SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
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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
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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
101 Barclay Street
New York, New York 10286
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 815-5092
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Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 14, 1998 21,400,000 Units of Beneficial Interest were
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BP PRUDHOE BAY ROYALTY TRUST
June 30, 1998
Statements of Assets, Liabilities and Trust Corpus
(In thousands, except unit data)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
Assets (Unaudited) 1997
------ ----------- ------------
<S> <C> <C>
Royalty Interest (notes 1 and 2) $ 535,000 $ 535,000
Less: accumulated amortization (313,997) (291,976)
--------- ---------
Total assets $ 221,003 243,024
========= =========
Liabilities and Trust Corpus
----------------------------
Accrued expenses 331 195
Trust corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units
issued and outstanding) 220,672 242,829
--------- ---------
Total liabilities and
Trust corpus $ 221,003 $ 243,024
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Cash Earnings and Distributions
(In thousands, except unit data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Royalty revenues $ 3,317 $ 12,052 $ 12,090 $ 27,190
Interest income 12 -- 17 --
Refund of overpayment of expenses -- -- 141 --
Less: trust administrative
expenses (234) (257) (337) (364)
----------- ----------- ----------- -----------
Cash earnings $ 3,095 $ 11,795 $ 11,911 $ 26,826
=========== =========== =========== ===========
Cash distributions $ 3,095 $ 11,795 $ 11,911 $ 26,826
=========== =========== =========== ===========
Cash distributions per unit $ .145 $ .551 $ .557 $ 1.253
=========== =========== =========== ===========
Units outstanding 21,400,000 21,400,000 21,400,000 21,400,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Changes in Trust Corpus
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trust corpus at beginning of period $231,851 $262,403 $242,829 $268,940
Cash Earnings 3,095 11,795 11,911 26,826
Decrease/(increase) in accrued
expenses (107) 29 (136) (95)
Cash distributions (3,095) (11,795) (11,911) (26,826)
Amortization of Royalty Interest (11,072) (6,483) (22,021) (12,896)
-------- -------- -------- --------
Trust corpus at end of period $220,672 $255,949 $220,672 $255,949
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
June 30, 1998
(Unaudited)
(1) Formation of the Trust and Organization
BP Prudhoe Bay Royalty Trust (the "Trust") was formed 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") on
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 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 performance by the
Company of its payment obligations with respect to the Royalty
Interest.
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.
(2) Basis of Accounting
The financial statements of the Trust are prepared on a modified cash
basis and reflect the Trust's assets, liabilities and trust corpus and
cash 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 generally include accounting, engineering,
legal, and other professional fees, trustees' fees and
out-of-pocket expenses) are recorded on an accrual basis.
(Continued)
<PAGE>
2
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
(Unaudited)
(2), Continued
(c) Amortization of the Royalty Interest is calculated based on the
units-of-production attributable to the Trust over the
production of estimated proved reserves attributable to the
Trust at the beginning of the fiscal year (approximately
65,000,000 barrels and 111,000,000 barrels of estimated proved
reserves were used to calculate the amortization of the Royalty
Interest for the six-month period ended June 30, 1998 and year
ended December 31, 1997, respectively). 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 was $8.23 for the three and six months ended June
30, 1998 and $4.82 for the three and six months ended June 30,
1997. The remaining unamortized balance of the net overriding
Royalty Interest at June 30, 1998 is not necessarily indicative
of the fair market value of the interest held by the Trust.
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, 1998 and December 31, 1997 and the modified cash earnings and
distributions and changes in Trust corpus for the three and six months
ended June 30, 1998 and 1997. The adjustments are of a normal recurring
nature and are, in the opinion of management, necessary to fairly
present the results of operations for the period.
The financial statements should be read in conjunction with the
financial statements and related notes in the Trust's 1997 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.
(Continued)
<PAGE>
3
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
(Unaudited)
(3) 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 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.
<PAGE>
ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. 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 Note 1 of Notes to Financial Statements
in Part I, Item 1, and the discussion under "THE PRUDHOE BAY UNIT - Reserve
Estimates" and "INDEPENDENT OIL AND GAS CONSULTANTS' REPORT" in Item 1 of the
Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
for information concerning the estimated future net revenues of the Trust.
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. Both
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, 1998 and 1997 are attributable to the Company's operations during
the three-month periods ended March 31, 1998 and 1997, respectively.
