-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RawhLXOVdDoeDC+UFKS1deSav1uNFYz3kPRw5tzghk2meDVN+gkH4wPcsw3xGEVs azJ30lGQlKvKmd1eP0zGHw== 0000890566-99-000684.txt : 19990518 0000890566-99-000684.hdr.sgml : 19990518 ACCESSION NUMBER: 0000890566-99-000684 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUE DOLPHIN ENERGY CO CENTRAL INDEX KEY: 0000793306 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731268729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15905 FILM NUMBER: 99626970 BUSINESS ADDRESS: STREET 1: 801 TRAVIS SUITE 2100 CITY: HOUSTON STATE: TX ZIP: 77002-5729 BUSINESS PHONE: 7132277660 MAIL ADDRESS: STREET 1: 11 GREENWAY PLAZA SUITE 1606 STREET 2: 11 GREENWAY PLAZA SUITE 1606 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: MUSTANG RESOURCES CORP DATE OF NAME CHANGE: 19900122 FORMER COMPANY: FORMER CONFORMED NAME: ZIM ENERGY CORP DATE OF NAME CHANGE: 19870921 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended: MARCH 31, 1999 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 Number: 0-15905 BLUE DOLPHIN ENERGY COMPANY (Exact name of registrant as specified in its charter) DELAWARE 73-1268729 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 TRAVIS, SUITE 2100, HOUSTON, TEXAS 77002 (Address of principal executive offices) (Zip Code) (713) 227-7660 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) 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 [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 4,524,627 SHARES $.01 PAR VALUE OUTSTANDING AT APRIL 30, 1999 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES PART. I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The condensed consolidated financial statements of Blue Dolphin Energy Company and Subsidiaries (the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, reflect all adjustments necessary to present a fair statement of operations, financial position and cash flows. The Company follows the full cost method of accounting for oil and gas properties, wherein costs incurred in the acquisition, exploration and development of oil and gas reserves are capitalized. The Company believes that the disclosures are adequate and the information presented is not misleading, although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. 2 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash ........................................ $ 382,858 $ 593,509 Trade accounts receivable ................... 1,386,820 771,268 Crude oil inventory ......................... 20,032 5,248 Prepaid expenses ............................ 188,649 152,340 ------------ ------------ Total Current Assets ....... 1,978,359 1,522,365 Property and Equipment, at cost, using full cost method for oil and gas properties .......... 26,700,574 24,980,278 Accumulated depletion, depreciation and amortization ........................... (16,979,967) (17,172,057) ------------ ------------ 9,720,607 7,808,221 Land ........................................... 930,500 1,133,333 Acquisition and development costs - Petroport .. 1,536,664 1,576,391 Other Assets ................................... 2,725,269 3,141,500 ------------ ------------ Total Assets ........... $ 16,891,399 $ 15,181,810 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ....... $ 1,635,408 $ 906,160 Current portion of accrued abandonment costs 206,000 206,000 Current portion of long term debt ........... 410,000 200,000 Accrued interest payable .................... 54,764 105,662 ------------ ------------ Total Current Liabilities ..... 2,306,172 1,417,822 Long-Term Debt, less current portion ........... 2,050,600 2,060,600 Accrued Abandonment Costs, less current portion -- 108,594 Common Stock ................................... 45,246 45,046 Additional Paid-in Capital ..................... 17,715,633 17,700,833 Accumulated Deficit since January 1, 1990 ...... (5,226,252) (6,151,085) ------------ ------------ Total Liabilities and Stockholders' Equity ....... $ 16,891,399 $ 15,181,810 ============ ============ 3 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 ----------- ----------- Revenue from operations: Pipeline operations ................................................ $ 435,855 $ 796,655 Oil and gas sales and operating fees ............................... 148,587 201,382 ----------- ----------- REVENUE FROM OPERATIONS ............................ 584,442 998,037 Cost of operations: Pipeline operating expenses ........................................ 190,099 195,735 Lease operating expenses ........................................... 157,998 143,817 Repair and maintenance costs ....................................... 157,900 94,550 Depletion, depreciation, and amortization .......................... 101,107 97,351 ----------- ----------- COST OF OPERATIONS ................................. 607,104 531,453 ----------- ----------- INCOME (LOSS) FROM OPERATIONS ...................... (22,662) 466,584 Other income (expense): General and administrative ......................................... (477,308) (363,790) Interest expense ................................................... (59,318) (51,714) Gain on sale of assets ............................................. 