BP Prudhoe Bay Royalty Trust 10-Q
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
OR
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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 1-10243
BP PRUDHOE BAY ROYALTY TRUST
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-6943724 |
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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The Bank of New York, 101 Barclay Street, New York, NY
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10286 |
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(Address of Principal Executive Offices)
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(Zip Code) |
Registrants Telephone Number, Including Area Code: (212) 815-6908
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
Yes o No þ
As of August 9, 2006, 21,400,000 Units of Beneficial Interest were outstanding.
BP Prudhoe Bay Royalty Trust
Statement of Assets, Liabilities and Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(Unaudited)
(In thousands, except unit data)
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June 30, |
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December 31, |
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2006 |
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2005 |
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Assets |
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Royalty Interest, net (Notes 1, 2 and 3) |
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$ |
9,038 |
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$ |
10,043 |
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Cash and cash equivalents (Note 2) |
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1,008 |
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1,011 |
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Total Assets |
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$ |
10,046 |
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$ |
11,054 |
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Liabilities and Trust Corpus |
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Accrued expenses |
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$ |
299 |
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$ |
178 |
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Trust Corpus (40,000,000 units of beneficial
interest authorized, 21,400,000 units issued
and outstanding) |
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9,747 |
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10,876 |
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Total Liabilities and Trust Corpus |
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$ |
10,046 |
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$ |
11,054 |
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See accompanying notes to financial statements (unaudited).
2
BP Prudhoe Bay Royalty Trust
Statements of Cash Earnings and Distributions
(Prepared on a modified basis of cash receipts and disbursements)
(Unaudited)
(In thousands, except unit data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Royalty revenues |
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$ |
47,539 |
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$ |
33,413 |
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$ |
92,922 |
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$ |
66,610 |
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Interest income |
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18 |
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9 |
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32 |
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14 |
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Less: Trust administrative expenses |
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(296 |
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(367 |
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(453 |
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(518 |
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Cash earnings |
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$ |
47,261 |
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$ |
33,055 |
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$ |
92,501 |
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$ |
66,106 |
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Cash distributions |
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$ |
47,258 |
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$ |
33,060 |
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$ |
92,504 |
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$ |
66,111 |
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Cash distributions per unit |
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$ |
2.2083 |
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$ |
1.5449 |
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$ |
4.3226 |
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$ |
3.0893 |
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Units outstanding |
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21,400,000 |
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21,400,000 |
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21,400,000 |
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21,400,000 |
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See accompanying notes to financial statements (unaudited).
3
BP Prudhoe Bay Royalty Trust
Statements of Changes in Trust Corpus
(Prepared on a modified basis of cash receipts and disbursements)
(Unaudited)
(In thousands)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2005 |
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2006 |
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2005 |
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Trust Corpus at beginning of period |
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$ |
10,230 |
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$ |
12,171 |
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$ |
10,876 |
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$ |
12,881 |
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Cash earnings |
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47,261 |
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33,055 |
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92,501 |
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66,106 |
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(Increase) decrease in accrued expenses |
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17 |
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(29 |
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(121 |
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(237 |
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Cash distributions |
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(47,258 |
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(33,060 |
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(92,504 |
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(66,111 |
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Amortization of Royalty Interest |
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(503 |
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(502 |
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(1,005 |
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(1,004 |
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Trust Corpus at end of period |
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$ |
9,747 |
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$ |
11,635 |
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$ |
9,747 |
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$ |
11,635 |
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See accompanying notes to financial statements (unaudited).
4
BP Prudhoe Bay Royalty Trust
Notes to Financial Statements (Unaudited)
(Prepared on a Modified Basis of Cash Receipts and Disbursements)
June 30, 2006
(1) Formation of the Trust and Organization
BP Prudhoe Bay Royalty Trust (the Trust), a grantor trust, was created as a Delaware business
trust pursuant to a Trust Agreement dated February 28, 1989 among The Standard Oil Company
(Standard Oil), BP Exploration (Alaska) Inc. (BP Alaska), The Bank of New York (the
Trustee) and The Bank of New York (Delaware), as co-trustee (the Trust Agreement). Standard
Oil and BP Alaska are indirect wholly-owned subsidiaries of BP p.l.c. (BP).
