SECURITIES & EXCHANGE COMMISSION EDGAR FILING
BLUE DOLPHIN ENERGY CO
Form: 10-K
Date Filed: 2018-04-02
Corporate Issuer CIK: 793306
© Copyright 2018, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the terms of use.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
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: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(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, a smaller reporting company, or emerging
growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of
the Act.
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☑
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 $3,800,118 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 June 30, 2017.
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Number of shares of common stock, par value $0.01 per share, outstanding at April 2, 2018: 10,925,513
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BLUE DOLPHIN ENERGY COMPANY
INTRODUCTION
FORM 10-K 12/31/17
This Annual Report for the fiscal year ended December 31, 2017 (this “Annual Report”) is a document that U.S. public companies file with the Securities and
Exchange Commission (“SEC”) every year. Part I of the Annual Report provides a general overview of our business, including relevant risk factors. Part II of the
Annual Report contains financial information and management’s discussion and analysis of our financial condition and results of operations. We hope investors
will find it useful to have all this information in a single document.
In this Annual Report, “Blue Dolphin,” “we,” “our,” and “us” are used interchangeably to refer to Blue Dolphin Energy Company individually or to Blue Dolphin
Energy Company and its subsidiaries collectively, as appropriate to the context. Information in this Annual Report is current as of the filing date, unless otherwise
specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this Annual Report, and from time to time throughout the year, we share our expectations for our future performance. These forward-looking statements
include statements about our business plans; our expected financial performance, including the anticipated effect of strategic actions; previously reported
material weakness in our internal control over financial reporting; economic, political and market conditions; and other factors that could affect our future results of
operations or financial condition, including, without limitation, statements under the sections entitled “Part I, Item 1. Business,” “Part I, Item 1A. Risk Factors,”
“Part I, Item 3. Legal Proceedings,” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Any
statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such
as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not
guarantees of our future performance. Our forward-looking statements represent our estimates and expectations at the time of disclosure. However,
circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will
determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the
factors that may affect their realization, whether considering new information, future events or otherwise, and investors should not rely on us to do so. In
accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, “Part I, Item 1A. Risk Factors” in this Annual Report explains
some of the important factors that may cause actual results to be materially different from those that we anticipate.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
GLOSSARY OF SELECTED ENERGY AND FINANCIAL TERMS
Below are abbreviations and definitions of certain commonly used oil and gas industry terms, as well as key financial performance measures used by
management, that are used in this Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (this “Annual Report”).
Regarding financial terms, management uses GAAP and certain non-GAAP performance measures to assess our results of operations. Certain performance
measures used by management to assess our operating results and the effectiveness of our business segment are considered non-GAAP performance
measures. These performance measures may differ from similar calculations used by other companies within the petroleum industry, thereby limiting their
usefulness as a comparative measure. We refer to certain refinery throughput and production data in the explanation of our period over period
changes in results of operations. For our consolidated results, we refer to our consolidated statements of operations in the explanation of our period over period
changes in results of operations.
Energy Terms
Atmospheric gas oil (“AGO”). The heaviest product boiled by a crude oil distillation unit operating at atmospheric pressure. This fraction ordinarily sells as
distillate fuel oil, either in pure form or blended with cracked stocks. Blended 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.
Barrel (“bbl”). One stock tank bbl, or 42 U.S. gallons of liquid volume, used about oil or other liquid hydrocarbons.
Blending. The physical mixture of several 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.
Barrels per Day (“bpd”). A measure of the bbls of daily output produced in a refinery or transported through a pipeline.
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. Although condensate is sometimes like crude oil, it is usually lighter.
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.
Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.
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 (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel),
(iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and heavy oil-based mud blendstock (“HOBM”), reduced crude, and AGO).
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 per 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.
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.
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.
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.
Kerosene. A middle distillate fraction of crude oil that is produced at higher temperatures than naphtha and lower temperatures than gas oil.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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 American
Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.
MMcf. One million cubic feet; a measurement of gas volume only.
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.
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.
Product Slate. Represents type and quality of products produced.
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane,
propylene, butadiene, butylene, isobutylene and mixtures thereof.
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.
Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil and condensate is separated and transformed into petroleum
products.
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 by-product of
removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized per 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.
Yield. The percentage of refined petroleum products that is produced from crude oil and other feedstocks.
Financial and Performance Measures
Arbitration award and associated fees . Damages and GEL’s attorneys’ fees and related expenses awarded to GEL Tex Marketing, LLC in arbitration
proceedings.
Capacity Utilization Rate . A percentage measure that indicates the amount of available capacity that is being used in a refinery or transported through a
pipeline. With respect to the Nixon Facility, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total
capacity of the Nixon Facility (currently 15,000 bpd).
Cost of Refined Products Sold. Primarily includes purchased crude oil and condensate costs, as well as transportation, freight and storage costs.
Depletion, Depreciation and Amortization. Represents property and equipment, as well as intangible assets that are depreciated or amortized based on the
straight-line method over the estimated useful life of the related asset.
Downtime. Scheduled and/or unscheduled periods in which the Nixon Facility is not operating. Downtime may occur for a variety of reasons, including bad
weather, power failures, preventive maintenance, equipment inspection, equipment repair due to mechanical failure, voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, and inventory management.
Easement, Interest and Other Income . Reflects land easement fees received from FLNG Land II, Inc., a Delaware corporation (“FLNG”), pursuant to a Master
Easement Agreement; fees recognized monthly as earned and recorded as land easement revenue within other income.
EBITDA. Reflects earnings before: (i) interest income (expense), (ii) income taxes, and (iii) depreciation and amortization.
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- Refinery Operations EBITDA. Reflects EBITDA for our refinery operations business segment.
- Total EBITDA. Reflects EBITDA for our refinery operations business segment, as well as corporate and other.
General and Administrative Expenses. Primarily include corporate costs, such as accounting and legal fees, office lease expenses, and administrative
expenses.
Gross Profit. Calculated as total revenue less cost of refined products sold, reflected as a dollar ($) amount.
Gross Margin. Calculated as total revenue less cost of refined products sold, reflected as a percentage (%).
Gross Margin per Bbl . Calculated as gross profit divided by the volume, in bbls, of refined petroleum products sold during the period.
Income Tax Expense. Includes federal and state taxes, as well as deferred taxes, arising from temporary differences between income for financial reporting and
income tax purposes.
JMA Profit Share. Represents the GEL Profit Share plus the Performance Fee for the period under the Joint Marketing Agreement; an indirect operating
expense. If Gross Profits were positive, then the JMA Profit Share reflected an expense. If Gross Profits were negative, then the JMA Profit Share reflected a
credit.
Net Income (Loss). Represents total revenue from operations less total cost of operations, total other expense, and income tax expense.
Operating Days. Represents the number of days in a period in which the Nixon Facility operated. Operating days is calculated by subtracting downtime in a
period from calendar days in the same period.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Other Income (Expense) . Reflects working capital loan interest, guaranty fees earned by Jonathan Carroll, expensed interest related to long-term debt, and
non-recurring income items.
Other Operating Expenses . Represents costs associated with our pipeline assets and leasehold interests in oil and gas properties.
Refinery Operating Expenses. Direct operating expenses of the Nixon Facility, including direct costs of labor, maintenance materials and services, chemicals
and catalysts and utilities. Includes fees paid to: (i) LEH to manage and operate the Nixon Facility pursuant to the Amended and Restated Operating Agreement
and (ii) Ingleside Crude, LLC to lease petroleum storage tanks to meet periodic, additional storage needs under the Amended and Restated Tank Lease
Agreement.
Revenue from Operations. Primarily consists of refined petroleum product sales, but also includes tank rental revenue. Excise and other taxes that are
collected from customers and remitted to governmental authorities are not included in revenue. Other operations revenue relates to fees received from pipeline
transportation services, which ceased in 2016.
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, HOBM and AGO.
Total Refinery Throughput. Refers to the volume processed as input through the Nixon Facility. Refinery throughput includes crude oil and condensate and
other feedstocks.
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FORM 10-K 12/31/17
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BLUE DOLPHIN ENERGY COMPANY
TABLE OF CONTENTS
GLOSSARY OF SELECTED ENERGY AND FINANCIAL TERMS
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
SIGNATURES
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE AND SAFETY DISCLOSURES
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
ITEM 1.
BUSINESS
Company Overview
PART I
Blue Dolphin, a Delaware corporation formed in 1986, is an independent refiner and marketer of petroleum products. We also conduct petroleum storage and
terminaling operations under third-party lease agreements. Our primary operating asset is a 15,000-bpd crude oil and condensate processing facility in Nixon,
Texas (the “Nixon Facility”). Blue Dolphin maintains a website at http://www.blue-dolphin-energy.com. Information on or accessible through Blue Dolphin’s
website is not incorporated by reference in or otherwise made a part of this Annual Report.
Structure and Management
Corporate Structure
Blue Dolphin operates a single business segment – Refinery Operations. Refinery operations are conducted at the Nixon Facility through the following
subsidiaries:
● Lazarus Energy, LLC, a Delaware limited liability company (“LE”).
● Lazarus Refining & Marketing, LLC, a Delaware limited liability company (“LRM”).
Blue Dolphin owns pipeline assets and has leasehold interests in oil and gas wells. These assets, which are not operational, are included in Corporate and
Other. Corporate and Other includes the following subsidiaries:
● Blue Dolphin Pipe Line Company, a Delaware corporation (“BDPL”).
● Blue Dolphin Petroleum Company, a Delaware corporation (“BDPC”).
● Blue Dolphin Services Co., a Texas corporation (“BDSC”).
See "Part I, Item 2. Properties” for additional information regarding our operating subsidiaries, facilities, and assets.
Management
Blue Dolphin is controlled by Lazarus Energy Holdings, LLC (“LEH”). LEH operates and manages all Blue Dolphin properties pursuant to an Amended and
Restated Operating Agreement (the “Amended and Restated Operating Agreement”). Jonathan Carroll is Chairman of the Board of Directors (the “Board”),
Chief Executive Officer, and President of Blue Dolphin, as well as a majority owner of LEH. Together LEH and Jonathan Carroll own 80.2% of our common stock,
par value $0.01 per share (the “Common Stock). (See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions,
Note (10) Long-Term Debt, Net and Note (19) Commitments and Contingencies – Financing Agreements” for additional disclosures related to LEH, the Amended
and Restated Operating Agreement, and Jonathan Carroll.)
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BLUE DOLPHIN ENERGY COMPANY
Going Concern
FORM 10-K 12/31/17
Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include the following:
● Final GEL Arbitration Award – As previously disclosed, LE was involved in arbitration proceedings (the “GEL Arbitration”) with GEL Tex Marketing, LLC
(“GEL”), an affiliate of Genesis Energy, LP (“Genesis”), related to a contractual dispute involving a Crude Oil Supply and Throughput Services Agreement
(the “Crude Supply Agreement”) and a Joint Marketing Agreement (the “Joint Marketing Agreement”), each between LE and GEL and dated August 12,
2011. On August 11, 2017, the arbitrator delivered its final award in the GEL Arbitration (the “Final Arbitration Award”). The Final Arbitration Award denied
all LE’s claims against GEL and granted substantially all the relief requested by GEL in its counterclaims. Among other matters, the Final Arbitration Award
awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate amount of approximately $31.3 million.
As previously disclosed, a hearing on confirmation of the Final Arbitration Award was scheduled to occur on September 18, 2017 in state district court in
Harris County, Texas. Prior to the scheduled hearing, LE and GEL jointly notified the court that the hearing would be continued for a period of no more than
90 days after September 18, 2017 (the “Continuance Period”), to facilitate settlement discussions between the parties. On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a Letter Agreement with GEL, effective September 18, 2017 (the “GEL Letter Agreement”),
confirming the parties’ agreement to the continuation of the confirmation hearing during the Continuance Period, subject to the terms of the GEL Letter
Agreement.
The GEL Letter Agreement has been amended to extend the Continuance Period through April 30, 2018. The GEL Letter Agreement, as amended to date,
prohibits Blue Dolphin and its affiliates from making any pre-payments on indebtedness, other than in the ordinary course of business as described in the
GEL Letter Agreement, and from making any payments to Jonathan Carroll under the Amended and Restated Guaranty Fee Agreements between
November 1, 2017 and the end of the Continuance Period. (Jonathan Carroll has received no cash payments since August 2016 and no common stock
payments since May 2017 under the Amended and Restated Guaranty Fee Agreements.) If the parties are unable to reach an acceptable settlement with
Genesis and GEL, and GEL seeks to confirm and enforce the Final Arbitration Award against LE, our business, financial condition, and results of operations
will be materially affected, and LE would likely be required to seek protection under bankruptcy laws.
● Veritex Secured Loan Agreement Event of Default – Veritex Community Bank (“Veritex”), as successor in interest to Sovereign Bank by merger, delivered to
obligors notices of default under secured loan agreements with Veritex, stating that the Final Arbitration Award constitutes an event of default under the
secured loan agreements. The occurrence of an event of default permits Veritex to declare the amounts owed under these loan agreements immediately
due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights
and remedies available. Veritex informed obligors that it is not currently exercising its rights and remedies under the secured loan agreements considering
the ongoing settlement discussions with GEL and the continuance of the hearing on confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final Arbitration Award, which would require Veritex’s approval. However, Veritex expressly
reserved all its rights, privileges and remedies related to events of default under the secured loan agreements and informed obligors that it would consider a
final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements. Any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material adverse effect on our business, financial condition, and results of operations and would
likely require us to seek protection under bankruptcy laws. The debt associated with loans under secured loan agreements was classified within the current
portion of long-term debt on our consolidated balance sheet at December 31, 2017 due to existing events of default related to the Final Arbitration Award as
well as the uncertainty of LE and LRM’s ability to meet financial covenants in the secured loan agreements in the future.
We are currently evaluating the effects of the Final Arbitration Award on our business, financial condition, and results of operations. In addition to the matters
described above, the Final Arbitration Award could materially and adversely affect our ability to procure adequate amounts of crude oil and condensate or our
relationships with our customers. The contract-related dispute has negatively affected our customer relationships, prevented us from taking advantage of
business opportunities, disrupted refinery operations, diverted management’s focus away from running the business, and impacted our ability to obtain financing.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
We can provide no assurance as to whether negotiations with GEL will result in a settlement, the potential terms of any such settlement, or whether Veritex
would approve any such settlement. If LE is unable to reach an acceptable settlement with GEL or Veritex does not approve any such settlement and GEL
seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected and LE
would likely be required to seek protection under bankruptcy laws.
Operating Risks
Successful execution of our business plan depends on several key factors, including reaching an acceptable settlement with GEL, having adequate crude oil and
condensate supplies, , maintaining the safe and reliable operation of the Nixon Facility, improving margins on refined petroleum products, and meeting
contractual obligations. (See “Business Strategies” within this Part I, Item 1. Business for information related to our business plan.) For the year ended
December 31, 2017, execution of our business plan was negatively impacted by several factors, including:
● Net Losses – For the year ended December 31, 2017, we reported a net loss of $22,328,390, or a loss of $2.09 per share, compared to a net loss of
$15,767,448, or a loss of $1.51 per share, for the year ended December 31, 2016. The $0.58 per share increase in net loss between the periods was the
result of the Final Arbitration Award, which was partially offset by improved margins for refined petroleum products and increased sales volume. The amount
expensed in the period related to the Final Arbitration Award was $24,338,628, which represented $2.28 per share. Excluding the Final Arbitration Award,
we would have reported net income of $0.19 per share.
● Working Capital Deficits – We had a working capital deficit of $69,512,829 at December 31, 2017 compared to a working capital deficit of $37,812,263 at
December 31, 2016. Excluding long-term debt, we had a working capital deficit of $29,968,427 at December 31, 2017, compared to working capital of
$5,599,927 at December 31, 2016. The significant increase in working capital deficit between the periods primarily related to the Final Arbitration Award and
a decrease in cash and cash equivalents.
● Crude Supply Issues – We currently have in place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil and condensate, and we expect the supplier to continue to do so for the foreseeable
future. However, our ability to purchase adequate amounts of crude oil and condensate is dependent on our liquidity and access to capital, which have been
adversely affected by the contract-related dispute with GEL and other factors, as noted above. The Final Arbitration Award could have a material adverse
effect on our ability to procure adequate amounts of crude oil and condensate from our current supplier or otherwise.
● Financial Covenant Defaults – In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LE and LRM were in
violation of certain financial covenants in secured loan agreements with Veritex. Covenant defaults under the secured loan agreements would permit Veritex
to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other rights and remedies available. The debt associated with these loans was classified
within the current portion of long-term debt on our consolidated balance sheet at December 31, 2017 due to existing events of default related to the Final
Arbitration Award as well as the uncertainty of LE and LRM’s ability to meet the financial covenants in the future. There can be no assurance that Veritex will
provide a waiver of events of default related to the Final Arbitration Award, consent to any proposed settlement with GEL or provide future waivers of any
financial covenant defaults, which may have an adverse impact on our financial position and results of operations.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
During the year ended December 31, 2017, we continued aggressive actions to improve operations and liquidity. We began selling certain of our refined
petroleum products immediately following production, which minimizes inventory, improves cash flow, and reduces commodity risk/exposure. We completed
construction on several new petroleum storage tanks at the Nixon Facility. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing to
third-parties. We also reduced our working capital requirements in a rising cost environment by decreasing costs, reducing inventory levels, improving our sales
cycle, and requiring pre-payments from certain customers. Management believes that it is taking the appropriate steps to improve operations at the Nixon
Facility and our overall financial stability. However, there can be no assurance that our business plan will be successful, LEH and its affiliates will continue to
fund our working capital needs, or that we will be able to obtain additional financing on commercially reasonable terms or at all. Among other factors, the Final
Arbitration Award could prevent us from successfully executing our business plan.
For additional disclosures related to the contract-related dispute with GEL, the Final Arbitration Award, the GEL Letter Agreement (as amended), defaults under
secured loan agreements, and risk factors that could materially affect our future business, financial condition and results of operations, refer to the following
sections in this Annual Report:
● Part I, Item 1A. Risk Factors
● Part I, Item 3. Legal Proceedings
● Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
- GEL Contract-Related Dispute and Final Arbitration Award
- Results of Operations
- Liquidity and Capital Resources
● Part II, Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements:
- Note (8) Related Party Transactions
- Note (10) Long-Term Debt, Net
- Note (19) Commitments and Contingencies – Legal Matters
- Note (20) Subsequent Events
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 naphtha, diesel, jet fuel
and other products. Crude oil refining is primarily a margin-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. To increase profitability, or improve margins, it is important
for a crude oil refinery to maximize the yields of higher value petroleum products and to minimize the costs of feedstocks and operating expenses. There are also
several 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 downtime for
maintenance, repair and investment, developing valuable by-products or production inputs out of materials that are typically discarded, and adjusting utilization
rates.
A refinery's product slate depends on the refinery's configuration and the type of crude oil and/or condensate being refined, and can be adjusted based on
market demand. 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, typically there is a time lag between the comparable 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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Refinery Operations
Nixon Facility
The Nixon Facility is comprised of assets owned by LE and LRM. LE owns the land, crude oil distillation unit, certain refined petroleum product storage tanks
and related piping, and loading and unloading facilities and utilities. LRM owns the naphtha stabilizer and depropanizer units, as well as certain petroleum
product storage tanks and related piping. Together, LE and LRM own more than 1,000,000 bbls of crude oil, condensate, and refined petroleum product storage
capacity at the Nixon Facility. Since 2015, the Nixon Facility has been undergoing a capital improvement expansion project to construct over 800,000 bbls of
petroleum storage tankage. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii) supports increased refinery throughput up to
approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing to third-parties. The Nixon Facility is pledged as
collateral under certain of our long-term debt as discussed in “Part II, Item 8. Financial Statements and Supplementary Data – Note (10) Long-Term Debt, Net”.
A regional electric cooperative supplies electrical power to the Nixon Facility. Fuel gas that is produced at the Nixon Facility is primarily used as fuel within the
refinery. In addition, small amounts of propane are occasionally acquired for use in starting-up the Nixon Facility.
Nixon Facility Process Summary
The Nixon Facility is considered a “topping unit” because it is primarily comprised of a crude oil distillation unit, the first stage of the crude oil refining process.
The Nixon Facility’s current level of complexity allows crude oil and condensate to be refined into finished and intermediate petroleum products. 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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BLUE DOLPHIN ENERGY COMPANY
Turnaround and Refinery Reliability
FORM 10-K 12/31/17
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 downtime for unanticipated maintenance or repairs that are more frequent than our scheduled turnarounds.
Crude Oil and Condensate Supply
Operation of the Nixon Facility depends on our ability to purchase adequate amounts of crude oil and condensate on favorable terms. We currently have in
place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This supplier currently provides us with adequate
amounts of crude oil and condensate, and we expect the supplier to continue to do so for the foreseeable future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital, which have been adversely affected by net losses, working capital deficits, the contract-related
dispute with GEL, and financial covenant defaults in secured loan agreements.
Management believes that it is taking the appropriate steps to improve operations at the Nixon Facility and our overall financial stability. If our business plan is
unsuccessful, it could affect our ability to acquire adequate supplies of crude oil and condensate under the existing contract or otherwise. Among other factors,
the Final Arbitration Award could prevent us from successfully executing our business plan and could have a material adverse effect on our ability to procure
adequate amounts of crude oil and condensate from our current supplier or otherwise. Further, because our existing crude supply contract is a month-to-month
arrangement, there can be no assurance that crude oil and condensate supplies will continue to be available under this contract in the future.
Products and Markets
Products
The Nixon Facility’s product slate can be moderately adjusted based on market demand. We currently produce a single finished product – jet fuel. We produce
several intermediate products, including naphtha, HOBM, and AGO.
Markets
The Nixon Facility is in the Gulf Coast region of the U.S., which is represented by the Energy Information Administration as Petroleum Administration for Defense
District 3 (“PADD 3”). Our products are primarily sold in the U.S. within PADD 3. However, with the opening of the Mexican refined products market to private
companies, we occasionally sell refined products to customers that export to Mexico. LEH, which is HUBZone certified, purchases our jet fuel and resells the jet
fuel to a government agency. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and
processing. (See “Part I, Item 1. Business – Management” and “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party
Transactions, Note (10) Long-Term Debt, Net, and Note (19) Commitments and Contingencies – Financing Agreements” for additional disclosures related to
LEH.)
Customers
Customers for 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 one-year terms, in place with most of our
customers. Certain of our contracts require us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products and many of
these arrangements are subject to periodic renegotiation, which could result in higher or lower relative prices for our refined petroleum products. See “Part II,
Item 8. Financial Statements and Supplementary Data – Note (14) Concentration of Risk” of this Annual Report for disclosures related to significant customers.
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BLUE DOLPHIN ENERGY COMPANY
Competition
FORM 10-K 12/31/17
Many of our competitors are substantially larger than us and are engaged on a national or international basis in many segments of the petroleum products
business, including exploration and production, refining, transportation and marketing. These competitors may have greater flexibility in responding to or
absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple
“topping unit” refinery, we can be relatively nimble in adjusting our refined petroleum products slate because of changing commodity prices, market demand, and
refinery operating costs.
Business Strategy
Our overall business strategy is to improve operations, increase refinery throughput, improve refining margins, and continue the safe and reliable operation of the
Nixon Facility. Successful execution of our business strategy depends on several key factors, including reaching an acceptable settlement with GEL, having
adequate crude oil and condensate supplies and continuing to meet contractual obligations.
Nixon Facility Capital and Efficiency Improvements
In 2015, LE and LRM secured $35.0 million in the aggregate in 19-year financing to expand the Nixon Facility. Since 2015, the Nixon Facility has been
undergoing a capital improvement expansion project to construct over 800,000 bbls of petroleum storage tankage. At December 31, 2017, the refinery had more
than 1,000,000 bbls of crude oil, condensate, and refined petroleum product storage capacity in 27 tanks. Overall improvements at the Nixon Facility will position
us for long-term growth by: (i) having crude and product storage to support refinery throughput and future expansion of up to 30,000 bpd; (ii) increasing the
processing capacity and complexity of the Nixon Facility for expanded refined product opportunities; and (iii) generating additional revenue from leasing product
and crude storage to third parties. Capital expenditures at the Nixon Facility are being funded primarily through borrowings under credit bank facilities that were
secured in 2015.
See “Part II, Item 8. Financial Statements and Supplementary Data – Note (10) Long-Term Debt, Net” for additional disclosures related to borrowings for capital
spending.
Improved Financial Stability
As noted elsewhere in this Annual Report, we began selling certain of our refined petroleum products immediately following production, which minimizes
inventory, improves cash flow, and reduces commodity risk/exposure. We also reduced our working capital requirements in a rising cost environment by
decreasing costs, reducing inventory levels, improving our sales cycle, and receiving pre-payments from certain customers. Management believes that these
efforts, combined with favorable margins, will improve operations and liquidity. (See “Part I, Item 1. Business – Going Concern” for certain factors that raise
substantial doubt about our ability to continue as a going concern.)
Pipeline Transportation
Our pipeline transportation operations involve the gathering and transportation of oil and natural gas for producers/shippers operating offshore near our pipelines,
as well as leasehold interests in oil and natural gas properties, in the Gulf of Mexico. We derived no revenue from our Pipeline Transportation operations for the
year ended December 31, 2017. Our pipeline transportation operations represented less than 1% of total revenue for the year ended December 31, 2016.
We fully impaired our pipeline assets at December 31, 2016. All pipeline transportation services to third-parties have ceased, existing third-party wells along our
pipeline corridor are being permanently abandoned, and no new third-party wells are being drilled near our pipelines. However, management believes our
pipeline assets have future value based on large-scale, third-party production facility expansion projects near the pipelines. Our oil and gas properties had no
production during the years ended December 31, 2017 and 2016. All leases associated with our oil and gas properties have expired, and our oil and gas
properties were fully impaired in 2011.
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BLUE DOLPHIN ENERGY COMPANY
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Acquisition, Disposition and Restructuring Activities
We regularly engage in discussions with third-parties regarding the possible purchase of assets and operations that are strategic and complementary to our
existing operations. However, we do not anticipate any material acquisition activity in the foreseeable future.
