Blue Dolphin Energy Co: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis is management’s perspective of our current financial condition and results of operations, as well as significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Overview and Outlook

Company Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.25 million barrels of petroleum storage tank capacity in Nixon, Texas. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements– Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

Business Operations Update

During the third quarter of 2024, refining margins were less favorable compared to the third quarter of 2023. Less favorable refining margins on lower sales volumes contributed to Blue Dolphin reporting a net loss of $5.0 million, or $0.34 per share, for the three months ended September 30, 2024 (“Q3 2024”) compared to net income of $7.1 million, or $0.47 per share, for the three months ended September 30, 2023 (“Q32023”). During the first nine months of 2024, refining margins were also less favorable compared to the first nine months of 2023. Less favorable refining margins on lower sales volumes contributed to Blue Dolphin reporting a net loss of $4.7 million, or $0.32 per share, for the nine months ended September 30, 2024 (“YTD 2024”) compared net income of $22.3 million, or $1.49 per share, for the nine months ended September 30, 2023 (“YTD 2023”).

Our full operating results for the three and nine months ended September 30, 2024 and September 30, 2023 including operating results by segment, can be found within ‘—Results of Operations.’

We used cash flow from operations of $0.1 million for Q3 2024. The use of cash flow from operations was primarily due to a buildup of inventory. Inventory increased due primarily to unfavorable product pricing, limited opportunities for customers who export to Mexico, and an intentional buildup of inventory by us during periods of low refining margins. At September 30, 2024, we had approximately $0.7 million in cash and cash equivalents. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found within ‘—Liquidity and Capital Resources.’

Blue Dolphin Energy Company

General Trends and Outlook

Uncertainties remain surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and the extent to which these factors may impact working capital, commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if lenders exercise their rights and remedies under secured loan agreements that are in default, our business, financial condition, and results of operations will be materially adversely affected.

Liquidity and Access to Capital Markets

We continue efforts to improve our balance sheet. During the last eighteen months, we entered into forbearance agreements with the Kissick Noteholder and LEH related to our existing secured loan agreements, and we continue to engage with potential lenders to obtain additional funding to refinance and restructure debt. There can be no assurance that we will be able to raise additional capital on acceptable terms, if at all, or refinance existing debt. If we are unable to refinance or restructure debt, certain of which is currently in default, or forbear or waive defaults and lenders exercise their rights with respect to the debt, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to manage business disruptions, such as those experienced during the height of the COVID-19 pandemic, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Changes in Regulations

Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other greenhouse gas emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.

Business Strategy and Accomplishments

Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:

Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful. If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, filing bankruptcy, or ceasing operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Optimize Existing Asset Base

In late Q3 2024, management began a 10-day pre-planned turnaround to repair equipment at the Nixon Facility. Three days of the turnaround occurred in September 2024 while 7 days occurred in October 2024. On a year-to-date basis, management successfully completed two pre-planned turnarounds (13 days in May and 10 days in September and October). Management also finished projects related to extreme weather protection, including facility improvements to add anti-icing chemical storage, upgrade the chiller system, and install a 'cool down room' for personnel, contractors, and drivers to reduce heat-related injuries.

Improve Operational Efficiencies

Work continued during Q3 2024 to significantly upgrade the Nixon facility's terminal management software. Once complete, key elements of the plant's terminal loading functions will be automated, improving order management, bills of lading delivery, and reporting. During YTD 2023, an additional Lease Automatic Custody Transfer (LACT) unit was also installed at the facility, which increases plant reliability and crude charge capacity.

Blue Dolphin Energy Company

Seize Market Opportunities

Management has been working since 2021 to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on renewable energy growth. In recent years, growing public support, U.S. governmental actions to increase energy independence, and environmental concerns related to climate change have fueled demand for clean energy products, technologies, and solutions. Throughout 2023 and 2024, management has had meaningful discussions with potential commercial partners and efforts continue to find the right opportunity based on geographic suitability, existing infrastructure, market demand, technological expertise, potential for synergy with our core business, and financial viability. Reductions or modifications to, or the elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us abandoning the development of renewable energy projects.

