BLUE DOLPHIN ENERGY CO - Quarter Report: 2019 September (Form 10-Q)

 

FORM 10-Q

(Mark One)

[ √ ]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 or

 

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to           

 

Commission File No. 0-15905

BLUE DOLPHIN ENERGY COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware		73-1268729
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
801 Travis Street, Suite 2100, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

713-568-4725

(Registrant’s telephone number, including area code)

 

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-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 Exchange Act).

Yes ☐ No ☒

 

Number of shares of common stock, par value $0.01 per share outstanding as of November 14, 2019: 12,327,365

TABLE OF CONTENTS 

 

GLOSSARY OF SELECTED ENERGY, FINANCIAL, AND OTHER TERMS		4
PART I.	FINANCIAL INFORMATION	6
ITEM 1.	FINANCIAL STATEMENTS	6
	Consolidated Balance Sheets (Unaudited)	6
	Consolidated Statements of Operations (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	8
	Notes to Consolidated Financial Statements	9
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 4.	CONTROLS AND PROCEDURES	49
PART II.	OTHER INFORMATION	50
ITEM 1.	LEGAL PROCEEDINGS	50
ITEM 1A.	RISK FACTORS	50
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	50
ITEM 4.	MINE SAFETY DISCLOSURES	51
ITEM 5.	OTHER INFORMATION	51
ITEM 6.	EXHIBITS	51
SIGNATURES		52

 

INTRODUCTION

 

This Quarterly Report for the period ended September 30, 2019 (this “Quarterly Report”) is a document that U.S. public companies file with the Securities and Exchange Commission (“SEC”) on a periodic basis. Part I, Item 1. of the Quarterly Report contains financial information, including consolidated financial statements and related notes. Part I, Item 2. of this Quarterly Report provides management’s discussion and analysis of our financial condition and results of operations. We hope investors will find it useful to have this information in a single document.

 

In this Quarterly 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 Quarterly Report is current as of the filing date, unless otherwise specified.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 

In this Quarterly 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; 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 section entitled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1. Legal Proceedings,” and “Part II, Item 1A. Risk Factors.” 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”), and “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2019, our Quarterly Report on Form 10-Q for the period ended June 30, 2019, and this Quarterly Report explain some of the important factors that may cause actual results to be materially different from those that we anticipate.

 

GLOSSARY OF SELECTED ENERGY, FINANCIAL, AND OTHER 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 Quarterly Report.

 

Regarding financial terms, management uses U.S. generally accepted accounting principles (“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.

Atmospheric gas oil (“AGO”). The heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.   Barrel (“bbl”). A unit of volume equal to 42 U.S. gallons.   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 distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“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 distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process turns crude oil and other inputs into intermediate and finished petroleum products. (Commonly referred to as a crude distillation unit or an atmospheric distillation unit.)   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.   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 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.   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.   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, or 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
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 crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd).   Cost of Goods Sold. Reflects the cost of crude oil and condensate, fuel use, and chemicals.   Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including bad weather, power failures, and preventive maintenance.   Gross Margin. Calculated as gross profit divided by total revenue; reflected as a percentage (%).   Gross Profit. Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount.   Operating Days. Represents the number of days in a period in which the crude distillation tower operated. Operating days is calculated by subtracting downtime in a period from calendar days in the same period.		Other conversion costs. Represents the combination of direct labor costs and manufacturing overhead costs. These are the costs that are necessary to convert our raw materials into refined petroleum products.   Other Operating Expenses. Represents costs associated with our pipeline assets and leasehold interests in oil and gas properties.   Refining Gross Profit per Bbl. Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined petroleum products sold during the period; reflected as a dollar ($) amount per bbl.   Total Refinery Production. Refers to the volume processed as output through the crude distillation tower. 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 crude distillation tower. Refinery throughput includes crude oil and condensate and other feedstocks.
Other Defined Terms
Final Arbitration Award. Damages and attorney fees and related expenses awarded to GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis Energy, L.P. (“Genesis”) by an arbitrator on August 11, 2017 (the “Final Arbitration Award”), in arbitration proceedings between LE and GEL (the “GEL Arbitration”) 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 dated August 12, 2011.		Settlement Agreement. On July 20, 2018, LE, NPS, and Blue Dolphin, together with LEH, Carroll & Company Financial Holdings, L.P. (“C&C”), and Jonathan Carroll (collectively referred to herein as the “Lazarus Parties”), entered into that certain Settlement Agreement with GEL (as may be further amended, restated, supplemented or otherwise modified from time to time, the “Settlement Agreement”), whereby GEL and the Lazarus Parties agreed to mutually release all claims against each other and to file a stipulation of dismissal with prejudice in connection with the GEL Arbitration (the “Settlement”), subject to the terms and conditions set forth in the Settlement Agreement. The Settlement was conditioned upon the Lazarus Parties paying GEL a lump sum cash payment of $10.0 million (the “Settlement Payment”) by a certain date (the “Settlement Date”) and $0.5 million in cash at the end of each calendar month (the “Interim Payments”) until the Settlement Payment was made.