In 2013, the Board established a Master Limited Partnership (“MLP”) Conversion Special Committee to oversee a potential conversion of Blue Dolphin from a
Delaware “C” corporation to a Delaware MLP. Due to a shift in market conditions over the past three years, the MLP Conversion Special Committee was
dissolved in March 2018.
Insurance and Risk Management
Our operations are subject to significant hazards and risks inherent in crude oil and condensate refining operations, as well as in the transportation and storage of
crude oil and condensate and finished and intermediate petroleum products. We have property damage and business interruption coverage at the Nixon Facility.
Business interruption coverage is 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,
“Part I, Item 1A. Risk Factors – Risks Related to Our Business” in this Annual Report.
Governmental Regulation
Our operations and properties are subject to extensive and complex federal, state, and local environmental, health, and safety statutes, regulations, and
ordinances. These rules govern, 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 costly obligations on our
operations, including requiring the acquisition of permits and authorizations to conduct regulated activities, restricting the way 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 existing 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, a revocation of our permits, and/or 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 or sustain compliance with applicable environmental, health, and safety laws. This
Governmental Regulation section should be read in conjunction with “Part I, Item 1A. Risk Factors” of this Annual Report, which discusses our expectations
regarding future events based on currently available information.
Air Emissions
Toxic Air Pollutants. The federal Clean Air Act (the “CAA”) is a comprehensive law that regulates toxic air pollutants from stationary and mobile sources. Among
other things, the law authorizes the Environmental Protection Agency (the “EPA”) to establish National Ambient Air Quality Standards to protect public health and
public welfare and to regulate emissions of hazardous air pollutants. The CAA, as well as corresponding state laws and regulations regarding 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 (“VOCs”) or nitrogen oxides face increasingly stringent regulations.
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BLUE DOLPHIN ENERGY COMPANY
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Refineries, which are major stationary sources of hazardous air pollutants, have historically been high-visibility targets for enforcement by the EPA under the
CAA. Petroleum refineries are subject to the EPA’s National Standards for Hazardous Air Pollutants. These standards require petroleum refineries to meet
emission standards reflecting the application of the maximum achievable control technology. The affected sources at petroleum refineries are defined to include
all process vents, storage vessels, marine tank vessel loading operations, gasoline rack operations, equipment leaks, and wastewater treatment systems located
at the refinery. To meet emission standards, we are required to obtain permits, as well as test, monitor, report, and implement control requirements.
Under the EPA’s Mobile Source Air Toxics regulations most refineries are required to produce transportation fuels for highway use at or below 15 ppm sulfur for
“on-road” and “off-road” diesel and 30 ppm sulfur for gasoline. The Nixon Facility does not produce gasoline, and the facility ceased production of nonroad,
locomotive, and marine, a transportation-related diesel fuel product in 2014 – when the new regulations took effect. Since 2014, the Nixon Facility has produced
HOBM, a non-transportation lubricant blend product. “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 sulfur control standards, and integration of such a desulfurization unit generally requires additional permitting and
significant capital upgrades. We can produce and sell diesel with sulfur content levels above the EPA’s sulfur control standards: (i) in the U.S. as a feedstock to
other refineries and blenders and (ii) to other countries as a finished petroleum product.
The EPA issued three (3) final rules to cut emissions of methane from the oil and gas industry. These final rules curb emissions of methane, VOC’s, and air
toxics from new, reconstructed and modified oil and gas sources, while providing greater certainty about CAA permitting requirements for the industry. The EPA
also issued an Information Collection Request (“ICR”) to operators in the oil and natural gas industry to obtain extensive information for developing regulations to
reduce methane emissions from existing oil and gas sources. In March 2017, the EPA withdrew the ICR request, effectively immediately. As a result, responses
to the ICR were no longer required.
Greenhouse Gas Emissions. Emission of Greenhouse Gases (“GHGs”) is regulated by the EPA under the CAA. By allowing the regulation of GHGs under the
CAA, the EPA’s findings also indirectly impacted many other carbon-intensive industries, which would potentially become subject to federal New Source Review
Prevention of Significant Deterioration and Title V permitting requirements under the CAA (the “CAA Permitting Requirements”).
The EPA established GHG emissions thresholds to define when permits under the CAA Permitting Requirements are required for new and existing industrial
facilities (the “Tailoring Rule”). Emissions from small farms, restaurants, and all but the very largest commercial facilities are not covered by the Tailoring Rule.
The Tailoring Rule established a schedule that: (i) initially focused on the largest stationary sources with the most CAA permitting experience, (ii) then expanded
to cover the largest stationary sources of GHG that may not have been previously covered by the CAA for other pollutants, and (iii) finally described the EPA’s
plan for any additional steps in this process. Without this tailoring rule, the lower emissions thresholds would have taken effect automatically for GHGs in 2011,
leading to dramatic increases in the number of required permits. The EPA implemented the Tailoring Rule in phases.
In 2016, the EPA updated New Source Performance Standards by setting emission limits for methane, covering additional sources, such as hydraulically
fractured oil wells, and requiring owners/operators to find and repair leaks. The EPA also updated the Source Determination rules to clarify when multiple pieces
of equipment and activities must be deemed a single source when determining whether major source permitting programs apply.
Although we are not currently subject to reporting requirements under GHG-related regulations, the future 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.
Renewable Fuels
Pursuant to the Energy Policy Act of 2005 and the Energy Independence and Security Act of 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 – would have created a
burden on the Nixon Facility related to its nonroad, locomotive, and marine production through 2014, LE applied for an extension of the temporary exemption
afforded small refineries through December 31, 2010 under the CAA Section 211(o)(9)(B). The EPA granted the Nixon Facility a small refinery exemption from
RFS requirements for 2013 and 2014. In 2014, the Nixon Facility began producing HOBM, a non-transportation lubricant blend product that does not fall under
RFS.
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BLUE DOLPHIN ENERGY COMPANY
Hazardous Waste
FORM 10-K 12/31/17
The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) imposes strict, joint and several liability on responsible parties with
uncontrolled or abandoned hazardous waste sites, as well as accidents, spills, and other emergency releases of pollutants and contaminants into the
environment. The law authorizes two kinds of response actions: (i) short-term removals, where actions may be taken to address releases or threatened releases
requiring prompt response, and (ii) long-term remedial response actions, that permanently and significantly reduce the dangers associated with releases or
threats of releases of hazardous substances that are serious, but not immediately life threatening. As of the filing of this Annual Report, neither we nor any of our
predecessors have been designated as a potentially responsible party under CERCLA or a similar state statute.
The Resource Conservation and Recovery Act (“RCRA”) and comparable state and local laws impose requirements related to the handling, storage, treatment
and disposal of solid and hazardous wastes. Our refining operations generate petroleum product wastes, solid wastes, and ordinary industrial wastes, such as
from paint and solvents, that are regulated under RCRA and state law. Certain wastes generated by the Nixon Facility 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.
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 VOC 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 were not threatened, and no further
reporting was required.
Water Discharges
Stormwater from the Nixon Facility is tested and discharged pursuant to applicable stormwater permits. Process wastewater from the Nixon Facility is tested
and discharged to a nearby municipal treatment facility pursuant to applicable process wastewater permits. Wastewater from our offshore facilities, including our
oil and natural gas pipelines and anchor platform, are tested and discharged pursuant to applicable produced water permits.
Spill Prevention and Control
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. These laws affect our crude oil and condensate processing operations and petroleum storage and terminaling operations, as well as our
pipeline, facilities, and exploration and production assets. The CWA prohibits the discharge of pollutants into U.S. waters 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.
The EPA covers inland oil spills. In 2015, the EPA published a final rule expanding the definition of “Waters of the United States” under the CWA. Waters that
are specifically excluded from the EPA’s jurisdiction include, among others, depressions incidental to mining or construction that may become filled with water,
puddles, groundwater, and stormwater control features constructed to convey, treat, or store stormwater on dry land. See “Offshore Safety and Environmental
Oversight” within this governmental regulation section for information on oil spills that occur in coastal waters.
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Offshore Safety and Environmental Oversight
In addition to the CAA, our pipeline, exploration and production assets are also subject to the requirements of the Outer Continental Shelf Lands Act (the
“OCSLA”). The OCSLA is administered by the Bureau of Ocean Energy Management (the “BOEM”) and the Bureau of Safety and Environmental Enforcement
(the “BSEE”) and the Office of Natural Resources Revenue. The BSEE has partnered with the U.S. Coast Guard for oil spill response. The BOEM and the BSEE
have been more aggressive in proposing and implementing several reforms to offshore oil and gas regulations.
Spill Liability. The Oil Pollution Act of 1990 (the “OPA”) and the CWA, combined with the OCSLA, impose liability on owners or operators of vessels and facilities
that discharge oil into the navigable waters of the U.S., adjoining shorelines, waters of the contiguous zone, or when the discharge may affect natural resources
of the U.S. With limited exceptions, responsible parties are liable for all removal costs and damages arising from oil spills. Damages may include: injury or
economic losses resulting from destruction of real or personal property, damages or loss of use of natural resources used for subsistence, lost tax revenue,
royalties, rents, or net profit shares suffered by federal, state, or local governments due to injury to real or personal property, lost profits or impaired earning
power because of injury to real or personal property or natural resources, and the net costs of providing increased or additional public services during or after
removal activities.
The BOEM has increased the offshore limit of liability for damages under the OPA from $75 million to $133.65 million, plus all clean-up costs, to reflect the
significant increase in the Consumer Price Index. The onshore facilities limit of liability for damages under the OPA is $350 million plus all clean-up costs. 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. The OPA requires responsible
parties to provide proof of financial responsibility for potential spills. The amount required for certain types of offshore facilities located seaward of the seaward
boundary of a state, including properties used for oil transportation, is $35 million. BDPL currently maintains the statutory $35 million coverage.
Spill Response. Pursuant to the OPA, the National Oil and Hazardous Substances Pollution Contingency Plan, more commonly called the National Contingency
Plan, provides a blueprint for responding to both oil spills and hazardous substance releases. The National Contingency Plan requires, among other things, that
responsible parties have an oil spill response plan in place. We have an oil spill response plan in place.
Decommissioning Requirements. To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, the
BOEM generally requires that lessees and rights-of-way holders demonstrate financial strength and reliability per regulations or post bonds or other acceptable
assurances that such obligations will be satisfied, unless the BOEM exempts the lessee or rights-of-way holder from such financial assurance
requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by the
BOEM.
Under a newer financial assurance program model, the BOEM no longer: (i) grants waivers from additional security obligations and (ii) considers the combined
strength and reliability of co-lessees when determining a lessee’s additional security requirements. Also, provided guidance and clarification regarding
submission of certified decommissioning cost expenditure summaries following permanent plugging of any well, removal of any platform or other facility, and
clearance of any site.
The BOEM requested that BDPL provide additional supplemental bonds or acceptable financial assurance of approximately $4.6 million related to five (5)
existing pipeline rights-of-way. At December 31, 2017 and 2016, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way
bonds issued to the BOEM. Of the five (5) existing pipeline rights-of-ways related to BOEM’s request, the pipeline associated with one (1) right-of-way was
decommissioned in 1997. The BSEE approved BDPL permit requests to decommission in place the pipelines for three (3) of these rights-of-way. As a result,
management is seeking a reduction in the amount of BOEM’s request for additional financial assurance. There can be no assurance that the BOEM will accept a
reduced amount of supplemental financial assurance or not require additional supplemental pipeline bonds related to our existing pipeline rights-of-way. If BDPL
is required by the BOEM to provide significant additional supplemental bonds or acceptable financial assurance, we may experience a significant and material
adverse effect on our operations, liquidity, and financial condition.
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BLUE DOLPHIN ENERGY COMPANY
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Offshore Safety. Under the Workplace Safety Rule, BSEE requires operators to employ a comprehensive safety and environmental management system
(“SEMS”). SEMS and a subsequent revision to SEMS (“SEMS II”) reduce human and organizational errors as root causes of work-related accidents and offshore
spills, develop protocols as to who at the facility has the ultimate operational safety and decision-making authority, and establish procedures to provide all
personnel with “stop work” authority. SEMS II must be periodically audited by an independent third-party auditor approved by the BSEE. BDPL has a SEMS II
plan in place.
Health, Safety and Maintenance
We are subject to several federal and state laws and regulations related to the health and safety of workers pursuant to the Occupational Safety and Health Act
of 1970. These laws and regulations are administered by the Occupational Safety and Health Administration (the “OSHA”) and, in states not participating in
OSHA-approved state safety plans, comparable state regulatory bodies.
Our refinery operations are also subject to OSHA process safety management regulations and the National Emphasis Program for Petroleum Refineries (the
“RNEP”). RNEP requires refineries to be inspected for compliance with process safety management regulations. Inspections 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
inspected by OSHA in 2013 and again in June 2016. Following the 2013 inspection, LE was assessed a civil penalty of $38,500. Following the 2016 inspection,
LE was assessed a civil penalty of $6,006. Citations issued by OSHA primarily related to failure to comply with documentation and notice posting requirements.
We operate a comprehensive safety, health and security program, with participation by personnel at all levels of the organization. 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.
Intellectual Property
We rely on intellectual property laws to protect our brand, as well as those of our subsidiaries. “Blue Dolphin Energy Company” is a registered trademark in the
U.S. in name and logo form. “Petroport, Inc.” is a registered trademark in the U.S. in name form. In addition, “www.blue-dolphin-energy.com” is a registered
domain name.
Personnel
We rely on the services of LEH pursuant to the Amended and Restated 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 personnel services under the Amended and Restated
Operating Agreement:
● Personnel serving in the capacities of corporate executive officers, including Chief Executive Officer and Chief Financial Officer, as well as general manager,
operations, maintenance, environmental, and health and safety personnel; and
● Personnel providing administrative and professional services, including accounting, human resources, insurance, and regulatory compliance.
All personnel work for and are paid by LEH. Blue Dolphin is billed by LEH at cost plus a 5% markup. See “Part II, Item 8. Financial Statements and
Supplementary Data - Note (8), Related Party Transactions” of this Annual Report for additional disclosures related to LEH.
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BLUE DOLPHIN ENERGY COMPANY
Available Information
FORM 10-K 12/31/17
We are subject to the informational requirements of the Exchange Act. We file financial and other information with the SEC as required, including but not limited
to, proxy statements on Schedule 14A, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. The public may read
and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, on official business days during
the hours of 10:00 a.m. to 3:00 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC also maintains an internet website at http:///www.sec.gov that contains reports, proxy information and information statements, and other
information regarding issuers, including us, that file electronically with the SEC.
We also make our SEC filings available through our website ( http://www.blue-dolphin-energy.com) as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
An investment in our Common Stock involves risks. In addition to the other information in this Annual Report and our other filings with the SEC, you should
carefully consider the following risk factors in evaluating us and our business. 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.
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.
Risks Related to Our Business and Industry
The adverse outcome in the arbitration of the contract-related dispute with GEL had a material adverse effect on our business, financial condition,
and results of operations and could materially adversely affect the value of an investment in our common stock.
As previously disclosed, LE was involved in the GEL Arbitration with GEL, an affiliate of Genesis, related to a contractual dispute involving the Crude Supply
Agreement and the Joint Marketing Agreement. On August 11, 2017, the arbitrator delivered the Final Arbitration Award. The Final Arbitration Award denied all
LE’s claims against GEL and granted substantially all the relief requested by GEL in its counterclaims. Among other matters, the Final Arbitration Award
awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate amount of approximately $31.3 million.
As previously disclosed, a hearing on confirmation of the Final Arbitration Award was scheduled to occur on September 18, 2017 in state district court in Harris
County, Texas. Prior to the scheduled hearing, LE and GEL jointly notified the court that the hearing would be continued for the Continuance Period to facilitate
settlement discussions between the parties. On September 26, 2017, LE and Blue Dolphin, together with LEH and Jonathan Carroll, entered into the GEL Letter
Agreement, effective September 18, 2017, confirming the parties’ agreement to the continuation of the confirmation hearing during the Continuance Period,
subject to the terms of the GEL Letter Agreement.
The GEL Letter Agreement has been amended to extend the Continuance Period through April 30, 2018. The GEL Letter Agreement, as amended to date,
prohibits Blue Dolphin and its affiliates from making any pre-payments on indebtedness, other than in the ordinary course of business as described in the GEL
Letter Agreement, and from making any payments to Jonathan Carroll under the Amended and Restated Guaranty Fee Agreements between November 1, 2017
and the end of the Continuance Period. (Jonathan Carroll has received no cash payments since August 2016 and no common stock payments since May 2017
under the Amended and Restated Guaranty Fee Agreements.) If the parties are unable to reach an acceptable settlement with Genesis and GEL, and GEL
seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially affected, and LE would
likely be required to seek protection under bankruptcy laws.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Veritex notified obligors that the Final Arbitration Award constitutes an event of default under secured loan agreements with Veritex. The occurrence of events of
default under the secured loan agreements permits Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise
its rights with respect to collateral securing our obligations under these loan agreements, and/or exercise any other rights and remedies available. Veritex
informed obligors that it is not currently exercising its rights, privileges and remedies under the secured loan agreements considering the ongoing settlement
discussions with GEL and the continuance of the hearing on confirmation of the Final Arbitration Award and to allow Veritex to evaluate any proposed settlement
agreement related to the Final Arbitration Award, which would require Veritex’s approval. However, Veritex expressly reserved all its rights, privileges and
remedies related to events of default under the secured loan agreements and informed obligors that it would consider a final confirmation of the Final Arbitration
Award to be a material event of default under the loan agreements.
We can provide no assurance as to whether negotiations with GEL will result in a settlement, as to potential terms of any such settlement, whether Veritex would
approve of any such settlement, or whether Veritex will exercise its rights and remedies under secured loan agreements. If: (i) we are unable to reach an
acceptable settlement with GEL or Veritex does not approve any such settlement, (ii) GEL seeks to confirm and enforce the Final Arbitration Award, or (iii)
Veritex exercises its rights and remedies under the secured loan agreements, our business, financial condition, and results of operations will be materially
adversely affected, and LE would likely be required to seek protection under bankruptcy laws. In addition, our ability to procure adequate amounts of crude oil
and condensate and our relationships with our customers could materially and adversely be affected, and the trading prices of our common stock and the value
of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common
stock in its entirety.
For additional information regarding the Final Arbitration Award, the GEL Letter Agreement (as amended), and their potential effects on our business, financial
condition, and results of operations, see “Part I, Item 3. Legal Proceedings,” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and the notes to our consolidated financial statements in “Part II, Item 8. Financial Statements and Supplementary Data.”
We may not have sufficient liquidity to sustain operations because of net losses, working capital deficits, and other factors, including the Final
Arbitration Award, crude supply issues, and financial covenant defaults in secured loan agreements.
For the year ended December 31, 2017, we reported a net loss of $22,328,390, or a loss of $2.09 per share, compared to a net loss of $15,767,448, or a loss of
$1.51 per share, for the year ended December 31, 2016. The $0.58 per share increase in net loss between the periods was the result of the Final Arbitration
Award, which was partially offset by improved margins for refined petroleum products and increased sales volume. The amount expensed in the period related to
the Final Arbitration Award was $24,338,628, which represented $2.28 per share. Excluding the Final Arbitration Award, we would have reported net income of
$0.19 per share.
We had a working capital deficit of $69,512,829 at December 31, 2017 compared to a working capital deficit of $37,812,263 at December 31, 2016. Excluding
long-term debt, we had a working capital deficit of $29,968,427 at December 31, 2017, compared to working capital of $5,599,927 at December 31, 2016. The
significant increase in working capital deficit between the periods primarily related to the Final Arbitration Award and a decrease in cash and cash equivalents.
We had cash and cash equivalents and restricted cash (current portion) of $495,296 and $48,980, respectively, at December 31, 2017. Comparatively, we had
cash and cash equivalents and restricted cash (current portion) of $1,152,628 and $3,347,835, respectively, at December 31, 2016.
The Final Arbitration Award awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate amount of approximately $31.3
million. We can provide no assurance as to whether negotiations with GEL will result in a settlement, as to potential terms of any such settlement, whether
Veritex would approve of any such settlement, or whether Veritex will exercise its rights and remedies under secured loan agreements. If: (i) we are unable to
reach an acceptable settlement with GEL or Veritex does not approve any such settlement, (ii) GEL seeks to confirm and enforce the Final Arbitration Award, or
(iii) Veritex exercises its rights and remedies under the secured loan agreements, our business, financial condition, and results of operations will be materially
adversely affected, and LE would likely be required to seek protection under bankruptcy laws.
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FORM 10-K 12/31/17
Following the cessation of crude supplies under the Crude Supply Agreement with GEL, we put in place a month-to-month evergreen crude supply contract with
a major integrated oil and gas company. This supplier currently provides us with adequate amounts of crude oil and condensate and having crude supply
continuity has boosted our customers’ confidence in our performance ability and enabled us to slowly rebuild counter-party relationships. However, we are
currently evaluating the effects of the Final Arbitration Award on our business, financial condition, and results of operations. In addition to the matters described
above, the Final Arbitration Award could materially and adversely affect our ability to procure adequate amounts of crude oil and condensate and our
relationships with our customers.
As described elsewhere in this Annual Report, Veritex notified obligors that the Final Arbitration Award constitutes an event of default under secured loan
agreements with Veritex. (Within this “Item 1A. Risk Factors” section, see also “Risks Related to Our Business and Industry” for a discussion of risks related to
our financial covenant defaults with Veritex.)
Currently, we rely on revenue from operations, LEH and its affiliates (including Jonathan Carroll), and borrowings under bank facilities to meet our liquidity needs.
During the year ended December 31, 2017, we continued aggressive actions to improve operations and liquidity. We began selling certain of our refined
petroleum products immediately following production, which minimizes inventory, improves cash flow, and reduces commodity risk/exposure. We completed
construction on several new petroleum storage tanks at the Nixon Facility. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing to
third-parties. We also reduced our working capital requirements in a rising cost environment by decreasing costs, reducing inventory levels, improving our sales
cycle, and requiring pre-payments from certain customers. Management believes that it is taking the appropriate steps to improve operations at the Nixon
Facility and our overall financial stability. However, there can be no assurance that our business plan will be successful, LEH and its affiliates will continue to fund
our working capital needs, or that we will be able to obtain additional financing on commercially reasonable terms or at all. Among other factors, the Final
Arbitration Award could prevent us from successfully executing our business plan.
Our short-term working capital needs are primarily related to acquisition of crude oil and condensate to operate the Nixon Facility, repayment of debt obligations,
and capital expenditures for maintenance, upgrades, and refurbishment of equipment at the Nixon Facility. Our long-term working capital needs are primarily
related 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 relating to any new environmental, health and safety regulations. 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 in Nixon, Texas in the Eagle Ford Shale and we market our refined petroleum products in a single, relatively
limited geographic area. In addition, our onshore facilities assets are in Freeport, Texas, and all our pipelines, offshore facilities 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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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Competition from companies having greater financial and other resources 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 U.S. Certain of our competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. 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 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.
Environmental laws and regulations could require us to make substantial capital expenditures to remain in compliance or to remediate current or
future contamination that could give rise to material liabilities.
Our operations are subject to a variety of federal, state and local environmental laws and regulations relating to the protection of the environment, including those
governing the emission or discharge of pollutants into the environment, product specifications and the generation, treatment, storage, transportation, disposal
and remediation of solid and hazardous wastes. Violations of these laws and regulations or permit conditions can result in substantial penalties, injunctive orders
compelling installation of additional controls, civil and criminal sanctions, permit revocations and/or facility shutdowns.
In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and
regulations, or other developments could require us to make additional unforeseen expenditures. 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. The requirements to be met, as well as the technology and
length of time available to meet those requirements, continue to develop and change. Expenditures or costs for environmental compliance could have a material
adverse effect on our results of operations, financial condition, and profitability.
The Nixon Facility operates under several federal and state permits, licenses, and approvals with terms and conditions that contain a significant number of
prescriptive limits and performance standards. These permits, licenses, approvals, limits, and standards require a significant amount of monitoring, record
keeping and reporting to demonstrate compliance with the underlying permit, license, approval, limit or standard. Non-compliance or incomplete documentation
of our compliance status may result in the imposition of fines, penalties and injunctive relief. Additionally, there may be times when we are unable to meet the
standards and terms and conditions of our permits, licenses and approvals due to operational upsets or malfunctions, which may lead to the imposition of fines
and penalties or operating restrictions that may have a material adverse effect on our ability to operate our facilities, and accordingly our financial performance.
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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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 more than
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, we may experience an increase in annual premiums, a limit on coverage, or loss of
coverage. Inadequate insurance or loss of coverage could have a material adverse effect on our business, financial condition, and results of operations.
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 Carroll, our Chief Executive Officer, President, Assistant Treasurer and Secretary, is also a majority owner of LEH. Together LEH and Jonathan Carroll
own 80.2% of our Common Stock, and, pursuant to the Amended and Restated Operating Agreement, manages and operates all Blue Dolphin properties. LEH
and Jonathan Carroll have significant influence over matters such as the election of the Board, control over our business, policies and affairs and other matters
submitted to our stockholders. LEH and Jonathan Carroll are entitled to vote the Common Stock owned by LEH in accordance with its interests, which may be
contrary to the interests of other stockholders. LEH has interests that may differ from the interests of other 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 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 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 new relationships in the future, which may have a material
adverse effect on our ability to do business.
Defaults under our secured loan agreements could have a material adverse effect on our business, financial condition, and results of operations and
materially adversely affect the value of an investment in our common stock.
As described elsewhere in this Annual Report, Veritex notified obligors that the Final Arbitration Award constitutes an event of default under secured loan
agreements with Veritex. In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LE and LRM were in violation of
the debt service coverage ratio, the current ratio, and debt to net worth ratio financial covenants related to the secured loan agreements. LE also failed to
replenish a payment reserve account as required. The occurrence of events of default under the secured loan agreements permits Veritex to declare the
amounts owed under the secured loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under
the loan agreements, and/or exercise any other rights and remedies available. Veritex informed obligors that it is not currently exercising its rights, privileges
and remedies under the secured loan agreements considering the ongoing settlement discussions with GEL and the continuance of the hearing on confirmation
of the Final Arbitration Award and to allow Veritex to evaluate any proposed settlement agreement related to the Final Arbitration Award, which would require
Veritex’s approval. However, Veritex expressly reserved all its rights, privileges and remedies related to events of default under the secured loan agreements
and informed obligors that it would consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements. Any
exercise by Veritex of its rights and remedies under the secured loan agreements would have a material adverse effect on our business, financial condition, and
results of operations and would likely require us to seek protection under bankruptcy laws.