Downstream Operations

Our refinery operations segment consists of the following assets and operations:

Crude Oil and Condensate Supply

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. On December 29, 2023, we entered a new crude supply agreement with MVP, effective January 1, 2024. This agreement provides a firm source of light-sweet Eagle Ford crude oil to the Nixon facility under improved credit terms, and management believes that MVP can provide us with adequate amounts of crude oil and condensate for the foreseeable future. Related to the crude supply agreement, MVP stores crude oil at the Nixon facility under a terminal services agreement. At September 30, 2024, accounts payable for crude oil and condensate was $5.9 million.

During 2023, we operated under a crude supply agreement with Tartan. Tartan also stored crude oil at the Nixon facility under a terminal services agreement. In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the crude supply agreement and terminal services agreement. The effective date of the termination was December 31, 2023. During Q3 2023, the vast majority of our crude was sourced from Tartan under the crude supply agreement. At September 30, 2023, accounts payable for crude oil and condensate was $0.

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices may increase, crude oil transportation costs could increase, and our liquidity may be reduced. Similarly, if producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs, which could result in refinery downtime and could materially affect our business, financial condition, and results of operations. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Products and Markets

Our market is the Gulf Coast region of the U.S., which is represented by the EIA as PADD 3. We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as naphtha and distillate to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

(in thousands, except percent amounts)

(in thousands, except percent amounts)

Blue Dolphin Energy Company

The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. An Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to the Affiliate's HUBZone certification. The product sales agreement with the Affiliate has a one-year term with automatic renewals. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.

Customers. Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). An Affiliate, LEH, purchases the majority of our jet fuel. We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.

Competition. Most of our competitors are larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.

Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Our storage tanks are equipped with leak detection devices. We also have response and control plans in place for spill prevention and emergencies.

The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages.

We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Shutdowns for maintenance may result in lost margin opportunity, potential increased maintenance expense, and reduced refined products inventory, which could adversely impact our ability to meet our payment obligations.

Midstream Operations

Our tolling and terminaling segment consists of the following assets and operations:

Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Our storage customers are typically from the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth area). Shipments are received and redelivered from the Nixon facility via third party trucks. Contract terms range from month-to-month to three years.

Operations Safety. Our midstream operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.

Blue Dolphin Energy Company

Inactive Operations

We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in ‘corporate and other.’ Our pipeline assets were fully impaired in 2016 and our oil and gas leasehold interests were fully impaired in 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and nine months ended September 30, 2024 and 2023. See “Part I, Item 1. Financial Statements – Note (14)” related to pipelines and platform decommissioning requirements and related risks.

Pipeline and Facilities Safety. Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.

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Blue Dolphin Energy Company

Results of Operations

Below is a discussion and analysis of the factors contributing to our consolidated financial results of operations. This information should be read in conjunction with our financial statements in “Part I, Item 1. Financial Statements.” While management intends for the financial statements, together with the following information, to provide investors with a reasonable basis for assessing our historical operations, they should not serve as the only criteria for predicting future performance.

Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per barrel commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher-value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally result in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.

The general outlook for the oil and natural gas industry for the remainder of 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East. We can provide no assurances that refining margins will be positive and demand will increase.

How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: refinery operations segment margin (deficit), refining segment margin (deficit) per MBbls, refinery throughput, production and sales data, refinery downtime, tolling and terminaling revenue, and intercompany processing fees. We modified our segment presentation to incorporate applicable depreciation and amortization into our cost of goods sold subtotal. We believe this provides a more complete representation of our cost of goods sold. Prior periods have been modified to conform with this presentation.

Refining Segment Margin (Deficit) per MBbls. We use refining segment margin (deficit) per MBbls as a downstream benchmark. This non-GAAP measure supplements presented GAAP financial information. Management uses refining segment margin (deficit) per MBbls to analyze our core refining results of operations, assess internal performance against forecasted amounts, and evaluate impacts on our financial performance considering potential capital investments. As this non-GAAP measure has important limitations as an analytical tool, it should not be considered a substitute for GAAP financial measures. Management believes this measure may help investors, analysts, lenders, and rating agencies analyze our results of operations and liquidity in conjunction with presented GAAP financial results.

Refinery Throughput, Production, and Sales Data. The revenue generated from the refinery operations business segment primarily depends on the crude oil volumes processed into refined products and the refined products volumes sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the direct and indirect markets served by our assets, as well as refinery downtime.

Refinery Downtime. The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Shutdowns for maintenance may result in lost margin opportunity, potential increased maintenance expense, and reduced refined products inventory, which could adversely impact our ability to meet our payment obligations. However, management may temporarily take the refinery offline or reduce throughput to preserve margins in a weak margin environment.

