<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2000
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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, NY 10286
-------------------------------------------------------- -------------
(Address of Principal Executive Office of Trustee) (Zip Code)
Trustee's Telephone Number, Including Area Code: (212) 815-5092
------------------
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 November 10, 2000, 21,400,000 Units of Beneficial Interest were
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
BP PRUDHOE BAY ROYALTY TRUST
Statements of Assets, Liabilities and Trust Corpus
(In thousands, except unit data)
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
----------------- -----------------
<S> <C> <C>
Assets
Royalty Interest, net (note 3) $ 20,713 22,596
Cash 1,000 500
----------------- -----------------
Total assets $ 21,713 23,096
================= =================
Liabilities and Trust Corpus
Accrued expenses $ 368 470
Trust Corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) 21,345 22,626
----------------- -----------------
Total liabilities and Trust Corpus $ 21,713 23,096
================= =================
</TABLE>
See accompanying notes to financial statements.
1
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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,
2000 1999 2000 1999
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Royalty revenues $ 16,425 4,427 45,370 4,427
Interest Income 11 13 27 13
Less: Trust administrative expenses (232) (625) (670) (625)
Expense reserve -- (250) (500) (250)
------------ ---------- ---------- ----------
Cash earnings $ 16,204 3,565 44,227 3,565
============ ========== ========== ==========
Cash distributions $ 16,204 3,565 44,227 3,565
============ ========== ========== ==========
Cash distributions per unit $ 0.7572 0.1666 2.0667 0.1666
============ ========== ========== ==========
Units outstanding 21,400,000 21,400,000 21,400,000 21,400,000
============ ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
2
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BP PRUDHOE BAY ROYALTY TRUST
Statements of Changes in Trust Corpus
(In thousands)
(Unaudited)
Nine months ended
September 30,
2000 1999
----------- -----------
Trust Corpus at beginning of period $ 22,626 25,008
Change in cash balance 500 237
Cash earnings 44,227 3,565
Decrease (increase) in accrued expenses 102 (376)
Cash distributions (44,227) (3,565)
Amortization of Royalty Interest (1,883) (1,875)
----------- -----------
Trust Corpus at end of period $ 21,345 22,994
=========== ===========
See accompanying notes to financial statements.
3
<PAGE>
BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements
September 30, 2000
(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").
During the fourth quarter of 1998, British Petroleum Company
p.l.c. merged with Amoco Corporation to form BP Amoco. This transaction
is not expected to have a material effect on the Trust's operations.
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 2001, 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.
4
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BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements (Continued)
(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 over the past
four quarters sufficient to pay approximately one year's current and
expected liabilities and expenses of the Trust.
(2) Basis of Accounting
The financial statements of the Trust are prepared on a
modified cash basis and reflect the Trust's assets, liabilities,
Corpus, earnings and distributions as follows:
(a) Revenues are recorded when received (generally within 15 days
of the end of the preceding quarter) and distributions to
Trust Unit holders are recorded when paid.
(b) Trust expenses (which include accounting, engineering, legal,
and other professional fees, trustees' fees and out-of-pocket
expenses) are recorded on an accrual basis.
(c) Amortization of the Royalty Interest is calculated using the
units of production method. Such amortization is charged
directly to the Trust Corpus, and does not affect cash
earnings. The daily rate for amortization per net equivalent
barrel of oil for the nine months ended September 30, 2000 and
1999 was $0.47. 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 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, 2000 and December 31, 1999 and the modified cash earnings
and distributions and changes in Trust corpus for the nine month
periods ended September 30, 2000 and 1999. The adjustments are of a
normal recurring nature and are, in the opinion of management,
necessary to fairly present the results of operations.
5
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BP PRUDHOE BAY ROYALTY TRUST
Notes to Financial Statements (Continued)
(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 1999 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
(in thousands):
September 30, December 31,
2000 1999
------------ -------------
Royalty Interest 535,000 $ 535,000
Less: Accumulated amortization (340,769) (338,886)
Impairment writedown (173,518) (173,518)
--------- ---------
$ 20,713 $ 22,596
========= =========
(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
<PAGE>
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, 1999 (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.
7
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Upon the resumption of distributions in the third quarter of 1999,
attributable to the increase in the WTI Price in the second quarter of 1999, the
Trustee established a cash reserve to provide liquidity to the Trust during any
future periods in which the Trust does not receive a distribution. Out of
quarterly 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 with the
fourth amount set aside from the April 15th distribution. 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 is 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 quarters ended September 30, 2000 and 1999
are attributable to the Company's operations during the quarters ended June 30,
2000 and 1999, respectively. Accordingly, 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 during the quarters ended September 30,
2000 and 1999 (see Note 1 of Notes to Financial Statements in Part I, Item 1).