There can be no assurance that: (i) our assets or cash flow would be sufficient to fully repay borrowings under outstanding long-term debt, either upon maturity
or if accelerated, (ii) LE and LRM would be able to refinance or restructure the payments on the long-term debt, and/or (iii) Veritex will provide future waivers.
Defaults under secured loan agreements and any exercise by Veritex of its rights and remedies related to such defaults may have a material adverse effect on
the trading prices of our common stock and on the value of an investment in our common stock, and holders of our common stock could lose their investment in
our common stock in its entirety, particularly if LE is required to seek bankruptcy protection because of the exercise by Veritex of such rights and remedies.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
For additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of
operations, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II and the notes to our
financial statements in “Part II, Item 8. Financial Statements and Supplementary Data.”
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.
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).
Blue Dolphin experienced ownership changes in 2005 because of a series of private placements, and in 2012 because of a reverse acquisition. 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.
At December 31, 2017 and 2016, management determined that cumulative losses incurred over the prior three-year period provided significant objective
evidence that limited the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a full valuation
allowance against the deferred tax assets as of December 31, 2017 and 2016.
Terrorist attacks, cyber-attacks, threats of war, or actual war may negatively affect our operations, financial condition, results of operations, and
cash flows.
Energy-related assets in the U.S. may be at a greater risk for future terrorist attacks than other potential targets. A direct attack on our assets or assets used by
us could have a material adverse effect on our operations, financial condition, results of operations, and cash flows. In addition, any terrorist attack in the U.S.
could have an adverse impact on energy prices, including prices for crude oil and refined petroleum products, and refining margins. Disruption or significant
increases in energy prices could result in government-imposed price controls. While we currently maintain some insurance that provides coverage against
terrorist attacks, such insurance has become increasingly expensive and difficult to obtain. As a result, insurance providers may not continue to offer this
coverage to us on terms that we consider affordable, or at all.
Our operations are dependent on our technology infrastructure, which includes a data network, telecommunications system, internet access, and various
computer hardware equipment and software applications. Our technology infrastructure is subject to damage or interruption from several potential sources,
including natural disasters, software viruses or other malware, power failures, cyber-attacks, and/or other events. To the extent that our technology infrastructure
is under our control, we have implemented measures such as virus protection software and emergency recovery processes to address identified risks. However,
there can be no assurance that a security breach or cyber-attack will not compromise confidential, business critical information, cause a disruption in our
operations, or harm our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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BLUE DOLPHIN ENERGY COMPANY
Risks Related to Our Refining Operations
FORM 10-K 12/31/17
Management has determined that there is, and the report of our independent registered public accounting firm expresses, substantial doubt about
our ability to continue as a going concern.
Our auditors, UHY LLP, have indicated in their report on our financial statements for the year ended December 31, 2017, that conditions exist that raise
substantial doubt about our ability to continue as a going concern due to the Final Arbitration Award, defaults in secured loan agreements, recurring losses from
operations, and the substantial decline in working capital. A “going concern” opinion could impair our ability to finance our operations through the sale of equity,
incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend upon reaching a settlement agreement with GEL related to
the Final Arbitration Award, sustained positive operating margins, and financing at commercially reasonable terms for working capital to operate the Nixon
Facility, purchase crude oil and condensate, and fund capital expenditures. If we are unable to achieve these goals, our business would be jeopardized, and we
may not be able to continue.
Refining margins are volatile, and a reduction in 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. 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 can pass along these price increases to our wholesale customers. Increases in the selling prices for refined petroleum
products typically trail the rising cost of crude oil and may be difficult to implement when crude oil costs increase dramatically over a short period.
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 can sell refined petroleum products.
Crude oil refining is primarily a margin-based business. 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, because of a variety of factors, including fluctuations in the prices of crude oil, other feedstocks, refined petroleum products, and fuel and utility
services. 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,
typically there is a time lag between the comparable 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 foreign, domestic, and local economic conditions;
● foreign and domestic demand for fuel products;
● worldwide political conditions, particularly in significant oil producing regions;
● foreign and domestic production levels of crude oil, other feedstocks, and refined petroleum products and the volume of crude oil, feedstocks, and refined
petroleum products imported into the U.S.;
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● availability of and access to transportation infrastructure;
● capacity utilization rates of refineries in the U.S.;
● Organization of Petroleum Exporting Countries’ influence on oil prices;
● 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 governmental regulations and taxes; and
● local factors, including market conditions, weather conditions and the level of operations of other refineries and pipelines in our markets.
Our future success depends on our ability to acquire sufficient levels of crude oil on favorable terms to operate the Nixon Facility.
Operation of the Nixon Facility depends on our ability to purchase adequate crude supplies on favorable terms. Following the cessation of crude supplies under
the Crude Supply Agreement with GEL, we put in place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil and condensate and having crude supply continuity has boosted our customers’ confidence in
our performance ability and enabled us to slowly rebuild counter-party relationships. However, we are currently evaluating the effects of the Final Arbitration
Award on our business, financial condition, and results of operations. In addition to the matters described above, the Final Arbitration Award could materially and
adversely affect our ability to procure adequate amounts of crude oil and condensate and our relationships with our customers.
We are pursuing alternative sources to finance crude oil and condensate acquisition costs, including commodity sale and repurchase programs, inventory
financing, debt financing, equity financing, or other means. We may not be successful in consummating suitable financing transactions in the time required or at
all, securing financing on terms favorable to us, or obtaining crude oil and condensate at the levels needed to earn a profit and/or safely operate the Nixon
Facility, any of which could adversely affect our business, results of operations and financial condition.
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 our refining operations are conducted at a single facility. Although 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
because 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.
For the year ended December 31, 2017, the Nixon Facility operated for a total of 348 days, reflecting 17 days of refinery downtime. For the year ended
December 31, 2016, the Nixon Facility operated for a total of 291 days, reflecting 75 days of refinery downtime. The significant amount of refinery downtime
during 2016 was primarily the result of significant under-delivery of crude oil and condensate by GEL, which resulted in 59 of the 75 days of refinery
downtime. (See “Part I, Item 3. Legal Proceedings” and “Part II, Item 8. Financial Statements and Supplementary Data – Note (19) Commitments and
Contingencies – Legal Matters” for disclosures related to the GEL contract-related dispute and Final Arbitration Award.)
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
We may have capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate. Further, LEH and its
affiliates (including Jonathan Carroll) 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.
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. Currently, we rely on revenue from operations, including sales of refined petroleum products and rental of petroleum storage tanks, LEH and its
affiliates (including Jonathan Carroll), and borrowings under bank facilities to meet our liquidity needs. At December 31, 2017 and 2016, accounts payable,
related party was $974,400 and $369,600, respectively.
In the event our working capital requirements are inadequate, 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 short-term working capital needs
are primarily related to acquisition of crude oil and condensate to operate the Nixon Facility, repayment of debt obligations, and capital expenditures for
maintenance, upgrades, and refurbishment of equipment at the Nixon Facility. Our long-term working capital needs are primarily related to repayment of long-
term debt obligations. Our liquidity will affect our ability to satisfy all these needs.
Our business may suffer if any of the executive officers or other key personnel discontinue 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 on the services of the executive officers and other key personnel and on our continuing ability to recruit, train and retain highly
qualified personnel in all areas of our operations. Furthermore, our operations require skilled and experienced personnel with proficiency in multiple
tasks. Competition for skilled personnel with industry-specific experience is intense, and the loss of these executives or personnel 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.
Loss of market share by a key customer or consolidation among our customer base that could harm our operating results.
For the year ended December 31, 2017, we had 3 customers that accounted for approximately 70% of our refined petroleum product sales. LEH was 1 of these
3 significant customers and accounted for approximately 33% of our refined petroleum product sales. At December 31, 2017, these 3 customers represented
approximately $1.3 million in accounts receivable. LEH represented approximately $0.7 million in accounts receivable. LEH, which is HUBZone certified,
purchases our jet fuel and resells the jet fuel to a government agency. (See “Part I, Item 1. Business – Management” and “Part II, Item 8. Financial Statements
and Supplementary Data – Note (8) Related Party Transactions, Note (10) Long-Term Debt, Net, and Note (19) Commitments and Contingencies – Financing
Agreements” for additional disclosures related to LEH.)
For the year ended December 31, 2016, we had 4 customers that accounted for approximately 67% of our refined petroleum product sales. LEH was one of
these 4 significant customers and accounted for approximately 27% of our refined petroleum product sales. At December 31, 2016, these 4 customers
represented approximately $1.6 million in accounts receivable. LEH represented approximately $1.6 million in accounts receivable.
Our 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. Our operating results could be harmed if a key customer is lost, reduces their order quantity, requires us to reduce our prices,
is acquired by a competitor, or suffers financial hardship.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Additionally, our profitability could be adversely affected if there is consolidation among our customer base and our customers command increased leverage in
negotiating prices and other terms of sale. We could decide not to sell our refined petroleum products to a certain customer if, because of increased leverage,
the customer pressures us to reduce our pricing such that our gross profits are diminished, which could result in a decrease in our revenue. Consolidation 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 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.
Our suppliers source 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 suppliers source a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. Consequently, 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 in the Eagle Ford Shale and we market our refined petroleum products in a single, relatively limited geographic
area. Therefore, we are more susceptible to regional economic conditions than our more geographically diversified competitors. Should the supply/demand
balance shift in our region due to 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.
Regulation of GHG emissions could increase our operational costs and reduce demand for our products.
Continued political focus on climate change, human activities contributing to the release of large amounts of carbon dioxide and other GHGs into the
atmosphere, and potential mitigation through regulation could have a material impact on our operations and financial results. International agreements and
federal, state and local regulatory measures to limit GHG emissions are currently in various stages of discussion and implementation. These and other GHG
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. The effect of regulation on our financial performance will depend on many factors including, among others, the
sectors covered, the GHG emissions reductions required by law, the extent to which we would be entitled to receive emission allowance allocations, our ability to
acquire compliance related equipment, the price and availability of emission allowances and credits, and our ability to recover incurred regulatory compliance
costs 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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Risks Related to Our Pipelines and Oil and Gas Properties
Requests by the BOEM to increase bonds or other sureties to maintain compliance with the BOEM’s regulations could significantly impact our
liquidity and financial condition.
To cover the various obligations of lessees on the Outer Continental Shelf, such as the cost to plug and abandon wells and decommission and remove platforms
and pipelines at the end of production, the BOEM generally requires that lessees demonstrate financial strength and reliability per regulations or post bonds or
other acceptable assurances that such obligations will be satisfied.
The BOEM requested that BDPL provide additional supplemental bonds or acceptable financial assurance of approximately $4.6 million related to five (5)
existing pipeline rights-of-way. At December 31, 2017 and 2016, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way
bonds issued to the BOEM. Of the five (5) existing pipeline rights-of-ways related to BOEM’s request, the pipeline associated with one (1) right-of-way was
decommissioned in 1997. The BSEE approved BDPL permit requests to decommission in place the pipelines for three (3) of these rights-of-way. As a result,
management is seeking a reduction in the amount of BOEM’s request for additional financial assurance. There can be no assurance that the BOEM will accept a
reduced amount of supplemental financial assurance or not require additional supplemental pipeline bonds related to our existing pipeline rights-of-way. If BDPL
is required by the BOEM to provide significant additional supplemental bonds or acceptable financial assurance, we may experience a significant and material
adverse effect on our operations, liquidity, and financial condition.
More stringent requirements imposed by the BOEM and the BSEE related to the decommissioning, plugging, and abandonment of wells, platforms,
and pipelines could materially increase our estimate of future AROs.
The BOEM has established a more stringent regimen for the timely decommissioning of what is known as “idle iron” – wells, platforms, and pipelines that are no
longer producing or serving exploration or support functions related to an operator’s lease. Any well that has not been used during the past five years for
exploration or production on active leases and is no longer capable of producing in paying quantities must be permanently plugged or temporarily abandoned
within three years. Plugging or abandonment of wells may be delayed by two years if all the well’s hydrocarbon and sulfur zones are appropriately isolated.
Similarly, platforms or other facilities which are no longer useful for operations must be removed within five years of the cessation of operations. The triggering of
these plugging, abandonment, and removal activities under what may be viewed as an accelerated schedule in comparison to historical decommissioning efforts
could cause an increase, perhaps materially, in our future plugging, abandonment, and removal costs, which may translate into a need to increase our estimate
of future AROs.
Although management has used its best efforts to determine future AROs, assumptions and estimates can be influenced by many factors beyond management’s
control. Such factors include, but are not limited to, changes in regulatory requirements, 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. At December 31, 2017 and 2016, our estimated future asset retirement obligations were
approximately $2.3 million. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (11) Asset Retirement Obligations” of this Annual Report
for additional information regarding asset retirement obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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BLUE DOLPHIN ENERGY COMPANY
ITEM 2. PROPERTIES
FORM 10-K 12/31/17
LEH manages and operates all Blue dolphin properties pursuant to the Amended and Restated Operating Agreement. Management believes that our properties
are generally adequate for our operations and are maintained in a good state of repair in the ordinary course of business. Following is a summary of our principal
facilities and assets:
Property
Operating Subsidiary
Owned / Leased
Location
Refinery Operations
● Nixon Facility (56 acres)
Corporate and Other
● Freeport Facility (162 acres)
LE, LRM
BDPL
owned
owned
Nixon, Texas
Freeport, Texas
● Pipelines and oil and gas working interests in
wells
BDPL, BDPC
Owned and leasehold interests
Gulf of Mexico
● Corporate headquarters
BDSC
leased
Houston, Texas
Nixon Facility. See “Part I, Item 1. Business – Company Overview and Refinery Operations” for a description of the Nixon Facility. The Nixon Facility is pledged
as collateral under certain of our long-term debt as discussed in “Part II, Item 8. Financial Statements and Supplementary Data – Note (10) Long-Term Debt,
Net”.
Freeport Facility. The Freeport Facility includes pipeline easements and rights-of-way, 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 Plant Complex in Freeport, Texas. In February 2017, BDPL sold approximately 15 acres of
property located in Brazoria County, Texas to FLIQ Common Facilities, LLC, an affiliate of FLNG.
Pipelines and Oil and Gas Assets . The following provides a summary of our pipeline and oil and gas assets, all of which are in the Gulf of Mexico:
Pipeline
Ownership
Miles
100%
100%
100%
38
13
18
Natural Gas
Capacity
(MMcf/d)
180
65
110
Blue Dolphin Pipeline (1)
GA 350 Pipeline (1)
Omega Pipeline (2)
_____________________
(1) Currently inactive.
(2) Currently abandoned in place.
● Blue Dolphin Pipeline – The Blue Dolphin Pipeline consists of 16-inch and 20-inch offshore pipeline segments, including a trunk line and lateral lines, that run
from an offshore anchor platform in Galveston Area Block 288 to our Freeport Facility;
● GA 350 Pipeline – The GA 350 Pipeline is an 8-inch offshore pipeline extending from Galveston Area Block 350 to a subsea interconnect and tie-in with a
transmission pipeline in Galveston Area Block 391; and
● Omega Pipeline – The Omega Pipeline is a 12-inch 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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Management performed periodic impairment testing of our pipeline and facilities assets in the fourth quarter of 2016. Upon completion of that testing, we
recorded an impairment expense of $968,684 related to our pipeline assets at December 31, 2016. All pipeline transportation services to third-parties have
ceased, existing third-party wells along our pipeline corridor have been permanently abandoned, and no new third-party wells are being drilled near our
pipelines. However, management believes our pipeline assets have future value based on large-scale, third-party production facility expansion projects near the
pipelines.
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. Our oil and gas properties had no production
during the years ended December 31, 2017 and 2016, and all leases associated with our oil and gas properties have expired. Accordingly, our oil and gas
properties were fully impaired in 2011.
Corporate Headquarters. We lease 7,675 square feet of office space in Houston, Texas. Our office lease is discussed more fully in “Part II, Item 8. Financial
Statements and Supplementary Data – Note (15) Leases” of this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
GEL Contract-Related Dispute and Final Arbitration Award
As previously disclosed, LE was involved in the GEL Arbitration with GEL, an affiliate of Genesis, related to a contractual dispute involving the Crude Supply
Agreement and the Joint Marketing Agreement, each between LE and GEL and dated August 12, 2011. On August 11, 2017, the arbitrator delivered the Final
Arbitration Award. The Final Arbitration Award denied all LE’s claims against GEL and granted substantially all the relief requested by GEL in its
counterclaims. Among other matters, the Final Arbitration Award awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate
amount of approximately $31.3 million.
As previously disclosed, a hearing on confirmation of the Final Arbitration Award was scheduled to occur on September 18, 2017 in state district court in Harris
County, Texas. Prior to the scheduled hearing, LE and GEL jointly notified the court that the hearing would be continued for the Continuance Period to facilitate
settlement discussions between the parties. On September 26, 2017, LE and Blue Dolphin, together with LEH and Jonathan Carroll, entered into the GEL Letter
Agreement, confirming the parties’ agreement to the continuation of the confirmation hearing during the Continuance Period, subject to the terms of the GEL
Letter Agreement.
The GEL Letter Agreement has been amended to extend the Continuance Period through April 30, 2018. The GEL Letter Agreement, as amended to date,
prohibits Blue Dolphin and its affiliates from making any pre-payments on indebtedness, other than in the ordinary course of business as described in the GEL
Letter Agreement, and from making any payments to Jonathan Carroll under the Amended and Restated Guaranty Fee Agreements between November 1, 2017
and the end of the Continuance Period. (Jonathan Carroll has received no cash payments since August 2016 and no common stock payments since May 2017
under the Amended and Restated Guaranty Fee Agreements.) If the parties are unable to reach an acceptable settlement with Genesis and GEL, and GEL
seeks to confirm and enforce the Final Arbitration Award against LE, our business, financial condition, and results of operations will be materially affected, and LE
would likely be required to seek protection under bankruptcy laws.
Other Legal Matters
From time to time we are involved in routine lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens and
administrative proceedings. Management does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows.
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Stock currently trades on the OTCQX U.S. tier of the OTC Markets under the ticker symbol “BDCO." The following table sets forth, for the periods
indicated, the high and low bid prices for our Common Stock as reported by 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
2017
December 31
September 30
June 30
March 31
2016
December 31
September 30
June 30
March 31
Stockholders
High
Low
$
$
$
$
$
$
$
$
0.90
1.77
2.75
4.00
$
$
$
$
3.90
4.10
4.30
5.01
$
$
$
$
0.06
0.02
1.25
3.00
2.62
1.69
4.00
3.60
At April 2, 2018, we had 271 record holders of our Common Stock. We have approximately 3,000 beneficial holders of our Common Stock.
Dividends
Under certain of our secured loan agreements, we are restricted from declaring or paying any dividend on our Common Stock without the prior written consent of
the lender. We have not declared any dividends on our Common Stock during the last two fiscal years.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
Remainder of Page Intentionally Left Blank
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORM 10-K 12/31/17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this Annual Report.
This discussion contains forward-looking statements that are based on management’s current expectations, estimates, and projections about our
business and operations. The cautionary statements made in this Annual Report should be read as applying to all related forward-looking
statements wherever they appear in this Annual Report. Our actual results may differ materially from those currently anticipated and expressed in
such forward-looking statements due to many factors, including those we discuss under “Part I, Item 1A. Risk Factors” and elsewhere in this Annual
Report. You should read such risk factors and forward-looking statements in this Annual Report.
Company Overview
See “Part I, Item 1. Business” for detailed information related to our business and operations.
Major Influences on Results of Operations
As a margin-based business, our refinery operations are primarily affected by gross margin per bbl, product slate, and refinery downtime.
Price Differentials per Bbl
The per bbl price of crude oil and condensate (input) and refined petroleum products (output) are the most significant driver of margins, and they have historically
been subject to wide fluctuations. Our per bbl cost to acquire crude oil and condensate and the per bbl price for which our refined petroleum products are
ultimately sold depend on the economics of supply and demand. Supply and demand are affected by numerous factors, most, if not all, of which are beyond our
control, including:
● Domestic and foreign market conditions, political affairs, and economic developments;
● Import supply levels and export opportunities;
● Existing domestic inventory levels;
● Operating and production levels of competing refineries;
● Expansion and/or upgrades of competitors’ facilities;
● Governmental regulations (e.g., mandated renewable fuels standards, proposed climate change laws and regulations, and increased mileage standards for
vehicles);
● Weather conditions;
● Availability of and access to transportation infrastructure;
● Availability of competing fuels (e.g., renewables); and
● Seasonal fluctuations.
For the year ended December 31, 2017 (the “Current Year”), gross margin per bbl was $3.98 compared to $1.67 for the year ended December 31, 2016 (the
“Prior Year”), reflecting an increase of $2.31. Our gross profit increased from $6,140,790 in the Prior Year to $17,344,629 in the Current Year, reflecting an
increase of $11,203,839. The increase between the periods was because of improved margins on refined petroleum products and increased sales volume.
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Product Slate
Management periodically determines whether to change the Nixon Facility’s product mix, as well as maintain, increase, or decrease inventory levels based on
various factors. These factors include the crude oil pricing market in the U.S. Gulf Coast region, the refined petroleum products market in the same region, the
relationship between these two markets, fulfilling contract demands, and other factors that may impact our operations, financial condition, and cash flows.
Refinery Downtime
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 our refining operations are conducted at a single facility. Although 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 from high winds and thunderstorms. In such cases, we must initiate a
standard refinery start-up process, which can last several days. 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.
Key Relationships
Relationship with LEH
Blue Dolphin and certain of its subsidiaries are currently party to a variety of agreements with LEH. Related party agreements with LEH include: (i) an Amended
and Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan and Security Agreement with BDPL, (iv) an
Amended and Restated Promissory Note with Blue Dolphin, and (v) a Debt Assumption Agreement with LE. In addition, we currently rely on advances from LEH
and its affiliates (including Jonathan Carroll) to fund our working capital requirements. There can be no assurances that LEH and its affiliates will continue to fund
our working capital requirements. (See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions” for additional
disclosures related to agreements that we have in place with LEH and its affiliates.)
Relationship with Crude Supplier
Operation of the Nixon Facility depends on our ability to purchase adequate amounts of crude oil and condensate on favorable terms. We currently have in
place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This supplier currently provides us with adequate
amounts of crude oil and condensate, and we expect the supplier to continue to do so for the foreseeable future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital, which have been adversely affected by net losses, working capital deficits, the contract-related
dispute with GEL, and financial covenant defaults in secured loan agreements. Management believes that it is taking the appropriate steps to improve
operations at the Nixon Facility and our overall financial stability. If our business plan is unsuccessful, it could affect our ability to acquire adequate supplies of
crude oil and condensate under the existing contract or otherwise. Further, because our existing crude supply contract is a month-to-month arrangement, there
can be no assurance that crude oil and condensate supplies will continue to be available under this contract in the future.
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Results of Operations
Effective January 1, 2017, we began reporting a single business segment – Refinery Operations. Business activities related to our Refinery Operations business
segment are conducted at the Nixon Facility. Due to their small size, amounts associated with Pipeline Transportation operations for the Current Year were
reclassified to Corporate and Other. Pipeline Transportation operations diminished significantly as services to third-parties ceased and third-party wells along our
pipeline corridor were permanently abandoned.
In this Results of Operations section, we review:
● Consolidated results (for our Refinery Operations business segment and Corporate and Other);
● Non-GAAP financial measures; and
● Refinery Operations business segment results.
Consolidated Results
Current Year Compared to Prior Year.
Total Revenue from Operations. For the Current Year, we had total revenue from operations of $258,449,579 compared to total revenue from operations of
$167,855,316 for the Prior Year, an increase of approximately 54%. Approximately 64% of the increase between the periods was the result of improved
margins for refined petroleum products while approximately 36% of the increase was due to increased sales volume.
Cost of Refined Products Sold. Cost of refined products sold was $241,104,950 for the Current Year compared to $161,714,526 for the Prior Year. The
approximate 49% increase in cost of refined products sold was the result of higher crude oil prices and increased sales volume in the Current Year compared to
the Prior Year.
Gross Profit. For the Current Year, gross profit totaled $17,344,629 compared to gross profit of $6,140,790 for the Prior Year. The $11,203,839 increase
between the periods related to improved margin for refined petroleum products and increased sales volume in the Current Year compared to the Prior Year.
Refinery Operating Expenses. We recorded refinery operating expenses of $8,145,553 in the Current Year compared to $12,040,676 in the Prior Year, a
decrease of approximately 32%. Refinery operating expenses per bbl of throughput were $1.81 in the Current Year compared to $3.35 in the Prior Year. The
$1.54 decrease in refinery operating expenses per bbl of throughput between the periods was the result of: (i) significantly lower refinery operating expenses
under the Amended and Restated Operating Agreement, which was restructured following cessation of crude supply and marketing activities under the Crude
Supply Agreement and Joint Marketing Agreement with GEL and (ii) a decrease in off-site tank leasing expense under an Amended and Restated Tank Lease
Agreement. (See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions” for additional disclosures related to
components of refinery operating expenses, the Amended and Restated Operating Agreement, and the Amended and Restated Tank Lease Agreement.)
JMA Profit Share. For the Current Year, the JMA Profit Share was $0 compared to an expense of $359,260 for the Prior Year. Elimination of the JMA Profit
Share between the periods was the result of cessation of marketing activities under the Joint Marketing Agreement. (See “Part II, Item 8. Financial Statements
and Supplementary Data – Note (19) Commitments and Contingencies – Legal Matters” for further discussion related to the Joint Marketing Agreement, JMA
Profit Share, Gross Profits and the contract-related dispute with GEL.)
Arbitration Award and Associated Fees. For the Current Year, we recorded $24,338,668 in expenses associated with the Final Arbitration Award. There were
no such expenses in the Prior Year.