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Consolidated Balance Sheets (Unaudited)

 

	September 30,	December 31,
	2019	2018
	(in thousands except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$584	$14
Restricted cash	49	49
Accounts receivable, net	336	379
Accounts receivable, related party	321	-
Prepaid expenses and other current assets	1,264	1,786
Deposits	162	194
Inventory	1,734	1,510
Refundable federal income tax	166	108
Total current assets	4,616	4,040
LONG-TERM ASSETS
Total property and equipment, net	64,412	64,697
Operating lease right-of-use assets	685	-
Restricted cash, noncurrent	547	1,602
Surety bonds	230	230
Deferred tax assets, net	50	108
Total long-term assets	65,924	66,637
TOTAL ASSETS	$70,540	$70,677
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Long-term debt less unamortized debt issue costs, current portion, in default	$34,151	$34,863
Line of credit payable	12,180	-
Long-term debt, related party, current portion, in default	7,918	7,041
Accrued interest payable (in default)	3,834	2,939
Accrued interest payable, related party (in default)	2,014	1,534
Accounts payable	2,265	2,719
Accounts payable, related party	2,042	1,529
Current portion of lease liabilities	262	-
Asset retirement obligations, current portion	2,580	2,580
Accrued expenses and other current liabilities	2,296	1,571
Accrued arbitration award payable	-	21,128
Total current liabilities	69,542	75,904
LONG-TERM LIABILITIES
Long-term lease liabilities, net of current	610	-
Total long-term liabilities	610	-
TOTAL LIABILITIES	70,152	75,904
Commitments and contingencies (Note 18)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ($0.01 par value, 20,000,000 shares authorized; 10,975,514
shares issued at September 30, 2019 and December 31, 2018)	110	110
Additional paid-in capital	36,936	36,936
Accumulated deficit	(36,658)	(42,273)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)	388	(5,227)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$70,540	$70,677

 

See accompanying notes to consolidated financial statements. 

 

Consolidated Statements of Operations (Unaudited)

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
	(in thousands, except share and per-share amounts)
REVENUE FROM OPERATIONS
Refinery operations	$77,537	$94,468	$222,652	$254,245
Tolling and terminaling	1,096	1,075	3,253	2,659
Total revenue from operations	78,633	95,543	225,905	256,904
COST OF GOODS SOLD
Crude oil, fuel use, and chemicals	74,163	92,167	213,714	243,245
Other conversion costs	2,066	1,959	6,587	6,463
Total cost of goods sold	76,229	94,126	220,301	249,708
Gross profit	2,404	1,417	5,604	7,196
COST OF OPERATIONS
LEH operating fee	144	154	477	462
Other operating expenses	52	33	165	133
General and administrative expenses	655	929	1,904	2,277
Depletion, depreciation and amortization	632	478	1,855	1,396
Accretion of asset retirement obligations	-	61	-	205
Total cost of operations	1,483	1,655	4,401	4,473
Income (loss) from operations	921	(238)	1,203	2,723
OTHER INCOME (EXPENSE)
Easement, interest and other income	1	18	2	20
Interest and other expense	(1,883)	(760)	(4,718)	(2,255)
Gain on extinguishment of debt	9,128	-	9,128	-
Total other income (expense)	7,246	(742)	4,412	(2,235)
Income (loss) before income taxes	8,167	(980)	5,615	488
Income tax benefit	-	43	-	260
Net income (loss)	$8,167	$(937)	$5,615	$748
Income (loss) per common share:
Basic	$0.74	$(0.09)	$0.51	$0.07
Diluted	$0.74	$(0.09)	$0.51	$0.07
Weighted average number of common shares outstanding:
Basic	10,975,514	10,925,513	10,975,514	10,925,513
Diluted	10,975,514	10,925,513	10,975,514	10,925,513

 

See accompanying notes to consolidated financial statements.

