Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - DOMINION RESOURCES BLACK WARRIOR TRUST | d80362exv32w1.htm |
EX-23.1 - EX-23.1 - DOMINION RESOURCES BLACK WARRIOR TRUST | d80362exv23w1.htm |
EX-99.2 - EX-99.2 - DOMINION RESOURCES BLACK WARRIOR TRUST | d80362exv99w2.htm |
EX-31.1 - EX-31.1 - DOMINION RESOURCES BLACK WARRIOR TRUST | d80362exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) |
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-11335
Dominion Resources Black Warrior Trust
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
75-6461716 (I.R.S. employer identification number) |
U.S. Trust, Bank of America
Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices; Zip Code)
Private Wealth Management
901 Main Street
17th Floor
Dallas, Texas 75202
(Address of principal executive offices; Zip Code)
Registrants telephone number, including area code:
(214) 209-2400
(214) 209-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on | ||
Title of Each Class | Which Registered | |
Units of Beneficial Interest | New York Stock Exchange, Inc. |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the registrants units of beneficial interest outstanding (based on
the closing sale price on the New York Stock Exchange) held by non-affiliates of the registrant as
of the last business day of the registrants most recently completed second fiscal quarter was
approximately $87,998,500.
At March 1, 2011, there were 7,850,000 units of beneficial interest outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
TABLE OF CONTENTS
3 | ||||||||
3 | ||||||||
3 | ||||||||
6 | ||||||||
12 | ||||||||
17 | ||||||||
22 | ||||||||
22 | ||||||||
24 | ||||||||
28 | ||||||||
32 | ||||||||
33 | ||||||||
33 | ||||||||
43 | ||||||||
43 | ||||||||
44 | ||||||||
44 | ||||||||
44 | ||||||||
45 | ||||||||
52 | ||||||||
52 | ||||||||
63 | ||||||||
63 | ||||||||
66 | ||||||||
66 | ||||||||
66 | ||||||||
67 | ||||||||
67 | ||||||||
69 | ||||||||
69 | ||||||||
69 | ||||||||
EX-23.1 | ||||||||
EX-31.1 | ||||||||
EX-32.1 | ||||||||
EX-99.2 |
2
Table of Contents
PART I.
Item 1. | Business. |
GLOSSARY
The following is a glossary of certain defined terms used in this Annual Report on Form 10-K.
Administrative Services Agreement means the Administrative Services Agreement dated as of
June 28, 1994, between Dominion Resources and the Trust, a copy of which is filed as an exhibit to
this Form 10-K.
Assignment and Assumption Agreement means the Assignment and Assumption Agreement dated as
of July 31, 2007, between Dominion Resources and HighMount Alabama, a copy of which is filed as an
exhibit to this Form 10-K.
Bcf means billion cubic feet of natural gas.
Btu means British Thermal Unit, the common unit of gross heating value measurement for
natural gas.
Code means the Internal Revenue Code of 1986, as amended.
Company means Walter Black Warrior Basin LLC, formerly known as HighMount Black Warrior
Basin LLC, a Delaware limited liability company, as successor to Dominion Black Warrior Basin,
Inc., an Alabama corporation.
Company Interests means the Companys interest in the Underlying Properties, as of June 1,
1994, not burdened by the Royalty Interests.
Company Interests Owner means the Company while it owns all or part of the Company Interests
and any other person or persons who acquire all or any part of the Company Interests or any
operating rights therein other than a royalty, overriding royalty, production payment or net
profits interest.
ConocoPhillips means ConocoPhillips Corporation, successor to The River Gas Corporation.
Conveyance means the Overriding Royalty Conveyance dated effective as of June 1, 1994, from
the Company to the Trust, as amended by instrument dated as of November 20, 1994, copies of which
are filed as exhibits to this Form 10-K.
Delaware Trustee means Mellon Bank (DE) National Association.
Dominion Resources means Dominion Resources, Inc., a Virginia corporation.
El Paso means El Paso Merchant Energy-Gas, L.P., successor to Sonat Marketing Company.
3
Table of Contents
Existing Wells means the wells producing on the Underlying Properties as of June 1, 1994.
Gas means natural gas produced and sold from the Underlying Properties.
Gas Purchase Agreement means the Gas Purchase Agreement dated as of May 3, 1994, between the
Company and El Paso, as successor to Sonat Marketing, as amended by instruments effective as of
April 1, 1996, May 16, 1996, April 9, 1998, July 1, 1999, July 1, 2000, July 1, 2001 and July 1,
2002.
Grantor Trust means a trust as to which the grantor is treated as the owner of the trust
income and corpus under the applicable provisions of the Code and the Treasury Regulations
thereunder.
Gross Proceeds means the aggregate amounts received by the Company Interests Owner
attributable to the Company Interests from the sale of Subject Gas at the central delivery points
in the gathering system for the Underlying Properties.
Gross Wells means the total whole number of gas wells without regard to ownership interest.
HighMount means HighMount Exploration & Production LLC, a Delaware limited liability
company, which is indirectly wholly-owned by Loews Corporation.
HighMount Alabama means HighMount Exploration & Production Alabama LLC, a Delaware limited
liability company, now known as Walter Exploration & Production LLC.
Index Price means the price published by Inside FERC Gas Market Report in its first issue of
the month which posts prices for the beginning of such month for Prices of Spot Gas Delivered to
Pipelines Southern Natural Gas Co. Louisiana Index, for such month.
Mcf means thousand cubic feet of natural gas. Natural gas volumes are stated herein at the
legal pressure base of 14.65 or 14.73 pounds per square inch absolute, as the case may be, at 60
degrees Fahrenheit.
MMBtu means million British Thermal Unit. As used herein, 992 MMBtu is deemed to be the Btu
content of 1 MMcf.
MMcf means million cubic feet of natural gas. As used herein, 1 MMcf is assumed to have a
Btu content of 1008 MMBtu.
Net revenue interest means Working Interest or mineral interest less any applicable
royalties, overriding royalties or similar burdens on production prior to the Royalty Interests.
Net wells and net acres are calculated by multiplying Gross Wells or gross acres by the
ownership interest in such wells or acres.
4
Table of Contents
Prospectus means the prospectus dated June 21, 1994, as supplemented by the final prospectus
supplement dated June 1, 1995, relating to the offer and sale of the Units, and forming a part of
Dominion Resources Registration Statement on Form S-3 (No. 33-53513).
Ralph E. Davis & Associates means Ralph E. Davis & Associates, independent petroleum
engineers.
Reserve Estimate means the estimated net proved reserves, estimated future net revenues and
the discounted estimated future net revenues attributable to the Royalty Interests as of December
31, 2010, prepared by Ralph E. Davis & Associates.
Royalty Interests means the overriding royalty interests conveyed to the Trust pursuant to
the Conveyance entitling the holder thereof to 65 percent of the Gross Proceeds derived from the
Company Interests.
Sonat Marketing means Sonat Marketing Company, a Delaware Corporation.
Subject Gas means Gas attributable to the Company Interests.
Treasury Regulations means the United States treasury regulations promulgated under the
Code.
Trust means Dominion Resources Black Warrior Trust, a Delaware business trust formed
pursuant to the Trust Agreement.
Trust Agreement means the Trust Agreement dated as of May 31, 1994, among the Company, as
grantor, Dominion Resources, the Delaware Trustee and the Trustee, as amended by instrument dated
as of June 27, 1994, copies of which are filed as exhibits to this Form 10-K.
Trustee means Bank of America, N.A., as successor to NationsBank of Texas, N.A. References
in this Form 10-K to U.S. Trust, Bank of America Private Wealth Management also describe the legal
entity Bank of America, N.A.
Underlying Properties means the natural gas properties in which the Company has an interest
located in the Black Warrior Basin, Tuscaloosa County, Alabama insofar as such properties include
the Pottsville Formation.
Unitholder means a holder of Units evidencing beneficial interest in the Trust.
Units means the 7,850,000 units of beneficial interest issued by, and evidencing the entire
beneficial interest in, the Trust.
Walter Exploration & Production means Walter Exploration & Production LLC, a Delaware
limited liability company, previously known as HighMount Exploration & Production Alabama LLC.
Working Interest generally refers to the lessees interest in an oil, gas or mineral lease
which entitles the owner to receive a specified percentage of oil and gas production, but requires
the owner of such Working Interest to bear such specified percentage of the costs to explore
for, develop, produce and market such oil and gas.
5
Table of Contents
DESCRIPTION OF THE TRUST
Dominion Resources Black Warrior Trust is a Delaware business trust formed under the Delaware
Business Trust Act, Title 12, Chapter 38 of the Delaware Code, Section 3801 et seq. (the Delaware
Code). The following information is subject to the detailed provisions of the Trust Agreement and
the Conveyance, copies of which are filed as exhibits to this Form 10-K. The provisions governing
the Trust are complex and extensive, and no attempt has been made below to describe or reference
all of such provisions. The following is a general description of the basic framework of the Trust
and the material provisions of the Trust Agreement.
Creation and Organization of the Trust
The Trust was initially created by the filing of its Certificate of Trust with the Delaware
Secretary of State on May 31, 1994. In accordance with the Trust Agreement, the Company
contributed $1,000 as the initial corpus of the Trust. On June 28, 1994, the Royalty Interests
were conveyed to the Trust by the Company pursuant to the Conveyance, in consideration for the
issuance to the Company of all 7,850,000 of the authorized Units in the Trust. The Company
transferred all the Units to its parent, Dominion Energy, Inc., a Virginia corporation (Dominion
Energy), which in turn transferred all the Units to its parent, Dominion Resources. Dominion
Resources sold an aggregate of 6,904,000 Units to the public through various underwriters (the
Underwriters) in June and August 1994 in the initial public offering of the Units (the Initial
Public Offering) and sold the remaining 946,000 Units to the public through certain of the
Underwriters in June 1995 pursuant to Post-Effective Amendment No. 1 to the Form S-3 Registration
Statement relating to the Units (the Secondary Public Offering and, collectively with the Initial
Public Offering, the Public Offerings).
On July 31, 2007, subsidiaries of HighMount purchased certain assets from subsidiaries of
Dominion Resources, including all of the equity interests in the Company which owns the interests
in the Underlying Properties that are burdened by the Trusts Royalty Interests. The Trust
continued to have ownership in the Royalty Interests burdening the Underlying Properties and such
sale did not affect that ownership. In connection with the sale, Dominion Resources assigned its
rights and obligations under the Trust Agreement governing the Trust and the Administrative
Services Agreement to HighMount Alabama, which was a subsidiary of HighMount.
On May 28, 2010, Walter Natural Gas, LLC, a wholly owned subsidiary of Walter Energy, LLC,
acquired the Alabama natural gas interests of HighMount, effective March 1, 2010. The acquisition
included the Companys Alabama coal bed methane operations, including the 532 existing conventional
gas wells in which the Trust has a net profits interest. The transaction was structured as an
acquisition of the membership interests in HighMount Alabama, following which, HighMount Alabamas
name was changed to Walter Exploration & Production LLC. Walter Exploration & Production will
continue to be party to the Administrative Services Agreement and Trust Agreement. Walter
Exploration & Production will continue to own all the interests in the Company, and the Company,
which has changed its name to Walter Black Warrior Basin LLC, will continue to own the Underlying
Properties. References herein to Walter Exploration & Production for periods prior to the May
28, 2010 acquisition refer to HighMount Alabama. The Trust continues to have ownership in the
Royalty Interests burdening the Underlying Properties and such sale did not affect that ownership.
The Trust
6
Table of Contents
anticipates no change in operations or reporting that will significantly impact the Trust or
its future revenue stream.
Assets of the Trust
The only assets of the Trust, other than cash and temporary investments being held for the
payment of expenses and liabilities and for distribution to Unitholders, are the Royalty Interests.
The Royalty Interests consist of overriding royalty interests burdening the Companys interest in
the Underlying Properties. The Royalty Interests generally entitle the Trust to receive 65 percent
of the Companys Gross Proceeds. The Royalty Interests are non-operating interests and bear only
expenses related to property, production and related taxes (including severance taxes). See
PropertiesThe Royalty Interests.
Duties and Limited Powers of the Trustee and the Delaware Trustee
Under the Trust Agreement, the Trustee has all powers to collect the payments attributable to
the Royalty Interests and to pay all expenses, liabilities and obligations of the Trust. The
Trustee has the discretion to establish a cash reserve for the payment of any liability that is
contingent or uncertain in amount or that otherwise is not currently due and payable. The Trustee
is entitled to cause the Trust to borrow money from any source, including from the entity serving
as Trustee (provided that the entity serving as Trustee shall not be obligated to lend to the
Trust), to pay expenses, liabilities and obligations that cannot be paid out of cash held by the
Trust. To secure payment of any such indebtedness (including any indebtedness to the Trustee), the
Trustee is authorized to (i) mortgage and otherwise encumber the entire Trust estate or any portion
thereof; (ii) carve out and convey production payments; (iii) include all terms, powers, remedies,
covenants and provisions it deems necessary or advisable, including confession of judgment and the
power of sale with or without judicial proceedings; and (iv) provide for the exercise of those and
other remedies available to a secured lender in the event of a default on such loan. The terms of
such indebtedness and security interest, if funds were loaned by the Trustee, must be similar to
the terms that the Trustee would grant to a similarly-situated commercial customer with whom it did
not have a fiduciary relationship, and the Trustee shall be entitled to enforce its rights with
respect to any such indebtedness and security interest as if it were not then serving as Trustee.
The Delaware Trustee has only such powers as are set forth in the Trust Agreement or are
required by law and is not empowered to take part in the management of the Trust.
The Royalty Interests are passive in nature and neither the Trustee nor the Delaware Trustee
has any control over or any responsibility relating to the operation of the Underlying Properties.
The Company does not have any contractual commitment to the Trust to develop further the Underlying
Properties or to maintain its ownership interest in any of the Underlying Properties. The Company
may sell the Company Interests subject to and burdened by the Royalty Interests and, absent certain
conditions having been met, with the continuing benefit of Walter Exploration & Productions
assurances. For a description of the Underlying Properties, the Royalty Interests and other
information relating to such properties, see PropertiesThe Royalty Interests.
7
Table of Contents
The Trust Agreement authorizes the Trustee to take such action as in its judgment is
necessary, desirable or advisable to best achieve the purposes of the Trust. The Trustee is
empowered by the Trust Agreement to employ consultants and agents (including the Company) and to
make payments of all fees for services or expenses out of the assets of the Trust. The Trustee is
authorized to agree to modifications of the terms of the Conveyance and to settle disputes with
respect thereto, so long as such modifications or settlements do not result in the treatment of the
Trust as an association taxable as a corporation for federal income tax purposes and such
modifications or settlements do not alter the nature of the Royalty Interests as a right to receive
a share of production or the proceeds of production from the Underlying Properties, which, with
respect to the Trust, are free of any operating rights, expenses or obligations. The Trust
Agreement provides that cash being held by the Trustee as a reserve for liabilities or for
distribution at the next distribution date will be placed in demand deposit accounts, U.S.
government obligations, repurchase agreements secured by such obligations or certificates of
deposit, but the Trustee is otherwise prohibited from acquiring any asset other than the Royalty
Interests and cash proceeds therefrom or engaging in any business or investment activity of any
kind whatsoever. The Trustee may deposit funds awaiting distribution in an account with the
Trustee provided the interest rate paid equals the interest rate paid by the Trustee on similar
deposits.
The Trust has no employees. Administrative functions are performed by the Trustee.
Resignation of Trustees
The Trustee and the Delaware Trustee may resign at any time upon 60 days prior written notice
or be removed, with or without cause, by a vote of not less than a majority of the outstanding
Units, provided in each case that a successor trustee has been appointed and has accepted its
appointment. Any successor must be a bank or trust company meeting certain requirements, including
having capital, surplus and undivided profits of at least $100,000,000, in the case of the Trustee,
and $20,000,000, in the case of the Delaware Trustee.
Transfer of Royalty Interests
Prior to the termination of the Trust, the Trustee is not authorized to sell or otherwise
dispose of all or any part of the Royalty Interests. The Trustee is authorized and directed to
sell and convey the Royalty Interests without Unitholder approval upon termination of the Trust.
No Unitholder approval for sales or dispositions upon termination is required even though they may
constitute a disposition of all or substantially all the assets of the Trust. Any sales upon
termination may be made to Walter Exploration & Production or its affiliates. See Termination
and Liquidation of the Trust.
Liabilities of the Trust
Because of the passive nature of the Trust assets and the restrictions on the activities of
the Trustee, the only liabilities the Trust has incurred are those for routine administrative
expenses, such as trusteeship fees and accounting, engineering, legal and other professional fees
and the administrative services fee paid to Walter Exploration & Production. If a court were to
hold that the Trust is taxable as a corporation for federal income tax purposes, then the Trust
would incur substantial federal income tax liabilities. See Federal Income Tax Considerations.
8
Table of Contents
Liabilities of the Trustee and the Delaware Trustee
Each of the Trustee and the Delaware Trustee may act in its discretion and is personally or
individually liable only for fraud or acts or omissions in bad faith or that constitute gross
negligence (and for taxes, fees and other charges on, based on or measured by any fees, commissions
or compensation received pursuant to the Trust Agreement) and will not be otherwise liable for any
act or omission of any agent or employee unless such Trustee has acted in bad faith or with gross
negligence in the selection and retention of such agent or employee. Each of the Trustee and the
Delaware Trustee (and their respective agents) is indemnified by Walter Exploration & Production
and from the Trust assets for certain environmental liabilities, and for any other liability,
expense, claim, damage or other loss incurred in performing its duties, unless resulting from gross
negligence, fraud or bad faith (each of the Trustee and the Delaware Trustee is indemnified from
the Trust assets against its own negligence that does not constitute gross negligence), and will
have a first lien upon the assets of the Trust as security for such indemnification and for
reimbursements and compensation to which it is entitled; provided that the Trustee and the Delaware
Trustee are generally required to first be indemnified from the Trust assets before seeking
indemnification from Walter Exploration & Production. Walter Exploration & Production also has
agreed to indemnify the Trustee and the Delaware Trustee against liabilities under certain
securities laws. Neither the Trustee nor the Delaware Trustee is entitled to indemnification from
Unitholders (except in connection with lost or destroyed Unit certificates). Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as amended (the
Securities Act), is permitted to the Trustee pursuant to the foregoing provisions, the Trustee
has been informed that in the opinion of the Securities and Exchange Commission (the SEC), such
indemnification is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Termination and Liquidation of the Trust
The Trust will terminate upon the occurrence of: (i) an affirmative vote of the holders of not
less than 66 percent of the outstanding Units to terminate the Trust; (ii) such time as the ratio
of the cash amounts received by the Trust attributable to the Royalty Interests in any calendar
quarter to administrative costs of the Trust for such calendar quarter is less than 1.2 to 1.0 for
two consecutive calendar quarters; or (iii) March 1 of any year if it is determined, based on a
reserve report as of December 31 of the prior year prepared by a firm of independent petroleum
engineers mutually selected by the Trustee and the Company, that the net present value (discounted
at 10 percent) of estimated future net revenues from proved reserves attributable to the Royalty
Interests is equal to or less than $5 million (as applicable, the Termination Date). Upon such
occurrence causing the Trust to terminate, the remaining assets of the Trust will be sold, the net
proceeds of the sale will be distributed to Unitholders and the Trust will be wound up and a
certificate of cancellation filed.
Upon the termination of the Trust, the Trustee will use its best efforts to sell any remaining
Royalty Interests then owned by the Trust for cash pursuant to the procedures described in the
Trust Agreement. The Trustee will retain a nationally recognized investment banking firm (the
Advisor) on behalf of the Trust who will assist the Trustee in selling the remaining Royalty
Interests. The Company has the right, but not the obligation, within 60 days following the
Termination Date, to make a cash offer to purchase all of the remaining Royalty Interests then held
by the Trust. In the event such an offer is made by the Company, the Trustee
9
Table of Contents
will decide, based on the recommendation of the Advisor, to either (i) accept such offer (in
which case no sale to the Company will be made unless a fairness opinion is given by the Advisor
that the purchase price is fair to Unitholders) or (ii) defer action on the offer for approximately
60 days and seek to locate other buyers for the remaining Royalty Interests. If the Trustee defers
action on the Companys offer, the offer will be deemed withdrawn and the Trustee will then use its
best efforts, assisted by the Advisor, to locate other buyers for the Royalty Interests. At the
end of the 120-day period following the Termination Date, the Trustee is required to notify the
Company of the highest of any other offers acceptable to the Trustee (which must be an all-cash
offer) received during such period (such price, net of any commissions or other fees payable by the
Trust, the Highest Acceptable Offer). The Company then has the right (whether or not it made an
initial offer), but not the obligation, to purchase all remaining Royalty Interests for a cash
purchase price computed as follows: (i) if the Highest Acceptable Offer is more than 105 percent of
the Companys original offer (or if the Company did not make an initial offer), the purchase price
will be 105 percent of the Highest Acceptable Offer, or (ii) if the Highest Acceptable Offer is
equal to or less than 105 percent of the Companys original offer, the purchase price will be equal
to the Highest Acceptable Offer. If no other acceptable offers are received for all remaining
Royalty Interests, the Trustee may request the Company to submit another offer for consideration by
the Trustee and may accept or reject such offer.