On February 28, 1989, Standard Oil conveyed an overriding royalty interest (the Royalty
Interest) to the Trust. The Trust was formed for the sole purpose of owning and administering
the Royalty Interest. The Royalty Interest represents the right to receive, effective February
28, 1989, a per barrel royalty (the Per Barrel Royalty) of 16.4246% on the lesser of (a) the
first 90,000 barrels of the average actual daily net production of oil and condensate per
quarter or (b) the average actual daily net production of oil and condensate per quarter from BP
Alaskas working interest as of February 28, 1989 in the Prudhoe Bay Field situated on the North
Slope of Alaska. Trust Unit holders will remain subject at all times to the risk that
production will be interrupted or discontinued or fall, on average, below 90,000 barrels per day
in any quarter. BP has guaranteed the performance of BP Alaska of its payment obligations with
respect to the Royalty Interest.
The trustees of the Trust are The Bank of New York, a New York corporation authorized to do a
banking business, and The Bank of New York (Delaware), a Delaware banking corporation. The Bank
of New York (Delaware) serves as co-trustee in order to satisfy certain requirements of the
Delaware Trust Act. The Bank of New York alone is able to exercise the rights and powers
granted to the Trustee in the Trust Agreement.
The Per Barrel Royalty in effect for any day is equal to the price of West Texas Intermediate
crude oil (the WTI Price) for that day less scheduled Chargeable Costs (adjusted in certain
situations for inflation) and Production Taxes (based on statutory rates then in existence).
The Trust is passive, with the Trustee having only such powers as are necessary for the
collection and distribution of revenues, the payment of Trust liabilities, and the protection of
the Royalty Interest. The Trustee, subject to certain conditions, is obligated to establish
cash reserves and borrow funds to pay liabilities of the Trust when they become due. The
Trustee may sell Trust properties only (a) as authorized by a vote of the Trust Unit Holders,
(b) when necessary to provide for the payment of specific liabilities of the Trust then due
(subject to certain conditions) or (c) upon termination of the Trust. Each Trust Unit issued
and outstanding represents an equal undivided share of beneficial interest in the Trust.
Royalty payments are received by the Trust and distributed to Trust Unit Holders, net of Trust
expenses, in the month succeeding the end of each calendar quarter. The Trust will terminate
upon the first to occur of the following events:
5
BP Prudhoe Bay Royalty Trust
Notes to Financial Statements (Unaudited)
(Prepared on a Modified Basis of Cash Receipts and Disbursements)
June 30, 2006
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a. |
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On or prior to December 31, 2010: upon a vote of Trust Unit Holders of not less than
70% of the outstanding Trust Units. |
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b. |
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After December 31, 2010: (i) upon a vote of Trust Unit Holders of not less than 60% of
the outstanding Trust Units, or (ii) at such time the net revenues from the Royalty
Interest for two successive years commencing after 2010 are less than $1,000,000 per year
(unless the net revenues during such period are materially and adversely affected by
certain events). |
In order to ensure the Trust has the ability to pay future expenses, the Trust established a
cash reserve account which the Trustee believes is sufficient to pay approximately one years
current and expected liabilities and expenses of the Trust.