 

Consolidated Statements of Cash Flows (Unaudited)

 

	Nine Months Ended September 30,
	2019	2018
	(in thousands)
OPERATING ACTIVITIES
Net income	$5,615	$748
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization	1,855	1,396
Deferred income tax	-	(216)
Amortization of debt issue costs	409	96
Guaranty fees paid in kind	471	-
Accretion of asset retirement obligations	-	205
Gain on extinguishment of debt	(9,128)	-
Changes in operating assets and liabilities
Accounts receivable	43	(312)
Accounts receivable, related party	(321)	653
Prepaid expenses and other current assets	522	760
Deposits and other assets	32	(65)
Inventory	(224)	462
Accrued arbitration award	(12,000)	(4,000)
Accounts payable, accrued expenses and other liabilities	1,689	1,023
Accounts payable, related party	513	404
Net cash provided by (used in) operating activities	(10,524)	1,154
INVESTING ACTIVITIES
Capital expenditures	(1,458)	(1,826)
Net cash used in investing activities	(1,458)	(1,826)
FINANCING ACTIVITIES
Proceeds from line of credit	12,402	-
Payments on debt	(990)	(723)
Payments of debt issuance costs	(322)	-
Net activity on related-party debt	(407)	924
Net cash provided by financing activities	11,497	201
Net change in cash, cash equivalents, and restricted cash	(485)	(471)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	1,665	2,146
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$1,180	$1,675
Supplemental Information:
Non-cash investing and financing activities:
Financing of capital expenditures via accounts payable and finance leases	$86	$82
Line of credit closing costs included in principal balance	$398	$-
Interest paid	$2,261	$2,173
Income taxes paid	$-	$-

 

See accompanying notes to consolidated financial statements.

 

(1)	Organization

 

Nature of Operations. Blue Dolphin Energy Company is a publicly traded Delaware corporation primarily engaged in the refining and marketing of petroleum products. We also provide tolling and storage terminaling services. Our assets, which are in Nixon, Texas, primarily include a 15,000-bpd crude distillation tower and more than 1.0 million bbls of petroleum storage tanks (collectively the “Nixon Facility”). Pipeline transportation and oil and gas operations are no longer active.

 

Structure and 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 owned 79.8% of our common stock, par value $0.01 per share (the “Common Stock”) at September 30, 2019. (See “Note (9) Related-Party Transactions,” “Note (11) Long-Term Debt and Accrued Interest” and “Note (18) Commitments and Contingencies – Financing Agreements” for additional disclosures related to LEH, the Amended and Restated Operating Agreement, and Jonathan Carroll.)

 

We have the following active subsidiaries:

 

 

 

 

 

 

 

See “Part I, Item 1. Business” and “Part I, Item 2. Properties” in our Annual Report for additional information regarding our operating subsidiaries, principal facilities, and assets.

 

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:

 

Defaults Under Veritex Secured Loan Agreements. LE and LRM each have loans with Veritex Community Bank (“Veritex”), as successor in interest to Sovereign Bank (“Sovereign”) by merger, in the original aggregate amount of $35.0 million. These Veritex loans are guaranteed 100% by the U.S. Department of Agriculture (“USDA”).

 

 

 

The debt associated with these loans was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2019 and December 31, 2018 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.

 

Veritex worked with LE and LRM and was aware and party to all discussions and arrangements with GEL surrounding the Settlement Agreement, all amendments, and the final and effective Settlement with GEL. In a notice to obligors dated April 30, 2019 (the "Veritex Consent'), Veritex agreed to waive certain covenant defaults and forbear from enforcing its remedies under the secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of a payment reserve account in the amount of $1.0 million as required by one of the secured loan agreements on or before August 31, 2019. As of the filing date of this Quarterly Report, the payment reserve account had not been fully replenished. Any exercise by Veritex of its rights and remedies under such secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. 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.

 

Net Losses and Working Capital Deficits. For the three months ended September 30, 2019, we reported net income of $8.2 million, or $0.74 per share. Excluding the $9.1 million gain on extinguishment of debt, we would have reported a net loss of $1.0 million, or a loss of $0.09 per share, for the three months ended September 30, 2019. Comparatively, we reported a net loss of $0.9 million, or a loss of $0.09 per share, for the three months ended September 30, 2018.

 

For the nine months ended September 30, 2019, we reported net income of $5.6 million, or $0.51 per share. Excluding the $9.1 million gain on extinguishment of debt, we would have reported a net loss of $3.5 million, or $0.32 per share, for the nine months ended September 30, 2019. This compares to reported net income of $0.7 million, or income of $0.07 per share, for the nine months ended September 30, 2018.