2,068,986 -- Interest and other income .......................................... 13,660 33,661 ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...... 1,523,358 84,741 Provision for income taxes (518,191) (39,900) ----------- ----------- Income before cumulative effect of a change in an accounting principle . 1,005,167 $ 44,841 Cumulative effect at January 1, 1999 of a change in accounting principle for start up costs, net of income tax benefit of $41,480 ............... (80,334) -- ----------- ----------- Net income ............................................................. $ 924,833 44,841 =========== =========== Earnings per common share-basic Income before accounting change .................................... $ 0.22 -- Cumulative effect of a change in accounting principle ............... (0.02) -- ----------- Net income .......................................................... $ 0.20 $ 0.01 =========== =========== Earnings per common share-diluted Income before accounting change .................................... $ 0.22 -- Cumulative effect of a change in accounting principle .............. (0.02) -- ----------- Net income ......................................................... $ 0.20 $ 0.01 =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic .............................................................. 4,517,960 4,491,847 =========== =========== Diluted ............................................................ 4,544,895 4,510,348 =========== ===========
4 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED MARCH 31, -------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income ........................................................ $ 924,833 $ 44,841 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization ............... 101,107 97,351 Deferred income taxes .................................. 463,199 13,100 Change in accounting principle ......................... 121,814 Gain on sale of assets ................................. (2,068,986) -- Changes in operating assets and liabilities: Increase in trade accounts receivable .............. (615,552) (143,972) Increase in crude oil inventory and prepaid expenses (51,093) (39,813) Increase in accounts payable and other current liabilities .................. 840,910 22,693 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES .................... (283,768) (5,800) INVESTING ACTIVITIES Oil and gas prospect generation costs ............................. (71,620) (42,493) Exploration and development costs ................................. -- (228,156) Purchases of property and equipment ............................... (5,436,183) (55,606) Net proceeds from sale of assets .................................. 5,497,923 -- Increase in other assets .......................................... (46,967) -- Funds escrowed for abandonment costs .............................. -- (47,018) Development costs - Petroport ..................................... (85,036) (53,348) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES ..................... (141,883) (426,621) FINANCING ACTIVITIES Net proceeds from borrowings ...................................... 200,000 -- Other ............................................................. 15,000 -- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................. 215,000 -- ----------- ----------- DECREASE IN CASH .......................................... (210,651) (432,421) CASH AT BEGINNING OF YEAR ............................................. 593,509 1,756,294 ----------- ----------- CASH AT MARCH 31, ..................................................... $ 382,858 $ 1,323,873 =========== =========== SUPPLEMENTARY CASH FLOW INFORMATION Interest paid ..................................................... $ 110,216 $ 106,115 =========== =========== Income taxes refunded ............................................. $ -- $ (142,729) =========== ===========
5 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED MARCH 31, 1999 EARNINGS PER SHARE The Company applies the provisions of Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share. SFAS No. 128 requiring the presentation of basic earnings per share (EPS) which excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of the income statement and requires a reconciliation of the numerators and denominators of basic EPS and diluted EPS. The following table provides a reconciliation between basic and diluted earnings per share: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND DILUTIVE PER NET POTENTIAL SHARE INCOME COMMON SHARES AMOUNT --------- ------------- ------ Three Months ended March 31, 1999: Basic earnings .................. $ 924,833 4,517,960 $ 0.20 Effect of dilutive stock options -- 26,935 -- ========= ============= ====== Diluted earnings ................ $ 924,833 4,544,895 $ 0.20 ========= ============= ====== Three Months ended March 31, 1998: Basic earnings .................. $ 44,841 4,491,847 $ 0.01 Effect of dilutive stock options -- 18,501 -- ========= ============= ====== Diluted earnings ................ $ 44,841 4,510,348 $ 0.01 ========= ============= ====== 6 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. The Company will adopt SFAS No. 133 beginning in calendar year 2000. The Company has not determined the impact that SFAS No. 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. The Company believes that adoption of this financial accounting standard will not have a material effect on its financial condition or results of operations. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that costs of start-up activities be charged to expense as incurred and broadly defines such costs. The Company has capitalized certain costs incurred in connection with a new business segment, and SOP 98-5 required that such costs be charged to results of operations upon its adoption. The Company adopted the requirements of SOP 98-5 as of January 1, 1999 resulting in a cumulative effect of a change in an accounting principle of $80,334, net of income tax benefit of $41,384. BUSINESS SEGMENT INFORMATION The Company's income producing operations are conducted in two principal business segments: oil and gas exploration and production, and pipeline operations. Intersegment revenues consist of transportation, general processing and storage fees charged by certain subsidiaries to another for natural gas and crude oil transported through the Blue Dolphin Pipeline System. The intercompany revenues and expenses are eliminated in consolidation. Information concerning these segments for the three months ended March 31, 1999 and 1998, and at March 31, 1999 and December 31, 1998 is as follows: 7 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED)
OPERATING DEPLETION, INTERSEGMENT INCOME DEPRECIATION AND REVENUES REVENUES (LOSS)(1) AMORTIZATION (2) ---------- ------------ ---------- ---------------- Three months ended March 31, 1999: Oil and gas exploration and production ................... $ 150,086 1,500 (173,583) 25,666 Pipeline operations ................ 440,110 4,254 159,801 66,561 Other .............................. (5,754) (486,188) 8,880 ---------- ---------- ---------------- Consolidated ....................... 584,442 (499,970) 101,107 Other income (expense) ............. 2,023,328 ---------- Loss before income taxes ........... 1,523,358 Three months ended March 31, 1998: Oil and gas exploration and production ................... $ 203,382 2,000 (63,102) 46,887 Pipeline operations ................ 803,981 7,326 536,289 43,861 Other .............................. (9,326) (370,393) 6,603 ---------- ---------- ---------------- Consolidated ....................... 998,037 102,794 97,351 Other income (expense) ............. (18,053) ---------- Loss before income taxes ........... 84,741
IDENTIFIABLE ASSETS ------------ Three months ended March 31, 1999: Oil and gas exploration and production ........................................... $ 6,565,924 Pipeline operations ........................................ 6,620,486 Other ...................................................... 4,015,084 ------------ Consolidated ............................................... 17,201,494 Year ended December 31, 1998 Oil and gas exploration and production ........................................... $ 5,253,370 Pipeline operations ........................................ 2,453,396 Other ...................................................... 7,475,004 ------------ Consolidated ............................................... 15,181,810 8 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) 1. Consolidated income from operations includes $20,219 and $30,370 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $3,310 and $3,503 for the three months ended March 31, 1999 and 1998, respectively. 2. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $6,035 and $6,385 for the three months ended March 31, 1999 and 1998, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $5,337 and $7,309 for the three months ended March 31, 1999 and 1998, respectively. ASSET ACQUISITION/DIVESTITURE On March 1, 1999 the Company acquired Black Marlin Pipeline Company (BMPC) from Enron Pipeline Company for $5,404,270 cash. BMPC is the owner of the 75 mile Black Marlin Pipeline System, see Part I, Item 1. "Business" in the Company's December 31, 1998 Form 10-K for a description of the Black Marlin Pipeline System. This acquisition was funded by selling a one-sixth (1/6) undivided interest in the Company's Blue Dolphin Pipeline System, the Black Marlin Pipeline System and the Omega Pipeline to WBI Southern Inc. (WBI) for $3,713,000 and selling a one-third (1/3) undivided interest in the Black Marlin Pipeline System to MCNIC Pipeline & Processing Company (MCNIC) for $1,801,423. MCNIC owns a one-third (1/3) undivided interest in the Blue Dolphin Pipeline System. The Company recognized a gain of $2,068,986 in connection with the sale of a one-sixth interest in the Blue Dolphin Pipeline System on March 1, 1999. The following unaudited