Item 1.
Financial Statements
WHITING USA TRUST I
Statements of Assets,
Liabilities and Trust Corpus (Unaudited)
(In thousands, except unit data)
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March 31,
2013
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December 31,
2012
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ASSETS
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Cash and short-term investments
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$
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171
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$
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227
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Investment in net profits interest, net
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27,702
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31,055
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Total assets
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$
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27,873
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$
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31,282
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LIABILITIES AND TRUST CORPUS
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Reserve for Trust expenses
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$
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171
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$
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227
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Trust corpus (13,863,889 Trust units issued and outstanding at March 31, 2013 and December 31, 2012)
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27,702
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31,055
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Total liabilities and Trust corpus
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$
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27,873
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$
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31,282
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Statements of Distributable Income (Unaudited)
(In thousands, except distributable income per unit data)
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Three Months
Ended
March 31,
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2013
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2012
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Income from net profits interest
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$
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8,174
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$
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10,247
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General and administrative expenses
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(156)
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(213)
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Cash reserves used (withheld) for current Trust expenses
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56
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38
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State income tax withholding
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(66)
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(70)
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Distributable income
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$
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8,008
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$
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10,002
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Distributable income per unit
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$
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0.577618
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$
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0.721468
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Statements of Changes in Trust Corpus (Unaudited)
(In thousands)
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Three Months
Ended
March 31,
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2013
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2012
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Trust corpus, beginning of period
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$
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31,055
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$
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46,593
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Distributable income
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8,008
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10,002
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Distributions to unitholders
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(8,008)
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(10,002)
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Amortization of investment in net profits interest
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(3,353)
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(4,233)
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Trust corpus, end of period
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$
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27,702
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$
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42,360
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The accompanying notes are an integral part of these modified cash basis financial statements.
5
WHITING USA TRUST I
NOTES TO MODIFIED CASH BASIS FINANCIAL STATEMENTS
(Unaudited)
1.
ORGANIZATION OF THE TRUST
Formation of the Trust
Whiting USA Trust I (the Trust) is a
statutory trust formed in October 2007 under the Delaware Statutory Trust Act, pursuant to a trust agreement (the Trust agreement) among Whiting Oil and Gas Corporation and Equity Oil Company, as trustors, The Bank of New York Trust
Company, N.A., as trustee (subsequently renamed The Bank of New York Mellon Trust Company, N.A., and hereinafter referred to as the Trustee) and Wilmington Trust Company as Delaware trustee (the Delaware Trustee). The initial
capitalization of the Trust estate was funded by Whiting Petroleum Corporation (Whiting) in November 2007. Effective September 30, 2009, Equity Oil Company merged into Whiting Oil and Gas Corporation (Whiting Oil and
Gas) with Whiting Oil and Gas as the surviving corporation. Whiting Oil and Gas, as referred to herein, is a subsidiary of Whiting and the successor to Equity Oil Company.
The Trust was created to acquire and hold a term NPI for the benefit of the Trust unitholders pursuant to a conveyance to the Trust from
Whiting Oil and Gas. The term NPI is an interest in certain of Whiting Oil and Gas properties located in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions (the underlying properties). The NPI is the only
asset of the Trust, other than cash reserves held for Trust expenses. As of December 31, 2012, these oil and gas properties included interests in 3,081 gross (368.0 net) producing oil and gas wells.
The NPI is passive in nature, and the Trustee has no management control over and no responsibility relating to the operation of the
underlying properties. The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties. The NPI will terminate when 9.11 MMBOE have been produced and sold from the underlying properties (which
amount is the equivalent of 8.20 MMBOE in respect of the Trusts right to receive 90% of the net proceeds from such reserves pursuant to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no
further distributions. As of March 31, 2013 on a cumulative accrual basis, 6.36 MMBOE (77%) of the Trusts total 8.20 MMBOE have been produced and sold and a cumulative reserve quantity of 0.02 MMBOE have been sold in divestitures.
