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 June 30, 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
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
The Bank of New York, 101 Barclay Street, New York, NY 10286
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 815-6908
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 [ ] No [X]
As of September 5, 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)
June 30,
2002 December 31,
(Unaudited) 2001
----------- ----
ASSETS
Royalty Interest $ 17,073 18,077
Cash equivalents (cash reserve) 1,001 1,009
--------- ---------
Total assets $ 18,074 19,086
========= =========
LIABILITIES AND TRUST CORPUS
Accrued expenses $ 437 522
Trust corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) 17,637 18,564
--------- ---------
Total liabilities and trust corpus $ 18,074 19,086
========= =========
See accompanying notes to financial statements.
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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Royalty revenues $ 5,205 14,418 10,046 34,350
Interest income 5 17 12 36
Less: Trust administrative expenses (298) (253) (514) (411)
---------- ---------- ---------- ----------
Cash earnings $ 4,912 14,182 9,544 33,975
========== ========== ========== ==========
Cash distributions $ 4,931 14,167 9,552 33,944
========== ========== ========== ==========
Cash distributions per unit $ 0.2304 0.6620 0.4463 1.5862
========== ========== ========== ==========
Units outstanding 21,400,000 21,400,000 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 Six Months Ended
June 30, June 30,
----------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Trust corpus at beginning of period $ 17,991 20,091 18,564 20,669
Cash earnings 4,912 14,182 9,544 33,975
(Increase) decrease in accrued expenses 167 (19) 85 (111)
Cash distributions (4,913) (14,167) (9,552) (33,944)
Amortization of royalty interest (502) (502) (1,004) (1,004)
----------- ----------- ----------- -----------
Trust corpus at end of period $ 17,637 19,585 17,637 19,585
=========== =========== =========== ===========
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)
June 30, 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 British Petroleum Company p.l.c.
("BP"). The Bank of New York alone is able to exercise the rights and
powers granted to the Trustee in the Trust Agreement.
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% of 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 located on the North Slope of Alaska (the
"Field") as of February 28, 1989. 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 of the Company of its payment obligations with
respect to the Royalty Interest.
In 2000, the Company and certain other Prudhoe Bay working interest owners
cross-assigned interests in the Field pursuant to the Prudhoe Bay Unit
Alignment Agreement. The Company retained all rights, obligations and
liabilities associated with the Trust. This transaction is not expected to
have a material effect on the Trust's operation.
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.
4
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:
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 considers
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, Trustee's 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 June 30, 2002 and 2001 was $0.3723. 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 ("SFAS 144") "Accounting for the Impairment or
Disposal 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.
5
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 June 30, 2002 and December
31, 2001 and the modified cash earnings and distributions and changes in
Trust corpus for the three and six month periods ended, June 30, 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 June 30, 2002 and December 31, 2001, cash equivalents which represent
the cash reserve consist of U.S. treasury bills with an initial term of
less than three months.
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 2001. 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 June 30, 2002 and
December 31, 2001 (in thousands):
June 30, December 31,
2002 2001
---- ----
Royalty interest $ 535,000 535,000
Less: Accumulated amortization (344,409) (343,405)
Impairment write-down (173,518) (173,518)
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$ 17,073 18,077
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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
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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 Trustee has 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. This amount is equal to approximately one year's expected
liabilities and expenses of the Trust. Amounts set aside for the cash reserve
are invested in U.S. government or agency securities secured by the full faith
and credit of the United States. 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. The Trustee
anticipates that it will keep the cash reserve 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.
7
Results of Operations
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Royalty revenues are generally received on fifteenth day of the month) following
the end of the calendar quarter in which the related Royalty Production occurred
(the "Quarterly Record Date"). 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 June 30, 2002 and 2001 are attributable to the Company's
operations during the quarters ended March 31, 2002 and 2001, respectively.
The following table shows the factors for the quarters ended March 31, 2002 and
2001 which wereemployed to compute the Per Barrel Royalty received by the Trust
during the quarters ended June 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 March 31,
-----------------------------------------------------
2002 2001
-------------------- --------------------
Average WTI Price $21.67 $28.83
Chargeable Costs $11.25 $10.75
Cost Adjustment Factor 1.3691 1.3537
Adjusted Chargeable Costs $15.40 $14.55
Production Taxes $ 2.36 $ 3.44
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$17.76 $17.99
Per Barrel Royalty $ 3.91 $10.84
====== ======
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 June 30, 2002 Compared to
Quarter Ended June 30, 2001
- ---------------------------------------
The Trust received royalty revenues of $5,205,512 in the quarter ended June 30,
2002, compared to $14,417,630 received in the quarter ended June 30, 2001, due
to a 63.9% decrease in the Per Barrel Royalty with respect to the quarter ended
March 31, 2002 from that for the quarter ended March 31, 2001 as shown in the
table above. See the discussion under "THE ROYALTY INTEREST" for a description
of the calculation of the Per Barrel Royalty in the Annual Report. A 24.8%
decrease in the Average WTI Price in effect during the first quarter of 2002
from that in effect during the first quarter of 2001 was slightly mitigated by a
1.3% decrease in the total of Adjusted Chargeable Costs and Production Taxes.
Although Adjusted Chargeable Costs increased $0.85 in the first quarter of 2002
from the comparable quarter of 2001, Production Taxes decreased $1.08.
8
Six Months Ended June 30, 2002 Compared to
Six Months Ended June 30, 2001
- ------------------------------------------
The Trust's royalty revenues of $10,045,925 for the six months ended June 30,
2002 were 70.8% below its revenues of $34,349,538 for the six months ended June
30, 2001, principally due to lower Average WTI Prices during the quarters ended
March 31, 2002 and December 31, 2001 ($21.67 and $20.41) than during the two
quarters ended March 31, 2001 and December 31, 2000 ($28.83 and $31.98). Cash
distributions, which decreased 71.9% from period to period, also were affected
by an increase in Chargeable Costs to $11.25 from $10.75 during the first
quarter of 2002, although increases in Adjusted Chargeable Costs were mitigated
by decreases in Production Taxes.
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 June 15, 2002 the Trust received a cash distribution of $10,314,078 from the
Company with respect to the quarter ended March 31, 2002 and, after deducting
expenses of $130,287, on July 25, 2002 distributed $10,184,771, or approximately
$0.4759 per Unit, to Unit holders of record.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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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 June 30, 2002.
10
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/ Marie E. Trimboli
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Marie E. Trimboli
Assistant Vice President
Date: September 6, 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.
11
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).