BP Prudhoe Bay Royalty Trust(BPT) - 2019 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The financial statements, prepared on a modified cash basis, detail the Trust's financial position as of March 31, 2019, and its first-quarter performance, showing decreased royalty revenues and cash earnings compared to the prior year Financial Statements The statements show a year-over-year decrease in cash earnings, distributions, and royalty revenues for the three months ended March 31, 2019, alongside a slight decline in total assets Statements of Assets, Liabilities and Trust Corpus (In thousands) | | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $1,010 | $1,031 | | Total assets | $1,010 | $1,031 | | Liabilities and Trust Corpus | | | | Accrued expenses | $312 | $339 | | Trust corpus | $698 | $692 | | Total liabilities and trust corpus | $1,010 | $1,031 | Statements of Cash Earnings and Distributions (In thousands, except per unit data) | | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Royalty revenues | $21,759 | $26,539 | | Interest income | $9 | $6 | | Less: Trust administrative expenses | ($326) | ($215) | | Cash earnings | $21,442 | $26,330 | | Cash distributions | $21,463 | $26,325 | | Cash distributions per unit | $1.0029 | $1.2302 | Notes to Financial Statements These notes detail the Trust's passive structure, its modified cash basis accounting, the full amortization of its Royalty Interest, its tax treatment as a grantor trust, and the Trustee's recent decision to withhold funds for cash reserves - The Trust's sole purpose is to own and administer the Royalty Interest, which is a 16.4246% per barrel royalty on the first 90,000 barrels of average actual daily net production per quarter from BP Alaska's 1989 working interests in the Prudhoe Bay field[19] - The financial statements are prepared on a modified cash basis, recording revenues when received, which is considered most meaningful for quarterly distributions[27][28] - The carrying value of the Royalty Interest was reduced to zero by December 31, 2010, through $359.5 million in amortization and $175.5 million in impairment write-downs[34] - Subsequent Event (April 2019): The Trust received a royalty payment of ~$7.7 million for Q1 2019, distributing $7.38 million to unit holders after withholding $33,750 to increase cash reserves, a practice the Trustee intends to continue quarterly[45][46] Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The Trustee's analysis highlights the Trust's sensitivity to oil prices and production, noting a significant Q1 2019 decline in royalty revenues and distributions primarily due to increased Chargeable Costs and lower production, leading to a new strategy for building cash reserves Liquidity and Capital Resources The Trust's liquidity is solely dependent on royalty payments from BP Alaska, prompting the Trustee to implement a plan to increase cash reserves by withholding a portion of quarterly distributions starting April 2019 - The Trust is a passive entity with its sole source of liquidity and capital being the revenue from the Royalty Interest[50] - Commencing with the April 2019 distribution, the Trustee began withholding funds each quarter to increase the cash reserve by a total of approximately $270,000 to cover future expenses[53] Results of Operations Q1 2019 royalty revenues decreased 18% year-over-year to $21.8 million, primarily due to a 14.1% drop in Average Per Barrel Royalty driven by increased Adjusted Chargeable Costs and lower average net production, despite a rise in WTI price Comparison of Royalty Calculation Factors (for Q4 production periods) | Factor | Q4 2018 | Q4 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Average WTI Price | $58.82 | $55.48 | 6.0% | | Adjusted Chargeable Costs | $38.81 | $32.67 | 18.8% | | Average Production Taxes | $2.04 | $1.92 | 6.3% | | Average Per Barrel Royalty | $17.94 | $20.89 | (14.1%) | | Average net production (mb/d) | 78.7 | 84.0 | (6.3%) | Comparison of Financial Results (Three Months Ended March 31) | (In thousands) | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Royalty revenues | $21,759 | $26,539 | (18.0%) | | Cash earnings | $21,442 | $26,330 | (18.6%) | | Cash distributions | $21,463 | $26,325 | (18.5%) | - The decrease in royalty revenue was primarily caused by the increase in Adjusted Chargeable Costs and lower production, despite a 6% increase in the average WTI price for the quarter[67][70] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Trust, as a passive entity, faces minimal market risk from interest rates, foreign currency, or derivatives, with oil price fluctuation being its inherent primary risk - The Trust is not subject to any material interest rate risk, foreign currency risk, or risk from derivative financial instruments[71] Item 4. Controls and Procedures The Trustee confirmed the effectiveness of the Trust's disclosure controls and procedures, relying on BP Alaska's contractual reporting, with no material changes to internal control over financial reporting during the quarter - The Trustee evaluated the Trust's disclosure controls and procedures and concluded they are effective, relying on information contractually provided by BP Alaska[72][77] - There were no changes in the Trust's internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, its internal controls[78] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Trust reports no legal proceedings - None[80] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2018 - There have been no material changes in risk factors disclosed in the 2018 Annual Report[81] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Trust reports no unregistered sales of equity securities - None[83] Item 3. Defaults Upon Senior Securities The Trust reports no defaults upon senior securities - None[84] Item 4. Mine Safety Disclosures This item is not applicable to the Trust - Not applicable[85] Item 5. Other Information This section references Note 7 of the financial statements, which details the subsequent event related to the April 2019 royalty payment and distribution - Reference is made to Note 7 of Notes to Financial Statements (Unaudited) in Part I, Item 1, regarding a subsequent event[86] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and various agreements incorporated by reference from previous filings - Exhibits filed include Rule 13a-14(a)/15d-14(a) Certifications and Section 1350 Certification. Other agreements are incorporated by reference[88] Signature Signature The report was duly signed and authorized on May 10, 2019, by The Bank of New York Mellon Trust Company, N.A., acting as the Trustee for the BP Prudhoe Bay Royalty Trust - The report was signed on May 10, 2019, by Elaina C. Rodgers, Vice President of The Bank of New York Mellon Trust Company, N.A., as Trustee[93][94]