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: MARCH 31, 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.
4,524,627 SHARES $.01 PAR VALUE OUTSTANDING AT APRIL 30, 1999
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART. I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy Company
and Subsidiaries (the "Company") included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission and, in the opinion of management, reflect all
adjustments necessary to present a fair statement of operations, financial
position and cash flows. The Company follows the full cost method of accounting
for oil and gas properties, wherein costs incurred in the acquisition,
exploration and development of oil and gas reserves are capitalized. The Company
believes that the disclosures are adequate and the information presented is not
misleading, although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash ........................................ $ 382,858 $ 593,509
Trade accounts receivable ................... 1,386,820 771,268
Crude oil inventory ......................... 20,032 5,248
Prepaid expenses ............................ 188,649 152,340
------------ ------------
Total Current Assets ....... 1,978,359 1,522,365
Property and Equipment, at cost, using full cost
method for oil and gas properties .......... 26,700,574 24,980,278
Accumulated depletion, depreciation
and amortization ........................... (16,979,967) (17,172,057)
------------ ------------
9,720,607 7,808,221
Land ........................................... 930,500 1,133,333
Acquisition and development costs - Petroport .. 1,536,664 1,576,391
Other Assets ................................... 2,725,269 3,141,500
------------ ------------
Total Assets ........... $ 16,891,399 $ 15,181,810
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses ....... $ 1,635,408 $ 906,160
Current portion of accrued abandonment costs 206,000 206,000
Current portion of long term debt ........... 410,000 200,000
Accrued interest payable .................... 54,764 105,662
------------ ------------
Total Current Liabilities ..... 2,306,172 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 ................................... 45,246 45,046
Additional Paid-in Capital ..................... 17,715,633 17,700,833
Accumulated Deficit since January 1, 1990 ...... (5,226,252) (6,151,085)
------------ ------------
Total Liabilities and
Stockholders' Equity ....... $ 16,891,399 $ 15,181,810
============ ============
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
----------- -----------
Revenue from operations:
Pipeline operations ................................................ $ 435,855 $ 796,655
Oil and gas sales and operating fees ............................... 148,587 201,382
----------- -----------
REVENUE FROM OPERATIONS ............................ 584,442 998,037
Cost of operations:
Pipeline operating expenses ........................................ 190,099 195,735
Lease operating expenses ........................................... 157,998 143,817
Repair and maintenance costs ....................................... 157,900 94,550
Depletion, depreciation, and amortization .......................... 101,107 97,351
----------- -----------
COST OF OPERATIONS ................................. 607,104 531,453
----------- -----------
INCOME (LOSS) FROM OPERATIONS ...................... (22,662) 466,584
Other income (expense):
General and administrative ......................................... (477,308) (363,790)
Interest expense ................................................... (59,318) (51,714)
Gain on sale of assets ............................................. 2,068,986 --
Interest and other income .......................................... 13,660 33,661
----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ...... 1,523,358 84,741
Provision for income taxes
(518,191) (39,900)
----------- -----------
Income before cumulative effect of a change in an accounting principle . 1,005,167 $ 44,841
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 ............................................................. $ 924,833 44,841
=========== ===========
Earnings per common share-basic
Income before accounting change .................................... $ 0.22 --
Cumulative effect of a change in accounting principle ............... (0.02) --
-----------
Net income .......................................................... $ 0.20 $ 0.01
=========== ===========
Earnings per common share-diluted
Income before accounting change .................................... $ 0.22 --
Cumulative effect of a change in accounting principle .............. (0.02) --
-----------
Net income ......................................................... $ 0.20 $ 0.01
=========== ===========
Weighted average number of common shares outstanding and
dilutive potential common shares:
Basic .............................................................. 4,517,960 4,491,847
=========== ===========
Diluted ............................................................ 4,544,895 4,510,348
=========== ===========
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
----------- -----------
OPERATING ACTIVITIES
Net income ........................................................ $ 924,833 $ 44,841
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion, depreciation and amortization ............... 101,107 97,351
Deferred income taxes .................................. 463,199 13,100
