þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Texas (State or Other Jurisdiction of Incorporation or Organization) |
75-6280532 (I.R.S. Employer Identification No.) |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
2
3
September 30, | ||||||||
2011 | December 31, | |||||||
(Unaudited) | 2010 | |||||||
ASSETS |
||||||||
Cash and short-term investments |
$ | 2,320,176 | $ | 4,580,923 | ||||
Net overriding royalty interests in producing oil and gas properties (net of
accumulated amortization of $10,064,649 and $10,004,009 at September 30, 2011
and December 31, 2010, respectively) |
910,567 | 971,207 | ||||||
TOTAL ASSETS |
$ | 3,230,743 | $ | 5,552,130 | ||||
LIABILITIES AND TRUST CORPUS |
||||||||
Distribution payable to Unit holders |
$ | 2,320,176 | $ | 4,580,923 | ||||
Commitments and contingencies |
| | ||||||
Trust corpus 46,608,796 Units of beneficial interest authorized and
outstanding |
910,567 | 971,207 | ||||||
TOTAL LIABILITIES AND TRUST CORPUS |
$ | 3,230,743 | $ | 5,552,130 | ||||
4
THREE | THREE | |||||||
MONTHS | MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2011 | September 30, 2010 | |||||||
Royalty income |
$ | 14,879,902 | $ | 16,016,241 | ||||
Interest income |
157 | 420 | ||||||
14,880,059 | 16,016,661 | |||||||
General and administrative
expenditures |
(150,178 | ) | (124,056 | ) | ||||
Distributable income |
$ | 14,729,881 | $ | 15,892,605 | ||||
Distributable income per Unit
(46,608,796 Units) |
$ | .32 | $ | .34 | ||||
5
NINE | NINE | |||||||
MONTHS | MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2011 | September 30, 2010 | |||||||
Royalty income |
$ | 50,076,877 | $ | 50,969,184 | ||||
Interest income |
521 | 808 | ||||||
50,077,398 | 50,969,992 | |||||||
General and administrative
expenditures |
(992,629 | ) | (987,391 | ) | ||||
Distributable income |
$ | 49,084,769 | $ | 49,982,601 | ||||
Distributable income per Unit
(46,608,796 Units) |
$ | 1.05 | $ | 1.07 | ||||
6
NINE | NINE | |||||||
MONTHS | MONTHS | |||||||
ENDED | ENDED | |||||||
September 30, 2011 | September 30, 2010 | |||||||
Trust corpus, beginning of
period |
$ | 971,207 | $ | 1,079,986 | ||||
Amortization of net overriding
royalty interests |
(60,640 | ) | (84,532 | ) | ||||
Distributable income |
49,084,769 | 49,982,601 | ||||||
Distributions declared |
(49,084,769 | ) | (49,982,601 | ) | ||||
Total Trust Corpus, end of
period |
$ | 910,567 | $ | 995,454 | ||||
Distributions per Unit |
$ | 1.05 | $ | 1.07 | ||||
7
1. | BASIS OF ACCOUNTING | |
The Permian Basin Royalty Trust (Trust) was established as of November 1, 1980. The net overriding royalties conveyed to the Trust include: (1) a 75% net overriding royalty carved out of Southland Royalty Companys fee mineral interests in the Waddell Ranch in Crane County, Texas (the Waddell Ranch properties); and (2) a 95% net overriding royalty carved out of Southland Royalty Companys major producing royalty interests in Texas (the Texas Royalty properties). The net overriding royalty for the Texas Royalty properties is subject to the provisions of the lease agreements under which such royalties were created. The financial statements of the Trust are prepared on the following basis: |
| Royalty income recorded for a month is the amount computed and paid to Bank of America, N.A. (Trustee) as Trustee for the Trust by the interest owners: Burlington Resources Oil & Gas Company LP (BROG), a subsidiary of ConocoPhillips for the Waddell Ranch properties and Riverhill Energy Corporation (Riverhill Energy), formerly a wholly owned subsidiary of Riverhill Capital Corporation (Riverhill Capital) and formerly an affiliate of Coastal Management Corporation (CMC), for the Texas Royalty properties. Schlumberger Technology Corporation (STC) currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. Riverhill Energy currently conducts the accounting operations for the Texas Royalty properties. Royalty income consists of the amounts received by the owners of the interest burdened by the net overriding royalty interests (Royalties) from the sale of production less accrued production costs, development and drilling costs, applicable taxes, operating charges, and other costs and deductions multiplied by 75% in the case of the Waddell Ranch properties and 95% in the case of the Texas Royalty properties. | ||
