-----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, VeBgDS6ENR7ZFkuxbD3sn2oiYlxsJSGsKmhWQFEAPg09tHHeRq2mu5argHe8Hx52 fFUEh+dKp9zRoaSpMYGfRQ== 0000890566-99-001414.txt : 19991115 0000890566-99-001414.hdr.sgml : 19991115 ACCESSION NUMBER: 0000890566-99-001414 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99747596 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: SEPTEMBER 30, 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. 4,924,480 SHARES $.01 PAR VALUE OUTSTANDING AT NOVEMBER 1, 1999 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
SEPTEMBER 30, DECEMBER 31, 1999 1998 ---------------- ---------------- (Unaudited) ASSETS Current Assets: Cash ........................................................... $ 615,858 $ 593,509 Trade accounts receivable ...................................... 968,983 771,268 Crude oil inventory ............................................ 19,871 5,248 Prepaid expenses and other assets .............................. 138,399 152,340 ------------ ------------ Total Current Assets .................. 1,743,111 1,522,365 Property and Equipment, at cost, using full cost method for oil and gas properties ............................. 27,014,992 24,980,278 Accumulated depletion, depreciation and amortization .............................................. (17,188,032) (17,172,057) ------------ ------------ 9,826,960 7,808,221 Land .............................................................. 930,500 1,133,333 Acquisition and development costs - Petroport ..................... 1,700,554 1,576,391 Other Assets ...................................................... 3,255,140 3,141,500 ------------ ------------ Total Assets ...................... $ 17,456,265 $ 15,181,810 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses .......................... $ 1,368,796 $ 997,852 Current portion of accrued abandonment costs ................... -- 206,000 Current portion of long term-debt .............................. 260,000 200,000 Accrued income taxes payable ................................... 90,306 13,970 ------------ ------------ Total Current Liabilities ............... 1,719,102 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 ...................................................... 49,245 45,046 Additional Paid-in Capital ........................................ 19,707,468 17,700,833 Accumulated (Deficit) since January 1, 1990 ....................... (6,070,150) (6,151,085) ------------ ------------ Total Liabilities and Stockholders' Equity ................ $ 17,456,265 $ 15,181,810 ============ ============
3 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 ----------- ----------- Revenue from operations: Pipeline operations ........................................... $ 513,942 $ 666,612 Oil and gas sales and operating fees .......................... 117,551 191,389 ----------- ----------- REVENUE FROM OPERATIONS ....................... 631,493 858,001 Cost of operations: Pipeline operating expenses ................................... 269,472 197,969 Lease operating expenses ...................................... 157,803 141,631 Repair and maintenance costs .................................. 191,383 35,559 Depletion, depreciation, and amortization ..................... 108,986 100,506 ----------- ----------- COST OF OPERATIONS ............................ 727,644 475,665 ----------- ----------- INCOME (LOSS) FROM OPERATIONS ................. (96,151) 382,336 Other income (expense): General and administrative .................................... (497,116) (367,590) Interest expense .............................................. (64,580) (53,475) Interest and other income ..................................... 15,008 23,763 ----------- ----------- LOSS BEFORE INCOME TAXES ..................... (642,839) (14,966) (Provision) benefit for income taxes .............................. 213,806 (1,050) ----------- ----------- Net loss .......................................................... $ (429,033) $ (16,016) =========== =========== Loss per share-basic ............................................. $ (0.09) $ -- =========== =========== Loss per share-diluted ............................................ $ (0.09) $ -- =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic ......................................................... 4,921,028 4,491,847 =========== =========== Diluted ....................................................... 5,019,727 4,503,619 =========== ===========
4 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 ----------- ----------- Revenue from operations: Pipeline operations ...................................................... $ 1,393,880 $ 2,204,808 Oil and gas sales and operating fees ..................................... 426,294 591,283 ----------- ----------- REVENUE FROM OPERATIONS .................................. 1,820,174 2,796,091 Cost of operations: Pipeline operating expenses .............................................. 708,840 592,532 Lease operating expenses ................................................. 453,470 437,591 Repair and maintenance costs ............................................. 473,080 192,971 Depletion, depreciation, and amortization ................................ 355,946 297,761 ----------- ----------- COST OF OPERATIONS ....................................... 1,991,336 1,520,855 ----------- ----------- INCOME (LOSS) FROM OPERATIONS ............................ (171,162) 1,275,236 Other income (expense): General and administrative ............................................... (1,486,258) (1,089,590) Interest expense ......................................................... (181,834) (159,589) Gain on sale of assets ................................................... 