If a sale of the Royalty Interests is made or a definitive contract for sale of the Royalty
Interests is entered into within a 150-day period following the Termination Date, the buyer of the
Royalty Interests, and not the Trust or Unitholders, will be entitled to all proceeds of production
attributable to the Royalty Interests following the Termination Date.
In the event that the Company does not purchase the Royalty Interests, the Trustee may accept
any offer for all or any part of the Royalty Interests as it deems to be in the best interests of
the Trust and Unitholders and may continue, for up to one calendar year after the Termination Date,
to attempt to locate a buyer or buyers of the remaining Royalty Interests in order to sell such
interests in an orderly fashion. If the Royalty Interests have not been sold or a definitive
agreement for sale has not been entered into by the end of such calendar year, the Trustee is
required to sell the remaining Royalty Interests at a public auction, which sale may be to the
Company or any of its affiliates.
The Companys purchase rights, as described above, may be exercised by the Company and each of
its successors in interest and assigns. The Companys purchase rights are fully assignable by the
Company to any person or entity. The costs of liquidation, including the fees and expenses of the
Advisor and the Trustees liquidation fee, will be paid by the Trust.
The Trust may terminate without Unitholder approval. Unitholders are not entitled to any
rights of appraisal or similar rights in connection with the termination of the Trust. The sale of
the remaining Royalty Interests and the termination of the Trust will be taxable events to the
Unitholders. Generally, a Unitholder will realize gain or loss equal to the difference between the
amount realized on the sale and termination of the Trust and his adjusted basis in such Units.
Gain or loss realized by a Unitholder who is not a dealer with respect to such Units and who has a
holding period for the Units of more than one year will be treated as long-term capital gain or
loss except to the extent of any depletion recapture amount, which must be treated as ordinary
income. Other federal and state tax issues concerning the Trust are discussed herein under
10
Table of Contents
Business Federal Income Tax Considerations and Business State Tax Considerations.
Each Unitholder should consult his own tax advisor regarding Trust tax compliance matters,
including federal and state tax implications concerning the sale of the Royalty Interests and the
termination of the Trust.
Arbitration and Actions by Unitholders
Pursuant to the Trust Agreement and the Assignment and Assumption Agreement, any dispute,
controversy or claim that may arise between or among Walter Exploration & Production or the
Company, on the one hand, and the Trustee, the Delaware Trustee or the Trust, on the other hand, in
connection with or otherwise relating to the Trust Agreement or the Conveyance or the application,
implementation, validity or breach thereof or any provision thereof, shall be settled by final and
binding arbitration in Dallas, Texas in accordance with the Rules of Practice and Procedure for the
arbitration of commercial disputes of Judicial Arbitration & Mediation Services, Inc. (or any
successor thereto) then in effect. The Administrative Services Agreement also includes a provision
that will require Walter Exploration & Production and the Trustee and the Trust to submit any
dispute regarding such contract to alternative dispute resolution before litigating such matter.
The Trust Agreement requires under certain circumstances that the Trustee and the Trust pursue
any claims against Walter Exploration & Production and the Company with respect to any breach by
Walter Exploration & Production and the Company of the terms of the Conveyance or the Trust
Agreement (and requires that any such claims be brought in arbitration), without the joinder of any
Unitholder. The Trust Agreement does not provide for any procedure allowing Unitholders to bring
an action on their own behalf to enforce the rights of the Trust under the Conveyance and, except
in the case of the failure of the Trustee to enforce certain performance obligations of Walter
Exploration & Production to the Trust, does not provide for any procedure allowing Unitholders to
direct the Trustee to bring an action on behalf of the Trust to enforce the Trusts rights under
the Conveyance. Each Unitholder has a statutory right, however, under Section 3816 of the Delaware
Code to bring a derivative action in the Delaware Court of Chancery on behalf of the Trust to
enforce the rights of the Trust if the Trustee has refused to bring the action or if an effort to
cause the Trustee to bring the action is not likely to succeed. The procedures for the arbitration
of disputes enumerated in the Trust Agreement neither bar nor restrict the statutory right of any
Unitholder under Section 3816 of the Delaware Code to bring a derivative action.
Pursuant to Section 3816 of the Delaware Code, a plaintiff in a derivative action must be a
beneficial owner at the time such action is brought and (i) at the time of the transaction subject
to such complaint or (ii) the Unitholders status as a beneficial owner must have devolved upon it
by operation of law or pursuant to the terms of the governing instrument of the Trust from a person
or entity who was a beneficial owner at the time of the transaction giving rise to the complaint.
If a derivative action is successful, in whole or in part, or if anything is received by the Trust
as a result of a judgment, compromise or settlement of any such action, the Delaware Chancery Court
may award the plaintiff reasonable expenses, including reasonable attorneys fees. If any award is
so received by the plaintiff, the Delaware Chancery Court will make such award of the plaintiffs
expenses payable out of those proceeds and direct the plaintiff to remit to the Trust the remainder
thereof. If the proceeds are insufficient to reimburse the plaintiffs reasonable expenses in
bringing the derivative action, the Delaware Chancery Court may direct
11
Table of Contents
that any such award of the plaintiffs expenses or a portion thereof be paid by the Trust.
The rights of Unitholders to bring a derivative action on behalf of the Trust provided pursuant to
the Trust Agreement and Section 3816 of the Delaware Code are substantially similar to the
derivative rights afforded stockholders under Section 327 of Chapter 8 of the Delaware General
Corporation Law and applicable Delaware case law.
In the event that any Unitholder was successful in bringing a derivative action on behalf of
the Trust to enforce rights on behalf of the Trust against Walter Exploration & Production or the
Company, then such Unitholder could, on behalf of the Trust, pursue such rights against Walter
Exploration & Production or the Company, as the case may be, in the Delaware Chancery Court. The
Trust Agreement does not require, and expressly provides that it shall not be construed to require,
arbitration of a claim or dispute solely between the Trustee and the Delaware Trustee or of any
claim or dispute brought by any person or entity, including, without limitation, any Unitholder
(whether in its own right or through a derivative action in the right of the Trust) who is not a
party to the Trust Agreement.
The right of a Unitholder to bring a derivative action on behalf of the Trust with respect to
Walter Exploration & Productions obligation to cure certain deficiencies under the Trust Agreement
is subject to the restriction that such right may only be exercised by Unitholders owning of record
not less than 25 percent of the Units then outstanding (treated as a single class) and then only
absent action by the Trustee to enforce any such obligation within 10 days following receipt by the
Trustee of a written request served upon the Trustee by such Unitholders to take such action. In
such an event, Unitholders owning of record not less than 25 percent of the Units then outstanding
may, acting as a single class and on behalf of the Trust, seek to enforce such obligations. See
PropertiesThe Royalty InterestsWalter Exploration & Productions Assurances.
DESCRIPTION OF UNITS
Each Unit represents an equal undivided share of beneficial interest in the Trust and is
evidenced by a transferable certificate issued by the Trustee. Each Unit entitles its holder to
the same rights as the holder of any other Unit, and the Trust has no other authorized or
outstanding class of equity security. At March 1, 2011, there were 7,850,000 Units outstanding.
The Trust may not issue additional Units.
Distributions and Income Computations
The Trustee determines for each calendar quarter the amount of cash available for distribution
to Unitholders. Such amount (the Quarterly Distribution Amount) is equal to the excess, if any,
of the cash received by the Trust attributable to production from the Royalty Interests during such
calendar quarter, provided that such cash is received by the Trust on or before the last business
day prior to the 45th day following the end of such calendar quarter, plus the amount of interest
expected by the Trustee to be earned on such cash proceeds during the period between the date of
receipt by the Trust of such cash proceeds and the date of payment to the Unitholders of such
Quarterly Distribution Amount, plus all other cash receipts of the Trust during such calendar
quarter (to the extent not distributed or held for future distribution as a Special Distribution
Amount (as defined herein) or included in the previous Quarterly Distribution Amount) (which might
include sales proceeds not sufficient in amount to qualify for
12
Table of Contents
a special distribution, as described in the next paragraph, and interest), over the
liabilities of the Trust paid during such calendar quarter and not taken into account in
determining a prior Quarterly Distribution Amount, subject to adjustments for changes made by the
Trustee during such calendar quarter in any cash reserves established for the payment of contingent
or future obligations of the Trust. An amount that is not included in the Quarterly Distribution
Amount for a calendar quarter because such amount is received by the Trust after the last business
day prior to the 45th day following the end of such calendar quarter shall be included in the
Quarterly Distribution Amount for the next calendar quarter. The Quarterly Distribution Amount for
each calendar quarter will be payable to Unitholders of record on the 60th day following the end of
such calendar quarter, unless such day is not a business day in which case the record date will be
the next business day thereafter. The Trustee will distribute the Quarterly Distribution Amount
for each calendar quarter on or prior to 70 days after the end of such calendar quarter to each
person who was a Unitholder of record on the record date for such calendar quarter.
The Royalty Interests will be sold in whole or in part upon termination of the Trust. Any
proceeds from sales of the Royalty Interests, plus any interest expected by the Trustee to be
earned thereon, less liabilities and expenses of the Trust and amounts used for cash reserves, will
be distributed to Unitholders of record on the record date established for such distribution. A
special distribution will be made of undistributed cash proceeds and other amounts received by the
Trust aggregating in excess of $10,000,000, plus the amount of interest expected by the Trustee to
be earned on such cash proceeds during the period between the date of receipt by the Trust of such
cash proceeds and the date of payment to the Unitholders of such special distribution (a Special
Distribution Amount). The record date for distribution of a Special Distribution Amount will be
the 15th day following receipt of amounts aggregating a Special Distribution Amount by the Trust
(unless such day is not a business day in which case the record date will be the next business day
thereafter) unless such day is within 10 days prior to the record date for a Quarterly Distribution
Amount in which case the record date will be the date as is established for the next Quarterly
Distribution Amount. Distributions to Unitholders will be no later than 15 days after the Special
Distribution Amount record date.
Conditional Right of Repurchase
The Trust Agreement provides that Dominion Resources (and any of its successors and
affiliates) has the right to repurchase all (but not less than all) outstanding Units at any time
at which 15 percent or less of the outstanding Units are owned by persons or entities other than
Dominion Resources and its affiliates. Subject to the following sentence, any such repurchase
would be at a price equal to the greater of (i) the highest price at which Dominion Resources or
any of its affiliates acquired Units during the 90 days immediately preceding the date (the
Determination Date) that is three New York Stock Exchange (NYSE) trading days prior to the date
on which notice of such exercise is delivered to the Unitholders and (ii) the average closing price
of Units on the NYSE for the 30 trading days immediately preceding the Determination Date. If
Dominion Resources or any of its affiliates acquires Units (other than an acquisition from Dominion
Resources or any affiliate) during the period that is three NYSE trading days after the
Determination Date at a price per Unit greater than that at which an acquisition was made during
the 90-day period referred to in clause (i) of the preceding sentence, then for purposes of clause
(i) of the preceding sentence the highest price used therein will be such greater price. Any such
repurchase would be conducted in accordance with applicable federal and state securities laws.
13
Table of Contents
In the event that Dominion Resources elects to purchase all Units, Dominion Resources and the
Trustee will, prior to the date fixed for purchase, give all Unitholders of record not less than 15
days nor more than 60 days written notice specifying the time and place of such repurchase,
calling upon each such Unitholder to surrender to Dominion Resources on the repurchase date at the
place designated in such notice its certificate or certificates representing the number of Units
specified in such notice of repurchase. On or after the repurchase date, each holder of Units to
be repurchased must present and surrender its certificates for such Units to Dominion Resources at
the place designated in such notice and thereupon the purchase price of such Units will be paid to
or on the order of the person or entity whose name appears on such certificate or certificates as
the owner thereof. In no event may fewer than all of the outstanding Units represented by the
certificates be repurchased (except for any Units held by Dominion Resources and any of its
affiliates).
If Dominion Resources and the Trustee give a notice of repurchase and if, on or before the
date fixed for repurchase, the funds necessary for such repurchase are set aside by Dominion
Resources, separate and apart from its other funds in trust for the pro rata benefit of the holders
of the Units so noticed for repurchase, then, notwithstanding that any certificate for such Units
has not been surrendered, at the close of business on the repurchase date the holders of such Units
shall cease to be Unitholders and shall have no interest in or claims against Dominion Resources,
the Company, the Trust, the Delaware Trustee or the Trustee by virtue thereof and shall have no
voting or other rights with respect to such Units, except the right to receive the purchase price
payable upon such repurchase, without interest thereon and without any other distributions for
record dates after the date of notice of repurchase, upon surrender (and endorsement, if required
by Dominion Resources) of their certificates, and the Units evidenced thereby shall no longer be
held of record in the names of such Unitholders. Subject to applicable escheat laws, any monies so
set aside by Dominion Resources and unclaimed at the end of two years from the repurchase date
shall revert to the general funds of Dominion Resources. After such reversion, the holders of such
Units so noticed for repurchase could look only to the general funds of Dominion Resources for the
payment of the purchase price. Any interest accrued on funds so deposited would be paid to
Dominion Resources from time to time as requested by Dominion Resources.
If Dominion Resources exercises and consummates its right of repurchase, then, at its option,
it may cause the Trust to be terminated by providing written notice thereof to the Trustee and the
Delaware Trustee. Within 30 days following written notice of Dominion Resources decision to
terminate the Trust, the Trustee must cause any remaining Royalty Interests (and, subject to the
rights of Unitholders with respect to the receipt of distributions for which a record date has been
determined, all proceeds of production attributable to the Royalty Interests) and any other assets
of the Trust to be conveyed to Dominion Resources or its assignee (subject to the right of such
trustees to create reasonable reserves in connection with the liquidation of the Trust).
Dominion Resources assigned its rights under the Trust Agreement to Walter Exploration &
Production pursuant to the Assignment and Assumption Agreement.
14
Table of Contents
Possible Divestiture of Units
The Trust Agreement imposes no restrictions based on nationality or other status of
Unitholders. The Trust Agreement provides, however, that in the event of certain judicial or
administrative proceedings seeking the cancellation or forfeiture of any property in which the
Trust has an interest, or asserting the invalidity of, or otherwise challenging any portion of the
Royalty Interests because of the nationality, citizenship or any other status of any one or more
Unitholders, the Trustee will give written notice thereof to each Unitholder whose nationality,
citizenship or other status is an issue in the proceeding, which notice will constitute a demand
that such Unitholder dispose of his Units within 30 days. If any Unitholder fails to dispose of
his Units in accordance with such notice, the Trustee will cancel all outstanding certificates
issued in the name of such Unitholder, transfer all Units held by such Unitholder to the Trustee
and sell such Units (including by private sale). The proceeds of such sale (net of sales
expenses), pending delivery of certificates representing the Units, will be held by the Trustee in
a non-interest bearing account for the benefit of the Unitholder and paid to the Unitholder upon
surrender of such certificates. Cash distributions payable to such Unitholder will also be held in
a non-interest bearing account pending disposition by the Unitholder of the Units or cancellation
of certificates representing the Units by the Trustee, subject to a maximum retention period of two
years or such shorter period as shall be permitted by applicable laws.
Periodic Reports
The Trustee causes a reserve report to be prepared for the Trust (by a firm of independent
petroleum engineers mutually selected by the Trustee and the Company) each year showing estimated
proved natural gas reserves and other reserve information attributable to the Royalty Interests as
of December 31 of such year. Such reserve reports show estimated future net revenues and the net
present value (discounted at 10 percent) of the estimated future net revenues (using the average
market price over the prior 12-month period or applicable contract price as of December 31 as
appropriate) from proved reserves attributable to the Royalty Interests. The costs of the reserve
reports are paid by the Trust and constitute an administrative expense. The Trustee also provides
to Walter Exploration & Production and the Company, within 15 days after the end of each calendar
quarter, a written itemized report showing all administrative costs of the Trust paid during such
quarter.
Within 75 days following the end of each of the first three calendar quarters of each calendar
year, the Trustee mails to each person or entity who was a Unitholder of record (i) on the record
date for each such calendar quarter and (ii) on a Special Distribution Amount record date occurring
during such quarter, if any, a report showing in reasonable detail the assets, liabilities,
receipts and disbursements of the Trust for such calendar quarter. Within 120 days following the
end of each fiscal year, the Trustee mails to Unitholders of record as of a date to be selected by
the Trustee an annual report containing audited financial statements, including reserve information
relating to the Trust and the Royalty Interests.
The Trustee files such returns for federal income tax purposes as it is advised are required
to comply with applicable law. The Trustee mails to each person or entity who was a Unitholder of
record (i) on the record date for each such calendar quarter and (ii) on a Special Distribution
Amount record date occurring during such quarter, if any, a report that shows in reasonable detail
information to permit each Unitholder to make all calculations reasonably necessary for
15
Table of Contents
tax purposes. The Trustee treats all income, credits and deductions recognized during each
calendar quarter during the term of the Trust as having been recognized by holders of record on the
quarterly record date established for the distribution unless otherwise advised by counsel.
Available year-end tax information permitting each Unitholder to make all calculations reasonably
necessary for tax purposes is distributed by the Trustee to Unitholders no later than March 15 of
the following year. See also page 23 regarding certain reporting requirements imposed upon
middlemen under Treasury Regulations because the Trust is considered a non-mortgage WHFIT for
federal income tax purposes.
Each Unitholder and his duly authorized agents and attorneys have the right during reasonable
business hours, and upon reasonable prior notice, to examine and inspect records of the Trust and
the Trustee and the Delaware Trustee.
Voting Rights of Unitholders
While Unitholders have certain voting rights as provided in the Trust Agreement, such rights
differ from and are more limited than those of stockholders of a corporation for profit. For
example, there is no requirement for annual meetings of Unitholders or for annual or other periodic
reelection of the Trustee.
Meetings of Unitholders may be called by the Trustee or by Unitholders owning not less than 10
percent of the outstanding Units. In addition, the Delaware Trustee may call such a meeting but
only for the purpose of appointing a successor to it upon its resignation. All meetings of
Unitholders will be held in Dallas, Texas. Written notice of every such meeting setting forth the
time and place of the meeting and the matters proposed to be acted upon will be given not more than
60 days nor less than 20 days before such meeting is to be held to all of the Unitholders of record
at the close of business on a record date selected by the Trustee, which record date will not be
more than 60 days before the date of such meeting. The presence in person or by proxy of
Unitholders representing a majority of the outstanding Units is necessary to constitute a quorum.
Each Unitholder is entitled to one vote for each Unit owned by such Unitholder. The Trustee will
call such meetings to consider amendments, waivers, consents and other changes relating to the
Conveyance, if requested in writing by the Company or Walter Exploration & Production. No matter
other than that stated in the notice of the Unitholder meeting will be voted on and no action by
the Unitholders may be taken without a meeting.
Generally, amendments to the Trust Agreement require approval of a majority of the outstanding
Units (except that amendments of required voting percentages requires approval of at least 80
percent of the outstanding Units), but no provision of the Trust Agreement may be amended that
would (i) increase the power of the Trustee or the Delaware Trustee to engage in business or
investment activities or (ii) alter the rights of the Unitholders as among themselves. Without the
written consent of Walter Exploration & Production and the approval of not less than 66 2/3 percent
of the outstanding Units, no provision of the Trust Agreement may be amended with respect to (a)
the sale or disposition of all or any part of the Trust estate, including the Royalty Interests,
except as specifically provided in the Trust Agreement; (b) termination of the Trust and the
disposition of Trust assets upon liquidation of the Trust; or (c) the Companys right of first
refusal with respect to the purchase of any remaining Royalty Interests upon termination of the
Trust. Without the written consent of Walter Exploration & Production and the approval of a
majority of the outstanding Units, no amendment may be made to the Trust
16
Table of Contents
Agreement that would alter Walter Exploration & Productions conditional right to repurchase
all outstanding Units at any time at which 15 percent or less of the outstanding Units is owned by
persons or entities other than Walter Exploration & Production or its affiliates. Additionally,
any amendment that increases the obligations, duties or liabilities of or affects the rights of the
Trustee or the Delaware Trustee must be consented to by such entity. The Trustee, the Delaware
Trustee, Walter Exploration & Production and the Company may, without approval of Unitholders, from
time to time supplement or amend the Trust Agreement in order to cure any ambiguity or to correct
or supplement any defective or inconsistent provisions, provided such supplement or amendment is
not adverse to the interests of Unitholders. In addition, (i) Walter Exploration & Production may
direct the Trustee to change the name of the Trust without approval of Unitholders and (ii) in the
event that a business purpose of the Trust is found or deemed to exist by any taxing or other
authority on which finding any taxation authority might rely, the Trustee is authorized to amend or
delete and, subject to the receipt of an opinion of counsel reasonably satisfactory to the Trustee,
the Trustee, the Delaware Trustee, Walter Exploration & Production and the Company will amend or
delete any provision of the Trust Agreement or take such other action as may be necessary to
eliminate such business purpose, without approval of Unitholders. Removal of the Trustee and the
Delaware Trustee, approval of amendments, waivers, consents and other changes relating to the
Conveyance and the approval of the merger or consolidation of the Trust into one or more entities
require approval of a majority of the outstanding Units. Except as set forth under Description of
the TrustTermination and Liquidation of the Trust, all other actions may be approved by a
majority vote of the Units represented at a meeting at which a quorum is present or represented.
