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DOM > SEC Filings for DOM > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for DOMINION RESOURCES BLACK WARRIOR TRUST | Request a Trial to NEW EDGAR Online Pro

Form 10-K for DOMINION RESOURCES BLACK WARRIOR TRUST


15-Mar-2013

Annual Report


Item 7. Trustee's Discussion and Analysis of Financial Condition and Results of Operations.

The Trust collects the proceeds attributable to the Royalty Interests and makes quarterly cash distributions to Unitholders. The only assets of the Trust, other than cash and cash equivalents being held for the payment of expenses and liabilities and for distribution to Unitholders, are the Royalty Interests. The Royalty Interests owned by the Trust burden the interest in the Underlying Properties that is owned by the Company.

The Royalty Interests consist of overriding royalty interests burdening the Company's interest in the Underlying Properties. The Royalty Interests generally entitle the Trust to receive 65 percent of the Gross Proceeds (as defined below). The Royalty Interests are non-operating interests and bear only expenses related to property, production and related taxes (including severance taxes). Gross Proceeds consist generally of the aggregate amounts received by the Company attributable to the interests of the Company in the Underlying Properties from the sale of coal seam gas at the central delivery points in the gathering system for the Underlying Properties.

Distributable income of the Trust generally consists of the excess of royalty income plus interest income over the administrative expenses of the Trust. Upon receipt by the Trust, royalty income is invested in short-term investments in accordance with the Trust Agreement until its subsequent distribution to Unitholders.

The amount of distributable income of the Trust for any calendar year may differ from the amount of cash available for distribution to the Unitholders in such year due to differences in the treatment of the expenses of the Trust and the determination of those amounts. The financial statements of the Trust are prepared on a modified cash basis pursuant to which the expenses of the Trust are recognized when they are paid or reserves are established whereas royalty income is recognized when received by the Trust. Consequently, the reported distributable income of the Trust for any year is determined by deducting from the income received by the Trust the amount of expenses paid by the Trust during such year. The amount of cash available for distribution to Unitholders is determined after adjustment for changes in reserves for unpaid liabilities in accordance with the provisions of the Trust Agreement. See Note 5 to the financial statements of the Trust appearing elsewhere in this Form 10-K for additional information regarding the determination of the amount of cash available for distribution to Unitholders.

The year 2012 marked the eighteenth full year of the existence of the Trust. The Trust received royalty income amounting to $5,341,293 during the year ended December 31, 2012, compared to $8,359,767 for 2011 and $10,207,523 for 2010, declining primarily due to lower production and lower prices for natural gas. The royalty income received by the Trust was net of the Royalty Interests' allocable share of property, production and related taxes. General and administrative expenses during the year ended December 31, 2012 increased to $1,095,854, compared to $999,090 for 2011 and $1,022,830 for 2010. Distributable income for the year ended December 31, 2012 was $4,245,723, or $0.54 per Unit, compared to $7,361,311, or $0.94 per Unit, for 2011 and $9,185,598, or $1.17 per Unit, for 2010. The increase in general and administrative expenses in 2012 compared to 2011 was primarily the result of timing of expenses. The decrease in general and administrative expenses in 2011 compared to 2010 was primarily the result of timing of expenses.

Royalty income to the Trust is attributable to the sale of depleting assets. All of the Underlying Properties burdened by the Royalty Interests consist of producing properties. Accordingly, the proved reserves attributable to the Company's interest in the Underlying Properties are expected to decline substantially during the term of the Trust and a portion of each cash distribution made by the Trust will, therefore, be analogous to a return of capital. Accordingly, cash yields attributable to the Units are expected to decline over the term of the Trust. The changes in royalty income and distributable income noted in the preceding paragraph were due primarily to changes in the average prices received for gas attributable to the Royalty Interests as summarized in the table below.

Royalty Income received by the Trust in a given calendar year will generally reflect the proceeds from the sale of gas produced from the Underlying Properties during the first three quarters of that year and the fourth quarter of the preceding calendar year due to the timing of the receipt of these revenues. Accordingly, the royalty income included in distributable income for the years ended December 31, 2012, 2011 and 2010, was based on production volumes and natural gas prices for the periods from October 1, 2011 to September 30, 2012, October 1, 2010 to September 30, 2011 and October 1, 2009 to September 30, 2010, respectively.


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The following table sets forth the production volumes attributable to the Trust's Royalty Interests and the average sales Price and Index Price for such production for the periods indicated. These Assets are mature natural gas properties and production should decline in the latter years.

                                                              For 12 Months Ended
                                                                 September 30,
                                                         2012        2011        2010
   Production (Bcf)(1)                                    2.034       2.166       2.410
   Production (MMBtu)(2)                                  2.013       2.156       2.406
   Average Sales or Contract Price Received ($/MMBtu)   $  2.81     $  4.12     $  4.50
   Average Index Price ($/MMBtu)                        $  2.73     $  4.11     $  4.50

(1) Billion cubic feet of natural gas.

(2) Trillion British Thermal Units.

