UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended: JUNE 30, 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.
4,916,627 SHARES $.01 PAR VALUE OUTSTANDING AT AUGUST 4, 1999
<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
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash ........................................ $ 1,732,016 $ 593,509
Trade accounts receivable ................... 1,044,724 771,268
Crude oil inventory ......................... 20,338 5,248
Prepaid expenses ............................ 156,174 152,340
------------ ------------
Total Current Assets ....... 2,953,252 1,522,365
Property and Equipment, at cost, using full cost
method for oil and gas properties .......... 26,582,688 24,980,278
Accumulated depletion, depreciation
and amortization ........................... (17,089,584) (17,172,057)
------------ ------------
9,493,104 7,808,221
Land ........................................... 930,500 1,133,333
Acquisition and development costs - Petroport .. 1,629,628 1,576,391
Other Assets ................................... 2,982,247 3,141,500
------------ ------------
Total Assets ........... $ 17,988,731 $ 15,181,810
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ....... $ 1,370,050 $ 997,852
Current portion of accrued abandonment costs -- 206,000
Current portion of long term-debt ........... 410,000 200,000
Accrued income taxes payable ................ 60,184 13,970
------------ ------------
Total Current Liabilities .... 1,840,234 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 ................................... 49,166 45,046
Additional Paid-in Capital ..................... 19,681,929 17,700,833
Accumulated (Deficit) since January 1, 1990 .... (5,633,198) (6,151,085)
------------ ------------
Total Liabilities and
Stockholders' Equity ....... $ 17,988,731 $ 15,181,810
============ ============
3
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended June 30,
------------------------
1999 1998
----------- -----------
Revenue from operations:
Pipeline operations ............................. $ 444,082 $ 741,539
Oil and gas sales and operating fees ............ 160,156 198,512
----------- -----------
REVENUE FROM OPERATIONS ......... 604,238 940,051
Cost of operations:
Pipeline operating expenses ..................... 249,269 198,829
Lease operating expenses ........................ 137,669 152,142
Repair and maintenance costs .................... 123,797 62,862
Depletion, depreciation, and amortization ....... 145,853 99,903
----------- -----------
COST OF OPERATIONS .............. 656,588 513,736
----------- -----------
INCOME (LOSS) FROM OPERATIONS ... (52,350) 426,315
Other income (expense):
General and administrative ...................... (496,905) (358,210)
Interest expense ................................ (57,935) (54,399)
Interest and other income ....................... (36,637) 32,962
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (643,827) 46,668
(Provision) benefit for income taxes ................ 236,881 (22,005)
----------- -----------
Net income (loss) ................................... $ (406,946) $ 24,663
=========== ===========
Earnings (loss) per share-basic ............ $ (0.09) $ 0.01
=========== ===========
Earnings (loss) per share-diluted .......... $ (0.09) $ 0.01
=========== ===========
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic ........................................... 4,646,187 4,491,847
=========== ===========
Diluted ......................................... 4,705,986 4,501,226
=========== ===========
4
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue from operations:
Pipeline operations ......................................... $ 879,937 $ 1,538,195
Oil and gas sales and operating fees ........................ 308,743 399,893
----------- -----------
REVENUE FROM OPERATIONS ..................... 1,188,680 1,938,088
Cost of operations:
Pipeline operating expenses ................................. 439,368 394,563
Lease operating expenses .................................... 295,667 295,959
Repair and maintenance costs ................................ 281,697 157,412
Depletion, depreciation, and amortization ................... 246,960 197,254
----------- -----------
COST OF OPERATIONS .......................... 1,263,692 1,045,188
----------- -----------
INCOME (LOSS) FROM OPERATIONS ............... (75,012) 892,900
Other income (expense):
General and administrative .................................. (974,213) (722,000)
Interest expense ............................................ (117,253) (106,113)
Gain on sale of assets ...................................... 2,052,920 --
Interest and other income ................................... (6,911) 66,622
----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE 879,531 131,409
