SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
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 1-10243
BP PRUDHOE BAY ROYALTY TRUST
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-6943724
- --------------------------------- ------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
The Bank of New York, 5 Penn Plaza, New York, NY 10001
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 896-7201
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 [ ]
As of May 15, 2002, 21,400,000 Units of Beneficial Interest were
outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BP PRUDHOE BAY ROYALTY TRUST
Statements of Assets, Liabilities and Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands, except unit data)
March 31,
2002 December 31,
(Unaudited) 2001
----------- ----
ASSETS
Royalty Interest, net (notes 1, 2 and 3) $ 17,575 18,077
Cash and Cash equivalents 1,020 1,009
--------- ---------
Total assets $ 18,595 19,086
========= =========
LIABILITIES AND TRUST CORPUS
Accrued expenses $ 605 522
Trust Corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) 17,991 18,564
--------- ---------
Total liabilities and Trust Corpus $ 18,595 19,086
========= =========
See accompanying notes to financial statements.
1
BP PRUDHOE BAY ROYALTY TRUST
Statements of Cash Earnings and Distributions
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands, except unit data)
(Unaudited)
Three months ended
March 31,
2002 2001
---- ----
Royalty revenues $ 4,841 19,932
Interest Income 7 19
Less: Trust administrative expenses (216) (158)
----------- -----------
Cash earnings $ 4,632 19,793
=========== ===========
Cash distributions $ 4,621 19,777
============ ===========
Cash distributions per unit $ 0.2159 0.9242
=========== ===========
Units outstanding 21,400,000 21,400,000
=========== ===========
See accompanying notes to financial statements.
2
BP PRUDHOE BAY ROYALTY TRUST
Statements of Changes in Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(In thousands)
(Unaudited)
Three months ended
March 31,
2002 2001
---- ----
Trust Corpus at beginning of period $ 18,564 20,669
Cash earnings 4,632 19,793
(Increase) in accrued expenses (82) (92)
Cash distributions (4,621) (19,777)
Amortization of Royalty Interest (502) (502)
----------- -----------
Trust Corpus at end of period $ 17,991 20,091
=========== ===========
See accompanying notes to financial statements.
3
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
March 31, 2002
(Unaudited)
(1) FORMATION OF THE TRUST AND ORGANIZATION
BP Prudhoe Bay Royalty Trust (the "Trust"), a grantor trust, was
created as a Delaware business trust pursuant to a Trust Agreement dated
February 28, 1989 among The Standard Oil Company ("Standard Oil"), BP
Exploration (Alaska) Inc. (the "Company"), The Bank of New York (The
"Trustee") and The Bank of New York (Delaware), as co-trustee. Standard Oil
and the Company are indirect wholly owned subsidiaries of the British
Petroleum Company p.l.c. ("BP").
On February 28, 1989, Standard Oil conveyed an overriding royalty
interest (the "Royalty Interest") to the Trust. The Trust was formed for
the sole purpose of owning and administering the Royalty Interest. The
Royalty Interest represents the right to receive, effective February 28,
1989, a per barrel royalty (the "Per Barrel Royalty") of 16.4246% on the
lesser of (a) the first 90,000 barrels of the average actual daily net
production of oil and condensate per quarter or (b) the average actual
daily net production of oil and condensate per quarter from the Company's
working interest in the Prudhoe Bay Field (the "Field") as of February 28,
1989, located on the North Slope of Alaska. Trust Unit holders will remain
subject at all times to the risk that production will be interrupted or
discontinued or fall, on average, below 90,000 barrels per day in any
quarter. BP has guaranteed the performance by the Company of its payment
obligations with respect to the Royalty Interest.
The trustees of the Trust are The Bank of New York, a New York
corporation authorized to do a banking business, and The Bank of New York
(Delaware), a Delaware banking corporation. The Bank of New York (Delaware)
serves as co-trustee in order to satisfy certain requirements of the
Delaware Trust Act. The Bank of New York alone is able to exercise the
rights and powers granted to the Trustee in the Trust Agreement.
The Per Barrel Royalty in effect for any day is equal to the price of
West Texas Intermediate crude oil (the "WTI Price") for that day less
scheduled Chargeable Costs (adjusted in certain situations for inflation)
and Production Taxes (based on statutory rates then in existence). For
years subsequent to 2006, Chargeable Costs will be reduced up to a maximum
amount of $1.20 per barrel in each year if additions to the Field's proved
reserves do not meet certain specific levels.