Change in accounting principle ......................... 121,814
Gain on sale of assets ................................. (2,068,986) --
Changes in operating assets and liabilities:
Increase in trade accounts receivable .............. (615,552) (143,972)
Increase in crude oil inventory and prepaid expenses (51,093) (39,813)
Increase in accounts payable and
other current liabilities .................. 840,910 22,693
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .................... (283,768) (5,800)
INVESTING ACTIVITIES
Oil and gas prospect generation costs ............................. (71,620) (42,493)
Exploration and development costs ................................. -- (228,156)
Purchases of property and equipment ............................... (5,436,183) (55,606)
Net proceeds from sale of assets .................................. 5,497,923 --
Increase in other assets .......................................... (46,967) --
Funds escrowed for abandonment costs .............................. -- (47,018)
Development costs - Petroport ..................................... (85,036) (53,348)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ..................... (141,883) (426,621)
FINANCING ACTIVITIES
Net proceeds from borrowings ...................................... 200,000 --
Other ............................................................. 15,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................. 215,000 --
----------- -----------
DECREASE IN CASH .......................................... (210,651) (432,421)
CASH AT BEGINNING OF YEAR ............................................. 593,509 1,756,294
----------- -----------
CASH AT MARCH 31, ..................................................... $ 382,858 $ 1,323,873
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid ..................................................... $ 110,216 $ 106,115
=========== ===========
Income taxes refunded ............................................. $ -- $ (142,729)
=========== ===========
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 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 requiring 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
--------- ------------- ------
Three Months ended March 31, 1999:
Basic earnings .................. $ 924,833 4,517,960 $ 0.20
Effect of dilutive stock options -- 26,935 --
========= ============= ======
Diluted earnings ................ $ 924,833 4,544,895 $ 0.20
========= ============= ======
Three Months ended March 31, 1998:
Basic earnings .................. $ 44,841 4,491,847 $ 0.01
Effect of dilutive stock options -- 18,501 --
========= ============= ======
Diluted earnings ................ $ 44,841 4,510,348 $ 0.01
========= ============= ======
6
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
$41,384.
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 three months ended March 31, 1999 and 1998, and at March
31, 1999 and December 31, 1998 is as follows:
7
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)
---------- ------------ ---------- ----------------
Three months ended March 31, 1999:
Oil and gas exploration
and production ................... $ 150,086 1,500 (173,583) 25,666
Pipeline operations ................ 440,110 4,254 159,801 66,561
Other .............................. (5,754) (486,188) 8,880
---------- ---------- ----------------
Consolidated ....................... 584,442 (499,970) 101,107
Other income (expense) ............. 2,023,328
----------
Loss before income taxes ........... 1,523,358
Three months ended March 31, 1998:
Oil and gas exploration
and production ................... $ 203,382 2,000 (63,102) 46,887
Pipeline operations ................ 803,981 7,326 536,289 43,861
Other .............................. (9,326) (370,393) 6,603
---------- ---------- ----------------
Consolidated ....................... 998,037 102,794 97,351
Other income (expense) ............. (18,053)
----------
Loss before income taxes ........... 84,741
IDENTIFIABLE
ASSETS
------------
Three months ended March 31, 1999:
Oil and gas exploration
and production ........................................... $ 6,565,924
Pipeline operations ........................................ 6,620,486
Other ...................................................... 4,015,084
------------
Consolidated ............................................... 17,201,494
Year ended December 31, 1998
Oil and gas exploration
and production ........................................... $ 5,253,370
Pipeline operations ........................................ 2,453,396
Other ...................................................... 7,475,004
------------
Consolidated ............................................... 15,181,810
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(CONTINUED)
1. Consolidated income from operations includes $20,219 and $30,370 in
unallocated general and administrative expenses, and unallocated
depletion, depreciation and amortization of $3,310 and $3,503 for the
three months ended March 31, 1999 and 1998, respectively.
2. Pipeline depletion, depreciation and amortization includes a provision
for pipeline abandonment of $6,035 and $6,385 for the three months
ended March 31, 1999 and 1998, respectively. Oil and gas depletion,
depreciation and amortization includes a provision for abandonment
costs of platforms and wells of $5,337 and $7,309 for the three months
ended March 31, 1999 and 1998, respectively.