(2) Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and reflect the
Trusts assets, liabilities, Corpus, earnings, and distributions, as follows:
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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. |
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b. |
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Trust expenses (which include accounting, engineering, legal, and other professional
fees, trustees fees, and out-of-pocket expenses) are recorded on an accrual basis. |
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c. |
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Cash reserves may be established by the Trustee for certain contingencies that would
not be recorded under generally accepted accounting principles. |
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d. |
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Amortization of the Royalty Interest is calculated based on the units of production
method. Such amortization is charged directly to the Trust Corpus, and does not affect cash
earnings. The daily rate for amortization per net equivalent barrel of oil for the three
months ended June 30, 2006 and 2005 was $0.38 and $0.37, respectively and for the six
months ended June 30, 2006 and 2005 it was $0.38 and $0.37, respectively. The Trust
evaluates impairment of the Royalty Interest by comparing the undiscounted cash flows
expected to be realized from the Royalty Interest to the carrying value, pursuant to
Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. If the expected future undiscounted cash flows are less
than the carrying value, the Trust recognizes an impairment loss for the difference between
the carrying value and the estimated fair value of the Royalty Interest. |
While these statements differ from financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, the modified cash basis of
reporting revenues and distributions is considered to be the most meaningful because quarterly
distributions to the Trust Unit Holders are based on net cash receipts. The
6
BP Prudhoe Bay Royalty Trust
Notes to Financial Statements (Unaudited)
(Prepared on a Modified Basis of Cash Receipts and Disbursements)
June 30, 2006
accompanying
modified cash basis financial statements contain all adjustments necessary to
present fairly the assets, liabilities and Corpus of the Trust as of June 30, 2006 and 2005, and
the modified cash earning and distributions and changes in Trust Corpus for the three-month and
six-month periods ended June 30, 2006 and 2005. The adjustments are of a normal recurring nature
and are, in the opinion of the Trustee, necessary to fairly present the results of operations.
As of June 30, 2006 and December 31, 2005, cash equivalents which represent the cash reserve
consist of US treasury bills with an initial term of less than three months.
Estimates and assumptions are required to be made regarding assets, liabilities and changes in
Trust Corpus resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in determining these
estimates could cause actual results to differ, and the differences could be material.
The financial statements should be read in conjunction with the financial statements and related
notes in the Trusts Annual Report on Form 10-K for the fiscal year ended December 31, 2005. The
cash earnings and distributions for the interim period presented are not necessarily indicative
of the results to be expected for the full year.
(3) Royalty Interest
The Royalty Interest is comprised of the following at June 30, 2006 and December 31, 2005 (in
thousands):
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June 30, |
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December 31, |
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2006 |
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2005 |
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Royalty Interest (at inception) |
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$ |
535,000 |
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$ |
535,000 |
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Less: Accumulated amortization |
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(352,444 |
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(351,439 |
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Impairment write-down |
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(173,518 |
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(173,518 |
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Balance, end of period |
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$ |
9,038 |
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$ |
10,043 |
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(4) Income Taxes
The Trust files its federal tax return as a grantor trust subject to the provisions of subpart E
of Part I of Subchapter J of the Internal Revenue Code of 1986, as amended, rather than as an
association taxable as a corporation. The Trust Unit Holders are treated as the owners of Trust
income and Corpus, and the entire taxable income of the Trust will be reported by the Trust Unit
Holders on their respective tax returns.
7
BP Prudhoe Bay Royalty Trust
Notes to Financial Statements (Unaudited)
(Prepared on a Modified Basis of Cash Receipts and Disbursements)
June 30, 2006
If the Trust were determined to be an association taxable as a corporation, it would be treated
as an entity taxable as a corporation on the taxable income from the Royalty Interest, the Trust
Unit Holders would be treated as shareholders, and distributions to Trust Unit Holders would not
be deductible in computing the Trusts tax liability as an association.
(5) Subsequent Event
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On August 7, 2006, BP announced that BP Alaska had commenced a shutdown of the Prudhoe Bay
Field. The shutdown followed the discovery of unexpectedly severe corrosion and a small spill
from an oil transit line in the Prudhoe Bay Field. |
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Based on the information available at the date of this report, the Trustee is unable to
estimate the magnitude or duration of the effect that the shutdown of the Prudhoe Bay Field
will have on the Trusts royalty revenues and its cash distributions. See Item 1A in Part II of
this report for additional information. |
8
Item 2. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement
This report contains forward looking statements (that is, statements anticipating future events or
conditions and not statements of historical fact). Words such as anticipate, expect, believe,
intend, plan or project, and should, would, could, potentially, possibly or may,
and other words that convey uncertainty of future events or outcomes are intended to identify
forward-looking statements. Forward-looking statements in this report are subject to a number of
risks and uncertainties beyond the control of the Trustee. These risks and uncertainties include
such matters as future changes in oil prices, oil production levels, economic activity, domestic
and international political events and developments, legislation and regulation, and certain
changes in expenses of the Trust.