In February 1997, BROG sold its interest in the Texas Royalty properties to Riverhill Energy. | |||
The Trustee was advised that in the first quarter of 1998, STC acquired all of the shares of stock of Riverhill Capital. Prior to such acquisition by STC, CMC and Riverhill Energy were wholly owned subsidiaries of Riverhill Capital. The Trustee was further advised that in connection with STCs acquisition of Riverhill Capital, the shareholders of Riverhill Capital acquired ownership of all of the shares of stock of Riverhill Energy. Thus, the ownership in the Texas Royalty properties referenced above remained in Riverhill Energy, the stock ownership of which was acquired by the former shareholders of Riverhill Capital. | |||
In 2007 the Bank of America private wealth management group officially became known as U.S. Trust, Bank of America Private Wealth Management. The legal entity that serves as Trustee of the Trust did not change, and references in this Form 10-Q to U.S. |
8
Trust, Bank of America Private Wealth Management shall describe the legal entity Bank of America, N.A. |
| Trust expenses recorded are based on liabilities paid and cash reserves established out of cash received or borrowed funds for liabilities and contingencies. | ||
| Distributions to Unit holders are recorded when declared by the Trustee. | ||
| Royalty income is computed separately for each of the conveyances under which the Royalties were conveyed to the Trust. If monthly costs exceed revenues for any conveyance (excess costs), such excess costs cannot reduce royalty income from other conveyances, but is carried forward with accrued interest to be recovered from future net proceeds of that conveyance. |
2. | FEDERAL INCOME TAXES | |
For federal income tax purposes, the Trust constitutes a fixed investment trust which is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unit holders are considered to own the Trusts income and principal as though no trust were in existence. The income of the Trust is deemed to have been received or accrued by each Unit holder at the time such income is received or accrued by the Trust and not when distributed by the Trust. | ||
The Royalties constitute economic interests in oil and gas properties for federal income tax purposes. Unit holders must report their share of the revenues from the Royalties as ordinary income from oil and gas royalties and are entitled to claim depletion with respect to such income. | ||
The Trust has on file technical advice memoranda confirming the tax treatment described above. |
9
The classification of the Trusts income for purposes of the passive loss rules may be important to a Unit holder. Royalty income generally is treated as portfolio income and does not offset passive losses. | ||
Some Trust Units are held by middlemen, as such term is broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an interest for a customer in street name, collectively referred to herein as middlemen). Therefore, the Trustee considers the Trust to be a non-mortgage widely held fixed investment trust (WHFIT) for U.S. federal income tax purposes. U.S. Trust, Bank of America Private Wealth Management, EIN: 56-0906609, 901 Main Street, 17th Floor, Dallas, Texas 75202, telephone number (214) 209-2400, is the representative of the Trust that will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. Tax information is also posted by the Trustee at www.pbt-permianbasintrust.com. Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of Unit holders, and not the Trustee of the Trust, are solely responsible for complying with the information reporting requirements under the U.S. Treasury Regulations with respect to such Trust Units, including the issuance of IRS Forms 1099 and certain written tax statements. Unit holders whose Trust Units are held by middlemen should consult with such middlemen regarding the information that will be reported to them by the middlemen with respect to the Trust Units. | ||