pro forma information for the three months ended March 31, 1999 and 1998, presents a summary of consolidated results of operations as if the acquisition/divestiture made in 1999 had occurred on January 1, 1998 with pro forma adjustments to give effect to depreciation and certain other adjustments together with related income tax effects (in thousands, except per share amounts): THREE MONTHS ENDED MARCH 31, ------------------------- 1999 1998 ---------- ---------- Revenues ........................................... $ 906 $ 1,319 Net earnings ....................................... $1,002,509 $2,191,503 Basic and diluted earnings per share ............... $ 0.22 $ 0.49 The above pro forma information is not necessarily indicative of the results of operations as they would have been had the acquisition been effected on January 1, 1998. 9 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain of the statements included below, including those regarding future financial performance or results, or that are not historical facts, are or contain "forward-looking" information as that term is defined in the Securities Act of 1933, as amended. The words "expect," "plan" "believe," "anticipate," "project," "estimate," and similar expressions are intended to identify forward-looking statements. The Company cautions readers that any such statements are not guarantees of future performance or events and such statements involve risks, uncertainties and assumptions, including but not limited to industry conditions, prices of crude oil and natural gas, regulatory changes, general economic conditions, interest rates and competition. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following is a review of certain aspects of the financial condition and results of operations of the Company and should be read in conjunction with the Condensed Consolidated Financial Statements included in Item 1. of this report. On March 1, 1999 the Company acquired Black Marlin Pipeline Company (BMPC) from Enron Pipeline Company for $5,404,270 cash. BMPC is the owner of the 75 mile Black Marlin Pipeline System, see Part I, Item 1. "Business" in the Company's December 31, 1998 Form 10-K for a description of the Black Marlin Pipeline System. This acquisition was funded by selling a one-sixth (1/6) undivided interest in the Company's Blue Dolphin Pipeline System, the Black Marlin Pipeline System and the Omega Pipeline to WBI Southern Inc. (WBI) for $3,713,000 and selling a one-third (1/3) undivided interest in the Black Marlin Pipeline System to MCNIC Pipeline & Processing Company (MCNIC) for $1,801,423. MCNIC owns a one-third (1/3) undivided interest in the Blue Dolphin Pipeline System. These transactions help to diversify the Company's revenue stream, reduces its concentration of credit risk and doubles the size of the market in which it competes to provide gathering and transportation services. Future utilization of the Company's pipelines and related facilities will depend upon the success of drilling programs in the pipeline corridors, and attraction and retention of producer / shippers to the systems. FINANCIAL CONDITION At March 31, 1999, the Company had a working capital deficit of $327,813 representing a decrease of $432,356 as compared with working capital of $104,543 at December 31, 1998. The Company is currently attempting to replenish its working capital. During the year ended December 31, 1998 and the three months ended March 31, 1999, working capital has been used for planned investments in longer term, high potential programs. A private placement offering of Company common stock and/or debentures is currently being pursued. If successful the Company expects to receive proceeds of $2,000,000 to $4,000,000. 10 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company maintains a $10,000,000 reducing revolving credit facility with Bank One, Texas, N.A. ("Loan Agreement"). Effective March 1, 1999, the borrowing base was adjusted to $620,000 reducing by $60,000 per month beginning April 1, 1999. The borrowing base and reducing amount are redetermined semi-annually. The maturity date is January 14, 2000, when the then outstanding principal balance, if any, is due and payable. At March 31, 1999 the outstanding balance under the credit facility was $410,000. The facility is available for the acquisition of oil and gas reserve based assets and other working capital needs. The Loan Agreement includes certain restrictive covenants, including restrictions on the payment of dividends on capital stock, and the maintenance of certain financial coverage ratios. At March 31, 1999, the Company was in compliance with the financial coverage ratios. As a result of a previous annual inspection by the Minerals Management Service, the Company is required to remove an inactive satellite platform in the Buccaneer Field. Removal of the satellite platform and site clearance is expected to take place in 1999, at an estimated cost of approximately $206,000. In order to enhance the productivity of the prospect generation program, during 1998 the Company