10-Q 1 d96840e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 MARCH 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________ COMMISSION FILE NUMBER 1-8033 PERMIAN BASIN ROYALTY TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN THE PERMIAN BASIN ROYALTY TRUST INDENTURE) Texas 75-6280532 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Bank of America, N.A. Trust Department 901 Main Street Dallas, Texas 75202 (Address of Principal Executive Offices; Zip Code) (214) 209-2400 (Registrant's Telephone Number, Including Area Code) 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 [ ] Number of Units of beneficial interest of the Trust outstanding at May 1, 2002: 46,608,796. PERMIAN BASIN ROYALTY TRUST PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The condensed financial statements included herein have been prepared by Bank of America, N.A. as Trustee for the Permian Basin Royalty Trust, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Trust's latest annual report on Form 10-K. In the opinion of the Trustee, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the assets, liabilities and trust corpus of the Permian Basin Royalty Trust at March 31, 2002, and the distributable income and changes in trust corpus for the three-month periods ended March 31, 2002 and 2001 have been included. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year. Deloitte & Touche LLP, independent certified public accountants, has made a limited review of the condensed financial statements as of March 31, 2002 and for the three-month periods ended March 31, 2002 and 2001 included herein. 2 INDEPENDENT ACCOUNTANTS' REPORT Bank of America, N.A., as Trustee for the Permian Basin Royalty Trust We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of the Permian Basin Royalty Trust as of March 31, 2002 and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of the Trustee. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As described in Note 1 to the condensed financial statements, these condensed financial statements have been prepared on a modified cash basis of accounting, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. Based on our reviews, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with the basis of accounting described in Note 1. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the statement of assets, liabilities and trust corpus of the Permian Basin Royalty Trust as of December 31, 2001, and the related statements of distributable income and changes in trust corpus for the year then ended (not presented herein); and in our report dated March 22, 2002, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2001 is fairly stated, in all material respects, in relation to the statement of assets, liabilities and trust corpus from which it has been derived. /s/ DELOITTE & TOUCHE LLP Dallas, Texas May 10, 2002 3 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
March 31, December 31, 2002 2001 ------------ ------------ (Unaudited) ASSETS Cash and short-term investments $ 1,634,721 $ 1,842,420 Net overriding royalty interests in producing oil and gas properties (net of accumulated amortization of $8,645,643 and $8,604,029 at March 31, 2002 and December 31, 2001, respectively) $ 2,329,575 $ 2,371,187 ------------ ------------ TOTAL ASSETS $ 3,964,296 $ 4,213,607 ============ ============ LIABILITIES AND TRUST CORPUS Distribution payable to Unit holders $ 1,634,721 $ 1,842,420 Commitments and contingencies Trust corpus - 46,608,796 Units of beneficial interest authorized and outstanding $ 2,329,575 $ 2,371,187 ------------ ------------ TOTAL LIABILITIES AND TRUST CORPUS $ 3,964,296 $ 4,213,607 ============ ============
The accompanying notes are an integral part of these financial statements. 4 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
THREE THREE MONTHS MONTHS ENDED ENDED March 31, 2002 March 31, 2001 -------------- -------------- Royalty income $ 4,574,228 $ 12,092,419 Interest income 4,834 26,177 -------------- -------------- 4,579,062 12,118,596 General and administrative expenditures (160,752) (165,982) -------------- -------------- Distributable income $ 4,418,310 $ 11,952,614 ============== ============== Distributable income per Unit (46,608,796 Units) $ .09 $ .26 ============== ==============
The accompanying notes to condensed financial statements are an integral part of these statements. 5 PERMIAN BASIN ROYALTY TRUST CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED March 31, 2002 March 31, 2001 -------------- -------------- Trust corpus, beginning of period $ 2,371,187 $ 2,595,254 Amortization of net overriding royalty interests (41,612) (58,252) Distributable income 4,418,310 11,952,614 Distributions declared (4,418,310) (11,952,614) -------------- -------------- Total Trust Corpus, end of period $ 2,329,575 $ 2,537,002 ============== ============== Distributions per unit $ .09 $ .26 ============== ==============