2,052,920 -- Interest and other income ................................................ 15,106 90,386 ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE .......... 228,772 116,443 Provision for income taxes ................................................... (67,503) (62,955) ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...................... 161,269 53,488 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 ................................................................... $ 80,935 $ 53,488 =========== =========== Earnings per common share-basic: Income before accounting change .......................................... $ 0.03 $ 0.01 Cumulative effect of a change in accounting principle .................... (0.01) ----------- ----------- Net income ............................................................... $ 0.02 $ 0.01 =========== =========== Earnings per common share-diluted: Income before accounting change .......................................... $ 0.03 $ 0.01 Cumulative effect of a change in accounting principle .................... (0.01) ----------- ----------- Net income ............................................................... $ 0.02 $ 0.01 =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic .................................................................... 4,694,895 4,491,847 =========== =========== Diluted .................................................................. 4,793,594 4,503,619 =========== ===========
5 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income ...................................................................... $ 80,935 $ 53,488 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization ............................. 345,408 297,761 Deferred income taxes ................................................ 35,644 11,055 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 ......................... (197,715) (159,817) Decrease (Increase) in crude oil inventory and prepaid expenses . (682) (41,884) Increase in accounts payable and other current liabilities ...... 411,636 13,739 ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .................................. (1,255,880) 174,342 INVESTING ACTIVITIES Oil and gas prospect generation costs ........................................... (1,426,529) (659,503) Reimbursement of oil and gas prospect generation costs .......................... 794,393 -- Purchases of property and equipment ............................................. (5,564,068) (317,179) Net proceeds from sale of assets ................................................ 5,570,287 -- Funds escrowed for abandonment costs ............................................ -- (357,632) Reduction of escrowed abandonment fund .......................................... -- 593,830 Development costs - Petroport ................................................... (245,881) (701,441) Exploration and development costs ............................................... -- (92,618) Decrease (Increase) in other assets ............................................. 89,193 (11,359) ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES .................................. (782,605) (1,545,902) FINANCING ACTIVITIES Proceeds from borrowings ........................................................ 200,000 -- Payment on borrowings ........................................................... (150,000) -- Net proceeds from the sale of stock ............................................. 1,960,000 (4,192) Other ........................................................................... 50,834 -- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................................. 2,060,834 (4,192) INCREASE (DECREASE) IN CASH ............................. 22,349 (1,375,752) CASH AT BEGINNING OF YEAR ........................................................... 593,509 1,756,294 ----------- ----------- CASH AT SEPTEMBER 30 ................................................................ $ 615,858 $ 380,542 =========== =========== SUPPLEMENTARY CASH FLOW INFORMATION Interest paid ................................................................... $ 178,872 $ 212,497 =========== =========== Income taxes paid (refunded) .................................................... $ 12,620 $ (109,639) =========== ===========
6 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED SEPTEMBER 30, 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 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 ------------- ------------------ ----------------- Nine Months ended September 30, 1999 Basic earnings per share ..................... $ 80,935 4,694,895 $0.02 Effect of dilutive stock options .................................. -- 98,699 -- --------- --------- ----- Diluted earnings per share ................... $ 80,935 4,793,594 $0.02 ========= ========= ===== Nine Months ended September 30, 1998 Basic earnings per share ..................... $ 53,488 4,491,847 $0.01 Effect of dilutive stock options .................................. -- 11,772 -- --------- --------- ----- Diluted earnings per share ................... $ 53,488 4,503,619 $0.01 ========= ========= =====
