UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: March 31, 2003
[ ] 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 small business issuer 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
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES [ ] 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.
6,635,150 shares of the registrants' common stock, par value $.01 per share,
were outstanding at May 12, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
March 31, 2003
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" or "Blue Dolphin") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") 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 U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
The accompanying condensed consolidated financial statements of the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
March 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 4,182,202
Accounts receivable 509,914
Prepaid expenses and other assets 252,254
------------
TOTAL CURRENT ASSETS 4,944,370
Property and Equipment at cost:
Oil and Gas properties, including $107,571
of unproved leasehold cost (full-cost method) 21,920,318
Pipelines 4,717,697
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 278,402
------------
29,440,820
Less: Accumulated depletion, depreciation and amortization 23,428,772
------------
6,012,048
Deferred federal income tax 244,444
Investment in New Avoca 610,714
Other assets 15,415
------------
TOTAL ASSETS $ 11,826,991
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 396,839
Asset retirement obligations, current portion 2,475,528
Accrued expenses and other liabilities 85,702
------------
TOTAL CURRENT LIABILITIES
2,958,069
Note payable 750,000
Asset retirement obligations, net of current portion 2,730,350
Common Stock, ($.01 par value, 10,000,000 shares authorized,
6,635,150 shares issued and outstanding) 66,352
Additional Paid-in Capital 26,258,535
Accumulated Deficit (20,936,315)
------------
5,388,572
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 11,826,991
============
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended March 31,
2003 2002
----------- -----------
Revenue from operations:
Pipeline operations $ 246,668 $ 329,297
Oil and gas sales 74,306 578,269
----------- -----------
320,974 907,566
----------- -----------
Cost of operations:
Pipeline operating expenses 193,394 144,716
Lease operating expenses 12,060 217,647
Depletion, depreciation, amortization and abandonment 89,048 289,567
Impairment of assets -- 339,984
General and administrative 482,706 584,615
Accretion expense 21,729 --
----------- -----------
798,937 1,576,529
----------- -----------
LOSS FROM OPERATIONS (477,963) (668,963)
Other income (expense):
Interest and other expense (12,692) (15,792)
Interest and other income 134,600 14,590
Bad debt expense -- (197,500)
----------- -----------
LOSS BEFORE MINORITY INTEREST AND INCOME TAXES (356,055) (867,665)
Minority interest -- (55,746)
Income taxes -- --
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (356,055) (923,411)
Cumulative effect of a change in accounting principle
for asset retirement obligations (40,455) --
----------- -----------
Net loss $ (396,510) $ (923,411)
=========== ===========
Loss per common share before cumulative effect of a change in
accounting principle - basic and diluted $ (0.05) $ (0.15)
=========== ===========
Cumulative effect of a change in accounting principle - basic and diluted $ (0.01) $ --
=========== ===========
Loss per common share - basic and diluted $ (0.06) $ (0.15)
=========== ===========
Weighted average number of common shares outstanding - basic and diluted 6,611,982 6,213,324
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months
Ended March 31,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net loss $ (396,510) $ (923,411)
Adjustments to reconcile net loss to net cash used in operating activities:
Depletion, depreciation, amortization, abandonment 89,048 289,567
Change in accounting principle 40,455 --
Accretion of asset retirement obligations 21,729 --
Minority interest -- 55,746
Impairment of assets -- 339,984
Bad debt expense -- 197,500
Common stock issued for services 19,722 12,002
Changes in operating assets and liabilities:
Accounts receivable 5,378 421
Prepaid expenses and other assets 41,938 (114,286)
Abandonment costs incurred (64,472) --
Trade accounts payable and accrued expenses 50,044 (160,823)
----------- -----------
NET CASH USED IN
OPERATING ACTIVITIES (192,668) (303,300)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (5,721) (103,979)
Exploration and development costs -- (331,313)
Purchase of minority interest from subsidiary -- (254,786)
Development costs - New Avoca (25,085) (4,302)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (30,806) (694,380)
----------- -----------
FINANCING ACTIVITIES -- --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (223,474) (997,680)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,405,676 3,343,560
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,182,202 2,345,880
=========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment financed with debt $ -- $ 750,000
=========== ===========
See accompanying notes to the condensed consolidated financial statements
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2003
1. Liquidity
At March 31, 2003, the Company's working capital was approximately $2.0 million.
