Item 1. Financial Statements.
The
condensed financial statements included herein have been prepared by Bank of America, N.A., as Trustee (the Trustee) of Dominion Resources Black Warrior Trust (the Trust), pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations, although the Trustee
believes that the disclosures are adequate to make the information presented not misleading. The condensed financial statements of the Trust presented herein are unaudited except for the balances as of December 31, 2013, and, therefore, are
subject to year-end adjustments. It is suggested that these condensed financial statements and notes thereto be read in conjunction with the financial statements and notes thereto in the Trusts Report on Form 10-K for the year ended
December 31, 2013. The December 31, 2013 condensed statement of assets, liabilities, and trust corpus is derived from the audited statement of assets, liabilities, and trust corpus as of that date. In the opinion of the Trustee, all
adjustments consisting of normal recurring adjustments necessary to present fairly the assets, liabilities and trust corpus of the Trust as of March 31, 2014, the distributable income for the three-month periods ended March 31, 2014 and
2013 and the changes in trust corpus for the three-month periods ended March 31, 2014 and 2013, have been included. The distributable income for such interim periods is not necessarily indicative of the distributable income for the full year.
The condensed financial statements as of March 31, 2014, and for the three-month periods ended March 31, 2014 and 2013 included
herein have been reviewed by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Unit Holders of Dominion Resources Black Warrior Trust and
Bank of America, N.A., Trustee
Dallas, Texas
We have reviewed the accompanying condensed statement of assets, liabilities and trust corpus of Dominion Resources Black Warrior Trust (the Trust)
as of March 31, 2014, and the related condensed statements of distributable income and changes in trust corpus for the three-month periods ended March 31, 2014 and 2013. These interim financial statements are the responsibility of the
Trustee.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of
interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
As described in Note 2 to the condensed interim financial statements, these condensed financial statements have been prepared on a modified cash basis of
accounting which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.
Based on our
reviews, we are not aware of any material modifications that should be made to such condensed interim financial statements for them to be in conformity with the basis of accounting described in Note 2.
As described in Note 6 to the condensed interim financial statements, in March 2012, Walter Black Warrior Basin LLC notified the Trustee, that it is
undertaking a study of the underlying properties on a well-by-well basis to determine the economic viability of continuing to produce each individual well. If Walter Black Warrior Basin LLC decides to suspend production or abandon any such wells,
such decision could adversely affect the Trusts future revenue stream, and if a significant number of wells are abandoned, it could cause a termination of the Trust.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statements of assets,
liabilities, and trust corpus of Dominion Resources Black Warrior Trust as of December 31, 2013, and the related statements of distributable income and changes in trust corpus for the year then ended (not presented herein); and in our report
issued March 10, 2014, we expressed an unqualified opinion on those financial statements and included an explanatory paragraph concerning the study of the underlying properties on a well-to-well basis to determine the economic viability of
continuing to produce each individual well. In our opinion, the information set forth in the accompanying condensed statement of assets, liabilities and trust corpus as of December 31, 2013 is fairly stated, in all material respects, in
relation to the statement of assets, liabilities, and trust corpus from which it has been derived.
/s/ Deloitte & Touche LLP
Dallas, TX
May 12, 2014
2
DOMINION RESOURCES BLACK WARRIOR TRUST
CONDENSED STATEMENTS OF ASSETS,
LIABILITIES AND TRUST CORPUS
(UNAUDITED)
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Note
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March 31,
2014
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December 31,
2013
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ASSETS
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Cash and cash equivalents
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$
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56,280
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$
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106,772
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Royalty interests in gas properties (less accumulated amortization of $147,391,314 and $146,865,502, respectively)
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8,426,186
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8,951,998
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TOTAL ASSETS
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$
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8,482,466
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$
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9,058,770
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LIABILITIES AND TRUST CORPUS
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Trust administration expenses payable
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$
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202,682
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$
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138,624
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Contingencies
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6
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Trust corpus7,850,000 units of beneficial interest authorized, issued and outstanding
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8,279,784
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8,920,146
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TOTAL LIABILITIES AND TRUST CORPUS
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$
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8,482,466
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$
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9,058,770
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The accompanying notes are an integral part of these condensed financial statements.