The actual results, performance and prospects of the Trust could differ materially from those
expressed or implied by forward-looking statements. Descriptions of some of the risks that could
affect the future performance of the Trust appear in Item 1A, Risk Factors, of the Trusts Annual
Report on Form 10-K for the fiscal year ended December 31, 2005 (the Annual Report) and in Item
1A of Part II this report. There may be additional risks of which the Trustee is unaware or which
are currently deemed immaterial.
In the light of these risks, uncertainties and assumptions, you should not rely unduly on any
forward-looking statements. Forward-looking events and outcomes discussed in the Annual Report and
in this report may not occur or may transpire differently. The Trustee undertakes no obligation to
update forward-looking statements after the date of this report, except as required by law, and all
such forward-looking statements in this report are qualified in their entirety by the preceding
cautionary statements.
Liquidity and Capital Resources
The Trust is a passive entity, and the Trustees 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 Part I, Item 1 of the Annual Report for a description of
the calculation of the Per Barrel Royalty, and the discussion under THE PRUDHOE BAY UNIT AND FIELD
- Reserve Estimates and INDEPENDENT OIL AND GAS CONSULTANTS REPORT in Part I, Item 1 of the
Annual Report for information concerning the estimated future net revenues of the Trust. However,
the Trustee has a limited power to borrow, establish a cash reserve, or dispose of all or part of
the Trust Estate, under limited circumstances pursuant to the terms of the Trust Agreement. See
the discussion under THE TRUST in Part I, Item 1 of the Annual Report.
In 1999, due to declines in oil prices during the fourth quarter of 1998 and the first quarter of
1999, which resulted in the Trust not receiving cash distributions for two quarters, the Trustee
established 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
9
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 holders of Units on each Quarterly Record Date.
As discussed under CERTAIN TAX CONSIDERATIONS in Part I, Item 1 of the Annual Report, amounts
received by the Trust as quarterly distributions are income to the holders of the Units, (as are
any earnings on investment of the cash reserve) and must be reported by the holders of the Units,
even if such amounts are used to repay borrowings or replenish the cash reserve and are not
received by the holders of the Units.
Results of Operations
Relatively modest changes in oil prices significantly affect the Trusts 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 fifteenth day of the month following the end of the
calendar quarter in which the related Royalty Production occurred (the Quarterly Record Date).
The Trustee, to the extent possible, pays all accrued expenses of the Trust 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 modified cash basis and, as a result,
royalties paid to the Trust and distributions to Unit holders in the quarters ended June 30, 2006
and 2005, respectively, are attributable to BP Alaskas operations during the quarters ended March
31, 2006 and 2005, respectively.
The following table show the factors which were employed to compute the Per Barrel Royalty payments
received by the Trust during the first two quarters of 2006 and 2005 (see Note 1 of Notes to
Financial Statements in Part I, Item 1). The information in the table has been furnished by BP
Alaska.
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Average WTI |
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Cost Adjustment |
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Adjusted Chargeable |
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Price |
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Chargeable Costs |
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Factor |
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Costs |
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Production Taxes |
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Per Barrel Royalty |
Calendar 2006 |
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4th Qtr 2005 |
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$ |
60.01 |
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$ |
12.25 |
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1.521 |
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$ |
18.63 |
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$ |
8.01 |
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$ |
33.37 |
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1st Qtr 2006 |
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$ |
63.36 |
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$ |
12.50 |
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1.530 |
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$ |
19.13 |
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$ |
8.50 |
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35.73 |
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Calendar 2005 |
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4th Qtr 2004 |
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48.35 |
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12.00 |
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1.471 |
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17.65 |
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6.29 |
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24.41 |
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1st Qtr 2005 |
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49.70 |
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12.25 |
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1.477 |
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18.09 |
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6.49 |
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25.12 |
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10
As long as BP Alaskas average daily net production from the Prudhoe Bay Unit exceeds 90,000
barrels, which BP Alaska currently projects will continue until the year 2012, the only factors
affecting the Trusts revenues and distributions to Unit holders are changes in WTI Prices,
scheduled annual increases in Chargeable Costs, changes in the Consumer Price Index, changes in
Production Taxes and changes in the expenses of the Trust, contributions to the cash reserve and
interest earned on the cash reserve. See, however, the Trusts Current Report on Form 8-K dated August 7, 2006 and Item 1A in Part II of
this report for information concerning the recent shutdown of the Prudhoe Bay field. The shutdown
is expected result in average daily net production from the Prudhoe Bay Unit falling below 90,000
barrels per day during the third quarter of 2006 and, possibly, during subsequent periods.