The remaining reserve quantities are projected to be produced by June 30, 2015, based on the reserve report for the underlying properties as of December 31, 2012. The Trusts Annual Report on Form 10-K includes additional information
on the Trusts reserves as of December 31, 2012.
The Trustee can authorize the Trust to borrow money to pay Trust
administrative or incidental expenses that exceed cash held by the Trust. The Trustee may authorize the Trust to borrow from the Trustee, Whiting, or the Delaware Trustee as a lender provided that the terms of the loan are similar to the terms it
would grant to a similarly situated commercial customer with whom it did not have a fiduciary relationship. The Trustee may also deposit funds awaiting distribution in an account with itself, which may be a non-interest bearing account, and make
other short-term investments with the funds distributed to the Trust.
Initial Issuance of Trust Units and Net Profits
Interest Conveyance
In April 2008, the Trust issued 13,863,889 Trust units to Whiting in exchange for the conveyance of the term NPI from Whiting Oil and Gas, which is described above. Immediately thereafter, Whiting completed an
initial public offering of units of beneficial interest in the Trust, selling 11,677,500 Trust units to the public. Whiting retained, and has continued to retain, an ownership in 2,186,389 Trust units, or 15.8% of the total Trust units issued and
outstanding.
2. BASIS OF ACCOUNTING
Interim Financial Statements
The accompanying unaudited financial information has been prepared by the Trustee in accordance with the instructions to the Quarterly Report on
Form 10-Q. The accompanying financial information is prepared on a comprehensive basis of accounting other than GAAP. The Trustee believes that the information furnished reflects all adjustments (consisting of normal and recurring adjustments) which
are, in the opinion of the Trustee, necessary for a fair presentation of the results for the interim periods presented. The Trusts 2012 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies
and should be read in conjunction with this Quarterly Report on Form 10-Q. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.
Term Net Profits Interest
The Trust uses the modified cash basis of accounting to report Trust receipts from
the term NPI and payments of expenses incurred. The actual cash distributions to the Trust are made based on the terms of the conveyance that created the Trusts NPI. The term NPI entitles the Trust to receive revenues (oil, gas and natural gas
liquid sales) less expenses (the amount by which all royalties, lease operating expenses including well workover costs, production and property taxes, payments made by Whiting to the hedge counterparty upon settlements of hedge contracts,
maintenance expenses, post-production costs including
6
plugging and abandonment, and producing overhead, exceed hedge payments received by Whiting under hedge contracts and other non-production revenue) of the underlying properties multiplied by 90%
(term NPI percentage). Actual cash receipts may vary due to timing delays of cash receipts from the property operators or purchasers and due to wellhead and pipeline volume balancing agreements or practices.
Modified Cash Basis of Accounting
The financial statements of the Trust, as prepared on a modified cash
basis, reflect the Trusts assets, liabilities, Trust corpus, earnings and distributions as follows:
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a)
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Income from net profits interest is recorded when NPI distributions are received by the Trust;
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b)
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Distributions to Trust unitholders are recorded when paid by the Trust;
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c)
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Trust general and administrative expenses (which include the Trustees fees as well as accounting, engineering, legal and other professional
fees) are recorded when paid;
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d)
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Cash reserves for Trust expenses may be established by the Trustee for certain expenditures that would not be recorded as contingent liabilities
under GAAP;
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e)
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Amortization of the investment in net profits interest is calculated based on the units-of-production method. Such amortization is charged directly
to Trust corpus and does not affect cash earnings; and
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f)
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The Trust evaluates impairment of the investment in net profits interest by comparing the undiscounted cash flows expected to be realized from the
investment in net profits interest to the NPI carrying value. If the expected future undiscounted cash flows are less than the carrying value, the Trust recognizes an impairment loss for the difference between the carrying value and the estimated
fair value of the investment in net profits interest. The determination of whether the NPI is impaired requires a significant amount of judgment by the Trustee and is based on the best information available to the Trustee at the time of the
evaluation. If market or oil and natural gas production conditions deteriorate, write-downs could be required in the future.