Unit holders should consult their tax advisors regarding Trust tax compliance matters. | ||
3. | STATE TAX CONSIDERATIONS | |
All revenues from the Trust are from sources within Texas, which has no individual income tax. However, Texas imposes a franchise tax on generally all entity types providing limited liability protection at a rate of 1% on gross revenues less certain deductions, as specifically set forth in the Texas franchise tax statute. Entities subject to tax generally include trusts unless otherwise exempt. Trusts that receive at least 90% of their federal gross income from designated passive sources, including royalties from mineral properties and other non-operated mineral interest income, and that do not receive more than 10% of their income from operating an active trade or business generally are exempt from the Texas franchise tax as passive entities. The Trust should be exempt from Texas franchise tax as a passive entity. Since the Trust should be exempt from Texas franchise tax at the Trust level as a passive entity, each Unit holder that is considered a taxable entity under the Texas franchise tax will generally be required to include its portion of Trust revenues in its own Texas franchise tax computation. This revenue is sourced to Texas under provisions of the Texas Administrative Code sourcing such income according to the principal place of business of the Trust, which is Texas. | ||
Unit holders should consult their tax advisors regarding state tax requirements, if any, applicable to such Unit holders ownership of Trust units. | ||
4. | SUBSEQUENT EVENTS | |
Subsequent to September 30, 2011, the Trust declared a distribution on October 21, 2011 of $.104152 per unit payable on November 15, 2011, to Unit holders of record on October 31, |
10
2011. $474,480 of proceeds from the Waddell Ranch properties was withheld by ConocoPhillips (and therefore not included in the distribution) relating to a claimed overpayment for prior periods. See Note 5 for additional detail. |
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 Unit holders. | ||
On May 2, 2011, ConocoPhillips, as the parent company of BROG, the operator of the Waddell Ranch properties, notified the Trustee that as a result of inaccuracies in ConocoPhillips accounting and record keeping relating to the Trusts interest in proceeds from the gas plant production since January 2007, ConocoPhillips overpaid the Trust approximately $5.9 million. ConocoPhillips informed the Trustee on September 20, 2011 that it was withholding $4,068,067 (all of the Waddell Ranch portion of the September, 2011 proceeds, which would be reflective of July, 2011 production, of approximately 29,796 bbls of oil and 180,425 mcf of gas) in order to recoup this claim. This affected the Trusts distribution declared September 20, 2011 and paid October 17, 2011. ConocoPhillips also withheld $474,480 from the proceeds for October, 2011, which ConocoPhillips has informed the Trustee completes the recoupment. Additionally, ConocoPhillips informed the Trustee that beginning with the June 2011 distribution, proceeds to the Trust relating to the gas plant production have been adjusted to reflect ConocoPhillips calculation of the corrected interest. | ||
The Trustee is continuing to evaluate the claim. |
11
Third Quarter | ||||||||
2011 | 2010 | |||||||
Production: |
||||||||
Oil sales (Bbls) |
125,747 | 168,282 | ||||||
Gas sales (Mcf) |
413,816 | 763,886 | ||||||
Product Sales From Which The Royalties Were Carved: |
||||||||
Oil: |
||||||||
Total oil sales (Bbls) |
191,190 | 256,478 | ||||||
Average per day (Bbls) |
2,078 | 2,788 | ||||||
Average price per Bbl |
$ | 94.11 | $ | 69.56 | ||||
Gas: |
||||||||
Total gas sales (Mcf) |
742,437 | 1,318,837 | ||||||
Average per day (Mcf) |
8,070 | 14,335 | ||||||
Average price per Mcf |