Tolling and Terminaling Revenue. Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees (such as for in-tank blending) associated with customer tank rental agreements. As a result, combined tank rental revenue and ancillary services fees are one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.

Intercompany processing fees. We have an intercompany tolling agreement in place between LE and LRM related to naphtha throughput volumes moving through the naphtha stabilizer unit at the Nixon facility. Although intercompany transactions are eliminated during consolidation, evaluation of intercompany processing fees provides investors with helpful information related to our tolling and terminaling business segment.

Cost of operations. We manage costs and expenses in tandem with meeting environmental, safety, and regulatory requirements while maintaining the mechanical integrity of our assets. Operating costs and expenses are comprised primarily of labor, repair, other maintenance, and utility costs. Refinery operating expenses generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed and the timing of those expenses within the reporting period. Tolling and terminaling operating costs and expenses are relatively fixed.

Blue Dolphin Energy Company

Consolidated Results

Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.

Q3 2024 Versus Q3 2023

Overview. Net loss for Q3 2024 totaled $5.0 million, or $0.34 per share, compared to net income of $7.1 million, or $0.47 per share, in Q32023. The $12.1 million, or $0.81 per share, decrease in net income between the periods resulted from less favorable refining margins on lower sales volumes. The Nixon refinery was down for 3 days in Q3 2024 as part of a 10-day pre-planned turnaround for equipment repairs. The Nixon refinery was down for 4 days in Q3 2023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (1 day).

Total Revenue from Operations. Total revenue from operations was $82.1 million for Q3 2024 compared to $102.6 million for Q32023, representing a decrease of 19.9%. The decrease in total revenue from operations in Q3 2024 compared to Q3 2023 related primarily to a 20.0% decrease in refinery operations revenue and a 13.3% decline in tolling and terminaling revenue. Refinery operations revenue in Q3 2024 decreased primarily due to lower market pricing and lower sales volumes; tolling and terminaling revenue in Q3 2024 declined primarily due to lower tank rental fees.

Total Cost of Goods Sold. Total cost of goods sold was $85.4 million for Q3 2024 compared to $92.0 million for Q32023, representing a decrease of 7.2%. The decrease related to higher crude acquisition costs, inventory write downs of $1.9 million that were recorded as a result of recognizing inventory at the lower of cost or net realizable value.

Total Other Operating and General Administrative Expenses. Total other operating and general and administrative expenses and totaled $1.4 million in Q3 2024 compared to $1.5 million in Q32023, representing a decrease of $0.1 million. General and administrative expenses within the category totaled $1.0 million in Q3 2024 compared to $1.1 million in Q32023, representing a decrease of 6.4%. The decrease was primarily related to lower professional fees.

Total Other Income (Expense). Total other expense was $1.5 million in each ofQ3 2024 and Q32023. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

(in thousands)

(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.

(2) The LEH operating fee, related party, abandonment expense, and accretion of asset retirement obligations are included in 'other operating and general and administrative expenses' within the refinery operations business segment.

Blue Dolphin Energy Company

YTD 2024 Versus YTD 2023

Overview. Net loss for YTD 2024 was $4.7 million, or $0.32 per share, compared to net income of $22.3 million, or $1.49 per share, for YTD 2023. The $27.0 million, or $1.81 per share, decrease in net income between the periods resulted from less favorable refining margins on lower sales volumes. The Nixon refinery was down for 21 days in YTD 2024 relating to pre-planned maintenance turnarounds (one in May for 13 days and another one in September for 3 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024). The Nixon refinery was down for 11 days in YTD 2023 relating to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (8 days).

Total Revenue from Operations. Total revenue from operations was $242.8 million for YTD 2024 compared to $288.1 million for YTD 2023, representing a decrease of 15.7%. The decrease related to declines in both refinery operations and tolling and terminaling revenue. Refinery operations revenue in YTD 2024 decreased primarily due to lower market pricing and lower sales volumes; tolling and terminaling revenue in YTD 2024 declined primarily due to lower tank rental fees.

Total Cost of Goods Sold. Total cost of goods sold was $239.6 million for YTD 2024 compared to $256.5 million for YTD 2023, representing a decrease of 6.6%. The decrease was related to lower sales volume.

