10-Q 1 0001.txt 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: JUNE 30, 2000 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. 5,953,665 SHARES $.01 PAR VALUE OUTSTANDING AT AUGUST 4, 2000 ------------------------------------------------------------- 1 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
June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash ..................................................................... $ 1,199,407 $ 1,166,730 Trade accounts receivable ................................................ 1,948,643 1,542,328 Prepaid expenses ......................................................... 756,223 318,139 ------------ ------------ Total Current Assets ........................... 3,904,273 3,027,197 Property and Equipment, at cost, using full cost method for oil and gas properties. Including $950,813 of unproved leasehold cost and leases held for sale at June 30, 2000 and December 31, 1999 ........................ 32,234,473 32,143,258 Accumulated depletion, depreciation and amortization ........................................................ (18,293,228) (17,412,195) ------------ ------------ 13,941,245 14,731,063 Land ........................................................................ 930,500 930,500 Acquisition and development costs - Petroport ............................... 1,803,326 1,741,823 Other Assets ................................................................ 2,008,683 1,574,621 ------------ ------------ Total Assets ............................... $ 22,588,027 $ 22,005,204 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses .................................... $ 1,811,047 $ 1,614,921 Current portion of long term-debt ........................................ 218,412 319,045 Notes payable - related parties .......................................... 1,200,000 1,000,000 ------------ ------------ Total Current Liabilities ......................... 3,229,459 2,933,966 Accrued Abandonment Costs ................................................... 488,783 466,988 Minority interest ........................................................... 1,026,168 958,521 Common Stock ................................................................ 59,537 59,509 Additional Paid-in Capital .................................................. 25,818,143 25,823,817 Accumulated (Deficit) since January 1, 1990 ................................. (8,034,063) (8,237,597) ------------ ------------ Total Liabilities and Stockholders' Equity ........................... $ 22,588,027 $ 22,005,204 ============ ============
3 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months Ended June 30, ---------------------------- 2000 1999 ------------ ------------ Revenue from operations: Pipeline operations ............................. $ 588,236 $ 444,082 Oil and gas sales ............................... 1,141,506 84,674 Operating fees ................................. 78,188 75,482 ------------ ------------ REVENUE FROM OPERATIONS ......... 1,807,930 604,238 Cost of operations: Pipeline operating expenses ..................... 265,252 282,826 Lease operating expenses ........................ 314,875 227,909 Depletion, depreciation, and amortization ....... 454,502 145,853 General and administrative ...................... 572,198 496,905 ------------ ------------ COST OF OPERATIONS .............. 1,606,827 1,153,493 ------------ ------------ INCOME (LOSS) FROM OPERATIONS ... 201,102 (549,255) Other income (expense): Interest expense ................................ (32,586) (57,935) Interest and other income ....................... 18,042 (36,637) ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 186,558 (643,827) Minority interest ................................... (35,861) -- Provision for income taxes .......................... -- 236,881 ------------ ------------ Net income (loss) ................................... $ 150,697 $ (406,946) ============ ============ Earnings (loss) per share-basic ..................... $ 0.03 $ (0.09) ============ ============ Earnings (loss) per share-diluted ................... $ 0.03 $ (0.09) ============ ============ Weighted average number of common shares outstanding and dilutive potential common shares: Basic ........................................... 5,951,436 4,646,187 ============ ============ Diluted ......................................... 6,002,072 4,705,986 ============ ============
4 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