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, 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. 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 $41,480. 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 nine months ended September 30, 1999 and 1998, the three months ended September 30, 1999 and 1998, and at September 30, 1999 and December 31, 1998 is as follows: 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) ----------------- ---------------- ---------------- -------------------- Nine months ended September 30, 1999: Oil and gas exploration and production ..................... $ 430,794 4,500 (699,509) 71,684 Pipeline operations .................. 1,404,817 10,937 (213,273) 272,065 Other ................................ (15,437) (744,637) 12,197 ----------- ----------- ----------- Consolidated ......................... 1,820,174 -- (1,657,419) 355,946 Other income ......................... 1,886,191 ----------- Income before income taxes ........... 228,772 Nine months ended September 30, 1998: Oil and gas exploration and production ..................... $ 597,283 6,000 (147,439) 144,021 Pipeline operations .................. 2,227,549 22,741 1,445,522 133,811 Other ................................ (28,741) (1,112,437) 19,929 ----------- ----------- ----------- Consolidated ......................... 2,796,091 -- 185,646 297,761 Other expense ........................ (69,203) ----------- Income before income taxes ........... 116,443 Three months ended September 30, 1999: Oil and gas exploration and production ..................... $ 120,551 3,000 (312,228) 14,836 Pipeline operations .................. 516,042 2,100 (50,052) 84,754 Other ................................ (5,100) (245,913) 9,396 ----------- ----------- ----------- Consolidated ......................... 631,493 -- (608,193) 108,986 Other expense ........................ (34,646) ----------- Loss before income taxes ............. (642,839) Three months ended September 30, 1998: Oil and gas exploration and production ..................... $ 193,389 2,000 2,919 48,462 Pipeline operations .................. 674,136 7,521 387,570 45,170 Other ................................ (9,524) (375,744) 6,874 ----------- ----------- ----------- Consolidated ......................... 858,001 -- 14,745 100,506 Other expense ........................ (29,711) ----------- Loss before income taxes ............. (14,966) IDENTIFIABLE IDENTIFIABLE ASSETS ASSETS ----------------- ----------------- Nine months ended September 30, 1999: Year ended December 31, 1998 Oil and gas exploration Oil and gas exploration and production ..................... $ 6,943,269 and production $ 5,253,370 Pipeline operations .................. 6,845,635 Pipeline operations 2,453,396 Other ................................ 3,667,361 Other 7,475,044 ----------- ------------ Consolidated ......................... 17,456,265 Consolidated 15,181,810
9 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (Continued) 1. Consolidated income from operations includes $1,486,258 and $1,089,590 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $17,674 and $22,846 for the nine months ended September 30, 1999 and 1998, respectively. Consolidated income from operations includes $497,116 and $367,590 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $6,107 and $8,154 for the quarter ended September 30, 1999 and 1998, respectively. 2. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $15,905 and $26,340 for the nine months ended September 30, 1999 and 1998, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $13,746 and $22,541 for the nine months ended September 30, 1999 and 1998, respectively. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $2,559 and $6,585 for the quarter ended September 30, 1999 and 1998, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $4,935 and $7,602 for the quarter ended September 30, 1999 and 1998, respectively. ASSET ACQUISITIONS/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 $2,052,920 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 nine months ended September 30, 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: 10 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (Continued) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1999 1998 ---------- ----------- Revenues .................................. $ 2034,424 $ 3,760,216 Net earnings .............................. $ 132,719 $ 286,516 Basic and diluted earnings per share ...... $ 0.03 $ 0.06 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. On August 3, 1999, the Company signed a definitive agreement to acquire a 75% ownership interest in American Resources Offshore, Inc. ("ARO") through subscription of new shares, and certain of ARO's senior indebtedness. At the time of closing, ARO's assets will be limited to its Gulf of Mexico assets. The purchase price for the ARO shares will be approximately $4.7 million, subject to certain upward or downward adjustments based on ARO's liabilities at closing and its revenues and expenses from its Gulf of Mexico properties from January 1, 1999 through closing of the transaction. The Company is currently pursuing a sale of its common stock, $.01 par value per share, through a private placement, to provide the funds for the acquisition of the ARO shares. Concurrent with the transaction with the Company, ARO will sell an 80% interest in its Gulf of Mexico assets to Fidelity Oil Holdings, Inc. The proceeds received by ARO will be used to retire debts. Closing is expected to occur in December 1999 and is subject to a number of conditions, including the approval of ARO's stockholders and the simultaneous closing of the transaction between ARO and Fidelity Oil Holdings, Inc. ARO's assets will then consist of an average 6% non-operated working interest in eight producing properties and one proved undeveloped property along with leasehold interests in 34 additional offshore tracts all located in the Gulf of Mexico offshore Louisiana and Texas. The properties have estimated proven reserves of approximately 7.2 billion cubic feet of natural gas equivalent. The Company believes significant exploratory drilling opportunities also exist. 