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BPT > SEC Filings for BPT > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for BP PRUDHOE BAY ROYALTY TRUST

Form 10-K for BP PRUDHOE BAY ROYALTY TRUST


28-Feb-2014

Annual Report


ITEM 7. TRUSTEE'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Trust is a passive entity. 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" in Item 1 for a description of the calculation of the Per Barrel Royalty, and the discussion under "THE PRUDHOE BAY UNIT AND FIELD - Reserve Estimates" in Item 1 for information concerning the estimated future net revenues of the Trust. However, the Trust Agreement gives the Trustee power to borrow, establish a cash reserve, or dispose of all or part of the Trust property under limited circumstances. See the discussion under "THE TRUST - Sales of Royalty Interest; Borrowings and Reserves" in Item 1.


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Since 1999, the Trustee has maintained a $1,000,000 cash reserve to provide liquidity to the Trust during any future periods in which the Trust does not receive a 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. The Trustee anticipates that it will keep this cash reserve program in place until termination of the Trust.

Amounts set aside for the cash reserve are invested by the Trustee in U.S. government or agency securities secured by the full faith and credit of the United States. Interest income received by the Trust from the investment of the reserve fund is added to the distributions received from BP Alaska and paid to the Unit holders on each Quarterly Record Date.

Annual decreases in Trust corpus and total assets are the result of amortization of the Royalty Interest. See Notes 2 and 3 of Notes to Financial Statements in Item 8.

Results of Operations

Relatively modest changes in oil prices significantly affect the Trust's revenues and results of operations. Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC and other producing countries. The effect of changing economic conditions on the demand and supply for energy throughout the world and future prices of oil cannot be accurately projected.

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, distributions to Unit holders in each calendar year ending December 31 are attributable to BP Alaska's operations during the twelve-month period ended on the preceding September 30.

When BP Alaska's average net production of oil and condensate per quarter from the 1989 Working Interests exceeds 90,000 barrels a day, the principal 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 and changes in Production Taxes. However, it is likely that the Trust's revenues in future periods also will be affected by increases and decreases in production from the 1989 Working Interests. BP Alaska's net production of oil and condensate allocated to the Trust from proved reserves was less than 90,000 barrels per day on an annual basis during 2011, 2012 and 2013. The Trustee has been advised that BP Alaska expects that average net production allocated to the Trust from the proved reserves will be less than 90,000 barrels a day on an annual basis in future years.

BP Alaska estimates Royalty Production from the 1989 Working Interests for purposes of calculating quarterly royalty payments to the Trust because complete actual field production data for the preceding calendar quarter generally is not available by the Quarterly Record Date. To the extent that average net production from the 1989 Working Interests is below 90,000 barrels per day, calculation by BP Alaska of actual Royalty Production data may result in revisions of prior Royalty Production estimates. Revisions by BP Alaska of its Royalty Production calculations may result in quarterly royalty payments by BP Alaska which reflect adjustments for overpayments or underpayments of royalties with respect to prior quarters. Such adjustments, if material, may adversely affect certain Unit holders who buy or sell Units between the Quarterly Record Dates for the Quarterly Distributions affected. See Note 8 of Notes to Financial Statements in Item 8. Because the annual statement of cash earnings and distributions of the Trust is prepared on a modified cash basis, royalty revenues for the calendar year do not include the amounts of underpayments or overpayments affecting payments received during the fourth quarter of the year.


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During the years 2012 and 2013 and the period of 2014 up to the date of this report, WTI Prices have been above the level necessary for the Trust to receive a Per Barrel Royalty. Whether the Trust will be entitled to future distributions during the remainder of 2014 will depend on WTI Prices prevailing during the remainder of the year.

2013 compared to 2012

As explained in Note 2 of Notes to Financial Statements below, the financial statements of the Trust are prepared on a modified cash basis and differ from financial statements prepared in accordance with generally accepted accounting principles in that (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 and (b) Trust expenses are recorded on an accrual basis. As a consequence, Trust royalty revenues for the fiscal year are based on Royalty Production during the twelve months ended September 30 of the fiscal year.