Provision for income taxes ...................................... (281,310) (61,905)
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN AN ACCOUNTING PRINCIPLE ........... 598,221 69,504
Cumulative effect at January 1, 1999 of a change in
accounting principle start up costs, net of income tax
benefit of $41,480 ............................................ (80,334) --
----------- -----------
Net income ...................................................... $ 517,887 $ 69,504
=========== ===========
Earnings per common share-basic
Income before accounting change ............................. $ 0.13 $ 0.02
Cumulative effect of a change in accounting principle ....... 0.02 --
----------- -----------
Net income .................................................. $ 0.11 $ 0.02
=========== ===========
Earnings per common share-diluted
Income before accounting change ............................. $ 0.13 $ 0.02
Cumulative effect of a change in accounting principle ....... 0.02 --
----------- -----------
Net income .................................................. $ 0.11 $ 0.02
=========== ===========
Weighted average number of common shares outstanding
and dilutive potential common shares:
Basic ....................................................... 4,582,428 4,491,847
=========== ===========
Diluted ..................................................... 4,642,227 4,505,787
=========== ===========
</TABLE>
5
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................... $ 517,887 $ 69,504
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization ...................... 246,960 197,254
Deferred income taxes ......................................... 380,216 19,306
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 .................. (273,456) (571,423)
(Increase) in crude oil inventory and prepaid expenses ... (18,924) (54,952)
Increase in accounts payable and other current liabilities 212,584 133,108
----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............... (865,839) (207,203)
INVESTING ACTIVITIES
Oil and gas prospect generation costs .................................... (686,308) (458,584)
Reimbursement of oil and gas prospect generation costs ................... 494,393 370,610
Purchases of property and equipment ...................................... (5,436,183) (48,481)
Net proceeds from sale of assets ......................................... 5,570,287 --
Funds escrowed for abandonment costs ..................................... -- (342,115)
Reduction of escrowed abandonment fund ................................... -- 593,830
Development costs - Petroport ............................................ (181,052) (448,723)
Exploration and development costs ........................................ -- (227,406)
Decrease in other assets ................................................. 57,993 --
----------- -----------
NET CASH (USED IN)
INVESTING ACTIVITIES ............................... (180,870) (560,869)
FINANCING ACTIVITIES
Net proceeds from borrowings ............................................. 200,000 --
Net proceeds from the sale of stock ...................................... 1,960,000 --
Other .................................................................... 25,216 --
----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES ............................... 2,185,216 --
INCREASE (DECREASE) IN CASH ....................... 1,138,507 (768,072)
CASH AT BEGINNING OF YEAR .................................................... 593,509 1,756,294
----------- -----------
CASH AT JUNE 30 .............................................................. $ 1,732,016 $ 988,222
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid ............................................................ $ 116,020 $ 108,137
=========== ===========
Income taxes paid (refunded) ............................................. $ 12,620 $ (109,639)
=========== ===========
</TABLE>
6
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 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
-------- --------------- ------
Six Months ended June 30, 1999
Basic earnings per share ............. $517,887 4,582,428 $ 0.11
Effect of dilutive stock
options .......................... -- 59,799 --
-------- --------------- ------
Diluted earnings per share ........... $517,887 4,642,227 $ 0.11
======== =============== ======
Six Months ended June 30, 1998
Basic earnings per share ............. $ 69,504 4,491,847 $ 0.02
Effect of dilutive stock
options .......................... -- 13,940 --
-------- --------------- ------
Diluted earnings per share ........... $ 69,504 4,505,787 $ 0.02
======== =============== ======
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. The Company
believes that adoption of this financial accounting standard will not have a
material effect on its financial condition or results of operations.