transitioned from use of consulting geologists and geophysicists to a 100% in house effort. Annual incremental costs associated with changing to a 100% in house effort is approximately $700,000. The Company currently is seeking participants for available interests in its 1998/1999 program. Additionally, funding is being sought which would permit the Company to directly participate as a working interest owner in and be designated operator for prospects generated. The Company has placed a 50% interest in its 1998/1999 program, whereby in exchange for certain participation rights, the participant partially funds the costs associated with the program. The remaining program costs will be reimbursed to the Company as prospects are developed and leases acquired. The Company is continuing its efforts to attract program participants. The Company had previously entered into a multi-year 3-D seismic data acquisition and licensing agreement, whereby a minimum of $1,500,000 has been committed over a 5 year period ending July 31, 1999 to acquire 3-D seismic data. The remaining commitment under this agreement is $450,000. Development of the Petroport deepwater terminal and offshore storage facility continues to proceed as anticipated. The design, engineering, costing and overall facility commercial evaluation have been completed, with favorable results. The Company is now seeking partners to fund the next phase of facility development - site evaluation and licensing of the facility by federal and state authorities. This cost is estimated to be $10 million. Cost of the offshore terminal and storage complex, the pipeline to shore, and the onshore support facilities is estimated to be $527 million. The Company expects to submit the license application and associated permit requests in 1999, with operations planned to commence in the year 2002. In general, the Company believes that it has or can obtain adequate capital resources and liquidity to continue to finance and otherwise meet its anticipated business requirements. The availability or cost of capital resources may, however, adversely affect the Company's timing for major pipeline expansions, further development of the Buccaneer Field, growth in oil and gas prospect generation activities and the Petroport project. 11 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The Company reported net income for the three months ended March 31, 1999, (current period) of $924,833, compared to net income of $44,841 reported for the first quarter 1998 (previous period). The increase is primarily due to the gain on sale of a one-sixth (1/6) interest in the Blue Dolphin Pipeline System of $2,068,986. REVENUES: Revenues for the current period decreased by $413,595 or 41% to $584,442 compared to revenues of $998,037 reported for the previous period. Current period revenues from pipeline operations decreased by $360,800 or 45% from the previous period due to a 48% decrease in gas volumes transported. Revenues from oil and gas sales and operating fees for the current period decreased by $52,795 or 26% from those of the previous period due to normal production declines. COSTS AND EXPENSES: Repair and maintenance costs for the current period increased by $63,350 due primarily to repairs and modifications to the Buccaneer Field production platforms and facilities of approximately $75,854. General and administrative expenses for the current period increased $113,518, or 31% from the previous period principally due to an increase in staff costs primarily associated with an asset acquisition and consulting fees associated with potential asset acquisitions. YEAR 2000 ISSUE The Company has conducted a review of its computer equipment and software to identify the systems that could be affected by the "Year 2000" issue. The Year 2000 issue results from computer programs being written using two digits (rather than four) to define the applicable year. As a result, certain of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. Accordingly, the Company has initiated a plan to address the Year 2000 issues associated with its operations and business. The plan includes several phases; (i) assessment of all of the Company's systems and technology; (ii) testing of existing systems and technology, both financial and operational; (iii) modification to or replacement of non-compliant systems and technology; (iv) communication with key business partners regarding Year 2000 issues; and (v) contingency planning. 