General and Administrative Expenses . We incurred general and administrative expenses of $4,021,962 in the Current Year compared to $2,708,594 in the Prior
Year. The 51% increase in general and administrative expenses in the Current Year compared to the Prior Year primarily related to an increase in legal fees.
Legal fees, the majority of which were associated with the contract-related dispute with GEL, totaled $2,142,478 in the Current Year compared to $1,093,050 in
the Prior Year.
35
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Depletion, Depreciation and Amortization. We recorded depletion, depreciation and amortization expenses of $1,810,134 in the Current Year compared to
$1,935,644 in the Prior Year. The approximate 6% decrease in depletion, depreciation and amortization expenses for the Current Year compared to the Prior
Year was primarily due to lower depreciation related to our pipeline assets, which were fully impaired in December 2016.
Impairment Expense. Impairment expense totaled $303,346 for the Current Year compared to $968,684 for the Prior Year. We fully impaired our trade name
intangible asset at December 31, 2017, resulting in the impairment expense of $303,346. The impairment expense in the Prior Year related to our pipeline fixed
assets.
Other Income (Expense). Total other income (expense) was expense of $457,026 in the Current Year compared to income of $70,326 in the Prior Year. During
the Current Year, a gain on the disposal of property was offset by an increase in working capital loan interest and lower easement income. In February 2017,
BDPL sold approximately 15 acres of property located in Brazoria County Texas to FLIQ Common Facilities, LLC, an affiliate of FLNG. In conjunction with the
sale of real estate, the Master Easement Agreement was terminated.
Income Tax Benefit . We recognized an income tax benefit of $0 in the Current Year compared to an income tax expense of $3,607,237 in the Prior
Year. Income tax expense in the Prior Year primarily related to a full valuation allowance against deferred tax assets as of December 31, 2016. (See “Part II,
Item 8. Financial Statements and Supplementary Data – Note (16) Income Taxes” for additional disclosures related to income taxes.)
Net Loss. For the Current Year, we reported a net loss of $22,328,390, or loss of $2.09 per share, compared to a net loss of $15,767,448, or loss of $1.51 per
share, for the Prior Year. The $0.58 per share increase in net loss between the periods was the result of the Final Arbitration Award, which was partially offset
by improved margins for refined petroleum products and increased sales volume. The amount expensed in the period related to the Final Arbitration Award was
$24,338,628, which represented $2.28 per share. Excluding the Final Arbitration Award, we would have reported net income of $0.19 per share.
Remainder of Page Intentionally Left Blank
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Non-GAAP Financial Measures
To supplement our consolidated results, management uses EBITDA, a non-GAAP financial measures, to help investors evaluate our ongoing operating results
and allow for greater transparency in reviewing our overall financial, operational and economic performance. EBITDA is reconciled to GAAP-based results below.
EBITDA should not be considered an alternative for GAAP results. EBITDA is provided to enhance an overall understanding of our financial performance for the
applicable periods and is an indicator management believes is relevant and useful. EBITDA may differ from similar calculations used by other companies within
the petroleum industry, thereby limiting its usefulness as a comparative measure. (See “Part I, Item 1. Financial Statements” for comparative GAAP results.)
EBITDA Current Year Compared to Prior Year.
Refinery Operations EBITDA. Refinery operations EBITDA for the Current Year was a loss of $17,988,895 compared to a loss of $7,919,750 for the Prior
Year. The significant decrease in refinery operations EBITDA between the periods was the result of the Final Arbitration Award.
EBITDA Reconciliation to GAAP – Current Year Compared to Prior Year .
2017
Segment
2016
Segment
Years Ended December 31,
Refinery
Operations
$ 258,449,579
(252,099,846)
-
-
(24,338,628)
(17,988,895)
$
$
$
Corporate &
Other
-
(1,768,989)
1,912,905
-
-
143,916
Total
$ 258,449,579
(253,868,835)
1,912,905
-
-
(17,844,979)
$
Refinery
Operations
$ 167,780,326
(175,340,816)
-
(359,260)
-
(7,919,750)
$
$
$
Corporate &
Other
74,990
(2,450,133)
1,914,607
-
-
(460,536)
Total
$ 167,855,316
(177,790,949)
1,914,607
(359,260)
-
(8,380,286)
$
(1,810,134)
(2,673,277)
(22,328,390
-
(1,935,644)
(1,844,281)
(12,160,211)
(3,607,237)
$
(22,328,390)
$ (15,767,448)
Revenue from operations
Less: cost of operations(1)
Other non-interest income(2)
Less: JMA Profit Share (3)
Less: Arbitration award(3)
EBITDA
Depletion, depreciation and
amortization
Interest expense, net
Income before income taxes
Income tax expense
Net income
_____________________
(1) Operation cost within the Refinery Operations segment includes related general and administrative 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), as
well as expenses associated with our pipeline assets and oil and/or gas leasehold interests (such as accretion and impairment expenses).
(2) Other non-interest income reflects FLNG easement revenue.
(3) The JMA Profit Share represents the GEL Profit Share plus the Performance Fee for the period pursuant to the Joint Marketing Agreement, under which
marketing activities have ceased. (See “Part II, Item 8. Financial Statements and Supplementary Data – Note (1) Organization – Going Concern – Final GEL
Arbitration Award” for further discussion of the contract-related dispute with GEL.)
(4) Arbitration award reflects damages and GEL’s attorneys’ fees and related expenses awarded to GEL as part of the Final Arbitration Award.
37
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Refinery Operations Business Segment Results
For the Current Year, gross margin per bbl was $3.98 compared to $1.67 for the Prior Year, reflecting an increase of $2.31. Our gross profit increased from
$6,140,790 in the Prior Year to $17,344,629 in the Current Year, reflecting an increase of $11,203,839. The increase between the periods was because of
improved margins on refined petroleum products and increased sales volume.
Refinery Throughput and Production Data .
Following are refinery operational metrics for the Nixon Facility:
Calendar Days
Refinery downtime
Operating Days
Total refinery throughput (bbls)
Operating days:
bpd
Capacity utilization rate
Calendar days:
bpd
Capacity utilization rate
Total refinery production (bbls)
Operating days:
bpd
Capacity utilization rate
Calendar days:
Years Ended December 31,
2017
2016
365
(17)
348
366
(75)
291
4,488,658
3,594,231
12,898
86.0%
12,351
82.3%
12,298
82.0%
9,820
65.5%
4,352,745
3,496,011
12,508
83.4%
12,014
80.1%
bpd
Capacity utilization rate
_____________________
Note: The small difference between total refinery throughput (volume processed as input) and total refinery production (volume processed as output)
represents a combination of multiple factors including refinery fuel use, elimination of some impurities originally present in the crude oil, loss, and other
factors.
79.5%
11,925
63.7%
9,552
In the Current Year, the Nixon Facility experienced 17 days of refinery downtime related to throughput management, repairs, and Hurricane Harvey. In the Prior
Year, the Nixon Facility experienced 75 days of refinery downtime primarily due to the contract-related dispute with GEL. Total refinery throughput bbls and total
refinery production bbls increased approximately 25% in the Current Year compared to the Prior Year because of improved refinery uptime associated with
crude oil and condensate delivery.
Refined Petroleum Product Sales Summary.
See “Part II, Item 8. Financial Statements and Supplementary Data - Note (14) Concentration of Risk” for a discussion of refined petroleum product sales.
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Refined Petroleum Products Economic Hedges.
During 2017, we began selling certain of our refined petroleum products immediately following production, which minimizes inventory, improves cash flow, and
reduces commodity risk/exposure. Previously, Genesis/GEL used commodity futures contracts to mitigate the volatile change in value for certain of our refined
petroleum products inventory.
We had no open commodity contracts in the Current Year. For the Prior Year, our refinery operations business segment recognized a loss of $2,629,298 on
settled transactions and a gain of $183,400 on the change in value of open contracts from December 31, 2015 to December 31, 2016.
Liquidity and Capital Resources
Overview.
Historically, we relied on the profit share distribution and operations payments under a Joint Marketing Agreement with GEL, as well as LEH, to fund our liquidity
needs. As disclosed elsewhere in this Annual Report, beginning in the second quarter of 2016, LE experienced an adverse change in its relationship with
Genesis/GEL involving a contract-related dispute. This shift in the relationship negatively affected our customer relationships, prevented us from taking
advantage of business opportunities, disrupted refinery operations, diverted management’s focus away from running the business, and impacted our ability to
obtain financing. Combined with decreased commodity prices throughout 2016, our resultant financial state raised substantial doubt about our ability to continue
as a going concern, which, in conjunction with the Final Arbitration Award, has continued into 2018. (As discussed elsewhere within this “Liquidity and Capital
Resources” section, management has determined that there is substantial doubt about our ability to continue as a going concern due to consecutive quarterly net
losses, inadequate working capital, the Final Arbitration Award, crude supply issues tied to access to capital, and defaults under secured loan agreements. See
“Part I, Item 1. Business – Going Concern,” “Part I, Item 1. Business -- Operating Risks,” and “Part II, Item 8. Financial Statements and Supplementary Data –
Note (1) Organization – Going Concern” for additional disclosures related to the contract-related dispute with GEL, the Final Arbitration Award, the GEL Letter
Agreement (as amended), defaults under secured loan agreements, and going concern.)
Currently, we rely on revenue from operations, LEH and its affiliates (including Jonathan Carroll), and borrowings under bank facilities to meet our liquidity
needs. Primary uses of cash include: (i) reimbursement of LEH for refinery operating expenses under the Amended and Restated Operating Agreement, (ii)
payments on long-term debt and the Final Arbitration Award, and (iii) purchase of crude oil and condensate.
During the Current Year, we continued aggressive actions to improve operations and liquidity. We began selling certain of our refined petroleum products
immediately following production, which minimizes inventory, improves cash flow, and reduces commodity risk/exposure. We completed construction on several
new petroleum storage tanks at the Nixon Facility. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii) supports increased
refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing to third-parties. We
also reduced our working capital requirements in a rising cost environment by decreasing costs, reducing inventory levels, improving our sales cycle, and
requiring pre-payments from certain customers. Management believes that it is taking the appropriate steps to improve operations at the Nixon Facility and our
overall financial stability. However, there can be no assurance that our business plan will be successful, LEH and its affiliates will continue to fund our working
capital needs, or that we will be able to obtain additional financing on commercially reasonable terms or at all. Among other factors, the Final Arbitration Award
could prevent us from successfully executing our business plan.
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Crude Oil and Condensate Supply .
Operation of the Nixon Facility depends on our ability to purchase adequate amounts of crude oil and condensate on favorable terms. We currently have in
place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This supplier currently provides us with adequate
amounts of crude oil and condensate, and we expect the supplier to continue to do so for the foreseeable future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital, which have been adversely affected by net losses, working capital deficits, the contract-related
dispute with GEL, and financial covenant defaults in secured loan agreements.
Management believes that it is taking the appropriate steps to improve operations at the Nixon Facility and our overall financial stability. However, there can be
no assurance that our business plan will be successful, LEH and its affiliates (including Jonathan Carroll) will continue to fund our working capital needs, or that
we will be able to obtain additional financing on commercially reasonable terms or at all. If our business plan is unsuccessful, it could affect our ability to acquire
adequate supplies of crude oil and condensate under the existing contract or otherwise. Among other factors, the Final Arbitration Award could prevent us from
successfully executing our business plan and could have a material adverse effect on our ability to procure adequate amounts of crude oil and condensate from
our current supplier or otherwise. Further, because our existing crude supply contract is a month-to-month arrangement, there can be no assurance that crude
oil and condensate supplies will continue to be available under this contract in the future.
Cash Flow.
Our cash flow from operations for the periods indicated was as follows:
Beginning cash, cash equivalents, and restricted cash
Cash flow from operations
Adjusted loss from operations
Change in assets and current liabilities
Total cash flow from operations
Cash inflows (outflows)
Proceeds from issuance of debt
Payments on debt
Net activity on related-party debt
Capital expenditures
Total cash inflows (outflows)
Total change in cash flows
Years Ended December 31,
2017
6,082,768
$
2016
$
20,645,652
(19,657,847)
14,714,278
(9,257,921)
5,378,581
(4,943,569)
(3,879,340)
3,677,953
(1,364,031)
1,124,803
(2,431,701)
7,118,969
(3,701,616)
-
(14,100,897)
1,007,024
(10,683,544)
(3,936,545)
(14,562,884)
Ending cash, cash equivalents, and restricted cash
$
2,146,223
$
6,082,768
For the Current Year, we experienced negative cash flow from operations of $4,943,569 compared to negative cash flow from operations of $3,879,340 for the
Prior Year. The $1,064,229 decline in cash flow from operations between the periods was primarily the result of expenses related to the Final Arbitration Award.
40
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Working Capital.
For the Current Year, net cash provided by financing activities totaled $3,438,725 compared to net cash provided by financing activities totaling $3,417,353 for
the Prior Year. Working capital provided by financing activities represented advances from LEH and its affiliates (including Jonathan Carroll) under promissory
notes. (See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions and Note (10) Long-Term Debt, Net,” as well
as “Contractual Obligations – Related Party” within the Liquidity and Capital Resources section for additional disclosures with respect to related party promissory
notes.)
We had a working capital deficit of $69,512,829 at December 31, 2017 compared to a working capital deficit of $37,812,263 at December 31, 2016. Excluding
long-term debt, we had a working capital deficit of $29,968,427 at December 31, 2017, compared to a working capital deficit of $5,599,927 at December 31,
2016. The significant increase in working capital deficit between the periods primarily related to the Final Arbitration Award and a decrease in cash and cash
equivalents.
As discussed elsewhere within this “Liquidity and Capital Resources” section, the contract-related dispute with GEL and the Final Arbitration Award has affected
our ability to obtain working capital through financing. Although LE is currently in settlement discussions with GEL, we expect this to continue for the foreseeable
future. We currently rely on LEH and its affiliates (including Jonathan Carroll) to fund our working capital requirements. There can be no assurance that LEH
and its affiliates (including Jonathan Carroll) will continue to fund our working capital requirements.
Capital Spending.
Capital improvements primarily relate to construction of new petroleum storage tanks to add to existing petroleum storage capacity. Since 2015, the Nixon
Facility has been undergoing a capital improvement expansion project to construct over 800,000 bbls of petroleum storage tankage. During the Current Year,
we completed several new tanks for which construction began during 2016. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility,
(ii) supports increased refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing
to third-parties. Due to the Final Arbitration Award, capital spending in the Current Year was minimal.
Capital expenditures at the Nixon Facility are being funded by Veritex through long-term debt that was secured in 2015. Available funds under these loans are
reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. Restricted cash (current portion) represents funds to pay
outstanding construction invoices and to fund construction contingencies. Restricted cash (current portion) totaled $48,980 and $3,347,835 at December 31,
2017 and 2016, respectively. Restricted cash, non-current represents funds held in our disbursement account with Veritex to complete construction of new
petroleum storage tanks. Restricted cash, noncurrent totaled $1,601,947 and $1,582,305 at December 31, 2017 and 2016, respectively.
Total capital expenditures for the periods indicated were as follows:
Capital expenditures financed by:
Cash disbursements
Accounts payable(1)
December 31,
2017
2016
$
$
2,431,701
1,650,910
4,082,611
$
$
14,100,897
2,286,082
16,386,979
_____________________
(1) Represents construction-related vendor invoices awaiting payment from the loan disbursement account.
See “Part II, Item 8. Financial Statements and Supplementary Data – Note (10) Long-Term Debt, Net” for additional disclosures related to borrowings for capital
spending.
41
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Contractual Obligations.
Related Party. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions” for a summary of the agreements we
have in place with related parties.
GEL. See “Part I, Item 1A. Risk Factors,” as well as “Part II, Item 8. Financial Statements and Supplementary Data – Note (1) Organization – Going Concern –
Final GEL Arbitration Award” for disclosures related to the contract-related dispute with GEL and the Final Arbitration Award.
Supplemental Pipeline Bonds. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (1) Organization – Going Concern – Final GEL
Arbitration Award and Note (19) Commitments and Contingencies – Supplemental Pipeline Bonds” for a discussion of supplemental pipeline bonding
requirements.
Indebtedness.
The principal balances outstanding on our long-term debt, net (including related party) for the periods indicated were as follow:
First Term Loan Due 2034 (in default)
Second Term Loan Due 2034 (in default)
Notre Dame Debt (in default)
LEH Loan Agreement
March Ingleside Note
March Carroll Note
Term Loan Due 2017
Capital Leases
Less: Current portion of long-term debt, net
Less: Unamoritized debt issue costs
$
December 31,
$
2017
23,199,031
9,501,930
4,977,953
4,000,000
1,168,748
439,733
-
-
43,287,395
2016
23,924,607
9,729,853
1,300,000
4,000,000
722,278
592,412
184,994
135,879
40,590,023
(39,544,402)
(32,212,336)
(2,134,512)
(2,262,997)
$
1,608,481
$
6,114,690
Payments on long-term debt totaled $1,364,031 in the Current Year compared to $3,701,616 in the Prior Year.
As described elsewhere in this Annual Report, Veritex notified obligors that the Final Arbitration Award constitutes an event of default under the First Term Loan
Due 2034 and Second Term Loan Due 2034. In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LE and LRM
were in violation of the debt service coverage ratio, the current ratio, and debt to net worth ratio financial covenants related to the secured loan agreements. LE
also failed to replenish a payment reserve account as required. The occurrence of events of default under the secured loan agreements permits Veritex to
declare the amounts owed under the secured loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’
obligations under the loan agreements, and/or exercise any other rights and remedies available. Veritex informed obligors that it is not currently exercising its
rights, privileges and remedies under the secured loan agreements considering the ongoing settlement discussions with GEL and the continuance of the hearing
on confirmation of the Final Arbitration Award and to allow Veritex to evaluate any proposed settlement agreement related to the Final Arbitration Award, which
would require Veritex’s approval. However, Veritex expressly reserved all its rights, privileges and remedies related to events of default under the secured loan
agreements and informed obligors that it would consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan
agreements. Any exercise by Veritex of its rights and remedies under the secured loan agreements would have a material adverse effect on our business,
financial condition, and results of operations and would likely require us to seek protection under bankruptcy laws.
42
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
See “Part II, Item 8. Financial Statements and Supplementary Data – Note (1) Organization – Going Concern and Operating Risks, as well as Note (10) Long-
Term Debt, Net” for additional disclosures related to long-term debt financial covenant violations and events of default.
See “Contractual Obligations – Related Party” within the Liquidity and Capital Resources section for additional disclosures with respect to related party
indebtedness.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Long-Lived Assets.
Refinery and Facilities. Management expects to continue making improvements to the Nixon Facility based on operation needs and technological
advances. Additions to refinery and facilities assets are capitalized. Expenditures for repairs and maintenance are expensed as incurred and included as
operating expenses under the Amended and Restated Operating Agreement.
We record refinery and facilities at cost less any adjustments for depreciation or impairment. Adjustment of the asset and the related accumulated depreciation
accounts are made for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of
operations. For financial reporting purposes, depreciation of refinery and facilities assets is computed using the straight-line method using an estimated useful
life of 25 years beginning when the refinery and facilities assets are placed in service. As a result of the Final Arbitration Award, which represents a significant
adverse change that could affect the value of a long-lived asset, management performed potential impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we determined that no impairment was necessary at December 31, 2017. We did not record any
impairment of our refinery and facilities assets for the year ended December 31, 2016.
Pipelines and Facilities Assets . Our pipelines and facilities are recorded at cost less any adjustments for depreciation or impairment. Depreciation is computed
using the straight-line method over estimated useful lives ranging from 10 to 22 years. In accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) guidance on accounting for the impairment or disposal of long-lived assets, management performed periodic
impairment testing of our pipeline and facilities assets in the fourth quarter of 2016. Upon completion of that testing, our pipeline assets were fully impaired. All
pipeline transportation services to third-parties have ceased, existing third-party wells along our pipeline corridor were permanently abandoned, and no new
third-party wells are being drilled near our pipelines. However, management believes our pipeline assets have future value based on large-scale, third-party
production facility expansion projects near the pipelines.
Oil and Gas Properties. Our oil and gas properties are accounted for 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. All leases associated with our oil and gas properties have expired,
and our oil and gas properties were fully impaired in 2011.
Construction in Progress. Construction in progress expenditures, which relate to construction and refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in service.
Revenue Recognition.
Refined Petroleum Products Revenue. Revenue from the sale of refined petroleum products is recognized when sales prices are fixed or determinable,
collectability is reasonably assured, and title passes. Title passage occurs when refined petroleum products are delivered in accordance with the terms of the
respective sales agreements, and customers assume the risk of loss when title is transferred. Transportation, shipping and handling costs incurred are included
in cost of refined products sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
43
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
Tank Rental Revenue. We lease petroleum storage tanks to third-parties. Tank rental fees are invoiced monthly in accordance with the terms of the related
lease agreement. Tank rental revenue is recognized on a straight-line basis as earned.
Inventory.
Our inventory primarily consists of refined petroleum products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net realizable
value with cost being determined by the average cost method, and net realizable value being determined based on estimated selling prices less any associated
delivery costs. If the net realizable value of our refined petroleum products inventory declines to an amount less than our average cost, we record a write-down
of inventory and an associated adjustment to cost of refined products sold.
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 assets. 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 legal or contractual obligation to dismantle or remove the refinery and facility assets
arises and 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 abandoning wells and restoring land and sea beds. We developed these cost estimates for each
of our assets based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering consultations. Because these costs typically extend many years into the future, estimating 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.
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 reporting period 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 the deferred tax assets will be realized, which is dependent upon the generation of future
taxable income prior to the expiration of any NOL carryforwards. At December 31, 2017 and 2016, management determined that cumulative losses incurred over
the prior three-year period provided significant objective evidence that limited the ability to consider other subjective evidence, such as projections for future
growth. Based on this evaluation, we recorded a full valuation allowance against the deferred tax assets as of December 31, 2017 and 2016.
44
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BLUE DOLPHIN ENERGY COMPANY
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
FORM 10-K 12/31/17
FASB ASC guidance related to income taxes 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 de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition.
See “Part II, Item 8. Financial Statements and Supplementary Data - Note (16) Income Taxes” for further information related to income taxes.
Recently Adopted Accounting Guidance
The Financial Accounting Standards Board (“FASB”) issues an Accounting Standards Update (“ASU”) to communicate changes to the FASB Accounting
Standards Codification, including changes to non-authoritative SEC content. Recently adopted ASUs include:
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. In July 2015, FASB issued ASU 2015-11, which requires an entity to measure
inventory at the lower of cost or net realizable value. We adopted this accounting pronouncement effective January 1, 2017. The adoption of ASU 2015-11 did
not have a significant impact on our consolidated financial statements.
New Pronouncements Issued, Not Yet Effective
The following are recently issued, but not yet effective, ASU’s that may influence our consolidated financial position, results of operations, or cash flows:
ASU 2018-05, Income Taxes (Topic 740) . In March 2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in
the period of enactment. This guidance also includes amendments to the XBRL Taxonomy. For public business entities, the amendments in ASU 2018-05 are
effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this guidance to have a significant impact
on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842). In February 2016, FASB issued ASU 2016-02. This guidance increases transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For a public business entity,
the amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated balance sheets.
ASU 2014-09, Revenue from Contracts with Customers . In May 2014, FASB issued ASU 2014-09 and has since amended the standard with ASU 2015-
14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ; ASU 2016-08, Revenue from Contracts with Customers (Topic 606):
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing; ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC
Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update);
ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ; ASU 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers; and ASU 2017-14, Income Statement – Reporting Comprehensive
Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). These standards replace existing revenue
recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. We do not expect the adoption of
ASU 2014-09 to have a material impact on our consolidated financial position, results of operations, or cash flows.
Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
45
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Remainder of Page Intentionally Left Blank
47
48
49
50
51
52
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
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Blue Dolphin Energy Company and Subsidiaries (the “Company”) as of December 31, 2017
and 2016, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes
(collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of operations and its cash flows for the years then ended, in conformity
with accounting principles general accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
(1) to the consolidated financial statements, the Company has received an adverse outcome of arbitration proceedings, has suffered recurring losses from
operations, has a net working capital deficiency and is in violation of certain financial covenants in their secured loan agreements. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. Management's plans regarding these matters are also described in Note (1). The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
/s/ UHY LLP
UHY LLP
Sterling Heights, Michigan
April 2, 2018
47
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Accounts receivable, related party
Prepaid expenses and other current assets
Deposits
Inventory
Total current assets
LONG-TERM ASSETS
Total property and equipment, net
Restricted cash, noncurrent
Surety bonds
Trade name
Total long-term assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Long-term debt less unamortized debt issue costs, current portion
Long-term debt, related party, current portion
Interest payable, current portion
Interest payable, related party, current portion
Accounts payable
Accounts payable, related party
Asset retirement obligations, current portion
Accrued expenses and other current liabilities
Accrued arbitration award payable
Total current liabilities
LONG-TERM LIABILITIES
Asset retirement obligations, net of current portion
Deferred revenues and expenses
Long-term debt less unamortized debt issue costs, net of current portion
Long-term debt, related party, net of current portion
Long-term interest payable, net of current portion
Total long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies (Note 19)
FORM 10-K 12/31/17
December 31,
2017
2016
$
$
495,296
48,980
1,356,859
652,928
1,206,971
129,200
3,089,204
6,979,438
64,596,939
1,601,947
230,000
-
66,428,886
1,152,628
3,347,835
2,022,166
1,161,589
1,046,191
138,957
2,075,538
10,944,904
62,324,463
1,582,305
205,000
303,346
64,415,114
$
73,408,324
$
75,360,018
$
$
35,544,402
4,000,000
2,135,327
892,444
2,343,795
974,400
2,314,571
1,159,465
27,127,863
76,492,267
-
41,695
-
1,608,481
-
1,650,176
31,712,336
500,000
80,200
243,556
14,552,383
369,600
17,510
1,281,582
-
48,757,167
2,010,129
83,390
1,300,000
4,814,690
1,691,383
9,899,592
78,142,443
58,656,759
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ($0.01 par value, 20,000,000 shares authorized; 10,925,513 and
10,624,714 shares issued at December 31,2017 and December 31, 2016, respectively)
Additional paid-in capital
Accumulated deficit
Treasury stock (0 and 150,000 shares at cost at December 31, 2017 and December 31, 2016, respectively)
Total stockholders' equity (deficit)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
109,255
36,906,533
(41,749,907)
-
(4,734,119)
73,408,324
$
106,248
36,818,528
(19,421,517)
(800,000)
16,703,259
75,360,018
$
See accompanying notes to consolidated financial statements.