Liability of Unitholders
Consistent with Delaware law, the Trust Agreement provides that Unitholders will have the same
limitation on liability as is accorded under Delaware law to stockholders of a corporation for
profit. No assurance can be given, however, that the courts in jurisdictions outside of Delaware
will give effect to such limitation.
Transfer Agent
American Stock Transfer & Trust Company serves as the transfer agent and registrar for the
Units.
Website/SEC Filings
The Trust maintains an Internet Website at www.dom-dominionblackwarriortrust.com, and will
provide website access to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to such reports as soon as reasonably practicable after such
material is filed with or furnished to the SEC.
FEDERAL INCOME TAX CONSIDERATIONS
THE TAX CONSEQUENCES TO A UNITHOLDER OF THE OWNERSHIP AND SALE OF UNITS WILL DEPEND IN PART ON
THE UNITHOLDERS TAX CIRCUMSTANCES. EACH UNITHOLDER SHOULD THEREFORE CONSULT THE UNITHOLDERS TAX
ADVISOR ABOUT THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO THE UNITHOLDER OF THE OWNERSHIP OF
UNITS.
17
Table of Contents
The section entitled Federal Income Tax Consequences appearing in the Prospectus sets forth
a discussion of the material federal income tax matters of general application of the acquisition,
ownership and sale of the Units acquired in the Public Offerings and a discussion of certain risk
factors associated with matters of federal income taxation as applied to the Trust and such
Unitholders. A copy of such section of the Prospectus is filed as an exhibit to this Form 10-K and
is incorporated herein by reference.
In connection with the registration of the Units for offer and sale in the Public Offerings,
Dominion Resources and the Underwriters received certain opinions of special counsel (Special
Counsel) to Dominion Resources (upon which the Trustee and the Delaware Trustee were entitled to
rely), including, without limitation, opinions as to the material federal income tax consequences
of the ownership and sale of the Units acquired in either of the Public Offerings. Each of these
opinions was based on provisions of the Code existing as of June 28, 1994, with respect to the
opinions given in connection with the Initial Public Offering, and as of June 8, 1995, with respect
to the opinions given in connection with the Secondary Public Offering, and existing and proposed
regulations thereunder, administrative rulings and court decisions as of such dates, all of which
are subject to changes that may or may not be retroactively applied. Some of the applicable
provisions of the Code have not been interpreted by the courts or the Internal Revenue Service
(IRS). In addition, such opinions were based on various representations as to factual matters
made by the Company and Dominion Resources in connection with the Public Offerings. In addition,
such opinions were expressly limited in their application to investors purchasing Units in each of
such Public Offerings and, as a result, provide no assurance to investors not purchasing Units in
one of the Public Offerings.
Neither the Trustee, the Delaware Trustee, nor counsel to the Trustee, respectively, has
rendered any opinions with respect to any tax matters associated with the Trust or the Units.
At the time of the Public Offerings, no ruling was requested by Dominion Resources, as the
sponsor of the Trust, the Trustee or the Delaware Trustee from the IRS with respect to any matter
affecting the Trust or Unitholders. No assurance can be provided that the opinions of Special
Counsel (which do not bind the IRS) will not be challenged by the IRS or will be sustained by a
court if so challenged.
Summary of Certain Federal Income Tax Consequences
The following summary of certain federal income tax consequences of acquiring, owning and
disposing of Units is based on the opinions of Special Counsel to Dominion Resources on federal
income tax matters, which are set forth in the Prospectus, and is qualified in its entirety by
express reference to the sections of the Prospectus identified in the first paragraph of this
Federal Income Tax Considerations section. Although the Trustee believes that the following
summary contains a description of all of the material matters discussed in the opinions referenced
above, the summary is not exhaustive and many other provisions of the federal tax laws may affect
individual Unitholders. Furthermore, the summary does not purport to be complete or address the
tax issues potentially affecting Unitholders acquiring Units other than by purchase through either
of the Public Offerings. Each Unitholder should consult the Unitholders tax advisor with respect
to the effects of the Unitholders ownership of Units on the Unitholders personal tax situation.
18
Table of Contents
Classification and Taxation of the
Trust
|
The Trust is a Grantor Trust for federal tax purposes and not an association taxable as a corporation. As a Grantor Trust, the Trust is not subject to federal income tax. There can be no assurance that the IRS will not challenge this treatment. The tax treatment of the Trust and Unitholders would be materially different if the IRS were to successfully challenge this treatment. | ||
Taxation of Unitholders
|
Each Unitholder is taxed directly on his proportionate share of income, deductions and credits of the Trust attributable to the Royalty Interests consistent with each such Unitholders taxable year and method of accounting and without regard to the taxable year or method of accounting employed by the Trust. | ||
Income and Deductions
|
The income of the Trust consists primarily of a specified share of the proceeds from the sale of coal seam gas produced from the Underlying Properties. During 2010, the Trust earned interest income on funds held for distribution. The deductions of the Trust consist of severance taxes and administrative expenses. In addition, each Unitholder is entitled to depletion deductions. See Unitholders Depletion Allowance below. Individuals may deduct miscellaneous itemized deductions (including, in general, investment expenses) only to the extent that such expenses exceed 2 percent of the individuals adjusted gross income. Although there are exceptions to the 2 percent limitation, authority suggests that no exceptions apply to expenses passed through from a Grantor Trust, like the Trust. |
19
Table of Contents
Treatment of the Royalty Interests
|
Each Royalty Interest is a nonoperating economic interest in an Underlying Property because it is a right to a fixed percentage of the gross proceeds from the sale of gas as, if and when produced from such properties, the right endures for the economic life of the burdened reserves and the right is not required to bear any cost of developing or producing such gas. | ||
Unitholders Depletion Allowance
|
Each Unitholder is entitled to amortize the cost of the Units through cost depletion over the life of the Royalty Interests or, if greater, through percentage depletion equal to 15 percent of gross income. Unlike cost depletion, percentage depletion is not limited to a Unitholders depletable tax basis in the Units. Rather, a Unitholder is entitled to a percentage depletion deduction as long as the applicable Underlying Properties generate gross income. If any portion of the Royalty Interests is treated as a production payment or is not treated as an economic interest, however, a Unitholder will not be entitled to depletion in respect of such portion. | ||
Depletion Recapture
|
If a taxpayer disposes of any section 1254 property (certain oil, gas, geothermal or other mineral property), and if the adjusted basis of such property includes adjustments for deductions for depletion under Section 611 of the Code, the taxpayer generally must recapture the amount deducted for depletion as ordinary income (to the extent of gain realized on the disposition of the property). This depletion recapture rule applies to any disposition of property that was placed in service by the taxpayer after December 31, 1986. Detailed rules set forth in Sections 1.1254-1 through 1.1254-6 of the Treasury Regulations govern dispositions of property after March 13, 1995. The IRS likely will take the position that a Unitholder who purchases a Unit subsequent to December 31, 1986, must recapture depletion upon the disposition of that Unit. | ||
Non-Passive Activity Income, Credits
and Loss
|
The income, credits and expenses of the Trust are not taken into account in computing the passive activity losses and income under Section 469 of the Code for a Unitholder who acquires and holds Units as an investment and did not acquire them in the ordinary course of a trade or business. |
20
Table of Contents
Unitholder Reporting Information
|
The Trustee furnishes to Unitholders tax information concerning royalty income and depletion and other relevant tax matters on an annual basis. Year-end tax information is furnished to Unitholders no later than March 15 of the following year. See third paragraph under Description of UnitsPeriodic Reports. | ||
WHFIT Reporting Requirements
|
Some Trust Units are held by middlemen, as such term is broadly defined in Treasury Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an interest for a custodian in street name, referred to herein collectively 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 Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. Tax information is also posted by the Trustee at www.dom-dominionblackwarriortrust.com. Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of Unitholders, and not the Trustee of the Trust, are solely responsible for complying with the information reporting requirements under the Treasury Regulations with respect to such Trust Units, including the issuance of IRS Forms 1099 and certain written tax statements. Unitholders 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. |
21
Table of Contents
ERISA CONSIDERATIONS
The section entitled ERISA Considerations appearing in the Prospectus sets forth certain
information regarding the applicability of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), and the Code to pension, profit-sharing and other employee benefit plans and to
individual retirement accounts (collectively, Qualified Plans). A copy of this section of the
Prospectus is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
Due to the complexity of the prohibited transaction rules and the penalties imposed upon
persons involved in prohibited transactions, it is important that potential Qualified Plan
investors consult their counsel regarding the consequences under ERISA and the Code of their
acquisition and ownership of Units.
STATE TAX CONSIDERATIONS
THE FOLLOWING IS INTENDED AS A BRIEF SUMMARY OF CERTAIN INFORMATION REGARDING STATE INCOME
TAXES AND OTHER STATE TAX MATTERS AFFECTING THE TRUST AND UNITHOLDERS. UNITHOLDERS SHOULD
THEREFORE CONSULT THE UNITHOLDERS TAX ADVISOR REGARDING STATE INCOME TAX FILING AND COMPLIANCE
MATTERS.
Alabama Income Tax
All revenues attributable to the Royalty Interests are derived from sources within the State
of Alabama. Alabama imposes an income tax on individuals, corporations (subject to certain
exceptions for S corporations) and certain other entities that are residents of, conduct business
in, or derive income from sources within Alabama. Under general rules of application, both
resident and nonresident Unitholders would be required to file annual Alabama income tax returns
and pay Alabama income taxes with respect to any income received from the Trust and would be
subject to penalties for failure to comply with those rules.
The Alabama Department of Revenue (the DOR) has issued a letter ruling that permits the
Trust to file a composite income tax return on behalf of all Unitholders who are not residents of
Alabama. The filing of the composite income tax return and acceptance of the return by the DOR
will relieve those nonresident Unitholders of any obligation to file Alabama state income tax
returns. The Trust filed for each of the years 1995-2009 composite income tax returns with the DOR
on behalf of all Nonresident Unitholders (defined below), and intends to file a composite return
for 2010 and each year thereafter for so long as the composite return does not report any taxable
income for Alabama state income tax purposes. Based on certain assumptions, the composite income
tax return to be filed by the Trust on behalf of Nonresident Unitholders will show a net taxable
loss for 2010. Accordingly, no Alabama state income tax is due under the 2010
return.
No assurance can be given, however, that the DOR will accept the assumptions used by the Trust
in preparing and filing the composite income tax return for any year and determining the composite
taxable income or loss thereunder for Alabama state income tax purposes. If all or a portion of
those assumptions are not acceptable to the DOR, the DOR may require the Trust to recompute and
refile one or more composite income tax returns based on different assumptions
22
Table of Contents
acceptable to the DOR. If the composite income tax return for 2010 (or any other tax year) as
initially filed by the Trust is not accepted as filed by the DOR, the Trust may decide not to
refile a composite income tax return either (i) because the Trust would have net Alabama taxable
income for that year as a result of the assumptions required by the DOR or (ii) because the
refiling of the composite income tax return imposes an unreasonable burden on the Trust in the
judgment of the Trustee (based on its sole discretion). In that event, each Nonresident Unitholder
would be required to file a separate Alabama state income tax return and pay any Alabama state
income tax due as well as any penalties and interest due thereon. For purposes of the filing of
the composite income tax return for any taxable year, Nonresident Unitholders will consist of
those Unitholders to whom the Trust has provided an individualized tax information letter (together
with its tax information booklet) for such tax year that shows a mailing address outside the State
of Alabama. All other Unitholders will be treated by the Trust for purposes of the filing of the
composite income tax return as Resident Unitholders.
The filing of the composite income tax return by the Trust does not relieve any resident of
the State of Alabama or any Resident Unitholder from the obligation to file an Alabama state income
tax return individually (and pay Alabama state income tax thereon, if any) with respect to the
revenues and expenses attributable to the Royalty Interests. In light of the foregoing, each
Unitholder should consult his tax adviser regarding the requirements for filing state income tax
returns for his state of residence and Alabama.
Alabama Business Privilege Tax
Alabama previously imposed a franchise tax on domestic corporations and foreign corporations
doing business in Alabama, under a broad definition of corporation in the state constitution,
based on the amount of a corporations capital employed in the state. In reliance upon the
representations and assumptions set forth in the Prospectus and on a private letter ruling issued
June 10, 1994, by the DOR as to the offering of the Units, special Alabama tax counsel to the
Company opined in connection with each of the Public Offerings that the Trust was not subject to
Alabama franchise tax. Although the Alabama Commissioner of Revenue has the authority to revoke
retroactively DOR rulings under certain limited circumstances, special Alabama tax counsel did not
believe, based on the above representations and assumptions, that those circumstances existed with
respect to the Companys private letter ruling. Walter Exploration & Production agreed to
indemnify the Trust against any resulting Alabama franchise tax imposed on the Trust.
In 2000, the Alabama franchise tax was repealed and replaced with the Alabama business
privilege tax (the BPT), which imposes an annual privilege tax on corporations, limited liability
entities, and disregarded entities (as those terms are statutorily defined in Alabamas tax code)
doing business in Alabama or organized under Alabama law. The DOR issued a revenue ruling in 2002
holding that the BPT applied to a grantor trust. Therefore, the Trust files BPT returns and pays
the applicable tax.
Alabama Severance Taxes
Alabama levies severance taxes on the removal of certain natural resources. Statewide
severance taxes are collected from oil, gas, coal, forest products and iron ore. Additional
severance taxes are collected by certain counties on oil, gas, coal, stone, rock, clay, sand and
23
Table of Contents
gravel. Therefore, the Trust, as owner of the Royalty Interests, bears its proportionate
share of Alabama state and county severance taxes. To the extent there is an increase in the
amount of severance taxes, the cash distribution amount payable to Unitholders will decrease.
Other Alabama Taxes
The Trust has been structured to cause the Units to be treated as interests in intangible
personal property rather than as interests in real property for certain Alabama state law purposes,
other than income and business privilege taxation. If the Units are held to be real property or as
interests in real property under the laws of Alabama, Unitholders could be subject to Alabama
probate laws, and estate and similar taxes, whether or not they are residents of Alabama.
REGULATION AND PRICES
Regulation of Natural Gas
Certain aspects of production, transportation, marketing and sale of natural gas from the
Underlying Properties may be subject to federal and state governmental regulation, including
regulation of transportation tariffs charged by pipelines, taxes, the prevention of waste, the
conservation of natural gas, pollution controls and various other matters.
Sales of natural gas produced from the Underlying Properties are considered to be sold at the
wellhead (as opposed to downstream sales or resales) for purposes of pricing and, therefore, are
not subject to federal regulation.
The transportation of natural gas in interstate commerce is subject to federal regulation by
the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act and the Natural Gas
Policy Act of 1978. In past years, FERC has adopted regulatory policy changes that have affected
the transportation of natural gas from the wellhead to the market. Interstate pipelines no longer
perform a merchant function. Gas producers now sell gas to end users or market accumulators rather
than into the system supply of an interstate pipeline who would then resell it. Transportation of
gas on interstate pipelines is now on an open access basis and interstate pipelines have been
required to unbundle their services with the result that customers now only pay for the services
they require. The interstate pipeline connected to the gathering system for the Underlying
Properties is subject to the regulations described above.
On August 8, 2005, Congress enacted the Energy Policy Act of 2005. The Energy Policy Act,
among other things, amended the Natural Gas Act to prohibit market manipulation by any entity, to
direct FERC to facilitate market transparency in the market for sale or transportation of physical
natural gas in interstate commerce, and to significantly increase the penalties for violations of
the Natural Gas Act, the Natural Gas Policy Act of 1978 or FERC rules, regulations or orders
thereunder. In the past, Congress has been very active in the area of natural gas regulation. At
the present time, it is impossible to predict what proposals, if any, might actually be enacted by
Congress or the various state legislatures and what effect, if any, such proposals might have on
the Underlying Properties and the Trust.
The State Oil and Gas Board of Alabama regulates the production of natural gas, including
requirements for obtaining drilling permits, the method of developing new fields, provisions for
the unitization or pooling of natural gas properties, the spacing, operation,
24
Table of Contents
plugging and abandonment of wells and the prevention of waste of natural gas resources. The
rate of production may be regulated, and the maximum daily production allowable from natural gas
wells may be established on a market demand or conservation basis or both. Reductions in allowable
production may extend the timing of recovery of reserves. Although the Trust is not aware of any
pending or contemplated proceedings to change allowable rates of production from the Underlying
Properties, there can be no assurances made that such changes will not be made. The Unitholders
and the Trust will not have any control over such changes. Reductions in the allowable production
from the Underlying Properties could affect the timing or amount of distributions to Unitholders.
Environmental Regulation
Operations on the Underlying Properties associated with the production of natural gas are
subject to numerous federal and state laws, rules and regulations governing the discharge of
materials into the environment or otherwise relating to the protection of the environment. Such
laws, rules and regulations require the acquisition of certain permits, impose substantial
liabilities for pollution resulting from exploration and production operations and may also
restrict air or other pollution resulting from operations. It is possible that federal and state
environmental laws and regulations will become more stringent in the future. For example, climate
change has become the subject of an important public policy debate. Climate change legislation and
regulations have been adopted by many foreign countries and some states in the United States;
however, legislation and regulations have not been enacted at the federal level, although the
United States Congress and several more states have or are considering adopting climate change
legislation. Further, the EPA has issued greenhouse gas monitoring and reporting regulations that
went into effect January 1, 2010, and require reporting by regulated facilities by March 2011 and
annually thereafter. Beyond measuring and reporting, the EPA issued an Endangerment Finding
under Section 202(a) of the Clean Air Act, concluding greenhouse gas pollution threatens the public
health and welfare of future generations. The EPA has issued final regulations requiring petroleum
and natural gas operators meeting a certain emission threshold to report their greenhouse gas
emissions to the EPA. The EPA has indicated that it will use data collected through the reporting
rules to decide whether to promulgate future greenhouse gas emission limits.
It is impossible to predict what the precise effect of the current legislation and regulations
and any future regulation or legislation, or enforcement policies thereunder, could have on the
operation of the Underlying Properties. However, any costs or expenses incurred by the Company in
connection with environmental liabilities arising out of or relating to activities occurring on, in
or in connection with, or conditions existing on or under, the Underlying Properties, will be borne
by the Company and not the Trust, and such costs and expenses will not be deducted in calculating
Gross Proceeds. Such costs and expenses may, however, be taken into account by the Company in
exercising its rights to abandon a well and may accelerate the termination of the Trust. See
PropertiesThe Royalty InterestsSale and Abandonment of Underlying Properties and
PropertiesDescription of the TrustTermination and Liquidation of the Trust.
Water from the operations on the Underlying Properties is discharged into the Black Warrior
River pursuant to a National Pollutant Discharge Elimination System permit issued by the Alabama
Department of Environmental Management (ADEM). ADEM initially issued
25
Table of Contents
five permits in connection with the Underlying Properties, which were consolidated into one
permit in February 1994. The ADEM permit was renewed in 1999, again in 2004, and a timely renewal
application was submitted in 2009. The 2004 permit is administratively extended until such time as
ADEM reviews and issues a renewal permit. It generally authorizes water disposal based upon the
Black Warrior Rivers minimum flow rate and maximum chloride level. The Company has advised the
Trust that since 1987 water disposal from the Underlying Properties has not been disrupted.
While the Company has informed the Trust that it believes the Underlying Properties are in
material compliance with all environmental laws and regulations, such regulations have generally
become more stringent and costly over time. As a royalty holder, the Trust may not be directly
subject to increased costs; however, such costs may be taken into account by the Company in
exercising its rights to abandon a well, which may accelerate the termination of the Trust. The
Company has informed the Trust that it has not budgeted any money during 2011 for expenditures
related to environmental remediation.