Total Other Operating Expenses and General and Administrative Expenses. Total other operating expenses and general and administrative expenses totaled $4.6 million in YTD 2024 compared to $4.1 million in YTD 2023, representing an increase of $0.5 million. General and administrative expenses within the category totaled $3.5 million in YTD 2024 compared to $3.2 million in YTD 2023, representing an increase of 8.2%. The increase was primarily related to an increase in professional service fees and liabilities settled associated with decommissioning our pipeline assets.

Total Other Income (Expense). Total other expense in YTD 2024 totaled $4.4 million compared to $4.5 million in YTD 2023, representing a decrease of 3.1%. The decrease was due to lower related party interest expenses in YTD 2024 compared to YTD 2023. Total other expense primarily relates to interest expense associated with third-party and related party secured loan agreements.

(in thousands)

(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.

(2) The LEH operating fee, related party, abandonment expense, and accretion of asset retirement obligations are included in 'other operating and general and administrative expenses' within the refinery operations business segment.

Blue Dolphin Energy Company

Downstream Operations

Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.

(in thousands)

Q3 2024 Versus Q3 2023

Refinery Downtime. Refinery downtime decreased from 4 days in Q3 2023 to 3 days in Q3 2024. Refinery downtime in Q3 2024 related to a pre-planned maintenance turnaround for equipment repairs. Refinery downtime in Q32023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (1 day).

Adjusted Refinery Operations Segment Margin (Deficit). We had an adjusted refinery operations segment deficit of $4.0 million in Q3 2024 compared to adjusted segment margin of $9.7 million in Q32023, representing a decrease of $13.7 million. The decrease in Q3 2024 was related to less favorable refining margins and lower sales volume. We incurred an inventory impairment expense of $1.9 million in Q3 2024 based on high volumes of naphtha and HOBM inventory. We incurred an inventory impairment expense of $1.5 million in Q3 2023 related to naphtha inventory.

Adjusted Refining Segment Margin (Deficit) per MBbls. On a per barrel basis, adjusted refining segment deficit was $3.90 for Q3 2024 compared to adjusted segment margin of $8.96 for Q32023, representing a decrease of $12.86 per barrel. The decrease related to less favorable refining margins and and lower sales volume in Q3 2024 compared to the same period a year earlier.

YTD 2024 Versus YTD 2023

Refinery Downtime. Refinery downtime increased from 11 days in YTD 2023 to 21 days in YTD 2024. Refinery downtime in YTD 2024 related to pre-planned maintenance turnarounds (one in May for 13 days and another one in September for 3 days), maintenance and repairs (2 days), and weather (3 days of freezing temperatures in January 2024). Refinery downtime in YTD 2023 related to a pre-planned maintenance turnaround (3 days) and maintenance and repairs (8 days).

Adjusted Refinery Operations Segment Margin. Adjusted refinery operations segment margin was $1.3 million in YTD 2024 compared to $28.1 million in YTD 2023, representing a decrease of $26.8 million. The significant decrease in YTD 2024 was related to less favorable refining margins and lower sales volume. We incurred an inventory impairment expense of $7.9 million in YTD 2024 based on high volumes of naphtha and HOBM inventory and maintenance turnaround expenses.

Adjusted Refining Segment Margin per MBbls. On a per barrel basis, adjusted refining segment margin was $0.46 for YTD 2024 compared to $9.35 for YTD 2023, representing a decrease of $8.89 per barrel. The decrease related to less favorable refining margins and lower sales volume in YTD 2024 compared to the same period a year earlier.

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Blue Dolphin Energy Company

Midstream Operations

Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer.

(in thousands)

(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.

Q3 2024 Versus Q32023

Tolling and Terminaling Total Revenue. Tolling and terminaling total revenue, which consists of storage tank rental and ancillary services fees less intercompany processing fees, totaled $0.8 million in Q3 2024 compared to $1.0 million in Q32023, representing a decrease of approximately $0.1 million. The decrease in Q3 2024 related to lower tank rental fees compared to the period a year earlier.

Tolling and Terminaling Segment Margin. We had tolling and terminaling segment margin of $0.1 million in Q3 2024 compared to $0.2 million in Q3 2023, representing a decrease of $0.1 million. The decrease in Q3 2024 compared to Q3 2023 related to lower tolling and terminaling total revenue.