SIX MONTHS ENDED JUNE 30, ---------------------------- 2000 1999 ------------ ------------ Revenue from operations: Pipeline operations ................................................ $ 1,059,082 $ 879,937 Oil and gas sales .................................................. 2,177,215 158,229 Operating fees .................................................... 156,414 150,514 ------------ ------------ REVENUE FROM OPERATIONS ............................ 3,392,711 1,188,680 Cost of operations: Pipeline operating expenses ........................................ 506,245 492,319 Lease operating expenses ........................................... 598,463 524,413 Depletion, depreciation, and amortization .......................... 910,772 246,960 General and administrative ......................................... 1,070,733 974,213 ------------ ------------ COST OF OPERATIONS ................................. 3,086,213 2,237,905 ------------ ------------ INCOME (LOSS) FROM OPERATIONS ...................... 306,498 (1,049,225) Other income (expense): Interest expense ................................................... (56,481) (117,253) Gain on sale of assets ............................................. -- 2,052,920 Interest and other income .......................................... 21,164 (6,911) ------------ ------------ INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...... 271,181 879,531 Minority interest ...................................................... (67,647) -- Provision for income taxes ............................................. -- (281,310) ------------ ------------ INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE .................. 203,534 598,221 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 ............................................................. $ 203,534 $ 517,887 ============ ============ Earnings per common share-basic Income before accounting change .................................... $ 0.03 $ 0.13 Cumulative effect of a change in accounting principle .............. -- (0.02) ------------ ------------ Net income ......................................................... $ 0.03 $ 0.11 ============ ============ Earnings per common share-diluted Income before accounting change .................................... $ 0.03 $ 0.13 Cumulative effect of a change in accounting principle .............. -- (0.02) ------------ ------------ Net income ......................................................... $ 0.03 $ 0.11 ============ ============ Weighted average number of common shares outstanding and dilutive potential common shares: Basic .............................................................. 5,951,158 4,582,428 ============ ============ Diluted ............................................................ 6,001,794 4,642,227 ============ ============
5 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED JUNE 30, ---------------------------- 2000 1999 ------------ ------------ OPERATING ACTIVITIES Net income ............................................................... $ 203,534 $ 517,887 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization ...................... 910,772 246,960 Deferred income taxes ......................................... -- 380,216 Change in accounting principle ................................ -- 121,814 Gain on sale of assets ........................................ -- (2,052,920) Changes in operating assets and liabilities: (Increase) in trade accounts receivable .................. (406,315) (273,456) (Increase) in prepaid expenses ........................... (438,085) (18,924) Increase in accounts payable and other current liabilities 263,773 212,584 ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............... 533,679 (865,839) INVESTING ACTIVITIES Oil and gas prospect generation costs .................................... (563,222) (686,308) Reimbursement of oil and gas prospect generation costs ................... 563,222 494,393 Purchases of property and equipment ...................................... (93,069) (5,436,183) Net proceeds from sale of assets ......................................... -- 5,570,287 Funds escrowed for abandonment costs ..................................... (280,296) -- Development costs - Petroport ............................................ (67,593) (181,052) Development costs - New Avoca ............................................ (111,411) -- (Increase) decrease in other assets ...................................... (42,355) 57,993 ------------ ------------ NET CASH (USED IN) INVESTING ACTIVITIES ............... (594,724) (180,870) FINANCING ACTIVITIES Net proceeds from borrowings ............................................. 200,000 200,000 Net proceeds from the sale of stock ...................................... -- 1,960,000 Payments on borrowings ................................................... (100,633) -- Other .................................................................... (5,645) 25,216 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES ............... 93,722 2,185,216 INCREASE IN CASH .................. 32,677 1,138,507 CASH AT BEGINNING OF YEAR .................................................... 1,166,730 593,509 ------------ ------------ CASH AT JUNE 30 .............................................................. $ 1,199,407 $ 1,732,016 ============ ============ SUPPLEMENTARY CASH FLOW INFORMATION Interest paid ............................................................ $ 74,399 $ 116,020 ============ ============ Income taxes paid ........................................................ $ 8,430 $ 12,620 ============ ============