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While these statements differ from financial statements prepared in accordance with GAAP, the modified cash basis of reporting revenues and distributions is considered to be the most meaningful for the
Trusts activities and results because quarterly distributions to the Trust unitholders are based on net cash receipts. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the SEC
as specified by FASB ASC Topic 932,
Extractive Activities Oil and Gas: Financial Statements of Royalty Trusts
.
Most accounting pronouncements apply to entities whose financial statements are prepared in accordance with GAAP, directing such entities
to accrue or defer revenues and expenses in a period other than when such revenues are received or expenses are paid. Because the Trusts financial statements are prepared on the modified cash basis as described above, however, most accounting
pronouncements are not applicable to the Trusts financial statements.
Recent Accounting Pronouncements
There were no accounting pronouncements issued during the three months ended March 31, 2013 applicable to the Trust or its financial statements.
3. INVESTMENT IN NET PROFITS INTEREST
Whiting Oil and Gas conveyed the
NPI to the Trust in exchange for 13,863,889 Trust units. The investment in net profits interest was recorded at the historical cost basis of Whiting on April 30, 2008, the date of conveyance, and was determined to be $123.6 million, of which
$111.2 million (90% of the NPI) was attributed to the Trust. As of March 31, 2013 and December 31, 2012, accumulated amortization of the investment in net profits interest was $83.5 million and $80.2 million, respectively.
4. INCOME TAXES
The
Trust is a grantor trust and therefore is not subject to federal income taxes. Accordingly, no recognition has been given to federal income taxes in the Trusts financial statements. The Trust unitholders are treated as the owners of Trust
income and corpus, and the entire taxable income of the Trust is reported by the Trust unitholders on their respective tax returns.
7
For Montana state income tax purposes, Whiting must withhold from its NPI payments to the
Trust, an amount equal to 6% of the net amount payable to the Trust from the sale of oil and gas in Montana. For Alabama, Arkansas, Colorado, Kansas, Louisiana, Michigan, Mississippi, New Mexico, North Dakota, Oklahoma and Utah, neither the Trust
nor Whiting is withholding the income tax due such states on distributions made to an individual resident or nonresident Trust unitholder, as long as the Trust is taxed as a grantor trust under the Internal Revenue Code.
5. DISTRIBUTION TO UNITHOLDERS
Actual cash distributions to the Trust unitholders depend on the volumes of and prices received for oil, natural gas and natural gas liquids produced from the underlying properties, among other factors.
Quarterly cash distributions during the term of the Trust are made by the Trustee no later than 60 days following the end of each quarter (or the next succeeding business day) to the Trust unitholders of record on the 50th day following the end of
each quarter. Such amounts equal the excess, if any, of the cash received by the Trust during the quarter, over the expenses of the Trust paid during such quarter, subject to any adjustments for changes made by the Trustee during such quarter in any
cash reserves established for future expenses of the Trust.
6. RELATED PARTY TRANSACTIONS
Capital Expenditures
During the three months ended March 31, 2013, Whiting incurred $1.1 million of
capital expenditures on the underlying properties. These capital expenditures are the costs net to Whitings interest in the wells and which are related to the drilling and completing of oil and gas wells, capital workovers, facility upgrades
and well recompletions that are performed to secure production from new horizons. Pursuant to the terms of the conveyance agreement, such expenditures were not deducted from gross proceeds or the Trust distributions, but they may have the effect of
ultimately accelerating the receipt of NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return on investment. The Trust cannot provide any assurance that this will continue to occur or that future capital
expenditures will be consistent with historical levels.