YTD 2024 Versus YTD 2023

Tolling and Terminaling Total Revenue. Tolling and terminaling total revenue totaled $3.0 million in YTD 2024 compared to $4.6 million in YTD 2023, representing a decrease of $1.5 million. The decrease in YTD 2024 related to lower tank rental fees. Tank rental fees in YTD 2023 included temporary terminal service fees associated with Pilot.

Tolling and Terminaling Segment Margin. We had tolling and terminaling segment margin of $0.8 million in YTD 2024 compared to $2.3 million in YTD 2023, representing a decrease of $1.5 million. The decrease in YTD 2024 compared to YTD 2023 related to lower tolling and terminaling total revenue.

Blue Dolphin Energy Company

Non-GAAP Measures

*Adjusted Refinery Operations Segment Margin (Deficit). '*Adjusted Refinery Operations Segment Margin (Deficit)' is a non-GAAP financial measure used to provide management and investors with (i) important supplemental indicators of the operational performance of our business, (ii) additional criteria for evaluation of our performance relative to our peers, and (iii) supplemental information to investors about certain material non-cash and/or other items that may not continue at the same level in the future. Adjusted refinery operations segment margin (deficit) has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP or as alternatives to net income (loss), operating income (loss), gross margin, or any other measure of financial performance presented in accordance with GAAP.

We define this financial metric as follows:

Adjusted Refinery Operations Segment Margin (Deficit) – Gross margin plus non-cash depreciation of our downstream assets, plus/minus certain material non-cash and or other items that may not continue at the same level in the future. The following table presents a reconciliation of the GAAP financial measure of gross margin to adjusted gross margin for each periods indicated (in thousands).

(in thousands)

Capital Resources and Liquidity

Working Capital. Certain conditions and events exist, in the aggregate, that caused management to evaluate Blue Dolphin's ability to continue as a going concern. Those conditions and events include historical working capital deficits and significant current debt in default. Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements). Management acknowledges that uncertainty remains related to future operating margins; however, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt.

We had positive working capital of $9.9 million at September 30, 2024 compared to a working capital deficit of $6.1 million at December 31, 2023, representing a $16.0 million improvement. Our significant current debt is primarily the result of bank debt to GNCU being in technical default for failure to provide standalone audited financial statements. The current portion of long-term debt on our consolidated balance sheets totaled $13.9 million and $39.4 million at September 30, 2024 and December 31, 2023, respectively. The $25.5 million decrease in current debt between the periods primarily related to the Veritex loans being reclassified to long-term debt, net of current portion at September 30, 2024 as a result of no longer being in default. We continue to engage with potential lenders to obtain additional funding to refinance and restructure debt and further improve working capital.

Our current assets totaled $45.3 million at September 30, 2024 compared to $49.3 million at December 31, 2023, representing a $4.0 million decrease. Our current liabilities totaled $35.4 million at September 30, 2024 compared to $55.4 million at December 31, 2023, representing a $20.0 million decrease.

Liquidity. Cash and cash equivalents totaled $0.7 million and $18.7 million at September 30, 2024 and December 31, 2023, respectively, representing a decrease of $18.0 million. A significant portion of our liquidity at September 30, 2024 was invested in inventory. Restricted cash, current totaled $1.0 million and $0.0 at September 30, 2024 and December 31, 2023, respectively. Restricted cash, current related to a Veritex payment reserve account. Although the payment reserve account had a balance of $0.0 at December 31, 2023, the account was fully replenished on January 2, 2024. Accounts receivable—related party, which was associated with the sale of jet fuel to LEH, totaled $6.7 million and $4.2 million at September 30, 2024 and December 31, 2023, respectively.

We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Third Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.

We continue efforts to improve our balance sheet. During the last eighteen months, we entered into forbearance agreements with the Kissick Noteholder and LEH related to our existing secured loan agreements, and we continue to engage with potential lenders to obtain additional funding to refinance and restructure debt. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.

Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital. Similarly, capital, credit, and commodity markets, as well as armed conflicts in the Middle East and Europe continue to evolve, and the extent to which these factors may impact our working capital, commodity prices, refined product demand, supply chain, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of confidence. In the long term, we may not be able to manage business disruptions or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Sources and Use of Cash

Components of Cash Flow.