48
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Consolidated Statements of Operations
REVENUE FROM OPERATIONS
Refined petroleum product sales
Tank rental revenue
Other operations
Total revenue from operations
COST OF OPERATIONS
Cost of refined products sold
Refinery operating expenses
Joint Marketing Agreement profit share
Other operating expenses
Arbitration award and associated fees
General and administrative expenses
Depletion, depreciation and amortization
Impairment of asset
Bad debt expense (recovery)
Accretion of asset retirement obligations
Total cost of operations
Loss from operations
OTHER INCOME (EXPENSE)
Easement, interest and other income
Interest and other expense
Gain on disposal of property
Total other income (expense)
Loss before income taxes
Income tax expense
Net loss
Loss per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
FORM 10-K 12/31/17
Years Ended December 31,
2017
2016
$ 255,547,311
2,902,268
-
258,449,579
$ 165,413,778
2,366,548
74,990
167,855,316
241,104,950
8,145,553
-
227,791
24,338,628
4,021,962
1,810,134
303,346
81,203
287,376
280,320,943
(21,871,364)
161,714,526
12,040,676
359,260
385,593
-
2,708,594
1,935,644
968,684
(139,868)
112,744
180,085,853
(12,230,537)
478,638
(2,770,164)
1,834,500
(457,026)
1,924,893
(1,854,567)
-
70,326
(22,328,390)
(12,160,211)
-
(3,607,237)
$ (22,328,390)
$ (15,767,448)
$
$
(2.09)
(2.09)
$
$
(1.51)
(1.51)
10,689,615
10,689,615
10,464,061
10,464,061
49
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Consolidated Statements of Stockholders’ Equity (Deficit)
Common Stock
Balance at December 31, 2015
Shares Issued
10,603,802 $
106,038 $36,738,737 $ (3,654,069)
Deficit
Shares
(150,000) $
Cost
Equity (Deficit)
(800,000) $32,390,706
Additional
Paid-In
Capital
Par Value
Accumulated
Treasury Stock
Stockholders’
Total
Common stock issued for services
Net loss
20,912
-
210
-
79,791
-
- (15,767,448)
-
-
80,001
-
- (15,767,448)
Balance at December 31, 2016
10,624,714 $
106,248 $36,818,528 $(19,421,517)
(150,000) $
(800,000) $16,703,259
Common stock issued for services
Net loss
300,799
-
3,007
-
88,005
-
- (22,328,390)
150,000
-
800,000
891,012
- (22,328,390)
Balance at December 31, 2017
10,925,513 $
109,255 $36,906,533 $(41,749,907)
- $
- $ (4,734,119)
See accompanying notes to consolidated financial statements.
Remainder of Page Intentionally Left Blank
50
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Depletion, depreciation and amortization
Unrealized gain on derivatives
Deferred income tax
Amortization of debt issue costs
Accretion of asset retirement obligations
Common stock issued for services
Bad debt (recovery of bad debt)
Impairment of assets
Changes in operating assets and liabilities
Accounts receivable
Accounts receivable, related party
Prepaid expenses and other current assets
Deposits and other assets
Inventory
Accrued arbitration award
Accounts payable, accrued expenses and other liabilities
Accounts payable, related party
Net cash used in operating activities
INVESTING ACTIVITIES
Capital expenditures
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from issuance of debt
Payments on debt
Net activity on related-party debt
Net cash provided by financing activities
Net decrease in cash, cash equivalents, and restricted cash
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
Supplemental Information:
Non-cash investing and financing activities:
Financing of capital expenditures via accounts payable
Financing of guaranty fees via long-term debt, related party
Conversion of related-party notes to common stock
Interest paid
Income taxes paid
See accompanying notes to consolidated financial statements.
FORM 10-K 12/31/17
Years Ended December 31,
2017
2016
$ (22,328,390)
$ (15,767,448)
1,810,134
-
-
128,484
287,376
60,000
81,203
303,346
584,105
508,661
(160,780)
(15,243)
(1,013,666)
27,127,863
(12,921,462)
604,800
(4,943,569)
1,935,644
(183,400)
3,607,237
128,485
112,744
80,001
(139,868)
968,684
3,574,947
(1,161,589)
95,449
1,073,457
5,732,780
-
(4,006,063)
69,600
(3,879,340)
(2,431,701)
(2,431,701)
(14,100,897)
(14,100,897)
3,677,953
(1,364,031)
1,124,803
3,438,725
(3,936,545)
7,118,969
(3,701,616)
-
3,417,353
(14,562,884)
6,082,768
2,146,223
$
20,645,652
6,082,768
1,650,910
$
2,286,082
327,462
$
831,012
$
-
-
2,688,449
$
2,357,237
-
$
-
$
$
$
$
$
$
51
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements
(1)
Organization
FORM 10-K 12/31/17
Nature of Operations. Blue Dolphin Energy Company (“Blue Dolphin,”) is primarily an independent refiner and marketer of petroleum products. Our primary
asset is a 15,000-bpd crude oil and condensate processing facility located in Nixon, Texas (the “Nixon Facility”). As part of our refinery operations business
segment, petroleum storage and terminaling operations under third-party lease agreements are conducted at the Nixon Facility. We also own pipeline assets
and have leasehold interests in oil and gas properties. The pipelines and oil and gas wells are not operational. (See “Note (4) Business Segment Information” for
further discussion of our business segments.)
Structure and Management. Blue Dolphin is a Delaware corporation that was formed in 1986. Blue Dolphin is controlled by Lazarus Energy Holdings, LLC
(“LEH”). LEH operates and manages all Blue Dolphin properties pursuant to an Amended and Restated Operating Agreement (the “Amended and Restated
Operating Agreement”). Jonathan Carroll is Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, as well as
a majority owner of LEH. Together LEH and Jonathan Carroll own 80.2% of our common stock, par value $0.01 per share (the “Common Stock). (See “Note (8)
Related Party Transactions,” “Note (10) Long-Term Debt, Net” and “Note (19) Commitments and Contingencies – Financing Agreements” for additional
disclosures related to LEH, the Amended and Restated Operating Agreement, and Jonathan Carroll.)
Our operations are conducted through the following active subsidiaries:
● Lazarus Energy, LLC, a Delaware limited liability company (“LE”).
● Lazarus Refining & Marketing, LLC, a Delaware limited liability company (“LRM”).
● Blue Dolphin Pipe Line Company, a Delaware corporation (“BDPL”).
● Blue Dolphin Petroleum Company, a Delaware corporation.
● Blue Dolphin Services Co., a Texas corporation (“BDSC”).
See "Part I, Item 1. Business and Item 2. Properties” for additional information regarding our operating subsidiaries, principal facilities, and assets.
References in this Annual Report to “we,” “us,” and “our” are to Blue Dolphin and its subsidiaries unless otherwise indicated or the context otherwise requires.
Going Concern. Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include
the following:
● Final GEL Arbitration Award – As previously disclosed, LE was involved in arbitration proceedings (the “GEL Arbitration”) with GEL Tex Marketing, LLC
(“GEL”), an affiliate of Genesis Energy, LP (“Genesis”), related to a contractual dispute involving a Crude Oil Supply and Throughput Services Agreement
(the “Crude Supply Agreement”) and a Joint Marketing Agreement (the “Joint Marketing Agreement”), each between LE and GEL and dated August 12,
2011. On August 11, 2017, the arbitrator delivered its final award in the GEL Arbitration (the “Final Arbitration Award”). The Final Arbitration Award denied
all LE’s claims against GEL and granted substantially all the relief requested by GEL in its counterclaims. Among other matters, the Final Arbitration Award
awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate amount of approximately $31.3 million.
As previously disclosed, a hearing on confirmation of the Final Arbitration Award was scheduled to occur on September 18, 2017 in state district court in
Harris County, Texas. Prior to the scheduled hearing, LE and GEL jointly notified the court that the hearing would be continued for a period of no more than
90 days after September 18, 2017 (the “Continuance Period”), to facilitate settlement discussions between the parties. On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a Letter Agreement with GEL, effective September 18, 2017 (the “GEL Letter Agreement”),
confirming the parties’ agreement to the continuation of the confirmation hearing during the Continuance Period, subject to the terms of the GEL Letter
Agreement.
52
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
The GEL Letter Agreement has been amended to extend the Continuance Period through April 30, 2018. The GEL Letter Agreement, as amended to date,
prohibits Blue Dolphin and its affiliates from making any pre-payments on indebtedness, other than in the ordinary course of business as described in the
GEL Letter Agreement, and from making any payments to Jonathan Carroll under the Amended and Restated Guaranty Fee Agreements between
November 1, 2017 and the end of the Continuance Period. (Jonathan Carroll has received no cash payments since August 2016 and no common stock
payments since May 2017 under the Amended and Restated Guaranty Fee Agreements.) If the parties are unable to reach an acceptable settlement with
Genesis and GEL, and GEL seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be
materially affected, and LE would likely be required to seek protection under bankruptcy laws.
● Veritex Secured Loan Agreement Event of Default – Veritex Community Bank (“Veritex”), as successor in interest to Sovereign Bank by merger, delivered to
obligors notices of default under secured loan agreements with Veritex, stating that the Final Arbitration Award constitutes an event of default under the
secured loan agreements. The occurrence of an event of default permits Veritex to declare the amounts owed under these loan agreements immediately
due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights
and remedies available. Veritex informed obligors that it is not currently exercising its rights and remedies under the secured loan agreements considering
the ongoing settlement discussions with GEL and the continuance of the hearing on confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final Arbitration Award, which would require Veritex’s approval. However, Veritex expressly
reserved all its rights, privileges and remedies related to events of default under the secured loan agreements and informed obligors that it would consider a
final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements. Any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material adverse effect on our business, financial condition, and results of operations and would
likely require us to seek protection under bankruptcy laws. The debt associated with loans under secured loan agreements was classified within the current
portion of long-term debt on our consolidated balance sheet at December 31, 2017 due to existing events of default related to the Final Arbitration Award as
well as the uncertainty of LE and LRM’s ability to meet financial covenants in the secured loan agreements in the future.
We are currently evaluating the effects of the Final Arbitration Award on our business, financial condition, and results of operations. In addition to the matters
described above, the Final Arbitration Award could materially and adversely affect our ability to procure adequate amounts of crude oil and condensate or our
relationships with our customers. The contract-related dispute has negatively affected our customer relationships, prevented us from taking advantage of
business opportunities, disrupted refinery operations, diverted management’s focus away from running the business, and impacted our ability to obtain financing.
We can provide no assurance as to whether negotiations with GEL will result in a settlement, the potential terms of any such settlement, or whether Veritex
would approve any such settlement. If LE is unable to reach an acceptable settlement with GEL or Veritex does not approve any such settlement and GEL
seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected, and LE
would likely be required to seek protection under bankruptcy laws.
53
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Operating Risks. Successful execution of our business plan depends on several key factors, including reaching an acceptable settlement with GEL, having
adequate crude oil and condensate supplies, maintaining the safe and reliable operation of the Nixon Facility, improving margins on refined petroleum products,
and meeting contractual obligations. (See “Part I, Item 1. Business – Business Strategies” for information related to our business plan.) For the year ended
December 31, 2017, execution of our business plan was negatively impacted by several factors, including:
● Net Losses – For the year ended December 31, 2017, we reported a net loss of $22,328,390, or a loss of $2.09 per share, compared to a net loss of
$15,767,448, or a loss of $1.51 per share, for the year ended December 31, 2016. The $0.58 per share increase in net loss between the periods was the
result of the Final Arbitration Award, which was partially offset by improved margins for refined petroleum products and increased sales volume. The amount
expensed in the period related to the Final Arbitration Award was $24,338,628, which represented $2.28 per share. Excluding the Final Arbitration Award,
we would have reported net income of $0.19 per share.
● Working Capital Deficits – We had a working capital deficit of $69,512,829 at December 31, 2017 compared to a working capital deficit of $37,812,263 at
December 31, 2016. Excluding long-term debt, we had a working capital deficit of $29,968,427 at December 31, 2017, compared to working capital of
$5,599,927 at December 31, 2016. The significant increase in working capital deficit between the periods primarily related to the Final Arbitration Award and
a decrease in cash and cash equivalents.
● Crude Supply Issues – We currently have in place a month-to-month evergreen crude supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil and condensate, and we expect the supplier to continue to do so for the foreseeable
future. However, our ability to purchase adequate amounts of crude oil and condensate is dependent on our liquidity and access to capital, which have been
adversely affected by the contract-related dispute with GEL and other factors, as noted above. The Final Arbitration Award could have a material adverse
effect on our ability to procure adequate amounts of crude oil and condensate from our current supplier or otherwise.
● Financial Covenant Defaults – In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LE and LRM were in
violation of certain financial covenants in secured loan agreements with Veritex. Covenant defaults under the secured loan agreements would permit Veritex
to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other rights and remedies available. The debt associated with these loans was classified
within the current portion of long-term debt on our consolidated balance sheet at December 31, 2017 due to existing events of default related to the Final
Arbitration Award as well as the uncertainty of LE and LRM’s ability to meet the financial covenants in the future. There can be no assurance that Veritex will
provide a waiver of events of default related to the Final Arbitration Award, consent to any proposed settlement with GEL or provide future waivers of any
financial covenant defaults, which may have an adverse impact on our financial position and results of operations.
During the year ended December 31, 2017, we continued aggressive actions to improve operations and liquidity. We began selling certain of our refined
petroleum products immediately following production, which minimizes inventory, improves cash flow, and reduces commodity risk/exposure. We completed
construction on several new petroleum storage tanks at the Nixon Facility. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tank rental revenue by leasing to
third-parties. We also reduced our working capital requirements in a rising cost environment by decreasing costs, reducing inventory levels, improving our sales
cycle, and requiring pre-payments from certain customers. Management believes that it is taking the appropriate steps to improve operations at the Nixon
Facility and our overall financial stability. However, there can be no assurance that our business plan will be successful, LEH and its affiliates will continue to
fund our working capital needs, or that we will be able to obtain additional financing on commercially reasonable terms or at all. Among other factors, the Final
Arbitration Award could prevent us from successfully executing our business plan.
54
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
For additional disclosures related to the contract-related dispute with GEL, the Final Arbitration Award, the GEL Letter Agreement, defaults under secured loan
agreements, and risk factors that could materially affect our future business, financial condition and results of operations, refer to the following sections in this
Annual Report:
● Part I, Item 1A. Risk Factors
● Part I, Item 3. Legal Proceedings
● Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
- GEL Contract-Related Dispute and Final Arbitration Award
- Results of Operations
- Liquidity and Capital Resources
● Part II, Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements:
- Note (8) Related Party Transactions
- Note (10) Long-Term Debt, Net
- Note (19) Commitments and Contingencies – Legal Matters
- Note (20) Subsequent Events
(2)
Basis of Presentation
Our consolidated financial statements include Blue Dolphin and its subsidiaries. Significant intercompany transactions have been eliminated in
consolidation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(“GAAP”) for consolidated financial information pursuant to the rules and regulations of the SEC under Regulation S-X and the instructions to Form 10-K. In
management’s opinion, all adjustments considered necessary for a fair presentation have been included, 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 accompanying notes are representations of management who is responsible for their integrity and objectivity. These accounting policies
conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.
Use of Estimates. We have made several 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. We believe our current estimates are reasonable
and appropriate, however, 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 totaled $495,296 and
$1,152,628 at December 31, 2017 and 2016, respectively.
Restricted Cash. Restricted cash (current portion) primarily represents: (i) amounts held in our disbursement account with Veritex attributable to construction
invoices awaiting payment from that account, (ii) a payment reserve account held by Veritex as security for payments under a loan agreement, and (iii) a
construction contingency account under which Veritex will fund contingencies. Restricted cash, noncurrent represents funds held in the Veritex disbursement
account for payment of future construction related expenses to build new petroleum storage tanks. At December 31, 2017, total restricted cash was $1,650,927,
comprised of restricted cash (current portion) totaling $48,980 and restricted cash, noncurrent totaling $1,601,947. At December 31, 2016, total restricted cash
was $4,930,140, comprised of restricted cash (current portion) totaling $3,347,835 and restricted cash, noncurrent totaling $1,582,305 (See “Note (10) Long-
Term Debt, Net” for additional disclosures related to our loan agreements with Veritex.)
55
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Accounts Receivable and Allowance for Doubtful Accounts . Our accounts receivable consists of customer obligations due in the ordinary course of
business. Since we have a small number of customers with individually large amounts due on any given date, we evaluate potential and existing customers’
financial condition, credit worthiness, and payment history to minimize credit risk. Allowance for doubtful accounts is based on a combination of current sales and
specific identification methods. If necessary, we establish an allowance for doubtful accounts to estimate the amount of probable credit losses. Allowance for
doubtful accounts totaled $0 both at December 31, 2017 and 2016.
Inventory. Our inventory primarily consists of refined petroleum products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net
realizable value with cost being determined by the average cost method, and net realizable value being determined based on estimated selling prices less any
associated delivery costs. If the net realizable value of our refined petroleum products inventory declines to an amount less than our average cost, we record a
write-down of inventory and an associated adjustment to cost of refined products sold. (See “Note (6) Inventory” for additional disclosures related to our
inventory.)
Property and Equipment .
Refinery and Facilities. Management expects to continue making improvements to the Nixon Facility based on operational needs and technological
advances. Additions to refinery and facilities assets are capitalized. Expenditures for repairs and maintenance are expensed as incurred and included as
operating expenses under the Amended and Restated Operating Agreement.
We record refinery and facilities at cost less any adjustments for depreciation or impairment. Adjustment of the asset and the related accumulated depreciation
accounts are made for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of
operations. For financial reporting purposes, depreciation of refinery and facilities assets is computed using the straight-line method using an estimated useful
life of 25 years beginning when the refinery and facilities assets are placed in service. As a result of the Final Arbitration Award, which represents a significant
adverse change that could affect the value of a long-lived asset, management performed potential impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we determined that no impairment was necessary at December 31, 2017. We did not record any
impairment of our refinery and facilities assets for the year ended December 31, 2016.
Pipelines and Facilities . Our pipelines and facilities are recorded at cost less any adjustments for depreciation or impairment. Depreciation is computed using
the straight-line method over estimated useful lives ranging from 10 to 22 years. In accordance with Financial Accounting Standards Board (“FASB”) ASC
guidance on accounting for the impairment or disposal of long-lived assets, management performed periodic impairment testing of our pipeline and facilities
assets in the fourth quarter of 2016. Upon completion of that testing, our pipeline assets were fully impaired. All pipeline transportation services to third-parties
have ceased, existing third-party wells along our pipeline corridor have been permanently abandoned, and no new third-party wells are being drilled near our
pipelines. However, management believes our pipeline assets have future value based on large-scale, third-party production facility expansion projects near the
pipelines.
Oil and Gas Properties. Our oil and gas properties are accounted for 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. All leases associated with our oil and gas properties have expired,
and our oil and gas properties were fully impaired in 2011.
Construction in Progress. Construction in progress expenditures, which relate to construction and refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in service.
(See “Note (7) Property, Plant and Equipment, Net” for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and
facilities assets, and construction in progress.)
56
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Intangibles – Other. Trade name, an intangible asset, represents the “Blue Dolphin Energy Company” brand name. We account for intangible assets under
FASB ASC guidance related to intangibles, goodwill, and other. Under the guidance, we determined trade name to have an indefinite useful life, and 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 2017. Upon completion of that testing, our trade name asset was fully impaired.
Debt Issue Costs . We have debt issue costs related to certain refinery and facilities assets 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. Debt issue costs are presented net with the related debt
liability. (See “Note (10) Long-Term Debt, Net” for additional disclosures related to debt issue costs.)
Revenue Recognition.
Refined Petroleum Products Revenue. Revenue from the sale of refined petroleum products is recognized when sales prices are fixed or determinable,
collectability is reasonably assured, and title passes. Title passage occurs when refined petroleum products are delivered in accordance with the terms of the
respective sales agreements, and customers assume the risk of loss when title is transferred. Transportation, shipping, and handling costs incurred are included
in cost of refined products sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
Tank Rental Revenue. We lease petroleum storage tanks to both related parties and third-parties. Tank rental fees are invoiced monthly in accordance with the
terms of the related lease agreement. Tank rental revenue is recognized on a straight-line basis as earned.
Easement Revenue. Revenue from land easement fees was associated with a Master Easement Agreement between BDPL and FLNG Land II, Inc., a Delaware
corporation (“FLNG”). Easement revenue was recognized monthly as earned and was included in other income. In February 2017, BDPL sold approximately
15 acres of property located in Brazoria County Texas to FLIQ Common Facilities, LLC, an affiliate of FLNG. In conjunction with the sale of real estate, the
Master Easement Agreement was terminated.
Pipeline Transportation Revenue. Revenue from our pipeline operations was derived from fee-based contracts and was typically based on transportation fees
per unit of volume transported multiplied by the volume delivered. Revenue was recognized when volumes were physically delivered for the customer through
the pipeline. All pipeline transportation services to third-parties have ceased, existing third-party wells along our pipeline corridor have been permanently
abandoned, and no new third-party wells are being drilled near our pipelines. (See “Note (4) Business Segment Information” for further discussion related to
pipeline transportation revenue.)
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 reporting period 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 a portion or all 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. A significant piece of objective negative evidence evaluated was the cumulative
loss incurred over the three-year period ended December 31, 2017. Such objective evidence limits the ability to consider other subjective evidence, such as our
projections for future growth. Based on this evaluation, we recorded a full valuation allowance against the deferred tax assets as of December 31, 2017.
57
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to
whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the
income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater
than 50% likely to be realized upon its ultimate settlement. At December 31, 2017 and 2016, there were no uncertain tax positions for which a reserve or liability
was necessary. (See “Note (16) Income Taxes” 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
periodically evaluate our long-lived assets for impairment. Additionally, we evaluate our long-lived assets when events or circumstances indicate that the
carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment
loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. 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. As a result of the Final Arbitration Award, which represents a significant adverse change
that could affect the value of a long-lived asset, management performed potential impairment testing of our refinery and facilities assets in the fourth quarter of
2017. Upon completion of that testing, we determined that no impairment was necessary at December 31, 2017. We did not record any impairment of our
refinery and facilities assets for the year ended December 31, 2016.
Asset Retirement Obligations. FASB ASC guidance related to asset retirement obligations (“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 assets. 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 legal or contractual obligation to dismantle or remove the refinery and facilities assets
arises and 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 for plugging and abandoning wells and restoring land and sea beds. We developed these cost estimates for
each of our assets based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering consultations. Because these costs typically extend many years into the future, estimating 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 (11) Asset
Retirement Obligations” for additional information related to our AROs.)
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 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 consolidated
statements of operations and requires a reconciliation of the denominator of basic EPS and diluted EPS. Diluted EPS is computed by dividing net income
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 that has not yet been recognized and the
amount of any current and deferred tax benefit 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 (17) Earnings Per Share” for additional information related to EPS.)
Treasury Stock. We accounted for treasury stock under the cost method. In May 2017, our treasury stock was re-issued. The net change in share price after
acquisition of the treasury stock was recognized as a component of additional paid-in-capital in our consolidated balance sheets. (See “Note (13) Treasury
Stock” for additional disclosures related to treasury stock.)
New Pronouncements Adopted. The FASB issues an Accounting Standards Update (“ASU”) to communicate changes to the FASB ASC, including changes to
non-authoritative SEC content. Recently adopted ASUs include:
ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. In July 2015, FASB issued ASU 2015-11, which requires an entity to measure
inventory at the lower of cost or net realizable value. We adopted this accounting pronouncement effective January 1, 2017. The adoption of ASU 2015-11 did
not have a significant impact on our consolidated financial statements.
58
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
New Pronouncements Issued, Not Yet Effective. The following are recently issued, but not yet effective, ASU’s that may influence our consolidated financial
position, results of operations, or cash flows:
ASU 2018-05, Income Taxes (Topic 740) . In March 2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in
the period of enactment. This guidance also includes amendments to the XBRL Taxonomy. For public business entities, the amendments in ASU 2018-05 are
effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this guidance to have a significant impact
on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842). In February 2016, FASB issued ASU 2016-02. This guidance increases transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. For a public business entity,
the amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
application is permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated balance sheets.
ASU 2014-09, Revenue from Contracts with Customers . In May 2014, FASB issued ASU 2014-09 and has since amended the standard with ASU 2015-
14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ; ASU 2016-08, Revenue from Contracts with Customers (Topic 606):
Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net); ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing; ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC
Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update);
ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ; ASU 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers; and ASU 2017-14, Income Statement – Reporting Comprehensive
Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). These standards replace existing revenue
recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. We do not expect the adoption of
ASU 2014-09 to have a material impact on our consolidated financial position, results of operations, or cash flows.
Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
Reclassification. Effective January 1, 2017, we reclassified amounts associated with our Pipeline Transportation operations to Corporate and Other. (See “Note
(4) Business Segment Information” for disclosures related to Corporate and Other.)