During the third and fourth quarters of 2002, the Company received approximately
$5.0 million from the sale of proved oil and gas properties from two separate
transactions. As a result, the Company believes that it has sufficient cash to
meet its working capital and capital expenditure requirements through March
2004. Historically, the Company has relied on the proceeds from the sale of
assets and capital raised from the issuance of debt and equity securities to
individual investors and related parties to sustain its operations.
2. Related Party Transactions
The Company currently owns a 12.8% common stock ownership interest in Drillmar,
Inc. ("Drillmar"). Ivar Siem, Chairman of the Company, and Harris A. Kaffie and
James M. Trimble, Directors of the Company, are owners of 30.3%, 30.6% and 6.6%,
respectively, of Drillmar's common stock. Messrs. Siem and Kaffie are both
Directors, and Mr. Siem is Chairman and President of Drillmar.
Effective April 1, 2003, the Company entered into a sublease agreement expiring
December 31, 2006 for certain of its office space with Tri-Union Development
Corporation. The Company's 2003 receipts from this sublease will be
approximately $55,600, and thereafter will be approximately $78,500 annually.
Mr. James M. Trimble, Director of the Company, is the Chairman and Chief
Executive Officer of Tri-Union.
3. Contingencies
During the operations of removing the Buccaneer Field platform complexes in
2001, discussions were initiated with the Texas Parks and Wildlife Department
("TPW") in an effort to leave certain of the underwater portions of the platform
complexes in place as artificial reefs. On January 3, 2003, the Company and TPW
executed deeds of donation for both of the Company's platform complexes in the
Buccaneer Field, whereby the Company will leave certain of the underwater
portions of the platforms in place as artificial reefs and donate them to the
TPW, along with cash of $390,000, of which $350,000 represents half of the site
clearance work that will be eliminated (which the TPW required) and $40,000
represents the cost of buoys to mark the reef sites. The Company requested and
has received an extension from the United States Minerals Management Service
("MMS") until August 31, 2003 to complete the abandonment/reefing operations.
The work to complete the abandonment/reefing is expected to begin in late second
quarter or early third quarter 2003. The Company believes that its provision for
the Buccaneer Field abandonment costs of approximately $3.7 million at March 31,
2003 is adequate.
The Company is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2003
4. Change in Accounting Principle
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. If the obligation is settled for
other than the carrying amount of the liability, the Company will recognize a
gain or loss on settlement.
SFAS 143 amended Statement of Financial Accounting Standards No. 19, Financial
Accounting and Reporting by Oil and Gas Producing Companies ("SFAS 19") to
require that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Under the provisions of SFAS 143, asset retirement
obligations are capitalized as part of the carrying value of the long-lived
asset. Under the provisions of SFAS 19, asset retirement obligations were
recognized using a cost-accumulation approach. Prior to the adoption of SFAS
143, the Company recorded asset retirement obligations through the
unit-of-production method for oil and gas properties, and the straight line
method for pipelines and related facilities.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $1.0 million increase in the carrying values of
pipelines, (ii) a $ .4 million decrease in accumulated depreciation, depletion,
and amortization of property, plant and equipment, and (iii) a $1.4 million
increase in non-current abandonment liabilities. The net impact of items (i)
through (iii) was to record an expense of $40 thousand, net of tax, as a
cumulative effect adjustment of a change in accounting principle in the
Company's consolidated statement of operations upon adoption on January 1, 2003.
The following pro forma data summarizes the Company's net loss and net loss per
share as if the Company had adopted the provisions of SFAS 143 on January 1,
2002, including an associated pro forma asset retirement obligation on that date
of $1.0 million:
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2003
Three months ended
March 31,
----------------------------
2003 2002
------------ ------------
(in thousands, except
per share amounts)
Net loss, as reported ...................... $ (397) $ (923)
Pro forma adjustments to reflect retroactive
adoption of SFAS 143 ....................... 41 4
------------ ------------
Pro forma net loss ......................... $ (356) $ (919)
============ ============
Net loss per share:
Basic - as reported ..................... $ (.06) $ (.15)
============ ============
Basic - pro forma ....................... $ (.05) $ (.15)
============ ============
Diluted - as reported ................... $ (.06) $ (.15)
============ ============
Diluted- pro forma ...................... $ (.05) $ (.15)
============ ============
5. Asset Retirement Obligations
The Company has asset retirement obligations associated with its Buccaneer Field
offshore platforms and the future abandonment of pipelines and related
facilities. The following table summarizes the Company's asset retirement
obligation transactions recorded in accordance with the provisions of SFAS 143
during the three months ended March 31, 2003 and in accordance with the
provisions of SFAS 19 during the three months ended March 31, 2002.