6 PERMIAN BASIN ROYALTY TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 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 Company's 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 Company's 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: o 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 ("BROG") for the Waddell Ranch properties and River hill Energy Corporation ("River hill Energy"), formerly a wholly owned subsidiary of River hill Capital Corporation ("River hill Capital") and formerly an affiliate of Coastal Management Corporation ("CMC"), for the Texas Royalty properties. CMC currently conducts all field, technical and accounting operations on behalf of BROG with regard to the Waddell Ranch properties. CMC also conducts the accounting operations for the Texas Royalty properties on behalf of River hill Energy. 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. As was previously reported, in February 1997, BROG sold its interest in the Texas Royalty properties to River hill Energy. The Trustee has been advised that in the first quarter of 1998, Schlumberger Technology Corporation ("Schlumberger") acquired all of the shares of stock of River hill Capital. Prior to such acquisition by Schlumberger, CMC and River hill Energy were wholly owned subsidiaries of River hill Capital. The Trustee has further been advised that in connection with Schlumberger's acquisition of River hill Capital, the shareholders of River hill Capital acquired ownership of all of the shares of stock of River hill Energy. Thus, the ownership in the Texas Royalty properties referenced above remained in River hill Energy, the stock ownership of which was acquired by the former shareholders of River hill Capital. o Trust expenses recorded are based on liabilities paid and cash reserves established out of cash received or borrowed funds for liabilities and contingencies. 7 o Distributions to Unit holders are recorded when declared by the Trustee. o 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 cannot reduce royalty income from other conveyances, but is carried forward with accrued interest to be recovered from future net proceeds of that conveyance. The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") because revenues are not accrued in the month of production and certain cash reserves may be established for contingencies which would not be accrued in financial statements. Amortization of the Royalties calculated on a unit-of-production basis is charged directly to trust corpus. 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 Trust's 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. The classification of the Trust's income for purposes of the passive loss rules may be important to a Unit holder. As a result of the Tax Reform Act of 1986, royalty income will generally be treated as portfolio income and will not offset passive losses. 3. SUBSEQUENT EVENTS Subsequent to March 31, 2002, the Trust declared a distribution on April 19, 2002 of $0.030655 payable on May 14, 2002. 8 ITEM 2. TRUSTEE'S DISCUSSION AND ANALYSIS FORWARD LOOKING INFORMATION Certain information included in this report contains, and other materials filed or to be filed by the Trust with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Trust) may contain or include, forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Such forward looking statements may be or may concern, among other things, capital expenditures, drilling activity, development activities, production efforts and volumes, hydrocarbon prices and the results thereof, and regulatory matters. 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 such as actual oil and gas prices and the recoverability of reserves, capital expenditures, general economic conditions, actions and policies of petroleum-producing nations and other changes in the domestic and international energy markets. Such forward looking statements generally are accompanied by words such as "estimate," "expect," "predict," "anticipate," "goal," "should," "assume," "believe," or other words that convey the uncertainty of future events or outcomes. THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 For the quarter ended March 31, 2002 royalty income received by the Trust amounted to $4,574,228 compared to royalty income of $12,092,419 during the first quarter of 2001. The decrease in royalty income is primarily attributable to significant decreases in both oil and gas prices. Interest income for the quarter ended March 31, 2002, was $4,834 compared to $26,177 during the first quarter of 2001. The decrease in interest income is primarily attributable to less funds available for investment. General and administrative expenses during the first quarter of 2002 amounted to $160,752 compared to $165,982 during the first quarter of 2001. The decrease in general and administrative expenses can be primarily attributed to the timing of payment of year end expenses. These transactions resulted in distributable income for the quarter ended March 31, 2002 of $4,418,310 or $.09 per Unit of beneficial interest. Distributions of $.031576, $.028145 and $.035073 per Unit were made to Unit holders of record as of January 31, February 28 and March 31, 2002, respectively. For the first quarter of 2001, distributable income was $11,952,614, or $.256445 per Unit of beneficial interest. Royalty income for the Trust for the first quarter of the calendar year is associated with actual oil and gas production for the period November and December of 2001 and January 2002 from the properties from which the Trust's net overriding royalty interests ("Royalties") were carved. Oil and gas sales attributable to the Royalties and the properties from which the Royalties were carved are as follows: 9
FIRST QUARTER ------------ ------------ 2002 2001 ------------ ------------ ROYALTIES: Oil sales (Bbls) 175,238 227,230 Gas sales (Mcf) 759,642 927,704 PROPERTIES FROM WHICH THE ROYALTIES WERE CARVED: Oil: Total oil sales (Bbls) 323,909 382,186 Average per day (Bbls) 3,521 4,154 Average price per Bbl $ 16.97 $ 27.90 Gas: Total gas sales (Mcf) 1,555,506 1,590,793 Average per day (Mcf) 16,908 17,291 Average price per Mcf $ 2.36 $ 6.69
