Blue Dolphin Energy Company (BDCO)

[Enterprising Investor]

Effectiveness of Settlement of GEL Arbitration (8/23/19)

Background

As previously disclosed, on July 20, 2018, Blue Dolphin Energy Company (“Blue Dolphin”) and its wholly-owned subsidiaries Lazarus Energy, LLC (“LE”) and Nixon Product Storage, LLC, together with Lazarus Energy Holdings, LLC, Carroll & Company Financial Holdings, L.P., and Jonathan Carroll (collectively, the “Lazarus Parties”), entered into a Settlement Agreement (as amended to the date of this report, the “Settlement Agreement”) with GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis Energy, LP, related to the previously disclosed arbitration proceedings involving LE and GEL (the “GEL Arbitration Proceedings”).

Under the Settlement Agreement, GEL and the Lazarus Parties agreed, upon the occurrence of the Settlement Payment Date (as defined below) and subject to the terms and conditions set forth in the Settlement Agreement, (1) to mutually release all claims against each other (the “Mutual Releases”), (2) to take such actions as are necessary to dismiss the GEL Arbitration Proceedings with prejudice and (3) to file a stipulation of dismissal with prejudice of the related Texas state court action filed by GEL to confirm the final award in the GEL Arbitration Proceedings (the hearing on which has been continued pursuant to the term of the Settlement Agreement) (collectively, the “Settlement”). The Settlement was conditioned upon the Lazarus Parties’ paying to GEL a lump sum cash payment of $10.0 million (the “Settlement Payment”) and cash payments of $0.5 million at the end of each calendar month until the Settlement Payment Date (the “Interim Payments”). The Fifth Amendment to the Settlement Agreement, entered into on May 6, 2019, amended the Settlement Agreement to provide, among other matters, that:

- the Lazarus Parties would pay the Settlement Payment to GEL in one or more installments in specified minimum amounts, each due on or before specified days during the period from May 7, 2019 to May 16, 2019 (the “Settlement Installment Payments”);

- the Interim Payment due April 30, 2019 would be paid by the Lazarus Parties to GEL on a deferred basis in minimum installments of $0.1 million, each due on or before the last business day of each month from June to October 2019 (the “Deferred Interim Installment Payments”);

- the Lazarus Parties would not be required to make any Interim Payments that otherwise would be required for months after April 2019, provided that the Lazarus Parties have timely made all Settlement Installment Payments and Deferred Interim Installment Payments; and

- the “Settlement Payment Date” would be the first date on which the Lazarus Parties have paid to GEL (1) the Settlement Installment Payments totaling $10.0 million, (2) the Deferred Interim Installment Payments totaling $0.5 million and (3) any additional Interim Payments that become due as a result of the Lazarus Parties’ failing to timely make any Settlement Installment Payment or Deferred Interim Installment Payment (as described in the preceding bullet point).

Effectiveness of Settlement

During the period from May 7, 2019 to May 10, 2019, the Lazarus Parties made multiple payments in cash to GEL totaling $10.0 million in the aggregate, which payments together constituted all of the Settlement Installment Payments. Additionally, during the months of June, July and August 2019, the Lazarus Parties made multiple payments in cash to GEL totaling $0.5 million in the aggregate, which payments together constituted all of the Deferred Interim Installment Payments and the last of which was made on August 23, 2019.

As a result of these payments and the fact that no further Interim Payments are required because of the timely payment of all of the Settlement Installment Payments and Deferred Interim Installment Payments:

- the Settlement Payment Date occurred on August 23, 2019;

- the Lazarus Parties have made all payments to GEL required for the Settlement of the GEL Arbitration Proceedings to be effective and final;

- the Mutual Releases have become effective; and

- LE and GEL are in the process of taking the actions required under the Settlement Agreement to effect the dismissal with prejudice of the GEL Arbitration Proceedings and the related Texas state court action filed by GEL to confirm the final award in the GEL Arbitration Proceedings.

As a result of the effectiveness of the Settlement, Blue Dolphin expects to recognize a gain on its consolidated statements of operations during the third quarter of 2019 in the amount of approximately $9.0 million related to the gain on settlement of the accrued arbitration award payable. Until the Settlement occurred, the accrued arbitration award payable was reflected on Blue Dolphin’s consolidated balance sheets.