6 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED JUNE 30, 2000 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 requires 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 ---------- ------------- ---------- Six Months ended June 30, 2000 Basic earnings per share ............. $ 203,534 5,951,158 $ 0.03 Effect of dilutive stock options .......................... -- 50,636 -- ---------- ------------- ---------- Diluted earnings per share ........... $ 203,534 6,001,794 $ 0.03 ========== ============= ========== Six Months ended June 30, 1999 Basic earnings per share ............. $ 517,887 4,582,428 $ 0.11 Effect of dilutive stock options .......................... -- 59,799 -- ---------- ------------- ---------- Diluted earnings per share ........... $ 517,887 4,642,227 $ 0.11 ========== ============= ==========
7 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, as amended, 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. In July 1999, SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133," was issued and delays the effective date for one year, to fiscal years beginning after June 15, 2000. The Company believes that adoption of this financial accounting standard will not have a material effect on its financial condition or results of operations. SECURITIES AND EXCHANGE COMMISSION REVIEW The Securities and Exchange Commission ("SEC") is currently reviewing certain of the Company's historical financial statements in conjunction with the Company's filing of a registration statement on Form S-3. The SEC review could result in significant modifications to such financial statements upon conclusion of the review process. 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 six months ended June 30, 2000 and 1999, and at June 30, 2000 and December 31, 1999 is as follow. 8 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) ------------ ------------ ---------- ---------------- Six months ended June 30, 2000: Oil and gas exploration and production and operating fees $ 2,336,629 3,000 833,823 719,654 Pipeline operations ............... 1,070,337 11,255 303,039 176,454 Other ............................. (14,255) (830,364) 14,664 ------------ ---------- ---------------- Consolidated ...................... 3,392,711 -- 306,498 910,772 Other expense ..................... -- -- (35,317) -- ---------- ---------------- Income before income taxes ........ -- -- 271,181 -- Six months ended June 30, 1999: Oil and gas exploration and production and operating fees $ 311,743 3,000 (268,798) 53,314 Pipeline operations ............... 888,774 8,837 (72,602) 181,559 Other ............................. (11,837) (707,825) 12,087 ------------ ---------- ---------------- Consolidated ...................... 1,188,680 -- (1,049,225) 246,960 Other expense ..................... -- 1,928,756 ---------- Income before income taxes ........ 879,531 Three months ended June 30, 2000: Oil and gas exploration and production and operating fees $ 1,221,194 1,500 434,293 358,667 Pipeline operations ............... 593,006 4,770 184,534 88,173 Other ............................. (6,270) (417,725) 7,662 ------------ ---------- ---------------- Consolidated ...................... 1,807,930 -- 201,102 454,502 Other expense ..................... (14,544) ---------- Loss before income taxes .......... 186,558 Three months ended June 30, 1999: Oil and gas exploration and production and operating fees $ 161,656 1,500 (129,243) 27,648 Pipeline operations ............... 448,336 4,524 (44,460) 111,953 Other ............................. (5,754) (375,552) 6,252 ------------ ---------- ---------------- Consolidated ...................... 604,238 -- (549,255) 145,853 Other expense ..................... (94,572) ---------- Income before income taxes ........ (643,827)
9 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) June 30, December 31, 2000 1999 ------------ ------------ Identifiable assets: Oil and gas exploration and production ...................... $ 13,356,421 $ 12,816,861 Pipeline operations ....................... 8,700,047 8,202,137 Other ..................................... 531,559 986,206 ------------ ------------ Consolidated .............................. 22,588,027 22,005,204 1. Consolidated income from operations includes $801,445 and $683,901 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $14,664 and $12,087 for the six months ended June 30, 2000 and 1999, respectively. Consolidated income from operations includes $403,792 and $363,546 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $7,661 and $6,252 for the quarters ended June 30, 2000 and 1999, respectively. 2. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $9,870 and $10,970 for the six months ended June 30, 2000 and 1999, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $11,925 and $11,187 for the six months ended June 30, 2000 and 1999, respectively. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $4,935 and $4,935 for the quarters ended June 30, 2000 and 1999, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $5,430 and $5,851 for the quarters ended June 30, 2000 and 1999, respectively. LEGAL PROCEEDINGS On May 8, 2000, American Resources Offshore, Inc., a 75% owned subsidiary of the Company, and its former Chief Financial Officer, were named in a lawsuit in the United States District Court for the Southern District of Texas, Houston Division, styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C. V. AMERICAN RESOURCES OFFSHORE, INC. ET AL (Case No H-00-1371). The lawsuit alleges that H&N Gas and American Resources entered into illegal and fraudulent natural gas purchase option agreements that benefited American Resources at the expense of H&N Gas. H&N Gas is seeking a claim against American Resources of $2.8 million plus treble damages. American Resources intends to vigorously defend this claim. 10 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 "forward-looking" statements as that term is defined in Section 21E of the Securities Exchange Act of 1934, 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. FINANCIAL CONDITION The following table summarizes the Company's financial position at June 30, 2000 and December 31, 1999 (amounts in thousands): JUNE 30, 2000 DECEMBER 31, 1999 ---------------- ----------------- AMOUNT % AMOUNT % -------- ----- -------- ----- Working capital ................... 675 3 93 1 Property and equipment, net ....... 13,941 72 14,731 77 Other noncurrent assets ........... 4,743 25 4,247 22 -------- ----- -------- ----- Total ............................. 19,359 100 19,071 100 ======== ===== ======== ===== Long-term debt .................... -- -- Other long-term liabilities ....... 489 3 467 2 Minority interest ................. 1,026 5 958 5 Stockholders' equity .............. 17,844 92 17,646 93 -------- ----- -------- ----- Total ............................. 19,359 100 19,071 100 ======== ===== ======== ===== There have been no significant changes in the Company's financial position for the period December 31, 1999 to June 30, 2000. During the six months ended June 30, 2000, the Company funded its activities through cash generated from operations and a short-term $200,000 promissory note from a related party. The net cash provided by or used in operating, investing and financing activities is summarized below (amounts in thousands): 11 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED SIX MONTHS ENDED JUNE 30 --------------------- 2000 1999 -------- -------- Net cash provided by (used in): Operating activities ............................ 534 (866) Investing activities ............................ (595) (181) Financing activities ............................ 94 2,185 -------- -------- Net increase in cash ................................. 33 1,138 ======== ======== On December 2, 1999, the Company acquired a 75% ownership interest in American Resources. The purchase price for the American Resources shares was approximately $4.5 million. Concurrently with the sale of its common stock to the Company, American Resources sold an 80% interest in its offshore oil and gas properties located in the Gulf of Mexico assets to Fidelity Oil Holdings, Inc. a subsidiary of MDU Resources Group, Inc. The proceeds received by American Resources were used to retire certain indebtedness. In order to provide funding for the acquisition of American Resources in December 1999, the Company arranged a private placement and conversion of principal and accrued interest on promissory notes into common stock, $.01 par value per share, of 701,820 shares and 314,898 shares, respectively (see Notes 5 and 7 in Item 8. Financial Statements and Supplementary Data in the Company's Form 10-K for the year ended December 31, 1999). The Company also issued a $1,000,000 convertible promissory note to Harris A. Kaffie, a director of the Company. This convertible promissory note originally due June 1, 2000 has been extended to March 31, 2001, bears interest at 10% per annum, and is convertible into common stock at $6.00 per share. The Company believes that if the $1,000,000 convertible promissory note is not converted, the amount due will be refinanced. The Company entered into an agreement with Fidelity Oil Holdings, Inc. to manage their interest in the properties acquired from American Resources for $40,000 per month. The agreement is in effect through December 2000 and provides for continuation thereafter on a year to year basis unless terminated by either party. The fees earned from Fidelity are recorded as a reduction to general and administrative expenses. The Company maintains a $10,000,000 reducing revolving credit facility with Bank One, Texas, N.A. (the "Loan Agreement"). The term of the Loan Agreement expires on December 31, 2000, when the outstanding balance, if any, is due and payable. The facility is available for the acquisition of oil and gas reserve based assets and working capital. In January 2000, the Company paid the $80,000 outstanding balance under the Loan Agreement. At June 30, 2000 the Company did not have an outstanding balance under the Loan