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, 2001
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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 (I.R.S. Employer
of 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 Office of Trustee) (Zip Code)
Trustee's Telephone Number, Including Area Code: (212) 815-5092
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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 August 13, 2001, 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)
June 30,
2001 December 31,
(Unaudited) 2000
----------- ------------
Assets
Royalty Interest, net (notes 1, 2 and 3) $19,081 20,085
Cash equivalents 1,079 1,048
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Total assets $20,160 21,133
======= =======
Liabilities and Trust Corpus
Accrued expenses $ 575 464
Trust Corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) 19,585 20,669
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Total liabilities and Trust Corpus $20,160 21,133
======= =======
See accompanying notes to financial statements.
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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,
2001 2000 2001 2000
---- ---- ---- ----
Royalty revenues $ 14,418 16,841 34,350 28,946
Interest Income 17 16 36 16
Less: Trust administrative expenses (253) (274) (411) (438)
Expense reserve - (250) - (500)
------------ ------------ ------------ ------------
Cash earnings $ 14,182 16,333 33,975 28,024
============ ============ ============ ============
Cash distributions $ 14,167 16,333 33,944 28,024
============ ============ ============ ============
Cash distributions per unit $ 0.6620 0.7632 1.5862 1.3095
============ ============ ============ ============
Units outstanding 21,400,000 21,400,000 21,400,000 21,400,000
============ ============ ============ ============
See accompanying notes to financial statements.
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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,
2001 2000 2001 2000
---- ---- ---- ----
Trust Corpus at beginning of period $ 20,091 22,138 20,669 22,626
Change in cash reserve - 250 - 500
Cash earnings 14,182 16,333 33,975 28,024
Decrease (increase) in accrued
expenses (19) 42 (111) (68)
Cash distributions (14,167) (16,333) (33,944) (28,024)
Amortization of Royalty Interest (502) (628) (1,004) (1,256)
-------- -------- -------- --------
Trust Corpus at end of period $ 19,585 21,802 19,585 21,802
======== ======== ======== ========
See accompanying notes to financial statements.
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BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
(Prepared on a modified basis of cash receipts and disbursements)
June 30, 2001
(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").
In 2000, the Company and certain other Prudhoe Bay working interest
owners cross-assigned interests in the Prudhoe Bay 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.
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:
(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.
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BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements (Continued)
(Prepared on a modified basis of cash receipts and disbursements)
(Unaudited)
(1), Continued
(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. The Trust Corpus includes
$1,079,000 to cover the aforementioned future expenses.
(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 June 30, 2001 and 2000 was $0.3723 and $0.47
respectively. The change in the amortization rate in 2001 is due
to an increase in the estimated number of years that average daily
production of oil and condensate from the proved reserves at
Prudhoe Bay Field will exceed 90,000 barrels. 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. 121 ("SFAS 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". 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 accounting principles generally accepted in the United
States of America, the modified 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, 2001 and December 31, 2000 and the
modified cash earnings and distributions and changes in Trust corpus for
the three month periods ended June 30, 2001 and 2000. 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, 2001 and December 31, 2000, cash equivalents consist
of US treasury bills with an initial term of less than three months. All
interest income earned on the treasury bills are reinvested as of
December 31, 2000. Subsequent to June 30, 2001, all interest income
earned on the treasury bills for the last quarter and previously
reinvested was distributed on July 23, 2001.
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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 2000 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 June 30, 2001 and
December 31, 2000 (in thousands):
June 30 December 31
2001 2000
---- ----
Royalty Interest $ 535,000 535,000
Less: Accumulated amortization (342,401) (341,397)
Impairment write-down (173,518) (173,518)
---------- ---------
$ 19,081 20,085
========== =========
(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.
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Item 2. Trustee's Discussion and Analysis of Financial Condition and Results
of Operations.
Cautionary Statement
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, 2000 (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 1998 and 1999 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
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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 has set
aside $250,000 from the July 15, 1999 distribution, $250,000 from the October
15, 1999 distribution, $250,000 from the January 15, 2000 distribution and
$250,000 from the April 15, 2000 distribution for such cash reserve. 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.
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 has determined to distribute any
interest received from the investment to the holders of Units upon maturity on
that next Quarterly Record Date. 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 three and six months period ended June 30,
2001 and 2000 are attributable to the Company's operations during the three and
six month periods ended March 31, 2001 and 2000, respectively.