                                                                  Increase (decrease)
                                             12 Months                                             12 Months
                                               Ended                                                 Ended
                                             9/30/2013          Amount            Percent          9/30/2012
Average WTI Price                           $     95.66       $     0.01               0.1        $     95.65
Adjusted Chargeable Costs                   $     30.00       $     0.66               2.3        $     29.34
Average Production Taxes                    $     25.98       ($    0.45 )            (1.7 )      $     26.43
Average Per Barrel Royalty                  $     39.68       ($    0.19 )            (0.5 )      $     39.87
Average net royalty production (mb/d)              82.6             (0.5 )            (0.6 )             83.1

Average WTI prices during the twelve months ended September 30, 2013 remained virtually unchanged overall compared to the preceding twelve-month period, despite fluctuating between an average price of $89.52 during October 2012 and an average price of $106.31 during September 2013, with a high average price of $106.55 during August 2013 and a low average price of $86.69 during November 2012. The increase in the Consumer Price Index used to calculate the Cost Adjustment Factor, as well as the scheduled increase in Chargeable Costs from $16.70 in calendar 2012 to $16.80 in calendar 2013, resulted in the increase in Adjusted Chargeable Costs during the twelve months ended September 30, 2013. The decrease in Production Taxes during the twelve-month period was primarily due to the modest decline in the production levels from the 1989 Working Interest for the twelve-month period. The decline in production levels during this period resulted primarily from two TAPS-related planned maintenance events and two planned Greater Prudhoe Bay field facility turnarounds during the second and third quarters of 2013.

                                                  Increase (decrease)
                              Year Ended                                        Year Ended
                              12/31/2013        Amount           Percent        12/31/2012
                                                 (Dollars in thousands)
  Royalty revenues           $    194,854     ($    5,165 )          (2.6 )    $    200,019
  Cash earnings              $    193,473     ($    5,395 )          (2.8 )    $    198,868
  Cash distributions         $    193,473     ($    5,412 )          (2.8 )    $    198,885
  Administrative expenses    $      1,382     $       230            20.0      $      1,152
  Trust corpus at year end   $        863     $        37             4.5      $        826


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The decline in the production levels from the 1989 Working Interest due to the two TAPS-related planned maintenance events and the two facility turnarounds at the Greater Prudhoe Bay field during the second and third quarters of 2013 had a corresponding effect on royalty revenues, cash earnings and cash distributions for the twelve months ended December 31, 2013. The increase in administrative expenses reflects certain increases in the overall costs of supplies and services and timing differences in accruals of expenses.

2012 compared to 2011

                                                                Increase (decrease)
                                            12 Months                                          12 Months
                                              Ended                                              Ended
                                            9/30/2012          Amount          Percent         9/30/2011
Average WTI Price                          $     95.65       $     2.83             3.0       $     92.82
Adjusted Chargeable Costs                  $     29.34       $     1.70             6.2       $     27.64
Average Production Taxes                   $     26.43       $     0.69             2.7       $     25.74
Average Per Barrel Royalty                 $     39.87       $     0.42             1.1       $     39.45
Average net royalty production (mb/d)             83.1             (2.3 )          (2.7 )            85.4

Average WTI prices rose 3.0% during the twelve months ended September 30, 2012, as compared to the preceding twelve-month period, fluctuating between an average price of $86.32 during October 2011 and an average price of $94.51 during September 2012, with a high average price of $106.16 during March 2012 and a low average price of $82.30 during June 2012. The increase in the Consumer Price Index used to calculate the Cost Adjustment Factor, as well as the scheduled increase in Chargeable Costs from $16.60 in calendar 2011 to $16.70 in calendar 2012, resulted in the increase in Adjusted Chargeable Costs during the twelve months ended September 30, 2012. The increase in Production Taxes during the twelve-month period was primarily due to the increase in Average WTI Price, which resulted in a higher average monthly production tax per barrel (see "THE ROYALTY INTEREST - Production Taxes" in Item 1). The decline in the production levels from the 1989 Working Interest for the twelve-month period was primarily due to maintenance at the Prudhoe Bay field during the quarter ended September 30, 2012.

                                                  Increase (decrease)
                              Year Ended                                        Year Ended
                              12/31/2012        Amount           Percent        12/31/2011
                                                 (Dollars in thousands)
  Royalty revenues           $    200,019     ($    2,306 )          (1.1 )    $    202,325
  Cash earnings              $    198,868     ($    2,241 )          (1.1 )    $    201,109
  Cash distributions         $    198,885     ($    2,207 )          (1.1 )    $    201,092
  Administrative expenses    $      1,152     ($       65 )          (5.3 )    $      1,217
  Trust corpus at year end   $        826     ($       64 )          (7.2 )    $        890

Despite the increase in average WTI Prices during the twelve months ended September 30, 2012, the decline in the production levels from the 1989 Working Interest due to maintenance at the Prudhoe Bay field during the quarter ended September 30, 2012 had a corresponding effect on royalty revenues, cash earnings and cash distributions for the twelve months ended December 31, 2012. The decrease in administrative expenses reflects certain decreases in the overall costs of supplies and services and timing differences in accruals of expenses.


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