as LE’s Profit Share under the Joint Marketing Agreement and Milam is obligated to release all liens on the Nixon Facility.
Master Easement Agreement - BDPL and FLNG Land
On October 30, 2014, FLNG Land, II, Inc., a Delaware corporation (“FLNG”) exercised its option to make a second payment of $250,000 to BDPL pursuant to a
Master Easement Agreement (the “Master Easement Agreement”) dated December 11, 2013 (the “Effective Date”). Under the Master Easement Agreement,
BDPL is providing FLNG with: (i) uninterrupted pedestrian and vehicular ingress and egress to and from State Highway 332, across the certain property of BDPL
to certain property of FLNG (the “Access Easement”) and (ii) a pipeline easement and right of way across certain property of BDPL to certain property owned by
FLNG (the “Pipeline Easement” and together with the Access Easement, the “Easements”). FLNG paid BDPL $250,000 on the Effective Date as initial
consideration for the grant of the Easements.
FLNG’s second payment of $250,000 will result in FLNG making annual payments in the amount of $500,000 to BDPL in October of each year for a minimum of
five (5) years. One year after the final annual payment of $500,000 is made to BDPL, FLNG will begin paying to BDPL annual payments of $10,000 for so long
as FLNG desires to use the Access Easement.
Supplemental Pipeline Bonds
We are required to satisfy supplemental pipeline bonding requirements of the Bureau of Ocean Energy Management (“BOEM”) with regard to certain pipelines
that we operate in federal waters of the Gulf of Mexico. These supplemental pipeline bonding requirements are intended to secure our performance of plugging
and abandonment obligations with respect to these pipelines. Once plugging and abandonment work has been completed, the collateral backing the
supplemental pipeline bonds will be released to us.
In August 2006, BDPL secured a $700,000 supplemental pipeline bond for Right-of-Way Number OCS-G 01381. On February 5, 2014, WBI and BDPL entered
into a Purchase Agreement whereby BDPL reacquired WBI’s 1/6th interest in the Pipeline Assets effective October 31, 2013. Pursuant to the Purchase
Agreement, WBI paid BDPL $100,000 in cash, and a surety company $850,000 in cash as collateral for supplemental pipeline bonds for the benefit of BDPL in
exchange for the payment and discharge of any and all payables, claims, and obligations related to the Pipeline Assets. The $850,000 in cash was used to: (i)
increase the supplemental pipeline bond for Right-of-Way Number OCS-G 01381 by $205,000, increasing the total cash-backed collateral for this right-of-way to
$905,000, and (ii) secure a $645,000 cash-backed supplemental pipeline bond for Right-of-Way Number OCS-G 08606.
In December 2014, BDPL completed plugging and abandonment work for Right-of-Way Number OCS-G 08606. As a result, BDPL anticipates release of the
collateral backing this supplemental pipeline bond by BOEM in the first half of 2015. There can be no assurance that BOEM will not require additional
supplemental pipeline bonds related to other BDPL pipeline right-of-ways.
Legal Matters
From time to time we are subject to various lawsuits, claims, mechanics liens and administrative proceedings that arise out of the normal course of business.
Management does not believe that the liens, if any, will have a material adverse effect on our results of operations.
Health, Safety and Environmental Matters
All of our operations and properties are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things,
the generation, storage, handling, use and transportation of petroleum and hazardous substances; the emission and discharge of materials into the environment;
waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of greenhouse gas emissions. Our
operations also require numerous permits and authorizations under various environmental, health and safety laws and regulations. Failure to obtain and comply
with these permits or environmental, health or safety laws generally could result in fines, penalties or other sanctions, or a revocation of our permits.
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Blue Dolphin Energy Company & Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(23) Subsequent Events
On March 25, 2015, Sovereign and LRM amended the Sovereign Loan pursuant to a Loan Modification Agreement. Under the Loan Modification Agreement, the
interest rate on the Sovereign Loan was modified to be the greater of the U.S. Prime Rate plus 2.75% or 6.00%. In addition, the maturity date of the Sovereign
Loan was extended to March 25, 2017. Pursuant to the Loan Modification Agreement, the monthly payment due under the Sovereign Loan is $61,665 plus
interest. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (13) Long-Term Debt” of this report for additional information related to the
Sovereign Loan.
Remainder of Page Intentionally Left Blank
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports
we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time
periods specified by SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including
the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions
regarding required disclosure. Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive
officer) and interim Chief Financial Officer (principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on our evaluation, the Chief
Executive Officer (principal executive officer) and interim Chief Financial Officer (principal financial officer) have concluded that these controls and procedures
were ineffective for the reasons set forth below as of the end of the period covered by this report to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms
of the SEC.
Management’s Report on Internal Control over Financial Reporting
Management’s Responsibility
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in
the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management’s Assessment
Management, under the supervision and with the participation of our Chief Executive Officer (principal executive officer) and interim Chief Financial Officer
(principal financial officer), assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework.
In connection with such evaluation, management concluded that our internal control over financial reporting was ineffective as of December 31, 2014 due to
certain material weaknesses described below:
•
•
•
Inadequate personnel resources to handle complex accounting transactions, which can result in errors related to the recording, disclosure and
presentation of consolidated financial information in quarterly, annual and other filings;
Lack of formally documented accounting policies and procedures; and
Inadequate personnel resources to ensure a complete segregation of duties within the accounting function.
We intend to take the necessary measures to continue development and implementation of formal policies, improved processes, documented procedures, as well
as the continued hiring of additional personnel to better define segregation of duties and improve financial reporting. The actions that we are taking are subject to
ongoing senior management review, as well as Audit Committee oversight. Although we plan to complete this remediation process as quickly as possible, we
cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating all material weakness.
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Changes in Internal Control over Financial Reporting
Other than as described above, there was no change over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15(d)-
15(d) of the Exchange Act that occurred during the year ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Exemption from Management's Report on Internal Control over Financial Reporting for 2013
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in
this annual report.
ITEM 9B. OTHER INFORMATION
None.
Remainder of Page Intentionally Left Blank
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Structure and Management
In connection with our reverse merger with Lazarus Energy, LLC (“LE”) in 2012, whereby, Blue Dolphin Energy Company (referred to herein, with its
predecessors and subsidiaries, as “Blue Dolphin,” “BDEC,” “we,” “us” and “our”) acquired the Nixon Facility, we:
(i) issued 8,426,456 shares of our common stock, par value $0.01 per share (the “Common Stock”) to Lazarus Energy Holdings, LLC (“LEH”) as
consideration. As a result, LEH, our controlling shareholder, owns approximately 81% of our Common Stock. Jonathan P. Carroll, Chairman of the Board of
Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH; and
(ii) entered into a Management Agreement dated and effective February 12, 2012 with LEH. Pursuant to the Management Agreement, LEH manages our
property and the property of our subsidiaries, including the Nixon Facility, in the ordinary course of business. On May 12, 2014, the Management Agreement
was amended to: (a) extend the term to August 12, 2015, and (b) change the name of the agreement from “Management Agreement” to “Operating
Agreement” (the “Operating Agreement”).
Under to the Operating Agreement, LEH provides us with personnel, among other services, in capacities equivalent to Chief Executive Officer and interim Chief
Financial Officer.
Board Composition
The amended and restated bylaws of Blue Dolphin provide that the Board shall consist of five members, with the precise number to be determined from time to
time by the Board, except that no decrease in the number shall have the effect of shortening the term of an incumbent director.
At a meeting of the Board on May 5, 2014, John N. Goodpasture, A. Haag Sherman, and Ivar Siem notified the Board that they would not stand for re-election to
the Board, effective June 4, 2014. Messrs. Siem, Goodpasture, and Sherman’s decision not to stand for re- election was not due to any disagreement with Blue
Dolphin, including with respect to any matter relating to Blue Dolphin’s operations, policies, or practices.
The Board currently has four directors, each serving until the next annual meeting of stockholders to be held by the Company. There is currently one vacancy on
the Board. The Board plans to fill the vacancy in due course following the selection of a suitable candidate, in accordance with our Amended and Restated By-
Laws. The following sets forth, as of March 31, 2015, each director’s name, age, principal occupation and directorships during the past five (5) years, as well as
their relevant knowledge and experience that led to their appointment to the Board:
Name, Age
Principal Occupation and Directorships During Past 5 Years
Jonathan P. Carroll, 53
Blue Dolphin Energy Company
Chief Executive Officer, President,
Assistant Treasurer and Secretary (since 2012)
Lazarus Energy Holdings, LLC
President and majority owner (since 2006)
LEH owns approximately 81% of our Common Stock
Knowledge and Experience
Mr. Carroll earned a Bachelor of Arts degree in Human
Biology and a Bachelor of Arts degree in Economics from
Stanford University, and he completed a Directed Reading in
Economics at Oxford University. Based on his educational
and professional experiences, Mr. Carroll possesses
particular knowledge and experience in business
management, finance and business development that
strengthen the Board’s collective qualifications, skills and
experience.
Mr. Carroll has served on Blue Dolphin’s Board since 2014. He is currently Chairman of the
Board. Since 2004, Mr. Carroll has served on the Board of Trustees of the Salient Fund Group,
and has served on the compliance, audit and nominating committees of several of its private and
public closed-end and mutual funds. In January 2014, Mr. Carroll was appointed to serve on the
Board of Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE).