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The following table shows the factors employed to compute the Per
Barrel Royalty received by the Trust during the quarters ended March 31, 2001
and 2000 (see Note 1 of Notes to Financial Statements in Part I, Item 1):
Quarter March 31,
------------------------------------------------------------
2001 2000
--------------------------- ----------------------------
Average WTI Price $28.83 $28.86
Chargeable Costs 10.75 10.00
Cost Adjustment Factor x 1.354 x 1.307
-------- --------
Adjusted Chargeable Costs 14.55 13.07
Production Taxes + 3.44 + 3.48
-------- --------
17.99 16.55
------ ------
Per Barrel Royalty $10.84 $12.31
====== ======
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.
During the third quarter of 2000, the Company and certain other Prudhoe
Bay working interest owners cross-assigned interests in the Field pursuant to a
Prudhoe Bay 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.
Quarter Ended June 30, 2001 Compared to
Quarter Ended June 30, 2000
The Trust's royalty revenues in the quarter ended June 30, 2001 were
$14,418,000 as compared to the same period a year ago in which the Trust had
$16,841,000 in revenues. This decrease in royalty revenues was due to several
factors: (i) an increase in the Chargeable Costs of $0.75 per barrel to $10.75
for the quarter ended June 30, 2001 as compared to the same period a year ago of
$10.00; (ii) an increase in the Cost Adjustment Factor of $0.047 to $1.354 for
the quarter ended June 30, 2001 as compared to the same period a year ago of
$1.307 (this has the effect of lowering the per barrel royalty approximately
$0.73 per barrel when compared to the same Cost Adjustment Factor of a year
ago); and (iii) a decrease in the Average WTI Price from $28.86 for the quarter
ended March 31, 2000 to $28.83 for the quarter ended March 31, 2001. These
factors, as well as a decrease of $0.04 in Production Taxes, resulted in total
deductions from the Average WTI Price to increase by $1.44 to $17.99 for the
quarter ending March 31, 2001 from $16.55 for the quarter ending March 31, 2000.
See the discussion under "THE ROYALTY INTEREST" for a description of the
calculation of the Per Barrel Royalty in the Annual Report.
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The Trust's cash distribution in the quarter ended June 30, 2001 was $
0.6620 per unit as compared to the same period a year ago in which the Trust had
a distribution $0.7632 per unit.
The Trustee's fees and expenses paid during quarter ended June 30, 2001
were $253,000 as compared to the same period a year ago in which the Trustee's
fees and expenses were $274,000. Upon paying the Trust's fees and expenses for
the quarter ending June 30, 2000 of $274,000, the Trustee set aside a $250,000
contribution to the cash reserve, which bought the total cash reserve to
$1,000,000.
Six Months Ended June 30, 2001 Compared to
Six Months Ended June 30, 2000
The Trust's royalty revenues for the six months ended June 30, 2001
were $34,350,000 as compared to the same period a year ago in which the Trust
had royalty revenues of 28,946,000. This was due to an increase in the Average
WTI Price from approximately $26.73 for the six month period ended March 31,
2000 to approximately $30.41 for the six month period ended March 31, 2001.
Total deductions from the Average WTI Price (consisting of Chargeable Costs,
Adjusted Chargeable Costs and Production Taxes) increased by $1.61 to $17.66 for
the six month period ended March 31, 2001 from $16.05 for the six month period
ended March 31, 2000. The $1.61 increase in deductions from Average WTI Price
was due to the following factors: (i) a $0.48 increase in the scheduled
Chargeable Costs; (ii) an increase in the Cost Adjustment Factor of $0.046
(which results in an increase of approximately $0.61 in Adjusted Chargeable
Costs); and (iii) and an increase of $0.52 in production taxes over the same
period a year ago. 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 six month period ended June 30,
2001 was $1.5862 per unit as compared to the same period a year ago in which the
Trust had a distribution of 1.3095.
The Trustee's fees and expenses paid during six month period ended June
30, 2001 were $411,000 as compared to the same period a year ago in which the
Trustee's fees and expenses were $438,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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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 July 16, 2001, the Trust received a cash distribution of $13,268,574
from the Company with respect to the quarter ended June 30, 2001 and, after
adding interest income of $18,853 and deducting expenses of $268,857,
distributed $13,096,027 or approximately $0.612 per Unit, to Unit holders of
record on July 23, 2001.
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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.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
2001.
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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.
BP PRUDHOE BAY ROYALTY TRUST
By: THE BANK OF NEW YORK,
as Trustee
By: /s/ Marie E. Trimboli
-----------------------------
Marie E. Trimboli
Assistant Vice President
Date: August 13, 2001
The registrant is a trust and has no officers or persons performing
similar functions. No additional signatures are available and none have been
provided.
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.
**27. Financial Data Schedule.
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* 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).
** Filed herewith.