Operating Overhead
Pursuant to the terms
of the applicable joint operating agreements, Whiting deducts from the gross proceeds an overhead fee to operate those underlying properties for which Whiting has been designated as the operator. Additionally, with respect to those underlying
properties for which Whiting is the operator but where there is no operating agreement in place, Whiting deducts from the gross proceeds an overhead fee calculated in the same manner that Whiting allocates overhead to other similarly owned
properties, which is customary practice in the oil and gas industry. Operating overhead activities include various engineering, legal and administrative functions. The fee is adjusted annually pursuant to COPAS guidelines and will increase or
decrease each year based on changes in the year-end index of average weekly earnings of crude petroleum and natural gas workers. The following table presents the Trusts portion of these overhead charges for the distributions made during the
three months ended March 31, 2013 and 2012:
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Three Months Ended March 31,
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2013
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2012
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Total overhead charges
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$
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432,683
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$
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420,922
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Overhead charge per month per active operated well
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$
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417
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$
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403
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Administrative Services Fee
Under the terms of the administrative services
agreement, the Trust pays a quarterly administration fee of $50,000 to Whiting 60 days following the end of each calendar quarter. General and administrative expenses in the Trusts statements of distributable income for the three months ended
March 31, 2013 and 2012 each include $50,000 for quarterly administrative fees paid to Whiting.
Trustee
Administrative Fee
Under the terms of the Trust agreement, the Trust pays an annual administrative fee to the Trustee of $160,000, paid in four quarterly installments of $40,000 each and is billed in arrears. General and
administrative expenses in the Trusts statements of distributable income for the three months ended March 31, 2013 and 2012 each include $40,000 for quarterly administrative fees paid to the Trustee.
Letter of Credit
On February 8, 2011, Whiting established a $1.0 million letter of credit for the
Trustee in order to provide it with a mechanism to pay the operating expenses of the Trust, in the event that Whiting should fail to lend funds to the Trust if requested to do so by the Trustee. This letter of credit will not be used to fund NPI
distributions to unitholders, and Whiting has no obligation to lend funds to the Trust.
8
7. SUBSEQUENT EVENT
On May 7, 2013, the Trustee announced the Trust distribution of net profits for the first quarterly payment period in 2013. Unitholders of record on May 20, 2013 are expected to receive a
distribution amounting to $6.3 million or $0.453290 per Trust unit, which is payable on or before May 30, 2013. This distribution is expected to consist of net cash proceeds of $6.6 million paid by Whiting to the Trust, less a provision of
$300,000 for estimated Trust expenses and $45,042 for Montana state income tax withholdings.
9
Item 2.
Trustees Discussion and Analysis of Financial Condition
and Results of Operations
References to the Trust in this document refer to Whiting USA Trust I.
References to Whiting in this document refer to Whiting Petroleum Corporation and its wholly-owned subsidiaries. References to Whiting Oil and Gas in this document refer to Whiting Oil and Gas Corporation, a wholly-owned
subsidiary of Whiting Petroleum Corporation and the successor to Equity Oil Company. Equity Oil Company was merged into Whiting Oil and Gas Corporation effective September 30, 2009. The merger did not have an effect on the Trust.
The following review of the Trusts financial condition and results of operations should be read in conjunction with the financial
statements and notes thereto, as well as the Trustees discussion and analysis contained in the Trusts 2012 Annual Report on Form 10-K. The Trusts Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and all amendments to those reports are available on the SECs website
www.sec.gov
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Note Regarding Forward-Looking
Statements
This Quarterly Report on Form 10-Q 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, as amended. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including
without limitation the statements under Trustees Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. No assurance can be given that such expectations will prove to have been
correct. When used in this document, the words believes, expects, anticipates, projects, intends or similar expressions are intended to identify such forward-looking statements. The
following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect the future results of the energy industry in general, and Whiting and the Trust in particular, and could cause actual results
to differ materially from those expressed in such forward-looking statements:
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the effect of changes in commodity prices and conditions in the capital markets;
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uncertainty of estimates of oil and natural gas reserves and production;
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risks incident to the operation of oil and natural gas wells;
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future production costs;
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the inability to access oil and natural gas markets due to market conditions or operational impediments;
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failure of the underlying properties to yield oil or natural gas in commercially viable quantities;
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the effect of existing and future laws and regulatory actions;
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competition in the energy industry;
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inflation or deflation; and
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other risks described under the caption Risk Factors in the Trusts 2012 Annual Report on Form 10-K.
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All subsequent written and oral forward-looking statements attributable to Whiting or the Trust or persons acting on behalf of Whiting or
the Trust are expressly qualified in their entirety by these factors. The Trustee assumes no obligation, and disclaims any duty, to update these forward-looking statements.