Competition, Markets and Prices
The revenues of the Trust and the amount of cash distributions to Unitholders depend upon,
among other things, the effect of competition and other factors in the market for natural gas. The
natural gas industry is highly competitive in all of its phases. The Company encounters
competition from major oil and gas companies, independent oil and gas concerns and individual oil
and gas producers and operators. Many of these competitors have greater financial and other
resources than the Company. Competition may also be presented by alternative fuel sources,
including heating oil, other fossil fuels and wind energy.
Demand for natural gas production has historically been seasonal in nature and prices for
natural gas fluctuate accordingly. Unseasonably warm weather and the ability of markets to access
storage can cause the demand for natural gas to decrease, resulting in lower prices received by
producers than when demand is higher due to seasonal weather factors. Such price fluctuations and
the continuation of/return to low prices for natural gas will directly impact Trust distributions,
estimates of reserves attributable to the Royalty Interests and estimated future net revenue from
reserves attributable to the Royalty Interests.
Prices for natural gas are subject to wide fluctuations in response to relatively minor
changes in supply, market uncertainty and a variety of additional factors that are beyond the
control of the Trust and the Company. These factors include political conditions in the Middle
East, the price and quantity of imported oil and gas, the level of consumer product demand, the
severity of weather conditions, government regulations, the price and availability of alternative
fuels and overall economic conditions. Additionally, lower natural gas prices may reduce the
amount of gas that is economic to develop or produce from the Underlying Properties. In view of
the many uncertainties affecting the supply and demand for natural gas and natural gas prices, the
Trustee is unable to make reliable predictions of future gas prices, production or demand or the
overall effect they will have on the Trust.
The Trusts revenues and distributions to Unitholders will be primarily dependent on the sales
prices for Gas produced from the Underlying Properties and the quantities of Gas sold. Natural gas
prices have historically been volatile and are likely to continue to be volatile. Price
26
Table of Contents
volatility and the risk of production curtailment make it difficult to estimate the future
levels of cash distributions to Unitholders or the value of the Units. Since the termination of
the Gas Purchase Agreement, a gas sales contract was entered into with SCANA Energy for base load
gas for the period of November 1, 2005 through March 31, 2006. Separate gas sales contracts were
entered into with Coral Energy and South Carolina Pipeline Company for the period of April 1, 2006
through October 31, 2006. A gas sales contract was entered into with ConocoPhillips for base load
gas for the period of November 1, 2006 through March 31, 2007. A gas sales contract was entered
into with Coral Energy for base load gas for the period of April 1, 2007 through October 31, 2007.
A gas sales contract was entered into with BP Energy for base load gas for the period of November
1, 2007 through March 31, 2008. Gas sales contracts were entered into with Atmos, BP Energy and
ConocoPhillips for base load gas for the period April 1, 2008 through October 31, 2008. Gas sales
contracts were entered into with Atmos, BP Energy, Chevron and Sequent for base load gas for the
period November 1, 2008 through March 31, 2009. Gas sales contracts were entered into with Atmos,
BP Energy, Chevron, ConocoPhillips and Sequent for base load gas for the period April 1, 2009
through October 31, 2009. Gas sales contracts were entered into with Atmos, BP Energy, Chevron and
ConocoPhillips for base load gas for the period November 1, 2009 through March 31, 2010. Gas sales
contracts were entered into with Atmos Energy, BP Energy and Sequent Energy for base load gas for
the period April 1, 2010 through August 31, 2010. During the terms of the above-mentioned
contracts, any gas above the base load was sold on the spot market to various purchasers. A
ten-year gas sales contract was entered into effective September 1, 2010 with Alabama Gas
Corporation for all gas produced during such period. The foregoing information regarding the gas
purchase contracts has been provided to the Trustee by Dominion Resources and Walter Exploration &
Production.
27
Table of Contents
Item 1A. Risk Factors.
Risks Related to the Oil and Gas Industry
Crude oil and natural gas prices are volatile and fluctuate in response to a number of factors.
Lower prices could reduce or eliminate the net proceeds payable to the Trust and Trust
distributions.
The Trusts quarterly distributions are highly dependent upon the prices realized from the
sale of crude oil and natural gas and a material decrease in such prices could reduce the amount of
cash distributions paid to Unitholders. Crude oil and natural gas prices can fluctuate widely on a
quarter-to-quarter basis in response to a variety of factors that are beyond the control of the
Trust. Factors that contribute to price fluctuation include, among others:
| political conditions in major oil producing regions, especially the Middle East; | ||
| worldwide economic conditions; | ||
| weather conditions; | ||
| the supply and price of domestic and foreign crude oil or natural gas; | ||
| the level of consumer demand; | ||
| the price and availability of alternative fuels; | ||
| the proximity to, and capacity of, transportation facilities; | ||
| the effect of worldwide energy conservation measures; and | ||
| the nature and extent of governmental regulation and taxation. |
When crude oil and natural gas prices decline, the Trust is affected in two ways. First, net
royalties are reduced. Second, exploration and development activity on the Underlying Properties
may decline as some projects may become uneconomic and are either delayed or eliminated. Recent
lifting costs have been close to or in some cases more than recent gas prices for certain
projects in the Underlying Properties. It is impossible to predict future crude oil and natural
gas price movements, and this reduces the predictability of future cash distributions to
Unitholders.
Reserve estimates depend on many assumptions that may prove to be inaccurate, which could cause
both estimated reserves and estimated future net revenues to be too high, leading to write-downs
of estimated reserves.
The value of the Units will depend upon, among other things, the reserves attributable to the
Royalty Interests in the Underlying Properties. The calculations of proved reserves included in
this Annual Report on Form 10-K are only estimates, and estimating reserves is inherently
uncertain. In addition, the estimates of future net revenues are based upon various assumptions
regarding future production levels, prices and costs that may prove to be incorrect over time.
The accuracy of any reserve estimate is a function of the quality of available data,
engineering interpretation and judgment, and the assumptions used regarding the quantities of
recoverable crude oil and natural gas and the future prices of crude oil and natural gas. Petroleum
engineers consider many factors and make many assumptions in estimating reserves. Those factors and
assumptions include:
28
Table of Contents
| historical production from the area compared with production rates from similar producing areas; | ||
| the effects of governmental regulation; | ||
| assumptions about future commodity prices, production and development costs, taxes, and capital expenditures; | ||
| the availability of enhanced recovery techniques; and | ||
| relationships with landowners, working interest partners, pipeline companies and others. |
Changes in any of these factors and assumptions can materially change reserve and future net
revenue estimates. The Trusts estimate of reserves and future net revenues is further complicated
because the Trust holds overriding royalty interests and does not own a specific percentage of the
crude oil or natural gas reserves. Ultimately, actual production, revenues and expenditures for the
Underlying Properties, and therefore actual net proceeds payable to the Trust, will vary from
estimates, and those variations could be material. Results of drilling, testing and production
after the date of those estimates may require substantial downward revisions or write-downs of
reserves.
Terrorism and continued hostilities in the Middle East could decrease Trust distributions or the
market price of the Units.
Terrorist attacks and the threat of terrorist attacks, whether domestic or foreign, as well as
the military or other actions taken in response, cause instability in the global financial and
energy markets. Terrorism, continued hostilities in the Middle East, and other sustained military
campaigns could adversely affect Trust distributions or the market price of the Units in
unpredictable ways, including through the disruption of fuel supplies and markets, increased
volatility in crude oil and natural gas prices, or the possibility that the infrastructure on which
the operators developing the Underlying Properties rely could be a direct target or an indirect
casualty of an act of terror.
Risks Related to the Trust and Ownership of the Units
The assets of the Trust are depleting assets and, if the operators developing the Underlying
Properties do not perform additional development projects, the assets may deplete faster than
expected. Eventually, the assets of the Trust will cease to produce in commercial quantities and
the Trust will cease to receive proceeds from such assets. In addition, a reduction in depletion
tax benefits may reduce the market value of the Units.
The net proceeds payable to the Trust are derived from the sale of depleting assets. The
reduction in proved reserve quantities is a common measure of depletion. Future maintenance and
development projects on the Underlying Properties will affect the quantity of proved reserves and
can offset the reduction in proved reserves. The timing and size of these projects will depend on
the market prices of crude oil and natural gas. Recent gas prices have been close to or in some
cases less than the lifting costs for certain projects in the Underlying Properties. If the
operators developing the Underlying Properties do not implement additional maintenance and
development projects or abandon certain uneconomic projects, the future rate of production decline
of proved reserves may be higher than the rate currently expected by the Trust.
29
Table of Contents
Because the net proceeds payable to the Trust are derived from the sale of depleting assets,
the portion of distributions to Unitholders attributable to depletion may be considered a return of
capital as opposed to a return on investment. Distributions that are a return of capital will
ultimately diminish the depletion tax benefits available to the Unitholders, which could reduce the
market value of the Units over time. Eventually, the Royalty Interests will cease to produce in
commercial quantities and the Trust will, therefore, cease to receive any distributions of net
proceeds therefrom.
Unitholders and the Trustee have no influence over the operations on, or future development of,
the Underlying Properties.
Neither the Trustee nor the Unitholders can influence or control the operations on, or future
development of, the Underlying Properties. The failure of the Company or any future operator to
conduct its operations, discharge its obligations, deal with regulatory agencies or comply with
laws, rules and regulations, including environmental laws and regulations, in a proper manner could
have an adverse effect on the net proceeds payable to the Trust. Neither the Company nor any future
operators developing the Underlying Properties are under any obligation to continue operations on
the Underlying Properties. Neither the Trustee nor the Unitholders have the right to replace an
operator.
The market price for the Units may not reflect the value of the Royalty Interests held by the
Trust.
The public trading price for the Units tends to be tied to the recent and expected levels of
cash distribution on the Units. The amounts available for distribution by the Trust vary in
response to numerous factors outside the control of the Trust, including prevailing prices for
crude oil and natural gas produced from the Trusts royalty interests. The market price is not
necessarily indicative of the value that the Trust would realize if it sold those Royalty Interests
to a third party buyer. In addition, such market price is not necessarily reflective of the fact
that since the assets of the Trust are depleting assets, a portion of each cash distribution paid
on the Units should be considered by investors as a return of capital, with the remainder being
considered as a return on investment. There is no guarantee that distributions made to a Unitholder
over the life of these depleting assets will equal or exceed the purchase price paid by the
Unitholder.
The Company may transfer its interest in any Underlying Property without the consent of the
Trust or the Unitholders.
The Company, as the operator developing the Underlying Properties, may at any time transfer
all or part of its interest in any Underlying Property to another party. Neither the Trust nor the
Unitholders are entitled to vote on any transfer of the properties underlying the Royalty
Interests, and the Trust will not receive any proceeds of any such transfer. Following any
transfer, the transferred property will continue to be subject to the Royalty Interests of the
Trust, but the net proceeds from the transferred property will be calculated separately and paid by
the transferee. The transferee will be responsible for all of the transferors obligations relating
to calculating, reporting and paying to the Trust the net overriding royalties from the transferred
property, and the transferor will have no continuing obligation to the Trust for that property.
30
Table of Contents
The obligations of Walter Exploration & Production to pay certain amounts if they are not paid
by the Company may terminate upon a sale by the Company of its interests in the Underlying
Properties or a sale by Walter Exploration & Production of its equity ownership interest in the
Company.
Walter Exploration & Production has agreed to assume Dominion Resources obligations in the
Trust Agreement to pay (i) all liabilities and operating and capital expenses that any Company
Interests Owner becomes obligated to pay as a result of the Company Interests Owners obligations
under the Conveyance and (ii) the obligations of the Company to indemnify the Trust and the
Trustees for certain environmental liabilities. Walter Exploration & Productions obligations will
terminate, among other times, upon (i) the sale or other transfer by the Company of all or
substantially all of its interest in the Underlying Properties or (ii) the sale or other transfer
of a majority of Walter Exploration & Productions direct or indirect equity ownership interests in
the Company. However, in these circumstances, Walter Exploration & Productions obligations will
terminate only if (a) the transferee has a specified credit rating or the transferee, together with
any affiliate that guarantees its obligations, does not have a rating assigned to its unsecured
long-term debt from a nationally recognized statistical rating organization but has a specified net
worth or (b) the transferee is approved by a majority of the Unitholders; and provided that the
transferee also unconditionally agrees in writing, in form and substance reasonably satisfactory to
the Trustee, to assume Walter Exploration & Productions remaining obligations under the Trust
Agreement with respect to the assets transferred and under the Administrative Services Agreement.
The Company may abandon the Underlying Properties, thereby terminating the related Royalty
Interest payable to the Trust.
The Company, as the operator developing the Underlying Properties, or any transferee thereof,
may abandon any well or lease without the consent of the Trust or the Unitholders if it reasonably
believes that the well or property can no longer produce in commercially economic quantities. This
could result in the termination of the Royalty Interest relating to the abandoned well or lease.
The Royalty Interests can be sold and the Trust would be terminated.
The Trustee must sell the Royalty Interests if the holders of 66% or more of the Units approve
the sale or vote to terminate the Trust. The Trustee must also sell the Royalty Interests if the
ratio of cash amounts received by the Trust attributable to the Royalty Interests in any calendar
quarter to administrative costs of the Trust for such calendar quarter is less than 1.2 to 1.0 for
two consecutive calendar quarters or if the net present value (discounted at 10 percent) of
estimated future net revenues from proved reserves attributable to the Royalty Interests is equal
to or less than $5 million. Sale of all of the Royalty Interests will terminate the Trust. The net
proceeds of any sale will be distributed to Unitholders. Business Description of the Trust
Termination and Liquidation of the Trust discusses the tax consequences that may result to
Unitholders in the event Trust assets are sold and the Trust is terminated.
31
Table of Contents
Unitholders have limited voting rights.
The voting rights of a Unitholder are more limited than those of stockholders of most public
corporations. For example, there is no requirement for annual meetings of Unitholders or for an
annual or other periodic re-election of the Trustee.
Financial information of the Trust is not prepared in accordance with GAAP.
The financial statements of the Trust are 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, or GAAP. Although this basis of accounting is permitted for royalty trusts by
the SEC, the financial statements of the Trust differ from GAAP financial statements because
revenues are not accrued in the month of production and cash reserves may be established for
specified contingencies and deducted, which could not be accrued in GAAP financial statements.
Unitholders May Lack Limited Liability.
Consistent with Delaware law, the Trust Agreement provides that the Unitholders will have the
same limitation on liability as is accorded under the laws of such state to stockholders of a
corporation for profit. No assurance can be given, however, that the courts in jurisdictions
outside of Delaware will give effect to such limitation.
Cash held by the Trustee is not insured by the Federal Deposit Insurance Corporation, and
future royalty income may be subject to risks relating to the creditworthiness of third parties.
Currently, cash held by the Trustee as a reserve for liabilities and for the payment of
expenses and distributions to Unitholders is invested in Bank of America money market accounts
which are backed by the good faith of Bank of America, N.A., but are not insured by the Federal
Deposit Insurance Corporation. Each Unitholder should independently assess the creditworthiness of
Bank of American, N.A. For more information about the credit rating of Bank of America, N.A.,
please refer to its periodic filings with the SEC. The Trust does not lend money and has limited
ability to borrow money, which the Trustee believes limits the Trusts risk from the current
tightening of credit markets. The Trusts future royalty income, however, may be subject to risks
relating to the creditworthiness of the operators of the Underlying Properties and other purchasers
of the natural gas produced from the Underlying Properties, as well as risks associated with
fluctuations in the price of natural gas.
Item 1B. Unresolved Staff Comments. None.
32
Table of Contents
Item 2. Properties.
THE ROYALTY INTERESTS
The Royalty Interests held by the Trust generally entitle the Trust to receive 65 percent of
Gross Proceeds. The Royalty Interests were conveyed to the Trust by means of a single instrument
of conveyance. The Conveyance was recorded in the appropriate real property records in Alabama, so
as to give notice of the Royalty Interests to creditors, and any transferees will take an interest
in the Underlying Properties subject to the Royalty Interests. The Conveyance was intended to
convey the Royalty Interests as real property interests under Alabama law.
The following description of the material provisions of the Conveyance and the Trust Agreement
is subject to and qualified by the more detailed provisions of the Conveyance and the Trust
Agreement included as exhibits to this Form 10-K.
The Underlying Properties
Black Warrior Basin. The Black Warrior Basin covers 6,000 square miles in west central
Alabama and contains seven Pennsylvania-age multi-seam coal groups in the Pottsville formation: the
Black Creek, Mary Lee, Pratt, Cobb, Gwin, Utley and Brookwood coal groups. The Pottsville coal
formation ranges from the surface to a depth of 4,100 feet.
Wells in the Black Warrior Basin produce natural gas from coal seam formations that have
production characteristics materially different from conventional natural gas wells. The primary
factor affecting recovery of gas reserves from coal seams in the Black Warrior Basin is the
lowering of reservoir pressure through dewatering operations. In a typical coal seam gas well on
the Underlying Properties, average daily natural gas production generally will increase as wells
are dewatered until natural gas production reaches a peak at which time natural gas production
will decline. The amount of time necessary to dewater a well and cause it to reach its peak
production, and the ultimate level of a wells peak production, are difficult to estimate. Since
all of the 532 wells included in the Underlying Properties were producing by mid-1991, the Company
believes that production from such wells is currently past its peak and will decline over the term
of the Trust.
The Royalty Interests were conveyed by the Company to the Trust out of the Company Interests.
The Existing Wells are operated by Dominion Black Warrior Basin, Inc. in accordance with the
Operating Agreement. See Operation of Properties. The Underlying Properties comprise 34,212
gross acres of land in an area approximately 5 miles wide and 23 miles long located on the
Tuscaloosa to Bankhead Lake portion of the Black Warrior Basin. Initial production began in
December 1988 and consisted of eight wells. The Company acquired its interest in the Underlying
Properties in December 1992. As of December 31, 2010, the Underlying Properties contained 532
wells that were producing gas, all of which were drilled prior to 1993.
On July 31, 2007, subsidiaries of HighMount purchased certain assets from subsidiaries of
Dominion Resources, including all of the equity interests in the Company which owns the interests
in the Underlying Properties that are burdened by the Trusts Royalty Interests. The Trust
continued to have ownership in the Royalty Interests burdening the Underlying Properties
33
Table of Contents
and such sale did not affect that ownership. In connection with the sale, Dominion Resources
assigned its rights and obligations under the Trust Agreement governing the Trust and the
Administrative Services Agreement to HighMount Alabama, which was a subsidiary of HighMount.
On May 28, 2010, Walter Natural Gas, LLC, a wholly owned subsidiary of Walter Energy, LLC,
acquired the Alabama natural gas interests of HighMount, effective March 1, 2010. The acquisition
included the Companys Alabama coal bed methane operations, including the 532 existing conventional
gas wells in which the Trust has a net profits interest. The transaction was structured as an
acquisition of the membership interests in HighMount Alabama, following which, HighMount Alabamas
name was changed to Walter Exploration & Production LLC. Walter Exploration & Production will
continue to be party to the Administrative Services Agreement and Trust Agreement. Walter
Exploration & Production will continue to own all the interests in the Company, and the Company,
which has changed its name to Walter Black Warrior Basin LLC, will continue to own the Underlying
Properties. The Trust continues to have ownership in the Royalty Interests burdening the
Underlying Properties and such sale did not affect that ownership. The Trust anticipates no change
in operations or reporting that will significantly impact the Trust or its future revenue stream.
Present Activities Well Count and Acreage Summary. The following table shows as of
December 31, 2010, the gross and net producing wells and acres for the Company Interests. The Net
wells and acres are determined by multiplying the Gross Wells or acres by the Company Interests
Owners Working Interest in the wells or acres.
Number of Wells | Acres | |||||||||||||||
Gross | Net | Gross | Net | |||||||||||||
Company Interests |
532 | 519 | 34,212 | 33,363 |
Royalty Interests, Company Interests and Retained Interests. On June 1, 1994, the effective
date of the Conveyance, the Company had an average aggregate Working Interest in the Existing Wells
of approximately 98 percent, and an average aggregate net revenue interest of approximately 80
percent in the Existing Wells. The Company has not sold or otherwise disposed of any of its
interest in the Company Interests since June 1, 1994. The Royalty Interests are entitled to
approximately 52 percent of the net revenue from natural gas produced and sold from the Underlying
Properties, and the interests (the Retained Interests) of the Company in the Underlying
Properties (after giving effect to the Royalty Interests) entitle the Company to receive
approximately 28 percent of the net revenue from the natural gas produced and sold from the
Underlying Properties. As a Working Interest owner in the Underlying Properties, the Company is
responsible for an average of approximately 98 percent of the operating costs of the Existing
Wells.
The Royalty Interests do not burden (i) royalties and other obligations, expressed or implied,
under oil or natural gas leases, (ii) the overriding royalties and other burdens created by the
Companys predecessors in title, or (iii) the Working Interests owned by other individual Working
Interest owners.