The Trust is passive, with the Trustee having only such powers as are
necessary for the collection and distribution of revenues, the payment of
Trust liabilities and the protection of the Royalty Interest. The Trustee,
subject to certain conditions, is obligated to establish cash reserves and
borrow funds to pay liabilities of the Trust when they become due. The
Trustee may sell Trust properties only (a) as authorized by a vote of the
Trust Unit holders, (b) when necessary to provide for the payment of
specific liabilities of the Trust then due (subject to certain conditions)
or (c) upon termination of the Trust. Each Trust Unit issued and
outstanding represents an equal undivided share of beneficial interest in
the Trust. Royalty payments are received by the Trust and distributed to
Trust Unit holders, net of Trust expenses, in the month succeeding the end
of each calendar quarter. The Trust will terminate upon the first to occur
of the following events:
4
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements (Continued)
(Unaudited)
(1), Continued
(a) On or prior to December 31, 2010: upon a vote of Trust Unit
holders of not less than 70% of the outstanding Trust Units.
(b) After December 31, 2010: (i) upon a vote of Trust Unit holders of
not less than 60% of the outstanding Trust Units, or (ii) at such
time the net revenues from the Royalty Interest for two
successive years commencing after 2010 are less than $1,000,000
per year (unless the net revenues during such period are
materially and adversely affected by certain events).
In order to ensure the Trust has the ability to pay future expenses,
the Trust established a cash reserve account which the Trustee believes is
sufficient to pay approximately one year's current and expected liabilities
and expenses of the Trust.
(2) BASIS OF ACCOUNTING
The financial statements of the Trust are prepared on a modified cash
basis and reflect the Trust's assets, liabilities, Corpus, earnings and
distributions as follows:
(a) Revenues are recorded when received (generally within 15 days of
the end of the preceding quarter) and distributions to Trust Unit
holders are recorded when paid.
(b) Trust expenses (which include accounting, engineering, legal, and
other professional fees, trustees' fees and out-of-pocket
expenses) are recorded on an accrual basis.
(c) Amortization of the Royalty Interest is calculated using the
units of production method. Such amortization is charged directly
to the Trust Corpus, and does not affect cash earnings. The daily
rate for amortization per net equivalent barrel of oil for the
three months ended March 31, 2002 and 2001 was $0.37. The Trust
evaluates impairment of the Royalty Interest by comparing the
undiscounted cash flows expected to be realized from the Royalty
Interest to the carrying value, pursuant to Statement of
Financial Accounting Standards No. 144, "Accounting for the
Impairment of Long-Lived Assets." If the expected future
undiscounted cash flows are less than the carrying value, the
Trust recognizes an impairment loss for the difference between
the carrying value and the estimated fair value of the Royalty
Interest.
While these statements differ from financial statements prepared in
accordance with generally accepted accounting principles, the cash basis of
reporting revenues and distributions is considered to be the most
meaningful because quarterly distributions to the Unit holders are based on
net cash receipts. The accompanying modified cash basis financial
statements contain all adjustments necessary to present fairly the assets,
liabilities and Trust corpus of the Trust as of March 31, 2002 and December
31, 2001 and the modified cash earnings and distributions and changes in
Trust corpus for the three month periods ended March 31, 2002 and 2001. The
adjustments are of a normal recurring nature and are, in the opinion of
management, necessary to fairly present the results of operations.
As of March 31, 2002 and December 31, 2001, cash equivalents consist
of US treasury bills with an initial term of less than three months. All
interest income earned on the treasury bills is reinvested.
5
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements (Continued)
(Prepared on a modified basis of cash receipts and disbursements)
(Unaudited)
(2), Continued
Estimates and assumptions are required to be made regarding assets,
liabilities and changes in Trust Corpus resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these
estimates could cause actual results to differ.
The financial statements should be read in conjunction with the
financial statements and related notes in the Trust's 2001 Annual Report on
Form 10-K. The cash earnings and distributions for the interim period
presented are not necessarily indicative of the results to be expected for
the full year.
(3) ROYALTY INTEREST
The Royalty Interest is comprised of the following at March 31, 2002
and December 31, 2001 (in thousands):
March 31, December 31,
2002 2001
---- ----
Royalty Interest $ 535,000 535,000
Less: Accumulated amortization (393,907) (343,405)
Impairment write-down (173,518) (173,518)
--------- ---------
$ 17,575 18,077
========= =========
(4) INCOME TAXES
The Trust files its federal tax return as a grantor trust subject to
the provisions of subpart E of Part I of Subchapter J of the Internal
Revenue Code of 1986, as amended, rather than as an association taxable as
a corporation. The Unit holders are treated as the owners of Trust income
and Corpus, and the entire taxable income of the Trust will be reported by
the Unit holders on their respective tax returns.