The following table shows the factors employed to compute the Per Barrel
Royalty received by the Trust during the quarters ended June 30, 1998 and 1997
(see Note 1 of Notes to Financial Statements in Part I, Item 1):
Quarter Ended
March 31,
------------------------
1998 1997
---- ----
Average WTI Price $15.96 $ 22.86
------ -------
Chargeable Costs $ 9.30 $ 8.85
Cost Adjustment Factor 1.2797 1.2647
------ -------
Adjusted Chargeable Costs 11.90 11.19
Production Taxes 1.56 2.61
------ -------
13.46 13.80
------ -------
Per Barrel Royalty $ 2.49 $ 9.06
====== =======
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
<PAGE>
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.
As a result of the severe drop in world oil prices during the second and
third quarters of 1998, the royalty revenues and cash distributions of the Trust
may be significantly reduced in the third and fourth quarters of 1998. After
giving effect to the Chargeable Costs, Cost Adjustment Factor and Production
Taxes, on any trading day during the second and third quarters of 1998 on which
the WTI Price is less than approximately $13.03 per barrel, no Per Barrel
royalty is payable with respect to that day's Royalty Production. The WTI Price
has fallen below this level a number of times during the second and third
quarters of 1998. As a consequence, the payment received from the Company on
July 15, 1998 with respect to the quarter ended June 30, 1998 was, and the
Trustee anticipates that the payment by the Company on or about October 15, 1998
of royalties with respect to the quarter ending September 30, 1998 will continue
to remain, historically low. Furthermore, given that the calculation of the
total Royalty Production for any given quarter is comprised of the sum of the
product of the Royalty Production for each day in such quarter, positive days of
Royalty Production (after deducting for the Chargeable Costs, Cost Adjustment
Factor and Production Taxes) will be offset by negative days of Royalty
Production (as long as the sum for the entire quarter does not equal less than
zero). Accordingly, if the WTI Price on any particular day in a quarter is less
than $13.03 per barrel, any subsequent increase in the WTI Price during such
quarter will be offset by the cumulative effect of days during such quarter on
which WTI Prices were less than $13.03 per barrel. Scheduled increases in
Chargeable Costs in 1999 and future years will also have an increasingly adverse
effect on royalty payments to the Trust should world oil prices remain at
current or lower levels.
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
The Trust's royalty revenues in the quarter ended June 30, 1998
decreased approximately 72 percent over revenues in the quarter ended June 30,
1997, principally as a result of the decrease in the Average WTI Price for the
quarter ended March 31, 1998, which was lower than the Average WTI Price for the
quarter ended March 31, 1997 by $6.90 (a decrease of approximately 30 percent).
Total deductions from the Average WTI Price (consisting of Adjusted Chargeable
Costs and Production Taxes) decreased by $0.34 (approximately 2.5 percent) from
the first quarter of 1997 to the first quarter of 1998.
Cash earnings and distributions for the second quarter of 1998 decreased
by approximately 74 percent over the second quarter of 1997 due to a decrease in
the Average WTI Price for the quarter ended March 31, 1998.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
On July 15, 1998, the Trust received a cash distribution of $1,773,568
from the Company with respect to the quarter ended June 30, 1998 and, after
deducting expenses of $303,240, distributed $1,470,328 or approximately $0.069
per Unit, to Unit holders of record on July 15, 1998.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON 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 March 31,
1998.
<PAGE>
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.
BP PRUDHOE BAY ROYALTY TRUST
BY: THE BANK OF NEW YORK,
as Trustee
By: /s/ Marie Trimboli
-----------------------------
Marie Trimboli
Assistant Treasurer
Date: August 14, 1998
The registrant is a trust and has no officers or persons performing
similar functions. No additional signatures are available and none have been
provided.
<PAGE>
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.
- ---------
* 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of BP Prudhoe Bay Royalty Trust as of and for the
fiscal quarter ended June 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 535,000 535,000
<DEPRECIATION> (313,917) (313,917)
<TOTAL-ASSETS> 221,015 221,015
<CURRENT-LIABILITIES> 322 322
<BONDS> 0 0
0 0
0 0
<COMMON> 220,693 220,693
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 221,015 221,015
<SALES> 0 0
<TOTAL-REVENUES> 3,317 12,090
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 234 337
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,095 11,911
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 3,095 11,911
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,095 11,911
<EPS-PRIMARY> 0.145 0.557
<EPS-DILUTED> 0.145 0.557
</TABLE>