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Name, Age
Principal Occupation and Directorships During Past 5 Years
Amitav Misra, 38
Cardinal Advisors
Founding Partner (since 2014)
Taxa, Inc.
President, Director and Chief Operating Officer (2012 to 2014)
EnerNOC, Inc.
Sales and Marketing (2011 to 2012)
Private Investment Partnership
Partner (2007 to 2011)
Mr. Misra has served on Blue Dolphin’s Board since 2014. He is currently a member of the Audit
and Compensation Committees, as well as a member of the Special Committee on MLP
Conversion. Mr. Misra serves as an advisor to several start-up companies and as a mentor to
SURGE Accelerator.
Chris T. Morris , 53
Tatum (a Randstad Company)
New York Managing Partner (since 2013)
MPact Partners
President (2011 to 2013)
Freddie Mac
Vice President (various divisions) (2000 to 2010)
Mr. Morris has served on Blue Dolphin’s Board since 2012; he is currently a Chairman of the Audit
and Compensation Committees, as well as Chairman of the Special Committee on MLP
Conversion.
Herbert N. Whitney , 74
Wildcat Consulting, LLC
Founder and President (since 2006)
Mr. Whitney has served on Blue Dolphin’s Board since 2012. He previously served on the Board
of Directors of Blackwater Midstream Corporation, the Advisory Board of Sheetz, Inc., as
Chairman of the Board of Directors of Colonial Pipeline Company and as Chairman of the
Executive Committee of the Association of Oil Pipelines.
Knowledge and Experience
Mr. Misra earned a Bachelor of Arts in Economics from
Stanford University. From 2007 to 2012, he worked as an
independent strategy and corporate finance consultant to
companies in the energy industry, and in a private
investment partnership focused on real estate and energy
investments. During that period he also worked at
EnerNOC, Inc., a leading energy technology company, in
sales and marketing roles. From 2006 to 2007, Mr. Misra
helped develop and execute the initial business plan for
LEH. Prior to LEH, he was a consultant in the Houston
office of McKinsey & Co. He began his career in 2000 at the
View Group, L.P. Mr. Misra possesses particular knowledge
and experience in economics, business development,
private equity, and strategic planning that strengthen the
Board’s collective qualifications, skills and experience.
Mr. Morris earned a Bachelor of Arts in Economics from
Stanford University and a Masters in Business Administration
from the Harvard Business School. Based on his educational
and professional experiences, Mr. Morris possesses
in business
particular
finance, strategic planning and business
management,
development
the Board’s collective
that strengthen
qualifications, skills and experience.
knowledge and experience
Mr. Whitney has more than 40 years of experience in
pipeline operations, crude oil supply, product supply,
distribution and trading, as well as marine operations and
logistics having served as the President of CITGO Pipeline
Company and in various general manager positions at
CITGO Petroleum Corporation. He earned his Bachelor of
Science in Civil Engineering from Kansas State University.
Based on his educational and professional experiences, he
possesses extensive knowledge
the supply and
distribution of crude oil and petroleum products, which
strengthens the Board’s collective qualifications, skills and
expertise.
in
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Executive Officers
The following sets forth, as of March 31, 2015, the name and age of each executive officer, as well as their principal occupation during the past five (5) years:
Name
Position
Jonathan P. Carroll
Tommy L. Byrd
Chief Executive Officer, President, Assistant Treasurer, and Secretary
Interim Chief Financial Officer, Treasurer, and Assistant Secretary
Since
2014
2012
Age
53
57
Jonathan P. Carroll was appointed Chairman of the Board of Blue Dolphin in June 2014, and he was appointed Chief Executive Officer, President, Assistant
Treasurer and Secretary of Blue Dolphin in February 2012. He has also served as President of LEH since 2006 and is its majority owner. LEH owns
approximately 81% of Blue Dolphin’s Common Stock. Before founding LEH, Mr. Carroll was a private investor focused on direct debt and equity investments,
primarily in distressed assets. Since 2004, he has served on the Board of Trustees of Salient Fund Group, and has served on the compliance, audit and
nominating committees of several of Salient’s private and public closed-end and mutual funds. In January 2014, Mr. Carroll was appointed to serve on the Board
of Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE). He earned a Bachelor of Arts degree in Human Biology and a Bachelor of Arts degree in
Economics from Stanford University, and he completed a Directed Reading in Economics at Oxford University.
Tommy L. Byrd was appointed Interim Chief Financial Officer, Treasurer and Assistant Secretary of Blue Dolphin in 2012 having previously served as our
Controller since November 2011. He is also an employee of LEH, where he has served since 2006. Mr. Byrd has extensive financial management, accounting
and internal audit experience in the energy industry. Prior to joining LEH, he served as Chief Financial Officer of Baard Energy LLC from 2004 to 2006. From
2000 to 2004, he was Project Audit Manager at TXU Energy. From 1987 to 1998, Mr. Byrd held various positions, including Controller, at MG Trade Finance
Corp. He earned a Bachelor of Business Administration in Accounting from Stephen F. Austin State University.
Family Relationships between Directors and Officers
As of March 31, 2015, there were no family relationships between any of our directors or executive officers.
Committees and Meetings of the Board
Board
Through June 2014, the Board previously consisted of Messrs. Goodpasture, Morris, Sherman, Siem and Whitney with Mr. Siem serving as Chairman. The
Board currently consists of Messrs. Carroll, Morris, Whitney and Misra with Mr. Carroll serving as Chairman. During 2014, the Board held two regular meetings
and two special meetings. Each director attended at least 75% of the total number of meetings of the Board and committees on which he served. The Board has
two standing committees, the Audit Committee and the Compensation Committee. In February 2013, the Board established a Special Committee of the Board on
Master Limited Partnership (“MLP”) Conversion the purpose of which is to oversee a potential conversion of Blue Dolphin from a Delaware “C” corporation to a
Delaware MLP.
Audit Committee
Through June 2014, the Audit Committee previously consisted of Messrs. Goodpasture, Morris and Sherman with Mr. Sherman serving as Chairman. The Audit
Committee currently consists of Messrs. Morris and Misra with Mr. Morris serving as Chairman. During 2014, the Audit Committee met four times. The Board
has affirmatively determined that all members of the Audit Committee are independent and that Mr. Morris qualifies as an Audit Committee Financial Expert. The
Audit Committee's duties include overseeing financial reporting and internal control functions, which are outlined in the Audit Committee’s charter. The Audit
Committee charter is available on our website (http://www.blue-dolphin-energy.com).
Compensation Committee
Through June 2014, the Compensation Committee previously consisted of Messrs. Goodpasture, Morris and Sherman with Mr. Sherman serving as
Chairman. The Compensation Committee currently consists of Messrs. Morris and Misra with Mr. Morris serving as Chairman. During 2014, the Compensation
Committee did not meet. The Board has affirmatively determined that all members of the Compensation Committee are independent. The Compensation
Committee does not have a charter, however, its duties are to oversee and set our compensation policies, to approve compensation of our executive officers and
to administer our stock incentive plan.
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MLP Conversion Special Committee
In February 2013, the Board formed a special committee to conduct a strategic review of the feasibility of optimizing value for stockholders by converting Blue
Dolphin from a publicly traded “C” corporation to a publicly traded MLP. Through June 2014, the MLP Conversion Special Committee consisted of Messrs.
Goodpasture, Morris and Sherman with Mr. Morris serving as Chairman. The MLP Conversion Special Committee currently consists of Messrs. Morris and Misra
with Mr. Morris serving as Chairman. The MLP Conversion Special Committee did not meet during 2014. The Board has affirmatively determined that all current
members of the MLP Conversion Special Committee are independent. Upon completion of its review, the MLP Conversion Special Committee will make a
recommendation to the Board. There can be no assurance that the MLP Conversion Special Committee’s review will result in a proposal for or subsequent
completion of a corporate reorganization of Blue Dolphin.
Nominating Committee
Given the size of the Board, the Board adopted a “Board Nomination Procedures” policy in July 2005 in lieu of appointing a standing nominating committee. The
policy is used by independent members of the Board when choosing nominees to stand for election.
The Board will consider for possible nomination qualified nominees recommended by stockholders. As addressed in the “Board Nomination Procedures” policy,
the manner in which independent directors evaluate nominees for director as recommended by a stockholder will be the same as that for nominees received from
other sources.
The Board will continue to nominate qualified directors of whom the Board believes will make important contributions to the Board and to Blue Dolphin. The Board
generally requires that nominees be persons of sound ethical character, be able to represent all stockholders fairly, have demonstrated professional
achievements, have meaningful experience and have a general appreciation of the major business issues facing us. The Board also considers issues of diversity
and background in its selection process, recognizing that it is desirable for its membership to have differences in viewpoints, professional experiences,
educational backgrounds, skills, race, gender, age and national origin.
Corporate Governance
Leadership Structure
Blue Dolphin is led by Jonathan Carroll, who has served as Chairman of the Board since June 2014 and Chief Executive Officer and President since 2012.
Having a single leader is commonly utilized by other public companies in the United States, and we believe it has been effective for Blue Dolphin as well. This
leadership structure demonstrates to our personnel, customers and stockholders that we are under strong leadership, with a single person setting the tone and
having primary responsibility for managing our operations, and eliminates the potential for confusion or duplication of efforts. We do not believe that appointing an
independent Board chairman, or a permanent lead director, would improve upon the performance of the Board.