Agreement and its borrowing capacity under the Loan Agreement was adjusted to $0. The Loan Agreement includes certain restrictive covenants that are applicable if any amounts are outstanding under the agreement, including restrictions on the Company's ability to pay dividends on its 12 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED capital stock and the maintenance of certain financial ratios. Among the various financial covenants the Company must comply with, it must maintain (i) a total tangible net worth of $10,250,000, (ii) a debt coverage ratio of not less than 1.2 to 1 calculated on a rolling four-quarter basis and (iii) a current ratio (as defined in the Loan Agreement) of at least 1 to 1. The Company may seek to renegotiate the terms of the Loan Agreement including, but not limited to, the borrowing capacity and restrictive covenants or enter into a credit agreement with another financial institution. There can be no assurance that the Company will be able to renegotiate the terms of the Loan Agreement or enter into a new credit agreement with commercially reasonable terms. The Company has exploration and development opportunities associated with its offshore properties owned through American Resources. American Resources will evaluate each of the exploration and development opportunities and its available capital resources to determine whether to participate, sell its interest or sell a portion of its interest and use the proceeds to participate at a reduced interest. As of July 31, 2000, American Resources had expended approximately $1 million on exploration and development opportunities on its properties during 2000, funded out of working capital. In April 2000, the Company amended its prospect generation program agreement with Fidelity Oil, whereby in exchange for certain participation rights of up to 100%, Fidelity Oil will fund $1,060,000 of the costs associated with the program during 2000. Fidelity Oil will also reimburse the company for seismic data acquired. The available interests in the prospect inventory developed in the program are for sale on an individual prospect basis. The Company announced a natural gas discovery in High Island Area Block A-7, in federal waters off the Texas coast. The Company acquired the block at MMS Sale 155 in 1995, and owns an 8.9% after payout reversionary working interest. High Island Block A-7 was one of four blocks the Company acquired in the first year of its offshore prospect generation program in 1995. In July 2000, the Company reached an agreement to provide transportation services for Vastar Resources, Inc. in High Island Block A-5 offshore Texas in the Gulf of Mexico. To accommodate this production, the Company agreed to construct a 3.4 mile 12" diameter pipeline from the production platform in High Island A-5 to the Black Marlin Pipeline. The cost to construct the pipeline is estimated to be $2.2 million, $1.1 million net to the Company's 50% interest. The pipeline is expected to be completed in August 2000, with production from High Island Block A-5 expected to commence in September or October 2000. The Company expects to finance this pipeline with its credit facility with Bank One, or from other external sources. In late July 2000, oil and gas production from the only producing well in the Buccaneer Field ceased due to down hole mechanical problems. The Company is currently evaluating alternatives to reestablish production from this well and the associated costs to do so. The Company has hired Ralph E. Davis Associates, Petroleum Engineers, to assist with evaluating alternatives to reestablish production in the field. If production is not reestablished or effects to reestablish production are not commenced within six months from the date of last production, the Company's leasehold on the Buccaneer Field will terminate, which would result in a significant non-cash impairment of oil and gas properties. 13 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED In July 2000, the Company acquired a 5/6th's ownership interest in an 8-inch, 12.78 mile pipeline from Walter Oil and Gas Corp. for approximately $269,000. The pipeline extends from Galveston Area Block 350 to an interconnect to another pipeline in Galveston Area Block 391 (the "GA350 Pipeline"), approximately 14 miles south of the Company's Blue Dolphin Pipeline. The pipeline currently transports nominal volumes of gas, but the Company believes it is well positioned to attract future discoveries in the area. In order to provide funding for the acquisition of the GA350 Pipeline and other working capital needs, the Company issued two convertible promissory notes each in the principal amount of $200,000 on May 25, 2000 and July 6, 2000. Both notes were issued to Ivar Siem, Chairman of the Company. These convertible promissory notes are due March 31, 2001, bear interest at the rate of 10% per annum and are convertible into common stock at the rate of $6.00 per share. In October 1999, American Resources sold call options for 5 MMBtu's per day of gas at a call price of $3.25 