Three months ended
March 31,
--------------------------
2003 2002
(in thousands)
Beginning asset retirement obligation $ 3,800 $ 4,600
Cumulative effect adjustment ........ 401 --
Liabilities incurred during period .. 1,047 --
Liabilities settled during period ... (64) --
Accretion expense ................... 22 --
----------- -----------
Ending asset retirement obligation ... $ 5,206 $ 4,600
=========== ===========
6. Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 requires the
presentation of basic earnings per share ("EPS") which excludes dilution and is
computed by dividing net income (loss) available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
SFAS 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.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2003
The employee stock options at March 31, 2003 and 2002, were not included in the
computation of diluted earnings per share because the effect of their assumed
exercise and conversion would have an antidilutive effect on the computation of
diluted loss per share on the loss before the cumulative effect of a change in
accounting principle.
7. 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. There were no intersegment revenues during the periods presented.
Information concerning these segments for the quarters ended March 31, 2003 and
2002, and at March 31, 2003 are as follows:
Depletion,
Depreciation,
Operating Amortization,
Income Abandonment, and
Revenues (3) (Loss)(1) Impairment (2)
---------------- ---------------- ----------------
Quarter ended March 31, 2003:
Oil and gas exploration and production $ 74,306 (12,864) --
Pipeline operations 246,668 (301,772) 83,977
Other -- (163,327) 5,071
---------------- ---------------- ----------------
Consolidated 320,974 (477,963) 89,048
Other income, net ---------------- 121,908 ----------------
----------------
Loss before minority interest and income taxes (356,055)
Quarter ended March 31, 2002:
Oil and gas exploration and production $ 578,269 (44,601) 232,433
Pipeline operations 329,297 34,408 51,778
Other -- (658,770) 345,340
---------------- ---------------- ----------------
Consolidated 907,566 (668,963) 629,551
Other income, net ---------------- (198,702) ----------------
----------------
Loss before minority interest and income taxes (867,665)
March 31,
2003
-----------
Identifiable assets:
Oil and gas exploration and production $ 636,496
Pipeline operations 6,372,193
Other 4,818,302
-----------
Consolidated $11,826,991
===========
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2003
(1) Consolidated income (loss) from operations includes $158,256
and $313,431 in unallocated general and administrative
expenses, and unallocated depletion, depreciation and
amortization of $5,071 and $5,356 for the quarters ended March
31, 2003 and 2002, respectively.
(2) The Company recorded an impairment expense of $339,984 for the
quarter ended March 31, 2002, of its investment in Drillmar.
8. Stock Based Compensation
The Company accounts for stock-based compensation granted under its long-term
incentive plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Stock-based compensation expenses associated with
option grants were not recognized in the net loss of the Company in the three
months ended March 31, 2003 and 2002, as all options granted had exercise prices
equal to the market value of the underlying common stock on the dates of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to stock-based employee compensation:
Three months ended
March 31,
--------------------------
2003 2002
----------- -----------
(in thousands, except
per share amounts)
Net loss, as reported .............................. $ (397) $ (923)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects -- 123
----------- -----------
Pro forma net loss ................................. $ (397) $ (1,046)
=========== ===========
Net loss per share:
Basic - as reported ............................. $ (.06) $ (.15)
=========== ===========
Basic - pro forma ............................... $ (.06) $ (.17)
=========== ===========
Diluted - as reported ........................... $ (.06) $ (.15)
=========== ===========
Diluted - pro forma ............................. $ (.06) $ (.17)
=========== ===========
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
MARCH 31, 2003
9. Recently Issued Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, Consolidation
of Variable Interest Entities. This interpretation provides guidance on the
identification of, and financial reporting for, variable interest entities.
Variable interest entities are entities that lack the characteristics of a
controlling financial interest or lack sufficient equity to finance its
activities without additional subordinated financial support. FIN 46 requires a
company to consolidate a variable interest entity if that company is obligated
to absorb the majority of the entity's expected losses or entitled to receive
the majority of the entity's residual returns, or both. FIN 46 also requires
disclosures about variable interest entities that a company is not required to
consolidate but in which it has a significant variable interest. FIN 46 is
applicable immediately to variable interest entities created after January 31,
2003. For all variable interest entities created prior to February 1, 2003, FIN
46 is applicable to periods beginning after June 15, 2003. The Company is in the
process of assessing the impact that FIN 46 will have on its consolidated
financial statements.