ASSET ACQUISITION/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 $2,068,986 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 three months ended March
31, 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 (in thousands, except per
share amounts):
THREE MONTHS
ENDED MARCH 31,
-------------------------
1999 1998
---------- ----------
Revenues ........................................... $ 906 $ 1,319
Net earnings ....................................... $1,002,509 $2,191,503
Basic and diluted earnings per share ............... $ 0.22 $ 0.49
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.
9
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 (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.
These transactions help to diversify the Company's revenue stream, reduces its
concentration of credit risk and doubles the size of the market in which it
competes to provide gathering and transportation services. Future utilization of
the Company's pipelines and related facilities will depend upon the success of
drilling programs in the pipeline corridors, and attraction and retention of
producer / shippers to the systems.
FINANCIAL CONDITION
At March 31, 1999, the Company had a working capital deficit of $327,813
representing a decrease of $432,356 as compared with working capital of $104,543
at December 31, 1998.
The Company is currently attempting to replenish its working capital. During the
year ended December 31, 1998 and the three months ended March 31, 1999, working
capital has been used for planned investments in longer term, high potential
programs. A private placement offering of Company common stock and/or debentures
is currently being pursued. If successful the Company expects to receive
proceeds of $2,000,000 to $4,000,000.
10
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 March 31, 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 March 31, 1999, the Company was in compliance with the
financial coverage ratios.
As a result of a previous annual inspection by the Minerals Management Service,
the Company is required to remove an inactive satellite platform in the
Buccaneer Field. Removal of the satellite platform and site clearance is
expected to take place in 1999, at an estimated cost of approximately $206,000.
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
currently is seeking participants for available interests in its 1998/1999
program. Additionally, funding is being sought which would permit the Company to
directly participate as a working interest owner in and be designated operator
for prospects generated. 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 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 has been
committed over a 5 year period ending July 31, 1999 to acquire 3-D seismic data.
The remaining commitment under this agreement is $450,000.
Development of the Petroport deepwater terminal and offshore storage facility
continues to proceed as anticipated. The design, engineering, costing and
overall facility commercial evaluation have been completed, with favorable
results. The Company is now seeking partners to fund the next phase of facility
development - site evaluation and licensing of the facility by federal and state
authorities. This cost is estimated to be $10 million. Cost of the offshore
terminal and storage complex, the pipeline to shore, and the onshore support
facilities is estimated to be $527 million. The Company expects to submit the
license application and associated permit requests in 1999, with operations
planned to commence in the year 2002.
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.
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The Company reported net income for the three months ended March 31, 1999,
(current period) of $924,833, compared to net income of $44,841 reported for the
first quarter 1998 (previous period). The increase is primarily due to the gain
on sale of a one-sixth (1/6) interest in the Blue Dolphin Pipeline System of
$2,068,986.
REVENUES:
Revenues for the current period decreased by $413,595 or 41% to $584,442
compared to revenues of $998,037 reported for the previous period.
Current period revenues from pipeline operations decreased by $360,800 or 45%
from the previous period due to a 48% decrease in gas volumes transported.
Revenues from oil and gas sales and operating fees for the current period
decreased by $52,795 or 26% from those of the previous period due to normal
production declines.
COSTS AND EXPENSES:
Repair and maintenance costs for the current period increased by $63,350 due
primarily to repairs and modifications to the Buccaneer Field production
platforms and facilities of approximately $75,854.
General and administrative expenses for the current period increased $113,518,
or 31% from the previous period principally due to an increase in staff costs
primarily associated with an asset acquisition and consulting fees associated
with potential 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.
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 estimates that approximately 90% of its Year 2000 plan related to
these IT systems has been implemented and anticipates that the remainder of the
plan including any necessary remedial action, will be completed by July 30,
1999. 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
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 March 31, 1999, the Company has incurred minimal costs in connection with
Year 2000 compliance. The Company intends to complete its Year 2000 compliance
projects by July 1999 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.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's Proxy Statement dated April 12, 1999 is incorporated
herein by reference.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits - None
B) Form 8-K - The Company's Form 8-K filed March 15, 1999 is
incorporated herein by reference.
15
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: MAY 14, 1999 /S/ MICHAEL J. JACOBSON
Michael J. Jacobson
President and Chief Executive Officer
/S/ G. BRIAN LLOYD
G. Brian Lloyd
Vice President, Treasurer
16