The information in this Form 10-K concerning production and prices relating to the Royalty Interests is based on information prepared and furnished by the Company to the Trustee. The Trustee has no control over and no responsibility relating to the operation of or accounting for the Underlying Properties.

Contracts were secured from various purchasers following termination of the Gas Purchase Agreement for base load gas from November 1, 2004 through August 31, 2010. During the terms of the above-mentioned contracts, any gas above the base load was sold on the spot market to various purchasers. A ten-year gas sales contract at spot market prices was entered into effective September 1, 2010 with Alabama Gas Corporation for all gas produced during such period. The foregoing information regarding the gas purchase contracts has been provided to the Trustee by Dominion Resources and Walter Exploration & Production.

The net proved reserves attributable to the Royalty Interests have been estimated as of December 31, 2012, 2011 and 2010, by independent petroleum engineers. The reserve quantities of 7.6 Bcf for 2012 compared to 11.0 Bcf for 2011 and compared to 14.7 Bcf for 2010, reflect a decline in reserves between 2010 and 2011 and between 2011 and 2012 as a result of production and a significant change in prices which affects the change in quantities. See "Financial Statements and Supplementary Data - Notes to Financial Statements - Note 8."

In March 2012, the Company notified the Trustee that it is undertaking a study of the Underlying Properties on a well-by-well basis to determine the economic viability of continuing to produce each individual well. The Company informed the Trustee that it abandoned 11 wells in 2012 as it considered them uneconomic and will evaluate an additional 24 wells in 2013. If the Company decides to suspend production or abandon any such additional wells, such decision could adversely affect the Trust's future revenue stream, and if a significant number of wells are abandoned, it could cause a termination of the Trust. Pursuant to the terms of the Trust Agreement, the Trust will terminate upon the occurrence of (i) such time as the ratio of cash amounts received by the Trust attributable to the Royalty Interests in any calendar quarter to administrative costs of the Trust for such calendar quarter is less than 1.2 to 1.0 for two consecutive calendar quarters; or (ii) March 1 of any year if it is determined, based on a reserve report as of December 31 of the prior year prepared by a firm of independent petroleum engineers mutually selected by the Trustee and the Company, that the net present value (discounted at 10 percent) of estimated future net revenues from proved reserves attributable to the Royalty Interests is equal to or less than $5 million. With respect to (i) above, the ratio of cash amounts to expenses for the most recent calendar quarter was 4.5 to 1.0 ratio and with respect to (ii) above, the net present value of the estimated future net revenues computed as described above by the independent petroleum engineers as of December 31, 2012 was approximately $12.8 million. While the results of these computations will not trigger early termination of the Trust as of December 31, 2012, future computations are subject to the numerous uncertainties in estimating the future net revenues. See "Item 1 - Business - Description of the Trust - Termination and Liquidation of the Trust" and "Item 1A - Risk Factors" for additional information.


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Critical Accounting Policies and Estimates

The Trust's financial statements reflect the selection and application of accounting policies that require the Trust to make significant estimates and assumptions. The following are some of the more critical judgment areas in the application of accounting policies that currently affect the Trust's financial condition and results of operations.

1. Basis of Accounting

The financial statements of the Trust are prepared on a modified cash basis and are not intended to present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Preparation of the Trust's financial statements on such basis includes the following:

Royalty income and interest income are recorded in the period in which amounts are received by the Trust rather than in the period of production and accrual, respectively.

General and administrative expenses are recorded based on liabilities paid and cash reserves established out of cash received.

Amortization of the Royalty Interests is calculated on a unit-of-production basis and charged directly to Trust corpus based upon when revenues are received.

Distributions to Unitholders are recorded when declared by the Trustee (see "Financial Statements and Supplementary Data - Notes to Financial Statements - Note 5).

The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America because royalty income is not accrued in the period of production, general and administrative expenses recorded are based on liabilities paid and cash reserves established rather than on an accrual basis, and amortization of the Royalty Interests is not charged against operating results. The comprehensive basis of accounting other than accounting principles generally accepted in the United States of America corresponds to the accounting permitted for royalty trusts by the U.S. Securities and Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.

2. Impairment

The Trustee routinely reviews the Trust's royalty interests in gas properties for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trust's royalty interests may not be recoverable, an impairment will be recognized and measured by the amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows. As of December 31, 2012, no impairment is required.

3. Revenue Recognition

Revenues from Royalty Interests are recognized in the period in which amounts are received by the Trust. Royalty income received by the Trust in a given calendar year will generally reflect the proceeds, on an entitlements basis, from natural gas produced for the twelve-month period ended September 30th in that calendar year.