If the Trust were determined to be an association taxable as a
corporation, it would be treated as an entity taxable as a corporation on
the taxable income from the Royalty Interest, the Trust Unit holders would
be treated as shareholders, and distributions to Trust Unit holders would
not be deductible in computing the Trust's tax liability as an association.
6
ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Cautionary Statement
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The Trustee, its officers or its agents on behalf of the Trustee may, from
time to time, make forward-looking statements (other than statements of
historical fact). When used herein, the words "anticipates," "expects,"
"believes," "intends" or "projects" and similar expressions are intended to
identify forward-looking statements. To the extent that any forward-looking
statements are made, the Trustee is unable to predict future changes in oil
prices, oil production levels, economic activity, legislation and regulation,
and certain changes in expenses of the Trust. In addition, the Trust's future
results of operations and other forward looking statements contained in this
item and elsewhere in this report involve a number of risks and uncertainties.
As a result of variations in such factors, actual results may differ materially
from any forward looking statements. Some of these factors are described below.
The Trustee disclaims any obligation to update forward looking statements and
all such forward-looking statements in this document are expressly qualified in
their entirety by the cautionary statements in this paragraph.
Liquidity and Capital Resources
- -------------------------------
The Trust is a passive entity, and the Trustee's activities are limited to
collecting and distributing the revenues from the Royalty Interest and paying
liabilities and expenses of the Trust. Generally, the Trust has no source of
liquidity and no capital resources other than the revenue attributable to the
Royalty Interest that it receives from time to time. See the discussion under
"THE ROYALTY INTEREST" for a description of the calculation of the Per Barrel
Royalty, and the discussion under "THE PRUDHOE BAY UNIT - Reserve Estimates" and
"INDEPENDENT OIL AND GAS CONSULTANTS' REPORT" in Part I, Item 1 of the Trust's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the
"Annual Report") for information concerning the estimated future net revenues of
the Trust. However, the Trustee does have a limited power to borrow, establish a
cash reserve, or dispose of all or part of the Trust Estate, under limited
circumstances pursuant to the terms of the Trust Agreement. See the discussion
under "THE TRUST" in Part I, Item 1 of the Annual Report.
The depressed WTI Prices during the fourth quarter of 1998 and first
quarter of 1999 resulted in the Trust not receiving distributions during the
first and second quarters of 1999. The Trustee, therefore, determined to
exercise certain of its limited powers under the Trust Agreement to obtain
liquidity in order to meet the Trust's future liabilities and expenses. Given
the unpredictability of WTI Prices and that the Trust only receives quarterly
distributions, the Trustee determined that a cash reserve is necessary to cover
any such future liabilities which may exceed those quarterly distributions
received by drawing upon the cash reserve. The Trustee has received an opinion
of counsel relating to certain tax matters as they pertain to the establishment
of the cash reserve.
During 1999 and 2000 the Trustee established a cash reserve of $1,000,000
to provide liquidity to the Trust during any future periods in which the Trust
does not receive a distribution. Out of distributions received by the Trust, the
Trustee set aside $1,000,000 in the cash reserve, an amount equal to
approximately one year's expected liabilities and expenses of the Trust. The
$1,000,000 in the cash reserve was set aside over the course of four quarters,
with one quarter of such amount being set aside from each quarterly distribution
received by the Trust. The Trustee will draw funds from the cash reserve account
during any quarter in which the quarterly distribution received by the Trust
does not exceed the liabilities and expenses of the Trust, and will replenish
the reserve from future quarterly distributions, if any.
7
Amounts set aside for the cash reserve from time to time are being invested
in U.S. government or agency securities secured by the full faith and credit of
the United States. The Trustee anticipates that it will keep this cash reserve
program in place until termination of the Trust.
As discussed under CERTAIN TAX CONSIDERATIONS in the Annual Report, amounts
received by the Trust as quarterly distributions are income to the holders of
the Units, (as will be any earning on investment of the cash reserve) and must
be reported by the holders of the Units, even if such amounts are used to repay
borrowings or establish a cash reserve and are not received by the holders of
the Units.
Results of Operations
- ---------------------
Royalty revenues are generally received on the Quarterly Record Date
(generally the fifteenth day of the month) following the end of the calendar
quarter in which the related Royalty Production occurred. The Trustee, to the
extent possible, pays all expenses of the Trust for each quarter on the
Quarterly Record Date on which the revenues for the quarter are received. For
the statement of cash earnings and distributions, revenues and Trust expenses
are recorded on a cash basis and, as a result, royalties paid to the Trust and
distributions to Unit holders in the quarters ended March 31, 2002 and 2001 are
attributable to the Company's operations during the quarters ended December 31,
2001 and 2000, respectively.
