10-Q/A 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A-1 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended: MARCH 31, 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 ------------------------------------------------------------- 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, 2000 1999 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash ................................................. $ 961,090 $ 1,166,730 Trade accounts receivable ............................ 1,841,956 1,542,328 Prepaid expenses ..................................... 339,450 318,139 ------------ ------------ Total Current Assets ....... 3,142,496 3,027,197 Property and Equipment, at cost: Oil and gas properties, including $950,813 of unproved leasehold cost at March 31, 2000 and December 31, 1999 (full-cost method) .............. 32,163,461 32,143,258 Accumulated depletion, depreciation and amortization .................................... (18,332,408) (17,879,183) ------------ ------------ 13,831,053 14,264,075 Land .................................................... 930,500 930,500 Acquisition and development costs - Petroport ........... 1,765,667 1,741,823 Other Assets ............................................ 1,688,567 1,574,621 ------------ ------------ Total Assets ........... $ 21,358,283 $ 21,538,216 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ................ $ 1,450,997 $ 1,614,921 Current portion of long term debt .................... 218,412 319,045 Note payable - related party ......................... 1,000,000 1,000,000 ------------ ------------ Total Current Liabilities ..... 2,669,409 2,933,966 Minority interest ....................................... 990,307 958,521 Common Stock ............................................ 59,509 59,509 Additional Paid-in Capital .............................. 25,823,817 25,823,817 Accumulated Deficit since January 1, 1990 ............... (8,184,759) (8,237,597) ------------ ------------ Total Liabilities and Stockholders' Equity ....... $ 21,358,283 $ 21,538,216 ============ ============
See accompanying notes to consolidated financial statements. 3 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED MARCH 31, 2000 1999 ----------- ----------- Revenue from operations: Pipeline operations ................................................ $ 470,846 $ 435,855 Oil and gas sales .................................................. 1,035,709 73,555 Operating fees ..................................................... 78,226 75,032 ----------- ----------- REVENUE FROM OPERATIONS ............................ 1,584,781 584,442 Cost of operations: Pipeline operating expenses ........................................ 240,993 209,493 Lease operating expenses ........................................... 283,588 296,504 Depletion, depreciation, and amortization .......................... 456,270 101,107 General and administrative ......................................... 498,535 477,308 ----------- ----------- COST OF OPERATIONS ................................. 1,479,386 1,084,412 ----------- ----------- INCOME FROM OPERATIONS ............................ 105,395 (499,970) Other income (expense): Interest expense ................................................... (23,895) (59,318) Interest and other income (expense) ................................ 3,124 13,660 Gain on sale of assets ............................................. -- 2,068,986 ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...... 84,624 1,523,358 Minority interest ...................................................... (31,786) -- Provision for income taxes ............................................. -- (518,191) ----------- ----------- Income before cumulative effect of a change in an accounting principle . 52,838 1,005,167 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 ............................................................. $ 52,838 $ 924,833 =========== =========== Earnings per common share-basic Income before accounting change .................................... $ 0.01 $ 0.22 Cumulative effect of a change in accounting principle .............. -- (0.02) ----------- ----------- Net income ......................................................... $ 0.01 $ 0.20 =========== =========== Earnings per common share-diluted Income before accounting change .................................... $ 0.01 $ 0.22 Cumulative effect of a change in accounting principle .............. -- (0.02) ----------- ----------- Net income ......................................................... $ 0.01 $ 0.20 =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic .............................................................. 5,950,880 4,517,960 =========== =========== Diluted ............................................................ 6,020,721 4,544,895 =========== ===========
See accompanying notes to consolidated financial statements. 4 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS - UNAUDITED