 

We had a working capital deficit of $64.9 million and $71.9 million at September 30, 2019 and December 31, 2018, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $22.9 million and $30.0 at September 30, 2019 at December 31, 2018, respectively.

 

For additional disclosures related to defaults under secured loan agreements and other long-term debt, see “Item 1. Financial Statements – Note (11) Long-Term Debt and Accrued Interest” and “ – Note (9) Related Party Transactions” in this Quarterly Report. For additional disclosures related to the Settlement Agreement, refer to “Item 1. Financial Statements – Note (18) Commitments and Contingencies – Legal Matters” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Final Arbitration Award and Settlement Agreement” in the Quarterly Report, as well as “Part I, Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the period ended December 31, 2018 (the “Annual Report”).

 

Operating Risks. Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon Facility, meeting contractual obligations, and having favorable margins on refined petroleum products. During the three months ended September 30, 2019, management successfully finalized the Settlement with GEL and realized a $9.1 million gain on the extinguishment of the liability, and management believes that it is continuing to take other steps to further improve our operations and financial stability. However, there can be no assurance that our business strategy will be successful, that LEH and its affiliates will continue to fund our working capital needs, or that we will be able to obtain additional financing or meet financial assurance (bonding) requirements on commercially reasonable terms or at all. If Veritex exercises its rights and remedies under the secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

For additional disclosures related to our business strategy and risk factors that could materially affect our future business, financial condition and results of operations, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations” and “Liquidity and Capital Resources” in this Quarterly Report, as well as “Part I, Item 1. Business – Business Strategy,” “Part I, Item 1A. Risk Factors,” and “Part I, Item 3. Legal Proceedings” in our Annual Report.

 

(2)	Basis of Presentation

 

The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. 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.

 

The consolidated balance sheet as of December 31, 2018 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019, or for any other period.

 

(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.

 

Restricted Cash. Restricted cash, current portion primarily represents a payment reserve account held by Veritex as security for payments under a loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction related expenses to complete building new petroleum storage tanks.

 

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management's judgment, deserve consideration in estimating bad debts.  Management assesses collectability primarily based on the current aging status of the customer's account, our historical collection experience with the customer, and the customer's financial condition.  Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole.  We had an allowance for doubtful accounts of $0.1 million at both September 30, 2019 and December 31, 2018.

 

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 goods sold. (See “Note (7) Inventory” for additional disclosures related to our inventory.)

 

Property and Equipment.

 

Refinery and Facilities. Management expects to continue making improvements to the crude distillation tower based on operational needs and technological advances. Additions to refinery and facilities assets are capitalized. Expenditures for repairs and maintenance are expensed as incurred.

 

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. We did not record any impairment of our refinery and facilities assets for the periods presented.

 

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”) 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 have been permanently abandoned, and no new third-party wells are being drilled near our 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, including capitalized interest, relate to construction and refurbishment activities at the Nixon Facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service.

 

(See “Note (8) 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.)

 

Revenue Recognition. We adopted the provisions of FASB ASU (defined below) 2014-09, Revenue from Contracts with Customers (ASC 606), on January 1, 2018, as described below in “New Pronouncements Adopted.” Accordingly, our revenue recognition accounting policy has been revised to reflect the adoption of this standard.

 

Refinery Operations Revenue. Revenue from the sale of refined petroleum products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined petroleum product is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are met when control is transferred to the customer. Control is transferred to the customer when the product has been lifted or, in cases where the product is not lifted immediately (bill and hold arrangements), when the product is added to the customer’s bulk inventory as stored at the Nixon Facility.

 

We consider a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the refined petroleum product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. Transportation, shipping, and handling costs incurred are included in cost of goods sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.

 

Tolling and Terminaling Revenue. Tolling and terminaling represents fees pursuant to: (i) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for use of the naphtha stabilizer unit and (ii) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over a period of time for the storage of products.

 

We typically satisfy performance obligations for tolling and terminaling operations with the passage of time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the term of the agreement. We allocate the transaction price to the single performance obligation that exists under the agreement, and we recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

 

Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer, and the price we charge for such services is not included in the fixed cost under the customer’s tank storage agreement. Ancillary services are considered a separate performance obligation by us under the tank storage agreement. The performance obligation is satisfied when the requested service has been performed in the applicable period.