$ | 8.52 | $ | 6.45 |
12
13
Nine Months Ended | ||||||||
2011 | 2010 | |||||||
Royalties: |
||||||||
Oil sales (Bbls) |
432,352 | 506,837 | ||||||
Gas sales (Mcf) |
1,708,150 | 2,292,284 | ||||||
Properties From Which The Royalties Were Carved: |
||||||||
Oil: |
||||||||
Total oil sales (Bbls) |
692,907 | 776,746 | ||||||
Average per day (Bbls) |
2,538 | 2,845 | ||||||
Average price per Bbl |
$ | 89.88 | $ | 72.91 | ||||
Gas: |
||||||||
Total gas sales (Mcf) |
3,212,146 | 3,958,768 | ||||||
Average per day (Mcf) |
11,766 | 14,501 | ||||||
Average price per Mcf |
$ | 7.59 | $ | 6.95 |
14
Three Months Ended September 30, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Waddell | Texas | Waddell | Texas | |||||||||||||
Ranch | Royalty | Ranch | Royalty | |||||||||||||
Properties | Properties | Properties | Properties | |||||||||||||
Gross proceeds of sales from the
Underlying Properties |
||||||||||||||||
Oil proceeds |
$ | 10,837,042 | $ | 7,156,526 | $ | 12,343,193 | $ | 5,496,900 | ||||||||
Gas proceeds |
5,037,905 | 1,289,581 | 7,333,630 | 1,168,823 | ||||||||||||
Total |
15,874,947 | 8,446,107 | 19,676,823 | 6,665,723 | ||||||||||||
Less: |
||||||||||||||||
Severance tax: |
||||||||||||||||
Oil |
445,640 | 273,326 | 491,195 | 177,759 | ||||||||||||
Gas |
263,532 | 62,282 | 363,863 | 68,120 | ||||||||||||
Lease operating expenses and
property tax: |
||||||||||||||||
Oil and gas |
3,163,355 | 420,000 | 4,776,138 | 360,000 | ||||||||||||
Other |
39,848 | | | | ||||||||||||
Capital expenditures |
1,864,001 | | 366,441 | | ||||||||||||
Total |
5,776,376 | 755,608 | 5,997,637 | 605,879 | ||||||||||||
Net profits |
10,098,571 | 7,690,499 | 13,679,186 | 6,059,844 | ||||||||||||
Net overriding royalty interests |
75 | % | 95 | % | 75 | % | 95 | % | ||||||||
Royalty income |
7,573,928 | 7,305,974 | 10,259,389 | 5,756,852 | ||||||||||||
15
| 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 recorded are 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 when revenues are received. | ||
| Distributions to Unit holders are recorded when declared by the Trustee (see Note 1 to the Financial Statements). |
16
17
18
Item 6. | Exhibits |
4.1 | Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) and The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference. | ||
4.2 | Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference. | ||
4.3 | Net Overriding Royalty Conveyance (Permian Basin Royalty Trust Waddell Ranch) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(c) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference. | ||
10.1 | Registration Rights Agreement dated as of July 21, 2004 by and between Burlington Resources Inc. and Bank of America, N.A., as trustee of Permian Basin Royalty Trust, heretofore filed as Exhibit 10.1 to the Trusts Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarterly period ended June 30, 2004 is incorporated herein by reference. | ||
10.2 | Underwriting Agreement dated December 15, 2005 among the Permian Basin Royalty Trust, Burlington Resources, Inc., Burlington Resources Oil |
19
& Gas L.P. and Lehman Brothers Inc. and Wachovia Capital Markets, LLC as representatives of the several underwriters, heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on December 19, 2005, is incorporated herein by reference. | |||
10.3 | Underwriting Agreement dated August 2, 2005 among the Permian Basin Royalty Trust, Burlington Resources, Inc., Burlington Resources Oil & Gas L.P. and Goldman Sachs & Co. and Lehman Brothers Inc. as representatives of the several underwriters, heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on August 8, 2005, is incorporated herein by reference. | ||
10.4 | Underwriting Agreement dated August 17, 2006, among Permian Basin Royalty Trust, ConocoPhillips, Burlington Resources Oil & Gas Company LP and Lehman Brothers Inc. and Wachovia Capital Markets, LLC as representatives of the several underwriters heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on August 22, 2006, is incorporated herein by reference. | ||