34
Table of Contents
Water Removal and Disposal. Water from the wells located on the Underlying Properties is
pumped from the wellhead to one of five water disposal systems, each with two ponds, where the
water is analyzed and chemically treated to remove impurities prior to discharge into the Black
Warrior River. Water from the operations on the Underlying Properties is discharged into the Black
Warrior River pursuant to a National Pollutant Discharge Elimination System permit issued by ADEM.
The ADEM permit was renewed in 2004 and a timely renewal application was submitted in 2009. The
2004 permit is administratively extended until such time as ADEM reviews and issues a renewal
permit. The ADEM permit generally authorizes water disposal based upon the Black Warrior Rivers
minimum flow rate and maximum chloride level. The Company has advised the Trust that, since 1987,
water disposal from the Underlying Properties has not been disrupted. Although the facilities of
the Company have the capacity to store several days of water production, if water disposal into the
Black Warrior River is disrupted, natural gas production from the wells on the Underlying
Properties would be curtailed during the period of such disruption. See BusinessRegulation and
PricesEnvironmental Regulation.
Curtailments. The Company has advised the Trust that during 2010 production from the
Underlying Properties was not curtailed for any reason other than for routine maintenance.
Federal Lands. Approximately one percent (360 acres) of the Underlying Properties are leases
on land held by the federal government. Royalty payments due to the U.S. government for natural
gas produced from federal lands included in the Underlying Properties must be calculated in
conformance with a Working Interest owners interpretation of regulations issued by the Minerals
Management Service (MMS). MMS regulations cover both valuation standards, which establish the
basis for placing a value on production, and cost allowances, which define those post-production
costs that are deductible by the lessee.
The Trust is subject to certain rules of the Bureau of Land Management under which the holding
of interests in leases by persons other than citizens, nationals and legal resident aliens of the
United States (Eligible Citizens) are limited. As a result, non-Eligible Citizens are prohibited
from owning Units. If any Units are acquired by persons or entities not constituting Eligible
Citizens, such Unitholders may be required to sell such Units pursuant to a procedure set forth in
the Trust Agreement. See BusinessDescription of the TrustPossible Divestiture of Units.
Additional Wells. Well spacing rules, which are in effect in Alabama, generally govern the
space between wells drilled to the same productive formation and are promulgated in order to
prevent waste and confiscation of property. Pursuant to such rules, the Existing Wells are located
on 40- to 80-acre spacing units. Exceptions or changes to these rules may be granted by the
applicable regulatory agency upon application of an interested party following notice to other
interested parties if, in the agencys opinion, good reasons exist therefor after consideration of
evidence presented by the applicant and any opponents. The Company has informed the Trust that it
is not aware of any plans to change spacing regulations with respect to the Underlying Properties
in Alabama. No assurances can be made, however, that exceptions or changes will not be made in the
future.
The Company and its affiliates or unrelated third parties may acquire interests in properties
adjoining the Underlying Properties. It is possible that wells drilled on adjoining properties
would drain reserves attributable to the Underlying Properties.
35
Table of Contents
The Company has agreed for the term of the Trust not to consent to, cooperate with, assist in
or conduct infill drilling (except as required by law) on any of the Underlying Properties in which
the Company owned an interest as of June 1, 1994. Although the Company has informed the Trustee
that it believes that it is unlikely that any additional wells will be drilled, if the Operating
Agreement is terminated, the Company cannot prevent one of the other owners of an interest in the
Underlying Properties from drilling additional wells on the Underlying Properties. Additional
wells, if drilled, could recover a portion of the reserves otherwise producible from wells burdened
by the Company Interests, thereby reducing the Gross Proceeds attributable to the Royalty
Interests.
The Royalty Interests
Summary of Conveyance. The Conveyance has been filed as an exhibit to this Form 10-K. The
following summary of the material terms of the Conveyance is qualified in its entirety by reference
to the terms thereof as set forth in such exhibit.
Expenses Borne by Royalty Interests. The Royalty Interests are non-operating, non-expense
bearing interests, except for their share of property, production and related taxes, including
severance taxes. Accordingly, owners of the Royalty Interests are not liable or responsible for
costs or liabilities incurred by the Working Interest owners in connection with the production of
Gas from the Underlying Properties.
Operating Standard. The Company Interests Owner is obligated to conduct and carry on, as
would a reasonably prudent operator, or cause to be so conducted or carried on, the development,
maintenance and operation of the Company Interests.
Infill Drilling. The Company Interests Owner has agreed not to consent to, cooperate with,
assist in or conduct any infill drilling on the Underlying Properties, except as required by law.
Pratt Recompletions. To recover behind pipe reserves, the Company Interests Owner recompleted
certain of the Existing Wells to the Pratt coal seam prior to March 31, 1997.
Right to Take In-Kind. The owner of the Royalty Interests has no right to take production
in-kind.
Pooling and Unitization. The Company Interests Owner has certain pooling and unitization
rights.
Right to Assign Company Interests. The Company Interests Owner has the right to assign all or
any part of the Company Interests, subject to the Royalty Interests and the terms and provisions of
the Conveyance. If any such assignment is made of part, but not all, of such interests, then
effective as of the date of such assignment, the assignee will be required to make a separate
computation of Gross Proceeds attributable to the assigned interests.
Sale or Assignment of Royalty Interests. In certain situations, the Trust may sell or dispose
of all or a part of the Royalty Interests, in which case the Trust would receive the proceeds
therefrom and distribute such proceeds to the Unitholders, net of any amounts held as a reserve.
See BusinessDescription of the TrustTransfer of Royalty Interests and
36
Table of Contents
BusinessDescription of the TrustDuties and Limited Powers of the Trustee and the Delaware
Trustee.
Books and Records. The Company Interests Owner is required to maintain books and records
sufficient to determine the amounts payable with respect to the Royalty Interests.
Computation and Payment. The Royalty Interests entitle the Trust to receive 65 percent of the
Gross Proceeds. The Royalty Interests bear their proportionate share of property, production and
related taxes (including severance taxes). The definitions, formulas and accounting procedures and
other terms governing the computation of the Royalty Interests are set forth in the Conveyance.
The Company Interests Owner is required, pursuant to the Conveyance, to pay to the Trust
amounts received by the Company Interests Owner from the sale of Subject Gas attributable to the
Royalty Interests. Under the Conveyance, the amounts payable by the Company Interests Owner with
respect to the Royalty Interests are computed with respect to each calendar quarter ending prior to
termination of the Trust, and such amounts are paid to the Trust not later than the last business
day before the 45th day following the end of each calendar quarter. The amounts paid to the Trust
do not include interest on any amounts payable with respect to the Royalty Interests that are held
by the Company Interests Owner prior to payment to the Trust. The Company Interests Owner is
entitled to retain all amounts attributable to the Retained Interests. The Company Interests Owner
deducts from the payment to the Trust the Royalty Interests share of property, production and
related taxes (including severance taxes) and pays the same on behalf of the Trust.
Reserve Estimate
Reserve Estimate. The following table summarizes net proved reserves estimated as of December
31, 2010, and certain related information for the Royalty Interests from the Reserve Estimate
prepared by Ralph E. Davis & Associates. The natural gas reserves were estimated by Ralph E. Davis
& Associates by applying volumetric and decline curve analyses. All of such reserves constitute
proved developed gas reserves located in the United States. The Reserve Estimate was prepared in
accordance with criteria established by the Commission.
37
Table of Contents
Summary
of Gas Reserves as of December 31, 2010 Based on
Average Fiscal-Year Prices
Average Fiscal-Year Prices
December 31, 2010 | ||||
Net Proved (MMcf) (a): |
||||
Developed |
14,690 | |||
Undeveloped |
0 | |||
Total Proved |
14,690 | |||
Estimated Future Net Revenues (in thousands) (a)(b): |
||||
2011 |
$ | 7,822 | ||
2012 |
6,927 | |||
2013 |
6,127 | |||
2014 |
5,407 | |||
2015 |
4,754 | |||
Thereafter |
29,274 | |||
Total |
$ | 60,311 | ||
Total Discounted at 10 Percent |
$ | 36,497 | ||
(a) | The estimates of reserves and future net revenues summarized in this table are based upon a price of $4.37 per Mcf, which represented the average market price for gas in their fields during the 12-month period prior to December 31, 2010, determined as an unweighted arithmetic average of the first day of the month price for each month within such period. This price may not be the most representative price for estimating reserves or related future net revenues data. | |
(b) | Estimated future net revenues are defined as the total revenues attributable to the Royalty Interests for gas production less the relevant share of production, property and related taxes (including severance taxes). Overhead costs have not been included, nor have the effects of depreciation, depletion and federal income tax. Estimated future net revenues and discounted estimated future net revenues are not intended and should not be interpreted as representing the fair market value for the estimated reserves. |
The reserve data set forth herein, which was prepared by Ralph E. Davis & Associates in a
manner customary in the industry, is an estimate only, and actual quantities, rates of production
and sales prices for natural gas are likely to differ from the estimated amounts set forth herein,
and such differences could be significant. Allen C. Barron is the technical person primarily
responsible for overseeing the preparation of the reserves estimates. Mr. Barron graduated from
The University of Houston in 1968 with a Bachelor of Science degree in Chemical Engineering with a
Petroleum Engineering option. Mr. Barron is a licensed professional engineer in the State of Texas
with over thirty years experience in conducting evaluations and engineering studies of U.S. oil and
gas fields and international energy assets.
There are many uncertainties inherent in estimating quantities and values of proved reserves
and in projecting future rates of production. Reserve engineering is a subjective process of
estimating underground accumulations of natural gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available data and of the
geological and engineering evaluation of that data. Results of testing and production subsequent
to the date of an estimate may justify revision of such estimate. Further, reserve
38
Table of Contents
estimates for any given property may vary from engineer to engineer even though each engineer
bases his estimate on common data and utilizes techniques and principles customary in the industry.
Because the process of estimating oil and gas reserves is complex and requires significant
judgment, the Trustee has developed internal policies and controls for estimating reserves. The
Trust does not have information that would be available to a company with oil and gas operations
because detailed information is not generally available to owners of royalty interests. The
Trustee gathers production information from the Company and provides such information to Ralph E.
Davis & Associates, who extrapolates from such information estimates of the reserves attributable
to the Underlying Properties based on its expertise in the oil and gas fields where the Underlying
Properties are situated, as well as publicly available information. The Trusts policies regarding
reserve estimates require proved reserves to be in compliance with the SEC definitions and
guidance.
For properties with short production histories, reserve estimates in many instances are based
upon volumetric calculations and upon analogy to similar types of production or producing fields.
Relative to many conventional natural gas producing properties, coal seam gas producing properties
in general, and the Underlying Properties in particular, have short production histories. In
addition, there are no significant coal seam reservoirs that have been produced to depletion that
can be used as analogies to the Underlying Properties.
The discounted estimated future net revenues shown herein were prepared using guidelines
established by the Commission and may not be representative of the market value for the estimated
reserves.
The reserves attributable to the Royalty Interests are expected to decline substantially
during the term of the Trust, and a portion of each cash distribution made by the Trust will,
therefore, be analogous to a return of capital. As a result, cash distributions will decrease
materially over time. For example, based upon the production estimates set forth in the Reserve
Estimate, annual production attributable to the Royalty Interests is estimated to decline from 1.9
Bcf in 2011 to 1.2 Bcf in 2015.
Drilling and other exploratory and development activities. Detailed information concerning the
number of wells on royalty properties is not generally available to the owner of Royalty Interests.
Consequently, the Registrant does not have information that would be disclosed by a company with
oil and gas operations, such as an accurate count of the number of wells located on the Underlying
Properties, the number of exploratory or development wells drilled on the Underlying Properties
during the periods presented by this report, or the number of wells in process or other present
activities on the Underlying Properties, and the Registrant cannot readily obtain such information.
Miscellaneous. Ralph E. Davis & Associates has delivered to the Trust the Reserve Estimate, a
summary of which is included as an exhibit to this Form 10-K. Information concerning historical
changes in net proved developed reserves attributable to the Royalty Interests, and the calculation
of the standardized measure of discounted future net revenues related thereto, is contained in Note
9 of the Notes to the Financial Statements incorporated by
39
Table of Contents
reference in Item 8 hereof. Neither the Company nor Walter Exploration & Production has filed
reserve estimates covering the Royalty Interests with any other federal authority or agency.
Natural Gas Sales Prices and Production
The following table sets forth the actual net production volumes attributable to the Royalty
Interests, weighted average property, production and information regarding natural gas sales prices
for the years ended December 31, 2010, December 31, 2009 and December 31, 2008.
Year ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Production attributable to the Royalty Interests (Bcf) |
2.4 | 2.7 | 3.1 | |||||||||
Weighted average property, production (per Mcf) |
$ | 0.26 | $ | 0.24 | $ | 0.54 | ||||||
Average Sales Price or Contract Price, as applicable (per Mcf) |
$ | 4.41 | $ | 4.03 | $ | 9.20 |
Gas Purchase Agreement
El Paso, successor to Sonat Marketing, was required under the Gas Purchase Agreement to
purchase the Gas produced from the Underlying Properties until such agreement was terminated,
effective January 31, 2004.
Contracts were secured from two purchasers, ConocoPhillips and Coral Energy Resources, L.P.,
for the base load gas for the period of November 1, 2004 through March 31, 2005. A gas sales
contract was entered into with Sequent Energy for base load gas for the period of April 1, 2005
through October 31, 2005. A gas sales contract was entered into with SCANA Energy for base load
gas for the period of November 1, 2005 through March 31, 2006. Separate gas sales contracts were
entered into with Coral Energy and South Carolina Pipeline Company for base load gas for the period
of April 1, 2006 through October 31, 2006. A gas sales contract was entered into with
ConocoPhillips for base load gas for the period of November 1, 2006 through March 31, 2007. A gas
sales contract was entered into with Coral Energy for base load gas for the period of April 1, 2007
through October 31, 2007. A gas sales contract was entered into with BP Energy for base load gas
for the period of November 1, 2007 through March 31, 2008. Gas sales contracts were entered into
with Atmos, BP Energy and ConocoPhillips for base load gas for the period April 1, 2008 through
October 31, 2008. Gas sales contracts were entered into with Atmos, BP Energy, Chevron and Sequent
for base load gas for the period November 1, 2008 through March 31, 2009. Gas sales contracts were
entered into with Atmos, BP Energy, Chevron, ConocoPhillips and Sequent for base load gas for the
period April 1, 2009 through October 31, 2009. Gas sales contracts were entered into with Atmos,
BP Energy, Chevron and ConocoPhillips for base load gas for the period November 1, 2009 through
March 31, 2010. Gas sales contracts were entered into with Atmos Energy, BP Energy and Sequent
Energy for base load gas for the period April 1, 2010 through August 31, 2010. During the terms of
the above-mentioned contracts, any gas above the base load was sold on the spot market to various
purchasers. A ten-year gas sales contract was entered into effective September 1, 2010 with
Alabama Gas Corporation for all gas produced during such period. The foregoing information
40
Table of Contents
regarding the gas purchase contracts has been provided to the Trustee by Dominion Resources
and Walter Exploration & Production. Operation of Properties
No Control by Trust. Under the terms of the Conveyance, neither the Trustees nor Unitholders
will be able to influence or control the operation or future development of the Underlying
Properties. Unitholders will therefore be reliant on the Company and the other Working Interest
owners to make all decisions regarding operations on the Underlying Properties. The Trust will not
be able to appoint or control the appointment of operators.
The Conveyance does not prohibit the transfer of the Underlying Properties by the Company,
subject to and burdened by the Royalty Interests. The Company and the other Working Interest
owners of the Underlying Properties will have the right, subject to certain restrictions, to
abandon any well or lease on the Underlying Properties under certain circumstances. Upon
abandonment of any such well or lease, that portion of the Royalty Interests relating thereto will
be extinguished. See Sale and Abandonment of Underlying Properties.
Operating Agreement. Pursuant to the Operating Agreement, ConocoPhillips operated and
maintained the Underlying Properties for the Company and the other Working Interest owners until
January 1, 2003. As amended October 30, 1996, the Operating Agreement had a three-year term and
was to be automatically renewed for additional one-year periods unless either party provided
written notice to the other party of its desire to terminate the Operating Agreement before the end
of the current calendar year. On December 27, 2000, Dominion Resources notified ConocoPhillips
that it was terminating the automatic one-year extension of the agreement. As such, the Operating
Agreement was amended effective January 1, 2003 naming Dominion Black Warrior Basin, Inc. as the
operator of the Underlying Properties.
Sale and Abandonment of Underlying Properties
The Company has the right to abandon any well or lease included in the Underlying Properties
if, in its opinion, acting as would a reasonably prudent operator, such well or lease is not
capable of producing Gas in commercial quantities (determined before giving effect to the Royalty
Interests). Neither the Trust nor the Unitholders will control the timing of the plugging and
abandoning of any wells. Through December 31, 2010, none of the wells included in the Underlying
Properties had been plugged and abandoned.
The Company may sell its interest in the Underlying Properties, subject to and burdened by the
Royalty Interests, without the consent of the Trust or Unitholders. Under the Trust Agreement, the
Company has certain rights (but not the obligation) to purchase the Royalty Interests upon
termination of the Trust. See BusinessDescription of the TrustTermination and Liquidation of
the Trust.
Walter Exploration & Productions Assurances
Pursuant to the Assignment and Assumption Agreement, Walter Exploration & Production agreed to
assume the obligations of Dominion Resources pursuant to the Trust Agreement to cause each of the
following obligations to be paid in full when due: (i) all liabilities and operating and capital
expenses that any Company Interests Owner becomes obligated to pay as a result of such Company
Interests Owners obligations under the
41
Table of Contents
Conveyance and (ii) the obligations of the Company to indemnify the Trust, the Trustee and the
Delaware Trustee for certain environmental liabilities under the Trust Agreement (collectively, the
Payment Obligations).
The Trustee may, at any time after the tenth day following receipt by Walter Exploration &
Production of written notice from the Trustee that a Payment Obligation has not been paid when due,
make demand of Walter Exploration & Production for payment stating the amount due. Walter
Exploration & Production is obligated to cure any failure to pay the obligation within 10 days
following receipt of the foregoing demand. After written request of the Unitholders owning of
record not less than 25 percent of the Units then outstanding served upon the Trustee, and absent
action by the Trustee within 10 days following receipt by the Trustee of such written request to
enforce such obligations for the benefit of the Trust, such Unitholders may, acting as a single
class and on behalf of the Trust, seek to enforce Walter Exploration & Productions performance
obligations.
All of Walter Exploration & Productions obligations will terminate upon: (i) the termination
and cancellation of the Trust, (ii) the sale or other transfer by the Company of all or
substantially all of the Companys interest in the Underlying Properties subject to the terms of
the Trust Agreement and (iii) the sale or other transfer of a majority of Walter Exploration &
Productions direct or indirect equity ownership interest in the Company; provided that, with
respect to clauses (ii) and (iii) above, Walter Exploration & Productions obligations will
terminate only if: (a) the transferee has a specified credit rating or the transferee together with
an affiliate that guarantees the transferees obligations has not less than a specified net worth
or (b) the transferee is approved by the holders of a majority of the outstanding Units; and
provided further, that in the case of clauses (ii) or (iii) above the transferee also
unconditionally agrees in writing, in form and substance reasonably satisfactory to the Trustee, to
assume Walter Exploration & Productions remaining obligations under the Trust Agreement with
respect to the assets transferred and under the Administrative Services Agreement.
Title to Properties
Alabama counsel to the Company has opined that the Companys title to its interest in the
Underlying Properties, and the Trusts title to the Royalty Interests, are good and defensible in
accordance with standards generally accepted in the natural gas industry, subject to such
exceptions that, in the opinion of Alabama counsel, are not so material as to detract substantially
from the use or value of the Company Interests or the Royalty Interests.
Although the matter is not entirely free from doubt, Alabama counsel has opined that the
Royalty Interests constitute interests in real property under Alabama law. Consistent therewith,
the Conveyance states that the Royalty Interests constitute real property interests. The Company
has recorded the Conveyance in the appropriate real property records of Alabama in accordance with
local recordation provisions. If, during the term of the Trust, the Company or any Company
Interests Owner becomes involved as a debtor in bankruptcy proceedings under the Federal Bankruptcy
Code, it is not entirely clear that the Royalty Interests would be treated as real property
interests under the laws of Alabama.
42
Table of Contents
Item 3. Legal Proceedings.