(4)
Business Segment Information
Effective January 1, 2017, we began reporting as a single business segment – Refinery Operations. Business activities related to our Refinery Operations
business segment are conducted at the Nixon Facility. Due to their small size, current and prior year ended amounts associated with Pipeline Transportation
operations were reclassified to Corporate and Other. Pipeline Transportation operations diminished significantly as services to third-parties ceased and third-party
wells along our pipeline corridor were permanently abandoned. Business segment information for the periods indicated (and as of the dates indicated), was as
follows:
Years Ended December 31,
Segment
Refinery
Operations
2017
Corporate &
Other
$
$
258,449,579
(252,099,846)
-
-
(24,338,628)
(17,988,895)
$
$
$
-
(1,768,989)
1,912,905
-
-
143,916
Segment
Refinery
Operations
2016
Corporate &
Other
$
$
167,780,326
(175,340,816)
-
(359,260)
-
(7,919,750)
$
$
$
74,990
(2,450,133)
1,914,607
-
-
(460,536)
Total
258,449,579
(253,868,835)
1,912,905
-
(24,338,628)
Total
167,855,316
(177,790,949)
1,914,607
(359,260)
-
(1,810,134)
(2,673,277)
(22,328,390)
-
(22,328,390)
$
(1,935,644)
(1,844,281)
(12,160,211)
(3,607,237)
(15,767,448)
$
$
$
4,082,611
$
-
$
4,082,611
$
15,041,074
$
-
$
15,041,074
71,708,714
$
1,699,610
$
73,408,324
$
74,236,629
$
1,123,389
$
75,360,018
Revenue from operations
Less: cost of operations(1)
Other non-interest income(2)
Less: JMA Profit Share(3)
Less: Arbitration award(4)
EBITDA(5)
Depletion, depreciation and
amortization
Interest expense, net
Loss before income taxes
Income tax expense
Net loss
Capital expenditures
Identifiable assets
_____________________
(1) Operation cost within the Refinery Operations segment includes related general and administrative 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), as
well as expenses associated with our pipeline assets and oil and/or gas leasehold interests (such as accretion and impairment expenses).
(2) Other non-interest income reflects FLNG easement revenue.
(3) The JMA Profit Share represents the GEL Profit Share plus the Performance Fee for the period pursuant to the Joint Marketing Agreement, under which
marketing activities have ceased. (See “Note (1) Organization – Going Concern – Final GEL Arbitration Award” for further discussion related to the contract-
related dispute with GEL.)
(4) Arbitration award reflects damages and GEL’s attorneys’ fees and related expenses awarded to GEL as part of the Final Arbitration Award.
(5) EBITDA is a non-GAAP financial measure. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations –
Results of Operations – Non-GAAP Financial Measures” for additional information related to EBITDA.
59
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
(5)
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
Prepaid crude oil and condensate
Prepaid insurance
Short-term tax bond
Prepaid exise taxes
(6)
Inventory
Inventory as of the dates indicated consisted of the following:
HOBM
Crude oil and condensate
AGO
Naphtha
Chemicals
Propane
LPG mix
Jet fuel
(7)
Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
Refinery and facilities
Land
Other property and equipment
Less: Accumulated depletion, depreciation, and amortization
Construction in progress
FORM 10-K 12/31/17
$
December 31,
2017
2016
$
912,702
294,269
-
-
-
248,853
505,000
292,338
$
1,206,971
$
1,046,191
$
December 31,
$
2017
1,558,066
961,571
213,402
169,591
161,563
17,450
7,561
-
2016
212,987
26,123
143,362
533,580
182,751
11,318
1,293
964,124
$
3,089,204
$
2,075,538
December 31,
$
$
2017
51,432,434
566,159
652,795
52,651,388
2016
50,814,309
602,938
652,795
52,070,042
(8,495,378)
44,156,010
(6,685,244)
45,384,798
20,440,929
16,939,665
$
64,596,939
$
62,324,463
We capitalize interest cost incurred on funds used to construct property, plant, and equipment. The capitalized interest is recorded as part of the asset to which it
relates and is depreciated over the asset’s useful life. Interest cost capitalized, which is currently included in construction in progress, was $3,857,082 and
$2,108,298 at December 31, 2017 and 2016, respectively.
60
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
(8)
Related Party Transactions
FORM 10-K 12/31/17
Blue Dolphin and certain of its subsidiaries are party to several agreements with LEH and its affiliates. Management believes that these related party
transactions were consummated on terms equivalent to those that prevail in arm's-length transactions.
Related Parties.
LEH. LEH is our controlling shareholder. Jonathan Carroll, Chairman of the Board, Chief Executive Officer, and President of Blue Dolphin, is the majority owner
of LEH. Together LEH and Jonathan Carroll own 80.2% of our Common Stock. Related party agreements with LEH include: (i) an Amended and Restated
Operating Agreement with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan and Security Agreement with BDPL, (iv) an Amended and
Restated Promissory Note with Blue Dolphin, and (v) a Debt Assumption Agreement with LE.
Ingleside Crude, LLC (“Ingleside”). Ingleside is a related party of LEH and Jonathan Carroll. Blue Dolphin is party to an Amended and Restated Promissory
Note with Ingleside.
Lazarus Marine Terminal I, LLC (“LMT”) . LMT is a related party of LEH and Jonathan Carroll. LE is party to a Tolling Agreement with LMT.
Jonathan Carroll. Jonathan Carroll is Chairman of the Board, Chief Executive Officer, and President of Blue Dolphin. Related party agreements with Jonathan
Carroll include: (i) Amended and Restated Guaranty Fee Agreements with LE and LRM and (ii) an Amended and Restated Promissory Note with Blue Dolphin.
Currently, we depend on LEH and its affiliates (including Jonathan Carroll and Ingleside) for financing when revenue from operations and borrowings under bank
facilities are insufficient to meet our liquidity needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or
long-term debt, related party. Each quarter amounts owed by the parties are settled with amounts to be paid by the parties as discussed within this Note (8),
Related Party Transactions. As a result, related-party transactions do not always reflect cash payments between the parties.
Operations Related Agreements.
Amended and Restated Operating Agreement . LEH operates and manages all Blue Dolphin properties pursuant to the Amended and Restated Operating
Agreement. The Amended and Restated Operating Agreement, which was restructured following cessation of crude supply and marketing activities under the
Crude Supply Agreement and Joint Marketing Agreement with GEL, expires: (i) April 1, 2020, (ii) upon written notice by either party to the Amended and
Restated Operating Agreement of a material breach by the other party, or (iii) upon 90 days’ notice by the Board if the Board determines that the Amended and
Restated Operating Agreement is not in our best interest. Blue Dolphin reimburses LEH at cost plus five percent (5%) for all reasonable Blue Dolphin expenses
incurred while LEH performs the services. These expenses are reflected within refinery operating expenses in our consolidated statements of operations.
Jet Fuel Sales Agreement. LE sells jet fuel and other products to LEH pursuant to a Jet Fuel Sales Agreement. LEH, which is HUBZone certified, resells these
products to a government agency. The Jet Fuel Sales Agreement terminates on the earliest to occur of: (a) a one-year term expiring March 31, 2018 plus a 30-
day carryover or (b) delivery of a maximum quantity of jet fuel as defined therein. LEH believes that it will be awarded a new jet fuel sales contract following the
expiration of the current agreement. Sales to LEH under the Jet Fuel Sales Agreement are reflected within refined petroleum product sales in our consolidated
statements of operations. (LRM previously leased Nixon Facility petroleum storage tanks to LEH for the storage of the jet fuel under a Terminal Services
Agreement. The Terminal Services Agreement has been terminated as described below).
Terminal Services Agreement. Pursuant to a Terminal Services Agreement, LEH leased petroleum storage tanks from LRM at the Nixon Facility for the storage
of Blue Dolphin purchased jet fuel under the Jet Fuel Sales Agreement (as described above). The Terminal Services Agreement was terminated in June
2017. Rental fees received from LEH under the Terminal Services Agreement are reflected within tank rental revenue in our consolidated statements of
operations.
61
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Amended and Restated Tank Lease Agreement . Pursuant to an Amended and Restated Tank Lease Agreement with Ingleside, LE leased petroleum storage
tanks to meet periodic, additional storage needs. The Amended and Restated Tank Lease Agreement was terminated in July 2017. Rental fees owed to
Ingleside under the tank lease agreement are reflected within long-term debt, related party, net of current portion in our consolidated balance sheets. Amounts
expensed as rental fees to Ingleside under the Amended and Restated Tank Lease Agreement are reflected within refinery operating expenses in our
consolidated statements of operations.
Tolling Agreement. In May 2016, LE entered a Tolling Agreement with LMT to facilitate loading and unloading of petroleum products by barge at LMT’s dock
facility in Ingleside, Texas. The Tolling Agreement has a five-year term and may be terminated at any time by the agreement of both parties. LE pays LMT a flat
reservation fee monthly. The reservation fee includes tolling volumes up to 84,000 gallons per day. Excess tolling volumes are subject to an increased per
gallon rate. Amounts expensed as tolling fees under the Tolling Agreement are reflected in cost of refined products sold in our consolidated statements of
operations.
Financial Agreements.
Loan and Security Agreement . In August 2016, BDPL entered a loan and security agreement with LEH as evidenced by a promissory note in the original
principal amount of $4.0 million (the “LEH Loan Agreement”). The LEH Loan Agreement matures in August 2018 and accrues interest at rate of 16.00%. A final
balloon payment is due at maturity.
The proceeds of the LEH Loan Agreement were used for working capital. There are no financial maintenance covenants associated with the LEH Loan
Agreement. The LEH Loan Agreement is secured by certain property owned by BDPL. Outstanding principal owed to LEH under the LEH Loan Agreement is
reflected in long-term debt, related party, current portion in our consolidated balance sheets. Accrued interest under the LEH Loan Agreement is reflected in
interest payable, current portion in our consolidated balance sheets.
Promissory Notes. We currently rely on LEH and its affiliates (including Jonathan Carroll) to fund our working capital requirements. The below promissory notes
represent non-cash advances, such as conversions of accounts payable to debt, to fund our working capital requirements. There can be no assurance that LEH
and its affiliates will continue to fund our working capital requirements.
● June LEH Note – In March 2017, Blue Dolphin entered a promissory note with LEH (the “March LEH Note”). In June 2017, the March LEH Note was
amended and restated to increase the principal amount (the “June LEH Note”). The June LEH Note accrued interest at a rate of 8.00% and had a maturity
date of January 2019. During the second quarter of 2017, principal and accrued interest balance due under the June LEH Note was settled to $0 with
amounts owed to us by LEH under the Jet Fuel Sales Agreement.
● March Ingleside Note – In March 2017, a promissory note between Blue Dolphin and Ingleside was amended and restated (the “March Ingleside Note”) to
increase the principal and extend the maturity date to January 2019. Interest under the March Ingleside Note, which is compounded annually and accrued at
a rate of 8.00%, was paid in kind and added to the outstanding balance. Under the March Ingleside Note, prepayment, in whole or in part, is permissible at
any time and from time to time, without premium or penalty.
● March Carroll Note – In March 2017, a promissory note between Blue Dolphin and Jonathan Carroll was amended and restated (the “March Carroll Note”) to
increase the principal amount, revise the payment terms to reflect payment in cash and shares of Blue Dolphin Common Stock, and extend the maturity date
to January 2019. Interest under the March Carroll Note, which is compounded annually and accrued at a rate of 8.00%, was paid in kind and added to the
outstanding balance. Under the March Carroll Note, prepayment, in whole or in part, is permissible at any time and from time to time, without premium or
penalty.
Outstanding principal and accrued interest owed to Ingleside and Jonathan Carroll under the March Ingleside Note and March Carroll Note, respectively, are
reflected in long-term debt, related party, net of current portion in our consolidated balance sheets.
62
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Debt Assumption Agreement. On September 18, 2017, LEH paid, on LE’s behalf, certain obligations totaling $3,648,742 to GEL relating to the GEL Arbitration
and the GEL Letter Agreement. In exchange for such payments, LE agreed to assume $3,677,953 of LEH’s existing indebtedness pursuant to the Debt
Assumption Agreement, entered on November 14, 2017 and made effective September 18, 2017, by and among LE, LEH and John Kissick. Debt held by John
Kissick, including the debt associated with the Debt Assumption Agreement, is reported in this Annual Report as the Notre Dame Debt and is reflected in long-
term debt less unamortized debt issue costs, current portion in our consolidated balance sheets, as it is currently in default. (See “Note (10) Long-Term Debt,
Net” for further discussion related to the Notre Dame Debt.)
Amended and Restated Guaranty Fee Agreements . Pursuant to Amended and Restated Guaranty Fee Agreements, Jonathan Carroll earns fees for providing
his personal guarantee on certain LE and LRM long-term debt. Jonathan Carroll was required to guarantee repayment of funds borrowed and interest accrued
under certain LE and LRM loan agreements. Amounts owed to Jonathan Carroll under Amended and Restated Guaranty Fee Agreements are reflected within
long-term debt, related party, net of current portion in our consolidated balance sheets. Amounts expensed related to Amended and Restated Guarantee Fee
Agreements are reflected within interest and other expense in our consolidated statements of operations.
The First Amendment, Second Amendment, Third Amendment and Fourth Amendment prohibit Blue Dolphin and its affiliates from making any pre-payments on
indebtedness, other than in the ordinary course of business as described in the GEL Letter Agreement, and from making any payments to Jonathan Carroll
under the Amended and Restated Guaranty Fee Agreements between November 1, 2017 and the end of the Continuance Period. (Jonathan Carroll has
received no cash payments since August 2016 and no common stock payments since May 2017 under the Amended and Restated Guaranty Fee
Agreements.) (See “Note (10) Long-Term Debt, Net” for further discussion related to these guaranty fee agreements.)
Financial Statements Impact.
Consolidated Balance Sheets. Accounts receivable, related party to LEH associated with the Jet Fuel Sales Agreement was $652,928 and $1,161,589 at
December 31, 2017 and 2016, respectively. Accounts payable, related party to LMT associated with the Tolling Agreement was $974,400 and $369,600 at
December 31, 2017 and 2016, respectively.
Long-term debt, related party associated with the LEH Loan Agreement, March Ingleside Note, and March Carroll Note as of the dates indicated was as follows:
LEH
Ingleside
Jonathan Carroll
Less: Long-term debt, related party,
current portion
December 31,
$
2017
4,000,000
1,168,748
439,733
$
2016
4,000,000
722,278
592,412
5,608,481
5,314,690
(4,000,000)
(500,000)
$
1,608,481
$
4,814,690
Accrued interest associated with the LEH Loan Agreement was $892,444 and $243,556 at December 31, 2017 and 2016, respectively.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Consolidated Statements of Operations. Related party revenue from LEH associated with:
Jet fuel sales
Jet fuel storage fees
HOBM sales
Other product sales
Years Ended December 31,
2017
2016
$
81,094,419
$
37,757,612
3,425,455
-
3,322,770
2,824,408
$
85,194,874
$
45,029,790
Related party cost of goods sold associated with the Tolling Agreement with LMT totaled $604,800 and $369,600 for the years ended December 31, 2017 and
2016, respectively.
Related party refinery operating expenses associated with the Amended and Restated Operating Agreement with LEH and the Amended and Restated Tank
Lease Agreement with Ingleside for the periods indicated were as follows:
LEH
Ingleside
Years Ended December 31,
2017
$
Amount
8,145,553
-
$
Per bbl
$
1.81
-
2016
Amount
11,140,676
900,000
$
$
8,145,553
$
1.81
$
12,040,676
$
Per bbl
3.10
0.25
3.35
For the year ended December 31, 2017, refinery operating expenses per bbl decreased compared to the year ended December 31, 2016 due to the revised
cost-plus expense reimbursement structure. In addition, refinery operating expenses per bbl were higher during the year ended December 31, 2016 due to
significant refinery downtime.
Related party interest expense associated with the LEH Loan Agreement and Amended and Restated Guaranty Fee Agreements for the periods indicated was
as follows:
Jonathan Carroll
LEH
Years Ended December 31,
2017
2016
$
$
663,130
706,146
$
692,969
243,556
$
1,369,276
$
936,525
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
(9)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
Unearned revenue
Board of director fees payable
Property taxes
Other payable
Customer deposits
Excise and income taxes payable
Insurance
(10)
Long-Term Debt, Net
FORM 10-K 12/31/17
$
December 31,
2017
2016
$
449,800
206,429
130,736
116,361
109,029
79,260
67,850
408,770
136,429
4,694
189,719
450,000
24,187
67,783
$
1,159,465
$
1,281,582
Long-term debt, net represents the outstanding principal of long-term debt less associated debt issue costs. Long-term debt, net as of the dates indicated
consisted of the following:
First Term Loan Due 2034 (in default)
Second Term Loan Due 2034 (in default)
Notre Dame Debt (in default)
Term Loan Due 2017
Capital Leases
Less: Current portion of long-term debt, net
Less: Unamortized debt issue costs
December 31,
2017
23,199,031
9,501,930
4,977,953
-
-
37,678,914
$
$
2016
23,924,607
9,729,853
1,300,000
184,994
135,879
35,275,333
$
$
(35,544,402)
(31,712,336)
(2,134,512)
(2,262,997)
$
-
$
1,300,000
Unamortized debt issue costs, which relate to secured loan agreements with Veritex, as of the dates indicated consisted of the following:
First Term Loan Due 2034 (in default)
Second Term Loan Due 2034 (in default)
Less: Accumulated amortization
Amortization expense was $128,484 and $128,233 for the years ended December 31, 2017 and 2016, respectively.
December 31,
$
2017
1,673,545
767,673
$
2016
1,673,545
767,673
(306,706)
(178,221)
$
2,134,512
$
2,262,997
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Accrued interest associated with long-term debt, net is reflected as interest payable, current portion and long-term interest payable, net of current portion in our
consolidated balance sheets and includes related party interest. Accrued interest as of the dates indicated consisted of the following:
Notre Dame Debt (in default)
LEH Loan Agreement (related party)
Second Term Loan Due 2034 (in default)
First Term Loan Due 2034 (in default)
Capital Leases
Term Loan Due 2017
Less: Interest payable, current portion
$
December 31,
$
2017
2,046,083
892,444
49,202
40,042
-
-
2016
1,691,383
243,556
44,984
33,866
1,165
185
3,027,771
2,015,139
(3,027,771)
(323,756)
Long-term interest payable, net of current portion
$
-
$
1,691,383
At December 31, 2017, our expected future long-term debt payments were as follow:
Years Ending December 31,
2018
2019
2020
2021
2022
Subsequent to 2022
Principal
41,678,914
1,608,481
-
-
-
-
43,287,395
$
$
$
Debt Issue Costs
(2,134,512)
-
-
-
-
-
(2,134,512)
Total
39,544,402
1,608,481
-
-
-
-
41,152,883
$
$
$
Related Party. See “Note (8) Related Party Transactions” for additional disclosures with respect to related party long-term debt.
First Term Loan Due 2034 (In Default). LE has a 2015 loan agreement and related security agreement with Veritex as administrative agent and lender. The loan
agreement is for a term loan in the principal amount of $25.0 million (the “First Term Loan Due 2034”). The First Term Loan Due 2034 matures in June 2034,
has a current monthly payment of principal and interest of $198,786, and accrues interest at a rate based on the Wall Street Journal Prime Rate plus
2.75%. Pursuant to a construction rider in the First Term Loan Due 2034, proceeds available for use were placed in a disbursement account whereby Veritex
makes payments for construction related expenses. Amounts held in the disbursement account are reflected as restricted cash (current portion) and restricted
cash, noncurrent in our consolidated balance sheets.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
As described elsewhere in this Annual Report, Veritex notified LE that the Final Arbitration Award constitutes an event of default under the First Term Loan Due
2034. In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LE was in violation of the debt service coverage
ratio, the current ratio, and debt to net worth ratio financial covenants related to the first Term Loan Due 2034. LE also failed to replenish a payment reserve
account as required. The occurrence of events of default under the First Term Loan Due 2034 permits Veritex to declare the amounts owed under the First
Term Loan Due 2034 immediately due and payable, exercise its rights with respect to collateral securing LE’s obligations under the loan agreement, and/or
exercise any other rights and remedies available. Veritex informed obligors that it is not currently exercising its rights, privileges and remedies under the First
Term Loan Due 2034 considering the ongoing settlement discussions with GEL and the continuance of the hearing on confirmation of the Final Arbitration Award
and to allow Veritex to evaluate any proposed settlement agreement related to the Final Arbitration Award, which would require Veritex’s approval. However,
Veritex expressly reserved all its rights, privileges and remedies related to events of default under the First Term Loan Due 2034 and informed LE that it would
consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan agreement. Any exercise by Veritex of its rights and
remedies under the First Term Loan Due 2034 would have a material adverse effect on our business, financial condition, and results of operations and would
likely require us to seek protection under bankruptcy laws. (See “Note (1) Organization – Going Concern and Operating Risks” for additional disclosures related
to the First Term Loan Due 2034, the Final Arbitration Award and financial covenant violations.)
As a condition of the First Term Loan Due 2034, Jonathan Carroll was required to guarantee r epayment of funds borrowed and interest accrued under the
loan. For his personal guarantee, LE entered a Guaranty Fee Agreement with Jonathan Carroll whereby he earns a fee equal to 2.00% per annum of the
outstanding principal balance owed under the First Term Loan Due 2034. Effective in April 2017, the Guaranty Fee Agreement associated with the First Term
Loan Due 2034 was amended and restated to reflect payment in cash and shares of Blue Dolphin Common Stock. For the years ended December 31, 2017 and
2016, guaranty fees earned by Jonathan Carroll related to the First Term Loan Due 2034 totaled $470,610 and $485,463, respectively. Guaranty fees are
recognized monthly as incurred and are included in interest and other expense in our consolidated statements of operations. (Jonathan Carroll has received no
cash payments since August 2016 and no common stock payments since May 2017 under the Amended and Restated Guaranty Fee Agreements.) LEH, LRM
and Blue Dolphin also guaranteed the First Term Loan Due 2034. (See “Note (8) Related Party Transactions” for additional disclosures related to LEH and
Jonathan Carroll)
A portion of the proceeds of the First Term Loan Due 2034 were used to refinance approximately $8.5 million of debt owed under a previous debt facility with
American First National Bank. Remaining proceeds are being used primarily to construct new petroleum storage tanks at the Nixon Facility. The First Term Loan
Due 2034 is secured by: (i) a first lien on all Nixon Facility business assets (excluding accounts receivable and inventory), (ii) assignment of all Nixon Facility
contracts, permits, and licenses, (iii) absolute assignment of Nixon Facility rents and leases, including tank rental income, (iv) a payment reserve account held by
Veritex, and (v) a pledge of $5.0 million of a life insurance policy on Jonathan Carroll. The First Term Loan Due 2034 contains representations and warranties,
affirmative, restrictive, and financial covenants, as well as events of default which are customary for bank facilities of this type.
Second Term Loan Due 2034 (In Default) . LRM has a 2015 loan agreement and related security agreement with Veritex as administrative agent and lender. The
loan agreement is for a term loan in the principal amount of $10.0 million (the “Second Term Loan Due 2034”). The Second Term Loan Due 2034 matures in
December 2034, has a current monthly payment of principal and interest of $74,111, and accrues interest at a rate based on the Wall Street Journal Prime Rate
plus 2.75%. Pursuant to a construction rider in the Second Term Loan Due 2034, proceeds available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected as restricted cash (current portion) and
restricted cash, noncurrent in our consolidated balance sheets.
67
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
As described elsewhere in this Annual Report, Veritex notified LRM that the Final Arbitration Award constitutes an event of default under the Second Term Loan
Due 2034. In addition to existing events of default related to the Final Arbitration Award, at December 31, 2017, LRM was in violation of the debt service
coverage ratio, the current ratio, and debt to net worth ratio financial covenants related to the Second Term Loan Due 2034. The occurrence of events of default
under the Second Term Loan Due 2034 permits Veritex to declare the amounts owed under the Second Term Loan Due 2034 immediately due and payable,
exercise its rights with respect to collateral securing LRM’s obligations under the loan agreement, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not currently exercising its rights, privileges and remedies under the Second Term Loan Due 2034 considering the
ongoing settlement discussions with GEL and the continuance of the hearing on confirmation of the Final Arbitration Award and to allow Veritex to evaluate any
proposed settlement agreement related to the Final Arbitration Award, which would require Veritex’s approval. However, Veritex expressly reserved all its rights,
privileges and remedies related to events of default under the Second Term Loan Due 2034 and informed LRM that it would consider a final confirmation of the
Final Arbitration Award to be a material event of default under the loan agreement. Any exercise by Veritex of its rights and remedies under the Second Term
Loan Due 2034 would have a material adverse effect on our business, financial condition, and results of operations and would likely require us to seek protection
under bankruptcy laws. (See “Note (1) Organization – Going Concern and Operating Risks” for additional disclosures related to the First Term Loan Due 2034,
the Final Arbitration Award and financial covenant violations.)
As a condition of the Second Term Loan Due 2034, Jonathan Carroll was required to guarantee repayment of funds borrowed and interest accrued under the
loan. For his personal guarantee, LRM entered a Guaranty Fee Agreement with Jonathan Carroll whereby he earns a fee equal to 2.00% per annum of the
outstanding principal balance owed under the Second Term Loan Due 2034. Effective in April 2017, the Guaranty Fee Agreement associated with the Second
Term Loan Due 2034 was amended and restated to reflect payment in cash and shares of Blue Dolphin Common Stock. For the years ended December 31,
2017 and 2016, guaranty fees earned by Jonathan Carroll related to the Second Term Loan Due 2034 totaled $192,108 and $197,024, respectively. Guaranty
fees are recognized monthly as incurred and are included in interest and other expense in our consolidated statements of operations. (Jonathan Carroll has
received no cash payments since August 2016 and no common stock payments since May 2017 under the Amended and Restated Guaranty Fee
Agreements.) LEH, LE and Blue Dolphin also guaranteed the Second Term Loan Due 2034. (See “Note (8) Related Party Transactions” for additional
disclosures related to LEH and Jonathan Carroll.)
A portion of the proceeds of the Second Term Loan Due 2034 were used to refinance a previous bridge loan from Veritex in the amount of $3.0
million. Remaining proceeds are being used primarily to construct additional new petroleum storage tanks at the Nixon Facility. The Second Term Loan Due
2034 is secured by: (i) a second priority lien on the rights of LE in the Nixon Facility and the other collateral of LE pursuant to a security agreement; (ii) a first
priority lien on the real property interests of LRM; (iii) a first priority lien on all of LRM’s fixtures, furniture, machinery and equipment; (iv) a first priority lien on all
of LRM’s contractual rights, general intangibles and instruments, except with respect to LRM’s rights in its leases of certain specified tanks, with respect to which
Veritex has a second priority lien in such leases subordinate to a prior lien granted by LRM to Veritex to secure obligations of LRM under the Term Loan Due
2017; and (v) all other collateral as described in the security documents. The Second Term Loan Due 2034 contains representations and warranties, affirmative,
restrictive, and financial covenants, as well as events of default which are customary for bank facilities of this type.