The posted price of oil decreased to an average price per barrel of $16.97 per Bbl in the first quarter of 2002, compared to $27.90 per Bbl in the first quarter of 2001. The Trustee has been advised by BROG that for the period August 1, 1993, through March 31, 2002, the oil from the Waddell Ranch properties was being sold under a competitive bid to a third party. The average price of gas decreased from $6.69 per Mcf in the first quarter of 2001 to $2.36 per Mcf in the first quarter of 2002 due to soft energy pricing and less demand for products. Since the oil and gas sales attributable to the Royalties are based on an allocation formula that is dependent on such factors as price and cost (including capital expenditures), the production amounts in the Royalties section of the above table do not provide a meaningful comparison. Oil and gas sales volumes from the Underlying Properties decreased for the applicable period in 2002 compared to 2001. Capital expenditures for drilling, remedial and maintenance activities on the Waddell Ranch properties during the first quarter of 2002 totaled $885,649 as compared to $2,379,000 for the first quarter of 2001. BROG has informed the Trustee that the 2002 capital expenditures budget has been revised to $2.8 million for the Waddell Ranch. The total amount of capital expenditures for 2001 was $4.6 million. Through the first quarter of 2002, capital expenditures of $885,649 have been expended. The Trustee has been advised that there was 1 well completed or in progress during the three months ended March 31, 2002 as compared to no wells completed and 10 wells in progress for the three months ended March 31, 2001 on the Waddell Ranch properties. Lease operating expense and property taxes totaled $2 million for the first quarter of 2002, compared to $2.7 million in the first quarter of 2001 on the Waddell Ranch properties. This decrease is primarily attributable to lower maintenance costs for the quarter due to more efficient operations. 10 CALCULATION OF ROYALTY INCOME The Trust's royalty income is computed as a percentage of the net profit from the operation of the properties in which the Trust owns net overriding royalty interests. These percentages of net profits are 75% and 95% in the case of the Waddell Ranch properties and the Texas Royalty properties, respectively. Royalty income received by the Trust for the three months ended March 31, 2002 and 2001, respectively, were computed as shown in the table below:
THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------ 2002 2001 ---------------------------- ---------------------------- WADDELL TEXAS WADDELL TEXAS RANCH ROYALTY RANCH ROYALTY PROPERTIES PROPERTIES PROPERTIES PROPERTIES ------------ ------------ ------------ ------------ Gross proceeds of sales from the Underlying Properties Oil proceeds $ 4,008,109 $ 1,490,222 $ 7,949,466 $ 2,824,057 Gas proceeds 3,067,957 600,278 9,741,084 1,021,186 ------------ ------------ ------------ ------------ Total 7,076,066 2,090,500 17,690,550 3,845,243 ------------ ------------ ------------ ------------ Less: Severance tax: Oil 167,894 57,880 333,403 117,774 Gas 162,016 45,925 634,962 56,519 Lease operating expense and property tax: Oil and gas 2,050,017 180,000 2,679,260 150,000 Capital expenditures 885,649 -0- 2,379,570 -0- ------------ ------------ ------------ ------------ Total 3,265,576 283,805 6,027,195 324,293 ------------ ------------ ------------ ------------ Net profits 3,810,490 1,806,695 11,663,355 3,520,950 Net overriding royalty interests 75% 95% $ 75% 95% ------------ ------------ ------------ ------------ Royalty income $ 2,857,868 $ 1,716,360 $ 8,747,516 $ 3,344,903 ============ ============ ============ ============
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Trust's market risk, as disclosed in the Trust's annual report on Form 10-K for the fiscal year ended December 31, 2001. 11 PART II - OTHER INFORMATION ITEMS 1 THROUGH 5. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (4)(a) Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company (now Burlington Resources Oil & Gas Company) and The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trust's 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)(b) Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company) 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 Trust's 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)(c) Net Overriding Royalty Conveyance (Permian Basin Royalty Trust - Waddell Ranch) from Southland Royalty Company (now Burlington Resources Oil & Gas Company) 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 Trust's 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. (b) Reports on Form 8-K No reports were filed during the quarter ended March 31, 2002. 12 SIGNATURES 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. 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 Date: May 13, 2002 (The Trust has no directors or executive officers.) 13 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT ------ ------- (4)(a) Permian Basin Royalty Trust Indenture dated November 3, 1980, between Southland Royalty Company (now Burlington Resources Oil & Gas Company) and The First National Bank of Fort Worth (now Bank of America, N.A.), as Trustee, heretofore filed as Exhibit (4)(a) to the Trust's 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.* (b) Net Overriding Royalty Conveyance (Permian Basin Royalty Trust) from Southland Royalty Company (now Burlington Resources Oil & Gas Company) 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 Trust's 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.* (c) Net Overriding Royalty Conveyance (Permian Basin Royalty Trust - Waddell Ranch) from Southland Royalty Company (now Burlington Resources Oil & Gas Company) 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 Trust's 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.*
* A copy of this Exhibit is available to any Unit holder, at the actual cost of reproduction, upon written request to the Trustee, Bank of America, N.A., 901 Main Street, Dallas, Texas 75202. 14