(in thousands)

Cash Flow from Operations. We used $0.1 million in cash flow from operations during Q3 2024 compared to generating $11.2 million in cash flow from operations during Q32023. The $11.3 million decrease in cash flow used from operations between the periods was primarily due to a buildup of inventory in Q3 2024. Inventory increased due primarily to unfavorable product pricing, limited opportunities for customers who export to Mexico, and an intentional buildup of inventory by us during periods of low refining margins.

We used $16.5 million in cash flow from operations during YTD 2024 compared to generating $13.3 million in cash flow from operations during YTD 2023. The $29.8 million decrease in cash flow used from operations was primarily due to earning $27.0 million less in net income between the periods.

Capital Expenditures. Capital expenditures totaled $0 for Q3 2024 and YTD 2024. Capital expenditures totaled $0.1 million for both Q3 2023 and YTD 2023. Due to continued uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, we anticipate continuing to limit capital expenditures for the remainder of 2024. However, to the extent we can capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.

Blue Dolphin Energy Company

We account for capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Management determines projects based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.

Financing Activities. During YTD 2024, Blue Dolphin made debt principal payments totaling $3.0 million. Proceeds from related-party debt totaled $2.5 million during YTD 2024. During YTD 2023, Blue Dolphin made debt principal payments totaling $1.0 million and paid off amounts owed to LEH totaling $1.2 million related to a June 2017 promissory note, as amended, for Blue Dolphin working capital.

Debt and Lease Obligations

Debt Agreements.

Related-Party Agreements Summary. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with related parties:

(in millions)

(in millions)

(1) As of September 30, 2024, only $2.5 million was drawn.

Third-Party Agreements Summary. Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with third parties:

(in millions)

(in millions)

(1) Restricted cash, current totaled $1.0 million and $0.0 at September 30, 2024 and December 31, 2023, respectively. Restricted cash, current reflected amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million. Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024.

(2) Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million.

(3) Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity. First principal payment made in October 2024.

(4) Original principal amount was $0.5 million; the principal amount increased by $1.5 million under a loan modification. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable.

(5) Payments deferred for thirty (30) months; first payment made February 2023; interest accrued during deferral period; loan not forgivable.

(6) In May 2019, LE entered into 12-month equipment rental agreement with option to purchase a backhoe at maturity; equipment rental agreement matured in May 2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.

Blue Dolphin Energy Company

Guarantees and Security.

(1) Veritex required Jonathan Carroll to personally guarantee repayment of borrowed funds and accrued interest.

(2) Subject to the Kissick Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034.

Lease Agreements.

Office Lease. We maintain our corporate headquarters in Houston, Texas. In October 2024, BDSC signed a new 24-month extension, the sixth amendment, to its operating lease. The sixth amendment was deemed to be a separate contract and not a lease modification. The first two months of the lease cover the holdover period of September and October 2024 wherein management negotiated the lease with the landlord; BDSC was not subject to a holdover rate during the holdover period. During months 3 through 12, which began on November 1, 2024, the landlord reduced the annual base rent to $29.00 per square foot. During months 13 through 24 the annual base rent will increase to $30.00 per square foot. As additional rent, BDSC will pay a proportionate share of basic building costs (e.g., utilities) up to a maximum of $1,500 per month. The total rental area under the sixth amendment is 9,961 square feet, an increase of 2,268 square feet to accommodate additional personnel. Under the lease amendment, BDSC will receive an improvement allowance of $1.50 per square foot; the improvement allowance will expire six months from the lease signing date. See "Note (15) to our consolidated financial statements for additional disclosures related to the BDSC office lease.

An Affiliate, LEH, sub-leases a portion of the Houston office space. BDSC received sub-lease income from LEH totaling $0.01 million for both the three-month periods ended September 30, 2024 and 2023. BDSC received sub-lease income from LEH totaling $0.02 million and $0.03 million for the nine-month periods ended September 30, 2024 and 2023, respectively.

Tank Lease. LE leases tanks from Ingleside under the LE Amended and Restated Master Services Agreement. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million for both the three-month periods ended September 30, 2024 and 2023. Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.9 million and $0.7 million for the nine-month periods ended September 30, 2024 and 2023, respectively.

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Blue Dolphin Energy Company

Outstanding Principal, Debt Issue Costs, and Accrued Interest. Related and third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:

Outstanding Principal and Accrued Interest.