Notre Dame Debt (In Default) . LE entered a loan with Notre Dame Investors, Inc. as evidenced by a promissory note in the original principal amount of $8.0
million, which is currently held by John Kissick (the “Notre Dame Debt”). Pursuant to a Sixth Amendment to the Notre Dame Debt, entered on November 14,
2017 and made effective September 18, 2017, the Notre Dame Debt was amended to increase the principal amount by $3,677,953 (the “Additional Principal”).
The Additional Principal was used to make payments to GEL to reduce the balance of the Final Arbitration Award in the amount of $3,648,742 in accordance
with the GEL Letter Agreement. Interest on the principal accrues at a rate of 16.00%. The Notre Dame Debt matured in January 2018, however, pursuant to a
Subordination Agreement dated June 2015, the holder of the Notre Dame Debt agreed to subordinate its right to payments, as well as any security interest and
liens on the Nixon Facility, in favor of Veritex as holder of the First Term Loan Due 2034.
The Notre Dame Debt 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. There are no financial maintenance covenants associated with the Notre Dame Debt.
Term Loan Due 2017. LRM had a 2014 loan and security agreement with Veritex for a term loan facility in the principal amount of $2.0 million (the “Term Loan
Due 2017”). The Term Loan Due 2017 was amended in March 2015, pursuant to a Loan Modification Agreement (the “March Loan Modification
Agreement”). Under the March Loan Modification Agreement, the interest rate was modified to be the greater of the Wall Street Journal Prime Rate plus 2.75%
or 6.00%, and the due date was extended to March 2017. Pursuant to the March Loan Modification Agreement, the Term Loan Due 2017 had a monthly
principal payment of $61,665 plus interest. The Term Loan Due 2017 was paid off in March 2017.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
As a condition of the Term Loan Due 2017, Jonathan Carroll was required to guarantee r epayment of funds borrowed and interest accrued under the loan. For
his personal guarantee, LRM entered a Guaranty Fee Agreement with Jonathan Carroll whereby he earned a fee equal to 2.00% per annum of the outstanding
principal balance owed under the Term Loan Due 2017. Effective in April 2017, the Guaranty Fee Agreement associated with the Term Loan Due 2017 was
amended and restated to reflect payment in cash and shares of Blue Dolphin Common Stock. (Guaranty Fee Agreements associated with the First Term Loan
Due 2034, Second Term Loan Due 2034, and Term Loan Due 2017 are collectively referred to in this Annual Report as the “Amended and Restated Guaranty
Fee Agreements”). For the years ended December 31, 2017 and 2016, guaranty fees earned by Jonathan Carroll related to the Term Loan Due 2017 totaled
$411 and $10,483, respectively. Guaranty fees are recognized monthly as incurred and are included in interest and other expense in our consolidated
statements of operations. (Jonathan Carroll has received no cash payments since August 2016 and no common stock payments since May 2017 under the
Amended and Restated Guaranty Fee Agreements.)
Capital Leases. In 2014, LRM entered a 36-month build-to-suit capital lease for the purchase of new boiler equipment for the Nixon Facility. The lease, which
was guaranteed by Blue Dolphin, required a quarterly payment in the amount of $44,258. The lease matured in December 2017, and management is currently
evaluating end of lease options. One of the boilers was placed in service during the second quarter of 2017, being reclassified on our consolidated balance
sheets from construction in progress to refinery and facilities. The other boiler remains in construction in progress.
A summary of equipment held under long-term capital leases as of the dates indicated follows:
Boiler equipment
Less: accumulated depreciation
December 31,
2017
2016
$
538,598
7,655
$
538,598
-
$
546,253
$
538,598
At December 31, 2017, there were no future minimum lease commitments under non-cancelable capital leases.
(11)
Asset Retirement Obligations
Refinery and Facilities. Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets.
Management believes that the refinery and facilities 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 legal or contractual obligation to dismantle or remove the
refinery and facilities assets arises and 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
assets, as well as the plugging and abandonment of our oil and gas properties. We recorded a discounted liability for the fair value of 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 depreciate the amount
added to property and equipment and recognize accretion expense relating to the discounted liability over the remaining life of the asset. Plugging and
abandonment costs are recorded during the period incurred or as information becomes available to substantiate actual and/or probable costs.
69
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
Changes to our ARO liability for the periods indicated were as follows:
Asset retirement obligations, at the beginning of the period
Liabilities settled
Accretion expense
Less: asset retirement obligations, current portion
FORM 10-K 12/31/17
$
December 31,
$
2017
2,027,639
(444)
287,376
2,314,571
(2,314,571)
2016
1,985,864
(70,969)
112,744
2,027,639
(17,510)
Long-term asset retirement obligations, at the end of the period
$
-
$
2,010,129
Liabilities settled represents amounts paid for plugging and abandonment costs against the asset’s ARO liability. At December 31, 2017 and 2016, we
recognized $444 and $70,969, respectively, in liabilities settled. Abandonment expense represents amounts paid for plugging and abandonment costs that
exceed the asset’s ARO liability. For the years ended December 31, 2017 and 2016, we recognized $0 in abandonment expense.
(12)
Impairment
For the years ended December 31, 2017 and 2016, we recorded impairment expense of $303,346 and $968,684, respectively. The impairment expense for the
year ended December 31, 2017 related to trade name. The impairment expense for the year ended December 31, 2016 related to our pipeline fixed assets.
At the time of the 2012 reverse acquisition, our trade name valuation was tied to pipeline transportation and exploration and production revenue and assumed,
under the relief-from-royalty approach, a growth rate of 2.2% annually. Although growth in these operations did not materialize for economic reasons,
management believed there was value associated with Blue Dolphin’s listing as a publicly-traded company. Given the decline in the price per share of our
common stock following the Final Arbitration Award, we fully impaired the trade name asset. Trade name is not associated with, nor is it material to, our refinery
operations business segment.
(13)
Treasury Stock
At December 31, 2017 and 2016, we had 0 and 150,000 shares of treasury stock, respectively. In May 2017, we issued 150,000 shares of treasury stock to
Jonathan Carroll as payment for amounts due under the March Carroll Note. The issuance price of the treasury stock issued to Mr. Carroll was $2.48 per share,
which represents the preceding 30-day average closing price of the Common Stock, in accordance with the Amended and Restated Guaranty Fee
Agreements. The shares of treasury stock issued to Mr. Carroll are restricted per applicable securities holding periods for affiliates.
(14)
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 U.S., the Federal Deposit Insurance Corporation (the “FDIC”) insures certain
financial products up to a maximum of $250,000 per depositor. At December 31, 2017 and 2016, we had cash balances (including restricted cash) of more than
the FDIC insurance limit per depositor in the amount of $1,602,045 and $5,372,689, respectively.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
Key Supplier.
FORM 10-K 12/31/17
As discussed elsewhere in this Annual Report, we ceased purchases of crude oil and condensate from GEL under the Crude Supply Agreement in November
2016. (See “Part I, Item 1A. Risk Factors” and “Note (19) Commitments and Contingencies – Legal Matters” for disclosures related to the Crude Supply
Agreement, the contract-related dispute with GEL, and the Final Arbitration Award.) We currently have in place a month-to-month evergreen crude supply
contract with a major integrated oil and gas company. This supplier currently provides us with adequate amounts of crude oil and condensate, and we expect
the supplier to continue to do so for the foreseeable future. However, our ability to purchase crude oil and condensate is dependent on our liquidity and access
to capital, which have been adversely affected by net losses, working capital deficits, the contract-related dispute with GEL, and financial covenant defaults in
secured loan agreements. The Final Arbitration Award could have a material adverse effect on our ability to procure adequate amounts of crude oil and
condensate from our current supplier or otherwise.
Significant Customers. We routinely assess the financial strength of our customers and have not experienced significant write-downs in our accounts receivable
balances. Therefore, we believe that our accounts receivable credit risk exposure is limited.
For the year ended December 31, 2017, we had 3 customers that accounted for approximately 70% of our refined petroleum product sales. LEH was 1 of these
3 significant customers and accounted for approximately 33% of our refined petroleum product sales. At December 31, 2017, these 3 customers represented
approximately $1.3 million in accounts receivable. LEH represented approximately $0.7 million in accounts receivable. LEH, which is HUBZone certified,
purchases our jet fuel and resells the jet fuel to a government agency. (See “Part I, Item 1. Business – Management” and “Part II, Item 8. Financial Statements
and Supplementary Data – Note (8) Related Party Transactions, Note (10) Long-Term Debt, Net, and Note (19) Commitments and Contingencies – Financing
Agreements” for additional disclosures related to LEH.)
For the year ended December 31, 2016, we had 4 customers that accounted for approximately 67% of our refined petroleum product sales. LEH was one of
these 4 significant customers and accounted for approximately 27% of our refined petroleum product sales. At December 31, 2016, these 4 customers
represented approximately $1.6 million in accounts receivable. LEH represented approximately $1.6 million in accounts receivable.
Refined Petroleum Product Sales. Our refined petroleum products are primarily sold in the U.S. However, with the opening of the Mexican diesel market to
private companies, we occasionally sell low-sulfur diesel to customers that export to Mexico. Total refined petroleum product sales by distillation (from light to
heavy) for the periods indicated consisted of the following:
LPG mix
Naphtha
Jet fuel
HOBM
Reduced Crude
AGO
Years Ended December 31,
2017
2016
$
122,911
60,407,725
81,094,418
54,851,030
-
59,071,227
0.1% $
23.6%
31.7%
21.5%
0.0%
23.1%
714,285
35,544,394
55,459,227
35,924,098
3,791,919
33,979,855
0.4%
21.5%
33.5%
21.8%
2.3%
20.5%
$ 255,547,311
100.0% $ 165,413,778
100.0%
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
(15)
Leases
FORM 10-K 12/31/17
Our principal office is in Houston, Texas. The office space is leased by BDSC, as lessee, under a 2006 lease agreement that expired in September
2017. Effective January 1, 2018, BDSC entered an amended lease agreement (the “Lease Amendment”) that: (i) reduced the leased premises from 13,878
square feet to 7,675 square feet (ii) extended the lease period by sixty-eight (68) months expiring on August 31, 2023, and (iii) has an initial monthly base rental
of $18,868. Of the 7,675 square feet, 1,186 square feet is used and paid for by LEH. The Lease Amendment includes an allowance for lessee improvements,
rent abatements, and a five-year renewal option.
For the years ended December 31, 2017 and 2016, rent expense totaled $161,920 and $142,604, respectively. Rent expense is recognized on a straight-line
basis.
At December 31, 2017, there were no future minimum lease commitments that were non-cancelable under our expiring office lease. However, future minimum
lease commitments that were non-cancelable under the Lease Amendment were as follow:
Years Ending December 31,
2018
2019
2020
2021
2022
2023
(16)
Income Taxes
$
$
113,206
190,276
229,930
233,448
237,285
160,535
1,164,680
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The principal element of the Tax Cuts and Jobs Act relevant to our financial statements
is a reduction in the U.S. federal corporate tax rate from 34% to 21%, effective January 1, 2018. Other provisions of the Tax Cuts and Jobs Act did not have a
significant impact on our financial statements for the year ended December 31, 2017.
The provision for income taxes as of the dates indicated consisted of the following:
Current
Deferred
Deferred provision
Impact of change in enacted tax rates
Change in valuation allowance
Total provision for income taxes
December 31,
2017
$
-
$
6,654,184
(6,654,184)
0
$
$
2016
-
-
-
-
(3,607,237)
(3,607,237)
In 2017, our effective tax rate differed from the U.S. federal statutory rate primarily due to re-measuring deferred income taxes at the new statutory tax rate and
the related change of the valuation allowance over our deferred tax assets. At the date of enactment of the Tax Cuts and Jobs Act, we re-measured our deferred
tax assets and liabilities using a rate of 21%, which is the rate expected to be in place when such deferred assets and liabilities are expected to reverse in the
future. The re-measurement reduced our net deferred tax assets by $6,654,184. In 2016, our effective tax rate differed from the U.S. federal statutory rate
primarily due to a change in the valuation allowance of our deferred tax assets.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
The state of Texas has a Texas margins tax (“TMT”), which is a form of business tax imposed on gross margin. Although TMT is imposed on an entity’s gross
profit rather than on its net income, certain aspects of TMT make it like an income tax. Accordingly, TMT is treated as an income tax for financial reporting
purposes.
Effective Tax Rate. Our effective tax rate was as follows:
Expected tax rate
Permanent differences
State tax
Federal tax
Change in valuation allowance
Deferred income taxes as of the dates indicated consisted of the following:
Deferred tax assets:
Net operating loss and capital loss carryforwards
Accrued arbitration award payable
Start-up costs (Nixon Facility)
Asset retirement obligations liability/deferred revenue
AMT credit and other
Total deferred tax assets
Deferred tax liabilities:
Basis differences in property and equipment
Total deferred tax liabilities
Valuation allowance
Deferred tax assets, net
December 31,
2017
2016
34.00%
0.00%
0.00%
0.00%
(34.00%)
0.00%
34.00%
0.00%
0.00%
0.00%
(63.66%)
(29.66%)
December 31,
2017
2016
$
$
9,767,205
4,122,187
763,428
494,816
216,925
15,364,561
13,550,338
-
1,373,363
717,751
266,522
15,907,974
(4,415,061)
(4,415,061)
(5,895,943)
(5,895,943)
10,949,500
10,012,031
(10,949,500)
(10,012,031)
$
-
$
-
Deferred Income Taxes. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and
their tax basis, as well as from NOL carryforwards. We state those balances at the enacted tax rates we expect will be in effect when taxes are paid. NOL
carryforwards and deferred tax assets represent amounts available to reduce future taxable income.
NOL Carryforwards . Under 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). For income tax purposes, we experienced ownership changes in 2005, relating to
a series of private placements, and in 2012, because of a reverse acquisition, that limit the use of pre-change NOL carryforwards to offset future taxable
income. 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. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards that were generated prior to the ownership
change to an annual use limitation of $638,196 per year. Unused portions of the annual use limitation amount may be used in subsequent years. Because of
the annual use limitation, approximately $6.7 million in NOL carryforwards that were generated prior to the 2012 ownership change will expire unused. NOL
carryforwards that were generated after the 2012 ownership change are not subject to an annual use limitation under IRC Section 382 and may be used for a
period of 20 years in addition to available amounts of NOL carryforwards generated prior to the ownership change.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused
because of the IRC Section 382 limitation):
Balance at December 31, 2015
Net operating losses
Balance at December 31, 2016
Net operating losses
Balance at December 31, 2017
Net Operating Loss Carryforward
Pre-Ownership
Change
9,614,449
$
Post-Ownership
Change
9,616,941
$
Total
$
19,231,390
-
13,945,128
13,945,128
$
9,614,449
$
23,562,069
$
33,176,518
-
6,656,563
6,656,563
$
9,614,449
$
30,218,632
$
39,833,081
Valuation Allowance . 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 the deferred tax assets will be realized, which is dependent upon the
generation of future taxable income prior to the expiration of any NOL carryforwards. At December 31, 2017 and 2016, management determined that cumulative
losses incurred over the prior three-year period provided significant objective evidence that limited the ability to consider other subjective evidence, such as
projections for future growth. Based on this evaluation, we recorded a full valuation allowance against the deferred tax assets as of December 31, 2017 and
2016.
(17)
Earnings Per Share
A reconciliation between basic and diluted income per share for the periods indicated was as follows:
Net loss
Basic and diluted income 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,
2017
$ (22,328,390)
2016
$ (15,767,448)
$
(2.09)
$
(1.51)
10,689,615
10,464,061
Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock
outstanding. Diluted EPS for the years ended December 31, 2017 and 2016 was the same as basic EPS as there were no stock options or other dilutive
instruments outstanding.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
(18)
Inventory Risk Management
FORM 10-K 12/31/17
During 2017, we began selling certain of our refined petroleum products immediately following production, which minimizes inventory, improves cash flow, and
reduces commodity risk/exposure. Previously, Genesis/GEL used commodity futures contracts to mitigate the volatile change in value for our crude oil and
refined petroleum products inventory.
The following table provides the effect of derivative instruments in our consolidated statements of operations for the years ended December 31, 2017 and 2016:
Derivatives
Commodity contracts
Statements of Operations Location
Cost of refined products sold
(19)
Commitments and Contingencies
Legal Matters.
Gain (Loss) Recognized
Years Ended December 31,
2017
$
-
$
2016
(2,445,898)
GEL Contract-Related Dispute and Final Arbitration Award . See “Note (1) Organization – Going Concern – Final GEL Arbitration Award” for disclosures related to
the GEL contract-related dispute and Final Arbitration Award. In addition, see "Part I, Item 3. Legal Proceedings” for additional information regarding the contract
related dispute and Final Arbitration Award.
Veritex Secured Loan Agreement Event of Default . See “Note (1) Organization – Going Concern – Veritex Secured Loan Agreement Event of Default” and “Note
(10) Long-Term Debt, Net” for disclosures related to defaults under secured loan agreements.
Other Legal Matters. From time to time we are involved in routine lawsuits, claims, and proceedings incidental to the conduct of our business, including
mechanic’s liens and administrative proceedings. Management does not believe that such matters will have a material adverse effect on our financial position,
earnings, or cash flows.
Amended and Restated Operating Agreement . See “Note (8) Related Party Transactions” for additional disclosures related to the Amended and Restated
Operating Agreement.
Financing Agreements. See “Note (10) Long-Term Debt, Net” for additional disclosures related to financing agreements.
Guarantees. Blue Dolphin and certain of its subsidiaries have guarantees for affiliates related to long-term debt. The maximum amount of any guarantee is
reduced as payments are made by the affiliate. Blue Dolphin has recorded no liability for these guarantees. See “Note (10) Long-Term Debt, Net” for additional
disclosures related to guarantees.
Health, Safety and Environmental Matters . All 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.
Nixon Facility Expansion . We have made and continue to make capital and efficiency improvements to the Nixon Facility. Therefore, we incurred and will
continue to incur capital expenditures related to these improvements, which include, among other things, facility and land improvements and completion of
petroleum storage tanks.
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BLUE DOLPHIN ENERGY COMPANY
Notes to Consolidated Financial Statements (Continued)
FORM 10-K 12/31/17
Supplemental Pipeline Bonds. In 2016, the Bureau of Ocean Energy Management (the “BOEM”) requested that BDPL provide additional supplemental bonds or
acceptable financial assurance of approximately $4.6 million related to five (5) existing pipeline rights-of-way. At December 31, 2017 and 2016, BDPL
maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to the BOEM. Of the five (5) existing pipeline rights-of-
ways related to BOEM’s request, the pipeline associated with one (1) right-of-way was decommissioned in 1997. The Bureau of Safety and Environmental
Enforcement (the “BSEE”) approved BDPL permit requests to decommission in place the pipelines for three (3) of these rights-of-way. As a result, management
is seeking a waiver of BOEM’s request for additional financial assurance. There can be no assurance that the BOEM will accept a reduced amount of
supplemental financial assurance or not require additional supplemental pipeline bonds related to our existing pipeline rights-of-way. If BDPL is required by the
BOEM to provide significant additional supplemental bonds or acceptable financial assurance, we may experience a significant and material adverse effect on
our operations, liquidity, and financial condition.
(20)
Subsequent Events
BDSC Principal Office Lease. See “Note (15) Leases” for disclosures related to an amendment to the lease agreement for our principal office.
Sixth Amendment to GEL Letter Agreement . On March 26, 2018, LE and Blue Dolphin, together with LEH and Jonathan Carroll, entered into a sixth amendment
to the GEL Letter Agreement, which extended the Continuance Period through April 30, 2018, in order to facilitate ongoing discussions. An additional
$500,000.00 was paid to GEL on March 26, 2018, which amount has been applied to reduce the balance of the final award. (See “Note (1) Organization – Going
Concern – Final GEL Arbitration Award” for disclosures related to the GEL contract-related dispute and Final Arbitration Award.)
Remainder of Page Intentionally Left Blank
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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 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 Annual Report. Based on our evaluation, our Chief
Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were
effective 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, are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
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 Chief
Financial Officer (principal financial officer), assessed the effectiveness of our internal controls over financial reporting at December 31, 2017. In making this
assessment, management used the criteria set forth by the 2013 Committee of Sponsoring Organizations of the Treadway Commission Framework and SOX
Compliance. Relating to such evaluation, management concluded that our internal controls over financial reporting were effective at December 31, 2017.
Changes in Internal Control over Financial Reporting. During the period covered by this report there have been no changes in our internal control over financial
reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Exemption from Management's Report on Internal Control over Financial Reporting. 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 attestation in this Annual Report.
ITEM 9B. OTHER INFORMATION
None.
Remainder of Page Intentionally Left Blank
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Structure and Management
Blue Dolphin is a Delaware corporation that was formed in 1986. Blue Dolphin is controlled by Lazarus Energy Holdings, LLC (“LEH”). LEH operates and
manages all Blue Dolphin properties pursuant
to an Amended and Restated Operating Agreement (the “Amended and Restated Operating
Agreement”). Jonathan Carroll is Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, as well as a majority
owner of LEH. Together LEH and Jonathan Carroll own 80.2% of our common stock, par value $0.01 per share (the “Common Stock). (See “Part II, Item 8.
Financial Statements and Supplementary Data – Note (8) Related Party Transactions, Note (10) Long-Term Debt, Net and Note (19) Commitments and
Contingencies – Financing Agreements” for additional disclosures related to LEH, the Amended and Restated Operating Agreement, and Jonathan Carroll.)
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. The Board currently has five
directors, each serving until the next annual meeting of stockholders to be held by Blue Dolphin. The following sets forth, at April 2, 2018, 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
Knowledge and Experience
Jonathan P. Carroll, 56
Blue Dolphin Energy Company
Chairman of the Board (since 2014)
Chief Executive Officer, President,
Assistant Treasurer and Secretary (since 2012)
Lazarus Energy Holdings, LLC (“LEH”)
President and majority owner (since 2006)
Together LEH and Jonathan Carroll own 80.2% of our outstanding Common Stock.
Mr. Carroll has served on Blue Dolphin’s Board since 2014. He is currently Chairman of the
Board. Since 2004, he 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 Salient’s
private and public closed-end and mutual funds. Mr. Carroll previously served on the Board
of Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE) from January 2014
until its merger with Vanguard Natural Resources, LLC in October 2015.
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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Name, Age
Principal Occupation and Directorships During Past 5 Years
Knowledge and Experience
Ryan A. Bailey, 42
Children’s Health System of Texas
Head of Investments (since 2014)
The Meadows Foundation
Investment Officer/Interim Chief Investment Officer (2006 to 2014)
Mr. Bailey was appointed to Blue Dolphin’s Board in November 2015. He is currently a
member of the Audit and Compensation Committees. He also serves as an advisor and
mentor to Texas Wall Street Women, a non-profit member organization; is a member of the
advisory board of Solovis, Inc., an investment software company; and serves as a Board
member for the Texas Hedge Fund Association.
Mr. Bailey earned a Bachelor of Arts in Economics from Yale
University and completed a graduate course in tax planning from
the Yale School of Management.
He holds professional
credentialing as a Chartered Financial Analyst (CFA), Financial
Risk Manager (FRM), Chartered Alternative Investment Analyst
(CAIA) and Chartered Market Technician (CMT). Based on his
educational and professional experiences, Mr. Bailey possesses
particular knowledge and experience in finance, financial analysis
and modeling, investment management, risk assessment and
the Board’s collective
strategic planning
qualifications, skills and experience.
that strengthen
Amitav Misra, 40
Arundo Analytics, Inc.
Vice President of Marketing (since June 2017)
Cardinal Advisors
Founder and Partner (2014 to 2017)
Taxa, Inc.
President, Director and Chief Operating Officer (2012 to 2014)
EnerNOC, Inc.
Channel Manager (2011 to 2012)
Mr. Misra has served on Blue Dolphin’s Board since 2014. He is currently a member of the
Audit and Compensation Committees. Mr. Misra serves as an advisor to several energy
technology and private investment companies. He is also a director of the Houston Center
for Literacy, a non-profit organization.
Christopher T. Morris , 56
Impact Partners LLC
President (since 2017)
Tatum (a Randstad Company)
New York Managing Partner (2013 to 2017)
MPact Partners LLC
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 Chairman of the
Audit and Compensation Committees.
Mr. Misra earned a Bachelor of Arts in Economics from Stanford
University and holds FINRA Series 79 and Series 63 licenses. Mr.
in
Misra possesses particular knowledge and experience
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 particular
knowledge and experience in business management, finance,
strategic planning and business development that strengthen the
Board’s collective qualifications, skills and experience.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Name, Age
Principal Occupation and Directorships During Past 5 Years
Knowledge and Experience
Herbert N. Whitney , 77
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.
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 in the supply
and distribution of crude oil and petroleum products, which
strengthens
the Board’s collective qualifications, skills and
expertise.
This table shows, as of April 2, 2018, the name and age of each executive officer, as well as their principal occupation during the past five (5) years:
Name
Jonathan P. Carroll
Position
Chief Executive Officer, President, Assistant Treasurer, and Secretary
Tommy L. Byrd
Chief Financial Officer
Treasurer and Assistant Secretary
Since
2014
2015
2012
Age
56
60
Jonathan P. Carroll was appointed Chairman of the Board of Blue Dolphin in 2014, and he was appointed Chief Executive Officer, President, Assistant
Treasurer and Secretary of Blue Dolphin in 2012. He has also served as President of LEH since 2006 and is its majority owner. Together LEH and Jonathan
Carroll own 80.2% 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. Mr. Carroll previously served on the Board of Directors of the
General Partner of LRR Energy, L.P. (NYSE: LRE) from January 2014 until its merger with Vanguard Natural Resources, LLC in October 2015. 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 Chief Financial Officer of Blue Dolphin in 2015, having previously served as Interim Chief Financial Officer from 2012 through
2015 and as Controller from 2011 to 2012. Mr. Byrd also serves as Treasurer and Assistant Secretary of Blue Dolphin, positions for which he was appointed in
2012. He is also an employee of LEH, where he has served as Chief Financial Officer since 2006. He earned a Bachelor of Business Administration in
Accounting from Stephen F. Austin State University. Mr. Byrd has extensive financial management, accounting and internal audit experience in the energy
industry.