The information in the table has been furnished by the Company.
8
<PAGE>
<TABLE>
<CAPTION>
Quarter June 30,
-----------------------------------------------------------
2000 1999
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Average WTI Price $28.87 $17.65
Chargeable Costs 10.00 9.80
Cost Adjustment Factor x 1.319 x 1.280
--------- ----------
Adjusted Chargeable Costs 13.19 12.54
Production Taxes + 3.47 + 1.82
--------- ----------
16.66 14.36
------ ------
Per Barrel Royalty $12.21 $ 3.29
====== ======
</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.
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 September 30, 2000 Compared to
Quarter Ended September 30, 1999
The Trust's royalty revenues received in the quarter ended September
30, 2000 were $16,424,513 as compared to $4,427,338 for the same period a year
ago, an increase of 271% . This was due to a significant increase in the Average
WTI Price attributable to the royalty payments received for the quarter ended
September 30, 2000 of $28.87 as compared to $17.65 attributable to the quarter
ended September 30, 1999. Total deductions from the Average WTI Price
(consisting of Adjusted Chargeable Costs and Production Taxes) increased by
$2.30 (approximately 16% percent) to $16.66 attributable to the quarter ended
September 30, 2000 from $14.36 attributable to the quarter ended September 30,
1999. The $2.30 increase was due to an increase of $0.65 in the Adjusted
Chargeable Costs over the same period a year ago, $0.20 of which is attributable
to the scheduled increase in Chargeable Costs and $0.45 due to an increase in
the cost adjustment factor, and an increase of $1.65 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 quarter ended September 30, 2000 was
approximately $0.76 per unit as compared $0.17 for the same period a year ago,
an increase of 347%. The increase was due largely to the increase in the Average
WTI Price, there was also a decrease in Trustee expenses and no cash
contribution to the cash reserve as compared to a $250,000 cash reserve
contribution in the quarter ended September 30, 1999 quarter. Because the cash
9
<PAGE>
reserve had reached $1,000,000 for the quarter ended June 30, 2000 there was no
cash contribution during the September 30, 2000 quarter.
The Trustee's fees and expenses paid during quarter ended September 30,
2000 were $232,000 as compared $625,000 for the same period a year ago. Due to
the fact that none of the fees nor expenses of the Trust incurred from October
1, 1998 through June 30, 1999 had been paid, the Trustee paid approximately
$625,000 in fees and expenses during the September 30, 1999 quarter to satisfy
such accumulated fees and expenses out of the distribution attributable to the
third quarter ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
The Trust's royalty revenues for the nine months ended September 30,
2000 were $45,370,000 as compared to $4,427,338 for the same period a year ago.
This was due to a significant increase in the Average WTI Price from
approximately $14.51 attributable to the nine month period ended September 30,
1999 to $27.38 attributable to the nine month period ended September 30, 2000
and that royalty revenues were paid in all three quarters of 2000 and only in
third quarter of 1999. The Average WTI Price attributable to the first and
second quarters of 1999 were below the level necessary to generate royalty
revenues. 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 distributions for the nine month period ended
September 30, 2000 were in the aggregate $2.07 per unit as compared to $0.17 per
unit the same period a year ago. This was due to a significant increase in the
Average WTI Price from approximately $14.51 attributable to the nine month
period ended September 30, 1999 to $27.38 attributable to the nine month period
ended September 30, 2000 and due to the fact that royalty revenues were paid in
all three quarters of 2000 and only in the third quarter ended September 30,
1999. This was due to Average WTI Price attributable to the first and second
quarters of 1999 being below the level necessary to generate any distribution to
Unit holders. A cash contribution to the cash reserve of $250,000 was made in
the first quarter of 2000 and a cash contribution to the cash reserve of
$250,000 was made in second quarter of 2000 as compared to a single $250,000
cash contribution to the cash reserve for the quarter ended September 30, 1999.
Because the cash reserve had reached a $1,000,000 during the second quarter
ended June 30, 2000 there was no cash contribution to the cash reserve for the
quarter ended September 30, 2000.
The Trustee's fees and expenses paid during nine month period ended
September 30, 2000 were $670,000 as compared to $625,000 the same period a year
ago.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See discussion above on Item 2. Trustee's Discussion and Analysis of
Financial Condition and Results of Operations.
10
<PAGE>
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 October 16, 2000, the Trust received a cash distribution of
$19,655,233.05 from the Company with respect to the quarter ended September 30,
2000 and, after adding interest income of $17,016.19 and deducting expenses of
$62,028.28, distributed $19,610,220.96 or approximately $0.92 per Unit, to Unit
holders of record on October 16, 2000.
11
<PAGE>
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 September
30, 2000.
12
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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 Treasurer
Date: November 16, 2000
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.