Overview and Trust Termination
The Trust does not conduct any operations
or activities. The Trusts purpose is, in general, to hold the NPI, to distribute to unitholders cash that the Trust receives in respect of the NPI, and to perform certain administrative functions in respect of the NPI and the Trust units. The
Trust derives substantially all of its income and cash flows from the NPI, which was in turn subject to commodity hedge contracts through December 31, 2012 (which hedging effects impacted the February 2013 distribution to unitholders but will
cease thereafter). The NPI entitles the Trust to receive 90% of the net proceeds from the sale of production from the underlying properties.
Oil and gas prices historically have been volatile and may fluctuate widely in the future. The table below highlights these price trends by listing quarterly average NYMEX crude oil and natural gas prices
for the periods indicated through December 31, 2012. The
10
February 2013 distribution is mainly affected, however, by October 2012 through December 2012 oil prices and September 2012 through November 2012 natural gas prices.
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2011
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2012
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Q1
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Q2
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Q3
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Q4
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Q1
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Q2
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Q3
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Q4
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Crude Oil (per Bbl)
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$
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94.25
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$
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102.55
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$
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89.81
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$
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94.02
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$
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102.94
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$
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93.51
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$
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92.19
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$
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88.20
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Natural Gas (per MMBtu)
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$
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4.10
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$
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4.32
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$
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4.20
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$
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3.54
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$
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2.72
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$
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2.21
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$
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2.81
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$
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3.41
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Although oil prices fell significantly after reaching highs in the third quarter of 2008, they
experienced a rebound in 2010, 2011 and 2012. Natural gas prices have likewise fallen significantly since their peak in the third quarter of 2008 and were particularly low in 2012, but have begun to increase in recent months. The following table
highlights the settled monthly average NYMEX prices for natural gas for January 2012 through April 2013:
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2012
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2013
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Jan.
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Feb.
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Mar.
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Apr.
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May
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Jun.
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Jul.
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Aug.
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Sep.
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Oct.
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Nov.
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Dec.
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Jan.
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Feb.
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Mar.
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Apr.
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Natural Gas
(per MMBtu)
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$
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3.08
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$
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2.68
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$
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2.41
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$
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2.19
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$
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2.03
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$
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2.42
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$
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2.77
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$
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3.01
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$
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2.63
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$
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3.06
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$
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3.47
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$
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3.71
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$
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3.35
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$
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3.23
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$
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3.43
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$
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3.98
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Lower oil and gas prices on production from the underlying properties could cause the following:
(i) a reduction in the amount of net proceeds to which the Trust is entitled; (ii) a reduction in the amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties; and (iii) an
extension of the length of time required to produce 9.11 MMBOE (8.20 MMBOE at the 90% NPI) due to some wells thereby reaching their economic limits sooner. Alternatively, higher oil and natural gas prices may potentially result in an increase in the
amount of oil, natural gas and natural gas liquids that is economic to produce from the underlying properties. All costless collar hedge contracts Whiting entered into, and in turn conveyed to the Trust, terminated as of December 31, 2012
(which hedging effects impacted the February 2013 distribution to unitholders but will cease thereafter) and no additional hedges are allowed to be placed on the Trust assets. Consequently, for production applicable to quarterly payment periods
after the February 2013 distribution, there will be no cash settlement gains or losses on commodity derivatives, and the Trust will have increased exposure to oil and natural gas price volatility.
Trust termination.
The NPI will terminate when 9.11 MMBOE have been produced and sold from the underlying properties (which amount
is equivalent to 8.20 MMBOE attributable to the NPI), and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Since the assets of the Trust are depleting assets, a portion of each cash
distribution paid on the Trust units should be considered by investors as a return of capital, with the remainder being considered as a return on investment. As a result, the market price of the Trust units will decline to zero at termination of the
Trust. As of March 31, 2013 on a cumulative accrual basis, 6.36 MMBOE (77%) of the Trusts total 8.20 MMBOE have been produced and sold (of which proceeds from the sale of 246 MBOE, which is 90% of 273 MBOE, will be distributed to
unitholders in the Trusts forthcoming May 2013 distribution) and a cumulative reserve quantity of 0.02 MMBOE have been divested. For additional discussion relating to, and of the assumptions underlying, the estimated date when 9.11 MMBOE (8.20
MMBOE at the 90% NPI) will be produced and sold from the underlying properties, after which the Trust will soon thereafter wind up its affairs and terminate, see Description of the Underlying Properties in Item 2 of the Trusts
