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
<PAGE>
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
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
(Unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
3
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
4
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
5
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
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)
=========== ===========
</TABLE>
6
<PAGE>
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
COMMON SHARES
OUTSTANDING
AND DILUTIVE PER
NET POTENTIAL SHARE
INCOME COMMON SHARES AMOUNT
------------- ------------------ -----------------
<S> <C> <C> <C>
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
========= ========= =====
</TABLE>
7
<PAGE>
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
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(Continued)
<TABLE>
<CAPTION>
OPERATING DEPLETION,
INTERSEGMENT INCOME DEPRECIATION AND
REVENUES REVENUES (LOSS)(1) AMORTIZATION (2)
----------------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C>
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
</TABLE>
9
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLUE DOLPHIN
ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND
INCORPORATED HEREIN BY REFERENCE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 615,858
<SECURITIES> 0
<RECEIVABLES> 968,983
<ALLOWANCES> 0
<INVENTORY> 19,871
<CURRENT-ASSETS> 1,743,111
<PP&E> 27,945,492
<DEPRECIATION> 17,188,032
<TOTAL-ASSETS> 17,456,265
<CURRENT-LIABILITIES> 1,719,102
<BONDS> 2,050,600
0
0
<COMMON> 49,245
<OTHER-SE> 13,637,318
<TOTAL-LIABILITY-AND-EQUITY> 17,456,265
<SALES> 191,948
<TOTAL-REVENUES> 1,820,174
<CGS> 768,443
<TOTAL-COSTS> 1,991,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 181,834
<INCOME-PRETAX> 148,438
<INCOME-TAX> 67,503
<INCOME-CONTINUING> 80,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,935
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
