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 September 30, 1998
------------------
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
------------------------------------------------------
(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
---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 815-5092
Not applicable
--------------------------------------------------
(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
Financial Statements
September 30, 1998
(Unaudited)
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Statements of Assets, Liabilities and Trust Corpus
(In thousands, except unit data)
September 30,
1998 December 31,
Assets (Unaudited) 1997
------ ----------- ----
Royalty Interest (notes 1 and 2) $ 535,000 535,000
Less: accumulated amortization (325,191) (291,976)
--------- ---------
Total assets $ 209,809 243,024
========= =========
Liabilities and Trust Corpus
Accrued expenses 109 195
Trust corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units
issued and outstanding) 209,700 242,829
--------- ---------
Total liabilities and
Trust corpus $ 209,809 243,024
========= =========
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 Nine months ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Royalty revenues $ 1,773 8,770 13,863 35,960
Interest income -- -- 17 --
Refund of overpayment of
expenses -- -- 141 --
Less: trust administrative
expenses (303) (221) (640) (585)
------------ ------------ ------------ ------------
Cash earnings $ 1,470 8,549 13,381 35,375
============ ============ ============ ============
Cash distributions $ 1,470 8,549 13,381 35,375
============ ============ ============ ============
Cash distributions per unit $ .069 .399 .626 1.653
============ ============ ============ ============
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 Nine months ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trust corpus at beginning of period $ 220,672 255,949 242,829 268,940
Cash earnings 1,470 8,549 13,381 35,375
Increase in prepaid expenses -- 141 -- 141
Decrease/(increase) in accrued
expenses 222 85 86 (10)
Cash distributions (1,470) (8,549) (13,381) (35,375)
Amortization of Royalty Interest (11,194) (6,555) (33,215) (19,451)
--------- --------- --------- ---------
Trust corpus at end of period $ 209,700 249,620 209,700 249,620
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
September 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) Basis of Accounting, 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 nine-month period ended
September 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 nine months ended
September 30, 1998 and $4.82 for the three and nine months ended
September 30, 1997. The remaining unamortized balance of the net
overriding Royalty Interest at September 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 September 30, 1998 and
December 31, 1997 and the modified cash earnings and distributions and
changes in Trust corpus for the three and nine months ended September 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 for purposes of
distributions to Unit holders and, as a result, royalties paid to the Trust and
distributions to Unit holders in the quarter ended September 30 of each year are
attributable to the Company's operations during the quarter ended June 30 of
that year, while royalties paid to the Trust and distributions to Unit holders
in the nine month period ended September 30 of each year are attributable to the
Company's operations during the first six months of such year and the last three
months of the preceding year.
The following table shows the factors employed to compute the Per Barrel
Royalty received by the Trust (see Note 1 of Notes to Financial Statements in
Part I, Item 1). The information in the table has been furnished by the Company.
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
--------------------------------- ---------------------------------
6/30/98 3/31/98 12/31/97 6/30/97 3/31/97 12/31/96
------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Average WTI Price $ 14.58 15.96 19.94 19.91 22.86 24.71
------ ------ ------ ------ ------ ------
Chargeable Costs $ 9.30 9.30 8.85 8.85 8.85 8.50
Cost Adjustment Factor 1.2797 1.2797 1.2797 1.2686 1.2647 1.2568
------ ------ ------ ------ ------ ------
Adjusted Chargeable Costs $ 11.90 11.90 11.33 11.23 11.19 10.68
Production Taxes 1.36 1.56 2.16 2.16 2.61 2.89
------ ------ ------ ------ ------ ------
$ 13.26 13.46 13.49 13.39 13.80 13.57
------ ------ ------ ------ ------ ------
Per Barrel Royalty $ 1.32 2.49 6.45 6.52 9.06 11.13
====== ====== ====== ====== ====== ======
</TABLE>
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.
