Kiewit Royalty Trust (KIRY) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-10810

KIEWIT ROYALTY TRUST

(Exact name of Registrant as specified in its charter)

Nebraska	47-6131402
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

Trust Division
U.S. Bank National Association
1700 Farnam Street
Omaha, Nebraska 68102
(Address of Principal Executive Offices and Zip Code)

(402) 348-6000
(Registrant’s Telephone Number, Including Area Code)

     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. Yesþ Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer “ and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer:o	Accelerated filer:o	Non-accelerated filer:o	Smaller reporting company:þ
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

KIEWIT ROYALTY TRUST

FORM 10-Q

For the Quarter Ended September 30, 2008

INDEX

	Page
Part I. Financial Information		1
Item 1. Financial Statements		1
Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations		4
Item 4T. Controls and Procedures		5
Part II. Other Information		6
Item 1. Legal Proceedings		6
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		6
Item 3. Defaults Upon Senior Securities		6
Item 4. Submission of Matters to a Vote of Security Holders		6
Item 5. Other Information		6
Item 6. Exhibits		6
Signature		7
Certification of Trust Officer Pursuant to Rule 13a-14
Certification of Trust Officer Pursuant to 18 U.S.C. Section 1350
Certification of Trust Officer
Section 906 Certification of Trust Officer

Forward-Looking Statements

     This Form 10-Q, including specifically the section entitled “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations,” includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Form 10-Q are forward-looking statements. Such statements include, without limitation, certain statements regarding the Trust’s financial position, industry conditions and other matters contained in this Form 10-Q. Although the Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct. There are many factors, none of which is within the Trustee’s control, that may cause such expectations not to be realized, including, among other things, factors identified in the Trust’s most recent Form 10-K affecting coal prices (including, without limitation, the domestic and foreign supply of coal and the price of foreign imports, market demand, the price and availability of alternative fuels and the effect of governmental regulations) and recoverability of “Tons Under Lease” and “Current Economic Tons,” general economic conditions, and other changes in the domestic and international coal markets.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

KIEWIT ROYALTY TRUST

STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS

	September 30,			December 31,
	2008			2007
Assets
Cash and cash equivalents	$	2,475,985		$	106,185
Royalty and overriding royalty interests in coal leases		167,817			167,817
Less accumulated amortization		(144,927	)		(144,927	)
Net royalty and overriding royalty interest in coal leases		22,890			22,890
Total assets	$	2,498,875		$	129,075
Liabilities and Trust Corpus
Distributions payable to unit holders	$	2,475,985		$	106,185
Trust corpus: 12,633,432 units of beneficial interest authorized and outstanding		22,890			22,890
Total liabilities and trust corpus	$	2,498,875		$	129,075

The accompanying notes are an integral part of the financial statements.

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KIEWIT ROYALTY TRUST

STATEMENTS OF DISTRIBUTABLE INCOME
(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Royalty income	$	2,485,993		$	2,306,235		$	3,365,637		$	3,450,119
Interest income		7,887			19,568			12,455			30,821
Trust expense		(17,895	)		(30,736	)		(93,367	)		(86,460	)
Distributable income	$	2,475,985		$	2,295,067		$	3,284,725		$	3,394,480
Distributable income per unit	$	0.1959867		$	0.1816662		$	0.2600026		$	0.2686902

STATEMENTS OF CHANGES IN TRUST CORPUS
(unaudited)

	Nine Months Ended
	September 30,
	2008			2007
Trust corpus as of January 1	$	22,890		$	22,890
Distributable income		3,284,725			3,394,480
Distributions to unit holders		(3,284,725	)		(3,394,480	)
Trust corpus as of September 30	$	22,890		$	22,890

The accompanying notes are an integral part of the financial statements.