Risk Oversight
Our Board is actively involved in overseeing Blue Dolphin’s risk management. Presentations by management to the Board include consideration of the challenges
and risks to our business, and the Board and management actively engage in discussion on these topics. Furthermore, the two standing Board committees
provide appropriate risk oversight. The Audit Committee oversees the accounting and financial reporting processes, as well as compliance, internal control, legal
and risk matters. The Compensation Committee oversees compensation policies, including the approval of compensation for the Board and its committees, as
well as management members. We believe that the processes established to report and monitor systems for material risks applicable to us are appropriate and
effective.
Code of Ethics and Code of Conduct
In compliance with the Sarbanes-Oxley Act of 2002, the Board adopted a code of ethics policy in 2003 and a code of conduct policy in 2005. The Audit
Committee established procedures to enable anyone who has a concern about our conduct, policies, accounting, internal controls over financial reporting, and/or
auditing matters to communicate that concern directly to the Chairman of the Audit Committee. The code of ethics and code of conduct policies are available to
any stockholder, without charge, upon written request to Blue Dolphin Energy Company, Attention: Audit Committee Chairman, 801 Travis Street, Suite 2100,
Houston, Texas 77002. Our code of ethics and code of conduct policies are available on our website (http://www.blue-dolphin-energy.com). Any amendments or
waivers to provisions of our code of ethics and code of conduct policies will be incorporated in revised policies as posted on our website.
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Communicating with Directors
As the Board does not receive a large volume of correspondence from stockholders, at this time, there is no formal process by which stockholders can
communicate directly with the Board. Instead, any stockholder who desires to contact the Board or specific members of the Board may do so by writing to: Blue
Dolphin Energy Company, Attention: Secretary for the Board, 801 Travis Street, Suite 2100, Houston, Texas 77002. Currently, all communications addressed in
such manner are sent directly to the indicated directors. In the future, if the Board adopts a formal process for determining how communications are to be relayed
to directors, that process will be disclosed on Form 8-K as filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Policy and Procedures
Under to the Operating Agreement, LEH provides us with personnel, among other services, in capacities equivalent to Chief Executive Officer and interim Chief
Financial Officer. All Blue Dolphin personnel work for and are paid directly by LEH. Blue Dolphin is billed at cost by LEH for certain personnel associated with
BDPL.
Compensation for Named Executives
Pursuant to the Operating Agreement, compensation paid to our principal executive officer, principal financial officer, and the most highly compensated executive
officers other than the principal executive officer and principal financial officer whose annual salary exceeded $100,000 in the fiscal year ended December 31,
2014 for services rendered to Blue Dolphin follows:
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary
Option Awards
Total
Jonathan P. Carroll
Chief Executive Officer and President
Tommy L. Byrd(1)
Interim Chief Financial Officer
2014
2013
2014
2013
$
$
$
$
-
-
100,000
100,000
$
$
$
$
-
-
-
-
$
$
$
$
-
-
100,000
100,000
(1) Mr. Byrd works for and is paid directly by LEH. However, a portion of his compensation is billed to Blue Dolphin at cost pursuant to the Operating
Agreement.
Compensation Risk Assessment
LEH’s approach to compensation practices and policies applicable for executive and non-executive personnel throughout our organization is consistent with the
base pay market median for each position. LEH believes its practices and policies in this regard are not reasonably likely to have a materials adverse effect on
us.
Outstanding Equity Awards
None.
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Director Compensation Policy and Procedures
Under to the Operating Agreement, LEH provides us with personnel, among other services, in capacities equivalent to Chief Executive Officer and interim Chief
Financial Officer. As a result, we do not have any directors that are also personnel of Blue Dolphin. Compensation for members of the Board and committees of
the Board is approved by the Board based on recommendations by Mr. Carroll as Chairman of the Board.
Compensation for Non-Employee Directors
During 2014, the annual retainer payable to non-employee directors serving on the Board was decreased from $50,000 to $40,000 per year. Payments are
made: (i) in Common Stock and cash on a quarterly rotating basis. Non-employee directors are entitled to receive Blue Dolphin Common Stock with a fair value
of $10,000 in the first and third quarters of each year. The number of shares of Common Stock issued is determined by the closing price of Blue Dolphin’s
Common Stock on the last trading day in the respective quarterly period. The shares of Common Stock are restricted pursuant to applicable securities holding
periods for affiliates. Non-employee directors are also entitled to receive cash payments in the amount of $10,000 in the second and fourth quarters of each year.
Additional compensation is paid to non-employee directors serving on the Audit Committee and the MLP Special Committee. The chairman of the Audit
Committee and the MLP Conversion Special Committee are each entitled to receive an annual retainer of $5,000 in cash in the second and fourth quarters of
each year. Members of the Audit Committee and the MLP Conversion Special Committee are entitled to receive an annual retainer of $2,500 in cash in the
second and fourth quarters of each year. Non-employee directors serving on the Compensation Committee are not entitled to compensation. Non-employee
directors are entitled to reimbursement for reasonable out-of-pocket expenses related to in-person meeting attendance.
The following table sets forth the compensation earned by non-employee directors during the year ended December 31, 2014:
Name
John N. Goodpasture
Amitav Misra
Chris T. Morris
A. Haag Sherman
Ivar Siem
Herbert N. Whitney
Fees Earned
Payable in Common
Stock Awards(1)
Payable in Cash
$
$
12,500 $
10,000
22,500
12,500
25,000
12,500
95,000 $
13,214
15,714
33,929
15,357
17,857
8,929
105,000
(1) Effective June 4, 2014, Messrs. Goodpasture, Sherman and Siem resigned from the Board. At June 4, 2014, Messrs. Goodpasture, Sherman and Siem had
total restricted awards of Common Stock outstanding of 37,067, 9,683 and 93,040, respectively. At December 31, 2014, Messrs. Misra, Morris and Whitney
had total restricted awards of Common Stock outstanding of 1,613, 9,872 and 9,683, respectively.
Remainder of Page Intentionally Left Blank
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The table below sets forth information with respect to persons or groups known to us to be the beneficial owners of more than five percent (5%) of our Common
Stock as of the December 31, 2014. Unless otherwise indicated, each named party has sole voting and positive power with respect to such shares.
Title of Class
Name of Beneficial Owner
Amount and
Nature of
Beneficial
Ownership Percent of Class(1)
Common Stock
Lazarus Energy Holdings, LLC
8,426,456
80.6%
(1) Based upon 10,449,444 shares of our Common Stock (10,599,444 shares of Common Stock issued less 150,000 shares of Common Stock held
in treasury as of December 31, 2014.)
Security Ownership of Management
The table below sets forth information as of December 31, 2014 with respect to: (i) directors, (ii) executive officers and (iii) directors and executive officers as a
group beneficially owning our Common Stock. Unless otherwise indicated, each of the following persons has sole voting and dispositive power with respect to
such shares.
Title of Class
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Name of Beneficial Owner
Jonathan P. Carroll(2)
Christopher T. Morris
Herbert N. Whitney
Amitav Misra
Tommy L. Byrd
Directors/Nominees and Executive Officers as a Group (5 Persons)
Amount and
Nature of
Beneficial
Ownership Percent of Class(1)
8,426,598
9,872
9,683
1,613
---
8,447,766
80.6%
*
*
*
---
80.8%
(1)
(2)
*
Based upon 10,449,444 shares of Common Stock outstanding (10,599,444 shares of Common Stock issued less 150,000 shares of Common Stock held
in treasury as of December 31, 2014). At December 31, 2014, there were no options outstanding, no options exercisable or no shares of Common Stock
reserved for issuance under the 2000 Stock Incentive Plan.
Includes 8,426,456 shares issued to Lazarus Energy Holdings, LLC (“LEH”). Mr. Carroll is the majority owner of LEH.
Less than 1%.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and stockholders who own more than ten percent (10%) of our Common Stock to file
reports of stock ownership and changes in ownership with the SEC and to furnish us with copies of all such reports as filed. Based solely on a review of the
copies of the Section 16(a) reports furnished to us, we are unaware of any late filings made during 2014.
Equity Compensation Plan Information
None.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
LEH, our controlling shareholder, owns approximately 81% of Common Stock. Jonathan Carroll, Chairman of the Board, Chief Executive Officer, and President
of Blue Dolphin, is the majority owner of LEH. LEH manages all of our subsidiaries and operates all of our assets, including the Nixon Facility, (the “Services”)
pursuant to the Operating Agreement.
With respect to the Nixon Facility, the Operating Agreement covers all refinery operating expenses with the exception of capital expenditures. Pursuant to the
Operating Agreement, for management and operation of the Nixon Facility LEH receives as compensation: (i) weekly payments from GEL not to exceed
$750,000 per month, (ii) reimbursement for certain accounting costs related to the preparation of financial statements of LE not to exceed $50,000 per month, (iii)
$0.25 for each barrel processed at the Nixon Facility during the term of the Operating Agreement, up to a maximum quantity of 10,000 barrels per day
determined on a monthly basis, and (iv) $2.50 for each barrel in excess of 10,000 barrels per day processed at the Nixon Facility during the term of the Operating
Agreement, determined on a monthly basis. For all other assets, LEH is reimbursed at cost for all reasonable expenses incurred while performing the Services.
All compensation owed to LEH under the Operating Agreement is to be paid to LEH within 30 days of the end of each calendar month.
The Operating Agreement expires upon the earliest to occur of: (a) the date of the termination of the Joint Marketing Agreement pursuant to its terms, (b) August
12, 2015, or (c) upon written notice of either party to the Operating Agreement of a material breach of the Operating Agreement by the other party.