THREE MONTHS ENDED MARCH 31, 2000 1999 ----------- ----------- OPERATING ACTIVITIES Net income .......................................................... $ 52,838 $ 924,833 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization ................. 456,270 101,107 Deferred income taxes .................................... -- 463,199 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 .............. (299,628) (615,552) (Increase) in prepaid expenses and other assets ...... (38,895) (98,060) (Decrease) increase in accounts payable and other current liabilities .................... (132,138) 840,910 ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......... 38,447 (330,735) INVESTING ACTIVITIES Purchases of property and equipment ................................. (20,203) (5,507,803) Net proceeds from sale of assets .................................... -- 5,497,923 Funds escrowed for abandonment costs ................................ (14,625) -- Investment in New Avoca ............................................. (81,737) -- Development costs - Petroport ....................................... (26,889) (85,036) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES ......... (143,454) (94,916) FINANCING ACTIVITIES Net proceeds from borrowings ........................................ -- 200,000 Payments on borrowings .............................................. (100,633) -- Other ............................................................... -- 15,000 ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......... (100,633) 215,000 ----------- ----------- DECREASE IN CASH .............. (205,640) (210,651) CASH AT BEGINNING OF YEAR ............................................... 1,166,730 593,509 ----------- ----------- CASH AT MARCH 31, ....................................................... $ 961,090 $ 382,858 =========== =========== SUPPLEMENTARY CASH FLOW INFORMATION Interest paid ....................................................... $ 13,267 $ 110,216 =========== ===========
See accompanying notes to consolidated financial statements. 5 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED MARCH 31, 2000 1. EARNINGS PER SHARE The Company follows Statement of Financial Accounting Standards No. 128 (SFAS No.128), Earnings per Share, for computing and presenting earnings per share and requires, among other things, dual presentation of basic and diluted earnings per share on the face of the statement of operations. The following table provides a reconciliation between basic and diluted earnings per share: WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND DILUTIVE POTENTIAL PER NET COMMON SHARE INCOME SHARES AMOUNT --------- ------------- ------ Three Months ended March 31, 2000: Basic earnings ................. $ 52,838 5,950,880 $0.01 Effect of dilutive stock options 69,841 --------- --------- ----- Diluted earnings ............... $ 52,838 6,020,721 $0.01 ========= ========= ===== 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 ========= ========= ===== 6 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) 2. 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. In July 1999, Statement of Financial Accounting Standards 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. 3. 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, which incudes mid-stream projects. 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, 2000 and 1999, and at March 31, 2000 and December 31, 1999 is as follows:
DEPLETION, OPERATING DEPRECIATION INTERSEGMENT INCOME AND REVENUES REVENUES (LOSS)(1) AMORTIZATION(2) ------------- ------------- ------------- ------------- Three months ended March 31, 2000: Oil and gas exploration and production and operating fees $ 1,115,435 1,500 244,567 360,987 Pipeline operations ............ 477,331 6,485 51,220 88,280 Other .......................... (7,985) -- (190,392) 7,003 ----------- ----------- ----------- Consolidated ................... 1,584,781 -- 105,395 456,270 Other expense .................. -- -- (20,771) -- ----------- Income before income taxes ..... -- -- 84,624 -- Three months ended March 31, 1999: Oil and gas exploration and production operating fees $ 150,087 1,500 (253,638) 25,666 Pipeline operations ............ 440,109 4,254 (78,138) 69,606 Other .......................... (5,754) -- (168,194) 5,835 ----------- ----------- ----------- Consolidated ................... 584,442 -- (499,970) 101,107 Other income ................... -- -- 2,023,328 -- ----------- Income before income taxes ..... -- -- 1,523,358 --
7 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES OT CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- Identifiable assets: Oil and gas exploration and Production and operating fees ..... $12,697,667 $12,816,861 Pipeline operations ... 8,167,578 7,735,149 Other ................. 493,038 986,206 ----------- ----------- Consolidated .......... 21,358,283 21,538,216 1. Consolidated income from operations includes $397,653 and $320,355 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $10,048 and $5,835 for the three months ended March 31, 2000 and 1999, respectively. 2. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $4,935 and $6,035 for the three months ended March 31, 2000 and 1999, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $6,495 and $5,337 for the three months ended March 31, 2000 and 1999, respectively. 4. LEGAL PROCEEDINGS On May 8, 2000, ARO, a 75% owned subsidiary of the Company, and Ralph Currie, ARO's 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. AND RALPH CURRIE, ET AL (Case No H-00-1371). The lawsuit alleges that H&N Gas and ARO entered into illegal and fraudulent natural gas purchase option agreements that benefited ARO at the expense of H&N Gas. H&N Gas is seeking a claim against ARO of $2.8 million plus treble damages. ARO intends to vigorously defend this claim. 8 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 our financial position at March 31, 2000 and December 31, 1999 (amounts in thousands):