The following table shows the factors employed to compute the Per Barrel
Royalty received by the Trust during the quarters ended March 31, 2002 and 2001
(see Note 1 of Notes to Financial Statements in Part I, Item 1). The information
in the table has been furnished by the Company.
Quarter ended December 31,
-----------------------------------------
2001 2000
------------------ -------------------
Average WTI Price $20.41 $31.98
Chargeable Costs $10.75 10.00
Cost Adjustment Factor x 1.3660 x 1.3406
-------- --------
Adjusted Chargeable Costs 14.68 13.41
Production Taxes 2.17 3.92
-------- --------
16.85 17.33
------ ------
Per Barrel Royalty $ 3.56 $14.66
====== ======
8
As long as the Company's average daily net production from the Prudhoe Bay
Unit exceeds 90,000 barrels, which the Company currently projects will continue
until the year 2009, the only factors affecting the Trust's revenues and
distributions to Unit holders are changes in WTI Prices, scheduled annual
increases in Chargeable Costs, changes in the Consumer Price Index, changes in
Production Taxes and changes in the expenses of the Trust.
Quarter Ended March 31, 2002 Compared to
Quarter Ended March 31, 2001
- ----------------------------
The Trust's royalty revenues received in the quarter ended March 31, 2002
were $4,840,414 as compared to $19,931,908 for the same period a year ago, a
decrease of 76%. This was due to a decrease in the Per Barrel Royalty as a
result of a decrease in the Average WTI Price to $20.41 for the quarter ended
December 31, 2001 as compared to $31.98 for the same period a year ago. Total
deductions from the Average WTI Price (consisting of Adjusted Chargeable Costs
and Production Taxes) for the quarter decreased by $0.48 (approximately 3%
percent) to $16.85 from $17.33 attributable to the same period in 2000. The
$0.48 decrease was due to a decrease of $1.75 in Production Taxes from the same
period a year ago, which was partially offset by a $1.27 increase in Adjusted
Chargeable Costs. See the discussion under "THE ROYALTY INTEREST" for a
description of the calculation of the Per Barrel Royalty in the Annual Report.
The Trust's cash distribution in the quarter ended March 31, 2002 was
approximately $0.22 per unit as compared $0.92 for the same period a year ago, a
decrease of 76%, as a result of the factors described above.
Trust administrative expenses paid during quarter ended March 31, 2002
increased 37% compared to the same period in 2000, principally due to increased
costs and timing differences in payments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See discussion above under Item 2. Trustee's Discussion and Analysis of
Financial Condition and Results of Operations.
9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN 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.
On April 15, 2002 the Trust received a cash distribution of $5,205,512 from
the Company with respect to the quarter ended March 31, 2002 and, after
deducting expenses of $297,912, on April 25, 2002 distributed $4,931,137, or
approximately $0.2304 per Unit, to Unit holders of record.
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
4.1 BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among
The Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of
New York, Trustee, and F. James Hutchinson, Co-Trustee.
4.2 Overriding Royalty Conveyance dated February 27, 1989 between BP
Exploration (Alaska) Inc. and The Standard Oil Company.
4.3 Trust Conveyance dated February 28, 1989 between The Standard Oil
Company and BP Prudhoe Bay Royalty Trust.
4.4 Support Agreement dated as of February 28, 1989 among The British
Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The Standard
Oil Company and BP Prudhoe Bay Royalty Trust.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2002.
11
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.
BP PRUDHOE BAY ROYALTY TRUST
By: THE BANK OF NEW YORK,
as Trustee
By: /s/ Ming Shiang
----------------------
Ming Shiang
Vice President
Date: April 15, 2002
The registrant is a trust and has no officers or persons performing similar
functions. No additional signatures are available and none have been provided.
12
INDEX TO EXHIBITS
Exhibit Exhibit
No. Description
- ------- -----------
*4.1 BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among The
Standard Oil Company, BP Exploration (Alaska) Inc., The Bank of New York,
Trustee, and F. James Hutchinson, Co-Trustee.
*4.2 Overriding Royalty Conveyance dated February 27, 1989 between BP
Exploration (Alaska) Inc. and The Standard Oil Company.
*4.3 Trust Conveyance dated February 28, 1989 between The Standard Oil Company
and BP Prudhoe Bay Royalty Trust.
*4.4 Support Agreement dated as of February 28, 1989 among The British Petroleum
Company p.l.c., BP Exploration (Alaska) Inc., The standard Oil Company and
BP Prudhoe Bay Royalty Trust.
- -----------------------------
* Incorporated by reference to the correspondingly numbered exhibit to the
registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996 (Commission File No. 1-10243).