per MMBtu to H & N Gas. The call options expire in September 2000. In exchange for establishing a ceiling of $3.25 per MMBtu over the option term, American Resources received an average option premium of approximately $0.12 per MMBtu on the volumes contracted for under the call option agreement. Fidelity Oil agreed to assume 80%, or 4 MMBtu's per day, of any liability from these options. The call options are settled each month. American Resources did not incur any liability from these options for the months of October 1999 through May 2000. The liability from the June 2000 option was $147,900, of which Fidelity Oil reimbursed ARO $118,320. For the months of July and August 2000, the settlement amounts were $222,580 and $79,515, respectively, of which Fidelity Oil has reimbursed ARO $178,064 and $63,612, respectively. The settlement price for September 2000 is unknown at this time. As a result of the legal proceedings with H & N Gas (see Part II, Item 1. Legal Proceedings, below), we have suspended payments to H&N Gas. In October 1999, the Company announced that Equilon Enterprises, LLC (an alliance of two major oil companies, Shell and Texaco), agreed to jointly continue development of the Petroport deepwater port project with the Company. The agreement provided that the parties would share mutually agreed upon third party costs of additional economic feasibility and design studies for the purpose of determining whether to proceed with further development efforts, including licensing and permitting of the facility. The same agreement contemplated that the parties would enter into further contractual arrangements in the event that Equilon chose to participate in the substantial additional costs of proceeding with licensing of the facility, and that Equilon would have no interest in the Petroport project if it did not. The agreement contemplated that those additional contracts would address such matters as the parties' respective ownership percentages of an entity to be formed to develop, own and operate Petroport, the sharing of further development costs and cash payments to the Company. Proposed, non-binding terms concerning those matters were contained in the agreement but were subject to substantial change depending upon, among other things, whether the Company or Equilon determined to sell a portion of their respective interests in the project to other participants. Although the Equilon agreement expired in December 1999, Equilon and the Company have continued to share relatively minor development expenses, although neither party is obligated to do so. Equilon has not advised the Company as to whether it will proceed with licensing and further documentation. Whether or not Equilon determines to participate further in the development of Petroport, the Company intends to continue its efforts to attract 14 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED throughput commitments from prospective users and seek partners to participate in the ownership and further costs of developing Petroport. Costs of the offshore terminal complex, the pipeline to shore, onshore facilities and facility licensing are estimated to be $200.0 million. The Company expects that its' partner or partners in the Petroport project would be responsible for all licensing and permitting costs, currently estimated to be approximately $6.0 million. The Company plans to seek financing for the costs associated with facility construction. In November 1999, the Company and WBI Holdings, Inc. (WBI) formed New Avoca Gas Storage LLC, 25% owned and managed by the Company and 75% owned by WBI, and acquired the Avoca gas storage assets for $400,000 ($100,000 net to the Company's interest) from Northeastern Gas Caverns ("Northeastern"). Additionally, a contingent payment of $500,000 ($125,000 net to the Company's interest) was due to Northeastern on May 22, 2000. New Avoca made a payment of $50,000 ($12,500 net to the Company's interest) and extended the remaining $450,000 payment to August 22, 2000. The contingent payment will be excused, and the $50,000 payment made will be refunded, if Northeastern successfully settles a claim associated with Avoca Gas Storage, Inc. (the original owner of the Avoca gas storage assets). A pending settlement of the claim is expected to be completed, and the Company believes that the contingent payment will not be made. New Avoca can elect to liquidate the project at any time. If liquidated, after settling all accrued obligations, the first $400,000 of proceeds, if any, goes to New Avoca, the next $500,000 goes to Northeastern (if the $500,000 has not yet been paid as described above) and anything over $900,000, subject to Northeastern successfully settling its claim with Avoca Gas Storage, Inc. goes to New Avoca. New Avoca is currently evaluating all previously gathered data and is preparing to test existing brine disposal wells to determine whether or not to go forward with construction of the project or to liquidate. Testing of the brine disposal wells is needed in order to complete the evaluation