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that
costs of start-up activities be charged to expense as incurred and broadly
defines such costs. The Company has capitalized certain costs incurred in
connection with a new business segment, and SOP 98-5 required that such costs be
charged to results of operations upon its adoption. The Company adopted the
requirements of SOP 98-5 as of January 1, 1999 resulting in a cumulative effect
of a change in an accounting principle of $80,334, net of income tax benefit of
$41,480.
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 six months ended June 30, 1999 and 1998, and at June 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>
Six months ended June 30, 1999:
Oil and gas exploration
and production $ 311,743 3,000 (387,281) 53,314
Pipeline operations 888,774 8,837 (163,221) 175,469
Other (11,837) (498,724) 18,177
---------------- ---------------- -----------------
Consolidated 1,188,680 - (1,049,226) 246,960
Other income 1,928,757
----------------
Income before income taxes 879,531
Six months ended June 30, 1998:
Oil and gas exploration
and production $ 403,893 4,000 (213,202) 95,559
Pipeline operations 1,553,413 15,218 616,170 88,642
Other (19,218) (232,067) 13,053
---------------- ---------------- -----------------
Consolidated 1,938,088 - 170,901 197,254
Other expense (39,492)
----------------
Income before income taxes 131,409
Three months ended June 30, 1999:
Oil and gas exploration
and production $ 161,657 1,500 (213,698) 27,648
Pipeline operations 448,664 4,583 (323,022) 108,908
Other (6,083) (12,536) 9,297
---------------- ---------------- -----------------
Consolidated 604,238 - (549,256) 145,853
Other income (expense) (94,571)
----------------
Loss before income taxes (643,827)
Three months ended June 30, 1998:
Oil and gas exploration
and production $ 200,512 2,000 (150,100) 48,672
Pipeline operations 749,430 7,891 79,881 44,781
Other (9,891) 138,326 6,450
---------------- ---------------- -----------------
Consolidated 940,051 - 68,107 99,903
Other expense (21,439)
----------------
Income before income taxes 46,668
Identifiable Identifiable
assets assets
---------------- -----------------
Six months ended June 30, 1999: Year ended December 31, 1998
Oil and gas exploration Oil and gas exploration
and production $ 6,398,642 and production $ 5,253,370
Pipeline operations 6,423,314 Pipeline operations 2,453,396
Other 5,166,775 Other 7,475,004
---------------- -----------------
Consolidated 17,988,731 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 $58,192 and $57,171 in
unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $6,609 and $6,833 for the
six months ended June 30, 1999 and 1998, respectively.
Consolidated income from operations includes $37,973 and $26,801 in
unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $3,299 and $3,303 for the
quarter ended June 30, 1999 and 1998, respectively.
2. Pipeline depletion, depreciation and amortization includes a provision
for pipeline abandonment of $10,970 and $13,170 for the six months
ended June 30, 1999 and 1998, respectively. Oil and gas depletion,
depreciation and amortization includes a provision for abandonment
costs of platforms and wells of $11,187 and $14,939 for the six months
ended June 30, 1999 and 1998, respectively.
Pipeline depletion, depreciation and amortization includes a provision
for pipeline abandonment of $4,935 and $6,785 for the quarter ended
June 30, 1999 and 1998, respectively. Oil and gas depletion,
depreciation and amortization includes a provision for abandonment
costs of platforms and wells of $5,850 and $7,630 for the quarter ended
June 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 six months ended June 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)
Six Months
Ended June 30,
---------------------------
1999 1998
---------- ----------
Revenues ..................................... $1,510,038 $2,580,838
Net earnings ................................. $ 595,563 $2,277,776
Basic and diluted earnings per share ......... $ 0.13 $ 0.51
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. 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 the fourth quarter 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 June 30, 1999, the Company's working capital (current assets less current
liabilities) was $1,113,018, representing an increase of $1,008,475 as compared
with working capital of $104,543 at December 31, 1998.
As previously announced 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 will be used to replenish
working capital previously used for planned investments in longer term, high
potential programs and general working capital requirements.