Aggregate amounts expensed for Services at the Nixon Facility for the years ended December 31, 2014 and 2013 were $10,698,023 (approximately $2.77 per
barrel of throughput) and $10,673,722 (approximately $2.79 per barrel of throughput), respectively.
At December 31, 2014 and 2013, the amounts outstanding to LEH to fund our working capital requirements were $1,174,168 and $3,659,340, respectively, and
are reflected in accounts payable, related party in our consolidated balance sheets.
Director Independence
The Board has affirmatively determined that each of its members, with the exception of Messrs. Carroll and Whitney are independent and have no material
relationship with us (either directly or indirectly or as a stockholder or officer of an organization that has a relationship with us), and that all members of the Audit
and Compensation Committees are independent, pursuant to NASDAQ Listing and SEC rules. Mr. Whitney serves as a consultant to LEH.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees paid to UHY by us in the years ended December 31, 2014 and 2013 were as follows:
Audit fees
Audit-related fees
Tax fees
2014
2013
192,860
-
-
192,860
$
$
267,205
5,915
-
273,120
$
$
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Audit fees for 2014 and 2013 related to the audit of our consolidated financial statements and the review of our quarterly reports that are filed with the SEC.
Audit-related fees for 2013 were for consultation services related to our contemplated MLP conversion. The Audit Committee must pre-approve all audit and non-
audit services provided to us by our independent registered public accounting firm.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report
PART IV
3. Exhibits. We hereby file as part of this report the Exhibits listed in the attached Exhibit Index.
Exhibit No.
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
Description
Amended and Restated Certificate of Incorporation of Blue Dolphin. (1)
Amended and Restated By-Laws of Blue Dolphin. (2)
Specimen Stock Certificate. (3)
Form of Promissory Note issued pursuant to the Note and Warrant Purchase Agreement dated September 8, 2004. (4)
Promissory Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin dated July 31, 2009. (5)
Blue Dolphin 2000 Stock Incentive Plan. (6) *
First Amendment to the Blue Dolphin 2000 Stock Incentive Plan. (7) *
Second Amendment to the Blue Dolphin 2000 Stock Incentive Plan. (8) *
Fourth Amendment to the Blue Dolphin 2000 Stock Incentive Plan. (9) *
Sale of American Resources Offshore, Inc. Common Stock Agreement between Blue Dolphin Exploration Co. and Ivar Siem, dated September
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
8, 2004. (4)
Purchase and Sale Agreement by and between Blue Dolphin Pipe Line Company and MCNIC, dated February 1, 2002.
Purchase and Sale Agreement by and between Blue Dolphin, WBI Pipeline & Storage Group, Inc. and SemGas LP, dated October 29, 2004.
(10)
(11)
Amendment to the Asset Purchase Agreement by and among MCNIC Offshore Pipeline and Processing Company and Blue Dolphin Pipe Line
Company dated February 28, 2005. (12)
Asset Sale Agreement by and among WBI Energy Midstream, LLC and Blue Dolphin Pipeline Company dated February 5, 2014. **
Placement Agency Agreement by and between Blue Dolphin and Starlight Investments, LLC dated May 27, 2005. (13)
Form of Stock Purchase Agreement between Blue Dolphin and Osler Holdings Limited, Gilbo Invest AS, Spencer Energy AS, Spencer Finance
Corp., Hudson Bay Fund, LP, Don Fogel and SIBEX Capital Fund, Inc. dated March 8, 2006. (14)
Loan and Option Agreement by and among Lazarus Energy Holdings, LLC, Lazarus Louisiana Refinery II, LLC, Lazarus Energy, LLC, Lazarus
Environmental, LLC, and Blue Dolphin dated July 31, 2009. (15)
Sale and Purchase Agreement by and among Blue Dolphin Exploration Company, Blue Sky Langsa Limited and Blue Sky Energy and Power
Inc. dated July 21, 2010. (16)
Option Agreement by and among Blue Dolphin Exploration Company, Blue Sky Langsa Limited and Blue Sky Energy and Power Inc. dated July
21, 2010. (17)
Sale and Purchase Agreement by and among Blue Dolphin Exploration Company and Blue Sky Langsa Limited dated November 6, 2012.
Escrow Agreement by and among Blue Dolphin Exploration Company, Blue Sky Langsa Limited and Doherty & Doherty, LLC dated November
(18)
6, 2012. (19)
Assignment Agreement by and among Blue Dolphin Exploration Company and Blue Sky Langsa Limited dated November 6, 2012.
Asset Purchase Agreement by and among Sunoco Partners Marketing & Terminals L.P. and Blue Dolphin Pipe Line Company and Bitter Creek
(20)
Pipelines, LLC dated August 3, 2011. (21)
Master Easement Agreement effective as of December 11, 2013 by and between Blue Dolphin Pipe Line Company and FLNG Land, II, Inc.
(22)
Letter of Intent effective as of December 11, 2013 by and between Blue Dolphin Pipe Line Company and Freeport LNG Expansion, L.P.
(23)
Purchase and Sale Agreement dated July 12, 2011 by and among Blue Dolphin, Lazarus Energy Holdings, LLC, Lazarus Louisiana Refinery II,
LLC, Lazarus Texas Refinery II, LLC, Lazarus Environmental, LLC, Lazarus Energy, LLC and Lazarus Energy Development, LLC. (24)
Management Agreement by and between Lazarus Energy Holdings, LLC, Lazarus Energy, LLC and Blue Dolphin effective as of February 15,
2012. (25)
Amendment No. 1 to Management Agreement dated May 12, 2014 by and among Lazarus Energy Holdings, LLC, Blue Dolphin and Lazarus
Energy, LLC. (26)
Crude Oil Supply and Throughput Services Agreement by and between GEL Tex Marketing, LLC and Lazarus Energy, LLC dated as of August
12, 2011. (27)
Construction and Funding Contract by and between Lazarus Energy, LLC dated as of August 12, 2011. (28)
Joint Marketing Agreement by and between GEL Tex Marketing, LLC and Lazarus Energy, LLC dated as of August 12, 2011.
Letter Agreement dated September 12, 2011 between GEL Tex Marketing, LLC, Milam Services, Inc., 1 st International Bank, Lazarus Energy
(29)
LLC and Lazarus Energy Holdings LLC. (30)
Acknowledgment Letter between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated June 1, 2012. (31)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated June 25, 2012. (32)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated July 30, 2012. (33)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated August 1, 2012. (34)
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10.32
10.33
10.34
10.35
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
Letter Agreement dated June 10, 2012 between Lazarus Energy Holdings, LLC and Blue Dolphin Energy Company.
Letter Agreement dated December 20, 2012 between Lazarus Energy, LLC, GEL Tex Marketing, LLC and Milam Services, Inc. (36)
Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013. (37)
Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013. (38)
Letter Agreement Regarding Certain Advances and Related Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC, and Milam
(35)
Services, Inc., effective October 24, 2013. (39)
Loan Agreement dated September 29, 2008 among 1 st International Bank as Lender, Lazarus Energy LLC as Borrower and Jonathan Pitts
Carroll, Sr. and Lazarus Energy Holdings LLC as Guarantors. (40)
Forbearance Agreement dated August 12, 2011 by and among 1 st International Bank, Lazarus Energy LLC, Jonathan P. Carroll, Gina L.
Carroll, Lazarus Energy Holdings, LLC, GEL Tex Marketing, LLC and Milam Services, Inc. (41)
Letter from American First National Bank to Lazarus Energy, LLC dated as of December 13, 2012. (42)
Note Modification Agreement effective June 1, 2013 by and between Lazarus Energy, LLC, Jonathan P. Carroll, Gina L. Carroll, Lazarus Energy
Holdings, LLC, GEL TEX Marketing, LLC, Milam Services, Inc. and American First National Bank. (43)
Letter from American First National Bank to Lazarus Energy, LLC dated as of July 24, 2013. (44)
Promissory Note between Lazarus Energy LLC as maker and Notre Dame Investors Inc. as Payee in the Principal Amount of $8,000,000 dated
June 1, 2006. (45)
Subordination Agreement effective August 21, 2008 by Notre Dame Investors, Inc. in favor of First International Bank. (46)
Intercreditor and Subordination Agreement dated September 29, 2008 by and between Notre Dame Investors, Inc., Richard Oberlin, Lazarus
Energy LLC and First International Bank. (47)
Intercreditor and Subordination Agreement dated August 12, 2011 by and among John H. Kissick, Lazarus Energy LLC and Milam Services,
Inc. (48)
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
14.1
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
_______________
First Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of July 1, 2013. (49)
Second Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of October 1, 2014. **
Loan and Security Agreement dated March 2, 2014 by and between Lazarus Refining & Marketing, LLC and Sovereign Bank.