(in thousands)

We classified the debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at December 31, 2023 due to being in default; however, we re-classified the Veritex loans to long-term debt, net of current portion at September 30, 2024 as a result of the loans no longer being in default. We classified the NPS Term Loan Due 2031 within long-term debt, current portion on our consolidated balance sheets at September 30, 2024 and December 31, 2023 due to the loan being in technical default. The Kissick Debt fell within long-term debt, current portion on our consolidated balance sheet at September 30, 2024 compared to long-term debt, net of current portion at December 31, 2023 due to principal payments being due within the next twelve months.

Debt Issue Costs. Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:

(in thousands)

Amortization expense was $0.05 million for both the three-month periods ended September 30, 2024 and 2023. Amortization expense was $0.1 million for both the nine-month periods ended September 30, 2024 and 2023.

Blue Dolphin Energy Company

Accrued Interest. Related-party and third-party accrued interest payable associated with long-term debt in our consolidated balance sheets, as of the dates indicated consisted of the following:

(in thousands)

Forbearance Agreements, Waivers, and Default.

Veritex Forbearance Agreements and Waivers. Under a November 2022 forbearance agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. The Veritex forbearance agreement expired in September 2023, and was superseded by a first amendment. The first amendment expired in December 2023, and was superseded by a second amendment. The second amendment expired in March 2024. During each of these forbearance periods, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants.

On July 8, 2024, LE and LRM received a confirmation letter from Veritex dated July 2, 2024 waiving all covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for calendar years 2021, 2022, and 2023. Pursuant to a letter dated June 25, 2024, the USDA approved Veritex's April 18, 2024 letter request for a waiver for the same periods. As of September 30, 2024, LE and LRM complied with all financial covenants related to their respective Veritex loans.

Kissick Payment Agreement. Pursuant to a Payment Agreement between LE and the Kissick Noteholder dated April 30, 2023, the Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the Kissick Debt. Under the terms of the Kissick payment agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid the Kissick Noteholder $1.5 million in principal and interest during both the three months ended September 30, 2024 and 2023. LE paid the Kissick Noteholder $4.4 million and $3.5 million in principal and interest for the nine months ended September 30, 2024 and 2023, respectively. As of the filing date of this report, the Kissick Debt was in forbearance related to payment violations prior to April 2023.

LEH Payment Agreement. Pursuant to the LEH Payment Agreement dated May 9, 2023, LEH agreed to forbear from exercising any of its rights and remedies related to a default pertaining to previous payment violations under the BDPL-LEH Loan Agreement. Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million and $0.2 million in interest for the three months ended September 30, 2024 and 2023, respectively. BDPL paid LEH approximately $0.3 million in interest for both the nine months ended September 30, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to payment violations prior to May 2023.

Defaults. As of September 30, 2024 and through the filing date of this report, we were in technical default under the NPS Term Loan Due 2031 for failure to provide standalone audited financial statements for NPS, a wholly-owned subsidiary. The default may permit the lender to declare the amount owed under the related loan agreement immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under the secured loan agreement that is in default, either upon maturity or if accelerated, (ii) NPS will be able to refinance or restructure the debt, and/or (iii) the third party will provide a future forbearance or default waiver. Any exercise by lenders of their rights and remedies under secured loan agreements that are in default could have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety. If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operations.

Blue Dolphin Energy Company

Concentration of Risk

Customers.

We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.

(in millions)

(in millions)

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification. The Affiliate lifts the jet fuel, which is stored at the Nixon Facility, as needed. For the three months ended September 30, 2024 and 2023, the Affiliate accounted for 26.5% and 32.2% of total revenue from operations, respectively. For the nine months ended September 30, 2024 and 2023, the Affiliate accounted for 31.4% and 32.6% of total revenue from operations, respectively. Accounts receivable of the Affiliate totaled $0 at September 30, 2024.

Bank Accounts.

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At September 30, 2024 and December 31, 2023, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $1.2 million and $18.2 million, respectively. Instability and volatility in the capital, credit, and commodity markets, as well as with financial institutions, could adversely affect our cash balances (including restricted cash) in excess of FDIC insurance limits per depositor. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

Regulatory Activities

BOEM -- Supplemental Pipeline Bonds. See "Part II, Item 1. Legal Proceedings —Unresolved Matters—BOEM Supplemental Pipeline Bonds."