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KIEWIT ROYALTY TRUST
NOTES TO FINANCIAL STATEMENTS
as of September 30, 2008 and December 31, 2007

Basis of Presentation

     The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and do not necessarily include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the Trustee’s opinion, all adjustments necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes included in the Trust’s annual report on Form 10-K for the year ended December 31, 2007.

Summary of Significant Accounting Policies

     (a) Basis of Accounting:

     The accompanying unaudited financial statements have been prepared on the following basis:

(1)	Royalty income and interest income are recognized in the month in which amounts are received by the Trust.
(2)	Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period.
(3)	Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.
(4)	Net royalty and overriding royalty interests that are producing properties are amortized using the unit-of-production method. This amortization is shown as a reduction of Trust corpus.
(5)	Distributions to Unit Holders are recognized when declared by the Trustee.
(6)	Production withholding taxes withheld from unit holder distributions and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from royalty income in the statement of distributable income.

     The financial statements of the Trust differ from financial statements prepared in conformity with U.S. generally accepted accounting principles because of the following:

• Royalty income and interest income are recognized in the month received rather than in the month of production.

• Expenses are not accrued.

• Amortization of the net royalty and overriding royalty interests is shown as a reduction to Trust corpus and not as a charge to operating results.

• Reserves may be established for contingencies that would not be recorded under U.S. generally accepted accounting principles.

     While these statements differ from financial statements prepared in accordance with U.S. generally accepted accounting principles, the cash basis of reporting revenues is considered to be the most meaningful because Quarterly Distributions to Unit Holders are based on net cash receipts.

     (b) Cash and Cash Equivalents:

     The Trust considers all highly liquid financial instruments with original maturities of three months or less when purchased to be cash equivalents.

     (c) Use of Estimates:

     The preparation of financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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Item 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations.

a. Material Changes in Financial Condition.

     Kiewit Royalty Trust (the “Trust”) is a royalty trust with royalty and overriding royalty interests in certain coal leases. The Trust was formed for the purposes of (1) administering the income received from such coal leases and (2) distributing such income (together with interest earned thereon less payment of or provision for obligations) to the holders of the Units of Beneficial Interest.

b. Material Changes in Results of Operations.

     During the three- and nine-month period ended September 30, 2008, the Trust received a total of $2,485,993 and $3,365,637, respectively, of royalty and overriding royalty payments. The following schedule reflects the royalty and overriding royalty payments received by the Trust in respect of leases at the following mines:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Decker	$	725,254	$	867,214	$	1,604,898	$	1,961,098
Spring Creek		1,760,739		1,439,021		1,760,739		1,489,021
Royalty income	$	2,485,993	$	2,306,235	$	3,365,637	$	3,450,119

i. Decker Mine.

     Royalty and overriding royalty payments received by the Trust from the Decker Mine decreased to $1,604,898 during the first nine months of 2008, as compared to $1,961,098 received during the same period in 2007. Similarly, royalty and overriding royalty payments received during the three months ended September 30, 2008, decreased to $725,254 from the $867,214 received in the three months ended September 30, 2007. In each case, the reduction in royalty and overriding royalty payments was the net result of changes in the relative amounts of coal mined under leases bearing different overriding royalty rates per ton, which were a normal result of the execution of a mining plan encompassing several coal leases bearing different royalty rates. Seasonal fluctuations occur in the relative amounts of coal mined under the leases with a majority of the royalty payments being received during the first and third calendar quarters of the year. In addition, beginning in 2008 the state of Montana imposed a royalty tax on all royalties from the Decker coal mine. Taxes withheld for the nine months ended September 30, 2008 were $101,910, which reduced royalty income that would have otherwise been received by the Trust.

ii. Spring Creek Mine.