3
DOMINION RESOURCES BLACK WARRIOR TRUST
CONDENSED STATEMENTS OF DISTRIBUTABLE INCOME (UNAUDITED)
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Note
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For
the Three
Months Ended
March 31,
2014
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For
the Three
Months Ended
March 31,
2013
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Royalty income
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$
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1,590,079
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$
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1,592,717
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Interest income
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63
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80
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1,590,142
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1,592,797
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General and administrative expenses
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(354,883
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)
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(296,388
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)
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Distributable income
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1, 5
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$
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1,235,259
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$
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1,296,409
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Distributable income per unit (7,850,000 units)
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$
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.16
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$
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.17
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The accompanying notes are an integral part of these condensed financial statements.
4
DOMINION RESOURCES BLACK WARRIOR TRUST
CONDENSED STATEMENTS OF CHANGES IN TRUST CORPUS (UNAUDITED)
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Note
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For
the Three
Months Ended
March 31,
2014
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For
the Three
Months Ended
March 31,
2013
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Trust corpus, beginning of period
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$
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8,920,146
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$
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11,003,644
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Amortization of royalty interests
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(525,812
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)
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(726,165
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Distributable income
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1,235,258
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1,296,409
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Distributions to unitholders
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5
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(1,349,808
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)
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(1,260,451
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)
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Trust corpus, end of period
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$
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8,279,784
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$
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10,313,437
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Distributions per unit (7,850,000 units)
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5
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$
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.17
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$
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.17
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The accompanying notes are an integral part of these condensed financial statements.
5
DOMINION RESOURCES BLACK WARRIOR TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1.
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TRUST ORGANIZATION AND PROVISIONS
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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 BNY Mellon Trust of Delaware, 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-Q to U.S. Trust, Bank of America
Private Wealth Management shall describe the legal entity Bank of America, N.A.
On January 9, 2014, the Trustee gave notice to
holders of units of beneficial interest in the Trust (Unitholders) and the Delaware Trustee that it will be resigning as trustee subject to the conditions set forth below. Bank of America nominated Southwest Bank, an independent state
bank chartered under the laws of the State of Texas and headquartered in Fort Worth, Texas (Southwest Bank), as successor trustee at a meeting of Unitholders of the Trust called for May 22, 2014 for the purpose of approving a
successor trustee of the Trust. The Trustees resignation is conditioned on the satisfaction or waiver by the Trustee of each of the following: (i) the appointment of Southwest Bank as trustee of Sabine Royalty Trust (another royalty trust
for which the Trustee currently serves as trustee); (ii) the appointment of Southwest Bank or another successor trustee as trustee of the Trust and five other royalty trusts for which the Trustee currently serves as trustee and as agent under a
disbursing arrangement for which it currently serves as agent; (iii) the accuracy of certain representations and warranties and performance of certain agreements made by Southwest Bank in an agreement between the Trustee and Southwest Bank; and
(iv) no governmental injunction, order or other action that would prohibit Southwest Banks appointment, the Trustees resignation or the other actions described above. The effective date of the Trustees resignation shall be
May 30, 2014, assuming all of the conditions described above have been satisfied or waived as of such date.
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, which in turn transferred all the Units to
6
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. All of the Underlying Properties consist of producing properties. Accordingly, the proved reserves attributable to
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 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 Delaware Trustee nor the 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 amount realized by the Trust upon termination will be allocated to Unitholders in the same manner as the Trustee allocates the income received by 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 (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, as amended.
On July 31, 2007, subsidiaries of HighMount Exploration & Production LLC
(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, dated as of June 28, 1994, between Dominion Resources and the Trust, to HighMount Exploration & Production Alabama LLC (HighMount Alabama), a
Delaware limited liability company, which was a subsidiary of HighMount.
7
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 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:
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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.
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General and administrative expenses recorded are based on liabilities paid and cash reserves established out of cash received.
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Amortization of the Royalty Interests is calculated on a unit-of-production basis and charged directly to trust corpus when revenues are received.
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Distributions to Unitholders are recorded when declared by the Trustee (see Note 5).
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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 certain cash reserves that may be established rather than on an accrual basis, and amortization of the Royalty Interests is not charged against operating results. This 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 (the SEC), as specified by
Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts.
Impairment
The Trustee routinely reviews the Trusts royalty interests in gas properties for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. If an impairment event occurs and it is determined that the carrying value of the Trusts royalty interests may not be recoverable, an impairment will be recognized as measured by the
amount by which the carrying amount of the royalty interests exceeds the fair value of these assets, which would likely be measured by discounting projected cash flows. As of March 31, 2014, no impairment is required.