 

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 of the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any net operating loss (“NOL”) carryforwards. When management determines that it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets. A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of September 30, 2019 and December 31, 2018. We expect to recover deferred tax assets related to the Alternative Minimum Tax (“AMT”) credit carryforwards. In addition, we have NOL carryforwards that remain available for future use.

 

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 September 30, 2019 and December 31, 2018, 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 2018. Upon completion of that testing, we determined that no impairment was necessary at December 31, 2018. We did not record any impairment of our refinery and facilities assets for the periods presented.

 

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 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. The cost estimates for each of our assets were developed based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current retirement procedures, and construction and engineering consultations. 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 (13) 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.)

 

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:

 

ASUs 2019-01, 2018-20, 2018-11, 2018-10, and 2016-02, Leases (Topic 842). In February 2016, FASB amended its accounting guidance for leases. Subsequently, FASB issued several clarifications and updates. The guidance requires a lessee to recognize assets and liabilities on the balance sheet arising from leases with terms greater than 12 months. While lessor guidance is relatively unchanged, certain amendments were made to confirm with changes made to lessee accounting and the amended revenue recognition guidance. The new guidance continues to classify leases as either finance or operating, with classification affecting the presentation and pattern of expense and income recognition, in the statement of operations. It also requires additional quantitative and qualitative disclosures about leasing arrangements. We adopted the new guidance on January 1, 2019 using the modified retrospective approach, which was applied beginning on the adoption date. Comparative information has not been restated and continues to be reported under the accounting guidance in effect for those periods. The adoption did not have a material effect on our consolidated statements of operations or cash flows. On the adoption date we recognized operating lease right-of-use assets, net of pre-existing deferred rent, and operating lease liabilities on our consolidated balance sheet of approximately $0.8 million and $0.9 million, respectively.

 

ASU 2018-09, Codification Improvements. In July 2018, FASB issued ASU 2018-09. This guidance affects a wide variety of topics in the codification and represents changes to clarify, correct errors in, or make minor improvements to the codification. The amendments make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments apply to all reporting entities within the scope of the affected accounting guidance. Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. Adoption of this guidance did not have a significant impact on our consolidated financial statements.

 

ASU 2014-09, Revenue from Contracts with Customers (ASC 606). We adopted this accounting pronouncement effective January 1, 2018, using a modified retrospective approach, which required us to apply the new revenue standard to: (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018. In accordance with this approach, our consolidated revenues for the periods prior to January 1, 2018 were not revised. In November 2018, FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808). ASU 2018-18 clarifies the interaction between ASC 808 and ASC 606. Our implementation activities related to ASC 606 are complete, and we did not have any material differences in the amount or timing of revenues as a result of the adoption of ASC 606. Our largest revenue streams consist of orders received from our customers for crude-oil derived specialty products based on market prices. These revenues are recognized at a point in time upon transfer of control of the product in accordance with contractual terms. With respect to ASC 808, we are not party to a collaborative agreement with a third party.

 

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 2019-07, Codification Updates to SEC Sections. In July 2019, FASB issued ASU 2019-07. This ASU amends certain SEC sections or paragraphs within the FASB ASC. The amendments are being made pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). The SEC Final Rule Releases, which also require improvements to the eXtensible Business Reporting Language (“XBRL”) taxonomy, were made to improve, update, and simplify SEC regulations on financial reporting and disclosure. For public companies, the amendments in ASU 2019-07 are effective upon issuance. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

 

ASU 2018-17, Consolidation (Topic 810). In October 2018, FASB issued ASU 2018-17. This ASU provides targeted improvements to related-party guidance for variable interest entities. In particular, indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in ASU 2018-17 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

 

 

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 Staff Accounting Bulletin No. 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.

 

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.

 

(4)	Revenue and Segment Information

 

We have two reportable business segments: (i) Refinery Operations and (ii) Tolling and Terminaling. Refinery operations relate to the refining and marketing of petroleum products at our 15,000-bpd crude distillation tower. Tolling and terminaling operations relate to tolling and storage terminaling services under related-party and third-party lease agreements. Both operations are conducted at the Nixon Facility.

 

Revenue from Contracts with Customers.

 

Disaggregation of Revenue. Revenue is presented in the table below under “Segment Information” disaggregated by business segment because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.

 

Receivables from Contracts with Customers. Our receivables from contracts with customers are presented as receivables, net on our consolidated balance sheets.

 

Remaining Performance Obligations. Most of our contracts with customers are spot contracts and therefore have no remaining performance obligations.