(50)
Deed of Trust, Security Agreement, Assignment of Leases, Assignment of Rents, and Financing Statement dated May 2, 2014. (51)
Guaranty Agreement dated May 2, 2014 by Jonathan P. Carroll and Ingleside Crude LLC for the benefit of Sovereign Bank. (52)
Pledge Agreement dated May 2, 2014 between Sovereign Bank and Lazarus Energy Holdings, LLC. (53)
Promissory Note payable to Sovereign Bank dated May 2, 2014. (54)
Collateral Assignment dated May 2, 2014 by Lazarus Refining & Marketing, LLC for the benefit of Sovereign Bank. (55)
Collateral Assignment dated May 2, 2014 by Lazarus Refining & Marketing, LLC for the benefit of Sovereign Bank. (56)
Code of Ethics applicable to the Chairman, Chief Executive Officer and Senior Financial Officer. (57)
List of Subsidiaries of Blue Dolphin. **
Consent of UHY LLP. **
Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. **
Tommy L. Byrd Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. **
Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. **
Tommy L. Byrd Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. **
XBRL Instance Document. **
XBRL Taxonomy Schema Document. **
XBRL Calculation Linkbase Document. **
XBRL Label Linkbase Document. **
XBRL Presentation Linkbase Document. **
XBRL Definition Linkbase Document. **
* Management Compensation Plan.
** Filed herewith
(1)
(2)
Incorporated herein by reference to Exhibit 3.1 filed in connection with the Form 8-K of Blue Dolphin under the Exchange Act dated June 2, 2009
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 3.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated December 26, 2007
(Commission File No. 000-15905).
84
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
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(19)
(20)
(21)
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Incorporated herein by reference to exhibits filed in connection with Form 10-K of Blue Dolphin for the year ended December 31, 1989 under the
Exchange Act dated March 30, 1990 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.4 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated September 14, 2004
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated August 6, 2009
(Commission File No. 000-15905).
Incorporated herein by reference to Appendix 1 filed in connection with the Proxy Statement of Blue Dolphin under the Exchange Act dated April 20, 2000
(Commission File No. 000-15905).
Incorporated herein by reference to Appendix B filed in connection with the definitive Proxy Statement of Blue Dolphin under the Exchange Act dated April
16, 2003 (Commission File No. 000-15905).
Incorporated herein by reference to Appendix A filed in connection with the definitive Proxy Statement of Blue Dolphin under the Exchange Act dated April
27, 2006 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit B filed in connection with the definitive Proxy Statement of Blue Dolphin under the Exchange Act dated
December 28, 2011 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.20 filed in connection with Form 10-KSB of Blue Dolphin under the Exchange Act dated March 21, 2003
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 3, 2004
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated March 3, 2005
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.9 filed in connection with Form 10-KSB of Blue Dolphin for the year ended December 31, 2005 under the
Exchange Act dated March 30, 2006 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.10 filed in connection with Form 10-KSB of Blue Dolphin for the year ended December 31, 2005 under the
Exchange Act dated March 30, 2006 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated August 6, 2009
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated July 21, 2010
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated July 21, 2010
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 13, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 13, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.3 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 13, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.15 filed in connection with Form 10-K of Blue Dolphin under the Exchange Act dated March 30, 2011.
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 5, 2014
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated November 5, 2014
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated July 22, 2011
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Amendment No. 1 to Form 8-K of Blue Dolphin under the Exchange Act dated
March 14, 2012 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 16, 2014
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.3 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.4 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.4 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.5 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.6 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.7 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated June 30, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated June 14, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.35 filed in connection with Form 10-K of Blue Dolphin under the Exchange Act dated March 30,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated August 14,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated May 15,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated November 14,
2013 (Commission File No. 000-15905).
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
85
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(40)
(41)
(42)
(43)
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
(52)
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(56)
(57)
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.5 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated August 14,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated August 14,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.3 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated August 14,
2013 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.6 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.3 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.7 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated March 31, 2012
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 10-Q of Blue Dolphin under the Exchange Act dated November 14, 2013
(Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.1 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.2 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.3 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.4 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.5 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.6 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 10.7 filed in connection with Form 8-K of Blue Dolphin under the Exchange Act dated May 8,
2014 (Commission File No. 000-15905).
Incorporated herein by reference to Exhibit 14.1 filed in connection with Form 10-KSB of Blue Dolphin for the year ended December 31, 2004 31, 2004
under the Exchange Act dated March 25, 2005 (Commission File No. 000-15905).
86
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 31, 2015
BLUE DOLPHIN ENERGY COMPANY
(Registrant)
By:
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President
Assistant Treasurer and Secretary
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
/s/ TOMMY L. BYRD
Tommy L. Byrd
/s/ AMITAV MISRA
Amitav Misra
/s/ CHRIS T. MORRIS
Chris T. Morris
/s/ HERBERT N. WHITNEY
Herbert N. Whitney
Chairman of the Board, Chief Executive Officer,
President, Assistant Treasurer and Secretary
(Principal Executive Officer)
Interim Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
Director
Director
Director
87
Date
March 31, 2015
March 31, 2015
March 31, 2015
March 31, 2015
March 31, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 10.9
Execution Version
This Asset Sale Agreement (the "Agreement') is entered into by and among W B I Energy Midstream, LLC, a Colorado limited liability company
("Seller") and Blue Dolphin Pipe Line Company, a Delaware corporation ("Buyer") on this 5 th day of February, 2014, provided that the effective date of the
transactions contemplated in this Agreement shall be October 31, 2013 (the "Effective Date").
ASSET SALE AGREEMENT
RECITALS
A. Buyer owns an 83.3% undivided beneficial interest in the herein described
Pipeline Assets and is the 100% record owner and operator of the Pipeline Assets. Seller owns the remaining 16.7% undivided beneficial interest in the Pipeline
Assets.
B. The "Pipeline Assets" consist of:
(i) A pipeline system (the "Blue Dolphin Pipeline") which includes: (A) a junction platform in Galveston Area Block 288 offshore; (B) an
approximately 193 acre surface tract of land and facilities located thereon in Brazoria County, Texas near Freeport, Texas (the
"Freeport Plant"); and (C) approximately 38 miles of 20-inch oil and natural gas pipeline running from GA 288 to the Freeport Plant
where the pipeline comes ashore;
(ii) A pipeline system (the "GA 350 Pipeline") which includes approximately 13 miles of 8-inch oil and natural gas pipeline extending from
Galveston Area Block 350 to a termination point located in Galveston Area Block 391;
(iii) An inactive pipeline system (the "Omega Pipeline") which originates in the High Island Area, East Addition Block A173 and extends to
West Cameron Block 342; and
(iv) Miscellaneous contracts, easements, rights of way, equipment and other tangible and intangible assets used, or held for use, in
connection the ownership and operation of the Blue Dolphin Pipeline, the GA 350 Pipeline and the Omega Pipeline, all as more
particularly described herein.
C. Buyer desires to purchase from Seller and Seller desires to sell to Buyer all of
Seller's right, title and interest in and to the Pipeline Assets on the terms and conditions herein set forth. For the avoidance of doubt, the parties acknowledge and
agree that it is the parties' intent that Seller sell and convey to Buyer any and all right, title and interest, beneficial or otherwise, Seller has in the assets that are
held or operated by Blue Dolphin Pipe Line Company.
NOW THEREFORE, in consideration of the premises, the mutual agreements contained herein and other good and valuable consideration the receipt
and sufficiency of which is hereby acknowledged, the parties agree as follows:
1. PIPELINE ASSETS PURCHASED AND SOLD; LIABILITIES ASSUMED.
1.1 Seller agrees to sell and convey to Buyer and Buyer agrees to purchase and accept
from Seller, on the terms and conditions set forth in this Agreement, all of Seller's right, title and interest in and to the Pipeline Assets, such Pipeline Assets being
more particularly described on the attached Schedule A. For the avoidance of doubt, Seller's interest in the Pipeline Assets sold and purchased by Buyer
hereunder shall also include all right, title and interest of Seller under that certain Master Easement Agreement dated December 11, 2013, by and between Buyer
and FLNG LAND II, LLC a Delaware limited liability company and any and all payments made or to be made thereunder to which Seller is entitled.
1.2 Seller agrees to pay Buyer One Hundred Thousand and 00/100 dollars
($100,000.00), and, in exchange, Buyer hereby assumes and agrees to duly and timely pay and discharge any and all liabilities and duly and timely perform any
and all obligations arising out of or otherwise related to the Pipeline Assets, whether existing as of Effective Date or thereafter arising, whether known or
unknown, fixed or contingent, liquidated or unliquidated including, without limitation, all outstanding invoices payable by Seller to Buyer or to any third parties.
1
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
1.3 Subject to the terms set forth in Section 3, Seller further agrees to pay Eight
Hundred Fifty Thousand and 00/100 dollars ($850,000.00) to a bonding company or companies satisfactory to the Bureau of Ocean Energy Management (the
"BOEM") to satisfy a demand by the BOEM to post one or more supplemental bonds for the decommissioning and abandonment of all, or a portion of, the
Pipeline Assets (the "Supplemental Bond Payment"). The Supplemental Bond Payment(s) shall be made by Seller directly to the bonding company or
companies providing such supplemental bond(s) upon being provided evidence reasonably satisfactory to Seller that the supplemental bond(s) will be promptly
issued by the bonding company or companies upon receipt of the Supplemental Bond Payment(s).
2. PURCHASE PRICE. In addition to the other consideration included herein, the purchase price for the Pipeline Assets is One Dollar ($1.00) (the "Purchase
Price").
3. COVENANTS OF BUYER. Buyer covenants and agrees as follows:
3.1 use the Supplemental Bond Payment solely to obtain a supplemental bond(s)
which has been formally requested by the BOEM and to maintain the supplemental(s) bond until such time as such bond is no longer required by the BOEM to
be posted;
3.2 conduct all operations for removal or abandonment of Pipeline Assets in a good
and workman-like manner and in compliance with all then applicable laws and regulations; and
3.3 duly and timely pay, or cause to be paid, all invoices of vendors, suppliers and others providing goods and services in connection with the
removal or abandonment of the Pipeline Assets, except for specific invoices that are being disputed by Buyer in good faith by appropriate proceedings.