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward Looking Statements. Certain of the statements included in this quarterly
report on Form 10-QSB, including those regarding future financial performance or
results or that are not historical facts, are "forward-looking" statements as
that term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of 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 and uncertainties that
may cause actual results and outcomes to differ materially from those indicated
in the forward-looking statements. Some of the important factors, risks and
uncertainties that could cause actual results to vary from the forward-looking
statements include:
o the risks associated with exploration;
o gas and oil price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures;
o the level of utilization of the Company's pipelines;
o availability and cost of capital;
o actions or inactions of third party operators for properties
where the Company has an interest;
o regulatory developments; and
o general economic conditions.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors" in the Company's Form 10-KSB for the fiscal year ended
December 31, 2002. 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 duty to update these forward-looking statements. Readers are urged
to carefully review and consider the various disclosures made by the Company
which attempt to advise interested parties of the additional factors which may
affect the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company's future cash flows are subject to a number of variables, including
receipt of revenues from leases in which the Company holds reversionary
interests, utilization of its pipeline systems and commodity prices among
others. The Company believes that it has sufficient liquidity at March 31, 2003
to meet its obligations and operating needs through the twelve month period
ending March 31, 2004. However, there can be no assurance that operations and
other capital resources will provide cash in sufficient amounts to maintain
planned levels of expenditures. The net cash provided by or used in operating,
investing and financing activities is summarized for the periods indicated below
(amounts in thousands):
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
Net cash used in:
Operating activities $ (192) $ (303)
Investing activities (31) (695)
Financing activities -- --
------------ ------------
Net decrease in cash $ (223) $ (998)
============ ============
During 2002, the Company sold substantially all of its interests in its oil and
gas properties for approximately $5.0 million. The properties sold generated all
of the Company's oil and gas sales revenues in 2002. As a result of the sale of
the Company's proved oil and gas properties, the amount of future oil and gas
sales revenues, lease operating expenses, depletion and capital expenditures
associated with oil and gas production activities are expected to materially
decrease and any subsequent changes will be dependent upon the success of the
Company's exploratory properties, reversionary working interests and future
acquisitions of oil and gas properties.
The Company owns an 8.9% reversionary working interest in High Island Area Block
A-7, in the Gulf of Mexico, and will begin to receive revenues from its
reversionary interest after "payout" occurs. Payout occurs after all of the
other working interest owners have recovered their costs and expenses associated
with developing the field from sales of gas and oil production from the field.
Based on payout statements provided by the field operator, the Company believes
that payout occurred at the end of April 2003, thus the Company expects to begin
receiving oil and gas sales revenues and lease operating expense from this field
in the quarter ending June 30, 2003.
Historically, the Company has relied on the proceeds from the sale of assets and
capital raised from the issuance of debt and equity securities to individual
investors and related parties to sustain its operations. At March 31, 2003, the
Company's working capital was approximately $2.0 million. During the third and
fourth quarters of 2002, the Company received approximately $5.0 million from
the sale of substantially all of its proved oil and gas properties. In addition
to using the sales proceeds to satisfy its working capital needs, the Company
may also use the sales proceeds to finance future asset acquisitions, which may
include other oil and gas properties. However, there can be no assurance that
the Company will be able to acquire and develop additional economically
recoverable oil and gas reserves.
The following table summarizes certain of the Company's contractual obligations
and other commercial commitments at March 31, 2003 (amounts in thousands).