MARCH 31, 2000 DECEMBER 31, 1999 --------------- --------------- AMOUNT % AMOUNT % --------------- --------------- Working capital .............. 473 3 93 -- Property and equipment, net .. 13,831 74 14,264 77 Other noncurrent assets ...... 4,385 23 4,247 23 ------ ------ ------ ------ Total ........................ 18,689 100 18,604 100 ====== ====== ====== ====== Long-term debt ............... -- -- -- -- Minority interest ............ 990 5 958 5 Stockholders' equity ......... 17,699 95 17,646 95 ------ ------ ------ ------ Total ........................ 18,689 100 18,604 100 ====== ====== ====== ======
There have been no significant changes in the Company's financial position from December 31, 1999 to March 31, 2000. During the three months ended March 31, 2000, the Company funded its activities through cash generated 9 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) from operations and working capital. The net cash provided by or used in its operating, investing and financing activities is summarized below (amounts in thousands): THREE MONTHS ENDED MARCH 31, --------------------------- 2000 1999 ---- ---- NET CASH PROVIDED BY (USED IN): Operating activities .... 38 (331) Investing activities .... (143) (95) Financing activities .... (101) 215 ---- ---- Net increase (decrease) in cash 206 (211) ==== ==== On December 2, 1999, the Company acquired a 75% ownership interest in American Resources Offshore, Inc. by purchasing approximately 39.0 million shares of American Resources common stock. The Company paid approximately $4.5 million dollars for the shares of American Resources common stock. Concurrently with the Company's purchase, American Resources sold an 80% interest in its offshore oil and gas properties located in the Gulf of Mexico to Fidelity Oil Holdings, Inc. a subsidiary of MDU Resources Group, Inc. . The proceeds received by American Resources from these transactions were used to retire certain indebtedness. In order to provide funding for the acquisition of its interest in 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 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 promissory note was originally due June 1, 2000, and 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 this promissory note is not converted, the amount due will be refinanced. The Company entered into an agreement with Fidelity Oil to manage their interest in the properties acquired from American Resources for $40,000 per month. This agreement is in effect through December 2000 and provides for continuation thereafter on a year to year basis unless terminated by either party. The Company maintains a $10,000,000 reducing revolving credit facility with Bank One, Texas, N.A. ("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 10 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) its 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 expects 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 the offshore oil and gas interests owned through American Resources . The Company 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, the Company has expended $1.0 million on exploration and development opportunities on the offshore oil and gas interests owned through American Resources . In April 2000, the Company amended the agreement with Fidelity Oil in its prospect generation program, whereby in exchange for certain participation rights of up to 100%, Fidelity Oil will fund on a monthly basis, an aggregate of up to $1,060,000 of the costs associated with the program during 2000 and will also reimburse the Company for seismic data acquired. As of July 31, 2000, Fidelity Oil had funded $639,000 of these costs. The available interests in the prospect inventory are for sale on an individual prospect basis. The Company recently announced a new natural gas discovery in High Island Area Block A-7, in federal waters off the Texas coast. The Company acquired the block at the Minerals Management Service 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 through its offshore prospect generation program during its first year of operation in 1995. In July 2000, the Company reached an agreement to provide transportation services for Vastar Resources 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 is currently negotiating with Bank One to finance this pipeline under the Loan Agreement. However, there is no assurance that the Company will be able to finance this pipeline under the Loan Agreement. If the Company is not able to use the Loan Agreement to finance this pipeline, it will have to seek financing from other 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 efforts to reestablish production are not commenced within six months 11 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. In July 2000, the Company acquired a 83.3% ownership interest in an 8-inch, 12.78 mile pipeline from Walter Oil and Gas Corp. for approximately $230,000. The pipeline extends from Galveston Area Block 350 to an interconnect to another pipeline in Galveston Area Block 391, 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, 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 contractural 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 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. 