8
Use of Estimates
The preparation of financial statements in conformity with the basis of accounting described above requires the Trustee to make estimates and
assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses as of and for the reporting period. Actual results may differ from such estimates.
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.
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 March 31, 2014, other than as stated in Note 6 below.
New Accounting Pronouncements
There are no new accounting pronouncements that are expected to have a significant impact on the Trusts financial statements.
For federal income tax purposes, the Trust constitutes a fixed investment
trust that is taxed as a grantor trust. A grantor trust is not subject to tax at the trust level. The Unitholders are considered to own the Trusts income and principal as though no trust were in existence. The income of the Trust is deemed to
have been received or accrued by each Unitholder at the time such income is received or accrued by the Trust and not when distributed by the Trust.
The Royalty Interests constitute economic interests in oil and gas properties for federal income tax purposes. Unitholders must
report their share of the revenues from the Royalty Interests as ordinary income from oil and gas royalties and are entitled to claim depletion with respect to such income. During the first quarter of 2014, the Trust also incurred administration
expenses and earned interest income on funds held for distribution and for the cash reserve maintained for the payment of contingent and future obligations of the Trust.
The classification of the Trusts income for purposes of the passive loss rules may be important to a Unitholder. Royalty income
generally is treated as portfolio income and does not offset passive losses.
Some Trust Units are held by middlemen, as such term is
broadly defined in U.S. Treasury Regulations (and includes custodians, nominees, certain joint owners, and brokers holding an interest for a customer in street name, collectively referred to herein as middlemen). Therefore, the Trustee
considers the Trust to be a non-mortgage widely held fixed investment trust (WHFIT) for U.S. federal income tax purposes. U.S. Trust, Bank of America Private Wealth Management, EIN: 56-0906609, 901 Main Street, 17th Floor, Dallas, Texas
75202, telephone number (214) 209-2400, email address trustee@dom-dominionblackwarriortrust.com
9
is the representative of the Trust that will provide tax information in accordance with applicable U.S. Treasury Regulations governing the information reporting requirements of the Trust as a
WHFIT. Tax information is also posted by the Trustee at
www.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 U.S. 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.
Pursuant to the Foreign Account Tax Compliance Act (commonly referred to as FATCA), distributions from the Trust to foreign
financial institutions and certain other non-financial foreign entities may be subject to U.S. withholding taxes. Specifically, certain withholdable payments (including certain royalties, interest and other gains or
income from U.S. sources) made to a foreign financial institution or non-financial foreign entity will generally be subject to the withholding tax unless the foreign financial institution or non-financial foreign entity complies with certain
information reporting, withholding, identification, certification and related requirements imposed by FATCA. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may
be subject to different rules.
The Treasury Department recently issued guidance providing that the FATCA withholding rules described
above generally will only apply to qualifying payments made after June 30, 2014. Foreign Unitholders are encouraged to consult their own tax advisors regarding the possible implications of these withholding provisions on their investment in
Trust Units.
Unitholders should consult their tax advisors regarding Trust tax compliance matters.
4.
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STATE TAX CONSIDERATIONS
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The Trust holds properties located in Alabama. Unitholders should
consult the Trusts latest annual report on Form 10-K for a summary of Alabama state tax matters.
5.
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DISTRIBUTIONS TO UNITHOLDERS
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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 and interest), 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
10
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 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 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 will be the date that is established for the next 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.
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 March 31, 2014, 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 the plaintiffs property, and suppression of material facts by defendants, and
the 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.
In March 2012, the Company notified the Trustee that it is undertaking a study of the Underlying Properties on a well-by-well
basis to determine the economic viability of continuing to produce each individual well. The Company informed the Trustee that it abandoned 11 wells in 2012 and 11 wells in 2013 as the Company considered them uneconomic and will continue to evaluate
an additional 10 to 20 wells in 2014. If the Company decides to suspend production or abandon any such additional wells, such decision could adversely affect the Trusts future revenue stream, and if a significant number of wells are abandoned,
it could cause a termination of the Trust. See Item 1 Business Description of the Trust Termination and Liquidation of the Trust and Item 1A Risk
Factors in the Trusts Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 10, 2014, which is accessible on the SECs website at
www.sec.gov
,
for additional information.
* * * * *
11