2012 Annual Report on Form 10-K.
Results of Trust Operations
Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012
The following is a summary of income from net profits interest received by the Trust for the three months ended March 31, 2013 and 2012, consisting of the February distribution for each respective
year (dollars in thousands, except per Bbl, per Mcf and per BOE amounts):
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Three Months Ended
March
31,
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2013
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2012
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Sales volumes:
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|
|
|
|
|
Oil from underlying properties (Bbl)
(a)
|
|
184,257
(b)
|
|
|
|
183,896
(c)
|
Natural gas from underlying properties (Mcf)
|
|
647,344
(b)
|
|
|
|
729,451
(c)
|
|
|
|
|
|
|
|
Total production (BOE)
|
|
292,148
|
|
|
|
305,471
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
2013
|
|
|
|
|
2012
|
|
Average sales prices:
|
|
|
|
|
|
|
|
|
|
|
Oil (per Bbl)
(a)
|
|
$
|
77.86
|
|
|
|
|
$
|
82.32
|
|
Effect of oil hedges on average price (per Bbl)
(d)
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil net of hedging (per Bbl)
|
|
$
|
77.86
|
|
|
|
|
$
|
82.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas (per Mcf)
|
|
$
|
3.08
|
|
|
|
|
$
|
3.97
|
|
Effect of natural gas hedges on average price (per Mcf)
(d)
|
|
|
2.13
|
|
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas net of hedging (per Mcf)
|
|
$
|
5.21
|
|
|
|
|
$
|
5.95
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs (per BOE):
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
$
|
25.58
|
|
|
|
|
$
|
22.33
|
|
Production taxes
|
|
$
|
3.99
|
|
|
|
|
$
|
4.17
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Oil sales
(a)
|
|
$
|
14,347
(b)
|
|
|
|
|
$
|
15,139
(c)
|
|
Natural gas sales
|
|
|
1,992
(b)
|
|
|
|
|
|
2,897
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
16,339
|
|
|
|
|
|
18,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
Lease operating expenses
|
|
|
7,472
|
|
|
|
|
|
6,822
|
|
Production taxes
|
|
|
1,166
|
|
|
|
|
|
1,274
|
|
Cash settlement gains received on commodity derivatives
(d)
|
|
|
(1,381)
|
|
|
|
|
|
(1,445)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs
|
|
|
7,257
|
|
|
|
|
|
6,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
|
9,082
|
|
|
|
|
|
11,385
|
|
Net profits percentage
|
|
|
90%
|
|
|
|
|
|
90%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from net profits interest
|
|
$
|
8,174
|
|
|
|
|
$
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Oil includes natural gas liquids.
|
(b)
|
Oil and gas sales volumes and related revenues for the three months ended March 31, 2013 (consisting of Whitings February 2013
distribution to the Trust) generally represent crude oil production from October 2012 through December 2012 and natural gas production from September 2012 through November 2012.
|
(c)
|
Oil and gas sales volumes and related revenues for the three months ended March 31, 2012 (consisting of Whitings February 2012
distribution to the Trust) generally represent crude oil production from October 2011 through December 2011 and natural gas production from September 2011 through November 2011.
|
(d)
|
Commodity derivative contracts that settled from October through December 2012 provided cash receipts of $1.4 million ($1.2 million to the 90% NPI)
which were included in the February 2013 distribution to Trust unitholders. As discussed below, all hedges terminated as of the February 2013 distribution presented above.
|
Income from Net Profits Interest.