12 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In November 1999, the Company and WBI Holdings formed New Avoca, 25% owned and managed by the Company and 75% owned by WBI Holdings, 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, but was extended to August 22, 2000. New Avoca and Northeastern have agreed to further extend this payment until October 1, 2000, in consideration for the extension the contingent payment of $450,000 was increased to $460,000. The contingent payment will be excused 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 $440,000 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 $940,000, 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 will accept brine that is produced during construction of the gas storage caverns. New Avoca believes it can achieve an acceptable rate that the brine disposal wells accept brine. New Avoca will conduct a test on the brine disposal wells as soon as 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 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 project. RESULTS OF OPERATIONS The Company reported net income for the three months ended March 31, 2000, (current period) of $52,838, compared to net income of $924,833 reported for the first quarter 1999 (previous period). The difference in net income is primarily due to the gain on sale of a one-sixth (1/6) interest in the Blue Dolphin Pipeline System of $2,052,920 during the first quarter of 1999. REVENUE FROM PIPELINE OPERATIONS. Current period revenues from pipeline operations increased by $34,991 or 8% to $470,846 from $435,855 in the previous period. The increase is due to the acquisition of the Black Marlin Pipeline System in March 1999, offset by lower transportation volumes in the Blue Dolphin Pipeline System. 13 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) REVENUE FROM OIL AND GAS SALES. Revenues from oil and gas sales and operating fees for the current period increased by $962,154 to $1,035,709 from $73,555 in the previous period due to the acquisition of American Resources in December 1999, providing revenues of approximately $925,317 in the current period. PIPELINE OPERATING EXPENSES. Pipeline operating expenses in the current period increased by $31,500 or 15% to $240,993 from $209,493 in the previous period. The increase is due primarily to additional costs associated with the operation of the Black Marlin pipeline acquired in March 1999. LEASE OPERATING EXPENSES. Lease operating expenses in the current period decreased by $12,916 to $283,588 from $296,504 in the previous period. Previous period lease operating expenses included repairs and maintenance costs associated with the Buccaneer Field of $129,616, partially offset by current period lease operating expenses associated with the American Resources oil and gas properties acquired in December 1999 of $141,693, and $24,993 of reduced Buccaneer Field expenses in the current period. DEPLETION, DEPRECIATION AND AMORTIZATION ("DD&A"). Depletion, depreciation and amortization expense for the current period increased by $355,163, or 351%, to $456,270 from $101,107 in the prior period. The increase was due to the acquisitions of the Black Marlin System in March 1999, resulting in current period depreciation of approximately $49,934, and American Resources in December 1999, resulting in current period depletion of approximately $327,908. GAIN ON SALE OF ASSETS. In March 1999, the Company reported a gain on the sale of a one-sixth interest in the Blue Dolphin System of $2,052,920. 14 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 sell 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. Presently, the Company does not have an outstanding balance under the Loan Agreement. Accordingly, a change in the interest rate under the Loan Agreement would have no effect on 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 opetion 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. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 8, 2000, American Resources and American Resources' 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 VOTE OF SECURITY HOLDERS None. 15 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A) Exhibit 27.1 B) Form 8-K - On February 15, 2000, the Company filed a current report of Form 8-KA dated February 15, 2000, 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). Form 8-K - On February 16, 2000, the Company filed a current report of Form 8-KA dated February 16, 2000, 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). 16 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: SEPTEMBER 6, 2000 /s/ MICHAEL J. JACOBSON Michael J. Jacobson President and Chief Executive Officer /s/ G. BRIAN LLOYD G. Brian Lloyd Vice President, Treasurer 17