4. TERMINATION OF CERTAIN AGREEMENTS RELATING TO THE PIPELINE ASSETS.
4.1 Buyer and Seller hereby mutually terminate the following agreements, in each
case effective as of the Effective Date: (a) that certain Amended and Restated Operating Agreement dated March 1, 1999 (the "1999 Operating Agreement"),
and (b) that certain Amendment and Merger of Operating Agreements dated January 1, 2002 (the "Amended Operating Agreement", and together with the
1999 Operating Agreement, the "Operating Agreements").
4.2 Buyer and Seller hereby mutually terminate that certain partnership for federal
income tax purposes formed pursuant to Exhibit 15.02 to the Operating Agreement, effective as of the Effective Date.
5. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to Buyer as follows:
5.1 Corporate Existence. Seller is now a limited liability company duly organized
and validly existing under the laws of the state of Colorado and is duly qualified to do business in, and is in good standing under the laws of the State of Texas.
5.2 Authorization. The execution, delivery, and performance of this Agreement is
duly authorized by all necessary action by the board of managers of Seller and this Agreement constitutes a valid and binding Agreement of Seller in accordance
with its terms.
5.3 No Warranty of Title; Liens Granted by Seller. Seller makes no warranty of
title, either express or implied, in connection with the sale of the Pipeline Assets. Buyer is solely responsible for assuring itself of the adequacy of Seller's title,
and will have no recourse against Seller in the event of any failure in title. The Seller's interest in the Pipeline Assets is free and clear of liens specifically and
consensually granted by Seller. Seller makes no representations regarding the existence or absence of liens on the Pipeline Assets granted or incurred by
others, including, without limitation, liens granted or incurred by action or inaction of Buyer as operator of the Pipeline Assets.
5.4 Brokers and Finders. Seller has not employed any broker or finder in
connection with the transaction contemplated by this Agreement, or taken action that would give rise to a valid claim against any party for a brokerage
commission, finder's fee, or other like payment.
5.5 Transfer Not Subject to Encumbrances or Third-Party Approval. To the best
of Seller's knowledge, the execution and delivery of this Agreement by Seller and the consummation of the contemplated transaction, will not result in the creation
or imposition of any valid lien, charge, or encumbrance on Seller's interest in the Pipeline Assets, and will not require the authorization, consent, or approval of
any non-governmental third party.
2
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
5.6 Disclaimer of Other Representations and Warranties. SELLER IS SELLING ITS INTEREST IN THE PIPELINE ASSETS "AS IS, WHERE
IS" WITH ALL FAULTS AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. IN PARTICULAR, NEITHER SELLER NOR ANY OF ITS
AFFILIATES, REPRESENTATIVES, OR ADVISORS HAVE MADE, OR SHALL BE DEEMD TO HAVE MADE, TO BUYER ANY REPRESENTATION OR
WARRANTY REGARDING THE PIPELINE ASSETS, EXCEPT FOR THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT. SELLER HEREBY
DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE WARRANTY OF MERCHANTABILITY,
SUITABILITY, FITNESS FOR A PARTIUCLAR PURPOSE AND ANY EXPRESS OF IMPLIED WARRANTY REGARDING ENVIRONMENTAL LAWS,
THE RELEASE OF HAZARADOUS SUBSTANCES, WASTES, OR MATERIALS INTO THE ENVIRONMENT, THE PRO 1ECTION OF THE
ENVIRONMENT OR HEALTH, OR THE ENVIRONMENTAL CONDITION OF THE PIPELINE ASSETS.
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS OF BUYER. Buyer represents, warrants, and covenants as follows:
6.1Corporate Existence. Buyer is a corporation duly organized and validly existing
under the laws of the state of Delaware and is duly qualified to do business in, and is in good standing under the laws of the State of Texas. Buyer has all
requisite power and authority to enter into this Agreement and perform its obligations hereunder pursuant to Buyer's articles of incorporation and bylaws.
6.2Authorization. The execution, delivery, and performance of this Agreement and
all related agreements being executed as part of this transaction have been duly authorized and approved by the board of directors of Buyer, and this
Agreement constitutes a valid and binding Agreement of Buyer in accordance with its terms.
6.3Brokers and Finders. Buyer has not employed any broker or finder in
connection with the transactions contemplated by this Agreement and has taken no action that would give rise to a valid claim against any party for a
brokerage commission, finder's fee, or other like payment.
6.4Independent Evaluation. Buyer represents that it is sophisticated in the
evaluation, purchase, operation, and ownership of pipelines and other facilities such as the Pipeline Assets. In making its decision to enter into this
Agreement and to consummate the contemplated transaction, Buyer represents that it has relied solely on its own independent investigation and evaluation
of the Pipeline Assets and has satisfied itself as to the physical condition and the environmental condition of the Pipeline Assets.
6.5Reliance. Buyer acknowledges and agrees that it is entitled to rely only on the
express representations and warranties of Seller set forth in this Agreement. Buyer may not rely on any other representations or warranties of Seller.
7. INDEMNIFICATION; SURVIVAL AND RELEASE.
7.1Seller's Indemnification. Seller agrees to defend, indemnify and hold Buyer, its successors, assigns, affiliates, officers, and employees harmless
from and against any and all damages resulting from any misrepresentation, breach of warranty or covenant, or nonfulfillment of any agreement on the
part of Seller under this Agreement.
7.2 Buyer's Indemnification. Buyer agrees to release, defend, indemnify and hold Seller, its successors, assigns, affiliates, officers, and
employees harmless from and against:
7.2.1 Any and all claims, liabilities, and obligations of every kind and description, fixed, contingent or otherwise, arising out of or related to
the Pipeline Assets including but not limited to the Freeport Plant and any abandonment and decommissioning liabilities, whether existing on or
arising after the Effective Date.
7.2.2 Any and all damages resulting from any misrepresentation, breach of warranty or covenant, or nonfulfillment of any agreement on the
part of Buyer under this Agreement.
7.3 Buyers Release of All Claims. Buyer does hereby release and forever discharge Seller, as well as its respective officers, directors,
shareholders, partners, subsidiaries, affiliates, employees, representatives, agents, attorneys, consultants, successors, and assigns from all theories
of recovery of whatever nature, arising on or before the Closing Date, whether presently known or unknown, recognized by the law of any
jurisdiction, including but not limited to actions, causes of action, demands, liabilities, suits, administrative proceedings, payments, charges,
obligations, and judgments, whether arising in contract or in tort, at law or in equity, or under any theory of liability including any theory of strict
liability, trespass, nuisance, breach of duty, fraud, negligent misrepresentation, common law or statutory negligence, property damage, breach of
contract, violations of the accommodation doctrine, conspiracy, quantum meruit, mental anguish, gross negligence, exemplary damages, intentional
acts or omissions, or violation of any statutory duty under State or Federal law, arising out of, relating to, or concerning the Pipeline Assets or the
Parties' acts or omissions which pertain in any way to the Pipeline Assets. Notwithstanding anything stated herein to the contrary, it is understood
and agreed that this release does not include or affect any claim for breach of this Agreement.
3
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
7.4 Seller's Release of All Claims. Seller does hereby release and forever discharge Buyer, as well as its respective officers, directors,
shareholders, partners, subsidiaries, affiliates, employees, representatives, agents, attorneys, consultants, successors, and assigns from all theories
of recovery of whatever nature, arising on or before the Closing Date, whether presently known or unknown, recognized by the law of any
jurisdiction, including but not limited to actions, causes of action, demands, liabilities, suits, administrative proceedings, payments, charges,
obligations, and judgments, whether arising in contract or in tort, at law or in equity, or under any theory of liability including any theory of strict
liability, trespass, nuisance, breach of duty, fraud, negligent misrepresentation, common law or statutory negligence, property damage, breach of
contract, violations of the accommodation doctrine, conspiracy, quantum meruit, mental anguish, gross negligence, exemplary damages, intentional
acts or omissions, or violation of any statutory duty under State or Federal law, arising out of, relating to, or concerning the Pipeline Assets or the
Parties' acts or omissions which pertain in any way to the Pipeline Assets. Notwithstanding anything stated herein to the contrary, it is understood
and agreed that this release does not include or affect any claim for breach of this Agreement.
7.5 Survival of Representations, Warranties, and Covenants. All representations, warranties, and covenants made in this Agreement shall
survive the closing of this Agreement. Any party learning of a misrepresentation or breach of representation or warranty under this Agreement shall
promptly give written notice thereof to all other parties to this Agreement.
8. CLOSING AND TERMINATION OF OBLIGATIONS.
8.1 Time. This Agreement is being entered into and closed (the "Closing") on the date first above written (the "Closing Date") provided that
the Effective Date shall be October 31, 2013.
8.2 Obligations of Seller at the Closing. At the Closing, Seller shall deliver to Buyer (i) One Hundred Thousand and 00/100 ($100,000.00),
(ii) a Quitclaim Deed and Bill of Sale conveying the Pipeline Assets to Buyer in form and substance satisfactory to both Buyer and Seller, and (iii) the
Supplemental Bond Payment.