11 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 and sold an interest in its pipeline systems to fund the acquisition (see Asset Acquisitions/Divestiture in Footnotes to Condensed Consolidated Financial Statements in Item 1. of this report). The Company's ownership interest in the Blue Dolphin Pipeline system, the Black Marlin Pipeline system and the Omega Pipeline is now 50%. On August 3, 1999, the Company signed a definitive agreement to acquire a 75% ownership interest in American Resources Offshore, Inc. ("ARO") through subscription of new shares, and certain of ARO's senior indebtedness (see Asset Acquisitions/Divestitures in Footnotes to Condensed Consolidated Financial Statements in Item 1.of this report). FINANCIAL CONDITION At September 30, 1999, the Company's working capital (current assets less current liabilities) was $24,009, representing a decrease of $80,534 as compared with working capital of $104,543 at December 31, 1998. The Company is currently pursing a sale of its common stock, $.01 par value per share, through a private placement. Proceeds to be received are anticipated to be approximately $6,000,000. The proceeds will be used to fund the ARO acquisition, and for general corporate purposes. In June 1999, the Company received $1,960,000 through a successful private placement of 392,000 shares of its' common stock, $.01 par value per share, at $ 5.00 per share. The proceeds were used to replenish working capital previously used for planned investments in longer term, high potential programs and general working capital. 12 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 is currently being redetermined. 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. The Company intends to maintain the credit facility beyond the current maturity date and has requested a multi-year renewal and extension of the facility. At September 30, 1999 the outstanding balance under the credit facility was $260,000. 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. The Company also has outstanding $2,050,600 principal amount of 10 1/4% promissory notes due December 31, 2000. Pipeline revenues have significantly decreased in the first nine months of 1999 vs. the first nine months of 1998, due primarily to a 51% decrease in gas throughput and the sale of a 1/6 interest in the Blue Dolphin Pipeline system. The decrease has been offset in part by the acquisition of a 50% interest in the Black Marlin Pipeline system. A new producer/shipper on the Black Marlin Pipeline system commenced production operations in late June 1999. As a result, gas throughput increased by 35% in third quarter 1999 compared to second quarter 1999. Additionally, a new discovery in the vicinity of the Black Marlin Pipeline is expected to commence production operations in late fourth quarter 1999 or early first quarter 2000. Drilling activity around the Black Marlin Pipeline remains active. In June 1999, the Company removed an inactive satellite platform in the Buccaneer Field at a cost of approximately $355,000. The U.S. Minerals Management Service has waived the Company's annual abandonment escrow fund payment of $250,000 that was due in June 1999. 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 has placed a 50% interest in the program, whereby in exchange for certain participation rights, the participant funds $100,000 per month for the costs associated with the program. The remaining program costs will be reimbursed to the Company as prospects are developed and leases acquired. In August 1999, the Company sold the available interest in a prospect to a third party. The associated lease acreage was acquired by the third party at the August 1999 Western Gulf of Mexico Federal lease sale. An available 50% interest in the remaining prospect inventory is for sale on an individual prospect basis. However, 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 was committed over a 5 year period that ended July 31, 1999 to acquire 3-D seismic data. The final commitment under this agreement, $450,000, was paid in July 1999. The Company recently announced that Equilon Enterprises, LLC (an alliance of two major oil companies, Shell and Texaco), has agreed to jointly continue development of the Petroport deep water port project with the Company. Development efforts are focusing on optimization of the facility design configuration, the 13 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) phasing-in of facility operations and determining the expected level of market support. It is expected that a decision to proceed with obtaining the requisite license and permits for the port facilities will be made later this year. Although the commercial evaluation, based upon the original facility design concept was favorable, alternative design configurations and the phasing-in of operations, which would result in significantly reduced capital costs, an accelerated start-up date and a more flexible, responsive, market driven, system fee structure have been developed and are being reviewed. 