Income from net profits interest is recorded on a cash basis when NPI proceeds are received by
the Trust from Whiting. NPI proceeds that Whiting remits to the Trust are based on the oil and gas production Whiting has received payment for within one month following the end of the most recent fiscal quarter. Whiting receives payment for its
crude oil sales generally within 30 days following the month in which it is produced, and Whiting receives payment for its natural gas sales generally within 60 days following the month in which it is produced. Income from net profits interest is
generally a function of oil and gas revenues, lease operating expenses, production taxes and cash settlements on commodity derivatives as follows:
Revenues.
Oil and natural gas revenues decreased $1.7 million or 9% for the three months ended March 31, 2013 as compared to the same period in 2012. Revenues are a function of oil and natural
gas sales prices and production volumes sold. The decrease in revenue between periods was due to lower sales prices realized for oil and natural gas and lower natural gas production volumes during the first quarter of 2013 as compared to the first
quarter of 2012. The average price for oil before the effects of hedging decreased 5% between periods, and the average price for gas before the effects of hedging decreased 22%. Gas sales volumes decreased 11% or 82 MMcf during the first quarter of
2013 compared to the same period in 2012, while oil sales volumes remained consistent between periods. Gas volume decreases during the first quarter of 2013 were primarily related to
12
normal field production decline. This gas volume decline was also impacted between reporting periods by differences in timing associated with revenues distributed and received from non-operated
properties. Oil production volumes remained relatively consistent between periods primarily due to two recently drilled oil wells that came online during the last twelve months, which effect was offset by normal field production decline. In the
December 31, 2012 reserve report, natural gas production attributable to the underlying properties is estimated to decline at rates ranging from 11% to 13% annually from 2013 through the estimated June 30, 2015 NPI termination date, while
oil production is estimated to decline at approximately 9% annually over this same time period.
Lease
Operating Expenses
. Lease operating expenses (LOE) increased $0.7 million or 10% during the first three months of 2013 compared to the first three months of 2012, primarily due to an increase of $0.5 million in plug and abandonment
charges and a $0.2 million increase in the cost of oilfield goods and services between periods. The increase in overall LOE coupled with the decrease in overall production volumes between periods resulted in an increase in LOE on a per BOE basis of
15%, from $22.33 during the first three months of 2012 to $25.58 for the same period in 2013.
Production
Taxes.
Production taxes are typically calculated as a percentage of oil and natural gas revenues before the effects of hedging, and production taxes as a percent of revenues remained consistent at 7.1% for the first three months of 2013 and
2012. Overall production taxes for the three months ended March 31, 2013 decreased, however, by $0.1 million or 8% compared to the same period in 2012.
Cash Settlements on Commodity Derivatives.
In connection with Whitings conveyance of the net profits interest to the Trust, Whiting entered into certain costless collar hedge contracts in
order to reduce the Trusts exposure to commodity price volatility. If current market prices are lower than a collars price floor when the cash settlement amount is calculated, Whiting receives cash proceeds from the contract
counterparty. Conversely, if current market prices are higher than a collars price ceiling when the cash settlement amount is calculated, Whiting is required to pay the contract counterparty.
Cash settlements relating to these hedges resulted in a gain of $1.4 million for the three months ended March 31,
2013, which had the effect of increasing the average price of natural gas by $2.13 per Mcf for that period, and cash settlements relating to these hedges also resulted in a gain of $1.4 million for the three months ended March 31, 2012, which
had the effect of increasing the average price of natural gas by $1.98 per Mcf for that period. As a result, the total net price of natural gas of $5.21 per Mcf and $5.95 per Mcf that the Trust received for the three months ended March 31, 2013
and 2012, respectively, included premiums of 41% and 33%, respectively, related to the effects of hedging for those same periods. However, all hedge related pricing impacts will cease after the February 2013 distribution presented above, while the
Trusts oil and gas reserves are currently projected to terminate in June 2015 based on the Trusts December 31, 2012 reserve report. Therefore, no commodity price hedges will impact future Trust distributions beginning with the May
2013 distribution through Trust termination, which has the effect of increasing the Trusts exposure to oil and natural gas price volatility.
General and Administrative Expenses.