Suspension or reduction of production from the Prudhoe Bay Unit is expected to have a material adverse effect on
the Trusts results of operations for the fourth quarter of 2006
and any subsequent periods affected.
For more
information concerning the calculation of the Per Barrel Royalty,
see the discussion under THE ROYALTY INTEREST in Part I, Item 1 of the Annual Report.
Quarter Ended June 30, 2006 Compared to
Quarter Ended June 30, 2005
As explained above, Trust royalty revenues received during the second quarter of the fiscal year
are based on Royalty Production during the first quarter of the fiscal year. Royalty revenues
received by the Trust in the quarter ended June 30, 2006 increased 42.3% from the revenues received
in the corresponding quarter of 2005, due to a 27.5% period-to-period increase in the Average WTI
Price from $49.70 per barrel during the quarter ended March 31, 2005 to $63.36 per Barrel during
the quarter ended March 31, 2006. A 12.4%% period-to-period increase in total deductible costs from
$24.58 per Barrel to $27.63 per Barrel was due principally to a 31% increase in Production Taxes
chargeable with respect to the quarter ended March 31, 2006, and partially offset the effect of the
increase in the Average WTI Price on the Trusts revenues.
Six Months Ended June 30, 2006 Compared to
Six Months Ended June 30, 2005
Trust royalty revenues increased 39.5% in the six months ended June 30, 2006 over the corresponding
period in 2005, reflecting the cumulative effect of increases in revenues received during the last
quarter of 2005 and the first quarter of 2006 over revenues received during the corresponding
periods of 2004 and 2005. The revenue increase resulted from continued increases in Average WTI
Prices during recent periods, which averaged $61.69 per Barrel during the six months ended March
31, 2006 compared to an average of $49.03 per Barrel during the six months ended March 31, 2005. An
11.9% increase in average total deductible costs charged during the two quarters ended March 31,
2005 over the corresponding average deductible costs during the two quarters ended March 31, 2005,
due principally to increases in Production Taxes, partially offset the effect of the increases in
the Average WTI Prices per Barrel on the Trusts revenues.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Trust is a passive entity and except for the Trusts ability to borrow money as necessary to
pay liabilities of the Trust that cannot be paid out of cash on hand, the Trust is prohibited from
11
engaging in borrowing transactions. The Trust periodically holds short-term investments acquired
with funds held by the Trust pending distribution to Unit holders and funds held in reserve for the
payment of Trust expenses and liabilities. Because of the short-term nature of these investments
and limitations on the types of investments which may be held by the Trust, the Trust is not
subject to any material interest rate risk. The Trust does not engage in transactions in foreign
currencies which could expose the Trust or Unit holders to any foreign currency related market risk
or invest in derivative financial instruments. It has no foreign operations and holds no long-term
debt instruments.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Trustee has disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)
under the Exchange Act) that are designed to ensure that information required to be disclosed by
the Trust in the reports that it files or submits under the Securities Exchange Act of 1934, as
amended (the Exchange Act) is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. These controls and procedures include but are not
limited to controls and procedures designed to ensure that information required to be disclosed by
the Trust in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the responsible trust officers of the Trustee to allow timely decisions regarding
required disclosure.