 

Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:

 

	Three Months Ended September 30,
	2019				2018
	(in thousands)
	Segments				Segment
	Refinery	Tolling and	Corporate		Refinery	Tolling and	Corporate
	Operations	Terminaling	& Other	Total	Operations	Terminaling	& Other	Total
Net revenues (excluding intercompany fees and sales)	$77,537	$1,096	$-	$78,633	$94,468	$1,075	$-	$95,543
Intercompany fees and sales	(668)	668	-	-	(873)	873	-	-
Operation costs and expenses(1)	(76,088)	(285)	(52)	(76,425)	(93,656)	(624)	(94)	(94,374)
Segment contribution margin	$781	$1,479	$(52)	$2,208	$(61)	$1,324	$(94)	$1,169
General and administrative expenses	(292)	(68)	(295)	(655)	(375)	(65)	(489)	(929)
Depreciation and amortization	(481)	(99)	(52)	(632)	(432)	(46)	-	(478)
Interest and other non-operating income (expenses), net				7,246				(742)
Income (loss) before income taxes				8,167				(980)
Income tax benefit				-				43
Net income (loss)				$8,167				$(937)
Capital expenditures	$964	$-	$-	$964	$372	$223	$-	$595
Identifiable assets	$49,613	$18,994	$1,933	$70,540	$51,816	$19,425	$926	$72,167

 

(1)

Operation costs within Refinery Operations includes the arbitration award and associated fees. Operation cost within Tolling and Terminaling includes terminal operating expenses, an allocation of other costs (e.g. insurance and maintenance), and associated refinery fuel use costs. Operation cost within Corporate and Other includes expenses associated with our pipeline assets and oil and gas leasehold interests (such as accretion).

 

	Nine Months Ended September 30,
	2019				2018
	(in thousands)
	Segments				Segment
	Refinery	Tolling and	Corporate		Refinery	Tolling and	Corporate
	Operations	Terminaling	& Other	Total	Operations	Terminaling	& Other	Total
Net revenues (excluding intercompany fees and sales)	$222,652	$3,253	$-	$225,905	$254,245	$2,659	$-	$256,904
Intercompany fees and sales	(1,927)	1,927	-	-	(2,419)	2,419	-	-
Operation costs and expenses(1)	(219,766)	(1,012)	(165)	(220,943)	(248,078)	(2,092)	(338)	(250,508)
Segment contribution margin	$959	$4,168	$(165)	$4,962	$3,748	$2,986	$(338)	$6,396
General and administrative expenses	(898)	(173)	(833)	(1,904)	(929)	(156)	(1,192)	(2,277)
Depreciation and amortization	(1,429)	(297)	(129)	(1,855)	(1,258)	(138)	-	(1,396)
Interest and other non-operating income (expenses), net				4,412				(2,235)
Income before income taxes				5,615				488
Income tax benefit				-				260
Net income				$5,615				$748
Capital expenditures	$1,375	$83	$-	$1,458	$1,141	$767	$-	$1,908
Identifiable assets	$49,613	$18,994	$1,933	$70,540	$51,816	$19,425	$926	$72,167

 

(1)

Operation costs within Refinery Operations includes the arbitration award and associated fees. Operation cost within Tolling and Terminaling includes terminal operating expenses, an allocation of other costs (e.g. insurance and maintenance), and associated refinery fuel use costs. Operation cost within Corporate and Other includes expenses associated with our pipeline assets and oil and gas leasehold interests (such as accretion).

 

(6)	Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

 

	September 30,	December 31,
	2019	2018
	(in thousands)
Prepaid insurance	$537	$437
Prepaid crude oil and condensate	525	1,166
Prepaid easement renewal fees	127	143
Other prepaids	75	40
	$1,264	$1,786

 

(7)

Inventory

 

Inventory as of the dates indicated consisted of the following:

 

	September 30,	December 31,
	2019	2018
	(in thousands)
Crude oil and condensate	$1,177	$861
AGO	285	276
Chemicals	142	106
Naphtha	99	143
Propane	25	17
LPG mix	6	5
HOBM	-	102
	$1,734	$1,510

 

 

(8)	Property, Plant and Equipment, Net

 

Property, plant and equipment, net, as of the dates indicated consisted of the following:

 

	September 30,	December 31,
	2019	2018
	(in thousands)
Refinery and facilities	$66,308	$63,058
Land	566	566
Other property and equipment	833	747
	67,707	64,371
Less: Accumulated depletion, depreciation, and amortization	(12,156)	(10,429)
	55,551	53,942
Construction in progress	8,861	10,755
	$64,412	$64,697