     Royalty and overriding royalty payments received by the Trust from the Spring Creek Mine increased to $1,760,739 during the first nine months of 2008 as compared to $1,489,021 received during the same period in 2007. All 2008 royalty and overriding royalty payments were received in the quarter ended September 30, 2008 and substantially all 2007 royalty and overriding royalty payments were received in the quarter ended September 30, 2007 due to seasonal fluctuations that occur in the relative amounts of coal mined under the leases that result in a majority of the royalty payments from this mine being received during the second half of the calendar year. The increase in royalty and overriding royalty payments for the three and nine month periods ended September 30, 2008 over the payments received in the same periods in 2007 were due to changes in the relative amounts of coal mined under leases bearing different royalty rates.

iii. Trust Expenses.

     Trust expenses were $93,367 in the first nine months of 2008, as compared to $86,460 for the same period in 2007. For the third quarter of 2008, trust expenses were $17,895 as compared to $30,736 for the same period in 2007. This change is related to the change in audit, accounting, legal and administrative fees.

c. Critical Accounting Policies and Estimates.

     The Trust’s financial statements reflect the selection and application of accounting policies which require the Trust to make significant estimates and assumptions. The following are some of the more critical judgment areas in the application of accounting policies that currently affect the Trust’s financial condition and results of operations:

• Royalty income and interest income are recognized in the month in which amounts are received by the Trust.

• Trust expenses, consisting principally of routine general and administrative costs, include payments made during the accounting period.

• Reserves for liabilities that are contingent or uncertain in amount may also be established if considered necessary.

• Net royalty and overriding royalty interests that are producing properties are amortized using the unit-of-production method. This amortization is shown as a reduction of Trust corpus.

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• Distributions to Unit Holders are recognized when declared by the Trustee.

• Production withholding taxes withheld from unit holder distributions and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from royalty income in the statement of distributable income.

     The financial statements of the Trust differ from financial statements prepared in conformity with U.S. generally accepted accounting principles because of the following:

• Royalty income and interest income are recognized in the month received rather than in the month of production.

• Expenses are not accrued.

• Amortization of the net royalty and overriding royalty interests is shown as a reduction to Trust corpus and not as a charge to operating results.

• Reserves may be established for contingencies that would not be recorded under U.S. generally accepted accounting principles.

Item 4T. Controls and Procedures.

     a. As of the end of the period covered by this Form 10-Q, the officer of the Trustee conducted an evaluation of the Trust’s disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, the officer of the Trustee concluded that the Trust’s disclosure controls and procedures are not effective in timely alerting him of any material information relating to the Trust that is required to be disclosed by the Trust in the reports it files or submits under the Securities Exchange Act of 1934, as a material weakness in internal control was identified as described below.

     b. There was no significant change in the Trust’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during the Trust’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting. During the second fiscal quarter of 2008, the Trustee identified certain internal control weaknesses relating to cash receipt cutoff for the Trust, and determined that such controls were not effective. The Trustee is in the process of modifying these internal controls and administrative functions used by it to identify errors.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     There are no material legal proceedings to which the Trust is a party or to which any of its property is subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None.

Item 3. Defaults Upon Senior Securities.

     None.

Item 4. Submission of Matters to a Vote of Security Holders.

     None.

Item 5. Other Information.

     None.

Item 6. Exhibits.

4.1	Kiewit Royalty Trust Indenture dated May 17, 1982, as amended June 9, 1982 and June 23, 1982 (filed as Exhibit 4.1 to the Trust’s Form 10-K filed with the Securities and Exchange Commission on March 28, 2003, and incorporated herein by reference).
4.2	Order dated September 23, 1994, of the County Court of Douglas County, Nebraska (filed as Exhibit 4.2 to the Trust’s Form 10-K filed with the Securities and Exchange Commission on March 28, 2003, and incorporated herein by reference).
31*	Certification of Trust Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
32*	Certification of Trust Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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SIGNATURE

     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.

KIEWIT ROYALTY TRUST
By:	U.S. Bank National Association in its
	capacity as Trustee and not in its
	individual capacity or otherwise
/s/ Luke H. Paladino
Luke H. Paladino
Trust Officer

Dated: November 17, 2008

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