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 nine months ended September 30, 1999, ("current period") of $80,935, compared to net income of $53,488 reported for the nine months ended September 30, 1998 ("previous period"). For the quarter ended September 30, 1999 ("current quarter") the Company reported a net loss of $429,032 compared to a net loss of $16,016 for the quarter ended September 30, 1998 ("previous quarter"). REVENUES: NINE MONTHS 1999 VS. 1998. Revenues for the current period decreased by $975,917 or 35% to $1,820,174 compared to revenues of $2,796,091 reported for the previous period. Current period revenues from pipeline operations decreased by $810,928 or 37% from the previous period. The decrease was primarily due to a 51% decline in gas volumes transported on the Blue Dolphin Pipeline system resulting in a $1,056,192 reduction in revenues and the sale of a 1/6 interest in the Blue Dolphin Pipeline system which resulted in reduced revenues of $219,143. These reductions in revenues were offset in part by the acquisition of the Black Marlin Pipeline system, resulting in an increase in revenues of $464,407. Current period revenues from oil and gas sales, and operating fees decreased by $164,989 from those of the previous period. Oil and gas sales, declined $123,941 due primarily to normal production declines and downtime associated with repairs to the Buccaneer Field production facilities. Operating fees declined $41,048 due primarily to normal production declines. THIRD QUARTER 1999 VS. 1998. Revenues for the current quarter decreased by $226,508 or 26% to $631,493 compared to revenues of $858,001 reported for the previous quarter. Current quarter revenues from pipeline operations decreased by $152,670 or 23% from the previous quarter. The decrease was primarily due to a 53% decline in gas volumes transported on the Blue Dolphin Pipeline system resulting in decreased revenues of $314,588 and the sale of a 1/6 interest in the Blue Dolphin 14 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Pipeline system which resulted in reduced revenues of $88,019. These reductions in revenues were offset in part by the acquisition of the Black Marlin Pipeline system, resulting in an increase in revenues of $249,947. Current quarter revenues from oil and gas sales, and operating fees decreased by $73,838 from those of the previous quarter. Oil and gas sales decreased $69,697, due primarily to downtime associated with repairs to the Buccaneer Field production facilities. COSTS AND EXPENSES: NINE MONTHS 1999 VS. 1998. Current period pipeline operating expenses increased $116,308, or 20% from those of the previous period. The increase is due to additional operating costs associated with the acquisition of the Black Marlin Pipeline system of $234,652. The increase in costs was partially offset by the sale of a 1/6 interest in the Blue Dolphin Pipeline system resulting in reduced costs of $148,185 and increased Blue Dolphin Pipeline system operating costs of $29,841. Repair and maintenance costs for the current period increased by $280,109 due primarily to repairs to the Buccaneer Field production platforms and offshore facilities incurred in the current period. General and administrative expenses for the current period increased $396,668, or 36% from the previous period principally due to an increase in staff costs and consulting fees associated with asset acquisitions and prospective asset acquisitions. Depletion, depreciation and amortization expense for the current period increased $58,185, or 20% from the previous period primarily due to the increase in depreciation of $149,083 resulting from the acquisition of the Black Marlin Pipeline system. The increase was offset by a decrease in depreciation of $25,027 resulting from the sale of a 1/6 interest in the Blue Dolphin Pipeline system and a decrease in depletion of $75,871 due to a reduction in the net book value of the Company's oil and gas properties resulting from the non-cash impairment recorded at December 31, 1998. THIRD QUARTER 1999 VS. 1998. Current quarter pipeline operating expenses increased $71,503 or 36% from those of the previous period. The increase is due primarily to additional operating costs associated with the acquisition of the Black Marlin Pipeline system of $114,008, offset in part by the sale of a one sixth interest in the Blue Dolphin Pipeline system resulting in reduced costs of $49,512. Repair and maintenance costs for the current quarter increased by $155,824 due primarily to repairs to the Buccaneer Field production platforms and offshore facilities incurred in the current quarter. General and administrative expenses for the current quarter increased $129,526, or 35% from the previous quarter principally due to an increase in staff costs and consulting fees associated with asset acquisitions and prospective asset acquisitions. 15 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. 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 has completed its Year 2000 plan related to these IT systems, including any necessary remedial action. 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 16 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 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 September 30, 1999, the Company has incurred minimal costs in connection with Year 2000 compliance 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. 17 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A) Exhibits - None B) Form 8-K: None 18 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: November 12, 1999 /s/ MICHAEL J. JACOBSON ------------------------------------------ Michael J. Jacobson President and Chief Executive Officer /s/ G. BRIAN LLOYD ------------------------------------------ G. Brian Lloyd Vice President, Treasurer 19 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INCORPORATED HEREIN BY REFERENCE. 9-MOS DEC-31-1999 SEP-30-1999 615,858 0 968,983 0 19,871 1,743,111 27,945,492 17,188,032 17,456,265 1,719,102 2,050,600 0 0 49,245 13,637,318 17,456,265 191,948 1,820,174 768,443 1,991,336 0 0 181,834 148,438 67,503 80,935 0 0 0 80,935 0.02 0.02
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