4. Reserve Disclosure

Independent petroleum engineers estimate the net proved reserves attributable to the Royalty Interests. Estimates of future net revenues from proved reserves have been prepared using average 12-month gas prices, determined as an unweighted arithmetic average of the first-day-of-the-month benchmark price for each month within the 12-month period preceding the end of the most recent fiscal year, unless prices are defined by contractual arrangements. The standardized measure of discounted future net cash flows is achieved by using a discount rate of 10% a year to reflect the timing of future cash flows relating to proved oil and gas reserves. The reserves actually


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recovered and the timing of production may be substantially different from the reserve estimates and related costs. Numerous uncertainties are inherent in estimating volumes and the value of proved reserves and in projecting future production rates and the timing of development of non-producing reserves. Such reserve estimates are subject to change as market conditions change.

Detailed information concerning the number of wells on royalty properties is not generally available to the owner of royalty interests. Consequently, the Registrant does not have information that would be disclosed by a company with oil and gas operations, such as an accurate count of the number of wells located on the Underlying Properties, the number of exploratory or development wells drilled on the Underlying Properties during the periods presented by this report, or the number of wells in process or other present activities on the Underlying Properties, and the Registrant cannot readily obtain such information.

5. Contingencies

Contingencies related to the Underlying Properties that are unfavorably resolved would generally be reflected by the Trust as reductions to future royalty income payments to the Trust with corresponding reductions to cash distributions to Unitholders. The Trustee is aware of no such items as of December 31, 2012, other than as stated below.

The Trust is named as a defendant in an action, styled Southwest Royalties, Inc.
v. Dominion Black Warrior Basin, Inc., et al., filed in the Circuit Court of Fayette County Alabama on October 5, 2007 regarding the quieting of title in certain oil and gas rights related to property in Fayette and Tuscaloosa Counties in Alabama. The plaintiff alleges that defendants are knowingly producing gas in violation of the deeds in question. The plaintiff is also alleging conversion of gas, continuing trespass by defendants on plaintiff's property, and suppression of material facts by defendants, and plaintiff is requesting an accounting, injunctive relief and compensatory and punitive damages, plus court costs and attorneys fees. The Trustee does not believe this litigation will have a material effect on the Trust's financial statements.

In March 2012, the Company notified the Trustee that it is undertaking a study of the Underlying Properties on a well-by-well basis to determine the economic viability of continuing to produce each individual well. The Company informed the Trustee that it abandoned 11 wells in 2012 as it considered them uneconomic and will evaluate an additional 24 wells in 2013. If the Company decides to suspend production or abandon any such additional wells, such decision could adversely affect the Trust's future revenue stream, and if a significant number of wells are abandoned, it could cause a termination of the Trust. See "Item 1 - Business - Description of the Trust - Termination and Liquidation of the Trust" and "Item 1A - Risk Factors" for additional information.

New Accounting Pronouncements

There are no new accounting pronouncements that are expected to have a significant impact on the Trust's financial statements.

Liquidity and Capital Resources

As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and neither the Delaware Trustee nor the Trustee has any control over or any responsibility relating to the operation of the Underlying Properties. The Trustee has powers to collect and distribute proceeds received by the Trust and pay Trust liabilities and expenses and its actions have been limited to those activities. The assets of the Trust are passive in nature, and other than the Trust's ability to periodically borrow money as necessary to pay expenses, liabilities and obligations of the Trust that cannot be paid out of cash held by the Trust, the Trust is prohibited from engaging in borrowing transactions. As a result, other than such borrowings, if any, the Trust has no source of liquidity or capital resources other than the Royalty Interests. See the earlier discussions in Item 7 for the discussion of the operations and cash inflows and outflows of the Trust.


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Off-Balance Sheet Arrangements

As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and neither the Delaware Trustee nor the Trustee has any control over or any responsibility relating to the operation of the Underlying Properties. The Trustee has powers to collect and distribute proceeds received by the Trust and pay Trust liabilities and expenses and its actions have been limited to those activities. Therefore, the Trust has not engaged in any off-balance sheet arrangements.

Tabular Disclosure of Contractual Obligations



                                                                       Payments Due by Period
                                                     Less than 1         1 - 3         3 - 5         More than
Contractual Obligations               Total              Year            Years         Years          5 Years
Distribution declared
subsequent to year end             $ 1,260,359       $  1,260,359             0             0                 0
Total                              $ 1,260,359       $  1,260,359             0             0                 0

The above payable relates to distributions declared February 19, 2013 and payable March 11, 2013 to Unitholders of record on March 1, 2013.

Forward-Looking Statements

This Annual Report includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor created thereby. All statements other than statements of historical fact included in this Annual Report are forward-looking statements. Such statements include, without limitation, factors affecting the price of oil and natural gas contained in Item 1, "Business," certain reserve information and other statements contained in Item 2, "Properties," and certain statements regarding the Trust's financial position, industry conditions and other matters contained in this Item 7. Although the Trustee believes that the expectations reflected in such forward-looking statements are reasonable, such expectations are subject to numerous risks and uncertainties and the Trustee can give no assurance that they will prove correct. There are many factors, none of which is within the Trustee's control, that may cause such expectations not to be realized, including, among other things, factors identified in this Annual Report affecting oil and gas prices and the recoverability of reserves, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets and the factors identified in Item 1A, "Risk Factors."

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