of the project. The original owners of the Avoca gas storage assets encountered difficulties associated with the rate at which the brine disposal wells accept brine that is produced during construction of the gas storage caverns. New Avoca believes that the brine disposal wells will accept brine at an acceptable rate. New Avoca will conduct a test on the brine disposal wells as soon as the necessary permits are received. The test, and evaluation of the test results, will take approximately one month to complete. It is currently estimated that the Company's share of the costs associated with these activities for 2000 will be approximately $300,000. The Company's share of construction costs, should New Avoca decide to go forward with the project, and the timing of such costs have not been determined. 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 and New Avoca projects. RESULTS OF OPERATIONS The Company reported net income for the six months ended June 30, 2000, ("current period") of $203,534, compared to net income of $517,887 reported for the six months ended June 30, 1999 15 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED ("previous period"). Net income in the previous period included a gain on sale of a one-sixth interest in the Blue Dolphin Pipeline system of $2,052,920. For the quarter ended June 30, 2000 ("current quarter") the Company reported net income of $150,697 compared to a net loss of $406,946 for the quarter ended June 30, 1999 ("previous quarter"). The improvement is due to increases in pipeline transportation revenues and oil and gas sales in the current quarter. REVENUES: SIX MONTHS 2000 VS. 1999. Revenues for the current period increased by $2,204,031 or 185% to $3,392,711 compared to revenues of $1,188,680 reported for the previous period. Current period revenues from pipeline operations increased by $179,145 or 20% from the previous period. The increase was primarily due to an increase in gas volumes transported on the Black Marlin Pipeline System, which system was acquired on March 1, 1999, resulting in a $354,317 increase in revenues. During the current period average daily gas volumes transported by the Black Marlin Pipeline System were 69,000 MMBtu/d compared to 51,000 MMBtu/d during the four months the Company owned the system in the previous period. This increase was offset in part by a decline in gas volumes in the Blue Dolphin Pipeline System. During the current period, average daily gas volumes transported by the Blue Dolphin Pipeline System were 29,000 MMBtu/d compared to 40,000 MMBtu/d during the previous period. On March 1, 1999, the Company sold a 1/6th interest in the Blue Dolphin Pipeline System, reducing its interest to 50%. Current period revenues from oil and gas sales increased by $2,018,986, from those of the previous period primarily due to the acquisition of American Resources in December 1999, resulting in additional revenues of $1,943,456 in the current period. In addition, oil and gas sales from existing properties increased by $75,530 due to higher commodity prices in the current period. SECOND QUARTER 2000 VS. SECOND QUARTER 1999. Revenues for the current quarter increased by $1,203,692 or 199% to $1,807,930 compared to revenues of $604,238 reported for the previous quarter. Current quarter revenues from pipeline operations increased by $144,154 or 32% from the previous quarter primarily due to an increase in gas volumes transported on the Black Marlin Pipeline System, resulting in revenues of $177,854, offset by a 22% decline in gas volumes transported on the Blue Dolphin Pipeline System, resulting in a reduction of revenues of $33,700. Current quarter revenues from oil and gas sales increased by $1,056,832, from those of the previous quarter primarily due to the acquisition of American Resources in December 1999, resulting in additional revenues of $1,018,000. In addition, oil and gas sales from existing properties increased by $38,832 due to higher commodity prices in the current period. 16 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED COSTS AND EXPENSES: SIX MONTHS 2000 VS. 1999. Current period lease operating expenses increased $74,050 or 14% from those of the previous period. Current period expenses from the ARO properties that were acquired in December 1999 totaled $321,441. The increase in expenses was offset by lower costs in the current period associated with the Buccaneer Field. In the previous period, repairs and modifications to a Buccaneer Field platform totaled $228,746. Current period depletion, depreciation and amortization increased $663,812, primarily due to the acquisition of American Resources in December 1999, resulting in increased depletion of $654,093. General and administrative expenses for the current period increased $96,520, primarily due to the acquisition of American Resources in December 1999. Current period interest expense decreased $60,772 due primarily to the retirement of $1,811,555 principal amount of promissory notes in December 1999 resulting in a decrease in interest expense of $104,045. The decrease was offset in part by interest expense of $51,990 on the $1,000,000 convertible promissory note issued in December 1999 and the $200,000 convertible promissory note issued in May 2000. SECOND QUARTER 2000 VS. SECOND QUARTER 1999. Current quarter lease operating expenses increased $86,966 or 38% from those of the previous quarter. Current quarter expenses from the American Resources properties that were acquired in December 1999 totaled $179,148. The increase in expenses was offset by lower costs in the current quarter associated with the Buccaneer Field of $92,182. Current quarter depletion, depreciation and amortization increased $308,649, primarily due to the acquisition of ARO in December 1999, resulting in increased depletion of $326,185. General and administrative expenses for the current quarter increased $75,293, primarily due to the acquisition of American Resources in December 1999. Current quarter interest expense decreased $25,349 due to the retirement of $1,811,555 principal amount of promissory notes in December 1999, resulting in a decrease in interest expense of $52,023. The decrease was offset in part by interest expense of $26,667 on the $1,000,000 convertible promissory note issued in December 1999 and the $200,000 convertible promissory note issued in May 2000. 17 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES 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. Except as described below the Company does not use derivative products 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. Since the Company does not have an outstanding balance under the Loan Agreement a 10% change in the interest rate on the credit facility would not effect interest expense. DERIVATIVES- In October 1999, American Resources sold call options for 5 MMBtu's per day of gas at a call price of $3.25 per MMBtu to H & N Gas. The call options expire in September 2000. In exchange for establishing a ceiling of $3.25 per MMBtu over the option term, American Resources received an average option premium of approximately $0.12 per MMBtu on the volumes contracted for under the call option agreement. Fidelity Oil agreed to assume 80%, or 4 MMBtu's per day, of any liability from these options. The call options are settled each month. The months of October 1999 through May 2000 expired with no liability to American Resources. The liability from the June 2000 option was $147,900, of which Fidelity Oil reimbursed American Resources $118,320. For the months of July and August 2000, the settlement amounts were $222,580 and $79,515, respectively, of which Fidelity Oil has reimbursed American Resources $178,064 and $63,612, respectively. 18 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 8, 2000, American Resources, a 75% owned subsidiary of the Company, and its former Chief Financial Officer, were named in a lawsuit in the United States District Court for the Southern District of Texas, Houston Division, styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C. V. AMERICAN RESOURCES OFFSHORE, INC. ET AL (Case No H-00-1371). The lawsuit alleges that H&N Gas and American Resources entered into illegal and fraudulent natural gas purchase option agreements that benefited American Resources at the expense of H&N Gas. H&N Gas is seeking a claim against American Resources of $2.8 million plus treble damages. American Resources intends to vigorously defend this claim. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on May 18, 2000. The matters that were voted upon at the meeting, and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to such matter, where applicable, are set forth below.
VOTES VOTES VOTES BROKER FOR AGAINST WITHHELD ABSTENTIONS NON-VOTES --------- ------- -------- ----------- --------- Election of Directors Ivar Siem ................... 3,615,694 2,947 -- 1,632 113,457 Michael S. Chadwick ......... 3,617,592 1,049 -- 1,632 113,457 Harris A. Kaffie ............ 3,617,592 1,049 -- 1,632 113,457 Daniel B. Porter ............ 3,617,592 1,049 -- 1,632 113,457 Proposal relating to 2000 Incentive Plan ......... 2,880,523 7,888 -- 245 113,457
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A) Exhibits - 27.1 Financial Data Schedule B) Form 8-K - On June 5, 2000, the Company filed a current report of Form 8-KA dated December 2, 1999, with respect to the acquisition of American Resources Offshore, Inc. The items reported in such current report were Item 2 (Acquisitions or Dispositions of Assets) and Item 7 (Financial Statement and Exhibits). On June 5, 2000, the Company filed a current report of Form 8-K dated June 5, 2000, amending the description of securities. The items reported in such current report were Item 5 (Other Events) and Item 7 (Financial Statement and Exhibits). 19 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: August 21, 2000 /S/ MICHAEL J. JACOBSON ----------------------------------------- Michael J. Jacobson President and Chief Executive Officer /S/ G. BRIAN LLOYD ----------------------------------------- G. Brian Lloyd Vice President, Treasurer 20