BSEE -- Offshore Pipelines and Platform Requirements. BDPL has pipelines and platform assets subject to BSEE's idle iron regulations. Idle iron regulations require lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

Platform Inspections. We are required by BSEE to perform annual structural inspections of our offshore platform, as well as to perform monthly platform checks of navigational aids, fog horns, and lifesaving equipment. In January 2024, BSEE assessed a civil penalty of $0.2 million against BDPL for failure to complete annual platform inspections in a timely manner. BDPL paid the civil penalty in April 2024.

Decommissioning Obligations. BOEM mandated that our pipelines and facilities assets offshore in federal waters be decommissioned due to their extended period of inactivity. In October 2023, management met with BSEE to discuss BDPL’s path forward for meeting decommissioning requirements. Management worked with a consultant to develop a decommissioning plan, and BDPL was following the plan. BDPL completed a significant portion of the project from late December 2023 to mid-February 2024. However, due poor weather conditions that contributed to significant cost overruns, in July 2024 BDPL requested a BSEE extension to decommission the remaining portion of the Blue Dolphin Pipeline System and associated platform until the second quarter of 2025. BDPL’s request for a decommissioning extension was denied by BSEE in September 2024. Management is currently assessing the feasibility and cost of performing decommissioning work in late November or December of 2024 during off-peak weather conditions in the U.S. Gulf of Mexico and vendor availability. Separately, management is also exploring alternatives to reactivate the assets under a potential alternate Rights-of-Use and Easement (RUE). BDPL's delay in decommissioning its offshore assets does not relieve BDPL of its obligations to comply with BSEE's mandate or of BSEE's authority to impose civil penalties. Further, there can be no assurance that BDPL will be able to complete the anticipated work or predict the outcome of BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of September 30, 2024 and December 31, 2023. At September 30, 2024 and December 31, 2023, BDPL maintained $3.0 million and $4.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.$4.5

In April 2024, BDPL received another civil penalty referral letter from BSEE related to INCs issued by the agency in September 2023. Although the civil penalty referral letter noted that BSEE would provide BDPL information related to its review within 90 days from the date of its letter, as of the filing date of this report BDPL had not received any further communication related to this letter. In August 2024, BDPL received two more civil penalty referral letters from BSEE related to INCs issued in October and November 2023. BSEE's 90-day review period related to these letters ends in late November 2024.

Blue Dolphin Energy Company

Surety Bonds. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—RLI Surety Bonds."

Civil Penalties. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—BSEE Civil Penalties."

OSHA. See "Part II, Item 1. Legal Proceedings—Resolved Matters—OSHA Settlement Agreement."

TCEQ. See "Part II, Item 1. Legal Proceedings—Unresolved Matters—TCEQ Proposed Order."

Off-Balance Sheet Arrangements

None.

Blue Dolphin Energy Company

Accounting Standards

Critical Accounting Policies and Estimates.

Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for credit losses, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.

Estimates. The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Although commodity price volatility, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, and severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to which these factors may impact our business, financial condition, liquidity, results of operations, and prospects will depend on future developments, which cannot be predicted with any degree of certainty.

We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of September 30, 2024 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for credit losses, inventory, and related reserves, and the carrying value of long-lived assets.

New Accounting Standards and Disclosures

New Pronouncements Adopted. During the three and nine months ended September 30, 2024, we did not adopt any ASUs.

New Pronouncements Issued, Not Yet Effective.

• ASU 2023-09 — Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in our income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method. We will adopt ASU 2023-09 for our financial statements covering the fiscal year ending December 31, 2025. We are currently evaluating the impact of adopting this ASU.
• ASU 2023-07 — Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024. ASU 2023-07 allows early adoption. We will adopt ASU 2023-07 for our financial statements covering the fiscal year ending December 31, 2024. We are currently evaluating the impact of adopting this ASU.

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Blue Dolphin Energy Company

Controls and Procedures

See “Part I, Item. 1. Financial Statements – Note (9)” for disclosures related to a default on a secured loan agreement.

Evaluation of Disclosure Controls and Procedures

Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Treasurer (principal financial officer and principal accounting 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on our evaluation, our Chief Executive Officer (principal executive officer) and Treasurer (principal financial officer and principal accounting 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.

Changes in Internal Control over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three and nine months ended September 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Blue Dolphin Energy Company

Legal Proceedings

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC. These risks and uncertainties could materially and adversely affect our business, financial condition, and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Blue Dolphin Energy Company