31.1 | Certification by Ron E. Hooper, Senior Vice President and Trust Administrator of Bank of America, Trustee of Permian Basin Royalty Trust, dated November 9, 2011 and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certificate by Bank of America, Trustee of Permian Basin Royalty Trust, dated November 9, 2011 and submitted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
20
BANK OF AMERICA, N.A., TRUSTEE FOR THE PERMIAN BASIN ROYALTY TRUST |
||||
By: | /s/ Ron E. Hooper | |||
Ron E. Hooper | ||||
Senior Vice President Trust Administrator |
||||
21
Exhibit | ||
Number | Exhibit | |
4.1
|
Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) and The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference.* | |
4.2
|
Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(b) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference.* | |
4.3
|
Net Overriding Royalty Conveyance (Permian Basin Royalty Trust Waddell Ranch) from Southland Royalty Company (now Burlington Resources Oil & Gas Company LP) to The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, dated November 3, 1980 (without Schedules), heretofore filed as Exhibit (4)(c) to the Trusts Annual Report on Form 10-K to the Securities and Exchange Commission for the fiscal year ended December 31, 1980 is incorporated herein by reference.* | |
10.1
|
Registration Rights Agreement dated as of July 21, 2004 by and between Burlington Resources Inc. and Bank of America, N.A., as trustee of Permian Basin Royalty Trust, heretofore filed as Exhibit 10.1 to the Trusts Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarterly period ended June 30, 2004 is incorporated herein by reference.* | |
10.2
|
Underwriting Agreement dated December 15, 2005 among the Permian Basin Royalty Trust, Burlington Resources, Inc., Burlington Resources Oil & Gas L.P. and Lehman Brothers Inc. and Wachovia Capital Markets, LLC as representatives of the several underwriters, heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on December 19, 2005, is incorporated herein by reference.* | |
10.3
|
Underwriting Agreement dated August 2, 2005 among the Permian Basin Royalty Trust, Burlington Resources, Inc., Burlington Resources Oil & Gas L.P. and Goldman Sachs & Co. and Lehman Brothers Inc. as representatives of the several underwriters, heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on August 8, 2005, is incorporated herein by reference.* |
22
Exhibit | ||
Number | Exhibit | |
10.4
|
Underwriting Agreement dated August 17, 2006, among Permian Basin Royalty Trust, ConocoPhillips, Burlington Resources Oil & Gas Company LP and Lehman Brothers Inc. and Wachovia Capital Markets, LLC as representatives of the several underwriters heretofore filed as Exhibit 10.1 to the Trusts current report on Form 8-K to the Securities and Exchange Commission filed on August 22, 2006, is incorporated herein by reference.* | |
31.1
|
Certification by Ron E. Hooper, Senior Vice President and Trust Administrator of Bank of America, Trustee of Permian Basin Royalty Trust, dated November 9, 2011 and submitted pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certificate by Bank of America, Trustee of Permian Basin Royalty Trust, dated November 9, 2011 and submitted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
* | A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, U.S. Trust, Bank of America Private Wealth Management, 901 Main Street, Dallas, Texas 75202. |
23
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes; | ||
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; | ||
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in |
the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 9, 2011 | By: | /s/ RON E. HOOPER | ||
Ron E. Hooper, | ||||
Senior Vice President and Trust Administrator Bank of America, N.A. |
BANK OF AMERICA, N.A., TRUSTEE FOR PERMIAN BASIN ROYALTY TRUST |
||||
Date: November 9, 2011 | By: | /s/ RON E. HOOPER | ||
Ron E. Hooper, | ||||
Senior Vice President and Trust Administrator Bank of America, N.A. | ||||