Family Relationships between Directors and Officers
At March 31, 2018, there were no family relationships between any of our directors or executive officers.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Structure and Meetings of the Board and Board Committees
Board
The Board consists of Messrs. Carroll, Bailey, Misra, Morris and Whitney with Mr. Carroll serving as Chairman. During 2017, the Board met five (5) times. The
Board has two standing committees, the Audit Committee and the Compensation Committee. In 2013, the Board formed a Special Committee of the Board to
oversee a potential conversion of Blue Dolphin from a Delaware “C” corporation to a Delaware MLP. The Special Committee of the Board was dissolved in
March 2018 (see below).
Audit Committee
The Audit Committee consists of Messrs. Morris, Bailey, and Misra with Mr. Morris serving as Chairman. During 2017, the Audit Committee met five (5)
times. The Board has affirmatively determined that all members of the Audit Committee are independent and that Messrs. Morris and Bailey qualify as Audit
Committee Financial Experts. The Audit Committee's duties include overseeing financial reporting and internal control functions. The Audit Committee’s written
charter is available on our corporate website (http://www.blue-dolphin-energy.com).
Compensation Committee
The Compensation Committee consists of Messrs. Morris, Bailey, and Misra with Mr. Morris serving as Chairman. During 2017, the Compensation Committee
did not meet. The Board has affirmatively determined that all members of the Compensation Committee are independent. The Compensation Committee’s duties
include setting and overseeing our compensation policies, as well as reviewing and recommending to the Board for its approval all compensation for the Chief
Executive Officer, other senior executives, and directors. The Compensation Committee’s written charter is available on our corporate website (http://www.blue-
dolphin-energy.com).
Master Limited Partnership ("MLP") Conversion Special Committee
The MLP Conversion Special Committee was formed by the Board in 2013 to determine the feasibility of optimizing stockholder value by potentially converting
Blue Dolphin from a publicly traded “C” corporation to a publicly traded MLP. Due to a shift in market conditions, the MLP Conversion Special Committee was
dissolved in March 2018. The MLP Conversion Special Committee did not meet during 2016 and 2017.
Nominating Committee
Given the size of the Board, the Board adopted a “Board Nomination Procedures” policy 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 way independent directors evaluate nominees for director as
recommended by a stockholder is the same as that for nominees received from other sources.
The Board endeavors to nominate qualified directors that will make important contributions to the Board and to Blue Dolphin. The Board generally requires that
nominees be persons of sound ethical character, can represent all stockholders fairly, have demonstrated professional achievements, have meaningful
experience, and have a general appreciation of the major business issues facing Blue Dolphin. 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.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Corporate Governance
Leadership Structure
Blue Dolphin is led by Jonathan P. Carroll, who has served as Chairman of the Board since 2014 and as our Chief Executive Officer and President since 2012.
Having a single leader is commonly utilized by other public companies in the U.S., and we believe it is 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 the performance of the Board.
Risk Oversight
The Board has responsibility for risk oversight, with reviews of certain areas being conducted by the relevant committees of the Board. These committees then
provide oral reports to the full board. The oversight responsibility of the Board and its committees is enabled by management reporting processes that are
designed to provide visibility to the board about the identification, assessment, and management of critical risks and management’s risk mitigation strategies.
These areas of focus include strategic, operational, financial and reporting, compliance, and other risks. The Board and Audit Committee meet in executive
session with representatives of outside advisors as required.
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. During 2017, there
were no substantive amendments to our Code of Ethics and Code of Conduct policies.
Communicating with Directors
Since the Board does not receive a large volume of correspondence from stockholders, there is no formal process by which stockholders can communicate
directly with the Board at this time. 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.
Remainder of Page Intentionally Left Blank
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BLUE DOLPHIN ENERGY COMPANY
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Policy and Procedures
FORM 10-K 12/31/17
LEH manages and operates all Blue Dolphin properties pursuant to an Amended and Restated Operating Agreement (the “Amended and Restated Operating
Agreement”). Under the Amended and Restated Operating Agreement, LEH provides us with executive personnel in the capacities of Chief Executive Officer
and Chief Financial Officer. All personnel work for and are paid directly by LEH. Blue Dolphin is billed by LEH at cost plus a 5% markup.
Compensation for Named Executives
Pursuant to the Amended and Restated 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 (collectively, the
“Named Executive Officers”) for the periods indicated was as follows:
Name and Principal Position
Jonathan P. Carroll
Chief Executive Officer and President
Tommy L. Byrd(1)
Chief Financial Officer
SUMMARY COMPENSATION TABLE
Year
2017
2016
2017
2016
Salary
Option Awards
Total
$
$
$
$
-
-
$
$
-
-
$
$
-
-
100,000
100,000
$
$
-
-
$
$
100,000
100,000
_____________________
(1) A portion of Mr. Byrd’s compensation is billed to Blue Dolphin at cost plus a 5% markup pursuant to the Amended and Restated 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.
Director Compensation Policy and Procedures
Under the Amended and Restated Operating Agreement, LEH provides us with personnel in the capacities of Chief Executive Officer and Chief Financial Officer.
Therefore, we do not have any directors that are also personnel of Blue Dolphin. The Compensation Committee reviews and recommends to the Board for its
approval all compensation for the directors.
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BLUE DOLPHIN ENERGY COMPANY
Compensation for Non-Employee Directors
FORM 10-K 12/31/17
The annual retainer payable to non-employee directors serving on the Board is $40,000 per year. Payments are made in Common Stock and cash on a
quarterly rotating basis.
Cash Fees. Cash fees reflect the amount of cash compensation earned for Board and committee service. For service on the Board, non-employee directors are
entitled to receive cash payments in the amount of $10,000 for services rendered in the second and fourth quarters of each year.
Non-employee directors earn additional compensation for serving on the Audit Committee. The chairman of the Audit Committee earns an additional $2,500 in
cash in each of the second and fourth quarters of the year, for a total of $5,000 annually. Members of the Audit Committee earn an additional $1,250 in cash in
each of the second and fourth quarters of the year, for a total of $2,500 annually. During 2017, no additional compensation was earned by non-employee
directors for serving on the MLP Conversion Special Committee. Non-employee directors serving on the Compensation Committee do not earn any additional
compensation. Non-employee directors are reimbursed for reasonable out-of-pocket expenses related to in-person meeting attendance.
Stock Awards. For service on the Board, non-employee directors earn Blue Dolphin Common Stock with a fair value of $10,000 for services rendered in each of
the first and third quarters of the year, for a total of $20,000 annually. 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 subject to resale restrictions applicable to
restricted securities and securities held by affiliates under federal securities laws.
Compensation that each independent, non-employee director earned for Board and committee service for the periods indicated was as follows:
Name
Christopher T. Morris
Amitav Misra
Ryan A. Bailey
Years Ended December 31,
2017
2016
Stock
Awards(1)(2)
Cash Fees(3)
Total
Compensation
Stock
Awards(1)(2)
Cash Fees(3)
Total
Compensation
$
20,000 $
20,000
20,000
25,000 $
22,500
22,500
15,000 $
12,500
42,500
30,000 $
30,000
20,001
25,000 $
22,500
22,500
55,000
52,500
42,504
$
60,000 $
70,000
130,000 $
80,001 $
70,000 $
150,007
_____________________
(1) At December 31, 2017, Messrs. Morris, Misra, and Bailey had total restricted awards of Common Stock outstanding of 58,359, 50,100, and 44,009,
(2)
respectively.
In accordance with SEC rules, the grant date fair value of independent, non-employee director stock awards is calculated by multiplying the number of
shares of Common Stock awarded by the closing price of Blue Dolphin’s Common Stock on the grant date (the “Cost Basis”). The Cost Basis was $3.50 and
$4.75 at March 31, 2017 and 2016, respectively. The Cost Basis was $0.28 and $3.00 at September 30, 2017 and 2016, respectively. The aggregate grant
date fair value of non-employee director stock awards for services rendered for the first and third quarters of 2017 and 2016 was $30,000 each quarter, or
$60,000 annually.
(3) Cash fees reflect cash compensation that was earned but not necessarily paid.
Independent, non-employee directors have not been paid cash fees since 2015. Unpaid cash fees are reflected within accrued expenses and other current
liabilities on our consolidated balance sheets. (See “Part II, Item 8. Financial Statements and Supplementary Data, Note (9) Accrued Expenses and Other
Current Liabilities” within this Annual Report for additional disclosures related to board of director fees payable.)
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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 at December 31, 2017. Unless otherwise indicated, each named party has sole voting and dispositive power with respect to such shares.
Title of Class
Name of Beneficial Owner
Common Stock
Lazarus Energy Holdings, LLC
801 Travis Street, Suite 2100
Houston, Texas 77002
(1) Based upon 10,925,513 shares of Common Stock issued and outstanding at December 31, 2017.
Security Ownership of Management
Amount and Nature of
Beneficial Ownership
Percent of Class(1)
8,426,456
77.1%
The table below sets forth information at December 31, 2017 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
Common Stock
Name of Beneficial Owner
Jonathan P. Carroll(2)
Christopher T. Morris
Amitav Misra
Ryan A. Bailey
Herbert N. Whitney
Tommy L. Byrd
Amount and
Nature of
Beneficial
Ownership
Percent of
Class(1)
8,763,300
80.2%
58,359
50,100
44,009
9,683
---
*
*
*
---
---
_____________________
(1) Based upon 10,925,513 shares of Common Stock issued and outstanding at December 31, 2017. At December 31, 2017, there were no options
outstanding, no options exercisable or no shares of common stock reserved for issuance under the 2000 Stock Incentive Plan.
(2) Includes 8,426,456 shares issued to Lazarus Energy Holdings, LLC (“LEH”). Mr. Carroll and his affiliates have an approximate 60% ownership interest in
Directors/Nominees and Executive Officers as a Group (6
Persons)
8,925,451
81.7%
LEH.
* Less than 1%.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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 2017.
Equity Compensation Plan Information
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
See “Part II, Item 8. Financial Statements and Supplementary Data – Note (8) Related Party Transactions” for disclosures related to relationships we have with
related parties.
Director Independence
The Board has affirmatively determined that each of its members, except for 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 OTCQX and SEC rules. Mr. Whitney has served as a consultant to LEH in the past.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees paid to UHY by us for the periods indicated were as follow:
Audit fees
Audit-related fees
Tax fees
Years Ended December 31,
2017
2016
$
$
268,070
-
-
268,070
$
$
136,826
-
-
136,826
Audit fees for 2017 and 2016 related to the audit of our consolidated financial statements and the review of our quarterly reports that are filed with the SEC. The
Audit Committee pre-approves, on an annual basis, all audit services provided to us by our registered public accounting firm. Such approval is in the form of an
engagement letter. Non-audit services must also be pre-approved by the Audit Committee prior to engagement of such services.
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules
Following is a list of documents filed as part of this Annual Report:
● consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders’ equity, and consolidated statements of cash
flows, which appear in “Part II, Item 8. Financial Statements and Supplementary Data” of this Annual Report; and
● exhibits as listed in the exhibit index of this Annual Report, which is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
Exhibits Index
No.
Description
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
Amended and Restated Certificate of Incorporation of Blue Dolphin (incorporated by reference to Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on
June 2, 2009, Commission File No. 000-15905)
Amended and Restated By-Laws of Blue Dolphin (incorporated by reference to Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on December 26, 2007,
Commission File No. 000-15905)
Specimen Stock Certificate (incorporated by reference to exhibits filed with Blue Dolphin’s Form 10-K on March 30, 1990, Commission File No. 000-
15905)
Form of Promissory Note issued pursuant to the Note and Warrant Purchase Agreement dated September 8, 2004 (incorporated by reference to
Exhibit 4.1 filed with Blue Dolphin’s Form 8-K on September 14, 2004, Commission File No. 000-15905)
Promissory Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin dated July 31, 2009 (incorporated by reference to Exhibit 10.1 filed
with Blue Dolphin’s Form 8-K on August 6, 2009, Commission File No. 000-15905)
Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix 1 filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on
April 20, 2000, Commission File No. 000-15905) *
First Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix B filed with Blue Dolphin’s Proxy Statement
on Form DEF 14A on April 16, 2003, Commission File No. 000-15905) *
Second Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on April 27, 2006, Commission File No. 000-15905) *
Fourth Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Exhibit B filed with Blue Dolphin’s Proxy Statement
on Form DEFA on December 28, 2011, Commission File No. 000-15905) *
Master Easement Agreement effective as of December 11, 2013 by and between Blue Dolphin Pipe Line Company and FLNG Land, II, Inc.
(incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on November 5, 2014, Commission File No. 000-15905)
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
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
Letter of Intent effective as of December 11, 2013 by and between Blue Dolphin Pipe Line Company and Freeport LNG Expansion, L.P (incorporated
by reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on November 5, 2014, Commission File No. 000-15905)
Management Agreement by and between Lazarus Energy Holdings, LLC, Lazarus Energy, LLC and Blue Dolphin effective as of February 15, 2012
(incorporated by reference to Exhibit 10.2 filed with Amendment No. 1 to Blue Dolphin’s Form 8-K on March 14, 2012, Commission File No. 000-
15905)
Amendment No. 1 to Management Agreement dated May 12, 2014 by and among Lazarus Energy Holdings, LLC, Blue Dolphin and Lazarus Energy,
LLC (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on May 16, 2014, Commission File No. 000-15905)
Crude Oil Supply and Throughput Services Agreement by and between GEL Tex Marketing, LLC and Lazarus Energy, LLC dated as of August 12,
2011 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File No. 000-15905)
Joint Marketing Agreement by and between GEL Tex Marketing, LLC and Lazarus Energy, LLC dated as of August 12, 2011 (incorporated by
reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on August 14, 2012, Commission File No. 000-15905)
Letter Agreement dated September 12, 2011 between GEL Tex Marketing, LLC, Milam Services, Inc., 1st International Bank, Lazarus Energy LLC and
Lazarus Energy Holdings LLC (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q on May 21, 2012, Commission File No.
000-15905)
Acknowledgment Letter between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated June 1, 2012 (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File No. 000-15905)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated June 25, 2012 (incorporated by reference to Exhibit 10.5 filed
with Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File No. 000-15905)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated July 30, 2012 (incorporated by reference to Exhibit 10.6 filed with
Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File No. 000-15905)
Letter Agreement between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated August 1, 2012 (incorporated by reference to Exhibit 10.7 filed
with Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File No. 000-15905)
Letter Agreement dated June 10, 2012 between Lazarus Energy Holdings, LLC and Blue Dolphin Energy Company (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on June 14, 2012, Commission File No. 000-15905)
Letter Agreement dated December 20, 2012 between Lazarus Energy, LLC, GEL Tex Marketing, LLC and Milam Services, Inc. (incorporated by
reference to Exhibit 10.35 filed with Blue Dolphin’s Form 10-K on March 30, 2013, Commission File No. 000-15905)
Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on August 14, 2013, Commission File No. 000-15905)
Letter Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam Services, Inc. dated February 21, 2013 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on May 15, 2013, Commission File No. 000-15905)
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Letter Agreement Regarding Certain Advances and Related Agreement between Lazarus Energy, LLC, GEL TEX Marketing, LLC, and Milam
Services, Inc., effective October 24, 2013 (incorporated by reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on November 14, 2013,
Commission File No. 000-15905)
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 (incorporated by reference to Exhibit 10.6 filed with Blue Dolphin’s Form 10-Q on March 31, 2012, Commission File No. 000-15905)
Subordination Agreement effective August 21, 2008 by Notre Dame Investors, Inc. in favor of First International Bank (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on March 31, 2012, Commission File No. 000-15905)
Intercreditor and Subordination Agreement dated September 29, 2008 by and between Notre Dame Investors, Inc., Richard Oberlin, Lazarus Energy
LLC and First International Bank (incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on March 31, 2012, Commission File
No. 000-15905)
Intercreditor and Subordination Agreement dated August 12, 2011 by and among John H. Kissick, Lazarus Energy LLC and Milam Services, Inc.
(incorporated by reference to Exhibit 10.7 filed with Blue Dolphin’s Form 10-Q on March 31, 2012, Commission File No. 000-15905)
First Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of July 1, 2013 (incorporated by reference
to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on November 14, 2013, Commission File No. 000-15905)
Second Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March 31, 2015, Commission File No. 000-15905)
Loan and Security Agreement dated March 2, 2014 by and between Lazarus Refining & Marketing, LLC and Sovereign Bank (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
Deed of Trust, Security Agreement, Assignment of Leases, Assignment of Rents, and Financing Statement dated May 2, 2014 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
Guaranty Agreement dated May 2, 2014 by Jonathan P. Carroll and Ingleside Crude LLC for the benefit of Sovereign Bank (incorporated by reference
to Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
Pledge Agreement dated May 2, 2014 between Sovereign Bank and Lazarus Energy Holdings, LLC. (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
Promissory Note payable to Sovereign Bank dated May 2, 2014 (incorporated by reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on May
8, 2014, Commission File No. 000-15905)
Collateral Assignment dated May 2, 2014 by Lazarus Refining & Marketing, LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
Collateral Assignment dated May 2, 2014 by Lazarus Refining & Marketing, LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File No. 000-15905)
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BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
Loan Modification Agreement dated March 25, 2015, by and between Lazarus Refining & Marketing, LLC, and Sovereign Bank (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on March 31, 2015, Commission File No. 000-15905)
Second Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March 31, 2015, Commission File No. 000-15905)
Loan Agreement among Sovereign Bank, Lazarus Energy, LLC and Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus Refining &
Marketing, LLC, and Lazarus Energy Holdings dated June 22, 2015 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on
June 26, 2015, Commission File No. 000-15905)
Promissory Note between Lazarus Energy, LLC and Sovereign Bank for the principal sum of $25,000,000 dated June 22, 2015 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Energy, LLC in favor of Sovereign Bank dated June 22, 2015 (incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Lazarus Energy, LLC
dated June 22, 2015 (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Energy, LLC for the benefit of Lazarus Refining & Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Loan and Security Agreement between Sovereign Bank and Lazarus Refining & Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Promissory Note between Lazarus Refining & Marketing, LLC and Sovereign Bank for the principal sum of $3,000,000 dated June 22, 2015
(incorporated by reference to Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Pledge Agreement by Lazarus Refining & Marketing, LLC in favor of Sovereign Bank dated June 22, 2015 (incorporated by reference to Exhibit 10.8
filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Collateral Assignment executed by Blue Dolphin Pipe Line Company for the benefit of Sovereign Bank dated June 22, 2015 (incorporated by
reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Guaranty Agreement by Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus Energy, LLC and Sovereign Bank dated June 22, 2015
(incorporated by reference to Exhibit 10.10 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Guaranty Fee Agreement between Jonathan P. Carroll and Lazarus Energy, LLC dated June 22, 2015 (incorporated by reference to Exhibit 10.11 filed
with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Guaranty Fee Agreement between Jonathan P. Carroll and Lazarus Refining & Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
91
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
Amendment No. 2. to Operating Agreement by and between Lazarus Energy Holdings, LLC, Blue Dolphin, and Lazarus Energy, LLC effective as of
June 1, 2015 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on August 14, 2015, Commission File No. 000-15905)
Loan Agreement among Sovereign Bank, Lazarus Refining & Marketing, LLC, Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus
Energy, LLC, and Lazarus Energy Holdings dated December 4, 2015 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
Promissory Note between Lazarus Refining & Marketing, LLC and Sovereign Bank for the principal sum of $10,000,000 dated December 4, 2015
(incorporated by reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Refining & Marketing, LLC in favor of Sovereign Bank dated December 4, 2015 (incorporated by reference to Exhibit
10.3 filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Lazarus Refining &
Marketing, LLC dated December 4, 2015 (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
Construction Rider to Loan Agreement dated December 4, 2015 (incorporated by reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
Absolute Assignment of Leases and Rents dated December 4, 2015 (incorporated by reference to Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
Indemnification Agreement dated December 4, 2015 (incorporated by reference to Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on December 10,
2015, Commission File No. 000-15905)
Pledge Agreement by Lazarus Energy Holdings, LLC in favor of Sovereign Bank dated December 4, 2015 (incorporated by reference to Exhibit 10.8
filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Collateral Assignment of Key Agreements dated December 4, 2015 (incorporated by reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
First Amendment to Lazarus Energy, LLC Loan Agreement and Loan Documents dated December 4, 2015 (incorporated by reference to Exhibit 10.10
filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
First Amendment to Lazarus Energy, LLC Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing dated December 4, 2015 (incorporated by reference to Exhibit 10.11 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
Guaranty Fee Agreement between Jonathan P. Carroll and Lazarus Refining & Marketing, LLC dated December 4, 2015 (incorporated by reference to
Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Loan and Security Agreement by and between Lazarus Energy Holdings, LLC and Blue Dolphin Pipe Line Company dated August 15, 2016
(incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No. 000-15905)
Promissory Note by and between Lazarus Energy Holdings, LLC and Blue Dolphin Pipe Line Company dated August 15, 2016 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No. 000-15905)
92
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Blue Dolphin Pipe Line
Company dated August 15, 2016 (incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File
No. 000-15905)
Collateral Assignment of Master Easement Agreement by Blue Dolphin Pipe Line Company for the benefit of Lazarus Energy Holdings, LLC dated
August 15, 2016 (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No. 000-15905)
Promissory Note dated March 31, 2017, of Blue Dolphin Energy Company in favor of Lazarus Energy Holdings, LLC (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-15905)
Amended and Restated Promissory Note dated March 31, 2017, of Blue Dolphin Energy Company in favor of Ingleside Crude, LLC (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-15905)
Amended and Restated Promissory Note dated March 31, 2017, of Blue Dolphin Energy Company in favor of Lazarus Capital, LLC (Jonathan Carroll)
(incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-15905)
Amended and Restated Operating Agreement effective as of April 1, 2017, between Lazarus Energy Holdings, LLC, Lazarus Energy, LLC, and Blue
Dolphin Energy Company (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-
15905)
Amended and Restated Promissory Note dated June 30, 2017, of Blue Dolphin Energy Company in favor of Lazarus Energy Holdings, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on October 12, 2017, Commission File No. 000-15905)
Amended and Restated Guaranty Fee Agreement between Jonathan Carroll and Lazarus Refining & Marketing, LLC (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on October 12, 2017, Commission File No. 000-15905)
Amended and Restated Guaranty Fee Agreement between Jonathan Carroll and Lazarus Refining & Marketing LLC (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on October 12, 2017, Commission File No. 000-15905)
Amended and Restated Guaranty Fee Agreement between Jonathan Carroll and Lazarus Energy, LLC (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 10-Q on October 12, 2017, Commission File No. 000-15905)
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll effective September 18, 2017 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on November 16, 2017,
Commission File No. 000-15905)
Amendment to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings,
LLC, and Jonathan Carroll dated November 1, 2017 (incorporated by reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on November 16,
2017, Commission File No. 000-15905)
Second Amendment to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated November 28, 2017.
Third Amendment to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated December 27, 2017.
93
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
10.77
10.78
10.79
10.80
14.1
Fourth Amendment to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated February 1, 2018.
Fifth Amendment to Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy
Holdings, LLC, and Jonathan Carroll dated March 1, 2018.
Debt Assumption Agreement by and among Lazarus Energy Holdings, LLC, Lazarus Energy, LLC, and John H. Kissick dated effective September 18,
2017 (incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on November 16, 2017, Commission File No. 000-15905)
Sixth Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of September 18, 2017 (incorporated by
reference to Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q on November 16, 2017, Commission File No. 000-15905)
Code of Ethics applicable to the Chairman, Chief Executive Officer and Senior Financial Officer (incorporated by reference to Exhibit 14.1 filed with
Blue Dolphin’s Form 10-KSB on March 25, 2005, Commission File No. 000-15905)
21.1
List of Subsidiaries of Blue Dolphin **
23.1
Consent of UHY LLP **
31.1
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 **
31.2
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 **
32.1
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 **
32.2
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 **
99.1
99.2
Amended and Restated Audit Committee Charter adopted by the Board of Directors of Blue Dolphin on November 4, 2015 (incorporated by reference
to Appendix A filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on November 18, 2015, Commission File No. 000-15905)
Compensation Committee Charter adopted by the Board of Directors of Blue Dolphin on November 4, 2015 (incorporated by reference to Appendix B
filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on November 18, 2015, Commission File No. 000-15905)
101.INS
XBRL Instance Document **
101.SCH XBRL Taxonomy Schema Document **
101.CAL
XBRL Calculation Linkbase Document **
101.LAB
XBRL Label Linkbase Document **
101.PRE
XBRL Presentation Linkbase Document **
101.DEF
_______________
XBRL Definition Linkbase Document **
* Management Compensation Plan
** Filed herewith
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
94
BLUE DOLPHIN ENERGY COMPANY
FORM 10-K 12/31/17
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
April 2, 2018
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 Annual 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
Date
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
/s/ TOMMY L. BYRD
Tommy L. Byrd
/s/ RYAN A. BAILEY
Ryan A. Bailey
/s/ AMITAV MISRA
Amitav Misra
/s/ CHRISTOPHER T. MORRIS
Christopher T. Morris
/s/ HERBERT N. WHITNEY
Herbert N. Whitney
Chairman of the Board, Chief Executive Officer, President,
Assistant Treasurer and Secretary (Principal Executive Officer)
April 2, 2018
Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
Director
Director
Director
Director
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
95
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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.
Exhibit 21.1
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 April 2, 2018, 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, 2017.
/s/ UHY LLP
UHY LLP
Sterling Heights,
Michigan
April 2, 2018
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
I, Jonathan P. Carroll, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Blue Dolphin Energy Company (the “Registrant”).
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;
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;
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: April 2, 2018
/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.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Blue Dolphin Energy Company (the “Registrant”).
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;
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;
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: April 2, 2018
/s/ TOMMY L. BYRD
Tommy L. Byrd
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, 2017 (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)
April 2, 2018
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, 2017 (the
“Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Tommy L. Byrd, 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
Chief Financial Officer, Treasurer and Assistant Secretary
(Principal Financial Officer)
April 2, 2018
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.