The Trust is named as a defendant in an action, styled Southwest Royalties, Inc. v. Dominion
Black Warrior Basin, Inc., et al., filed in the Circuit Court of Fayette County Alabama on October
5, 2007 regarding the quieting of title in certain oil and gas rights related to property in
Fayette and Tuscaloosa Counties in Alabama. The plaintiff alleges that defendants are knowingly
producing gas in violation of the deeds in question. The plaintiff is also alleging conversion of
gas, continuing trespass by defendants on plaintiffs property, and suppression of material facts
by defendants, and plaintiff is requesting an accounting, injunctive relief and compensatory and
punitive damages, plus court costs and attorneys fees. The Trustee does not believe this
litigation will have a material effect on the Trusts financial
statements.
Item 4. Reserved.
43
Table of Contents
PART II.
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. The Units in the Trust are listed and traded on the NYSE under the
symbol DOM. The following table sets forth, for the periods indicated, the high and low sales
prices per Unit on the NYSE and the amount of quarterly cash distributions per Unit paid by the
Trust.
Price | Distribution | |||||||||||
High | Low | per Unit | ||||||||||
2010 |
||||||||||||
First Quarter |
$ | 15.63 | $ | 12.94 | $ | 0.272321 | ||||||
Second Quarter |
$ | 14.50 | $ | 11.01 | $ | 0.321086 | ||||||
Third Quarter |
$ | 14.98 | $ | 11.02 | $ | 0.277926 | ||||||
Fourth Quarter |
$ | 16.35 | $ | 13.13 | $ | 0.291694 | ||||||
2009 |
||||||||||||
First Quarter |
$ | 20.49 | $ | 11.25 | $ | 0.578705 | ||||||
Second Quarter |
$ | 19.95 | $ | 14.70 | $ | 0.359399 | ||||||
Third Quarter |
$ | 17.05 | $ | 13.73 | $ | 0.264913 | ||||||
Fourth Quarter |
$ | 16.78 | $ | 14.01 | $ | 0.246351 |
At March 1, 2011,
there were 7,850,000 Units outstanding and approximately 367 Unitholders
of record.
The Trust has no equity compensation plans and has not repurchased any Units during the period
covered by this report.
Item 6. | Selected Financial Data. |
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Royalty Income |
$ | 10,207,523 | $ | 12,425,827 | $ | 26,537,428 | $ | 21,962,082 | $ | 31,403,042 | ||||||||||
Distributable Income |
$ | 9,185,598 | $ | 11,197,573 | $ | 25,644,510 | $ | 20,912,169 | $ | 30,467,067 | ||||||||||
Distributable Income per Unit |
$ | 1.17 | $ | 1.43 | $ | 3.27 | $ | 2.66 | $ | 3.88 | ||||||||||
Distributions per Unit |
$ | 1.16 | $ | 1.45 | $ | 3.24 | $ | 2.68 | $ | 3.88 | ||||||||||
Total Assets, December 31 |
$ | 16,812,650 | $ | 19,513,673 | $ | 23,055,462 | $ | 26,676,808 | $ | 30,692,809 | ||||||||||
Total Corpus, December 31 |
$ | 16,653,530 | $ | 19,345,951 | $ | 22,941,064 | $ | 26,353,024 | $ | 30,444,631 |
44
Table of Contents
Item 7. Trustees Discussion and Analysis of Financial Condition and Results of Operations.
The Trust collects the proceeds attributable to the Royalty Interests and makes quarterly cash
distributions to Unitholders. The only assets of the Trust, other than cash and cash equivalents
being held for the payment of expenses and liabilities and for distribution to Unitholders, are the
Royalty Interests. The Royalty Interests owned by the Trust burden the interest in the Underlying
Properties that is owned by the Company.
The Royalty Interests consist of overriding royalty interests burdening the Companys interest
in the Underlying Properties. The Royalty Interests generally entitle the Trust to receive 65
percent of the Gross Proceeds (as defined below) during the preceding calendar quarter. The
Royalty Interests are non-operating interests and bear only expenses related to property,
production and related taxes (including severance taxes). Gross Proceeds consist generally of the
aggregate amounts received by the Company attributable to the interests of the Company in the
Underlying Properties from the sale of coal seam gas at the central delivery points in the
gathering system for the Underlying Properties.
Distributable income of the Trust generally consists of the excess of royalty income plus
interest income over the administrative expenses of the Trust. Upon receipt by the Trust, royalty
income is invested in short-term investments in accordance with the Trust Agreement until its
subsequent distribution to Unitholders.
The amount of distributable income of the Trust for any calendar year may differ from the
amount of cash available for distribution to the Unitholders in such year due to differences in the
treatment of the expenses of the Trust and the determination of those amounts. The financial
statements of the Trust are prepared on a modified cash basis pursuant to which the expenses of the
Trust are recognized when they are paid or reserves are established whereas royalty income is
recognized when received by the Trust. Consequently, the reported distributable income of the
Trust for any year is determined by deducting from the income received by the Trust the amount of
expenses paid by the Trust during such year. The amount of cash available for distribution to
Unitholders is determined after adjustment for changes in reserves for unpaid liabilities in
accordance with the provisions of the Trust Agreement. See Note 6 to the financial statements of
the Trust appearing elsewhere in this Form 10-K for additional information regarding the
determination of the amount of cash available for distribution to Unitholders.
The year 2010 marked the sixteenth full year of the existence of the Trust. The Trust
received royalty income amounting to $10,207,523 during the year ended December 31, 2010, compared
to $12,425,827 for 2009 and $26,537,428 for 2008, declining primarily due to lower production and
significantly lower prices for natural gas. The royalty income received by the Trust was net of
the Royalty Interests allocable share of property, production and related taxes. Administrative
expenses during the year ended December 31, 2010 decreased to $1,022,830, compared to $1,232,893
for 2009 and $931,256 for 2008. Distributable income for the year ended December 31, 2010 was
$9,185,598 or $1.17 per Unit, compared to $11,197,573, or $1.43 per Unit, for 2009 and $25,644,510,
or $3.27 per Unit, for 2008. The decrease in administrative expenses in 2010 compared to 2009 was
primarily the result of timing of expenses. The increase in administrative expenses in 2009
compared to 2008 was primarily the result of a significant increases for professional expenses
relating to timing of expenses.
45
Table of Contents
Royalty income to the Trust is attributable to the sale of depleting assets. All of the
Underlying Properties burdened by the Royalty Interests consist of producing properties.
Accordingly, the proved reserves attributable to the Companys interest in the Underlying
Properties are expected to decline substantially during the term of the Trust and a portion of each
cash distribution made by the Trust will, therefore, be analogous to a return of capital.
Accordingly, cash yields attributable to the Units are expected to decline over the term of the
Trust. The changes in royalty income and distributable income noted in the preceding paragraph
were due primarily to changes in the average prices received for gas attributable to the Royalty
Interests as summarized in the table below.
Royalty Income received by the Trust in a given calendar year will generally reflect the
proceeds from the sale of gas produced from the Underlying Properties during the first three
quarters of that year and the fourth quarter of the preceding calendar year due to the timing of
the receipt of these revenues. Accordingly, the royalty income included in distributable income
for the years ended December 31, 2010, 2009 and 2008, was based on production volumes and natural
gas prices for the periods from October 1, 2009 to September 30, 2010, October 1, 2008 to September
30, 2009 and October 1, 2007 to September 30, 2008, respectively.
The following table sets forth the production volumes attributable to the Trusts Royalty
Interests and the average sales Price and Index Price for such production for the periods
indicated. These Assets are mature natural gas properties and production should decline in the
latter years.
For 12 Months Ended | ||||||||||||
September 30, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Production (Bcf)(1) |
2.410 | 2.758 | 3.098 | |||||||||
Production (MMBtu)(2) |
2.406 | 2.761 | 3.104 | |||||||||
Average Sales or Contract Price Received
($/MMBtu) |
$ | 4.50 | $ | 4.79 | $ | 9.10 | ||||||
Average Index Price ($/MMBtu) |
$ | 4.50 | $ | 4.46 | $ | 9.35 |
(1) | Billion cubic feet of natural gas. | |
(2) | Trillion British Thermal Units. |
The information in this Form 10-K concerning production and prices relating to the Royalty
Interests is based on information prepared and furnished by the Company to the Trustee. The
Trustee has no control over and no responsibility relating to the operation of or accounting for
the Underlying Properties.
El Paso, successor to Sonat Marketing, was required under the Gas Purchase Agreement to
purchase the Gas produced from the Underlying Properties until such agreement was terminated,
effective January 31, 2004.
46
Table of Contents
Contracts were secured from various purchasers following termination of the Gas Purchase
Agreement. A gas sales contract was entered into with SCANA Energy for base load gas for the
period of November 1, 2005 through March 31, 2006. Separate gas sales contracts were entered into
with Coral Energy and South Carolina Pipeline Company for base load gas for the period of April 1,
2006 through October 31, 2006. A gas sales contract was entered into with ConocoPhillips for base
load gas for the period of November 1, 2006 through March 31, 2007. A gas sales contract was
entered into with Coral Energy for base load gas for the period of April 1, 2007 through October
31, 2007. A gas sales contract was entered into with BP Energy for base load gas for the period of
November 1, 2007 through March 31, 2008. Gas sales contracts were entered into with Atmos, BP
Energy and ConocoPhillips for base load gas for the period April 1, 2008 through October 31, 2008.
Gas sales contracts were entered into with Atmos, BP Energy, Chevron and Sequent for base load gas
for the period November 1, 2008 through March 31, 2009. Gas sales contracts were entered into with
Atmos, BP Energy, Chevron, ConocoPhillips and Sequent for base load gas for the period April 1,
2009 through October 31, 2009. Gas sales contracts were entered into with Atmos, BP Energy,
Chevron and ConocoPhillips for base load gas for the period November 1, 2009 through March 31,
2010. Gas sales contracts were entered into with Atmos Energy, BP Energy and Sequent Energy for
base load gas for the period April 1, 2010 through August 31, 2010. During the terms of the
above-mentioned contracts, any gas above the base load was sold on the spot market to various
purchasers. A ten-year gas sales contract was entered into effective September 1, 2010 with
Alabama Gas Corporation for all gas produced during such period. The foregoing information
regarding the gas purchase contracts has been provided to the Trustee by Dominion Resources and
Walter Exploration & Production.
The net proved reserves attributable to the Royalty Interests have been estimated as of
December 31, 2010, 2009 and 2008, by independent petroleum engineers. The reserve quantities of
14.7 Bcf for 2010 compared to 15.7 Bcf for 2009 and compared to 19.8 Bcf for 2008, reflect a
decline in reserves between 2008 and 2009 and between 2009 and 2010 as a result of production and a
significant change in prices which affects the change in quantities. See Financial Statements and
Supplementary Data Notes to Financial Statements Note 9.
Critical Accounting Policies and Estimates
The Trusts financial statements reflect the selection and application of accounting policies
that require the Trust to make significant estimates and assumptions. The following are some of
the more critical judgment areas in the application of accounting policies that currently affect
the Trusts financial condition and results of operations.
1. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and are not
intended to present financial position and results of operations in conformity with accounting
principles generally accepted in the United States of America. Preparation of the Trusts
financial statements on such basis includes the following:
| 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. |
47
Table of Contents
| General and administrative expenses are recorded 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 based upon when revenues are received. |
| Distributions to Unitholders are recorded when declared by the Trustee (see Financial Statements and Supplementary Data Notes to Financial Statements Note 5). |
The financial statements of the Trust differ from financial statements prepared in accordance
with accounting principles generally accepted in the United States of America because royalty
income is not accrued in the period of production, general and administrative expenses recorded are
based on liabilities paid and cash reserves established rather than on an accrual basis, and
amortization of the Royalty Interests is not charged against operating results. The comprehensive
basis of accounting other than accounting principles generally accepted in the United States of
America corresponds to the accounting permitted for royalty trusts by the U.S. Securities and
Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of
Royalty Trusts.
2. Impairment
The net amount of Royalty Interests in gas properties is limited to the fair value of these
assets, which would likely be measured by discounting projected cash flows. If the net cost of
Royalty Interests in gas properties exceeds the aggregate of these amounts, an impairment provision
is recorded and charged to the Trust corpus. As of December 31, 2010, no impairment is required.
3. Revenue Recognition
Revenues from Royalty Interests are recognized in the period in which amounts are received by
the Trust. Royalty income received by the Trust in a given calendar year will generally reflect
the proceeds, on an entitlements basis, from natural gas produced for the twelve-month period ended
September 30th in that calendar year.
4. Reserve Disclosure
Independent petroleum engineers estimate the net proved reserves attributable to the Royalty
Interest. In accordance with FASB guidance, estimates of future net revenues from proved reserves
have been prepared using year-end contractual gas prices and related costs. Numerous uncertainties
are inherent in estimating volumes and the value of proved reserves and in projecting future
production rates and the timing of development of non-producing reserves. Such reserve estimates
are subject to change as additional information becomes available. The reserves actually recovered
and the timing of production may be substantially different from the reserve estimates.
Detailed information concerning the number of wells on royalty properties is not generally
available to the owner of royalty interests. Consequently, the Registrant does not have
information that would be disclosed by a company with oil and gas operations, such as an accurate
count of the number of wells located on the Underlying Properties, the number of
48
Table of Contents
exploratory or development wells drilled on the Underlying Properties during the periods
presented by this report, or the number of wells in process or other present activities on the
Underlying Properties, and the Registrant cannot readily obtain such information.
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 Unitholders. The Trustee is aware of no
such items as of December 31, 2010, other than as stated below.
The Trust is named as a defendant in an action, styled Southwest Royalties, Inc. v. Dominion
Black Warrior Basin, Inc., et al., filed in the Circuit Court of Fayette County Alabama on October
5, 2007 regarding the quieting of title in certain oil and gas rights related to property in
Fayette and Tuscaloosa Counties in Alabama. The plaintiff alleges that defendants are knowingly
producing gas in violation of the deeds in question. The plaintiff is also alleging conversion of
gas, continuing trespass by defendants on plaintiffs property, and suppression of material facts
by defendants, and plaintiff is requesting an accounting, injunctive relief and compensatory and
punitive damages, plus court costs and attorneys fees. The Trustee does not believe this
litigation will have a material effect on the Trusts financial statements.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance effective July
1, 2009 that requires all then-existing non-SEC accounting and reporting standards to be superseded
by the FASB Accounting Standards Codification (the Codification), the source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental entities. Previous references to
then-existing non-SEC accounting and reporting standards were removed and are reflected in the
Trusts footnotes herein.
Liquidity and Capital Resources
As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and
neither the Delaware Trustee nor the Trustee has any control over or any responsibility relating to
the operation of the Underlying Properties. The Trustee has powers to collect and distribute
proceeds received by the Trust and pay Trust liabilities and expenses and its actions have been
limited to those activities. The assets of the Trust are passive in nature, and other than the
Trusts ability to periodically borrow money as necessary to pay expenses, liabilities and
obligations of the Trust that cannot be paid out of cash held by the Trust, the Trust is prohibited
from engaging in borrowing transactions. As a result, other than such borrowings, if any, the
Trust has no source of liquidity or capital resources other than the Royalty Interests. See the
earlier discussions in Item 7 for the discussion of the operations and cash inflows and outflows of
the Trust.
Off-Balance Sheet Arrangements
As stipulated in the Trust Agreement, the Trust is intended to be passive in nature and
neither the Delaware Trustee nor the Trustee has any control over or any responsibility relating
49
Table of Contents
to the operation of the Underlying Properties. The Trustee has powers to collect and
distribute proceeds received by the Trust and pay Trust liabilities and expenses and its actions
have been limited to those activities. Therefore, the Trust has not engaged in any off-balance
sheet arrangements.
Tabular Disclosure of Contractual Obligations
Payments Due by Period | ||||||||||||||||||||
Less than 1 | 1 - 3 | 3 - 5 | More than | |||||||||||||||||
Contractual Obligations | Total | Year | Years | Years | 5 Years | |||||||||||||||
Distribution declared
subsequent to year end |
$ | 1,794,950 | $ | 1,794,950 | 0 | 0 | 0 | |||||||||||||
Total |
$ | 1,794,950 | $ | 1,794,950 | 0 | 0 | 0 |
The above payable relates to distributions declared February 18, 2011 and payable March 11,
2011 to Unitholders of record on March 1, 2011.
Forward-Looking Statements
This Annual Report includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
which are intended to be covered by the safe harbor created thereby. All statements other than
statements of historical fact included in this Annual Report are forward-looking statements. Such
statements include, without limitation, factors affecting the price of oil and natural gas
contained in Item 1, Business, certain reserve information and other statements contained in Item
2, Properties, and certain statements regarding the Trusts financial position, industry
conditions and other matters contained in this Item 7. 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 Trustees control, that may
cause such expectations not to be realized, including, among other things, factors identified in
this Annual Report affecting oil and gas prices and the recoverability of reserves, general
economic conditions, actions and policies of petroleum-producing nations and other changes in the
domestic and international energy markets and the factors identified in Item 1A, Risk Factors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Trust invests in no
derivative financial instruments and has no foreign operations or long-term debt instruments. The
assets of the Trust are passive in nature, and other than the Trusts ability to periodically
borrow money as necessary to pay expenses, liabilities and obligations of the Trust that cannot be
paid out of cash held by the Trust, the Trust is prohibited from engaging in borrowing
transactions. The amount of any such borrowings is unlikely to be material to the Trust. The
Trust periodically holds short-term investments acquired with funds held by the Trust pending
distribution to Unitholders and funds held in reserve for the payment of Trust expenses and
liabilities. Because of the short-term nature of these borrowings and investments and certain
limitations upon the types of such investments which may be held by the Trust, the Trustee
50
Table of Contents
believes that the Trust is not subject to any material interest rate risk. Funds held by the Trust
pending distribution to Unitholders and in reserve for the payment of Trust expenses and
liabilities are invested in Bank of America, N.A. money market accounts, which are backed by the
good faith and credit of Bank of America, N.A., but are not insured by the Federal Deposit
Insurance Corporation. Each Unitholder should independently assess the creditworthiness of Bank of
America, N.A. For more information about the credit rating of Bank of America, N.A., please refer
to its periodic filings with the SEC. Additionally, the Trusts future royalty income may be
subject to risks relating to the creditworthiness of the operators of the Underlying Properties and
other purchasers of crude oil and natural gas produced from the Underlying Properties, as well as
risks associated with fluctuations in the price of crude oil and natural gas. See Item 1A Risk
Factors Cash held by the Trustee is not insured by the Federal Deposit Insurance Corporation,
and future royalty income may be subject to risks relating to the creditworthiness of third
parties. The Trust does not engage in transactions in foreign currencies which could expose the
Trust or Unitholders to any foreign currency related market risk. Information contained in Bank of
America, N.As periodic filings with the SEC is not incorporated by reference into this annual
report on Form 10-K and should not be considered part of this report or any other filing that the
Trust makes with the SEC.
51
Table of Contents
Item 8. | Financial Statements and Supplementary Data. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Unit Holders of Dominion Resources Black Warrior Trust and
Bank of America, N.A., Trustee:
Bank of America, N.A., Trustee:
We have audited the accompanying statements of assets, liabilities, and trust corpus of Dominion
Resources Black Warrior Trust (the Trust) as of December 31, 2010 and 2009, and the related
statements of distributable income and changes in trust corpus for each of the three years in the
period ended December 31, 2010. These financial statements are the responsibility of the Trustee.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, these 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.
In our opinion, such financial statements present fairly, in all material respects, the assets,
liabilities, and trust corpus of the Dominion Resources Black Warrior Trust at December 31, 2010
and 2009, and the distributable income and changes in trust corpus for each of the three years in
the period ended December 31, 2010, on the basis of accounting described in Note 2.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Trusts internal control over financial reporting as of December 31,
2010, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 11,
2011 expressed an unqualified opinion on the Trusts internal control over financial reporting.
DELOITTE & TOUCHE LLP
Austin, TX
March 11, 2011
March 11, 2011
52
Table of Contents
DOMINION RESOURCES BLACK WARRIOR TRUST
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Statements of Assets, Liabilities and Trust Corpus
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 60,357 | $ | 13,123 | ||||
Royalty interests in gas properties (less accumulated
amortization of $139,065,207 and
$136,316,950, respectively) |
16,752,293 | 19,500,550 | ||||||
Total Assets |
$ | 16,812,650 | $ | 19,513,673 | ||||
LIABILITIES AND TRUST CORPUS |
||||||||
Trust expenses payable |
$ | 159,120 | $ | 167,722 | ||||
Trust corpus
(7,850,000 units of beneficial interest authorized, issued and outstanding) |
16,653,530 | 19,345,951 | ||||||
Total Liabilities and Trust Corpus |
$ | 16,812,650 | $ | 19,513,673 | ||||
Statements of Distributable Income
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Royalty income |
$ | 10,207,523 | $ | 12,425,827 | $ | 26,537,428 | ||||||
Interest income |
905 | 4,639 | 38,338 | |||||||||
10,208,428 | 12,430,466 | 26,575,766 | ||||||||||
General and administrative expenses |
(1,022,830 | ) | (1,232,893 | ) | (931,256 | ) | ||||||
Distributable income |
$ | 9,185,598 | $ | 11,197,573 | $ | 25,644,510 | ||||||
Distributable income per unit
(7,850,000 units) |
$ | 1.17 | $ | 1.43 | $ | 3.27 | ||||||
Distributions per unit |
$ | 1.16 | $ | 1.45 | $ | 3.24 | ||||||
Statements of Changes in Trust Corpus
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Trust corpus, beginning of period |
$ | 19,345,951 | $ | 22,941,064 | $ | 26,353,024 | ||||||
Amortization of Royalty Interests |
(2,748,257 | ) | (3,415,148 | ) | (3,584,906 | ) | ||||||
Distributable income |
9,185,598 | 11,197,573 | 25,644,510 | |||||||||
Distributions to Unitholders |
(9,129,762 | ) | (11,377,538 | ) | (25,471,564 | ) | ||||||
$ | 16,653,530 | $ | 19,345,951 | $ | 22,941,064 | |||||||
The accompanying notes are an integral part of these financial statements.