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Payments Due by Period
Contractual Less than After
Obligations Total 1 year 2-3 years 4-5 years 5 years
----------- ----------- ----------- ----------- ----------- -----------
Long-Term Debt $ 803 -- -- 803 --
Operating Leases 458 136 237 85
Abandonment - Costs 2,700 1,440 1,260 -- --
----------- ----------- ----------- ----------- -----------
Total Contractual
Obligations $ 3,961 1,576 1,497 888 --
=========== =========== =========== =========== ===========
Amount of Commitment Expiration Per Period
Other Commercial Less than After
Commitments Total 1 year 2-3 years 4-5 years 5 years
----------- ----------- ----------- ----------- ----------- -----------
Abandonment - Costs $ 2,506 1,036 -- -- 1,470
----------- ----------- ----------- ----------- -----------
Total Commercial
Obligations $ 2,506 1,036 -- -- 1,470
=========== =========== =========== =========== ===========
The following table summarizes the Company's financial position for the
periods indicated (amounts in thousands):
March 31, December 31,
2003 2002
--------------------- ---------------------
Amount % Amount %
--------- --------- --------- ---------
Working Capital $ 1,986 22 $ 2,243 29
Property and equipment, net 6,012 68 4,687 60
Other noncurrent assets 871 10 845 11
--------- --------- --------- ---------
Total $ 8,869 100 $ 7,775 100
========= ========= ========= =========
Long-term Liabilities $ 3,480 39 $ 2,010 26
Stockholders' equity 5,389 61 5,765 74
--------- --------- --------- ---------
Total $ 8,869 100 $ 7,775 100
========= ========= ========= =========
The change in the Company's financial position from December 31, 2002
to March 31, 2003, was primarily due to the adoption of SFAS No. 143 (see Note
4. Change in Accounting Principle, in Part I, Item 1.)
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
In November 2000, the Company elected to abandon the Buccaneer Field due to
adverse developments in the field. In August 2001, the Company reached an
agreement with Tetra Applied Technologies, Inc. ("Tetra") to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. Pursuant to
the agreement, Tetra and the Company agreed to extended payment terms, whereby
the Company will pay 20% upon completion of the reefing operations and 5% per
month for twelve months, with the remaining balance due in the thirteenth month.
To provide security for the extended payment terms, the Company provided Tetra
with a first lien on the 50% interest it then owned in the Blue Dolphin Pipeline
System. Operations to remove the platforms commenced in August 2001 and were
suspended in December 2001, while the Company continued discussions with and was
awaiting a decision from the Texas Parks and Wildlife Department ("TPW") to
leave the underwater portion of the platforms in place as artificial reefs.
Approval by the TPW was granted and Deeds of Donation executed by TPW and the
Company in January 2003. While the scope of work with Tetra has changed, due to
reefing rather than complete removal as originally contemplated, the contract
price and payment terms remain unchanged. The Company requested and has received
an extension from the Minerals Management Service until August 31, 2003 to
complete operations needed to convert the platform complexes into artificial
reefs. Tetra is expected to resume its operations during late second or early
third quarter 2003. The Company is also obligated to pay $390,000 to TPW, of
which $350,000 represents half of the site clearance work that will be
eliminated (which the TPW required) and $40,000 represents the cost of buoys to
mark the reef sites. The Company believes that its provision for the Buccaneer
Field abandonment costs, of approximately $3.7 million at March 31, 2003, is
adequate.
In February 2002, the Company acquired an additional 1/3 interest in the Blue
Dolphin Pipeline System and the inactive Omega Pipeline from MCNIC. Pursuant to
the terms of the purchase and sales agreement, Blue Dolphin Pipeline issued
MCNIC a $750,000 promissory note due December 31, 2006, with required monthly
payments to be made out of 90% of the net revenues of the interest acquired. The
note bears interest at the rate of 6% per annum and is secured by the interest
acquired. Additionally, contingent payments of up to $750,000 will be made, if
the promissory note is retired before its maturity date, payable annually after
the promissory note is retired until December 31, 2006, out of 50% of the net
revenues from the interest acquired. The maturity date, December 31, 2006, will
be extended by one additional year, up to a maximum of two years, for years in
which non-recurring, extraordinary expenditures, attributable to the interest
acquired, exceeds $200,000, in the aggregate, during any year. As of March 31,
2003, the amount owed MCNIC is $750,000 plus accrued interest of approximately
$53,000.
15
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 a net loss for the three months ended March 31, 2003,
("current period") of $396,510, compared to a net loss of $923,411 reported for
the three months ended March 31, 2002 ("previous period").
Revenues:
Current period revenues from pipeline operations decreased by $82,629 or 25%
from the previous period to $246,668. The decrease is primarily due to a 36%
decrease in throughput on the Blue Dolphin Pipeline System in the current
period, partially offset by a 205% increase in throughput on the GA 350 system.
Current period revenues from oil and gas sales decreased by $503,963, from those
of the previous period to 74,306. The decrease was due to the sale of the
Company's oil and gas properties in the second half of 2002. The properties sold
represented all of the Company's previous period oil and gas sales. Current
period oil and gas sales represent adjustments for periods prior to the sale of
the oil and gas properties.