12 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In planning and developing the project, the Company has considered both its information technology (IT) and its non-IT systems. The term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone systems, scanning equipment, and other miscellaneous systems. Non-IT systems include alarm systems, measurement devices, fax machines, and other miscellaneous equipment. Both IT and non-IT systems may contain embedded technology, which complicates the Company's Year 2000 identification, assessment, testing, and remediation efforts. The Company has tested most of its IT systems, primarily financial and operational software, for necessary compliance. As of the date of this filing, the Company estimates that approximately 90% of its Year 2000 plan related to these IT systems has been implemented and anticipates that the remainder of the plan including any necessary remedial action, will be completed by July 30, 1999. The Company continues to evaluate its vulnerability to Year 2000 issues related to its non-IT systems, primarily field operational systems and equipment. The failure to correct a material Year 2000 issue could result in an interruption in, or a failure of, certain normal business activities, resulting in a material adverse affect on the Company's results of operations, liquidity and financial position. The Company's remediation efforts are expected to reduce significantly the Company's level of uncertainty about Year 2000 compliance and the possibility of interruptions of normal operations. However, there can be no guarantee that other companies' systems, on which the Company's systems rely, will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. In a recent Securities and Exchange Commission release regarding Year 2000 disclosures, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Analysis of the most reasonably likely worst case Year 2000 scenario the Company may face leads to contemplation of the following possibilities which, though unlikely in some or many cases, must be included in any consideration of worst cases: widespread failure of oil and gas producers transporting production through the Company's pipeline systems, widespread failure of electrical, gas, and similar supplies by utilities serving the Company; widespread disruption of the services of communications common carriers; similar disruption to means and modes of transportation for the Company and its employees, contractors, suppliers and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of the Company's mission-critical information (computer) hardware and software systems, including both internal business systems and systems (such as those with embedded chips) controlling operational facilities such as oil and gas rigs, oil and gas pipelines and gas plants. The effects of which would have a cumulative material adverse impact on the Company. Among other things, the Company could face substantial claims by customers or loss of revenues due to service interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers accurately and on a timely basis, increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. The Company could also experience the inability by customers to pay, on a timely basis or at all, obligations owed to the Company. Under these circumstances, the adverse effect on the Company, and the diminution of the 13 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's revenues, would be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on the Company, and the diminution of the Company's revenues, from a domestic or global recession or depression is also likely to be material, although not quantifiable at this time. As of March 31, 1999, the Company has incurred minimal costs in connection with Year 2000 compliance. The Company intends to complete its Year 2000 compliance projects by July 1999 and does not anticipate any additional costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE The Company is exposed to market risk, including adverse changes in commodity prices and interest rates as discussed below. COMMODITY PRICE RISK- The Company produces and sells natural gas, crude oil, and natural gas liquids. As a result, the Company's financial results can be significantly affected if these commodity prices fluctuate widely in response to changing market forces. The Company has not used derivative products in the past to manage commodity price risk. INTEREST RATE RISK- The Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with floating interest rates. Based upon the current credit facility a 10% change in the interest rate on the credit facility would result in a minimal increase in interest expense. 14 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The Company's Proxy Statement dated April 12, 1999 is incorporated herein by reference. ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A) Exhibits - None B) Form 8-K - The Company's Form 8-K filed March 15, 1999 is incorporated herein by reference. 15 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. By: BLUE DOLPHIN ENERGY COMPANY Date: MAY 14, 1999 /S/ MICHAEL J. JACOBSON Michael J. Jacobson President and Chief Executive Officer /S/ G. BRIAN LLOYD G. Brian Lloyd Vice President, Treasurer 16 EX-27.1 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INCORPORATED HEREIN BY REFERENCE. 3-MOS DEC-31-1999 MAR-31-1999 382,858 0 1,386,820 0 20,032 1,978,359 27,631,074 16,979,967 16,891,399 2,306,172 2,050,600 0 0 45,246 12,489,381 16,891,399 73,555 584,442 267,401 607,104 0 0 59,318 1,523,358 518,191 1,005,167 0 0 80,334 924,833 0.20 0.20
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