53
Table of Contents
Notes to Financial Statements
Years Ended December 31, 2010, 2009 and 2008
Years Ended December 31, 2010, 2009 and 2008
1. Trust Organization and Provisions
Dominion Resources Black Warrior Trust (the Trust) was formed as a Delaware business trust
pursuant to the terms of the Trust Agreement of Dominion Resources Black Warrior Trust (as amended,
the Trust Agreement), entered into effective as of May 31, 1994, among Dominion Black Warrior
Basin, Inc., an Alabama corporation, as trustor; Dominion Resources, Inc., a Virginia corporation
(Dominion Resources); and Bank of America, N.A. (as successor to NationsBank of Texas, N.A.), a
national banking association (the Trustee); and Mellon Bank (DE) National Association, a national
banking association (the Delaware Trustee), as trustees. The Trustees are independent financial
institutions. 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-K to U.S. Trust, Bank of
America Private Wealth Management shall describe the legal entity Bank of America, N.A.
The Trust is a grantor trust formed to acquire and hold certain overriding royalty interests
(the Royalty Interests) burdening proved natural gas properties located in the Pottsville coal
formation of the Black Warrior Basin, Tuscaloosa County, Alabama (the Underlying Properties)
owned by Walter Black Warrior Basin LLC, a Delaware limited liability company, as successor to
Dominion Black Warrior Basin, Inc. (the Company). The Trust was initially created by the filing
of its Certificate of Trust with the Delaware Secretary of State on May 31, 1994. In accordance
with the Trust Agreement, the Company contributed $1,000 as the initial corpus of the Trust. On
June 28, 1994, the Royalty Interests were conveyed to the Trust by the Company pursuant to the
Overriding Royalty Conveyance (the Conveyance), effective as of June 1, 1994, from the Company to
the Trust, in consideration for all the 7,850,000 authorized units of beneficial interest (Units)
in the Trust. The Company transferred all the Units to its parent, Dominion Energy, Inc., a
Virginia corporation (Dominion Energy), which in turn transferred all the Units to its parent,
Dominion Resources, Inc., a Virginia corporation (Dominion Resources), which sold an aggregate of
6,904,000 Units to the public through various underwriters (the Underwriters) in June and August
1994 and the remaining 946,000 Units through certain of the Underwriters in June 1995.
The Trustee has all powers to collect and distribute proceeds received by the Trust and to pay
Trust liabilities and expenses. The Delaware Trustee has only such powers as are set forth in the
Trust Agreement or are required by law and is not empowered to otherwise manage or take part in the
management of the Trust. The Royalty Interests are passive in nature and neither the Trustee nor
the Delaware Trustee has any control over, or any responsibility relating to, the operation of the
Underlying Properties or the Companys interest therein.
The Trust is subject to termination under certain circumstances described in the Trust
Agreement. Upon the termination of the Trust, all Trust assets will be sold and the net proceeds
therefrom distributed to Unitholders.
The only assets of the Trust, other than cash and temporary investments being held for the
payment of expenses and liabilities and for distribution to Unitholders, are the Royalty
54
Table of Contents
Interests. The Royalty Interests consist of overriding royalty interests burdening the
Companys interest in the Underlying Properties. The Royalty Interests generally entitle the Trust
to receive 65 percent of the Companys Gross Proceeds (as defined below). The Royalty Interests
are non-operating interests and bear only expenses related to property, production and related
taxes (including severance taxes). Gross Proceeds consist generally of the aggregate amounts
received by the Company attributable to the interests of the Company in the Underlying Properties
from the sale of coal seam gas at the central delivery points in the gathering system for the
Underlying Properties. The definitions, formulas and accounting procedures and other terms
governing the computation of the Royalty Interests are set forth in the Conveyance.
Because of the passive nature of the Trust and the restrictions and limitations on the powers
and activities of the Trustee contained in the Trust Agreement, the Trustee does not consider any
of the officers and employees of the Trustee to be officers or executive officers of the Trust
as such terms are defined under applicable rules and regulations adopted under the Securities
Exchange Act of 1934.
On July 31, 2007, subsidiaries of HighMount purchased certain assets from subsidiaries of
Dominion Resources, including all of the equity interests in the Company which owns the interests
in the Underlying Properties that are burdened by the Trusts Royalty Interests. The Trust
continued to have ownership in the Royalty Interests burdening the Underlying Properties and such
sale did not affect that ownership. In connection with the sale, Dominion Resources assigned its
rights and obligations under the Trust Agreement governing the Trust and the Administrative
Services Agreement to HighMount Alabama, which was a subsidiary of HighMount.
On May 28, 2010, Walter Natural Gas, LLC, a wholly owned subsidiary of Walter Energy, LLC,
acquired the Alabama natural gas interests of HighMount, effective March 1, 2010. The acquisition
included the Companys Alabama coal bed methane operations, including the 532 existing conventional
gas wells in which the Trust has a net profits interest. The transaction was structured as an
acquisition of the membership interests in HighMount Alabama, following which, HighMount Alabamas
name was changed to Walter Exploration & Production LLC. Walter Exploration & Production will
continue to be party to the Administrative Services Agreement and Trust Agreement. Walter
Exploration & Production, will continue to own all the interests in the Company, and the Company,
which has changed its name to Walter Black Warrior Basin, will continue to own the Underlying
Properties. The Trust continues to have ownership in the Royalty Interests burdening the
Underlying Properties and such sale did not affect that ownership. The Trust anticipates no change
in operations or reporting that will significantly impact the Trust or its future revenue stream.
2. Basis of Accounting
The financial statements of the Trust are prepared on a modified cash basis and are not
intended to present financial position and results of operations in conformity with accounting
principles generally accepted in the United States of America. Preparation of the Trusts
financial statements on such basis includes the following:
| 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. |
55
Table of Contents
| General and administrative expenses are recorded 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 based upon when revenues are received. | |
| Distributions to Unitholders are recorded when declared by the Trustee (see Note 5). |
The financial statements of the Trust differ from financial statements prepared in accordance
with accounting principles generally accepted in the United States of America because royalty
income is not accrued in the period of production, general and administrative expenses recorded are
based on liabilities paid and cash reserves established rather than on an accrual basis, and
amortization of the Royalty Interests is not charged against operating results. The comprehensive
basis of accounting other than accounting principles generally accepted in the United States of
America corresponds to the accounting permitted for royalty trusts by the U.S. Securities and
Exchange Commission, as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of
Royalty Trusts.
Use of Estimates
The preparation of financial statements in conformity with the basis of accounting described
above requires management to make estimates and assumptions that affect reported amounts of certain
assets, liabilities, revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.
Impairment
The net amount of Royalty Interests in Gas properties is limited to the fair value of these
assets, which would likely be measured by discounting projected cash flows. If the net cost of
Royalty Interests in Gas properties exceeds the aggregate of these amounts, an impairment provision
is recorded and charged to the Trust corpus. As of December 31, 2010, no impairment is required.
Distributable Income Per Unit
Basic distributable income per unit is computed by dividing distributable income by the
weighted average units outstanding. Distributable income per unit assuming dilution is computed by
dividing distributable income by the weighted average number of units and equivalent units
outstanding. The Trust had no equivalent units outstanding for any period presented, thus basic
distributable income per unit and diluted distributable income per unit are the same.
3. New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued guidance effective July
1, 2009 that requires all then-existing non-SEC accounting and reporting standards to be superseded
by the FASB Accounting Standards Codification (the Codification), the source of authoritative
GAAP recognized by the FASB to be applied by nongovernmental
56
Table of Contents
entities. Previous references to then-existing non-SEC accounting and reporting standards were
removed and are reflected in the Trusts footnotes herein.
4. Federal Income Taxes
The Trust is a Grantor Trust for federal income tax purposes. As a Grantor Trust, the Trust
is not required to pay federal income taxes. Accordingly, no provision for federal income taxes
has been made in these financial statements.
Because the Trust is treated as a Grantor Trust, and because a Unitholder is treated as
directly owning an interest in the Royalty Interests, each Unitholder is taxed directly on his per
Unit pro rata share of income attributable to the Royalty Interests consistent with the
Unitholders method of accounting and without regard to the taxable year or accounting method
employed by the Trust.
Some Trust Units are held by middlemen, as such term is broadly defined in the Treasury Regulations
(and includes custodians, nominees, certain joint owners, and brokers holding an interest for a
custodian in street name, referred to herein collectively 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
Treasury Regulations governing the information reporting requirements of the Trust as a WHFIT. Tax
information is also posted by the Trustee at www.dom-dominionblackwarriortrust.com.
Notwithstanding the foregoing, the middlemen holding Trust Units on behalf of Unitholders, and not
the Trustee of the Trust, are solely responsible for complying with the information reporting
requirements under the Treasury Regulations with respect to such Trust Units, including the
issuance of IRS Forms 1099 and certain written tax statements. Unitholders 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.
Each Unitholder should consult his tax advisor regarding Trust tax compliance matters.
5. Related Party Transactions
Until July 2007, Dominion Resources provided accounting, bookkeeping and informational
services to the Trust in accordance with an Administrative Services Agreement dated effective June
1, 1994, after which HighMount Alabama (now Walter Exploration & Production) assumed this function.
During 2010 the fee for these services was $477,907 and will increase annually by three percent.
Fees paid by the Trust to HighMount in 2009 were $463,987 and in 2008 were $450,473.
Aggregate fees and expense reimbursements paid by the Trust to the Trustees in 2010, 2009 and
2008 were $52,791, $51,399 and $50,047, respectively.
57
Table of Contents
6. Distributions to Unitholders
The Trustee determines for each calendar quarter the amount of cash available for distribution
to Unitholders. Such amount (the Quarterly Distribution Amount) is an amount equal to the
excess, if any, of the cash received by the Trust attributable to production from the Royalty
Interests during such quarter, provided that such cash is received by the Trust on or before the
last business day prior to the 45th day following the end of such calendar quarter, plus the amount
of interest expected by the Trustee to be earned on such cash proceeds during the period between
the date of receipt by the Trust of such cash proceeds and the date of payment to the Unitholders
of such Quarterly Distribution Amount, plus all other cash receipts of the Trust during such
quarter (to the extent not distributed or held for future distribution as a Special Distribution
Amount (as defined below) or included in the previous Quarterly Distribution Amount) (which might
include sales proceeds not sufficient in amount to qualify for a special distribution as described
in the next paragraph), over the liabilities of the Trust paid during such quarter and not taken
into account in determining a prior Quarterly Distribution Amount, subject to adjustments for
changes made by the Trustee during such quarter in any cash reserves established for the payment of
contingent or future obligations of the Trust. An amount that is not included in the Quarterly
Distribution Amount for a calendar quarter because such amount is received by the Trust after the
last business day prior to the 45th day following the end of such calendar quarter will be included
in the Quarterly Distribution Amount for the next calendar quarter. The Quarterly Distribution
Amount for each quarter will be payable to Unitholders of record on the 60th day following the end
of such calendar quarter unless such day is not a business day in which case the record date is the
next business day thereafter. The Trustee will distribute the Quarterly Distribution Amount for
each quarter on or prior to 70 days after the end of such calendar quarter to each person who was a
Unitholder of record on the record date for such calendar quarter.
The Royalty Interests may be sold under certain circumstances and will be sold following
termination of the Trust. A special distribution will be made of undistributed net sales proceeds
and other amounts received by the Trust aggregating in excess of $10 million (a Special
Distribution Amount). The record date for a Special Distribution Amount will be the 15th day
following the receipt by the Trust of amounts aggregating a Special Distribution Amount (unless
such day is not a business day, in which case the record date will be the next business day
thereafter) unless such day is within 10 days or less prior to the record date for a Quarterly
Distribution Amount, in which case the record date for the Special Distribution Amount will be the
same as the record date for the Quarterly Distribution Amount. Distribution to Unitholders of a
Special Distribution Amount will be made no later than 15 days after the Special Distribution
Amount record date.
58
Table of Contents
7. Subsequent Events
Subsequent to December 31, 2010, the Trust declared and paid the following distribution:
Quarterly | Distribution | |||
Record Date | Payment Date | per Unit | ||
March 1, 2011 | March 11, 2011 | $0.228656 |
8. Quarterly Financial Data (Unaudited)
The following table sets forth the royalty income, distributable income and distributable
income per Unit of the Trust for each quarter in the years ended December 31, 2010 and 2009 (in
thousands, except per Unit amounts):
Royalty | Distributable | Distributable | ||||||||||
Calendar Quarter | Income | Income | Income per Unit | |||||||||
2010 |
||||||||||||
First |
$ | 2,513 | $ | 2,236 | $ | .28 | ||||||
Second |
2,830 | 2,531 | .32 | |||||||||
Third |
2,393 | 2,204 | .28 | |||||||||
Fourth |
2,472 | 2,215 | .29 | |||||||||
$ | 10,208 | $ | 9,186 | $ | 1.17 | |||||||
2009 |
||||||||||||
First |
$ | 4,773 | $ | 4,362 | $ | 0.56 | ||||||
Second |
3,171 | 2,855 | 0.36 | |||||||||
Third |
2,319 | 2,105 | 0.27 | |||||||||
Fourth |
2,163 | 1,876 | 0.24 | |||||||||
$ | 12,426 | $ | 11,198 | $ | 1.43 | |||||||
Selected 2010 fourth quarter data are as follows (in thousands, except per Unit amounts):
Royalty income |
$ | 2,472 | ||
Interest income |
| |||
General and administrative expenses |
(257 | ) | ||
Distributable income |
$ | 2,215 | ||
Distributable income per Unit |
0.29 | |||
Distributions per Unit |
0.29 |
59
Table of Contents
Due to revisions in estimate of reserve quantities (see Note 9), estimated amortization of
royalty interests decreased by approximately $235,553, increased by approximately
$222,943, and decreased by approximately $48,747, during the fourth quarters of 2010, 2009 and
2008, respectively. These adjustments did not have an impact on the Trusts distributable income.
9. Supplemental Gas Disclosure (Unaudited)
The net proved reserves attributable to the Royalty Interests have been estimated as of
December 31, 2010, 2009, 2008 and January 1, 2008, by independent petroleum engineers.
In accordance with FASB guidance, estimates of proved reserves and future net cash flows from
proved reserves have been prepared using contractually guaranteed prices and average natural gas
prices, and related costs. The standardized measure of future net cash flows from the gas reserves
is calculated based on discounting such future net cash flows at an annual rate of 10 percent. The
average price for December 31, 2010, and the year-end prices for December 31, 2009 and December 31,
2008, were $4.37, $3.70, and $5.71 per Mcf, respectively. As of February 28, 2011, published Gas
prices were approximately $3.7930 per Mcf. The use of such price as compared to $4.38 per
Mcf, which was used to calculate the below information, would result
in a lower standardized
measure of discounted future net cash flows for Gas.
Numerous uncertainties are inherent in estimating volumes and value of proved reserves and in
projecting future production rates and timing of development expenditures. Such reserve estimates
are subject to change as additional information becomes available. The reserves actually recovered
and the timing of production may be substantially different from the original estimates.
Detailed information concerning the number of wells on royalty properties is not generally
available to the owner of royalty interests. Consequently, the Registrant does not have
information that would be disclosed by a company with oil and gas operations, such as an accurate
count of the number of wells located on the Underlying Properties, the number of exploratory or
development wells drilled on the Underlying Properties during the periods presented by this report,
or the number of wells in process or other present activities on the Underlying Properties, and the
Registrant cannot readily obtain such information.
The reserve estimates for the Royalty Interests are based on a percentage share of the
Companys Gross Proceeds payable to the Trust of 65 percent.
Proved developed reserves at January 1, 2008 |
22,597 | |||
Revisions of previous estimates |
301 | |||
Production (MMcf) |
(3,098 | ) | ||
Proved developed reserves at December 31, 2008 |
19,800 | |||
Revisions of previous estimates |
(1,292 | ) | ||
Production (MMcf) |
(2,758 | ) | ||
Proved developed reserves at December 31, 2009 |
15,750 | |||
Revisions of previous estimates |
1,350 | |||
Production (MMcf) |
(2,410 | ) | ||
Proved developed reserves at December 31, 2010 |
14,690 | |||
60
Table of Contents
All proved reserve estimates presented above at December 31, 2010, 2009, 2008 and January 1,
2008, are proved developed.
Proved reserves, all located in the United States, for the Trusts Interests are those
quantities of coal seam gas, which, by analysis of geoscience and engineering data, can be
estimated with reasonable certainty to be economically producible from a given date forward,
from known reservoirs, and under existing economic conditions, operating methods, and government
regulations prior to the time at which contracts providing the right to operate expire, unless
evidence indicates that renewal is reasonably certain, regardless of whether deterministic or
probabilistic methods are used for the estimation. The Trusts proved developed reserves are
proved reserves that can be expected to be recovered through existing wells with existing equipment
and operating methods.
The following table sets forth the standardized measure of discounted estimated future net
cash flows from proved reserves at December 31, 2010, 2009 and 2008 relating to the Trusts Royalty
Interests (thousands of dollars):
2010 | 2009 | 2008 | ||||||||||
Future cash inflows |
$ | 64,160 | $ | 55,145 | $ | 102,862 | ||||||
Future severance taxes |
(3,850 | ) | (3,309 | ) | (6,171 | ) | ||||||
Future net cash flows |
60,310 | 51,836 | 96,691 | |||||||||
10% annual discount for estimated timing
of cash flow |
(23,813 | ) | (19,311 | ) | (39,321 | ) | ||||||
Standardized measure of discounted
future net cash flows |
$ | 36,497 | $ | 32,525 | $ | 57,370 | ||||||
Future cash flows do not include Section 29 tax credits, which no longer apply for coal seam
gas produced and sold after December 31, 2002.
The following table sets forth the changes in the present value of estimated future net cash
flows from proved reserves during the period ended December 31, 2010, 2009 and 2008 (thousands of
dollars):
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of period |
$ | 32,525 | $ | 57,370 | $ | 84,849 | ||||||
Increase (decrease) due to: |
||||||||||||
Royalty income, net of taxes |
(10,208 | ) | (12,426 | ) | (26,537 | ) | ||||||
Changes in prices |
5,012 | (19,589 | ) | (21,711 | ) | |||||||
Changes in estimated volumes |
5,915 | 1,433 | 12,285 | |||||||||
Accretion of discount |
3,253 | 5,737 | 8,485 | |||||||||
Balance at December 31 |
$ | 36,497 | $ | 32,525 | $ | 57,370 | ||||||
61
Table of Contents
10. Gas Purchase Agreement
El Paso Merchant EnergyGas, L.P. (El Paso), successor to Sonat Marketing Company (Sonat
Marketing), was required under a gas purchase agreement (the Gas Purchase Agreement) to purchase
the gas produced from the Underlying Properties until such agreement was terminated, effective
January 31, 2004.
Contracts were secured from various purchasers following termination of the Gas Purchase
Agreement. A gas sales contract was entered into with SCANA Energy for base load gas for the
period of November 1, 2005 through March 31, 2006. Separate gas sales contracts were entered into
with Coral Energy and South Carolina Pipeline Company for base load gas for the period of April 1,
2006 through October 31, 2006. A gas sales contract was entered into with ConocoPhillips for base
load gas for the period of November 1, 2006 through March 31, 2007. A gas sales contract was
entered into with Coral Energy for base load gas for the period of April 1, 2007 through October
31, 2007. A gas sales contract was entered into with BP Energy for base load gas for the period of
November 1, 2007 through March 31, 2008. Gas sales contracts were entered into with Atmos, BP
Energy and ConocoPhillips for base load gas for the period April 1, 2008 through October 31, 2008.