Costs and Expenses:
Current period pipeline operating expense increased by $48,678 or 34% from the
previous period to $193,394. The increase was due to increased insurance costs
of approximately $57,000 and legal costs of approximately $21,000, offset in
part by lower repairs and maintenance and other expenses of approximately
$29,000.
Current period lease operating expense decreased by $205,587 from the previous
period to $12,060. The decrease was due to the sale of the Company's oil and gas
properties in the second half of 2002. The properties sold represented all of
the Company's previous period lease operating expenses. Current period lease
operating expenses represent adjustments for periods prior to the sale of the
oil and gas properties.
Current period depletion, depreciation and amortization decreased $200,519 from
the previous period to $89,048. In the previous period the Company recorded
depletion of approximately $230,000 associated with the oil and gas properties
sold in the second half of 2002, offset in part by increased pipeline
depreciation expense of approximately $30,000.
In the previous period, the Company elected to record a full impairment of its
investment in Drillmar of $339,984 and a full reserve for the accounts
receivable amount owed from Drillmar of $197,500 due to Drillmar's working
capital deficiency and delays in securing capital funding.
General and administrative expenses for the current period decreased $101,909
from the previous period to $482,706. The decrease is primarily due to a
reduction in personnel and related costs.
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
In the current period, the company recorded accretion expense of $21,729 as a
result of its adoption of SFAS No. 143, which reflects the increase in future
asset retirement obligations.
Interest and other income increased in the current period by $120,010 from the
previous period. The increase is due to consulting services provided by the
Company in the current period associated with the evaluation of oil and gas
properties of approximately $72,000, and the refund of prepaid costs associated
with the oil and gas properties sold effective October 2002 that were in excess
of actual costs incurred.
The Company recorded a cumulative effect adjustment at January 1, 2003 of a
change in accounting principle for asset retirement obligations of $40,455, as a
result of the Company adopting SFAS No. 143 (see Note 4. Change of Accounting
Principle in Part I, Item I).
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates as discussed below.
Commodity Price Risk- During the three months ended March 31, 2003, the Company
did not sell any natural gas, crude oil, and natural gas liquids. Accordingly,
during this period the Company did not have any exposure to fluctuations in
commodity prices. However, the Company expects to receive production
attributable to its interest in the High Island Area Block A-7 field, and it
expects to sell natural gas and crude oil from its interest beginning in the
second quarter 2003. Thus, the Company's financial results can be significantly
affected if commodity prices fluctuate widely in response to changing market
forces. The Company does not expect to use derivative products to manage
commodity price risk.
Interest Rate Risk- The Company currently has no short-term or long-term debt
with floating interest rates, and thus currently is not subject to risk of
interest rate changes.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Quarterly Report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Primary Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a -
14(c) and 15d - 14 (c) under the Securities Exchange Act of 1934). Based upon
the evaluation, the Chief Executive Officer and Primary Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits
99.1 Michael J. Jacobson Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 G. Brian Lloyd Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
B) Reports on Form 8-K
On March 27, 2003, the Company filed a current report on Form
8-K dated March 25 2003, reporting a non-binding letter of
intent to sell the assets of New Avoca Gas Storage, LLC to
Gotham Energy Partners, LLC. The item in such current report
was Item 5 (Other Events).
19
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, 2003 /s/ Michael J. Jacobson
--------------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
--------------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CERTIFICATION BY MICHAEL J. JACOBSON PURSUANT TO SECURITIES EXCHANGE ACT RULE
13a-14
I, Michael J. Jacobson, certify that:
I have reviewed this quarterly report on Form 10-QSB of Blue Dolphin Energy
Company (the "Registrant").
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
2. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
3. The Registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrants auditors and the audit committee of
Registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants ability to
record, process, summarize and report financial data and have
identified for the Registrants auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants internal
controls; and
6. The Registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: May 14, 2003
/s/ Michael J. Jacobson
-----------------------
Michael J. Jacobson
President and Chief Executive Officer
21
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CERTIFICATION BY G. BRIAN LLOYD PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14
I, G. Brian Lloyd, certify that:
I have reviewed this quarterly report on Form 10-QSB of Blue Dolphin Energy
Company (the "Registrant").
1. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
2. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
3. The Registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrants auditors and the audit committee of
Registrants board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants ability to
record, process, summarize and report financial data and have
identified for the Registrants auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants internal
controls; and
6. The Registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weakness.
Date: May 14, 2003
/s/ G. Brian Lloyd
------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)
22