<PAGE>
As a result of the severe drop in world oil prices during 1998, the royalty
revenues and cash distributions of the Trust have been significantly reduced
during the year. After giving effect to the Chargeable Costs, Cost Adjustment
Factor and Production Taxes, on any trading day during 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 1998. As a consequence, the payment
received from the Company on October 15, 1998 with respect to the quarter ended
September 30, 1998 was, and the Trustee anticipates that the payment by the
Company on or about January 15, 1999 of royalties with respect to the quarter
ending December 31, 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.
Three and Nine Months Ended September 30, 1998 Compared to
Three and Nine Months Ended September 30, 1997
The Trust's royalty revenues in the quarter ended September 30, 1998
decreased approximately 80 percent over revenues in the quarter ended September
30, 1997, principally as a result of the decrease in the Average WTI Price for
the quarter ended June 30, 1998, which was lower than the Average WTI Price for
the quarter ended June 30, 1997 by $5.33 (a decrease of approximately 27
percent). Revenues in the nine-month period ended September 30, 1998 decreased
by approximately 61% over the comparable period ended September 30, 1997 due
primarily to the decrease in the Average WTI Price. Total deductions from the
Average WTI Price (consisting of Adjusted Chargeable Costs and Production Taxes)
decreased by $0.13 (approximately 1.0 percent) from the second quarter of 1997
to the second quarter of 1998.
Cash earnings and distributions for the three months and nine months ended
September 30, 1998 decreased by approximately 83 percent and 62 percent,
respectively, from the comparable periods of 1997 due primarily to a decrease in
the Average WTI Price for the quarter ended June 30, 1998.
Year 2000 Problem
Given that 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
believes that there are not any Year 2000 issues or consequences which are
likely to have a material effect on the Trust's business, results of operations
or financial condition, or to involve any material costs and expenses to be
borne by the Trust. However, the Trust's ability to perform properly is also
dependent upon The Bank of New York in its capacity as Trustee of the Trust, and
the Depository Trust Company ("DTC") in its capacity as clearing agent.
To the extent that there are any material Year 2000 issues or consequences
for The Bank of New York in its capacity as Trustee of the Trust, those issues
and consequences, if any, are addressed in The Bank of New York Company, Inc.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
Quarterly Report on Form 10-Q for the period ending September 30, 1998
(Commission File No. 1-6152).
To the extent that there are any material Year 2000 issues or consequences
for DTC, DTC has provided the following information:
<PAGE>
"DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
Problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it believes that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("DTC Services"), will continue to function appropriately. This program includes
a technical assessment and remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase which is expected to be
completed within appropriate time frames."
"However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors on whom DTC relies for information or the provision
of services, including telecommunication and electrical utility service
providers, among others. DTC has informed the Industry that it is contacting
(and will continue to contact) third party vendors from whom DTC acquires
services to: (i) impress upon them the importance of such services being Year
2000 compliant; and (ii) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing such contingency plans as it deems appropriate."
"According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind."
Although the Trust believes it is adequately addressing its Year 2000
issues, if the Trust were to encounter a material Year 2000 problem, such
problem could materially and adversely result in an interruption in, or a
failure of, the Trustee's exercising its powers on behalf of the Trust as
described above.
The information presented with respect to Year 2000 compliance is forward
looking information. As such it is subject to risks and uncertainties that could
cause actual results to differ materially from the projected results discussed
in this report.
<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 October 15, 1998, the Trust received a cash distribution of $1,299,679
from the Company with respect to the period July 1, 1998 to September 30, 1998
and, after adding investment income of $186 and deducting expenses of $115,692,
distributed $1,184,173 or approximately $0.055 per Unit, to Unit holders of
record on October 20, 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: November 13, 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 September 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 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-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> (325,191) (325,191)
<TOTAL-ASSETS> 209,809 209,809
<CURRENT-LIABILITIES> 109 109
<BONDS> 0 0
0 0
0 0
<COMMON> 209,700 209,700
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 209,809 209,809
<SALES> 0 0
<TOTAL-REVENUES> 1,773 13,863
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 303 640
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,470 13,381
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,470 13,381
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,470 13,381
<EPS-PRIMARY> 0.069 0.626
<EPS-DILUTED> 0.069 0.626
</TABLE>