Under the terms of the Trust Agreement and the Conveyance, BP Alaska has significant disclosure and
reporting obligations to the Trust. BP Alaska is required to provide the Trust such information
concerning the Royalty Interest as the Trustee may need and to which BP Alaska has access to permit
the Trust to comply with any reporting or disclosure obligations of the Trust pursuant to
applicable law and the requirements of any stock exchange on which the Units are issued. These
reporting obligations include furnishing the Trust a report by February 28 of each year containing
all information of a nature, of a standard and in a form consistent with the requirements of the
SEC respecting the inclusion of reserve and reserve valuation information in filings under the
Exchange Act and with applicable accounting rules. The report is required to set forth, among other
things, BP Alaskas estimates of future net cash flows from proved reserves attributable to the
Royalty Interest, the discounted present value of such proved reserves, the assumptions utilized in
arriving at the estimates contained in the report, and the estimate of the quantities of proved
reserves (including reductions of proved reserves as a result of modification of BP Alaskas
estimates of proved reserves from prior years) added during the preceding year to the total proved
reserves allocated to the BP Working Interests as of December 31, 1987. (See THE ROYALTY INTEREST
Chargeable Costs in Part I, Item 1 of the Annual Report.)
In addition, the Conveyance gives the Trust and its independent accountants certain rights to
inspect the books and records of BP Alaska and discuss the affairs, finances and accounts of BP
Alaska relating to the BP Working Interests with representatives of
BP Alaska; it also requires BP Alaska to provide the Trust with such other information as the Trustee may reasonably request
from time to time and to which BP Alaska has access.
The Trustees disclosure controls and procedures include ensuring that the Trust receives the
information and reports that BP Alaska is required to furnish to the Trust on a timely basis, that
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the appropriate responsible personnel of the Trustee examine such information and reports, and that
information requested from and provided by BP Alaska is included in the reports that the Trust
files or submits under the Exchange Act.
As of the end of the period covered by this report, the trust officers of the Trustee responsible
for the administration of the Trust conducted an evaluation of the Trusts disclosure controls and
procedures. Their evaluation considered, among other things, that the Trust Agreement and the
Conveyance impose enforceable legal obligations on BP Alaska, and that BP Alaska has provided the
information required by those agreements and other information requested by the Trustee from time
to time on a timely basis. The officers concluded that the Trusts disclosure controls and
procedures are effective.
Internal Control Over Financial Reporting
There has not been any change in the Trusts internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the
Exchange Act that occurred during the Trusts last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Trusts internal control over financial reporting.
13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors
1. The following paragraphs supplement a risk factor described Part II, Item 1A in the Trusts
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 which appears under the heading:
Bills pending in the Alaska Legislature to repeal Alaskas current oil production tax and provide
for a new basis of taxation on the production of oil may result in higher production tax deductions
from royalty payments to the Trust.
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On June 26, 2006, the Governor of Alaska called the Legislature into a third special
session to continue consideration of his petroleum production tax bill, among other business.
On August 6, 2006, the House passed a revised version of a new bill (CSHB 3001(FIN)), which
introduces an investment based tax rate. Producers would be taxed on the production tax value of taxable oil (gross value at the point of
production for the calendar year less the producers lease expenditures for the year) at a rate
varying from 20% for producers with a high investment factor (the quotient of the producers
total qualified capital expenditures incurred during the calendar year divided by the total amount
of taxable and nontaxable oil and gas, in BTU equivalent barrels, produced from leases or
properties in Alaska during the year) to 25% for producers with a low investment factor. The bills proponents estimate that if companies
maintain their current investments in Alaska, the tax rate would be approximately 22.5%. |
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The new bill was sent to the Senate on August 7, 2006. The third special session is
required adjourn on August 10, 2006. At the date of this report, the Senate had taken no action on the bill. |
2. The following paragraphs supplement the risk factors described in Part I, Item 1A of the
Annual Report and in Part II, Item 1A of the Trusts Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006:
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The shutdown of the Prudhoe Bay oil field may result in materially reduced
distributions or no quarterly distributions to Unitholders for an indefinite period. |
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On August 7, 2006, BP announced that BP Alaska had commenced a shutdown of the Prudhoe Bay
field. The shutdown followed the discovery of unexpectedly severe corrosion and a small spill
from an oil transit line in the Prudhoe Bay field. For additional information, see the Trusts
Current Report on Form 8-K dated August 7, 2006.