8.3 Obligations of Buyer at the Closing. At the Closing, Buyer shall pay the Purchase Price to Seller.
8.4 Survival of Obligations. Except for the obligations of Seller and Buyer contained in Section 8.2 and 8.3 above, all obligations of Seller and
Buyer in this Agreement shall survive Closing and remain in full force and effect.
8.4.1 Notwithstanding the foregoing, the obligations of Seller to Buyer under Section 1.3 shall terminate immediately and without further
action by Buyer or Seller upon the breach of this Agreement by Buyer; provided, however, that if such breach is capable of being cured, such
termination by Seller shall not become effective until the thirtieth (30th) day after Seller gives Buyer notice of such breach and if such breach is not
fully cured within such thirty (30) day period;
9. MISCELLANEOUS.
9.1 Expenses. Except as otherwise expressly provided herein, each party to this
Agreement shall each pay its own expenses (including, without limitation, the fees and expenses of its agents, representatives, counsel, and accountants)
incurred in connection with the negotiation, drafting, execution, delivery and performance of this Agreement and the transactions contemplated hereby.
9.2 Recitals, Schedules, and Exhibits. The Recitals, Schedules and Exhibits to this
Agreement are incorporated herein and, by this reference, made a part hereof as if fully set forth herein.
9.3 Successors and Assigns. No party to this Agreement may assign any of its rights
hereunder without the prior written consent of the other parties, or delegate any of its responsibilities.
9.4 Waiver. No provision of this Agreement shall be deemed waived by course of
conduct, including the act of closing, unless such waiver is made in a writing signed by all then existing or surviving parties hereto, stating that it is intended
specifically to modify this Agreement, nor shall any course of conduct operate or be construed as a waiver of any subsequent breach of this Agreement
whether of a similar or dissimilar nature.
9.5 Entire Agreement. This Agreement (together with the Exhibits attached hereto) supersedes any other agreement, whether written or oral,
that may have been made or entered into by Buyer, or any of its subsidiaries or affiliates, or Seller (or by any member, director, officer, employee,
shareholder, agent, or other representative of such parties) relating to the matters contemplated hereby. This Agreement (together with the Exhibits
attached hereto) constitutes the entire agreement between the parties and there are no agreements or commitments except as expressly set forth
herein.
4
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
9.6 Further Assurances. Each of the parties hereto agrees to execute all further documents and instruments and to take or to cause to be
taken all reasonable actions which are necessary or appropriate to complete the transactions contemplated by this Agreement.
9.7 Notices. All notices, demands, requests, and other communications hereunder shall be in writing and shall be deemed to have been duly
given and shall be effective upon receipt if delivered by hand, or sent by certified or registered United States mail, postage prepaid and return receipt
requested, or by prepaid overnight express service or facsimile transmission (with receipt confirmed). Notices shall be sent to the parties at the
following addresses (or at such other addresses for a party as shall be specified by like notice; provided that such notice shall be effective only upon
receipt thereof):
If to Seller:
WBI Energy Midstream, LLC
1250 West Century Ave. Bismarck, ND 58503
Attention: General Counsel
If to Buyer:
Blue Dolphin Pipe Line Company
801 Travis, Suite 2100
Houston, TX 77002
Attention: Jonathan Carroll,
Chief Executive Officer
9.8 Amendments, Supplements, Etc. This Agreement may be amended or modified only by a written instrument executed by all then existing
or surviving parties hereto which states specifically that it is intended to amend or modify this Agreement.
9.9 Severability. In the event that any provision contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if
such invalid, illegal or unenforceable provisions had never been contained herein and, in lieu of each such illegal, invalid or unenforceable provision,
there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as
may be possible but still be legal, valid and enforceable.
9.10 Governing Law. This Agreement and the legal relations between the parties hereto shall be governed by and construed in accordance with
the substantive laws of the state of Texas, without giving effect to the conflicts of laws principles thereof.
9.11 Execution in Counterparts; Facsimile Execution. This Agreement may be executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same instrument. A signed copy of this Agreement delivered by facsimile, e-mail
or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original manually signed copy of this Agreement.
9.12 Attorney Fees. In any litigation, arbitration, or other proceeding by which one party either seeks to enforce its rights under this Agreement
(whether in contract, tort, or both) or seeks a declaration of any rights or obligations under this Agreement, the prevailing party shall be awarded
reasonable attorney fees, together with any costs and expenses, including expert witness fees, to resolve the dispute and to enforce the final judgment.
[Signatures on following page]
5
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the date set forth above.
SELLER:
BUYER:
WBI ENERGY MIDSTREAM, LLC
BLUE DOLPHIN PIPE LINE COMPANY
By:
Name:
Title:
/s/STEVEN L. BIETZ
Steven L. Bietz
President & CEO
By:
Name:
/s/JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer
[Signature Page to Asset Sale Agreement by and between
WBI Energy Midstream, LLC as Seller and Blue Dolphin Pipe Line Company as Buyer]
6
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SCHEDULE A
PIPELINE ASSETS
BLUE DOLPHIN PIPELINE
(a) Easements, Permits, and Rights-of-Way (as described below)
(b) Pipeline Systems. All pipeline systems on or within the below-described easements and permits, and all improvements, fixtures, equipment, personal
property and appurtenances therein and thereon that are used or held for use in connection therewith.
EASEMENT/PERMIT
DATE
GRANTOR
BLUE DOLPHIN 20" PIPELINE
1. ROW decision OCS-G 1381
5/24/1965
Bureau of Land Management
2. Permit No. 6548
7/15/1965
U.S. Army Corps of Engineers
3. Renewal of Easement
6/2/1995
State of Texas
Being more particularly described in instrument No. ME 85-091 recorded under clerk's file number 95022366 of the Deed Records of Brazoria County, Texas
4. Permit
5. Easement
5/24/1965
Brazoria Granting permission for pipeline under and across Surfside Beach to a
Tract 214
12/6/1965
Shell Oil Company
Being more particularly described in instrument recorded in Volume 929, Page 816 of the Deed Records of Brazoria County, Texas
6. (a) Permit
8/23/1965
Brazoria County
Granting permission for a pipeline under and across and County Road Numbers 257, 756, 690, and 229
(b) Easement
3/6/1972
Dow Chemical Company
Being more particularly described in instrument recorded in Volume 1129, Page 531 of the Deed Records of Brazoria County, Texas
7. Permit No. 6588
8. Permit
7/28/1965
U.S. Army Corps of Engineers
8/23/1965
Brazoria County
Granting permission for a pipeline under and across County Road Numbers 257, 756, 690, and 229
9. Permit No. 6614
10. Easement
8/27/1965
U.S. Army Corps of Engineers
8/24/1985
State of Texas
Being more particularly described in instrument No. ME 85-128 recorded in Volume (86)244, Page 964 of the Deed Records of Brazoria County, Texas
7
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
11. Permit No. 6615
12. Easement
8/30/1965
U.S. Army Corps of Engineers
8/24/1985
State of Texas
Being more particularly described in instrument No. ME 85-126 recorded in Volume (86)244, Page 958 of the Deed Records of Brazoria County, Texas
13. Easement
8/30/1965
Velasco Drainage
Being more particularly described in instrument recorded in Volume 927, Page 680 of the Deed Records of Brazoria County, Texas
BLUE DOLPHIN PIPELINE CO. 16" PIPELINE
1. Cathodic Protection Easement
6/24/1966
Shell Oil Company
2. Easement
12/6/1965
Shell Oil Company
Being more particularly described in instrument recorded in Volume 929, Page 816 of the Deed Records of Brazoria County, Texas
3. Permit No. 65-3358
8/19/1965
Texas Highway Dept.
4. Permit No. 6613
5. Easement
8/30/1965
U.S. Army Corps of Engineers
8/24/1985
State of Texas
Being more particularly described in instrument No. ME 85-131 recorded in Volume (86)247, Page 828 of the Deed Records of Brazoria County, Texas
6. Easement
8/30/1965
Velasco Drainage
Being more particularly described in instrument recorded in Volume 927, Page 680 of the Deed Records of Brazoria County, Texas
7. Easement "A"
9/21/1965
Dow Chemical Co.
Being more particularly described in instrument recorded in Volume 925, Page 252 of the Deed Records of Brazoria County, Texas as amended by instrument
filed for record in the Deed Records of Brazoria County, Texas under Volume 1006, Page 744 and Partial Release under File No. 92-40472.