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 and reducing amount are redetermined semi-annually. The
maturity date is January 14, 2000, when the then outstanding principal balance,
if any, is due and payable. At June 30, 1999 the outstanding balance under the
credit facility was $410,000. The facility is available for the acquisition of
oil and gas reserve based assets and other working capital needs. The Loan
Agreement includes certain restrictive covenants, including restrictions on the
payment of dividends on capital stock, and the maintenance of certain financial
coverage ratios. At June 30, 1999, the Company was in compliance with the
financial coverage ratios. The Company also has outstanding $2,050,600 principal
amount of 10 1/4% promissory notes due December 31, 2000.
Although pipeline revenues significantly decreased in first half 1999 vs. 1998,
due to a 48% decrease in gas throughput on the Blue Dolphin Pipeline system,
revenues on the recently acquired Black Marlin Pipeline system are expected to
increase. A new producer/shipper on the Black Marlin Pipeline system commenced
production operations in late June 1999. As a result, gas throughput increased
by greater than 50% in July 1999 compared to June 1999. Additionally, a new
discovery in the vicinity of the Black Marlin Pipeline has been recently
announced. The Company is aggressively competing to provide transportation
services.
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 its 1998/1999 program, whereby in exchange for
certain participation rights, the participant partially funds the costs
associated with the program. The remaining program costs will be reimbursed to
the Company as prospects are developed and leases acquired. The 50% available
interest in prospects 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 remaining
commitment under this agreement, $450,000, was paid in July 1999.
As previously reported, the Company is seeking partners to jointly continue
development of the Petroport deepwater port facility. 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 and an accelerated start-up date,
have been developed and are being reviewed with prospective partners and
potential system users. The Company believes it has selected and is in
discussions with prospective partners who can facilitate licensing and
construction, and enhance the over-all commercial viability of the project.
13
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 six months ended June 30, 1999,
("current period") of $517,887, compared to net income of $69,504 reported for
the six months ended June 30, 1998 ("previous period"). The increase is
primarily due to the gain on sale of a one-sixth interest in the Blue Dolphin
Pipeline system of $2,068,986 that took place during the first quarter of 1999.
For the quarter ended June 30, 1999 the Company reported a net loss of $406,946
compared to net income of $24,663 for the quarter ended June 30, 1998.
REVENUES:
SIX MONTHS 1999 VS. 1998. Revenues for the current period decreased by $749,408
or 39% to $1,188,680 compared to revenues of $1,938,088 reported for the
previous period.
Current period revenues from pipeline operations decreased by $658,258 or 43%
from the previous period primarily due to a 48% decrease in gas volumes
transported on the Blue Dolphin Pipeline system resulting in a $335,813
reduction in revenues. Revenues from the acquisition of the Black Marlin
Pipeline system were offset by revenues associated with the sale of a one sixth
interest in the Blue Dolphin Pipeline system.
Current period revenues from oil and gas sales, and operating fees decreased by
$91,150 from those of the previous period. Oil and gas sales, and operating fees
declined $54,244 and $36,906, respectively, due primarily to normal production
declines.
SECOND QUARTER 1999 VS. 1998. Revenues for the current quarter decreased by
$335,813 or 36% to $604,238 compared to revenues of $940,051 reported for the
previous quarter.
Current quarter revenues from pipeline operations decreased by $297,457 or 40%
from the previous quarter primarily due to a decrease in gas volumes transported
on the Blue Dolphin Pipeline System.
Current quarter revenues from oil and gas sales, and operating fees decreased by
$38,356 from those of the previous quarter due primarily to normal production
declines.
14
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
COSTS AND EXPENSES:
SIX MONTHS 1999 VS. 1998. Current period pipeline operating expenses increased
$44,805 or 11% from those of the previous period. The increase is due to
additional costs associated with the acquisition of the Black Marlin Pipeline
system of approximately $120,600, offset in part by the sale of a one sixth
interest in the Blue Dolphin Pipeline system of approximately $65,700.