During the first three months of 2013, the Trusts general and administrative expenses decreased by $0.1 million as compared to the same period in 2012 due
to differences in timing as to when certain administrative invoices were received and paid by the Trustee.
Distributable
Income.
For the three months ended March 31, 2013, the Trusts distributable income was $8.0 million and was based on income from net profits interest of $8.2 million, reduced by Trust general and administrative costs of $0.2 million
and Montana state income tax withholdings of $0.1 million, and adjusted for changes in Trust cash reserves. This compares to distributable income of $10.0 million for the first three months of 2012, which was based on income from net profits
interest of $10.2 million, reduced by $0.2 million of Trust administrative expenses and $0.1 million in Montana state income tax withholdings, and adjusted for changes in Trust cash reserves.
13
Liquidity and Capital Resources
The Trust has no source of liquidity or capital resources other than cash flows from the NPI. Other than Trust administrative expenses,
including any reserves established by the Trustee for future liabilities, the Trusts only use of cash is for distributions to Trust unitholders. Administrative expenses include payments to the Trustee and the Delaware Trustee, a quarterly fee
to Whiting pursuant to an administrative services agreement, and expenses in connection with the discharge of the Trustees duties, including third party engineering, audit, accounting and legal fees. Each quarter, the Trustee determines the
amount of funds available for distribution to unitholders. Available funds are the excess cash, if any, received by the Trust from the NPI and other sources (such as interest earned on any amounts reserved by the Trustee) that quarter, over the
Trusts expenses for that quarter. Available funds are reduced by any cash the Trustee decides to hold as a reserve against future liabilities. The Trustee may borrow funds required to pay liabilities if the Trustee determines that the cash on
hand and the cash to be received are insufficient to cover the Trusts liabilities. If the Trustee borrows funds, the Trust unitholders will not receive distributions until the borrowed funds are repaid.
Income to the Trust from the NPI is based on the calculation and definitions of gross proceeds and net proceeds
contained in the conveyance agreement, which is listed as an exhibit to this report, and reference is hereby made to such conveyance agreement for the actual definitions of gross proceeds and net proceeds.
Although capital expenditures for the testing, drilling, completion, equipping, plugging back or recompletion of any well that is a part
of the underlying properties cannot be deducted from gross proceeds pursuant to the terms of the conveyance agreement, Whiting incurred capital expenditures of $1.1 million on the underlying properties during the three months ended March 31,
2013. Such expenditures were not deducted from gross proceeds or Trust distributions, but they may have the effect of ultimately accelerating the receipt of NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return
on investment. The Trust cannot provide any assurance that this will continue to occur or that future capital expenditures will be consistent with historical levels.
On February 8, 2011, Whiting established a $1.0 million letter of credit for the Trustee in order to provide a mechanism for the Trustee to pay the operating expenses of the Trust, in the event that
Whiting should fail to lend funds to the Trust if requested to do so by the Trustee. This letter of credit will not be used to fund NPI distributions to unitholders, and Whiting has no obligation to lend funds to the Trust.
The Trust does not have any transactions, arrangements or other relationships with unconsolidated entities or persons that could
materially affect the Trusts liquidity or the availability of capital resources.
Future Trust Distributions to Unitholders
On May 7, 2013, the Trustee announced the Trust distribution of net profits for the first quarterly payment period
in 2013. Unitholders of record on May 20, 2013 are expected to receive a distribution amounting to $6.3 million or $0.453290 per Trust unit, which is payable on or before May 30, 2013. This distribution is expected to consist of net cash
proceeds of $6.6 million paid by Whiting to the Trust, less a provision of $300,000 for estimated Trust expenses and $45,042 for Montana state income tax withholdings.
New Accounting Pronouncements
There were no accounting pronouncements
issued during the three months ended March 31, 2013 applicable to the Trust or its financial statements.
Critical Accounting Policies
and Estimates
A disclosure of critical accounting policies and the more significant judgments and estimates used in the
preparation of the Trusts financial statements is included in Item 7 of the Trusts Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes to the critical accounting policies
during the three months ended March 31, 2013.
14