8. (a) Permit
8/23/1965
Brazoria County
Granting permission for a pipeline under and across County Road Numbers 257, 756, 690, and 229
(b) Easement
3/6/1972
Down Chemical Company
Being more particularly described in instrument recorded in Volume 1129, Page 531 of the Deed Records of Brazoria County, Texas
BLUE DOLPHIN 6 - 5 / 8" NORTH LATERAL PIPELINE (NGPL)
1. ROW decision OCS-G 4350
9/18/1980
Bureau of Land Management
8
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
From 03/17/2006 application filed, it is now under OCS-026981
2. Easement
9/3/1990
State of Texas
Being more particularly described in instrument No. ME 80-0204 recorded under clerk's file number 9042112 of the Deed Records of Brazoria County, Texas
3. Permit Application No. 14500
8/1/1980
U.S. Army Corps of Engineers
BLUE DOLPHIN 6 - 5 / 8" EAST LATERAL PIPELINE (Cockrell)
1. ROW decision OCSG 12688
10/12/1990
Minerals Management Service
BLUE DOLPHIN 4 - 1 / 2" SOUTH LATERAL PIPELINE (Kerr-McGee)
1. ROW decision OCS-G 8543
9/25/1986
Minerals Management Service (Koch)
BLUE DOLPHIN 8 - 5 / 8" LATERAL PIPELINE
1. ROW decision OCS - 13220
9/4/1991
Minerals Management Service BLUE
2. Permit Application No. 19391
8/26/1991
U.S. Army Corps of Engineers (Burlington)
BLUE DOLPHIN 8" SOUTH LATERAL PIPELINE
1. ROW decision OCS-G 8606
3/5/1987
Minerals Management Service
BLUE DOLPHIN 6 - 5 / 8" NORTH LATERAL PIPELINE (Coastal)
1. ROW decision OCS-G 1381-A
7/1/1976
Minerals Management Service
2. Permit Application No. 11166
3/30/1976
U.S. Army Corps of Engineers
BLUE DOLPHIN 8" PIPELINE (Houston Pipe Line Company)
1. Memorandum of Easement
6/20/1996
State of Texas
Being more particularly described in instrument No. ME 850197 recorded under clerk's file number 96028174 of the Deed Records of Brazoria County, Texas
2. Easement
3/11/1976
Alvin R. Martin
Being more particularly described in instrument recorded in Volume 1283, Page 699 of the Deed Records of Brazoria County, Texas. Insofar and only insofar as
easement lies south of engineers station 378+59 on that Houston Pipeline Drawing No. HC-133603-H
9
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
3. Easement
3/18/1976
Sidney L. Martin
Being more particularly described in instrument recorded in Volume 1283, Page 695 of the Deed Records of Brazoria County, Texas. Insofar and only insofar as
easement lies south of engineers station 378+59 on that Houston Pipeline Drawing No. HC-133603-H.
4. Easement
3/18/1976
Isabel Martin Seyfried
Being more particularly described in instrument recorded in Volume 1283, Page 697 of the Deed Records of Brazoria County, Texas, Insofar and only insofar as
easement lies south of engineers station 378+59 on that Houston Pipeline Drawing No. HC-133603-H.
5. Permit
11/3/1975
Brazoria County
Granting permission to construct a pipeline under and across certain roads in Brazoria County, Texas (County Road 257).
OMEGA PIPELINE
(a)Easements, Permits, and Rights-of-Way (as described below)
(b)Pipeline Systems. All pipeline systems on or within the below-described easements and permits, and all improvements, fixtures, equipment, personal
property and appurtenances therein and thereon that are used or held for use in connection therewith.
OMEGA 12 - 3 / 4" PIPELINE
1. ROW assignment OCS-G 19655
5/1/1997
Minerals Management Service (Formerly OCS-G 9327)
2. ROW decision OCS-G 9327
11/3/1987
Minerals Management Service
3. Permit No. 3473
2/14/1997
U.S. Army Corps of Engineers
4. ROW decision OCS-G 10098
Minerals Management Service
PROPERTY DESCRIPTION
Tract 1
Lots 33, 34, 35, 36, 71, 72, 86, 87, 88, 89, 90. 91, 92, 148, 149, 150, 151 (less and except a 1.37741 acre tract more particularly described in a deed
from O.T. Maxwell et ux recorded in Volume 917, Page 810 of the Deed Records of Brazoria County, Texas), 152, 153 and 214 of the Brazos Coast
Investment Company Subdivision No. 1, in the B.T. Archer Leauge, Abstract 9, Brazoria County, Texas.
Tract 2
Lots 38 (less and except a 1.2 acre tract of land conveyed to the United States of America in instrument recorded in Volume 319, Page 55 of the Deed
Records of Brazoria County, Texas), 47, 48 and 83 of the Brazos Coast Investment Company Subdivision No. 8, in the F.J. Calvit League, Abstract 51,
Brazoria County, Texas.
Tract 5
A 6.769 acre tract of land being the sound half of Cone Island in the B.T. Archer Leauge, Abstract 9, Brazoria County, Texas.
Tract 6
A 57.082 acre tract of land out of the F.J. Calvit League, Abstract 51, Brazoria County, Texas.
RIGHT-OF-WAY EASEMENT
Right-of-Way easement No. ME 85-132 from the State of Texas to Shell Oil Company dated August 24, 1985, 30 feet in width, being 15 feet on either side of
the lines as constructed, as same is set forth in instrument recorded in Volume (85)218, Page 55 of the Official Records of Brazoria County, Texas.
—END-
10
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
SECOND AMENDMENT TO PROMISSORY NOTE
Exhibit 10.48
This SECOND AMENDMENT TO PROMISSORY NOTE (the "Amendment7) by and between Lazarus Energy, LEG, a Delaware limited liability company
(“Maker") and. John H. Kissick ("Payee") is made effective as of October 1, 2014 (the "Effective Date"). The Maker and the Payee shall be referenced
individually as a "Party" and collectively and "Parties".
WHEREAS, the Maker and the Payee are Parties to that certain Promissory Note dated June 1, 2006, (as amended, restated, supplemented or
otherwise modified from time to time in accordance with its provisions, the ("Note") to which reference is hereby made for all purposes; and
WHEREAS, the Parties hereto desire to amend the Note on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the Parties agree as follows:
1. Definitions. Capitalized terms used and not defined in this Amendment shall have the respective meanings given them in the Note.
2. Amendments to the Note. The Note is hereby amended as follows:
(a) Interest Rate. The annual Interest Rate on Unpaid Balance shall be sixteen per cent (16.00%).
(b) Final Maturity. The Final Maturity shall be July 1, 2016.
3. Limited Effect. Except as expressly provided hereby, all of the terms and
provisions of the Note and the Deed of Trust are and shall remain in full force and effect and are hereby ratified and confirmed by the Maker. The amendments
contained herein shall not be construed as a waiver or amendment of any other provision of Note or Deed of Trust or for any purpose except as expressly set
forth herein or a consent to any further or future action on the part of the Maker that would require the waiver or consent of the Payee.
4. Successors and Assigns. This Amendment shall inure to the benefit of and be binding upon the Payee and Maker and each of their respective successors
and assigns.
5.Counterparts. This Amendment may be executed in any number of counterparts,
all of which shall constitute one and the same agreement, and any Party hereto may execute this Amendment by signing and delivering one or more counterparts.
Delivery of an executed counterpart of this Amendment electronically or by facsimile shall he effective as delivery of an original executed counterpart of this
Amendment.
[Remainder of page intentionally left blank; signature page to follow]
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment as of the Effective Date.
Lazarus Energy, LLC, as Maker
By:
Name:
/s/JONATHAN P. CARROLL
Jonathan P. Carroll
President
John H. Kissick, as Payee
By:
Name:
/s/JOHN H. KISSICK
John H. Kissick
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 21.1
List of subsidiaries of Blue Dolphin Energy Company (“Blue Dolphin”):
• Lazarus Energy, LLC, a Delaware limited liability company;
• Lazarus Refining & Marketing, LLC, a Delaware limited liability company
• Blue Dolphin Pipe Line Company, a Delaware corporation;
• Blue Dolphin Petroleum Company, a Delaware corporation;
• Blue Dolphin Services Co., a Texas corporation;
• Blue Dolphin Exploration Company, a Delaware corporation; and
• Petroport, Inc., a Delaware corporation.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-134156, 333-38606 and 333-124908) of Blue
Dolphin Energy Company of our report dated March 31, 2015, relating to our audit of the consolidated financial statements, which appear in this Annual Report
on Form 10-K for the year ended December 31, 2014.
/s/ UHY LLP
UHY LLP
Sterling Heights, Michigan
March 31, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
I, Jonathan P. Carroll, certify that:
1.
I have reviewed this annual report on Form 10-K of Blue Dolphin Energy Company (the “Registrant”).
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this annual
report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and
we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) Disclosed in this annual report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent
fiscal quarter (the Registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over
financial reporting.
Date: March 31, 2015
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President, Assistant Treasurer and Secretary
(Principal Executive Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.2
I, Tommy L. Byrd, certify that:
1.
I have reviewed this annual report on Form 10-K of Blue Dolphin Energy Company (the “Registrant”).
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this annual
report;
3. Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and
we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) Disclosed in this annual report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent
fiscal quarter (the Registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect,
the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over
financial reporting.
Date: March 31, 2015
/s/ TOMMY L. BYRD
Tommy L. Byrd
Interim Chief Financial Officer, Treasurer and Assistant Secretary
(Principal Financial Officer)
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Blue Dolphin Energy Company (the “Blue Dolphin”) on Form 10-K for the period ended December 31, 2014 (the
“Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jonathan P. Carroll, Chief Executive Officer, President, Assistant
Treasurer and Secretary (Principal Executive Officer) of Blue Dolphin, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Blue Dolphin.
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President, Assistant Treasurer and Secretary
(Principal Executive Officer)
March 31, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CERTIFICATION OF
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Blue Dolphin Energy Company (the “Blue Dolphin”) on Form 10-K for the period ended December 31, 2014 (the
“Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Tommy L. Byrd, Interim Chief Financial Officer, Treasurer and Assistant
Secretary (Principal Financial Officer) of Blue Dolphin, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Blue Dolphin.
/s/ TOMMY L. BYRD
Tommy L. Byrd
Interim Chief Financial Officer, Treasurer and Assistant Secretary
(Principal Financial Officer)
March 31, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.