Gas sales contracts were entered into with Atmos, BP Energy, Chevron and Sequent for base load gas
for the period November 1, 2008 through March 31, 2009. Gas sales contracts were entered into with
Atmos, BP Energy, Chevron, ConocoPhillips and Sequent for base load gas for the period April 1,
2009 through October 31, 2009. Gas sales contracts were entered into with Atmos, BP Energy,
Chevron and ConocoPhillips for base load gas for the period November 1, 2009 through March 31, 2010
Gas sales contracts were entered into with Atmos Energy, BP Energy and Sequent Energy for base load
gas for the period April 1, 2010 through August 31, 2010. During the terms of the above-mentioned
contracts, any gas above the base load was sold on the spot market to various purchasers. A
ten-year gas sales contract was entered into effective September 1, 2010 with Alabama Gas
Corporation for all gas produced during such period. The foregoing information regarding the gas
purchase contracts has been provided to the Trustee by Dominion Resources and Walter Exploration &
Production.
11. 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 Unitholders. The Trustee is aware of no
such items as of December 31, 2010, other than as stated below.
The Trust is named as a defendant in an action, styled Southwest Royalties, Inc. v. Dominion
Black Warrior Basin, Inc., et al., filed in the Circuit Court of Fayette County Alabama on October
5, 2007 regarding the quieting of title in certain oil and gas rights related to property in
Fayette and Tuscaloosa Counties in Alabama. The plaintiff alleges that defendants are knowingly
producing gas in violation of the deeds in question. The plaintiff is also alleging conversion of
gas, continuing trespass by defendants on plaintiffs property, and suppression of material facts
by defendants, and plaintiff is requesting an accounting, injunctive relief and compensatory and
punitive damages, plus court costs and attorneys fees. The Trustee does not believe this
litigation will have a material effect on the Trusts financial statements.
62
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Trustee carried out an evaluation of
the effectiveness of the design and operation of the Trusts disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Trustee
concluded that the Trusts disclosure controls and procedures are effective in timely recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by
the Trust in the reports that it files or submits under the Securities Exchange Act of 1934 and are
effective in ensuring that information required to be disclosed by the Trust in the reports that it
files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the
Trustee to allow timely decisions regarding required disclosure. In its evaluation of disclosure
controls and procedures, the Trustee has relied, to the extent considered reasonable, on
information provided by the Company.
Changes in Internal Control Over Financial Reporting
There has not been any change in the Trusts internal control over financial reporting during
the fourth quarter of 2010 that has materially affected, or is reasonably likely to materially
affect, the Trusts internal control over financial reporting.
Trustees Report on Internal Control Over Financial Reporting
The Trustee is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities
Exchange Act of 1934, as amended. The Trustee conducted an evaluation of the effectiveness of the
Trusts internal control over financial reporting modified cash basis (internal control over
financial reporting) based on the criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the
Trustees evaluation under the framework in Internal Control-Integrated Framework, the Trustee
concluded that the Trusts internal control over financial reporting was effective as of December
31, 2010. The independent registered public accounting firm of Deloitte & Touche LLP, as auditors
of the statements of assets, liabilities, and trust corpus, and the related statements of
distributable income and changes in trust corpus for the period ended December 31, 2010, has issued
an attestation report on the Trusts internal control over financial reporting, which is included
herein.
63
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Unit Holders of Dominion Resources Black Warrior Trust and
Bank of America, N.A., Trustee
Bank of America, N.A., Trustee
We have audited the internal control over financial reporting of Dominion Resources Black
Warrior Trust (the Trust) as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Trustee is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Trustees Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Trusts internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A trusts internal control over financial reporting is a process designed by, or under the
supervision of, the Trustee, or persons performing similar functions, and effected by the Trustee
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with the modified cash
basis of accounting, which is a comprehensive basis of accounting other than accounting principles
generally accepted in the United States of America and is described in Note 2 to the Trusts
financial statements. A trusts internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the trust; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with the modified cash basis of accounting discussed above, and
that receipts and expenditures of the Trust are being made only in accordance with authorizations
of the Trustee; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Trusts assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Dominion Resources Black Warrior Trust maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2010, based on
64
Table of Contents
the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the statements of assets, liabilities, and trust corpus of the
Trust as of December 31, 2010 and the related statement of distributable income and changes in
trust corpus for the year ended December 31 2010, which financial statements have been prepared on
the modified cash basis of accounting as described in Note 2 to such financial statements, and our
report dated March 11, 2011 expressed an unqualified opinion on those financial statements.
DELOITTE & TOUCHE LLP
Austin, TX
March 11, 2011
Austin, TX
March 11, 2011
Item 9B. Other Information. None.
65
Table of Contents
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers. The Trust has no directors or executive officers. Each of
the Trustee and the Delaware Trustee is a corporate trustee that may be removed as trustee under
the Trust Agreement, with or without cause, at a meeting duly called and held by the affirmative
vote of Unitholders of not less than a majority of all the Units then outstanding. Any such
removal of the Delaware Trustee shall be effective only at such time as a successor Delaware
Trustee fulfilling the requirements of Section 3807(a) of the Delaware Code has been appointed and
has accepted such appointment, and any such removal of the Trustee shall be effective only at such
time as a successor Trustee has been appointed and has accepted such appointment.
Audit Committee and Nominating Committee. Because the Trust has no directors, it does not
have an audit committee, an audit committee financial expert or a nominating committee.
Compliance with Section 16(a) of the Exchange Act. The Trust has no directors and officers
and knows of no Unitholder that is a beneficial owner of more than 10 percent of the outstanding
Units and is therefore unaware of any person that failed to report on a timely basis reports
required by Section 16(a) of the Exchange Act.
Code of Ethics. Because the Trust has no employees, it does not have a code of ethics.
Employees of the Trustee, Bank of America, N.A., must comply with the banks code of ethics, a copy
of which will be provided to Unitholders, without charge, upon request made to U.S. Trust, Bank of
America Private Wealth Management, Trustee, 901 Main Street, 17th Floor, Dallas, Texas 75202,
Attention: Ron E. Hooper.
Item 11. Executive Compensation.
Compensation Committee. Because the Trust has no directors, it does not have a compensation
committee.
The following is a description of certain fees and expenses anticipated to be paid or borne by
the Trust, including fees expected to be paid to Walter Exploration & Production, the Trustee, the
Delaware Trustee, American Stock Transfer & Trust Company (the Transfer Agent) or their
respective affiliates.
Ongoing Administrative Expenses. The Trust is responsible for paying all fees, charges,
expenses, disbursements and other costs incurred by the Trustee in connection with the discharge of
its duties pursuant to the Trust Agreement, including, without limitation, trustee fees,
engineering, audit, accounting and legal fees and expenses, printing and mailing costs, amounts
reimbursed or paid to the Company or Walter Exploration & Production pursuant to the Trust
Agreement or the Administrative Services Agreement and the out-of-pocket expenses of the Transfer
Agent.
Compensation of the Trustee. The Trust Agreement provides that the Trustee is to be
compensated for its administrative services and preparation of quarterly and annual statements, out
of the Trust assets, in an annual amount of $47,791, plus an hourly charge for services in
66
Table of Contents
excess of a combined total of 350 hours annually at its standard rate, which is currently $150
per hour. These service fees escalate by three percent annually. The Delaware Trustee is
compensated for its administrative services, in an annual amount of $5,000, which will be paid by
the Trustee. Each of the Trustee and the Delaware Trustee is entitled to reimbursement for
out-of-pocket expenses. Upon termination of the Trust, the Trustee will receive, in addition to
its out-of-pocket expenses, a termination fee in the amount of $10,000. If the Trustee resigns and
a successor has not been appointed in accordance with the terms of the Trust Agreement within 210
days after the notice of resignation is received, the fee payable to the Trustee will increase
significantly until a new trustee is appointed. During 2010, the Trustee and the Delaware Trustee
received total compensation of $47,791 and $5,000, respectively.
Compensation of the Transfer Agent. The Transfer Agent receives no annual transfer agency fee
per account.
Fees to Walter Exploration & Production. Walter Exploration & Production will receive
throughout the term of the Trust an administrative services fee for accounting, bookkeeping and
other administrative services relating to the Royalty Interests and the Underlying Properties as
described in Certain Relationships and Related Transactions, and Director Independence
Administrative Services Agreement. Prior to July 2007, such services were performed by and the
administrative services fee was paid to Dominion Resources.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Security Ownership of Certain Beneficial Owners. The Trustee knows of no Unitholder that is a
beneficial owner of more than five percent of the outstanding Units.
Security Ownership of Management. The Trust has no directors or executive officers. As of
March 1, 2011, Bank of America, N.A., the Trustee, beneficially owned 7,997 units. Mellon Bank
(DE) National Association, the Delaware Trustee, did not beneficially own any Units.
Changes in Control. The Trustee knows of no arrangements the operation of which may at a
subsequent date result in a change in control of the Registrant.
Securities Authorized for Issuance Under Equity Compensation Plans. The Trust has no equity
compensation plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Administrative Services Agreement
Pursuant to the Trust Agreement, Dominion Resources and the Trust entered into the
Administrative Services Agreement, pursuant to which the Trust is obligated, throughout the term of
the Trust, to pay to Dominion Resources each quarter an administrative services fee for accounting,
bookkeeping and other administrative services relating to the Royalty Interests and the Underlying
Properties. In July 2007, Walter Exploration & Production assumed Dominion Resources obligations
under the Administrative Services Agreement and is entitled to the
67
Table of Contents
administrative services fee. The annual fee, payable in equal quarterly installments, is
currently $477,907 and will increase annually by three percent.
A copy of the Administrative Services Agreement is filed as an exhibit to this Form 10-K. The
foregoing summary of the material provisions of the Administrative Services Agreement does not
purport to be complete and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Administrative Services Agreement.
Walter Exploration & Productions Conditional Right of Repurchase
Dominion Resources assigned its rights under the Trust Agreement to Walter Exploration &
Production, including its right to repurchase all (but not less than all) outstanding Units at any
time at which 15 percent or less of the outstanding Units is owned by persons or entities other
than Walter Exploration & Production and its affiliates. Any such repurchase would generally be at
a price equal to the greater of (i) the highest price at which Walter Exploration & Production or
any of its affiliates acquired Units during the 90 days immediately preceding the Determination
Date and (ii) the average closing price of Units on the NYSE for the 30 trading days immediately
preceding the Determination Date. Any such repurchase would be conducted in accordance with
applicable federal and state securities laws. See BusinessDescription of UnitsConditional
Right of Repurchase.
Potential Conflicts of Interest
The interests of Walter Exploration & Production and its affiliates and the interests of the
Trust and the Unitholders with respect to the Underlying Properties could at times be different.
The following is a summary of certain conflicts of interest:
Obligations of Company Interests Owner may exceed its share of distributions and tax credits.
As a Working Interest owner in the Underlying Properties, the Company Interests Owner is
responsible for an average of approximately 98 percent of the operating costs of the Existing Wells
but only entitled to approximately 28 percent of the revenues therefrom, after giving effect to the
Royalty Interests. Based on the Reserve Estimate, beginning in the year 2000, the projected
operating costs to be borne by the Company Interests Owner were anticipated to exceed its projected
share of Gross Proceeds and Section 29 tax credits (before the Section 29 tax credit expired for
coal seam gas produced and sold after 2002). The terms of the Conveyance provide, however, that
the Company Interests Owner will make decisions with respect to the Company Interests pursuant to
the standard of a reasonably prudent operator.
Sale or abandonment of Underlying Properties may terminate assurances. The Company Interests
Owners interests may conflict with those of the Trust and Unitholders in situations involving the
sale or abandonment of Underlying Properties. The Company Interests Owner has the right at any
time to sell any of the Underlying Properties subject to the Royalty Interests and may abandon a
well or lease included in the Underlying Properties if such well or lease is not capable of
producing in commercial quantities, determined before giving effect to the Royalty Interests.
Under certain circumstances, a sale or abandonment will effectively terminate Walter Exploration &
Productions assurances of the Company Interests Owners obligation to the Trust with respect to
the Underlying Properties sold or abandoned. Such sales or abandonment may not be in the best
interest of the Trust or the Unitholders.
68
Table of Contents
Walter Exploration & Production may profit from contracts with the Trust. The amount that
Walter Exploration & Production may charge for services it renders under the Administrative
Services Agreement is established in such contract at rates that do not necessarily take into
account the actual cost of rendering such services by Walter Exploration & Production.
Accordingly, Walter Exploration & Production may profit or suffer losses in connection with the
performance of such contract.
Item 14. Principal Accounting Fees and Services.
Fees for services performed by Deloitte & Touche LLP for the years ended December 31, 2010 and
2009 are:
2010 | 2009 | |||||||
Audit Fees |
$ | 114,500 | $ | 182,500 | ||||
Audit-related fees |
| | ||||||
Tax fees |
| | ||||||
All other fees |
| | ||||||
$ | 114,500 | $ | 182,500 | |||||
As referenced in Item 10 above, the Trust has no audit committee, and as a result, has no
audit committee pre-approval policy with respect to fees paid to Deloitte & Touche LLP.
PART IV.
Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as a part
of this report:
Financial Statements (included in Item 8 of this report)
Report of Independent Registered Public Accounting Firm
Statements of Assets, Liabilities and Trust Corpus as of December 31, 2010 and 2009
Statements of Distributable Income for the years ended December 31, 2010, 2009 and 2008
Statements of Changes in Trust Corpus for the years ended December 31, 2010, 2009 and 2008
Notes to Financial Statements
Financial Statement Schedules
Financial statement schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the financial statements and
notes thereto.
69
Table of Contents
Exhibits
No. | Exhibit | |||
3.1
|
| Trust Agreement of Dominion Resources Black Warrior Trust dated as of May 31, 1994, by and among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and NationsBank, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 3.1 to Dominion Resources, Inc.s Registration Statement* on Form S-3 (No. 33-53513), and incorporated herein by reference). | ||
3.2
|
| First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust dated as of June 27, 1994, by and among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and NationsBank, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 3.2 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.1
|
| Overriding Royalty Conveyance dated as of June 28, 1994, from Dominion Black Warrior Basin, Inc. to Dominion Resources Black Warrior Trust (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.2
|
| Administrative Services Agreement dated as of June 1, 1994, by and between Dominion Resources, Inc. and Dominion Resources Black Warrior Trust (filed as Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.3
|
| Amendment to and Ratification of Overriding Royalty Conveyance dated as of November 20, 1994, among Dominion Black Warrior Basin, Inc., NationsBank, N.A. (as successor to NationsBank of Texas, N.A.), and Mellon Bank (DE) National Association (filed as Exhibit 10.3 to the Registrants Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). | ||
10.4
|
| Gas Purchase Agreement, dated as of May 3, 1994, between Sonat Marketing and the Company (filed as Exhibit 10.2 to Dominion Resources, Inc.s Registration Statement* on Form S-3 (No. 33-53513), and incorporated herein by reference). | ||
10.5
|
| Amendment to Gas Purchase Agreement dated May 16, 1996, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference). | ||
10.6
|
| Amendment to Gas Purchase Agreement dated April 9, 1998, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.6 to the Registrants Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
70
Table of Contents
No. | Exhibit | |||
10.7
|
| Amendment to Gas Purchase Agreement dated July 1, 1999, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.7 to the Registrants Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). | ||
10.8
|
| Amendment to Gas Purchase Agreement dated July 1, 2000, between El Paso Merchant Energy Gas, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as Exhibit 4 to the Registrants Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). | ||
10.9
|
| Amendment to Gas Purchase Agreement dated July 1, 2001, between El Paso Merchant Energy Gas, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as an exhibit to the Registrants Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference). | ||
10.10
|
| Amendment to Gas Purchase Agreement dated July 1, 2002 between El Paso Merchant Energy, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference). | ||
10.11
|
| Assignment and Assumption Agreement, dated as of July 31, 2007, between Dominion Resources and HighMount Exploration & Production Alabama (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference). | ||
23.1
|
| Consent of Ralph E. Davis Associates, Inc., independent petroleum engineers. | ||
31.1
|
| Certification required by Rule 13a-14(a)/15d-14(a). | ||
32.1
|
| Certification required by Rule 13a-14(b)/15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002. | ||
99.1
|
| The information under the sections captioned Federal Income Tax Consequences and ERISA Considerations of the Prospectus dated June 21, 1994, which constitutes a part of the Registration Statement on Form S-3 of Dominion Resources, Inc.* (Registration No. 33-53513) and is incorporated herein by reference. | ||
99.2
|
| Summary of Reserve Report, dated March 4, 2011, on the estimated reserves, estimated future net revenues and the discounted estimated future net revenues attributable to the Royalty Interests as of December 31, 2010, prepared by Ralph E. Davis & Associates Petroleum Engineers, independent petroleum engineers. |
* | On its own behalf and as sponsor of the Dominion Resources Black Warrior Trust |
71
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dominion Resources Black Warrior Trust By: Bank of America, N.A., Trustee |
||||
By: | /s/ Ron E. Hooper | |||
Ron E. Hooper | ||||
Senior Vice President and Administrator | ||||
Date:
March 11, 2011
(The Registrant has no directors or executive officers.)
72
Table of Contents
Index to Exhibits
No. | Exhibit | |||
3.1
|
| Trust Agreement of Dominion Resources Black Warrior Trust dated as of May 31, 1994, by and among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and NationsBank, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 3.1 to Dominion Resources, Inc.s Registration Statement* on Form S-3 (No. 33-53513), and incorporated herein by reference). | ||
3.2
|
| First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust dated as of June 27, 1994, by and among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and NationsBank, N.A. (as successor to NationsBank of Texas, N.A.) (filed as Exhibit 3.2 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.1
|
| Overriding Royalty Conveyance dated as of June 28, 1994, from Dominion Black Warrior Basin, Inc. to Dominion Resources Black Warrior Trust (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.2
|
| Administrative Services Agreement dated as of June 1, 1994, by and between Dominion Resources, Inc. and Dominion Resources Black Warrior Trust (filed as Exhibit 10.2 to the Registrants Form 10-Q for the quarter ended June 30, 1994 and incorporated herein by reference). | ||
10.3
|
| Amendment to and Ratification of Overriding Royalty Conveyance dated as of November 20, 1994, among Dominion Black Warrior Basin, Inc., NationsBank, N.A. (as successor to NationsBank of Texas, N.A.), and Mellon Bank (DE) National Association (filed as Exhibit 10.3 to the Registrants Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). | ||
10.4
|
| Gas Purchase Agreement, dated as of May 3, 1994, between Sonat Marketing and the Company (filed as Exhibit 10.2 to Dominion Resources, Inc.s Registration Statement* on Form S-3 (No. 33-53513), and incorporated herein by reference). | ||
10.5
|
| Amendment to Gas Purchase Agreement dated May 16, 1996, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference). | ||
10.6
|
| Amendment to Gas Purchase Agreement dated April 9, 1998, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.6 to the Registrants Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
73
Table of Contents
No. | Exhibit | |||
10.7
|
| Amendment to Gas Purchase Agreement dated July 1, 1999, between Sonat Marketing Company L.P. and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.7 to the Registrants Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). | ||
10.8
|
| Amendment to Gas Purchase Agreement dated July 1, 2000, between El Paso Merchant Energy Gas, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as Exhibit 4 to the Registrants Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference). | ||
10.9
|
| Amendment to Gas Purchase Agreement dated July 1, 2001, between El Paso Merchant Energy Gas, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as an exhibit to the Registrants Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference). | ||
10.10
|
| Amendment to Gas Purchase Agreement dated July 1, 2002 between El Paso Merchant Energy, L.P., as successor to Sonat Marketing Company L.P., and Dominion Black Warrior Basin, Inc. (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference). | ||
10.11
|
| Assignment and Assumption Agreement, dated as of July 31, 2007, between Dominion Resources and HighMount Exploration & Production Alabama (filed as Exhibit 10.1 to the Registrants Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference). | ||
23.1
|
| Consent of Ralph E. Davis Associates, Inc., independent petroleum engineers. | ||
31.1
|
| Certification required by Rule 13a-14(a)/15d-14(a). | ||
32.1
|
| Certification required by Rule 13a-14(b)/15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002. | ||
99.1
|
| The information under the sections captioned Federal Income Tax Consequences and ERISA Considerations of the Prospectus dated June 21, 1994, which constitutes a part of the Registration Statement on Form S-3 of Dominion Resources, Inc.* (Registration No. 33-53513) and is incorporated herein by reference. | ||
99.2
|
| Summary of Reserve Report, dated March 4, 2011, on the estimated reserves, estimated future net revenues and the discounted estimated future net revenues attributable to the Royalty Interests as of December 31, 2010, prepared by Ralph E. Davis & Associates Petroleum Engineers, independent petroleum engineers. |
* | On its own behalf and as sponsor of the Dominion Resources Black Warrior Trust |
74