Repair and maintenance costs for the current period increased by $124,285 due
primarily to repairs and modifications to the Buccaneer Field production
platforms and facilities incurred in the current period.
General and administrative expenses for the current period increased $252,213,
or 35% from the previous period principally due to an increase in staff costs
and consulting fees associated with prospective asset acquisitions.
SECOND QUARTER 1999 VS. 1998. Current quarter pipeline operating expenses
increased $50,440 or 25% from those of the previous period. The increase is due
primarily to additional costs associated with the acquisition of the Black
Marlin Pipeline system of approximately $88,555, offset in part by the sale of a
one sixth interest in the Blue Dolphin Pipeline system of approximately $53,985.
Repair and maintenance costs for the current quarter increased by $60,935 due
primarily to repairs and modifications to the Buccaneer Field production
platforms and facilities incurred in the current quarter.
General and administrative expenses for the current quarter increased $138,695,
or 39% from the previous quarter principally due to an increase in staff costs
and consulting fees associated with prospective asset acquisitions.
YEAR 2000 ISSUE
The Company has conducted a review of its computer equipment and software to
identify the systems that could be affected by the "Year 2000" issue. The Year
2000 issue results from computer programs being written using two digits (rather
than four) to define the applicable year. As a result, certain of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
Accordingly, the Company has initiated a plan to address the Year 2000 issues
associated with its operations and business. The plan includes several phases;
(i) assessment of all of the Company's systems and technology; (ii) testing of
existing systems and technology, both financial and operational; (iii)
modification to or replacement of non-compliant systems and technology; (iv)
communication with key business partners regarding Year 2000 issues; and (v)
contingency planning.
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,
15
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 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.
16
<PAGE>
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
As of June 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 :
On May 14, 1999, the Company filed a current report on Form 8-K/A
dated March 1, 1999 with respect to Blue Dolphin Energy Company's
acquisition of Black Marlin Pipeline Company. The items reported in
such current report were Item 2 (Acquisitions or Dispositions of
Assets) and Item 7 (Financial Statement and Exhibits).
On June 1, 1999, the Company filed a current report on Form 8-K dated
May 26, 1999 with respect to Blue Dolphin Energy Company's intent to
acquire a controlling interest in American Resources Offshore, Inc.
The item reported in such current report was Item 5 (Other Events).
On June 18, 1999, the Company filed a current report on Form 8-K dated
June 15, 1999 with respect to Blue Dolphin Energy Company's amendment
to extend the termination date of its intent to acquire a controlling
interest in American Resources Offshore, Inc. The item reported in
such current report was Item 5 (Other Events).
On July 19, 1999, the Company filed a current report on Form 8-K dated
July 16, 1999 with respect to Blue Dolphin Energy Company's further
amendment to extend the termination date of its intent to acquire a
controlling interest in American Resources Offshore, Inc. The item
reported in such current report was Item 5 (Other Events).
On August 9, 1999, the Company filed a current report on Form 8-K
dated August 3, 1999 with respect to Blue Dolphin Energy Company's
investment agreement to acquire a controlling interest in American
Resources Offshore, Inc. The items reported in such current report
were Item 5 (Other Events) and Item 7 (Financial Statement and
Exhibits).
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: August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,732,016
<SECURITIES> 0
<RECEIVABLES> 1,044,724
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<INVENTORY> 20,338
<CURRENT-ASSETS> 2,953,252
<PP&E> 27,513,188
<DEPRECIATION> 17,089,584
<TOTAL-ASSETS> 17,988,731
<CURRENT-LIABILITIES> 1,840,234
<BONDS> 2,050,600
0
0
<COMMON> 49,166
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<TOTAL-LIABILITY-AND-EQUITY> 17,988,731
<SALES> 158,229
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<CGS> 479,513
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<INCOME-PRETAX> (643,827)
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