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Based on the information available at the date of this report, the Trustee is unable to
estimate the magnitude or duration of the effect that the shutdown of the Prudhoe Bay oil |
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field will have on the Trusts royalty revenues and its cash distributions. The magnitude of the
effect on the Trusts revenues and distributions will depend on whether the Prudhoe Bay field is shut down
completely and, if the field is completely shut down, when production from the field, or parts of the field, resumes. To the extent that the shutdown of the
Prudhoe Bay field results in the average daily net production of oil and condensate from the BP
Working Interests falling below 90,000 barrels per day during the current quarter ending
September 30, 2006 and any subsequent quarter, the Trustee anticipates that there will be an
adverse effect on the royalty revenues receivable by the Trust, and a decrease, which may be material, in funds available
for distribution to Unit holders with respect to those periods. If the
Prudhoe Bay field should be completely shut down during the entire fourth quarter of 2006
and any subsequent quarter, the Trust would receive no revenues with respect to those periods.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
(a) In July 2006 the Trust received a cash distribution of $55,796,947 from BP Alaska with
respect to the quarter ended June 30, 2006. On July 20, 2006, after adding interest income received
from investment of the cash reserve and deducting Trust administrative expenses, the Trustee
distributed $55,538,026 (approximately $2.60 per Unit) to Unit holders of record on July 17, 2006
(Form 8-K, Item 8.01).
(b) Not applicable.
Item 6. Exhibits.
4.1 |
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BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989 among The Standard Oil
Company, BP Exploration (Alaska) Inc., The Bank of New York, Trustee, and F. James
Hutchinson, Co-Trustee. |
4.2 |
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Overriding Royalty Conveyance dated February 27, 1989 between BP Exploration (Alaska)
Inc. and The Standard Oil Company. |
4.3 |
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Trust Conveyance dated February 28, 1989 between The Standard Oil Company and BP
Prudhoe Bay Royalty Trust. |
4.4 |
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Support Agreement dated as of February 28, 1989 among The British Petroleum Company
p.l.c., BP Exploration (Alaska) Inc., The Standard Oil Company and BP Prudhoe Bay
Royalty Trust. |
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31 |
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Rule 13a-14(a)/15d-14(a) Certification. |
32 |
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Section 1350 Certification. |
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SIGNATURE
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.
BP PRUDHOE BAY ROYALTY TRUST
By: THE BANK OF NEW YORK,
as Trustee
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By: |
/s/ Ming J. Ryan
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Ming J. Ryan |
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Vice President |
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Date: August 9, 2006
The registrant is a trust and has no officers or persons performing similar functions. No
additional signatures are available and none have been provided.
17
INDEX TO EXHIBITS
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Exhibit |
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Exhibit |
No. |
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Description |
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*4.1 |
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BP Prudhoe Bay Royalty Trust Agreement dated February 28, 1989
among The Standard Oil Company, BP Exploration (Alaska) Inc., The
Bank of New York, Trustee, and F. James Hutchinson, Co-Trustee. |
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*4.2 |
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Overriding Royalty Conveyance dated February 27, 1989 between BP
Exploration (Alaska) Inc. and The Standard Oil Company. |
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*4.3 |
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Trust Conveyance dated February 28, 1989 between The Standard Oil
Company and BP Prudhoe Bay Royalty Trust. |
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*4.4 |
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Support Agreement dated as of February 28, 1989 among The British
Petroleum Company p.l.c., BP Exploration (Alaska) Inc., The
Standard Oil Company and BP Prudhoe Bay Royalty Trust. |
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31. |
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Rule 13a-14(a)/15d-14(a) Certification. |
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32 |
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Section 1350 Certification. |
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* |
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Incorporated by reference to the correspondingly numbered exhibit to the registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 1-10243). |